Ready For Retirement
Ready For Retirement
No Taxes on Social Security? Here’s What Trump’s Plan Means for You
For nearly 50 years after Social Security's inception in 1935, benefits were not subject to federal income taxes. That changed in 1983 when Congress introduced taxation on benefits for higher-income retirees, using a "provisional income" threshold of $25,000 for individuals and $32,000 for couples. However, these thresholds were never adjusted for inflation, leading to a significant increase in the number of retirees paying taxes on their benefits—now nearly 50%.
President Trump has proposed eliminating federal taxation on Social Security, a move that could benefit retirees financially but would accelerate the depletion of the Social Security Trust Fund, currently projected to run out by 2034. Removing taxes could shift the depletion timeline up by about a year, raising questions about alternative funding solutions. Potential fixes include raising payroll taxes, increasing the wage base, or pushing back the full retirement age. While tax relief sounds appealing, long-term sustainability remains uncertain.
Questions answered:
1. Why are Social Security benefits taxed, and how did this change over time?
2. What would happen if Social Security taxes were eliminated, and how could it impact the program’s future?
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Timestamps:
0:00 - SS payments are taxed?
1:25 - Provisional income
3:18 - Trump's plans for SS
6:17 - The downsides
8:06 - The SS Trust Fund
9:19 - The challenge
11:21 - In the meantime
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Social Security began in 1935, and for almost the first 50 years of the program, none of those benefits were subject to federal income taxes. Fast forward to today and almost 50% of workers are paying federal taxes on those Social Security benefits they receive. In today's video, we're going to talk about a brief history of how this came to be. We're going to talk about comments that President Trump has recently made about ending taxation on Social Security, and we're going to discuss what this potentially means for you and what you can do to prepare. This is another episode of Ready for Retirement. I'm your host, james Canole, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. Prior to 1935, social Security did not exist. 1935, the program was rolled out and, as part of the program, when you were receiving benefits, those benefits were not subject to federal income taxes, and that was the case all the way until 1983. In 1983, amendments were passed and those amendments subjected Social Security to federal income taxes. For certain high-income earners, something was introduced and that something was called provisional income. Starting in 1984, people whose provisional income was over a certain threshold had a portion of their benefits subject to taxes. Now that provisional income threshold, starting in 1984, was $25,000. If your provisional income exceeded that, you owed taxes on part of your Social Security benefit. So, practically speaking, what happened when that change was made was 0% of people who were receiving Social Security benefits were paying federal taxes on those benefits. To fewer than 10% of people who were receiving benefits started paying taxes on that, so it was not a dramatic change in terms of the number of people who were paying taxes on their benefits. Here's the thing about provisional income, though the provisional income thresholds, which, if you were single, started at $25,000, and if you're married, started at $32,000. Once your provisional income exceeded those amounts, you started having some of your social security benefit taxed, but those amounts, those thresholds, were not adjusted for inflation. Now you can either look at this as an oversight at the time, saying they should have adjusted this for inflation, or you could say this is a very strategic decision to say that we're going to start by taxing very little social security, so fewer than 10% of all people collecting benefits. In overtime, as inflation goes up and people's social security benefits go up and their income goes up to keep up with inflation, more and more people will start having their benefits subject to taxes. Well, that's exactly what's played out.
Speaker 1:Just to give some perspective with this, back in 1983, when this provisional income limit was set $25,000 as the threshold for single filers that was $25,000 in 1983. Inflation since then has averaged about 2.8% per year. If you do the math, $25,000 in 1983 turns to about $80,000 today. So retirees with provisional incomes of $80,000 today have the same real purchasing power as someone who had provisional income of $25,000 in 1983. However, the individual in 1983 had none of their Social Security benefits subject to taxes, whereas the individual today with $80,000 of provisional income so keep in mind the same real number as the individual with $25,000 in 1983, that individual today has 85% of their Social Security benefit included when they're calculating their income taxes owed. So a dramatic difference from what we saw 40 plus years ago.
Speaker 1:This is why Social Security has been such a hot topic for so many people and it's why so many politicians are starting to talk about it. You went from a system where 0% of people are paying taxes to a system today where 50% of all people collecting social security benefits are paying federal income taxes on those benefits. So let's talk about what President Trump has said about the system. Let's talk about the potential impact of that and then let's talk about potential solutions to this problem. Now you're, of course, already going to have your own opinions about President Trump and his policies. I'm not going to try to change those at all. What I am going to do is I'm going to share with you what has been stated by his platform and share with you how that's going to potentially impact not only your benefit but the Social Security Trust Fund as a whole. So President Trump's done a couple of things. Number one, the 14th of his 20 promises that you can see right here on his party platform, is that Social Security and Medicare would be protected and benefits would not be cut. You can also see right here he says things like Social Security should not be taxed.
Speaker 1:Now, all of us, of course, are going to have opinions on whether or not these things will be implemented or not, but let's explore the implications here. The first implication of this, of course, is that it addresses the principle here, and the principle being most people do not want to be taxed twice on their income. Now, of course, to be technical here, it's two different taxes when you pay into the Social Security Trust Fund. Those are payroll taxes, so you're paying a portion of your wages into the Social Security Trust Fund via payroll taxes. When you receive those benefits, what we're talking about is federal income taxes on those benefits. So technically, two different taxes, but it still doesn't change the fact that people don't like having their money taxed on the way in and having that money taxed when they receive it if their provisional income is over a certain threshold. So I think the first implication here is just the principle of it. People do not want to be taxed twice, and this is something that would address that. The second implication is a bit more practical and less philosophical, and that's this About half of all retirees rely on Social Security to fund 50% or more of their retirement income needs.
Speaker 1:What does that mean? It means if you reduce the taxes or eliminate taxes on their Social Security benefit, their income, their overall income, is going to be dramatically improved, because Social Security is already representing half or more of your income. If you're keeping more of that half, that dollar amount, those income amounts are going to go much further. The third implication here and the thing to know is this is that 50% of people are currently paying taxes on their Social Security income. What does that mean? It means the other 50% are not.
Speaker 1:Who are the people that aren't paying taxes on social security? Well, it's people whose provisional income is lower than $25,000 if they are single or $32,000 if they are married. So if their provisional income is under those thresholds, they're not paying taxes on Social Security. So, aka, what that means is lower-income retirees are already not having their Social Security benefit taxed. People in the medium to high income and obviously all of this is relative, you could argue, what does low, medium, high mean? But people who have relatively medium to relatively larger incomes in retirement? It's those individuals that are paying taxes on their benefits. So if you were to eliminate social security taxes across the board in terms of federal income taxes on benefits, it would impact people who are medium to high earners when you compare it to everyone in retirement.
Speaker 1:Now what's the downside of some of this? Of course it's great to say can I receive income and not have to pay tax on that income? You now have more that you can do with those dollar amounts. But what's the downside? Well, the downside is there's already a pretty significant challenge facing social security, and that challenge is that by 2034, if no changes are made, social security trust fund is set to be depleted. And that does not mean that no one will receive social security at that point, because as long as there are workers paying into the system, there will be people that can collect those benefits on the other side. But what's going to happen is now that you have 10,000 baby boomers retiring every single day. There are more and more people retiring and collecting benefits and fewer people paying into the system to support those benefits. So if no changes are made, there's projected to be about a 20% reduction in your social security benefit in the year 2034. So for every $100 that you're currently receiving, you're projected to receive $80. So someone with a $2,000 paycheck today, that might go down to $1,600 if no changes are made.
Speaker 1:Now what happens if President Trump does eliminate taxes on Social Security benefits? It's going to feel really good. There will be an implication. The implication is the projected shortfall of the trust fund isn't going to be in 2034. That's going to be accelerated. Last year, for example, in 2024, about $100 billion was put into the Social Security Trust Fund, based upon taxing current retirees' Social Security benefits.
Speaker 1:You can argue whether that's right or whether that's wrong. What I'm here to say, though, is that is the fact. That is what was paid in. So if you remove that, if you remove one part of the funding now, the overwhelming majority of the funding is actually coming from people who have wages and subjecting those wages to payroll taxes, but this is something that's contributing. So if Social Security federal income taxes were eliminated on retirees collecting their benefit, it would expedite the depletion of the Social Security Trust Fund. Now, believe it or not, from 1984 until 2021, there was actually a surplus going into the Social Security Trust Fund. That trust fund is now at about $2.7, $2.8 trillion. Yes, I know what a lot of you are thinking of that trust fund. A lot of it has maybe been used for other purposes, because that trust fund doesn't just sit in cash. It's used to purchase government securities, which is government debt, which means there's other things that that money ultimately goes for. However, as of today, based on the Social Security Administration's reporting, there is $2.7 to $2.8 trillion in that Social Security Trust Fund.
Speaker 1:If President Trump were to move forward with eliminating federal income tax on Social Security benefits, you can see the implications right here. The dark blue line right here shows the current status of the projected depletion of the Social Security Trust Fund, the dotted line. What that's showing is what the new depletion rate would look like and, as you can see, it's maybe going to move that up by about a year. Now, what the orange line is showing is that showing the same thing, but for Medicare, and for Medicare it's about a six year acceleration of the depletion of what's set aside there. So what does this mean? Well, what it means is, in the short term, there are definitely benefits for people who no longer have their social security benefits taxed. There are downsides. The downside is the fund that set aside to fund these benefits is going to run out.
Speaker 1:Now, this isn't to say that the only way to keep Social Security solvent is to keep taxing Social Security benefits. That's a relatively small portion of what's going to fund the Social Security trust. What it is to say is we have a problem here. Now, this is not a surprise. This has been a problem that's been lingering for several years now. This is not coming as anything new to anybody. The challenge is we're getting closer and closer to that depletion date and at some point something's going to change in order to preserve the solvency of Social Security that so many millions of retirees are relying on.
Speaker 1:So do we want Social Security taxed? Of course not. Of course we don't want our Social Security tax. It feels like double taxation. But do we want Social Security to last? Of course we do. So what do you do with this problem? Well, that's what we're going to have to wait and see.
Speaker 1:It's likely that they might do something with the Social Security wage base. So right now, social Security taxes are assessed on the first $176,100 of income that someone earns, and beyond that Social Security taxes aren't assessed. So the wage base is capped, but so too are benefits that retirees receive. There's talk of increasing that wage base or even doing away with that wage base. There's talks of increasing the social security tax. Currently you pay 7.65% of all of your wages up to that wage base. Of that 7.65%, 6.2% goes to fund Social Security. 1.45% goes to fund Medicare. Whatever you pay in, your employer is also matching and paying in. So a combined 15.3% is going in. There's conversations of increasing that. There's talk of pushing back full retirement age. It used to be full retirement age was age 65. Now the latest it is is age 67. You can keep delaying beyond that to get delayed retirement credits, but there's conversations of pushing that back.
Speaker 1:So what you have is you have a whole bunch of different potential solutions. We don't know exactly what's going to happen yet, but what we do know is any change that is made that has a benefit, there's going to be a corresponding negative implication of it as well. That has a benefit, there's going to be a corresponding negative implication of it as well. Remove taxes today, wonderful benefit. What do you do to solve it going forward? That's what we'll wait and see. But what you can do in the meantime is you can start to understand what can you do to maximize your social security benefits. So whatever changes do potentially come are coming from a higher starting wage base. If you want to understand what you can do to maximize your social security benefit, check out this video here. I'll walk you through four simple things you can do to maximize that benefit so that you can ultimately maximize your retirement income.
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