Trump and the GOP should revise the way Social Security is taxed

Social Security benefits were untaxed before the landmark 1983 deal that made the system solvent for the next forty years. Under that bill, seniors with a combined income of $25,000 or more would pay taxes on up to 50% of their benefits. The taxable benefit amount was increased in 1993 to 85% of benefits for seniors with a combined income of $34,000.

The income levels are slightly higher for married couples filing jointly ($32,000 and $44,000), but the system is otherwise identical. 

Combined income is also a term of art, comprised of all non-benefit income and half of a filer’s Social Security benefits. This means seniors must have a fair bit of non-Social Security income to be taxed on their benefits, but that still ensnares tens of millions of people.

Many of these people are not financially comfortable or well-off, but are nonetheless paying taxes on the benefits they expected to rely on to provide that security in their retirement.

That’s not right, and Trump is right to want to do away with that. But that’s not what the deal originally did.

Those income levels were set at a time when the median household income was only $22,240. In other words, seniors back then had to have well above the median overall income to pay any tax on their benefits at all.

The bill’s authors, however, did not index those levels for inflation. Even the relatively low inflation we’ve experienced in the last few decades has eroded the real value of those levels.

Congress could restore the deal’s original impact on seniors by adjusting those levels for inflation. The $25,000 taxation threshold for single filers, for example, would be raised to $77,430, and the $32,000 level for married couples would rise to $99,100.

The level at which the higher tax bite hits would also be increased for over four decades of inflation. The $34,000 single level would rise to $106,000 while the $44,000 married level would be hiked to $137,000.

This simple change would eliminate taxes on Social Security benefits for over 80% of people 65 and older, according to data from the 2023 Current Population Survey. It would exempt even more seniors who were not working at all. Those data show that only 4.634 million people who did not work at all and were 65 or older had incomes more than $77,000 out of a total of 45.64 million non-working seniors.

Congress should then index the revised income thresholds for inflation to protect seniors from future tax increases. No longer will retired Americans have to worry in their golden years about unexpected bracket creep.

This approach should also substantially limit the revenue loss that would otherwise damage the system’s solvency. High-income taxpayers face much higher marginal tax rates than those just scraping by. Continuing to tax their benefits will still reap lots of money for Social Security, money that ultimately pays for the benefits for average Americans.

Warren Buffett is famed for saying that he shouldn’t be paying a lower marginal income tax rate than his secretary. Trump’s plan would eliminate taxes for Buffett and his retired secretaries. This alternative would give the secretaries a break while taxing Buffett.

SOCIAL SECURITY TAXATION NEEDS REFORM, NOT ABANDONMENT

This approach also sells politically because it distinguishes between what Ronald Reagan called “the needy and the greedy.” People who need Social Security to get by in retirement need and will get a tax break. Those who don’t, won’t.

Republicans should aim to deliver tax cuts for Americans who are struggling. Indexing the levels at which Social Security benefits get taxes does that. The GOP should sell Trump on this alternative as soon as possible.

Henry Olsen is a senior fellow at the Ethics and Public Policy Center and a veteran political analyst. He is the host of Beyond the Polls, a podcast about American elections and campaigns.