What to Know About the New Bill Repealing Social Security Income Taxes

A new proposal emerged this week in the U.S. House of Representatives aimed at improving the financial standing of the Social Security program by repealing the federal taxation of benefits while phasing out the current wage cap on taxable earnings.

The bill is sponsored by Reps. Angie Craig, D-Minn., and Yadira Caraveo, D-Colo., and it is dubbed the You Earned It, You Keep It Act. According to the lawmakers, the proposed reforms would make the program fairer while also pushing out the projected insolvency date of the key Social Security retirement trust fund to 2054 — 20 years beyond the current projection of 2034.

This would principally be achieved by expanding payroll taxes to wages above $250,000. Currently such taxes are only imposed up to a cap that is indexed to inflation — $168,600 for 2024. The tax cap would continue to rise until it hits $250,000 and is effectively eliminated.

Effective in 2025, the proposal would eliminate the federal taxation of Social Security benefits for personal income tax filers. The trust would be held harmless, however, with transfers from the general fund of the Treasury to the three trust funds equivalent to the amount of revenue that would have been realized from taxation of benefits in the absence of this provision.

Responding to a request from Craig and Caraveo, the Office of the Chief Actuary of the Social Security Administration has published a detailed analysis of the bill’s provisions and their potential effects on beneficiaries, government revenues and Social Security solvency.

The analysis shows that the You Earned It, You Keep It Act would also reduce the federal debt by $8.9 trillion over 75 years. This would occur because the transfers going to the trust funds from the Treasury’s general fund, while sizable, would be significantly smaller than the positive increases in overall cash flows generated by phasing out the taxable maximum wage cap.

Here are seven key findings from the SSA’s report:

1. The bill would keep the trust funds solvent until 2054.

Also, benefit cuts after the funds run out would be less severe, according to the SSA.

Under current law, 80% of scheduled benefits are projected to be payable on a timely basis in 2034 after depletion of the combined trust fund reserves, with the percentage payable declining to 74% for 2097.

Under the proposal, 91% of scheduled benefits are projected to be payable on a timely basis in 2054 after depletion of the combined trust fund reserves, with the percentage payable declining to 88% for 2097.

2. All earnings would likely be subject to the Social Security payroll tax by 2035.

As noted in the SSA report, the proposal would apply the combined Social Security payroll tax rate on covered earnings above $250,000 paid in 2025 and later.

Notably, the $250,000 level is not indexed to price inflation or changes in the average wage index. All covered earnings would be taxed once the current-law taxable maximum exceeds $250,000, which is projected to occur in 2035.

Any covered earnings above the higher of $250,000 or the current-law taxable maximum in a given year would be counted as additional earnings taxed and would be credited for benefit purposes via a formula spelled out in the proposal.

3. The program’s long-range deficit drops meaningfully.

According to the SSA report, enactment of the two provisions of the proposal would decrease the long-range actuarial deficit of the Social Security program — officially known as Old Age, Survivors, and Disability Insurance — from 3.61% of taxable payroll under current law to 1.30% of payroll under the proposal.

Notably, the projected level of cost reflects the full cost of scheduled benefits under both current law and the proposal. After trust fund reserve depletion, the SSA report explains, projected expenditures under current law and under the proposal include only amounts payable from projected tax revenues (non-interest income), which are less than projected cost.

4. Key trust funds would be held harmless.

Under current law, single tax filers with combined income greater than $25,000 may have to pay income tax on up to 50% of their Social Security benefits. If combined income exceeds $34,000, up to 85% of benefits may be taxable. These figures are $32,000 and $44,000, respectively, for joint tax filers. These taxes go directly to the trust fund.

Effective in 2025, the proposal would eliminate these taxes. The trust would be held harmless, however, with transfers from the general fund of the Treasury to the three trust funds equivalent to the tax revenue they would have collected in absence of the provision.

The SSA estimates that enactment of this provision alone would have no effect on the long-range OASDI actuarial deficit and no effect on the annual deficit for the 75th projection year of 2097.

5. Employees with multiple employers would pay taxes via a special formula.

Those employees with multiple employers in a tax year would make payroll tax contributions in the amount equivalent to what would have been paid directly if all earnings in the year were from one employer.

For example, an employee with earnings of $200,000 from each of two employers would pay the 6.2% employee payroll tax on earnings up to the current law taxable maximum in 2025 (estimated at $174,900) and on the excess of total earnings over $250,000.

The SSA estimates that enactment of these rules would reduce the long-range OASDI actuarial deficit by 2.31% of taxable payroll and would reduce the annual deficit for the 75th projection year (2097) by 2.40% of payroll.

6. Trust fund operations would be meaningfully bolstered.

The SSA report includes a myriad of charts showing how annual costs, income rates, annual balances and trust fund ratios will be affected for the OASDI program.

For 2025 and later, the proposal improves the annual balance (non-interest income minus program cost). The improvement in the annual balance increases from 1.7% of current-law payroll for 2025 to 2.5% of payroll for 2035, and thereafter generally decreases to 2.4% of payroll for 2097.

Under the proposal, the annual deficit is 1.2% of payroll in 2023 and 2.0% in 2024. The annual deficit decreases to 0.4% in 2025 and 0.3% in 2026. It then increases to 2.7% of payroll in 2078, and generally decreases thereafter, ultimately reaching 1.9% of current-law payroll for 2097.