Biden Signature Laws Causing Increases Social Security for Retirements
Many have seen an increase in Social Security payments thanks to laws aimed at amending years of benefits cuts for public sector workers.
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During his campaign, President Trump proposed exemption from social security from federal income taxes. Several lawmakers in Congress recently introduced legislation aimed at achieving the same goal.
- Rep. Angie Craig (D-Minn.) announced in January that you won it, you will keep it.
- Rep. Jeff Van Drew (RN.J.) announced in January that he would not be tax-free on the Social Security Act.
- In February, Rep. Thomas Massey (R-KY) announced the Elderly Tax Elimination Act.
Additionally, last month, President Trump urged Congress to approve a “big and beautiful” tax and spending bill that fulfills the promises of several other campaigns. “In the coming weeks and months, we will pass on the biggest tax cuts in American history, not including taxes on tips, no tax on social security, or tax on overtime,” he said.
However, these major changes to tax laws could hurt retired Social Security workers. This is why.
Social Security benefits could be reduced by 23% in 2035 under current tax laws
Social Security is primarily funded by taxes, but there are three sources of income. 91% comes from payroll tax, 4% comes from taxes collected in benefits, and 5% comes from interest acquired in trust fund assets. This program runs in the red periodically. This means that with more retired populations withdrawing benefits than tax paying populations supporting the program, they spend more money than they break in.
The Congressional Budget Office (CBO) estimates that the Social Security Trust Fund (financial accounts that pay benefits to retirees, spouses, survivors and disabled workers) will be exhausted by 2034. At that point, one source of funding disappears. The remaining tax revenues will only cover 77% of the payments scheduled for 2035. This means that in 10 years, we can cut benefits by 23%, unless lawmakers find a solution.
Ending taxes on Social Security means that benefits will be cut faster
The CBO estimates that Social Security will run a $3.3 trillion deficit over the next decade. Taxes on benefits will be donated to $1.1 trillion in revenue over that period. So, eliminating income already means a much larger deficit. Similarly, trust funds will be exhausted faster than CBOs expect under current law. This means that Congress will have less time to avoid substantial profit cuts.
Importantly, the exact time to trust fund depletion depends on the discrepancy between cash inflows and outflows, but the Responsible Federal Budget Committee (CFRB) says that Social Security termination tax will move the depletion of trust funds a year ago. Alternatively, Penn Wharton’s budget model at Ivy League Business School estimates that it will speed up the depletion of trust funds over two years.
More broadly, the CRFB estimates tips, overtime and tax termination on social security — the hope that President Trump will be included in the “big beautiful bill” currently being debated in Congress — collectively brings the depletion of the trust fund until three years. In that scenario, profits will be reduced in 2032 unless lawmakers resolve the funding issue.
Furthermore, these tax law changes could potentially reduce Social Security revenues by up to $2 trillion over the next decade, resulting in even greater profit cuts than expected. The CRFB estimates that payments will be reduced by 33% by 2035 from the 23% reduction projected by the CBO under current tax laws.
The bottom line is: Representatives from both parties propose to eliminate taxes on social security benefits. President Trump proposed tips and took it further that overtime should be exempt from federal income tax. These changes may be bad for retired workers, despite the increased benefits of individuals currently owing taxes on social security checks.
Nancy Altman, president of the nonprofit Social Security Works, recently told Kiplinger, “Trump talks about removing taxation, which increases profits, but the very profits that are subject to taxation are significantly reduced.
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