During his presidential campaigning period last year, President Donald Trump proposed the elimination of Social Security taxes and whilst in theory, this may sound like an ideal way forward, the relief this would bring would only be short lived and could, in fact, cause more trouble than relief. This is particularly note-worthy when considering how the Social Security trust fund is on the path to depletion within the next decade if no changes are made to the program now.
Whilst there had been no proposal for the elimination of Social Security tax, Donald Trump’s “Big, Beautiful Bill” does include several tax reforms, including the extension of Trump’s tax cuts that have been in place since 2017 during his first term in office, no tax on overtime or tips, and an increase to the child tax credit. Social Security beneficiaries will also be able to enjoy an additional $4,000 in tax deductions under this Big Bill.
Whilst Social Security taxes will continue, the outcome of it may be for the greater good. Here is what you need to know.
Social Security taxes here to stay
In what President Donald Trump describes as “the most beautiful piece of policy ever written,” his promise to eliminate Social Security taxes has not been fulfilled. However, if this should be viewed in a positive light as it will help uphold the president’s other promise that Social Security will not be cut.
“The people are going to get what they get,” Trump previously said, referring to Social Security beneficiaries. “And we’re not raising ages or any of that stuff.”
The “One, Big, Beautiful Bill”, whilst free of any proposals to eliminate Social Security taxes, does now allow for seniors aged above 65 to qualify for an $4,000 in tax deductions — provided that their income threshold is below $75,000. This would provide the qualifying seniors with a fair amount of relief and will have far less of an impact on the longevity of the Social Security program than the complete elimination of Social Security taxes.
Why is eliminating Social Security taxes a bad idea?
Social Security tax is actually one of three sources of income for the program which means that eliminating taxes on benefits will likely have a significant ripple effect on the program’s future since one source of income would be lost. Last year, Social Security taxes brought in $54 billion and is a growing source of income, meaning that its importance cannot be understated if the depletion of the Social Security trust fund is to be slowed down.
An analysis conducted by the Committee for a Responsible Federal Budget states that if Social Security taxes are eliminated, “it could accelerate the trust fund depletion by over a year and require a 25% cut in benefits (instead of 21%).”
The Social Security trust fund is comprised of three revenue sources:
- Tax on wages which is paid in part by the employer and in part by the employee. The rate at which this is paid is 12.4% per each dollar earned. Last year, tax on wages brought in $1.1 trillion.
- Funds held in the trust are invested in government bonds which generates interest income. Las year, the net interest income amounted to $64 billion.
- The final source of income, as previously mentioned, is the tax on Social Security benefits.
“About 40% of Americans pay these taxes on their Social Security (the other 60% don’t make enough to be taxed). If Trump eliminates the taxes on these benefits, while it may benefit retirees upfront in that they can keep more of their money, that is less money going back into the overall Social Security fund that pays out those benefits to everyone, which could speed the rate of the Social Security Trust running low on funds,” according to Clay Cooper, partner and wealth management advisor at Clearview Financial Partners, Northwestern Mutual.