MÁS ALLÁ DE LOS NÚMEROS
Contrary to Administration’s Misleading Claims, New Senior Deduction Doesn’t Help Low- and Middle-Income Seniors, Does Deplete Social Security Trust Funds
The Trump Administration has been peddling false and exaggerated claims about the harmful Republican megabill’s effects on the taxation of Social Security benefits, including in a blast email from the Social Security Administration. The new law doesn’t help most low- and middle-income seniors, and it depletes the Social Security trust funds faster. Moreover, the Administration’s misleading claims shouldn’t distract from how the law’s deep cuts to health care and food assistance will leave millions of seniors with low incomes worse off.
The law creates a new $6,000 deduction through 2028 for taxpayers aged 65 and over. This will reduce taxable income — including from Social Security benefits — and thus the amount of tax that eligible seniors will pay. This deduction does not eliminate taxes on Social Security benefits (nor should it).
Here’s the reality behind the Administration’s claims:
The new senior deduction does nothing to help most low- and middle-income retirees and non-senior beneficiaries. Under prior law, nearly half of seniors already didn’t owe any income tax, including on their Social Security benefits. Since the substantial majority of low- and middle-income seniors didn’t pay income taxes, the new deduction will provide no benefit to these households — doing nothing to help them afford their health care, housing, and other critical living expenses. The new deduction is also not available to Social Security beneficiaries who are younger than 65, including people with disabilities, early retirees, or family members after the death of a parent or working-age spouse, many of whom face financial difficulties. In fact, the legislation’s deep cuts to health care and food assistance will leave millions of beneficiaries with low incomes worse off, while at the same time lavishing enormous tax cuts on the wealthy and driving up deficits.
Most of the people who will benefit from the deduction are higher-income seniors. Overall, the Tax Policy Center (TPC) finds that seniors with incomes between $80,000 and $270,000 — those at 60 to 95 percent of the income scale, adjusted for family size — receive nearly two-thirds of the benefits of the new deduction, even though they make up only a quarter of people over 65. (The deduction phases out fully at $250,000 for married couples.) For the vast majority of these higher-income taxpayers, the tax on their Social Security benefits would be reduced but not eliminated. The deduction will also benefit people 65 and over who have not started to draw on their Social Security benefits.
The new senior deduction is one of several provisions of the new law that will hurt the solvency of the Social Security and Medicare trust funds. Currently, about three-fifths of the revenue from taxing Social Security benefits is devoted to Social Security’s trust funds; the rest goes to the Medicare trust fund. The combination of the new senior deduction, permanent extension of the 2017 tax law’s rates and deductions, and other tax cuts in the new law will reduce the taxation of Social Security benefits by about $30 billion annually. This is enough to accelerate the insolvency of the Social Security retirement fund and Medicare Hospital Insurance fund to 2032, a year sooner than the program’s trustees projected just last month. If the bill had repealed taxation of Social Security benefits altogether, as President Trump promised, the effects on the trust funds would be even worse, costing them $1.5 trillion over ten years.
This all paints a very different picture than recent claims from President Trump that the law eliminates taxes on Social Security, or the Social Security Administration’s (SSA) blast email message to tens of millions of people claiming that nearly 90 percent of seniors would “no longer” pay income taxes on their Social Security.
For people age 65 or older, the deduction lowers taxable income from all sources — not just Social Security benefits — so wages, withdrawals from retirement accounts, dividends, and interest are also included. The Council on Economic Advisors (CEA) analysis that SSA cites exaggerates the effects of the new law by ignoring other sources of income, comparing only the amount of taxable Social Security benefits to the total deductions and exemptions available. This implies that as long as a filer has taxable benefits under that amount, they will pay no taxes on their benefits. This is highly misleading and could confuse beneficiaries. In reality, nearly half of Social Security beneficiaries will still have to pay some tax on their Social Security benefits since taxation of benefits is connected to the amount of other income a person has.
The misleading communications will likely lead to more questions for SSA staff, even as callers to the agency’s 800 number already face hours-long delays. For example, beneficiaries who think taxes on Social Security benefits have been eliminated will likely have questions when they are required to still calculate the taxable amount on their tax returns. They may also stop withholding estimated taxes on their benefits even when they still owe taxes, resulting in a surprise at tax time. Such a blatantly political email is also likely to undermine trust in legitimate communications from SSA, prompting some recipients to unsubscribe altogether and miss important updates.
