Late July of this year, former President Donald Trump proposed eliminating income taxes on Social Security benefits. This is something that, according to the Committee for a Responsible Federal Budget (CRFB), would cut approximately $950 billion in funding for the program over the next 10 years.
This would push Social Security’s insolvency date to 2032 — instead of 2033, which is where it’s currently set. Not only that but it would also result in recipients getting a 25% cut in their monthly benefits as opposed to the 17% that’s currently estimated.
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Cutting Social Security income tax could also cut into Medicare funding since a portion of those taxes goes toward that program. In the next 10 years, Medicare could lose around $650 billion in revenue. This could push Medicare’s insolvency from 2036 to 2030.
In addition to this, Trump has also floated the idea of cutting federal income taxes. Ideally, this would ease the financial burden on individual workers. But the combination of these policies could actually lead to increased costs for Americans everywhere — retirees included.
Here’s what could become more expensive if Trump ends up eliminating Social Security and income taxes, according to financial experts.
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Healthcare and Related Essential Services
Robert Hodgins, founder at Sand Hill Road Technologies Fund, predicts that cutting income taxes alone would lead to higher costs of goods and services. This is because these things are often indirectly subsidized by tax revenue.
“If income taxes are reduced, there could be less funding available for public programs,” he said. This could lead to “potential increases in the cost of healthcare services, long-term care and other essential support services that retirees rely on.”
Budget cuts in government-run programs like Medicare — and potentially Medicaid — could also cause out-of-pocket costs to rise. For retirees with a more frequent need for medical services, this could mean spending more on everything from checkups to prescription drugs to insurance premiums.
As for long-term care, cutting Social Security taxes could have a similarly adverse effect. Many retirees use a combination of Social Security, Supplemental Security Income and Medicare to help offset the cost of long-term care. With program cuts, they’d have to start paying more out of pocket. This could be a significant burden for those on a fixed income.
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Other Taxes
Hodgins believes that even a reduced income tax could push state or local governments to increase other forms of taxes.
Currently, eight states don’t have personal income tax. This includes Alaska, Washington, Nevada and Texas. While this does mean workers — and retirees who still bring in some money each month — don’t get taxed at a state level, other costs might offset these ones.
For instance, Texas has no state income tax, but it has one of the highest property tax rates at about 1.69%. Washington state has one of the highest combined sales tax rates at 9.23%. This may not be causation, but there could be a correlation here.
Given this, cutting income taxes could mean spending more on other things — like sales tax for everyday goods — or property taxes.
Reduced taxes may also cause the government to borrow more, which would increase inflation. This, of course, would make everyday goods and services more expensive.
Everyday Expenses
Changes to Social Security, particularly budget cuts, could also have a far-reaching impact on retirees who rely on it.
As of June 2024, the Social Security Administration reported that the average Social Security recipient’s monthly benefit amount was $1,781. If that amount is cut by 25%, as estimated by the CRFB, that’s a $445 reduction — down to $1,336 a month.
While this won’t increase costs, it will make it harder for the millions of people who rely on Social Security to make ends meet.
“This program serves as a primary source of income for millions of Americans,” said Hodgins. “Without Social Security, retirees might face higher costs for basic living expenses, including housing, utilities and groceries.”
Private Insurance Products
If Trump ends up implementing these changes, particularly Social Security cuts, Hodgins said there would likely be a greater demand for private insurance products. This includes life insurance, health insurance and the like.
Greater demand generally means higher costs — unless supply can keep up. But with program cuts, it might be harder to bring about that necessary balance.
Bottom Line
“While tax cuts may benefit some, the unintended consequences often hit the most vulnerable hardest,” said Nischay Rawal, a CPA with NR CPAs and Business Advisors. “Retirees living on the margins have little ability to absorb rising costs.”
Right now, it’s unclear what will actually happen if Trump is elected. It’s entirely possible that his proposals to eliminate Social Security and income tax might not even come to pass. This is due in no small part to the fact that there’d need to be new legislation that updates the current tax codes — something that could be hard to achieve if the Senate or House are in disagreement.
Plus, Trump has yet to release a more detailed plan outlining his tax proposals. The country — retirees and non-retirees alike — will have to wait to see what happens.
Editor’s note on election coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: Trump Wants To Eliminate Social Security and Income Taxes: Here’s What Will Likely Get More Expensive for Retirees
