For decades, retirees have lost some of their Social Security checks to the government. This could potentially change in 2025, though.
But while there's a chance seniors could soon get to keep more of their retirement money, there's controversy over whether this would be a good thing or could ultimately hurt retirees.
Here's the change to Social Security that could potentially help retirees bring home more benefits now -- but that may backfire in the long run.
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This is why retirees have been losing benefits for decades
Retirees have been missing out on some of their Social Security money for 40 years for a simple reason.
In 1983, lawmakers amended Social Security to shore up its finances. As part of this effort, the government made Social Security benefits partly taxable. Up to 50% of benefits are taxed for retirees with provisional incomes above $25,000 for single tax filers or $32,000 for married filers. Provisional income is half of Social Security benefits, all taxable income, and some non-taxable income.
In 1994, another change was made, and up to 85% of benefits became taxable for single filers with incomes above $32,000 and married joint filers with incomes above $44,000.
Originally, these taxes were supposed to impact a very small percentage of retirees. Fewer than 10% of seniors owed them at the time the 1983 law passed. However, lawmakers did not index the income numbers to inflation, so the threshold at which benefits are taxed has not changed for decades.
Wages and benefits have obviously increased over time due to inflation. The result is that more retirees are taxed on benefits each year. Around half of all households now have to give the IRS a cut of their benefits, losing out on money that they may have needed to support themselves if they had inadequate savings.
This could change in 2025.
Here's why retirees may no longer lose money to the IRS next year
For retirees tired of paying taxes on their benefits, there's potential good news on the horizon. Former President Donald Trump has pledged to eliminate taxes on Social Security benefits if he is reelected.
Of course, even if President Trump does win the election, there's no guarantee this will happen. In order for this proposal to become law, he would have to convince Congress to pass legislation putting his plan into action. Whether this is possible would likely depend on which party has control of the House and Senate.
While the proposal may sound good to retirees, it's worth remembering that the taxes collected on Social Security benefits do not go into the general fund. The money collected is paid to Social Security, and the most recent Social Security Trustee's report revealed that the program's trust fund collected $50.7 billion in 2023 from taxes on benefits.
If taxes on benefits are abolished, this money would no longer come into the program. Social Security's trust fund is already at risk of running short of funds and is expected to be depleted in 2035. If that happens, retirees could only be paid from money coming into the program, which would mean a 17% cut to benefits would have to occur automatically.
If Social Security stops collecting taxes on benefits, this will only worsen the shortfall. The trust fund could run out of money sooner, and a bigger benefits cut could be necessary once the tax revenue stops coming from taxes collected on current benefits. This obviously could be a big problem for all retirees.
These concerns may be why the Senior Citizens League has recommended adjusting the thresholds at which benefits become taxable rather than eliminating the tax altogether. This approach could save middle-income people from having to pay a tax on their retirement benefits that wasn't initially designed to take their retirement funds -- without giving wealthy seniors a huge tax break that could weaken Social Security in the end.
