Social Security is one of the biggest issues politicians in Washington must address in the next few years.
Many retirees are feeling the pressure on their budgets due to rising inflation, despite automated cost-of-living adjustments for their monthly benefits. Meanwhile, the Social Security trust fund is in danger of depletion by early next decade if Congress fails to make any reforms to the program. Not only will that impact the amount future retirees will receive, but it'll cut benefits for the tens of millions of people relying on retirement benefits right now.
President Donald Trump made several promises to voters about Social Security during his 2024 campaign. He said the government won't cut benefits, and it won't raise the retirement age for new beneficiaries (which is just another form of cuts). His biggest promise of all, though, aimed to help stretch each dollar of Social Security further for retirees.
Trump proposed doing away with taxes on Social Security benefits. Not only are taxes on Social Security income complicated, they can significantly reduce the value of each retiree's monthly checks. But in the version of the new tax bill the House of Representatives just passed last month, there's no tax cut on Social Security benefits at all.
While many retirees may find that disappointing, the truth is that they may be better off without it.
Image source: Getty Images.
How the government taxes Social Security
As mentioned, taxes on Social Security income can be quite complex. The government uses a metric called combined income to determine what percentage (if any) of your Social Security benefits count as taxable income. Combined income is equal to half your Social Security income, plus your adjusted gross income, plus any untaxed interest income.
If your combined income exceeds certain thresholds, you'll have to pay taxes on up to 85% of your Social Security benefits. Here's how it breaks down.
| Percentage taxed | Combined Income (Individual) | Combined Income (Filing Jointly) |
|---|---|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | More than $34,000 | More than $44,000 |
Data source: Internal Revenue Service.
As you can see, the thresholds are extremely low. That's because they haven't been updated for inflation since they went into effect over 30 years ago. Nonetheless, Social Security benefits have gotten annual adjustments to the point where the average retiree collects about $2,000 per month from Social Security. As such, more and more retirees are facing a tax bill on their Social Security income each year.
Eliminating that tax sounds like a great relief for many seniors, but the policy could actually harm lower-income retirees the most over the long run, while leaving very few Americans better off.
The unfortunate truth about Social Security's future
As mentioned, Social Security is facing a significant shortfall if Congress fails to reform the program. Demographic shifts and extending life expectancies have led to higher cumulative benefits payouts without the requisite income to support those payments.
The latest Trustees Report estimates the Social Security trust fund for retirement benefits will drop to $0 by 2033. At that point, the incoming funds will only support about 79% of benefits due.
There are three components of how the Social Security trust fund generates revenue to support benefits payments.
First is the tax on wages that's usually split between employers and employees. Every dollar of wages in America (up to $176,100 per person in 2025) incurs a 12.4% tax that goes directly to Social Security. That brought in $1.1 trillion last year.
The second source of income comes from investing the funds held in the trust in government bonds. Net interest income totaled almost $64 billion last year.
The third source of income is taxation on benefits themselves. In other words, Trump's plan to get rid of the tax on Social Security benefits will accelerate the depletion of the Social Security trust fund. And while those taxes generated just $54 billion last year, they're a growing source of revenue, and the impact is very noticeable. It could accelerate the trust fund depletion by over a year and require a 25% cut in benefits (instead of 21%), according to an analysis by the Committee for a Responsible Federal Budget.
Eliminating taxes on Social Security will harm everyone in the long run, but the policy will only benefit a small percentage of Americans in the near term. Low-income households pay very little taxes on Social Security income. The bottom 40% of households by income receiving benefits pay an average of less than 1% in taxes on their benefits. Even high-income households don't face significant tax burdens. The top quintile of retirees, those with more than $205,800 in household income, pay just 20% in taxes on Social Security benefits, on average.
Here's what the "One Big Beautiful Bill" offers instead
Instead of cutting taxes on Social Security benefits, Americans age 65 and older will get an additional $4,000 tax deduction as long as their income remains below certain thresholds. That could give seniors some relief without as much negative impact on Social Security in the long run. As a result, most seniors will be better off under the current plan than if Trump got his way and fully eliminated taxes on Social Security.
