Trump wants to cut income taxes on Social Security. Here's how that would impact your benefits.
Former President Donald Trump is promising to eliminate taxes on Social Security, a vow aimed squarely at the 67 million Americans who receive monthly benefit checks from the retirement and disability program.
"Seniors should not pay taxes on Social Security and they won't," Trump said at a Wednesday campaign rally in Harrisburg, Pennsylvania.
Such a pledge could be be a potent campaign plank at a time when poverty among seniors is on the rise, according to the National Council on Aging, and the U.S. Government Accountability Office has found millions of older workers are nearing retirement without a penny in savings. Currently, about 40% of Social Security recipients pay federal income taxes on their benefits, according to the agency.
But cutting income taxes on Social Security income would ultimately harm the program by cutting off one of its funding sources – taxes — which in turn would likely hasten the insolvency of its trust funds, experts told CBS MoneyWatch. If that occurred, the Social Security Administration could be forced to make larger benefit cuts a year earlier than is now forecast.
"It really is, in some ways, Trump advocating defunding Social Security," Nancy Altman, president of Social Security Works, an advocacy group for the program, told CBS MoneyWatch. "It's a sleight of hand — it's giving with one hand and taking with another."
The Trump campaign didn't respond to a request for comment.
Payroll taxes, the FICA taxes taken out of workers' paychecks, fund the bulk of Social Security. But about 4% of its financing stems from the income taxes that recipients pay on their benefits, providing about $50 billion in annual revenue to the program, according to the latest annual report from Social Security's board of trustees.
While 4 in 5 Social Security recipients are senior citizens, the remaining beneficiaries are people who qualify for disability payments or are the children and spouses of deceased workers, according to the Center on Budget and Policy Priorities.
Social Security's solvency problem
Social Security's funding issues have been years in the making, partially due to changing U.S. demographics. With baby boomers retiring in record numbers and seniors living longer, the program is increasingly strained by growing financial demands.
Because of that shift, Social Security is now paying out more in benefits than it receives in income, which is eating away at the $2.7 trillion in assets held in its trust funds — the reserves that pay out retirement and disability benefits.
By 2033, the trust fund paying Social Security benefits is on track to be depleted, at which point the Social Security Administration would be forced to cut recipients' monthly benefits by 17%, according to the agency's latest report.
Trump's proposal to nix income taxes on benefits would wipe out $950 billion in funding for Social Security over the next decade, according to a July 31 estimate from the Committee for a Responsible Federal Budget (CRFB), a nonpartisan advocacy group focused on fiscal policy.
That would have a twofold effect, pushing the program's insolvency date forward a year to 2032 and forcing the Social Security Administration to cut benefits even more deeply than it now predicts, the group said. Recipients would face a 25% cut in their monthly checks in 2032, the CRFB estimated.
Cutting income taxes on Social Security could also potentially lead to funding shortfalls for Medicare, because a portion of those taxes are directed toward the program, the CRFB added. It estimates that Medicare would lose about $650 billion in revenue over the next decade, resulting in its potential insolvency being pushed forward by six years, from 2036 to 2030.
"Freeing them from taxation is a kind of benefit increase, but [the Social Security Administration] has to get the revenue from somewhere else or the benefits would just be cut," Altman of Social Security Works told CBS MoneyWatch.
Are Social Security benefits taxable?
There is a misperception among some Americans that Social Security benefits aren't taxable, perhaps reflecting that such income wasn't taxable until 1984. But under changes signed into law by President Ronald Reagan, Social Security income above a certain threshold became taxable.
More seniors are subject to the tax each year because those thresholds haven't been adjusted for inflation since 1984, which means each year more middle-income beneficiaries are paying taxes on their Social Security checks. For instance, the share of seniors who paid taxes on their benefits was 26% in 1998, according to the Congressional Budget Office. That figure now stands at 40%.
Individual tax filers with combined annual income (Social Security and other income, such as retirement distributions or dividends) ranging from $25,000 to $34,000 may have to pay income tax on up to half of their benefits. Individuals with earnings of more than $34,000 may pay taxes on up to 85% of their Social Security income.
Joint filers with incomes between $32,000 and $44,000 may have to pay income tax on up to 50% of their benefits, while married couples with incomes over $44,000 may be taxed on up to 85% of their benefits.
For instance, a single filer who collects the average annual Social Security benefit of $22,884, but whose total income is $50,000, would be taxed on 85% of their benefits, or $19,451. Only $3,433 of their Social Security income would be tax-free.
Trump's tax promises
It's not the first time Trump has made a promise on the campaign trail to lower taxes for specific groups of people. The former president pledged in June to end taxation on tips for service workers, a move that experts said would cost $250 billion over 10 years.
Many seniors might like the idea of eliminating taxes on their benefit checks, Altman noted. Many older Americans feel like they're losing ground after years of high inflation, despite the annual cost-of-living adjustment that's applied to Social Security checks, she said.
Trump's Social Security proposal could be designed to appeal to seniors who were put off by a proposal from the Republican Study Committee, a group of conservatives in the House, to raise the retirement age to 70 for both Social Security and Medicare, Altman added. Currently, the full retirement age for Social Security is 67, while seniors can qualify for Medicare at 65.
"They were really targeting Social Security, and seniors took notice," Altman said. Trump "is throwing things out to try to win voters."
If Trump were elected, it's unclear whether his proposals to eliminate taxes on tips or Social Security benefits would come to fruition. For one, lawmakers would need to pass legislation to change the tax code, which could be a hurdle if either the House or Senate were to be controlled by Democrats under a second Trump administration.
Meanwhile, Trump hasn't yet released detailed plans for his tax proposals, unlike at this point in the 2016 race, according to Paul Ashworth, chief North America economist at Capital Economics.
"Although Trump occasionally talks about eliminating the taxes on tips or lowering the corporate tax rate a little more, these are throwaway lines in his stump speech rather than firm costed proposals," Ashworth wrote in a report this week. "At this point in the 2016 election race, Trump had a (relatively) detailed plan to cut taxes by a massive $7 trillion over the following decade."