Trump's Idea to End Taxation of Social Security Benefits Would Be a Budgetary Blunder

As we get closer to the elections in November, we will see more pandering from both Donald Trump and Kamala Harris in the hopes of winning the Electoral College. In an attempt to woo elderly voters, Trump posted the following on his alt-tech social media platform Truth Social: "Seniors should not pay tax on Social Security!" Trump's call to exempt senior citizens from paying taxes on Social Security sounds like a great political message. From a political tactic vantage, it makes sense because there are a lot of seniors out there and they are more likely to vote than younger generational cohorts. 

How is it from a policy or budgetary standpoint? You would think that being a libertarian, I would be inclined towards supporting this policy. As I have brought up as early as 2017, tax policy cannot be simplified into "tax cut = good." Last February, I discussed the argument for eliminating the grocery tax. Eliminating the grocery tax might sound like a positive from a viewpoint of making government smaller, but it actually caused more problems. As we will see shortly, a similar argument can be made about exempting Social Security benefits from taxation. 

What about those poor seniors? As current Social Security policy stands, taxpayers with a Modified Adjusted Gross Income (MAGI) between $25,000 and $34,000 are required to report up to 50 percent of their benefits as taxable income. For those with greater than $34,000, that goes up to 85 percent of their benefits being taxable. Part of where Trump's argument gets diminished is that about 60 percent of Social Security beneficiaries do not pay taxes on their Social Security benefits because their MAGI is less than $25,000. Given the progressivity of the Social Security tax rate structure, it means that higher-income households are paying this tax. Removing this tax would mainly benefit higher-income households (see modeling from the Tax Foundation to see that effect), not the seniors who primarily or solely rely on Social Security for retirement income.

As a side note brought up by the American Enterprise Institute, it makes even less sense to create the tax exemption when the tax treatment of private pensions is roughly equivalent to that of Social Security benefits. Why should two retirees with two identical MAGIs have two different post-tax incomes simply because they have different mixes of retirement savings? 

Isn't taxing Social Security benefits a form of double taxation? Representative Thomas Massie (R-KY) is claiming that taxing Social Security benefits is a form of double taxation. If it were a form of double taxation, like it is with the corporate tax or wealth tax, I would take issue with the double taxation effect and criticize accordingly. Here is the issue. According to a report from the Social Security Administration, 85 percent of Social Security benefits are funded with pre-tax dollars. This would make Massie's double taxation claim largely false. The Right-leaning Tax Foundation, which has no love for double taxation (see here, here, and here), argues that Social Security income should be subject to the income tax. 

Trump's proposal will exacerbate federal budgeting. The income tax from those Social Security benefits currently funds the Social Security and Medicare Hospital Insurance (HI) trust funds. Unless Trump provides an alternative revenue source to replace those funds, we have to assume that a shortfall is created in the process. The bipartisan Committee for a Responsible Federal Budget (CRFB) estimates that the following would occur over the next decade if Trump's plan is enacted:

• Increased deficits by anywhere between $1.6 trillion and $1.8 trillion
• Increase Social Security's 75-year shortfall by 25 percent while increasing Medicare's 75-year HI shortfall by nearly triple
• Advance the Social Security and Medicare HI trust fund insolvency dates by one year and six years, respectively 

This tax cut would not do a good job at fostering economic growth. The Tax Foundation uses both static and dynamic modeling to measure the effects of Trump's proposal. Even when factoring the boost in economic growth and increased incentives to work, save, and invest, the dynamic model estimates that it would still create a $1.3 trillion shortfall over the next decade. What is implicit in these findings is that this tax cut would not be a great way to boost the economy. 

Conclusion: In concept, it sounds lofty to want to lower taxes. However, we cannot look at this policy prescription in isolation. Trump did not make any significant Social Security reforms in his first term as president. In March 2024, Trump said that he would not do anything to "jeopardize or hurt Social Security or Medicare." The truth of the matter is that there is even less appetite from either political party to make reforms on Social Security than there has been in decades past.

To fund the shortfall that Trump's tax exemption would create, the main solutions would be to raise taxes elsewhere or to lower benefits. All Trump would be doing is narrowing the income tax base while exacerbating federal fiscal woes. As I pointed out last year, Social Security is such an insolvent mess that I argued for its privatization. Social Security also has been a major driver in the U.S. federal budget for quite some time. We need more salient solutions than Trump's political pandering if we want true Social Security reform.