On July 4, President Trump enacted his tax and spending bill. The White House promoted the new law as fulfilling the president’s campaign pledge to remove taxes on Social Security. According to a press release, "No tax on Social Security is a reality in the One Big Beautiful Bill."
Despite these claims, the law did not actually abolish taxes on Social Security benefits. Instead, it introduced a new standard deduction that will reduce or eliminate taxes for many, but not all, Social Security beneficiaries. Specifically, around 88% of seniors aged 65 and older will no longer owe taxes on their Social Security, up from 64% before the bill was enacted.
Still, a number of lawmakers are pushing for significant reforms to Social Security, with the complete removal of taxes on benefits being a shared objective. Here’s what retirees need to understand.
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The Protecting and Preserving Social Security Act
Earlier this month, Sen. Ruben Gallego (D-Ariz.) put forward the Protecting and Preserving Social Security Act. In the House, Rep. Angie Craig (D-Minn.) introduced a similar bill. This legislation would bring about two major changes to Social Security, outlined below:
1. End federal income taxes on Social Security benefits starting in 2026
Federal income taxes were first applied to Social Security benefits in 1984. While the law has been updated over time, it currently requires those with combined income above certain limits to pay taxes on up to 85% of their Social Security benefits.
However, Congress has never raised the combined income thresholds to keep pace with inflation, even though Social Security payments have seen regular cost-of-living increases. As a result, while the tax thresholds have stayed the same, benefit amounts have grown considerably over the past four decades, causing more recipients to owe taxes today.
The Old-Aged, Survivors, and Disability Insurance (OASDI) Trust Fund, which finances Social Security, is projected to run out by 2034 due to the pressures of an aging population. Taxes collected from benefits are a significant funding source, so removing this revenue would accelerate the depletion of the trust fund and bring potential benefit reductions closer.
The You Keep It, You Earned It Act seeks to address this issue by requiring transfers from the Treasury General Fund to the Social Security Trust Fund. However, the Treasury General Fund is financed by income taxes and government borrowing, so the government would need to either increase taxes or take on more debt to make up the difference.
2. Extend the Social Security payroll tax to earnings above $250,000
Social Security is mainly funded through a dedicated payroll tax. Both employees and employers pay 6.2% of wages up to the annual taxable earnings cap, which will be $176,100 in 2025. Any income above this cap is not taxed for Social Security, so someone earning $200,000 pays the same amount as someone earning $2 million.
The You Earned It, You Keep It Act proposes to apply the Social Security payroll tax to all earnings above $250,000, aiming to "ensure high-earners pay their share." This extra revenue would push the projected depletion date of the Social Security OASDI Trust Fund to 2058, allowing full benefits to be paid for 24 more years compared to the current law.
What retired workers should know about Social Security
The You Earned It, You Keep It Act is not the only proposal to remove taxes on Social Security benefits. For example, Sen. Mazie Hirono (D-Hawaii) introduced the Protecting and Preserving Social Security Act in August, with Rep. Jill Tokuda (D-Hawaii) introducing a matching bill in the House. Among other provisions, this legislation would also eliminate taxes on Social Security.
Nevertheless, any bill that reduces Social Security’s funding is unlikely to pass in Congress soon. With the program expected to face a $3 trillion shortfall by 2034, it is difficult to justify cutting revenue sources while also trying to address a major funding gap.
