Eliminating Social Security Income Taxes Would Cost $1.5 Trillion And Deplete The Trust Fund By 2032—Who Wins And Who Loses?

During his most recent presidential campaign, Donald Trump proposed eliminating taxes on Social Security benefits, a plan that found strong support among retirees who would like to keep more of their monthly checks. While tax cuts may sound like a good idea in the short term, finance experts have raised concerns about the long-term effects of such a policy. 

"He's talking about getting rid of the taxation, which increases the benefits, but the very benefits that are subject to taxation will be much reduced," Nancy Altman, president for Social Security Works told Kiplinger. "So basically, it's not an honest proposal."

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The numbers suggest that cutting these taxes could also speed up the depletion of the Social Security Trust Fund, offering immediate relief to some retirees now but ultimately creating significant challenges for future generations.

The Penn Wharton Budget Model estimates that removing taxes on Social Security benefits would result in a $1.5 trillion revenue loss over the next decade and increase the federal debt. This would put a larger strain on the Social Security Trust Fund, pushing up its projected depletion date from December 2034 to December 2032.

Currently, Social Security benefits are taxed for individuals earning more than $25,000 ($32,000 for joint filers). Depending on the beneficiary’s total income, up to 85% of their benefits can be taxed. These taxes are critical to keeping the program afloat. 

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Higher-income retirees would stand to gain the most from the elimination of these taxes. Some of the wealthiest households could save over $100,000 throughout their lifetimes. Retirees in the middle-income range would also benefit, though to a lesser degree.

With more disposable income, some retirees may increase their spending, which could provide a short-term economic boost. But, higher spending among retirees does not necessarily translate into economic growth, especially if it's at the expense of national savings and investment.

While retirees would see immediate tax savings, younger generations might end up paying the price. The Penn Wharton Budget Model projects that eliminating Social Security taxes would add 7% to the federal deficit by 2054. This rising debt could cut into capital investment, leading to wage reductions of 0.4% over the next decade and 1.8% by 2054.

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Young workers, particularly those under 30, would be most affected. A child born on the day the policy is enacted could face a $10,000 reduction in lifetime welfare benefits. As the trust fund nears insolvency, younger generations might face major cuts to their benefits in the future.

Eliminating these taxes could also have broader economic implications. If retirees have more after-tax income, they may feel less need to save for retirement. Over time, this could lead to lower national savings and a reduction in productive capital. The Penn Wharton Budget Model projects that, by 2054, GDP could be 2.1% lower under this policy than if the current system were kept in place.

On the surface, eliminating Social Security income taxes might seem like a win for retirees. But looking at the broader picture, the story changes. High-income retirees would benefit most, while younger workers and future generations may bear the brunt of the rising federal debt and possible benefit cuts. As lawmakers consider changes to Social Security, they'll have to balance short-term relief with the long-term health of the program.

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