Retiring on Social Security alone is not an easy thing to do. But the silver lining is that seniors who have only Social Security as income typically don’t pay taxes on their benefits.
Once additional income comes into the mix, though, taxes on those benefits can easily apply. This is a rule that financially hurts many seniors.
The problem is that the thresholds at which federal taxes apply to Social Security are almost unreasonably low. Those thresholds were established decades ago and have not been adjusted for inflation or wage growth, despite big changes in both categories through the years.
As a result, a lot of people pay federal taxes on their Social Security income who shouldn’t. And President Trump is not a fan of that policy.
That’s why Trump has proposed to eliminate federal taxes on Social Security benefits, allowing seniors to keep those monthly checks in full. It’s a good idea in theory. But it unfortunately has the potential to cause a world of problems.
Why getting rid of taxes on Social Security may not work
Social Security gets the bulk of its funding from payroll taxes. However, taxes on benefits are another key source of income for the program.
If those were to go away, it would no doubt provide financial relief for the many people who are subject to them. But it could also push Social Security that much closer to insolvency.
In the coming years, Social Security expects to owe more in benefits than it receives in revenue due to an anticipated mass retirement on the part of baby boomers. And while the program can reach into its trust funds to keep up with benefits for a good number of years, once those trust funds are depleted, benefit cuts may be inevitable.
Unfortunately, it’s not as if lawmakers have decades to solve Social Security’s funding issues. The program’s Trustees estimate that Social Security’s combined trust funds will be used up by 2035. At that point, broad benefit cuts could happen unless lawmakers manage to intervene.
If taxes on Social Security are eliminated as per Trump’s proposal, the timeline for benefit cuts could get pushed up. So while not paying taxes on benefits might help seniors in the near term, it could cause them more financial upheaval in the long run.
A solution that has potential
President Trump’s idea to get rid of taxes on Social Security benefits could work if he and his team manage to find another feasible solution for pumping more money into the program. There are other ideas that have been floated in the past, like raising full retirement age or increasing the Social Security tax rate on current wages.
There’s also the idea of raising the wage cap for Social Security taxes, or even doing away with it altogether. But those suggestions clearly come with drawbacks.
All told, it’s too soon to tell whether taxes on Social Security benefits will go away in the near term. But if they do become a thing of the past, lawmakers may have to scramble to come up with replacement revenue for the program.
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