By Mark Miller

(Reuters) – When retirees discover that their Social Security benefits are taxable, it often leads to frustration. This summer, Republican presidential candidate Donald Trump proposed eliminating this tax as an attractive option for voters.

Reducing or eliminating the tax on benefits has gained bipartisan support in Congress, with Democrats offering alternative proposals on how to fund these cuts. However, unlike Trump, their solutions aim to mitigate the tax cuts’ impact on Social Security and Medicare, which would lose $1.5 trillion in revenue over the next decade.

Currently, Social Security faces a solvency issue, with estimates indicating that funds will be depleted by 2035. If no changes are made, beneficiaries may only receive 83% of promised benefits, leading to a significant reduction in support.

The taxation of benefits is crucial for funding. Eliminating this tax could shorten the solvency period of Social Security by two years and Medicare by up to six years.

A report from the Urban Institute indicates that the poverty level among beneficiaries could rise over 50% if the trust fund is depleted, disproportionately affecting people of color. It’s noteworthy that eliminating the tax primarily benefits middle and upper-income seniors.

HOW THE TAX WORKS

Taxation on Social Security benefits was introduced in 1984 to stabilize the program. This reform included raising the full retirement age from 65 to 67. Currently, the tax accounts for roughly 4% of trust fund revenues.

The tax is determined by a complex formula based on what is termed combined or provisional income, which includes the modified adjusted gross income (MAGI) plus nonexempt interest and half of the Social Security benefits. No taxes are owed for combined income at or below $25,000 for single filers and $32,000 for joint filers. Incomes between those thresholds result in taxes on up to 50% of benefits, while higher incomes face taxes on up to 85% of benefits.

While taxing Social Security is consistent with other retirement income taxes, many retirees view this as unfair. Some states also vary widely in taxing retirement income, with only eight taxing Social Security income.

Any federal repeal or limit of Social Security taxes must coincide with broader reforms to maintain solvency and expand benefits. The Social Security 2100 bill, proposed by Representative John Larson, aims to increase benefits while ensuring sustainability through changes to taxation, including higher earnings and investment taxes.

The bill proposes a single set of income thresholds for taxing benefits, which would exempt more individuals, maintaining this system through 2034, after which current tax levels would resume.

In summary, tax cuts for higher-income seniors should be part of a comprehensive Social Security reform that agencies to aid all beneficiaries.