Will Eliminating Social Security Taxes Actually Harm Retirees? Here's What May Happen to Social Security

The Funding Crisis: Why Social Security Can’t Afford Tax Relief

Social Security faces an unprecedented financial squeeze. The program is now spending considerably more cash than it collects, a structural imbalance driven by demographic shifts. As the population ages, the ratio of benefit recipients to contributing workers continues to deteriorate—fewer workers are supporting more retirees than ever before.

The numbers are sobering. The OASDI Trust Fund is projected to face depletion by 2035, a milestone just over a decade away. When that happens, incoming revenues will cover only 83% of promised benefit payments, forcing a mandatory 17% across-the-board reduction unless Congress acts. Over the next 75 years, the cumulative funding gap reaches approximately $23 trillion—a staggering figure that underscores the scale of the challenge.

A Well-Intentioned Proposal with Unintended Consequences

The idea of removing taxes on Social Security benefits sounds appealing on the surface. President Trump has championed this concept during his campaign, arguing that “seniors should not pay taxes on Social Security.” The proposal enjoys bipartisan support: Representatives from both parties have introduced legislation toward this goal, including efforts in early 2024 and 2025.

But here’s the critical flaw: Social Security’s revenue streams come from three sources—payroll taxes (91%), investment income from trust fund assets (5%), and taxation of benefits themselves (4%). That final stream, while modest in percentage terms, generated crucial funding. Eliminating it would remove one of only three revenue legs supporting the entire program.

The Tax on Benefits: A Misunderstood but Necessary Policy

The taxation of Social Security benefits began in 1983 when a bipartisan commission found the trust fund facing imminent insolvency. Initially, only half of benefits were taxable for higher-income retirees. Congress expanded this in 1993, setting income thresholds above which 85% of benefits become taxable.

Here’s the problem that nobody talks about: these thresholds have never been adjusted for inflation. Meanwhile, annual cost-of-living adjustments (COLAs) continuously increase benefit payments. The result is bracket creep on a massive scale. In 1984, less than 10% of beneficiaries owed tax on their Social Security. Today, more than 50% do. This wasn’t the result of aggressive policy—it was the inevitable consequence of fixed thresholds meeting persistent inflation.

The Real Threat: What Happens If Congress Eliminates This Tax

Removing the benefits tax would cut program revenues by up to $1.8 trillion over the next decade, according to the Committee for a Responsible Federal Budget. Even worse, it would accelerate the trust fund’s depletion date by more than one year.

This timing matters. When the OASDI Trust Fund runs dry in 2035, benefit cuts become automatic without new legislation. Accelerating that timeline means retirees will face reduced payments sooner than they otherwise would have. In effect, eliminating this tax would trade immediate relief for a select group of current retirees against steeper, broader cuts for the next generation.

The Bottom Line: A False Choice

The uncomfortable truth is that Social Security’s funding crisis demands difficult decisions. Reducing the tax burden on current beneficiaries sounds compassionate, but it shrinks the financial runway available to Congress for implementing sustainable solutions. Whether you view this as a one-year acceleration of inevitable cuts or simply less time to fix what will happen to Social Security’s long-term viability, the outcome is the same: more pressure on future retirees.

Congress is unlikely to pass benefit tax repeal legislation in the near term, precisely because the program is already operating at a loss. Lawmakers recognize that eliminating any revenue stream would exacerbate an already critical situation. For retirees and near-retirees, this gridlock may actually offer protection—though it leaves the fundamental problem unresolved.