Trump Wants to End Taxes on Social Security Benefits. Who Would This Stand to Help?

In a campaign with few substantive ideas on financial regulation or retirement policy, former President Donald Trump has put forward one significant idea: End taxes on Social Security benefits, increasing the amount of money that goes into (at least some) retirees’ pockets every month.

Does this idea have merit? Sort of.

We find that about 45% of current US workers will not have enough money saved to meet expenses in retirement if they retire at age 65, according to a recent analysis.

Under Trump’s plan to eliminate taxes on Social Security, our analysis shows that things would get a little bit better: Just 41% of workers would run short, a 4-percentage-point improvement. Of course, there’s also a tax revenue hit, which would accelerate Social Security’s insolvency (which we did not model).

The number of workers this would affect is in the millions (over the next few decades), but it’s still a low percentage.

We calculated these results with the Morningstar Model of US Retirement Outcomes, which enables us to analyze retirement readiness and the effect of retirement policy proposals. For this analysis, we leveraged the metric that assesses the percentage of workers who will have fully funded their projected expenses in retirement.

Why Would Trump’s Plan to Eliminate Taxes on Social Security Benefits Do So Little?

There are a few reasons.

First, many Americans already pay little to no taxes on Social Security. The rules are too complicated to summarize in this article, but in short: Workers with lower benefits (who tend to have few other sources of retirement income) pay no Social Security income tax, and even the highest-income retirees only pay taxes on 85% of their benefits.

Second, that means that most of the additional tax savings from Trump’s proposal would flow to people who are already projected to meet their spending needs in retirement. While the plan would mean a 4-percentage-point increase in retirement readiness across the board, it would have the biggest impact on the income of workers who are already on track.

Today, we project 43% of workers will have at least 110% of the resources they need to meet their retirement needs at age 65. If Social Security taxes were eliminated? That number jumps to 49%. Those affected retirees might enjoy their retirement more, but they were already projected to be able to meet their needs. So, these gains simply mean retirees who we already project would meet their expenses in retirement would be better off.

Third, we don’t see this policy change benefiting one generation more than another.

This might be confusing for people who have read all those complicated rules I mentioned above. If you have better things to do, just know that the rules around Social Security benefits’ taxation are not indexed for inflation. The phaseouts start at the same income levels year after year—so as incomes increase, a higher percentage of workers can be expected to surpass the threshold for Social Security taxation.

Given that, it might seem that Generation Z, which won’t retire for another 40 years, would therefore pay more in taxes as a baseline condition and pay less in a world in which the Social Security tax was eliminated.

And they would, except younger generations tend to be on better track for an adequate retirement in general. So once again, the extra tax benefits would mostly flow to people on track to meet their retirement needs. Obviously, if that changed, such tax relief probably would be more helpful in the future.

So Who Does Trump’s Social Security Plan Stand to Help?

Nonetheless, it’s worth highlighting that people collecting typical, middle-of-the-distribution Social Security benefits would be the most likely to move from an inadequately funded retirement to an adequately funded one if Social Security taxes were eliminated.

These are the people who earn enough income to be taxed on Social Security benefits but who are still in a financial position where a few extra thousand dollars a year could make a meaningful difference.

For example, we found that among members of Generation X projected to collect Social Security benefits between the first and third quartiles of the projected distribution, 5 percentage points would move to fully funded if Social Security taxes were eliminated. That’s substantially more than the 1-percentage-point uptick we saw for workers with lower benefits and 2-percentage points for workers with higher benefits.

We see a similar pattern with other generational cohorts.

What Would Be a Better Approach to Elevating Retirement Readiness?

This tax plan all adds up to the beginnings of a good idea but not a fully formed one.

Of course, many people might enjoy having more money in retirement, but it wouldn’t move many individuals from a projected retirement shortfall to projected retirement readiness.

Still, if our retirement policy is supposed to help maximize the number of people able to meet their needs in retirement, the idea of tax relief on Social Security benefits is worth further discussion.

From our first pass at analyzing the impact of a sledgehammer to the current tax, it seems Social Security could benefit from a more targeted approach. This could increase the number of people on track for an adequate retirement—and avoid sending most of the new tax benefits to retirees who are on track for a fine retirement already.