Social Security Needs a Fix More Than Ever After the Big Bill. What Would Work.

The Social Security Administration’s $2.7 trillion trust fund is expected to be depleted in less than a decade. (SAUL LOEB / AFP / Getty Images)

About the authors: Marc Goldwein is the senior vice president and senior policy director for the Committee for a Responsible Federal Budget. Anthony Colavito is the organization’s Social Security analyst.

Contrary to claims from the Trump administration, the recently passed “One Big Beautiful Bill Act” didn’t end taxes on Social Security benefits. It did indirectly reduce those taxes, however, and in the process actually accelerates the insolvency of both the Social Security and Medicare trust funds.

Those funds are now expected to run dry in just seven years, at which point retirees will face a 24% across-the-board benefit cut. Fortunately, there are ways to avoid this cut and address taxation of benefits at the same time. Trump’s temporary tax reductions just aren’t one of them.

Since 1983, Social Security benefits have been partially subject to the federal income tax. Specifically, seniors with adjusted income above $25,000, or $32,000 for couples, pay income taxes on half their benefits. Those with adjusted income over $34,000, or $44,000 for couples, pay taxes on 85% of their benefits. That tax revenue is deposited into the Social Security and Medicare trust funds and helps pay for benefits.

On the campaign trail, President Donald Trump called for ending these taxes altogether. The White House and others have claimed that the recent tax and spending legislation will achieve his goal of ending taxes on Social Security benefits for most beneficiaries.

That isn’t quite right. The bill didn’t eliminate taxation of benefits. It didn’t even change the calculus behind those taxes. What it did was indirectly reduce them by extending lower tax rates and establishing a new, temporary deduction of $6,000 per senior.

These policies lower the tax rates paid on many seniors’ benefits and reduce the number of seniors that pay taxes on any income, including on Social Security income.

Unfortunately, these policies will also cost the Social Security and Medicare trust funds about $30 billion a year and accelerate their insolvency, from 2033 to 2032. The taxation of benefits remains largely intact, especially considering the senior deduction expires at the end of 2028.

Extending or expanding that senior deduction on its own would be a costly mistake. But the president did have a point on the campaign trail: The current method of taxing benefits can be problematic.

Taxing Social Security benefits creates complexity and confusion for seniors as they struggle to estimate how much they will owe based on their age, benefits, marital status, retirement account withdrawals, and other income. The design of benefit taxation compels excessive tax planning, which increases costs to seniors and the federal government. And these taxes can encourage seniors to retire unnecessarily early, as the income phase-in of benefit taxation leads to a very high effective marginal tax rate.

One way to solve these problems, ironically, would be to expand taxation of benefits to match the tax treatment of most private pensions, 401(k)s, and IRAs: taxing all benefits in excess of worker payroll tax contributions. This approach would remove the various income cliffs, mitigate disincentives to work, and reduce tax planning opportunities. It would also generate large sums of revenue—enough to make permanent the higher senior deduction and generate hundreds of billions of dollars to strengthen Social Security and Medicare solvency.

Another approach would be to treat Social Security more like a Roth-style retirement account, counting all employer payroll tax contributions as income on the front-end while truly eliminating income taxes on benefits on the back-end. This approach would ensure all income is taxed only once while encouraging delayed retirement—an outcome that strengthens individual retirement security and promotes faster economic growth.

Based on modeling by PolicyEngine and our estimates at the Committee for a Responsible Federal Budget, this policy could generate upward of $1 trillion over a decade—triple the trust fund revenue set to be lost from the tax bill—and delay the insolvency of the Social Security and Medicare trust funds by several years. Gradually phasing in the policy to ensure current high-income seniors pay much of the taxes they owe would generate even larger near-term savings and further delay insolvency.

To be sure, more than just fixing the taxation of benefits is needed to rescue Social Security and Medicare. Policymakers should consider increasing the retirement age, expanding the payroll tax, adjusting the benefit formula, reforming Medicare cost-sharing, and reducing overpayments to hospitals and insurance plans, among other ideas.

Our organization is currently developing a novel set of trust fund solutions that would restore solvency, strengthen retirement security, lower healthcare costs, and accelerate economic growth.

Today’s youngest retirees will be just 69 years old when insolvency demands deep cuts in benefits. Time is running out to enact thoughtful reforms.

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