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Eliminating Taxation of Social Security Benefits Would Be Unwise
Social Security beneficiaries with higher incomes pay income tax on part of their benefits. Repealing the taxation of Social Security benefits, as President Trump has proposed, would be unwise because it would weaken the financing of Social Security and Medicare and make the Social Security system less progressive.
Individuals with incomes below $25,000 and couples below $32,000 pay no tax on their Social Security benefits. Those with higher incomes pay tax on a sliding scale. (For details on how Social Security benefits are taxed, see here.)
About half of Social Security beneficiaries pay no tax on their benefits — primarily because their incomes fall below the specified thresholds. On average, beneficiaries pay about 7 percent of their benefits in income taxes. Those in the bottom two income quintiles (with incomes below $63,300) owe an average of 1 percent or less of their benefits in taxes. In contrast, beneficiaries in the top quintile (with incomes over $205,800) pay 20 percent. (See figure.) If Congress repealed the taxation of benefits, beneficiaries in the top quintile would receive a tax cut averaging $7,250, according to Tax Policy Center estimates.
The proceeds from taxing Social Security benefits provide an increasingly important source of income for both Social Security and Medicare. About three-fifths of the revenue from taxing Social Security benefits is devoted to the two Social Security trust funds. In 2025, this will provide an estimated $60.8 billion in income to the Old-Age and Survivors and Disability Insurance (OASDI) trust funds, or about 4 percent of their total income. This will grow to 6 percent of Social Security OASDI income by 2033. The remaining revenue from taxing benefits is devoted to Medicare’s Hospital Insurance (HI) trust fund. This will represent $42.6 billion, or 9 percent, of HI income in 2025 and 13 percent of income by 2033.
Over the next ten years, the taxation of benefits will provide over $1½ trillion to the Social Security and Medicare trust funds. Without that income, the programs would face greater funding shortfalls, and the dates on which the trust funds would be depleted — meaning that benefits would need to be funded entirely by incoming payroll taxes and other revenues — would occur earlier. By one estimate, Social Security’s Old-Age and Survivors Insurance trust fund would be exhausted one year earlier (in 2032) and the Medicare HI trust fund six years earlier (in 2030).
Some proposals to end the taxation of Social Security benefits aim to hold the trust funds harmless. One proposal would replace the lost income with a transfer from the federal government’s general revenues. Another would retain the tax on benefits but fully offset it with an equal income tax credit. But these variants, while protecting the trust funds, would still dig a large and growing hole in the federal budget that would require additional taxes, reduced spending, or larger deficits. They would also leave the government in a tougher position when policymakers take steps to close Social Security’s financing gap.