Key Points
We project that eliminating income taxes on Social Security benefits would reduce revenues by $1.5 trillion over 10 years and increase federal debt by 7 percent by 2054. The projected depletion date of the Social Security Trust Fund would accelerate from December 2034 to December 2032.
Incentives to save and work are reduced along with rising federal debt. Relative to the baseline, the capital stock falls by 1.0 percent in 2034 and 4.2 percent in 2054. Average wages fall by 0.4 percent in 10 years and by 1.8 percent by 2054. GDP falls by 0.5 percent in 10 years and by 2.1 percent by 2054.
Some high-income households would gain more than $100,000 in remaining lifetime welfare from the policy change, but those under age 30 would be worse off, with newborn households losing about $10,000 in lifetime welfare.
Eliminating Income Taxes on Social Security Benefits
The Social Security Amendments of 1983 introduced the taxation of Social Security benefits for the first time. The Omnibus Budget Reconciliation Act of 1993 introduced a second tier of taxation. The share of an individual’s Social Security benefits subject to taxation is based on combined income.1 Beneficiaries with combined income below $25,000 ($32,000 for joint filers) pay no taxes on their benefits. Those with combined income between $25,000 and $34,000 ($32,000 to $44,000 for joint filers) are taxed on up to 50 percent of their benefits, while individuals with combined income above $34,000 ($44,000 for joint filers) are taxed on up to 85 percent of their benefits. These income limits are not indexed for inflation. As incomes rise due to inflation, more people may find their Social Security benefits subject to taxation. These legislative changes were primarily aimed at improving the financial stability of Social Security.
President Trump campaigned on a promise to eliminate all income taxes on Social Security benefits. As no further details have been provided, we estimate this policy change as a full removal of benefits taxation starting in 2025 (retroactively applied) and permanent.
Table 1 presents the conventional revenue impact of ending the taxation of Social Security benefits, assuming the policy takes effect on January 1, 2025. Over the 2025-34 period, the policy change would reduce revenues by $1.45 trillion.
| Provision | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2025 - 2034 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Ending taxation of Social Security benefits | -60 | -116 | -132 | -139 | -147 | -155 | -164 | -172 | -180 | -187 | -1,452 |
Table 2 presents the economic and fiscal impacts of the proposed policy. The most significant effects include an increase in federal debt and shifts in household savings behavior. By 2054, the federal debt is projected to be 7 percent higher than under current law.
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | -0.5 | -0.7 | -1.0 | -1.4 | -2.1 |
| Capital stock | -1.0 | -1.5 | -2.1 | -2.9 | -4.2 |
| Hours worked | 0.0 | 0.0 | 0.0 | -0.1 | -0.2 |
| Average wage | -0.4 | -0.6 | -0.9 | -1.2 | -1.8 |
| Consumption | 0.6 | 0.5 | 0.4 | 0.2 | -0.1 |
| Debt held by the public | 3.3 | 4.5 | 5.4 | 6.2 | 6.9 |
One of the policy’s key consequences is a reduction in savings among both retirees and working-age households. Since the proposal increases after-tax Social Security benefits, households adjust by lowering their savings targets. As a result, retirees and those nearing retirement boost their consumption, which is 0.6 percent higher in 2034 compared to baseline.
However, the decline in savings, coupled with higher debt, leads to a reduction in the stock of productive capital, which is projected to be approximately 4 percent lower in 2054 compared to the baseline. A smaller capital stock results in lower wages, projected to be 1.8 percent lower in 2054. In response, households slightly reduce their labor supply, leading to a 0.2 percent decline in hours worked over time. The combined effect of reduced capital and labor lowers GDP by 2.1 percent in 2054.
By 2054, households will have fully adjusted their savings behavior. With lower wages and GDP, consumption is projected to be 0.1 percent lower in 2054 than it would be under the baseline.
Conventional distributional analysis reports how household after-tax income changes, net of all changes to taxes and transfers. This information is represented as a cross-section of the population for a given year.
| Income group | 2026 | 2034 | 2054 | |||
|---|---|---|---|---|---|---|
| Average tax change | Percent change in income, after taxes and transfers | Average tax change | Percent change in income, after taxes and transfers | Average tax change | Percent change in income, after taxes and transfers | |
| First quintile | 0 | 0.0% | 0 | 0.0% | -5 | 0.0% |
| Second quintile | -15 | 0.0% | -45 | 0.1% | -275 | 0.3% |
| Middle quintile | -340 | 0.5% | -615 | 0.8% | -1,730 | 1.3% |
| Fourth quintile | -1,135 | 1.1% | -1,630 | 1.2% | -3,560 | 1.6% |
| 80-90% | -1,625 | 1.0% | -2,160 | 1.1% | -4,075 | 1.2% |
| 90-95% | -1,590 | 0.7% | -2,160 | 0.7% | -4,385 | 0.9% |
| 95-99% | -2,020 | 0.5% | -2,605 | 0.6% | -4,565 | 0.6% |
| 99-99.9% | -2,205 | 0.2% | -2,715 | 0.2% | -4,820 | 0.2% |
| Top 0.1% | -2,450 | 0.0% | -2,970 | 0.0% | -5,080 | 0.0% |
Table 3 illustrates the conventional distributional effects of the proposed policy change for households across the entire income distribution. The largest tax reductions go to the top income quintile, with annual gains ranging from $1,625 to $2,450 in 2026 and increasing to $4,075 to $5,080 by 2054. However, the greatest relative gains—measured as a percentage of income after taxes and transfers—are received by households in the fourth income quintile, ranging from 1.1 percent in 2026 to 1.6 percent in 2054. Lower-income earners see significantly smaller gains. Those in the second and third quintiles receive between $15 and $340 in 2026 and between $275 and $1,730 in 2054, equivalent to a relative income increase of 0 to 0.5 percent in 2026 and 0.3 to 1.3 percent in 2054.
Dynamic distributional analysis considers households across the income and age distribution, including the unborn represented by a negative age index at the time of the reform. It asks how much each household in the (income, age) combination values the proposed policy change over their entire lifetime, represented as a one-time transfer at the time of the policy change. Dynamic distributional analysis is the standard in academic research, where conventional analysis is rarely used due to several key limitations that dynamic analysis addresses.
A positive equivalent variation means that the person would be better off under the policy reform; a negative equivalent variation means that the person would be worse off under the policy reform. For example, as shown in Table 4, a person aged 60 at the time of the policy change and with a gross income in the highest 20th percent of the income distribution receives $43,600 of value from this policy bundle. Put differently, this household is indifferent between the adoption of this policy bundle and receiving a one-time payment of $43,600 without this bundle. However, a household aged 30 in the bottom 20th percentile loses the equivalent of $3,400, as shown by the negative value. This household would be exactly indifferent between this policy bundle and a one-time payment of $3,400 to avoid permanently adopting this bundle.
More than 60 percent of currently living households and over 95 percent of retirees would benefit from implementing this policy bundle. However, all future generations would be worse off. The longer households are exposed to the policy and the further in the future they are born, the greater their welfare losses.
Unborn households face the largest losses, ranging from $11,700 to $22,000 for those born 20 years in the future, while those born today experience slightly smaller losses between $9,200 and $14,100. This is because the policy reduces incentives to save for retirement, increases federal debt, and does not encourage higher labor supply. Consequently, capital and wages decline over time, leading to welfare losses.
In contrast, households closer to retirement at the time of the policy change see welfare gains. For instance, 50-year-old households in the top three income quintiles gain between $1,800 and $27,500. This is because these households are nearing the end of their working lives, and the policy's negative effects are not yet substantial enough to outweigh its benefits. Having spent much of their careers saving for retirement, assuming they would pay taxes on their Social Security benefits, they now realize they have over-saved under the new policy. Consequently, they increase consumption and reduce savings.
While nearly all retirees benefit from the policy, the gains are unevenly distributed. Higher-income retirees—those who currently pay the most in taxes on Social Security benefits—gain between $11,000 and nearly $135,000. Meanwhile, households in the lowest two income quintiles see more modest but still positive gains, ranging from $1,000 to $2,000.
Felix Reichling produced this analysis under the direction of Kent Smetters. Jon Huntley, Ed Murphy, Brendan Novak, and Sophie Shin contributed to the analysis. Mariko Paulson prepared the brief for the website.
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Combined income includes everything in adjusted gross income (such as wages, investment income, other pension income, etc.) plus nontaxable interest and half of gross social security benefits. ↩
Age 0 to 20 20 to 40 40 to 60 60 to 80 80 to 100 -20 -11700 -20900 -22000 -18900 -15700 -10 -11500 -20000 -21000 -18000 -14800 0 -9200 -14000 -14100 -12600 -9800 10 -6600 -9000 -9300 -6600 -4000 20 -3500 -4800 -4900 -2600 -1700 30 -3400 -4900 -4800 -3900 -1100 40 -2400 -2700 0 1600 12400 50 -400 -100 1800 7800 27500 60 -2400 -1700 2600 11100 43600 70 2000 2300 9800 41800 134400 80 2500 1100 4600 17900 79400