Trump Wants To Eliminate Social Security Taxes: How This Could Impact Retirees in 10+ Years
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Jordan Rosenfeld
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Molly Sullivan
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President Donald Trump has said that under his second term he would look to eliminate taxes on Social Security income for seniors, which at first glance sounds like a good thing for folks who are already living on limited incomes. However, there are complexities related to the necessity of these taxes.
What impact could such a potential move have on retirees in the next decade and Social Security at large?
Clay Cooper, partner and wealth management advisor at Clearview Financial Partners, Northwestern Mutual, shared some possibilities.
How Social Security Income Is Taxed
Currently, individuals who claim Social Security benefits and make an income between $25,000 and $34,000 per year (between $32,000 and $44,000 for married couples filing jointly) may have to pay an income tax on about 50% of their benefits. For individuals who earn over $34,000 (over $44,000 for married couples filing jointly), up to 85% of your benefits may be taxable.
According to Cooper, about 40% of Americans pay these taxes on their Social Security (the other 60% don’t make enough to be taxed). If Trump eliminates the taxes on these benefits, while it may benefit retirees upfront in that they can keep more of their money, that is less money going back into the overall Social Security fund that pays out those benefits to everyone, which could speed the rate of the Social Security Trust running low on funds.
Tax Breaks Now Can Have Consequences Later
Additionally, Trump has talked about eliminating the payroll taxes that employers pay into Social Security, around 6.2% (the other 6.2% is paid by the employee). This would also significantly reduce the amount of money going into Social Security.
It can be a little murky to understand how the Social Security Trust works that pays out these benefits to Americans. Cooper explained that if you imagine Social Security as a person who earns $77,000 per year but spends $100,000 per year, drawing the rest from savings, they’re spending more money than they’re making and depleting their sayings.
“So Social Security has a trust with a positive balance right now, and that’s where they’re making up the difference between the 77 cents on the dollar that they pay out. That all comes from payroll tax.”
Even if Trump does not eliminate any of these taxes, experts have been predicting for a while that Social Security’s funds will run low or even out by 2034, limiting the Social Security benefits that many Americans count on in their retirement.
“That’s kind of a half truth,” Cooper said. “The savings account is going to be depleted, but they’re still making 77 cents on every dollar they pay out. So it’s not like Social Security goes to zero.”
However, if Trump eliminates those taxes, there will be even less going into the overall Trust, which could hasten its depletion.
Alternative Funding Sources Don’t Abound
As of yet, Cooper said, Trump has not outlined any alternative funding mechanisms if he cuts these taxes. However, it’s possible the government could make different choices to keep the Trust robust.
“Some people have been critical of the Trust because right now it just buys treasuries,” Cooper said. “So government debt is pretty low yielding. Some people think the U.S. should be buying from the [stock market] and that should get a better return than buying treasuries over a decade long period of time.”
However, these kinds of changes would have to be made through acts of Congress.
Plan For Less Social Security
Whatever happens, Cooper thinks it’s wise for retirees to plan on a reduction of benefits, assuming more like a 75% payout than 100% of what you expect to receive.
There have been threats of Social Security running out since the 1980s, Cooper said, and yet he pointed out “the government always has found a way to fund it because it is a very important part of our economy and supporting retirees.
“If 40% of people pay taxes on Social Security, the inverse of that’s also true, 60% of people don’t pay taxes on Social Security, meaning they make less than $32,000 a year in retirement. And so to cut that would create a tremendous amount of poverty in America and that would be absolutely detrimental to cut.”
Spend Less
If Social Security benefits get reduced or slashed, which Cooper pointed out would affect “tens if not hundreds of millions of U.S. citizens,” then it really only leaves people one recourse: to spend less.
“That’s really the only option there is. And pull more from their retirement accounts if they have them. But if there’s no other assets on somebody’s balance sheet, then there’s not a lot other than spending less would be the only option.”
Strive For Safe Investments
For retirees looking to shift their portfolios around to account for such a possibility, Cooper recommended to opt for “safe and stable” investments, things that are long-term and growth oriented.
“So, if you’re taking more out of your portfolio in retirement, you may want to become a little bit more safe and stable and [remove] risk from your portfolio. Moving more into money markets and CDs and bonds.”
Social Security Is a Bipartisan Issue
Cooper feels that Social Security is too important to Americans for either political party to truly threaten it and has some faith that most politicians see the value in Social Security — and might even be counting on it themselves.
“If Social Security ran out of money and ran out of tax revenue, it would make a lot of Americans very mad. And so it’d be kind of a poison pill to a politician,” he said.
He said it’s not uncommon to wait until the eleventh hour of crisis for major change to happen and Social Security could get to that point. “Closer to the date of the trust running out of the money, the more need there is to figure out the tax situation behind it.”
In the meantime, retirees should look to curb their spending and anyone planning to retire soon should consider other forms of retirement savings, such as 401(k) accounts, IRAs and similar.
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