President Donald Trump‘s proposal to eliminate income taxes on Social Security benefits has stirred significant debate, with new analysis revealing potential financial risks for the Social Security Administration and beneficiaries.

Why It Matters

Social Security is a lifeline for over 67 million Americans, with many having to pay taxes on their Social Security benefits. These taxes contribute billions annually to federal revenue, helping to fund critical programs. Trump has proposed eliminating these taxes to allow seniors to keep more of their benefits, but this could reduce government revenue, increasing the strain on Social Security’s already fragile trust funds.

The Social Security Administration projects that without reforms, the trust fund reserves could be depleted by 2034. However, a new Penn Wharton Budget Model suggests that the timeline would accelerate to December 2032 if income taxes on Social Security benefits are eliminated. This policy change could also disproportionately benefit high-income households nearing retirement while negatively impacting younger households and future generations.

What To Know

Trump’s proposal aims to eliminate income taxes on Social Security benefits, a move intended to provide immediate financial relief to retirees. His administration argues that this would put more money directly into the hands of seniors, boosting their Social Security checks and stimulating the economy.

However, a Penn Wharton Budget Model that looks at “Eliminating Income Taxes on Social Security Benefits” estimates that eliminating these taxes could cost the federal government approximately $1.5 trillion over the next decade. This significant loss of revenue could exacerbate Social Security’s projected funding shortfalls, potentially accelerating the depletion of the trust fund reserves, which are already expected to run out by 2034.

Future generations would face significant welfare losses due to reduced incentives to save for retirement, increased federal debt and declining capital and wages. For example, unborn households (those expected to be born in the future) experience the largest losses, ranging from $11,700 to $22,000, while those born today see slightly smaller losses between $9,200 and $14,100.

In contrast, households closer to retirement gain from the policy, with 50-year-olds in the top three income quintiles benefiting between $1,800 and $27,500, as they adjust consumption and savings based on the expectation of no longer paying taxes on Social Security benefits.

Additionally, the model projects other negative consequences. The reduced federal revenue could increase the strain on the fragile Social Security trust funds. Eliminating these taxes would also reduce incentives to save and work, which could impact overall economic productivity. The model also predicts a decrease in wages, with average wages projected to fall by 0.4 percent in 10 years and by 1.8 percent by 2054.

Kent Smetters, Boettner Chair Professor at the University of Pennsylvania’s Wharton School, told Newsweek the study examines the impact of eliminating income taxes on Social Security benefits on its own, without considering any compensatory measures to make up for the lost revenue “because it raises unique issues for policymakers as they head into reconciliation.” Those issues include the revenue loss, the reduced incentives to work and save, and how future generations are harmed.

What People Are Saying

Senator Marshall previously stated in a press release: “President Trump promised to protect Social Security and deliver relief to senior citizens by cutting taxes on these benefits. This simple action will put more money in seniors’ pockets, correct a fundamental flaw in our tax system, and support President Trump’s economic agenda and a promise made to the American people: No Tax on Social Security.”

Kent Smetters, Boettner Chair Professor at the University of Pennsylvania’s Wharton School, told Newsweek: “Unless the new source of revenue effectively undid this increase in after-tax benefits (which is not possible) then you would still see a reduction in retirement savings and labor supply. The exact amount would depend on the actual payfor.”

Alex Beene, financial literacy instructor for the University of Tennessee at Martin, told Newsweek: “Over the past few years and in the coming years to come, we’re entering a time of unprecedented numbers starting to receive Social Security benefits. An increasingly aging population that is nearing retirement age puts additional pressure on a program that already has solvency questions in the coming decade.

To completely eliminate taxes, as much as it would be a benefit for recipients at a time when cost-of-living expenses are dramatically higher, would add to the national debt further over time. It would also call into question the long-term viability of a program that is expected to have shortfalls before any taxes are eliminated or reduced. I don’t think many wouldn’t support making the move to help America’s seniors, but financially, it’s a hard decision to justify.”

What Happens Next

While Trump’s proposal could influence future discussions, its prospects depend on bipartisan negotiations and concerns about fiscal sustainability. Lawmakers are expected to revisit Social Security funding issues later this year. In addition, the recent introduction of a bill by Senators Marsha Blackburn and Roger Marshall seeks to eliminate the double taxation of Social Security benefits and redirect funds from inefficient government spending to safeguard Social Security funds.