President Donald Trump’s proposal to eliminate taxes on Social Security benefits could add more to the federal debt, according to a new analysis of the plan.
The Penn Wharton Budget Model projects that the plan would reduce revenues by $1.5 trillion over 10 years and increase the federal debt by 7% by 2054. It would also hasten the projected depletion date of the Social Security Trust Fund from December 2034 to December 2032.
“Eliminating taxes on Social Security benefits reduces incentives to save and work while increasing federal debt,” the analysis noted. “The policy primarily benefits high-income households nearing or in retirement while harming households under thirty and all future generations across the entire income distribution.”
Trump campaigned on the issue along with eliminating taxes on tips and overtime, but solid details of the proposal have yet to take shape leaving uncertainty around the plan.
Social Security beneficiaries with combined income under $25,000 ($32,000 for joint filers) pay no taxes on benefits. Those with combined income between $25,000 and $34,000 ($32,000 to $44,000 for joint filers) are taxed on up to 50% of their benefits, while those with combined income above $34,000 ($44,000 for joint filers) are taxed on up to 85% of their benefits.
“These income limits are not indexed for inflation. As incomes rise due to inflation, more people may find their Social Security benefits subject to taxation,” the analysis noted. “These legislative changes were primarily aimed at improving the financial stability of Social Security.”
The change would help those living on Social Security benefits, but poses challenges for younger taxpayers.
“More than 60% of currently living households and over 95% of retirees would benefit from implementing this policy bundle,” according to the analysis. “However, all future generations would be worse off. The longer households are exposed to the policy and the further in the future they are born, the greater their welfare losses.”
Those with more money could come out on top.
“While nearly all retirees benefit from the policy, the gains are unevenly distributed,” according to the analysis. “Higher-income retirees – those who currently pay the most in taxes on Social Security benefits – gain between $11,000 and nearly $135,000. Meanwhile, households in the lowest two income quintiles see more modest but still positive gains, ranging from $1,000 to $2,000.”
