Former U.S. President Donald Trump recently proposed eliminating taxes on retirement income, sparking discussion among both the public and financial professionals. Trump contends that this move is necessary to alleviate the financial pressure on seniors, while critics argue it could harm the economy.
About 40% of individuals receiving retirement, spousal, and disability benefits, excluding Supplemental Security Income (SSI), must pay federal income tax. However, under Trump’s proposed plan, these taxes would be abolished, potentially benefiting millions of American retirees.
As things stand, up to 50% of those earning between $25,000 and $34,000 annually are taxed. For those exceeding this figure, a considerable 85% of SSA benefits could face taxation. Many retirees would gladly see this extensive tax burden removed.
Nevertheless, opposition to the tax cut proposal is evident. The Center for a Responsible Federal Budget estimated that this course of action could increase deficits by $1.6 trillion to $1.8 trillion by 2035.
Proposed tax-free retirement plan: A boons or peril?
Critics suggest the move would primarily benefit the wealthy, potentially decreasing funding for important social programs.
If implemented, Trump’s proposition could have significant implications for future Social Security beneficiaries. A 2023 Trustees Report from the SSA suggests that their reserve could run out without restructuring by 2035, leaving beneficiaries to receive just 83% of their expected benefits.
Revenue from Social Security income taxes is critical to funding Social Security and Medicare trust funds. A decrease in this income stream would directly affect these programs, with The Tax Foundation labeling the move “fiscally irresponsible.” They anticipate this could lead to funds being depleted by 2033.
Nonetheless, removing Social Security income taxes could provide financial relief for retirees. The Tax Foundation estimates that this could result in approximately a 1.1% increase in after-tax income for retirees earning above the tax thresholds. However, those not currently paying taxes on their benefits would see minimal change.
Neal Shah, CEO of CareYaya, supports this sentiment, predicting the transition would favor those nearing retirement and retirees by increasing their income. However, Devin Carroll warns the move could negatively impact active workers and suggests it is “more of a political maneuver than a significant financial improvement.”
The proposal spurs ongoing debate about balancing tax policy and social welfare, and its impact on retirees, active workers, and SSA funding continues to be contentious.
