In the first chaotic weeks of Donald Trump’s second term in office, much of the country’s attention has been on the president’s on-again, off-again imposition of tariffs, his turning loose of Elon Musk to slash spending and jobs, and his immigration crackdown.
But there is another major policy change that Trump has in mind — eliminating income taxes on Social Security benefits. He pitched the idea again last week during his State of the Union address.
The proposal is disconcerting not only because it’s terribly ill-conceived but also because it could generate support from beneficiaries who are unaware of or don’t think through the consequences.
Social Security is in an already precarious financial position. Eliminating the income tax on benefits would push it more quickly toward insolvency.
Presently, about half of the nation’s Social Security beneficiaries — the wealthiest half — pay income taxes on their benefits, somewhere between 10% and 20%. Most of those taxes go right back into the Social Security trust fund to pay future benefits.
Even with that infusion from retirees and the much larger infusion from the payroll taxes collected on current workers, Social Security’s financial cushion is steadily shrinking, as benefits paid out exceed payments coming in. Based on current projections and current law, all beneficiaries are scheduled in eight years to get a 21% cut in their monthly Social Security payment.
To make Social Security free of federal taxes would push up that day of reckoning by one or two years. Not only that, but the cut in benefits might have to increase, too, to 25% or even more.
Rather than make matters worse, as Trump is proposing, Congress has to consider painful steps that it has already put off too long if it intends to shore up the system. Other than reducing benefits, the obvious possibilities include raising the payroll tax (now at 6.2% for the employee and the employer), raising the amount of income that’s subject to the tax (it now caps at just over $176,000), increasing the retirement age again, or revising downward the formula that calculates the cost-of-living adjustment.
Responsible members of Congress know all of this, but most of them are hoping they can punt the problem to someone else after they leave office. That’s been their strategy for decades. The last time that Congress enacted substantial reforms to Social Security was in 1983, when Ronald Reagan was president and both the retirement age and payroll tax rate were raised.
Unless they depart in the next few years, though, many of today’s lawmakers are going to have to deal with the problem. Donald Trump’s fiscally irresponsible suggestion would have the unwitting consequence of forcing them to do so even sooner.
