President Trump during his campaign proposed exempting Social Security from federal income tax. Several lawmakers in Congress have recently introduced legislation that aims to accomplish the same goal.
- Rep. Angie Craig (D-Minn.) in January announced the You Earned It, You Keep It Act.
- Rep. Jeff Van Drew (R-N.J.) in January announced the No Tax on Social Security Act.
- Rep. Thomas Massie (R-Ky) in February announced the Senior Citizens Tax Elimination Act.
Additionally, President Trump last month pushed Congress to approve a "big, beautiful" tax and spending bill that fulfills several other campaign promises. "In the coming weeks and months, we will pass the largest tax cuts in American history -- and that will include no tax on tips, no tax on Social Security, and no tax on overtime," he said.
However, those major changes to tax law would likely hurt retired workers on Social Security. Here's why.
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Social Security benefits could be cut 23% in 2035 under current tax law
Social Security is primarily financed by taxes, but there are three revenue sources: 91% comes from payroll taxes, 4% from taxes collected on benefits, and 5% from interest earned on trust fund assets. The program is regularly running deficits, meaning it's spending more money than it brings in, because the retired population that draws benefits is growing more quickly than the taxpaying population that supports the program.
The Congressional Budget Office (CBO) estimates the Social Security Trust Fund -- the financial account that pays benefits to retirees, spouses, survivors, and disabled workers -- will be exhausted by 2034. At that point, one funding source would disappear because the trust fund would no longer earn interest. The remaining tax revenues would cover only 77% of scheduled payments in 2035. That means benefits could be cut 23% in 10 years unless lawmakers find a solution.
Ending taxes on Social Security means benefit cuts would happen sooner
The CBO estimates Social Security will run a $3.3 trillion deficit over the next decade. Taxes on benefits will contribute $1.1 trillion to revenue during that period. So, eliminating that income would make an already-substantial deficit much larger. In turn, the trust fund would be exhausted sooner than CBO anticipates under current law, meaning Congress would have less time to avoid substantial benefit cuts.
Importantly, while the precise time to trust fund depletion depends on the discrepancy between cash inflows and outflows, the Committee for a Responsible Federal Budget (CFRB) says ending taxes on Social Security would move trust fund depletion forward by one year. Alternatively, a budget model from Ivy League business school Penn Wharton estimates it would hasten trust fund depletion by two years.
More broadly, CRFB estimates ending taxes on tips, overtime, and Social Security -- changes President Trump wants included in the "big, beautiful bill" currently being debated in Congress -- would collectively bring trust fund depletion forward by three years. In that scenario, benefits would be cut in 2032 unless lawmakers fix the financing problem.
Additionally, because those tax law modifications could reduce Social Security's revenue by as much as $2 trillion over the next decade, the resultant benefit cuts would be even larger than expected. CRFB estimates payments would be slashed 33% by 2035, up from the 23% cut projected by CBO under current tax law.
Here's the bottom line: Representatives from both political parties have proposed eliminating taxes on Social Security benefits. President Trump has gone even further in suggesting tips and overtime should be exempt from federal income tax. Those changes may ultimately be a bad thing for retired workers, despite increasing benefits for individuals that currently owe tax on their Social Security checks.
Nancy Altman, President of nonprofit group Social Security Works, recently told Kiplinger, "[Trump's] talking about getting rid of taxation, which increases benefits, but the very benefits that are subject to taxation will be much reduced. So basically, it's not an honest proposal."
