A coalition of Democratic lawmakers is advocating for the elimination of taxes on Social Security benefits as part of a proposal aimed at stabilizing the program’s finances.
Representative Angie Craig, D-Minn., introduced the “You Earned It, You Keep It Act” in the House of Representatives in late January. Since then, 10 House members have joined as cosponsors for the bill, which has been referred to a health subcommittee.
The legislation addresses both sides of the taxation issue: Besides terminating federal taxes on Social Security payments received by approximately 70 million Americans each month, it proposes a significant increase in the portion of annual wages subject to Social Security taxes.
Currently, around 40% of beneficiaries are taxed on their Social Security benefits. Critics argue that this taxation, applicable when an individual earns $25,000 or more annually, unnecessarily diminishes retirement funds.
“This bill aims to exempt our nation’s seniors from federal taxes on their Social Security income. I see this as eliminating double taxation and a means to put more money back into retirees’ pockets,” states Craig.
Under current rules, individuals with incomes between $25,000 and $34,000 may be taxed on up to 50% of their benefits, rising to 85% for those earning above $34,000, based on a specific definition of “combined income.”
The proposed legislation would eliminate federal taxes on benefits across all income levels, leaving state Social Security taxes unaffected in nearly a dozen states, including Montana, Utah, and Vermont.
Additionally, the “You Earned It, You Keep It Act” aims to boost tax revenues by adjusting the income threshold where Americans cease paying Social Security payroll taxes. Presently capped at $168,600 of wages, the bill would extend these taxes to earnings exceeding $250,000.
“These higher earners would contribute Social Security taxes on 100% of their income, similar to those making up to $168,000 annually,” explains Craig. “This adjustment ensures fairness in the tax structure.”
Could tax reform save Social Security? According to Stephen Goss, chief actuary at the Social Security Administration, implementing the bill could extend the program’s solvency by two decades. Social Security faces depletion of trust fund surpluses by 2035, potentially reducing benefits by 20%, but enactment of the bill could postpone this depletion to 2054.
While other proposals over the years have included reducing cost-of-living adjustments or altering eligibility ages, these tend to face public opposition for reducing benefits, stalling legislative progress.
Nicole Asher, senior vice president and senior wealth management advisor at Greenleaf Trust, supports the bill for its potential to secure Social Security for future generations while affecting taxes on a minority of earners.
Though Craig’s bill is unlikely to garner bipartisan support in its current form, Republicans have also explored eliminating taxes on Social Security benefits in recent legislative proposals, such as a bill introduced by Representative Thomas Massie, R-Ky., last year, which did not include tax increases.
