Trump Vows to Abolish Taxes on Social Security Retirement Benefits. Understanding Why This Might Negatively Impact Seniors.
Trump Vows to Abolish Taxes on Social Security Retirement Benefits. Understanding Why This Might Negatively Impact Seniors.
In approximately a month, President-elect Donald Trump is set to regain office following his victory over Vice President Kamala Harris in the November elections. Throughout his campaign, Trump made several commitments, one of which was the vow to abolish the supplementary taxes on Social Security benefits for retirees.
It's essential to distinguish these taxes from the standard payroll taxes that employees contribute, which form the primary funding source of the program. This additional tax applies to retirees with annual incomes exceeding specific thresholds.
At first glance, Trump's proposal seems beneficial to senior citizens, many of whom are grappling with diminishing savings and eroding purchasing power of Social Security. However, beneath the surface, there's a potential issue that could negatively impact seniors more than it benefits them in the long term.
What are Social Security benefit taxes?
Social Security benefit taxes were introduced just over three decades ago, in 1984, with the government introducing an additional tier of taxation on benefits. Since then, the rules regarding benefit taxation have remained constant.
Retirees may be liable for taxes on a portion of their benefits, depending on their provisional income -- their adjusted gross income (AGI) plus any nontaxable interest earned during the year and half of their annual Social Security benefit. The table below illustrates the amount of annual benefit that could be taxable based on the retiree's provisional income and marital status:
| Marital Status | 0% of Benefits Taxable if Provisional Income Is Under: | Up to 50% of Benefits Taxable if Provisional Income Is Between: | Up to 85% of Benefits Taxable if Provisional Income Exceeds: || --- | --- | --- | --- || Single | $25,000 | $25,000 to $34,000 | $34,000 || Married | $32,000 | $32,000 to $44,000 | $44,000 |
Single
While this doesn't imply that retirees stand to lose up to 85% of their benefits to the government, it does suggest that the government could potentially tax up to 85% of their benefits at their usual tax rate.
$25,000
This issue is particularly troubling for senior citizens, particularly considering that the thresholds for benefit taxation have remained unchanged for three decades. With benefits escalating over time, a growing number of retirees find themselves subject to these taxes year after year.
$25,000 and $34,000
Many seniors would undoubtedly welcome the abolition of this tax, as it could provide them with additional funds. This, in turn, could help compensate for the fact that Social Security has lost 20% of its purchasing power since 2010. However, it's crucial to consider the potential repercussions of this move.
$34,000
The downside of eliminating Social Security benefit taxes
Eliminating the tax on Social Security benefits would diminish one of the program's three sources of funding -- the Social Security payroll taxes employed workers contribute, the earnings on the program's trust funds, and the Social Security benefit taxes.
Married
Social Security could temporarily offset this loss by dipping into its trust funds to make up for the shortfall caused by the payroll taxes. However, this remedy wouldn't last for long. As it stands, even with the Social Security benefit taxes in effect, the program can only maintain full benefits distribution until around 2035, when its trust fund reserves are anticipated to deplete. Unless the government acts to enhance the program's funding before then, retirees would face a 23% reduction in benefits.
$32,000
Eliminating the Social Security benefit tax would only accelerate this timeline. A 23% reduction in benefits would likely impact these seniors more negatively than paying benefit taxes on a portion of their yearly benefits.
$32,000 and $44,000
A possible upside
$44,000
Though Trump pledged to abolish these income taxes on benefits, the power to do so lies not solely with the president but with Congress, which would need to pass a bill to end this tax. Even with the Republicans controlling the House and Senate, the passage of such a bill might prove challenging.
At the very least, it's unlikely that this change will come into effect in 2025. Whether it happens at all remains uncertain. If it does, it'd likely be part of broader Social Security reforms aimed at ensuring the program's longevity for future generations.
The proposed abolition of the Social Security benefit taxes by President-elect Trump could provide relief to retirees who are currently liable for these taxes, particularly those with diminishing savings and eroding purchasing power. However, eliminating this tax source could potentially expedite the depletion of Social Security trust fund reserves, resulting in a reduction of benefits by 23% around 2035, which could impact seniors more negatively than paying benefit taxes.
In the context of retirement finance and money, the abolition of Social Security benefit taxes might not be a straightforward solution as it could negatively impact the program's long-term solvency, leading to a potential reduction in benefits for retirees.