A Deep Dive into the Impact of Dropping the Income Tax on Social Security Benefits
President Trump has led the most recent charge to rescue Social Security beneficiaries from the pain of income tax assessments, but that’s certainly not the first time the thought has emerged. Through the years, many have argued that including a portion of one’s Social Security benefit in taxable income is unjust, since the benefit itself is the product of already taxed work. There are counterarguments that illustrate that it’s technically not “double taxation,” but these econometric arguments usually only serve to augment the perceptions of unfairness surrounding this 40-year-old tax rule. Then, there’s the point that simply removing the tax would further exacerbate Social Security’s unraveling financial situation unless a source of compensating revenue is found. What usually happens is that a compromise is sought, and that often leads to a discussion on alleviating part of the angst by modernizing the thresholds that determine when the tax kicks in, since these parameters have never been adjusted since their 1983 and 1993 enactment.
All of the arguments expressed are worth consideration, but what about the long-term, psychological aspects of eliminating the income tax? The Penn Wharton Budget Model (PWBM), a nonpartisan think tank, has taken a deep dive into what they see as a potential serious pitfall related to this change in strategy. Specifically, in a brief on the subject, their team puts forth this summary: “Eliminating taxes on Social Security benefits reduces incentives to save and work while increasing federal debt. Wages and GDP fall over time. The policy primarily benefits high-income households nearing or in retirement while harming households under thirty and all future generations across the entire income distribution.”
For more on this topic, check out this Knowledge at Wharton business journal article here. The article contains a link to the brief titled “Eliminating Income Taxes on Social Security Benefits,” wherein you’ll find key statistics supporting their conclusions.
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