The proposals for the social security tax cut by Donald Trump have managed to dominate conversations since his election into office in 2024.
Trump Social Security Tax Cut
One of the ideas on Donald Trump’s checklist for his 2024 presidential campaign has been that federal taxes on Social Security benefits are to be eliminated. Analysts and observers are taking a close look at the potential impact on retirees and the federal budget.
Under this plan, expenditures would be around $1.2 trillion in 10 years from 2025 to 2034, according to projections in the Penn Wharton Budget Model. Such a dramatic shift does lead some people to question its likely implications for the federal budget and whether the Social Security program will remain viable in the long term.
Among the wide array of economic proposals, this proposal to cut the Social Security tax has far-reaching consequences for Social Security’s long-term stability and fiscal sustainability.
Overview of the Proposed Trump Social Security Tax Cut
Presently under United States law, Social Security benefits are taxed at the level of income.
- Individuals with higher incomes can be subject to the taxation of as much as 85% of their Social Security benefits while other people with smaller income levels will pay a lesser percentage.
- This way, funding is afforded to the Social Security program so that it will not become depleted and support generations in the future.
- Trump’s tax cut would make Social Security benefits fully tax-free to the recipient regardless of his or her income level.
- The proposal to eliminate tax on beneficiaries would increase the take-home pay of retirees. The effect can spur consumption and the economy
- The proposal will, however, likely end up costing the federal government an estimated $1.2 trillion over ten years, based on analysis from the Penn Wharton Budget Model.
Trump Social Security Tax Cut Fiscal Impact & Challenges
Eradication of Social Security benefit taxes will slash federal revenue by huge margins. This may, in turn, enlarge the nation’s deficits.
- The Committee for a Responsible Federal Budget states that the revenue loss due to the proposal could be as high as $950 billion over ten years, with broader estimates suggesting total fiscal impact above the trillion-dollar mark.
- The depth of that level of revenue decline could mean increased borrowing in the federal sector and hasten the depletion of the Social Security trust fund.
Impact on Social Security Solvency
The trust fund of social security is expected to run out in 2034, and then the program will have a reserve to pay for only 80-83% of scheduled benefits by that time.
- The tax cut introduced during the Trump administration might make it insolvent sooner. Some experts predict that it will be depleted as early as 2031.
- If the program were not supplemented with other revenue sources, then the immediate shortfall might make the system cut up to 33% from the future beneficiaries’ benefits, which is a significant blow on the retired populations in terms of financial stress.
Trump Social Security Tax Cut Economic Impact
Short-Term Economic Gains
- On the surface, this tax cut would reduce the cost burden for millions of retirees-in reality, the ones who stand to gain most are middle and upper-income recipients with the highest tax burdens
- Retirees would likely increase their spending and thereby the overall economy in the short term because of the increased disposable incomes.
- This increased consumer expenditure may then be beneficial to industries that are significantly spent on or by elderly populations and could have implications for growth at a macro level.
Long-Term Risks To Economic Stability
- However, the effects on economic stability, from a longer-term perspective, are much more complex.
- The policy increases national debt at a time when interest rates are higher, thereby raising the cost of financing debt for the government by lowering federal revenue.
- High debt levels may weigh on economic growth over time and can reduce the capacity of the government in responding to future fiscal challenges.
Alternative Options and Amendments of Trump Social Security Tax Cut
To mitigate the immediate fiscal impact, lawmakers can phase in the tax cut for years. The rationale for phasing is that it would spread the revenue loss but it would lighten the pressure on the federal budget as time, conditioned by economic developments, is available to act to fill in adjustments.
- The alternative would be a targeted tax cut for low- and middle-income beneficiaries who will bear a disproportionate pain from any reduction in their benefit programs.
- This targeted approach would avoid delivering big-benefit flows to high-income recipients and at the same time would reduce the revenue loss.
Pairing Trump Social Security Tax Cut with Social Security Reforms
To that end, some politicians have proposed merging the tax cut with broader reforms for Social Security to address the program’s solvency issues.
- Reforms might raise the retirement age, modify payroll tax caps, or adjust benefits.
- Combining the tax cut with the reforms could thus be the way lawmakers move toward making sure Social Security will be sustainable in the long term without inordinately increasing the deficit.
- Through this proposal, for instance, Trump would cut Social Security taxes as part of a broader agenda in taxation, which includes the extension of individual tax cuts that were implemented under the 2017 Tax Cuts and Jobs Act (TCJA) and slashing corporate tax rates even further.
- Though these policies would help spur growth, they come with the real and present danger of increasing the federal deficit.
- The Penn Wharton Budget Model estimates that Trump’s overall tax agenda will augment the primary deficit by up to $5.8 trillion during the next decade and will amplify long-term fiscal pressures.
