No one can deny that Social Security is insolvent and faces major deficits over the next decade that will impact Payments of social security benefits for millions of recipients across the country. Vice President Kamala Harris and former President Donald Trump have both said they will not touch the program, despite decades of denial. Trump intends to increase bankruptcy by eliminating taxes on Social Security benefits. While lower tax rates are welcome, the current tax structure on Social Security benefits encourages seniors not to work. These work disincentives are harmful. While cutting Social Security taxes would encourage some seniors to go back to work, other problems could arise if Social Security benefits are not changed.

Taxes on social benefits can be a problem for the United States

Even now, social security is facing serious financial difficulties. In addition to payroll tax revenue, current benefit taxes bring in another $87 billion a year in revenue. Social Security is already bankrupt. Currently, it is estimated that Social Security’s main fund will be depleted by 2033. Exempting Social Security benefits from taxation would bring that date forward to 2032, according to the Committee for a Responsible Budget (it would also deplete the Medicare trust fund six years earlier). In addition, beneficiaries should be aware of this issue because bankruptcy laws mandate a 23% cut in Social Security benefits unless Congress reforms the program.

The US Treasury Department will have to borrow $39 trillion over 30 years (on top of the $77 trillion borrowed for Medicare) if Congress and the administration decide to keep the benefits and pay for them with borrowed money. Of course, this amount is on top of our already substantial debt and deficits. Without taxes on benefits, this deficit would be much higher. It is important to remember that these taxes were originally enacted because of bankruptcy. It was not until 1983, when the program was already in financial trouble, that the decision was made to tax benefits. It was believed that higher payroll and other taxes were essential to the viability of the program. But then Congress should have changed the program more drastically. The program was originally designed to allow for bankruptcy.

Nevertheless, Congress chose a less responsible, more politically expedient course, resulting in Americans now paying the price for this political cowardice. Raising taxes on Social security benefits would be unfair because seniors are overrepresented in the top income quintile, have the lowest poverty rate of any age group, and their average household income has grown four times faster than that of the average worker since 1980. In contrast, the younger people now paying for the benefits of the elderly tend to come from lower-income households. Social Security thus transfers benefits from lower-income Americans to higher-income Americans. Raising taxes would exacerbate the imbalance that already exists.

Why is exclusion from social security taxes a bad idea?

A study by the Urban Institute shows that seniors already receive more in Social security contributions than they paid in. Despite paying only $783,000 into the program, a two-middle-income couple retiring in 2025 will receive $831,000 in lifetime benefits. Tax cuts for these wealthy seniors will hit younger and less wealthy members of the current labor force. Moreover, exempting Social Security benefits from taxes is a terrible idea because politicians gain financial and other benefits when they promise to make deficit-financed payments, such as during pandemic-era spending.

Aside from that, future generations will ultimately have to pay for these benefits. The greatest threat to Social Security is not the current tax structure but political denial about the program’s looming insolvency. Addressing these challenges sooner can preserve the integrity of the system and uphold the intergenerational contract. Now is the time for meaningful reforms before financial reality forces more drastic measures in the future.