Former President Donald Trump has introduced one notable idea in his campaign: eliminating taxes on Social Security benefits. This proposal, aimed at increasing monthly incomes for retirees, stands out in a campaign otherwise light on detailed financial regulation or retirement policy discussions.
The question arises, though: does this idea hold any significant merit? The answer is nuanced. According to recent analyses, approximately 45% of current U.S. workers will not have sufficient savings to cover their retirement expenses if they stop working at age 65. Under Trump’s plan, eliminating taxes on Social Security benefits would marginally improve this situation. The analysis shows that 41% of workers would still fall short, which represents a slight 4-percentage-point improvement. However, this tax relief comes with a cost—the loss of tax revenue would likely accelerate Social Security’s insolvency, an issue that wasn’t modeled in the study.
The impact of such a policy would affect millions of workers over the next several decades, but the percentage of the population that would see significant benefits remains relatively small. The projections were calculated using the Morningstar Model of U.S. Retirement Outcomes, which assesses workers’ retirement readiness and the impact of various retirement policies. The key metric used in this analysis is the percentage of workers who will have saved enough to fully cover their expenses in retirement.
The merits of eliminating Social Security taxes
One might wonder why Trump’s plan to eliminate Social Security taxes would have only a limited effect on retirement readiness. Several factors contribute to this.
First, many retirees already pay little to no taxes on their Social Security income. The tax rules are complex, but generally, individuals with lower Social Security benefits, who often have fewer additional sources of income, do not pay any taxes on their benefits. Even the highest earners only pay taxes on 85% of their Social Security income. Therefore, much of the proposed tax savings would benefit those already on track to meet their retirement needs.
Additionally, the proposal would mostly benefit workers who are already projected to have enough resources to meet their retirement expenses. The analysis shows that currently, 43% of workers are projected to have at least 110% of the money they need to retire comfortably at age 65. If Trump’s plan were implemented, that number would rise to 49%. While these retirees may enjoy a more comfortable retirement, they were already in a good financial position, meaning the plan primarily enhances the retirement experience for those already in decent shape.
Another key point is that this policy change wouldn’t necessarily benefit one generation more than another. While it might seem that younger generations, such as Generation Z, would gain more from this tax relief since Social Security taxes are not adjusted for inflation, the reality is different. Younger generations are generally on a better path toward retirement readiness, so while they would pay less in taxes if Social Security were no longer taxed, they are already less likely to face significant financial shortfalls in retirement. If this trend holds, the policy would continue to mainly benefit individuals who are already doing well financially.
That said, Trump’s proposal could have a more meaningful impact on a specific group of retirees: those in the middle of the income distribution. These individuals earn enough to be taxed on their Social Security benefits but are still in a position where an extra few thousand dollars per year could make a significant difference. Among Generation X, for example, the analysis found that 5 percentage points more of individuals in the middle of the income distribution would move from an inadequately funded retirement to a fully funded one if Social Security taxes were eliminated. This is in contrast to a 1-percentage-point improvement for lower-income retirees and a 2-percentage-point increase for higher-income retirees.
This pattern holds across other generational groups as well, indicating that while the plan may not radically improve retirement readiness across the board, it could help certain segments of the population significantly.
While eliminating taxes on Social Security benefits might seem like a step in the right direction, the proposal remains incomplete. The potential tax relief could indeed provide retirees with more disposable income, but it would not substantially reduce the number of people facing financial shortfalls in retirement. If the goal of retirement policy is to help as many individuals as possible meet their financial needs, Trump’s plan, as it stands, might not be the most effective solution.
