I’m a Financial Girl: 4 Things That Could Happen If Trump Ends Social Security Taxes

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As we approach the November 5, 2024 general election, both candidates continue to sprinkle their campaign appearances and social media messages with policy content. Social Security is a major institution in the economic and social life of Americans, and the period leading up to Election Day promises to be one of the most extensive debates about the troubled 89-year-old program.

Republican nominee Donald Trump’s plan to end the payroll tax has met with support from allies of the former president, who believe the legislation would improve the long-term solution to Social Security, and strong opposition. from the people, as a member in the ranks of House Ways. and Means submitee on Social Security, Rep. John Larson (D-Conn.), who called the idea a “fatal mistake.”

According to Devin Carroll, Principal Consultant at Carroll Advisory Group, Trump’s idea is not new. “Earlier this year, Representative Angie Craig (D-Minn.) reintroduced the UE Earn, You Keep Act, which also aims to eliminate taxes on Social Security benefits. Her proposal was praised because not only eliminated these taxes but also extended the life of Social Security by nearly 20 years and helped reduce the federal debt by taxing more money for Social Security.

There have been several recent legislative proposals designed to help preserve Social Security for future generations. In addition to Craig’s You Earned, UE Save the Law and Larson’s Social Security 2100 Act,

A number of top Democratic senators, including Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.), introduced the Social Security Expansion Act at a Budget Committee hearing. of the Senate in June 2022.

As the presidential election season continues, keep up with what the candidates are saying about the issue. Here are four things that could happen if Trump is elected and removes taxes on Social Security benefits. Make sure you talk to your financial advisor if you believe they will affect you.

1. Immediate Impact on Social Security Support

Reducing taxes on Social Security is a risky move, especially for someone who hasn’t considered any type of wealth tax in the past. As Larson noted about Trump’s recent Social Security statement, “He’s coming out and saying he’s going to get a tax break but he’s not saying how he’s going to pay for it.”

In order to pay for Social Security benefits, the government may need to divert money from general tax receipts, which could result in larger federal deficits or program cuts. In addition, tax increases or the introduction of new ones can be used to replace the loss of Social Security tax revenue.

While most solutions include charging the wealthiest Americans to pay for the cuts, Social Security may have to undergo changes such as raising the retirement age or health screening payments. methods. If federal government borrowing is necessary, the national debt can balloon to maintain Social Security benefits in the absence of other funding sources.

2. Long-Term Effects on Social Security Benefits

Social Security taxes are the primary source of funding for the Social Security Fund. Eliminating this tax would significantly reduce revenue, which could jeopardize the program’s ability to pay benefits.

“In 2024 alone, more than $50 billion in Social Security benefits went into the Social Security fund,” Carroll said. This amount is expected to triple in the coming years as the income levels that trigger these taxes have not been updated since 1983 and 1993.

Without this revenue, the Social Security Fund could quickly run out of money, meaning current and future retiree benefits could be cut unless another source of funding is found. finances.

“Financial planners like myself are concerned about the long-term impact on the implementation of the Social Security program,” said Taylor Kovar, CFP, founder and CEO of Lufkin, Texas-based 11 Financial. “Eliminating these taxes would seriously jeopardize funding, which could lead to reduced or reduced benefits for retirees who rely on Social Security for a large portion of their retirement income. job.”

3. Economic Effects

Although there is a long-term risk to the program’s effectiveness, eliminating the Social Security tax would increase workers’ take-home pay by the amount they currently contribute: 6.2% of their wages, up to a certain limit (employers will keep the same amount. contribution amount).

Both Kovar and Carroll believe the immediate effects of the Social Security tax cuts will benefit workers and retirees, but are more cautious about the long-term effects. “Trump’s proposal to eliminate Social Security taxes could bring immediate benefits to ordinary Americans by increasing their take-home pay, allowing for more consumer spending,” he said. Kovar, and Carroll said “giving retirees an extra $50 billion would boost the economy as they would have more disposable income.”

4. Real Impact on Employees and Retired

When it comes to tax cuts, we need to ask, “Who will benefit?” As Mark Luscombe, LD, LL.M, CPA and Senior Auditor with tax and accounting professionals at Wolters Kluwer noted, low-income families will receive little or no benefit. you get a smaller tax benefit in 2025.

“Currently single taxpayers with combined income (gross income plus tax-free interest plus half of Social Security benefits) less than $25,000 ($32,000 for joint filers) pay no tax on Social Security benefits,” Luscombe said.

“Those with a combined income above $25,000/$32,000 pay taxes on 50 percent of their Social Security benefits or 85 percent of their Social Security benefits while the income is increase,” he added. “Therefore, taxpayers with incomes above these levels will see a direct benefit.”

According to a Tax Policy Center analysis released on August 1, Trump’s proposed tax break could save US households an average of $550 for 2025. “In the short term, [Trump’s plan] will provide modest benefits, on average, to Social Security beneficiaries,” Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Institute, told CNBC. But almost all of those benefits it goes to high-income retirees who don’t really need it.

Tax cuts make good electoral promises, but Social Security is the most popular government benefit program that’s been around for 89 years and is now sitting on the sidelines. “Trump’s plan to stop taxing Social Security benefits has generated a lot of speculation, but the facts are still in,” Carroll said.

In the coming months, both presidential candidates will have to address the looming Social Security funding crisis by coming up with a tax, age limit or other compromise, but that, as they say, that’s a discussion for another day.

_{Editor’s note on election coverage: GOBankingRates is non-partisan and strives to accurately cover all aspects of the economy and produce balanced reports on politically oriented financial stories. You can find more information on this topic at GOBankingRates.com.}