Proposed legislation aiming to terminate the federal tax burden on Social Security retirement benefits offers potential relief for retirees as early as the upcoming year. The bill, known as the You Earned It, You Keep It Act, outlines the elimination of federal taxes on Social Security income starting in 2025, with corresponding tax returns filed in early 2026.
Sponsored by Minnesota Representative Angie Craig, the bill is hailed as a “win-win,” heralding a tax cut for seniors and bolstering Americans’ reliance on their earned Social Security benefits, as expressed in a release by Rep. Craig. Despite the novelty of this proposal, it’s not the first instance of lawmakers introducing legislation to end income tax on Social Security benefits.
Bill Aims to Eliminate Taxes on Social Security
The proposed bill’s objective to eradicate federal income tax on Social Security retirement benefits holds promise for numerous retirees, particularly those receiving other taxable income sources, such as wages or retirement account distributions. Presently, up to 85% of Social Security benefits face federal taxation.
An analysis conducted by the Social Security Office of the Actuary underscores the potential long-term benefits of the You Earned It, You Keep It bill. Provisions within the bill could ensure full payments for retirees and other Social Security recipients until 2054. This forecast surpasses the existing projection, indicating Social Security program insolvency by 2034, as outlined in a report by the Social Security and Medicare Boards of Trustees.
Furthermore, the analysis highlights that enacting this legislation would contribute to a substantial reduction in federal debt, projecting a decrease of nearly $9 trillion over the next few decades. The elimination of the tax on Social Security benefits is proposed to be offset by increased taxes on higher earners, signaling a potential shift in fiscal dynamics if the bill successfully advances.
Should Social Security Benefits Still Be Taxed?
Some people argue that Social Security benefits should not be taxed. They argue that the taxes are unfair because they are paid on income that has already been taxed. They also argue that the taxes are a burden on retirees and people with disabilities, who are already struggling to make ends meet.
However, the vast majority of economists agree that taxing Social Security benefits is necessary to ensure the long-term solvency of the program. They also argue that the taxes are fair and that they help to control the overall cost of the program.
There are a few reasons why Social Security benefits are taxed. First, it helps to ensure that the program is sustainable in the long term. The Social Security Trust Fund, which is used to pay benefits, is projected to be depleted by 2035. By taxing benefits, the government can generate additional revenue to help keep the program afloat.
Second, taxing benefits helps to ensure that the program is fair. If benefits were not taxed, then wealthy individuals who receive high Social Security payments would be getting a bigger break than low-income individuals who receive lower payments. Taxing benefits helps to level the playing field and ensure that everyone pays their fair share.
Finally, taxing benefits helps to control the overall cost of the program. If benefits were not taxed, then there would be an incentive for people to claim benefits early or to claim benefits that they are not entitled to. Taxing benefits helps to discourage these behaviors and keep the cost of the program in check.
Lower COLA in 2025 but Higher Taxes for Retirees
Be prepared to see a notable reduction in the cost-of-living adjustment (COLA) for Social Security in the upcoming year, with the continuation of a slowdown in inflation trends affecting older adults. According to an analysis by The Senior Citizens League (TSCL) based on January’s consumer price index (CPI) report, the forecasted COLA for 2025 stands at 1.75%.
This projection is notably lower than the 3.2% adjustment witnessed this year and the substantial 8.7% increase observed in 2023, marking the largest jump in four decades. The projected COLA also falls below the Congressional Budget Office’s (CBO) estimate of 2.5%.
Mary Johnson, TSCL’s Social Security and Medicare policy analyst, highlighted that while the CBO employs a different calculation method than TSCL, both indicate an expectation of decreased inflation rates from the elevated levels seen in 2023, translating to a lower COLA for 2025.
It’s advisable for retirees to assess their overall financial situation and consult with a tax professional to understand the implications of any potential changes in COLA on their tax obligations.
The Social Security Administration determines its annual COLA based on the average annual increases in the consumer price index for urban wage earners and clerical workers (CPI-W) from July through September.