When Social Security was launched in 1935, benefits were entirely tax-free. That remained true for nearly five decades, until 1983, when legislation was passed to tax a portion of benefits for higher-income earners. This marked the introduction of the “provisional income” formula, which determines whether a retiree’s Social Security benefits are subject to federal income tax.

Set in 1984, the provisional income thresholds were $25,000 for single filers and $32,000 for married couples. However, these thresholds were never indexed for inflation. While $25,000 in 1983 is roughly equivalent to $80,000 today, the thresholds remain unchanged. The result? A growing number of retirees find themselves paying taxes on their Social Security benefits. Originally intended to affect fewer than 10% of beneficiaries, the rule now impacts nearly 50%.

2. What Does Trump Propose? No Taxes on Social Security Benefits

Former President Trump has publicly stated that Social Security benefits should not be taxed, aligning with a long-standing party platform to protect Social Security and Medicare without reducing benefits. Trump argues that taxing benefits constitutes double taxation: retirees paid into the system via payroll taxes and are now taxed again when collecting those benefits.

While this proposal sounds appealing, especially to retirees who rely on Social Security for the majority of their income, the primary beneficiaries would be middle- to high-income retirees. Most lower-income seniors are already below the provisional income thresholds and don’t pay taxes on their benefits.

3. What Happens If We Eliminate These Taxes?

Removing federal taxes on Social Security would undeniably increase take-home income for retirees. Considering that about half of all retirees depend on Social Security for at least 50% of their retirement income, this change would offer significant financial relief.

However, this move comes with a cost. In 2020 alone, roughly $100 billion was added to the Social Security Trust Fund through the taxation of benefits. Eliminating this source of revenue would accelerate the depletion of the Trust Fund, already projected to be exhausted by 2034. Without intervention, that could lead to a 20% reduction in benefits across the board. Experts estimate that ending the taxation of benefits would move up the Trust Fund depletion date by approximately one year.

And it’s not just Social Security. The Medicare Trust Fund would also face strain, with a projected six-year acceleration in its depletion timeline.

4. Can Social Security Be Saved? Possible Policy Solutions

The Social Security Trust Fund currently holds between $2.7 and $2.8 trillion. But as more baby boomers retire and birth rates remain low, fewer workers are contributing to the system relative to the number of retirees drawing from it.

Several policy changes are under consideration:

• Raising the wage cap: Currently, only income up to $176,100 is subject to Social Security payroll tax. Lifting or eliminating this cap could boost the fund.
• Increasing payroll tax rates: A small increase across all income brackets could generate billions.
• Pushing back the full retirement age: Currently set at 67 for those born in 1960 or later, raising the age could reduce long-term payout obligations.

Each option has trade-offs, but the goal is to ensure solvency without undercutting retirees’ financial security.

5. Balancing Fairness with Sustainability

Eliminating taxes on Social Security benefits could correct what many see as an unfair system of double taxation. But doing so without a plan to replace that lost revenue risks jeopardizing the long-term viability of the entire program.

Ultimately, the conversation around Social Security taxes underscores a bigger issue: the need for a sustainable, fair, and forward-thinking retirement system. Adjusting provisional income thresholds for inflation, reforming benefit structures, or gradually increasing contributions are all being discussed as ways to ensure that Social Security remains a reliable source of retirement income for generations to come.

You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns.

Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.

The post Should Social Security Benefits Be Taxed? appeared first on ROI TV.

How Is Social Security Funded?

Social Security is primarily funded through payroll taxes. If you’ve ever looked at your paycheck stub and wondered where that 6.2% deduction goes, that’s it—it’s your contribution to Social Security. Your employer matches that amount, so a total of 12.4% of your wages (up to $176,100 in 2025) goes into the system. If you’re self-employed, you pay the full 12.4% yourself.

These taxes fall under the Federal Insurance Contributions Act (FICA), and while FICA also includes Medicare contributions, I’m going to focus specifically on the Social Security part for this discussion.

It’s important to understand that Social Security operates on a pay-as-you-go system. That means the taxes being deducted from your paycheck right now aren’t being saved in an account with your name on it. Instead, they’re funding the benefits of current retirees.

Where Does the Money Go? Trust Funds Explained

There are two trust funds that handle these payments:

• Old Age Survivors Insurance (OASI) Trust Fund, which supports retirees, their families, and survivors of deceased workers
• Disability Insurance (DI) Trust Fund, which supports disabled workers and their families

Payroll taxes feed into these trust funds, and they’re also supplemented by taxes on Social Security benefits. Yes—up to 85% of your Social Security benefit can be taxable if you have other sources of income. The taxes on the first 50% of benefits go right back into Social Security, and the remaining 35% is used for Medicare.

Social Security Investments: Where the Surplus Goes

When there’s a surplus in these trust funds, it doesn’t just sit there. It’s invested in special U.S. Treasury securities. These investments are considered risk-free and earn interest, which is added back into the trust funds. That interest is paid twice a year—on June 30 and December 31—and in smaller amounts throughout the year when bonds are redeemed.

Some critics argue that this allows the government to “borrow” from Social Security to fund other programs. While that’s technically true, it’s important to note that these bonds are guaranteed by the U.S. government and earn interest for Social Security.

The Real Challenge: Demographics

The biggest challenge isn’t fraud or mismanagement—it’s demographics. With more people retiring and fewer workers paying into the system, we’re approaching a tipping point. By the mid-2030s, the trust funds are projected to be depleted. That doesn’t mean Social Security will vanish—it just means incoming payroll taxes will only be able to cover about 75-80% of promised benefits.

To fix this, Congress could take a number of steps: raise payroll tax rates, lift the income cap, adjust the full retirement age, or find alternative revenue streams. None of these solutions are painless, but something will need to change.

Is Social Security Efficient?

Actually, yes. Administrative costs are impressively low—about 0.7% of total program spending. In 2023, Social Security paid out $1.35 trillion in benefits, accounting for roughly 22% of the federal budget. However, that year it ran a $41 billion deficit, drawing down its reserves.

When we look closer, about 68% of Old Age Survivors Insurance benefits go to retired workers. The rest supports spouses, widows, and other family members. For the Disability Trust Fund, 94% of benefits go directly to disabled workers.

Misconceptions About Social Security

Let’s address one of the biggest myths: that the government has “raided” Social Security. While the system does invest in Treasury bonds (which can be viewed as a type of borrowing), that money earns interest and stays within the program.

Another myth? That Social Security is “going broke.” That’s misleading. Yes, the trust fund reserves are expected to run out, but payroll taxes will continue to fund a significant portion of benefits—unless Congress steps in to shore things up.

What We Can Do Now

I truly believe that understanding how Social Security works is the first step in securing your retirement. Whether you’re just starting your career or approaching retirement age, knowing what to expect can help you plan smarter and make informed decisions.

If you haven’t already, I recommend creating an account at ssa.gov to get a personalized estimate of your benefits. It’s one of the best tools available for retirement planning.

And finally, let’s keep this conversation going. What do you think? Should payroll taxes be increased? Should the income cap be lifted? I’d love to hear your thoughts in the comments.

All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.

The post Truths and Myths About Social Security appeared first on ROI TV.