I’m a Financial Planner: 4 Things That Could Happen If Trump Eliminates Social Security Tax
GOBankingRates, 8/24/24
As we edge closer to the November 5, 2024 presidential general election, both candidates continue to sprinkle their campaign appearances and social media dispatches with policy issues. Social Security is a major institution in the economic and social life of Americans, and the period leading up to Election Day promises to be one of wide public discussion concerning the troubled 89-year old program.
Republican candidate Donald Trump’s plan to end taxes on the benefit income has been met with support from the former president’s allies, who believe legislation would improve the long-term solvency of Social Security, and staunch opposition from people, like ranking member of the House Ways and Means subcommittee on Social Security, Rep. John Larson (D-Conn.), who called the idea a “fatal mistake.”
According to Devin Carroll, Lead Advisor at Carroll Advisory Group, Trump’s idea isn’t new. “Earlier this year, Representative Angie Craig (D-Minn.) reintroduced the You Earned It, You Keep It Act, which also aims to get rid of taxes on Social Security benefits. Her proposal was praised because it not only removed these taxes but also extended the life of the Social Security trust funds by almost 20 years and helped reduce the federal debt by taxing more income for Social Security.”
There have been several recent legislative proposals designed to help shore up Social Security for future generations. Aside from Craig’s You Earned It, You Keep It Act and Larson’s Social Security 2100 Act,
A number of high-profile Democrat senators, among them a Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.), introduced the Social Security Expansion Act at a Senate Budget Committee hearing in June 2022.
As the presidential election season progresses, stay informed to what the candidates have to say on the issue. Here are four things that could happen of Trump gets elected and gets rid of taxes on Social Security benefits. Be sure to speak to your financial advisor if you believe they will impact you.
1. Immediate Impact on Social Security Funding
Cutting taxes on Social Security is a risky move, especially for someone who hasn’t considered any sort of wealth tax in the past. As Larson noted about Trump’s recent Social Security statements, “He comes out and says he’s going to have a tax break but doesn’t say how he’s going to pay for that.”
In order to pay for Social Security payouts, the government may need to divert money from general tax receipts, which could result in larger federal deficits or program cuts. Additionally, tax increases or the possible introduction of new ones could be used to make up for the loss of Social Security tax revenue.
While most solutions involve taxing the richest Americans to pay for cuts, Social Security might have to undergo changes like raising the retirement age or means-testing payments. If federal government borrowing is required, the national debt may balloon to maintain Social Security benefits in the absence of alternative sources of funding.
2. Long-Term Effects on Social Security Benefits
The Social Security tax is a primary source of funding for the Social Security Trust Fund. Eliminating this tax would drastically reduce the inflow of funds, potentially jeopardizing the program’s ability to pay benefits.
“In 2024 alone, more than $50 billion in taxes on Social Security benefits flowed into the Social Security trust fund,” said Carroll. “This amount is expected to nearly triple in the coming years since the income thresholds that trigger these taxes haven’t been updated since 1983 and 1993.”
In the absence of this revenue, the Social Security Trust Fund may run out of money faster, which would mean that benefits for retirees both now and in the future could be reduced unless another source of financing is discovered.
“Financial planners like me are concerned about the long-term impact on the sustainability of the Social Security program,” said Taylor Kovar, CFP, founder and CEO of the Lufkin, Texas-based 11 Financial. “Eliminating these taxes could seriously jeopardize funding, potentially leading to cuts or reduced benefits for future retirees who rely on Social Security as a big part of their retirement income.”
3. Economic Consequences
Despite the long-term risk to the program’s viability, eliminating the Social Security tax would boost workers’ take-home pay by the amount they currently contribute: 6.2% of their income, up to a specific limit (employers would also save that same matching contribution amount).
Both Kovar and Carroll admit that immediate impacts of a Social Security tax cut will benefit workers and retirees, but are more wary of long-term consequences. “Trump’s proposal to eliminate Social Security taxes could bring immediate benefits for the average American by increasing their take-home pay, allowing for more consumer spending,” said Kovar, and Carroll mentioned that “giving retirees an extra $50 billion could boost the economy as they’d have more money to spend.”
4. The Real Impact on Workers and Retirees
When there’s talk of tax cuts, we have to ask, “Who will benefit?” As Mark Luscombe, LD, LL.M, CPA and Principal Analyst with the tax and accounting professionals at Wolters Kluwer noted, lower-income households would get little or no benefit from the tax cut in 2025.
“Currently single taxpayers with a combined income (adjusted gross income plus non-taxable interest plus one half of Social Security benefits) under $25,000 ($32,000 for joint filers) pay no tax on Social Security benefits,” Luscombe said.
“Those with combined income above $25,000/$32,000 pay tax on 50 percent of Social Security benefits or 85 percent of Social Security benefits as combined income increases,” he added. “Therefore, taxpayers with incomes above those levels would see a direct benefit.”
According to a Tax Policy Center analysis released August 1, the proposed Trump tax break could save U.S. households an average of $550 for 2025. “In the short run, [Trump’s plan] will provide a fairly modest benefit, on average, to Social Security beneficiaries,” Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, told CNBC. “But nearly all of that benefit goes to high-income retirees who really don’t need it.”
Tax cuts make for good election promises, but Social Security is an extremely popular government benefit program that’s been around for 89 years and currently sitting on shaky ground. “Trump’s plan to stop taxing Social Security benefits has generated a lot of buzz, but the specifics are still up in the air,” said Carroll.
In the coming months, both presidential candidates will have to tackle the looming Social Security funding crisis by coming up with a taxation, age eligibility or other compromise, but that, as they say, is a discussion for another day.