Repealing the taxation of Social Security benefits would have severe consequences for the program’s finances. The current system, which applies an income tax to beneficiaries on a sliding scale, generates significant revenue for both Social Security and Medicare.
According to estimates, about half of Social Security beneficiaries pay no tax on their benefits due to low incomes. However, those with higher incomes – particularly in the top quintile – are heavily taxed, with 20% of their benefits going towards taxes. If Congress were to repeal this taxation, it would result in a significant revenue loss for both programs.
The funds generated from taxing Social Security benefits currently provide about three-fifths of the revenue for the two trust funds. Without this income, Social Security’s Old-Age and Survivors Insurance trust fund would be depleted one year earlier (in 2032), while Medicare’s Hospital Insurance trust fund would face a six-year depletion period (in 2030).
Some proposals aim to mitigate the impact of repealing taxation by offsetting the lost revenue. However, these alternatives would only serve to widen the federal budget deficit and increase the burden on taxpayers.
It is essential to recognize that Social Security benefits should remain subject to taxation as part of a broader progressive income tax system. This approach ensures that those who can afford it contribute more to the program’s finances, making it more sustainable for future generations.
Source: https://www.cbpp.org/blog/eliminating-taxation-of-social-security-benefits-would-be-unwise