Executive Summary¶
This analysis examines seven policy options for reforming the taxation of Social Security benefits, evaluating their 10-year budgetary impacts from 2026-2035 using microsimulation modeling. The Committee for a Responsible Federal Budget (CRFB) requested this analysis to inform policy discussions around Social Security solvency and tax reform.
Current law subjects Social Security benefits to income taxation under a two-tier system. Benefits become taxable when combined income, defined as the sum of an individual’s adjusted gross income (AGI), nontaxable interest and half of their Social Security benefits, exceeds certain thresholds, with up to 50% of benefits taxable at lower income levels and up to 85% at higher income levels. The revenue generated from this taxation is allocated to the Social Security and Medicare Hospital Insurance trust funds.
Policy Options Analyzed¶
This study examines seven distinct approaches to reforming Social Security benefit taxation:
Option 1 (Full Repeal): Complete elimination of Social Security benefit income taxation
Option 2 (85% Taxation): Taxation of 85% of all Social Security benefits regardless of income level
Option 3 (85% Taxation with Senior Deduction Extension): Combines 85% benefit taxation with permanent extension of the bonus senior deduction
Option 4 (Tax Credit System): Replaces the bonus senior deduction with a $500 nonrefundable tax credit applied against Social Security taxation
Option 5 (Roth-Style Swap): Eliminates benefit taxation while making employer payroll contributions taxable to employees
Option 6 (Phased Roth-Style Swap): Gradual implementation of the Roth-style approach over multiple years
Option 7 (Eliminate Bonus Senior Deduction): Eliminates the $6,000 bonus senior deduction (with 6% phase-out at $75k/$150k) from 2026-2028
Report Structure¶
This report is organized into five main sections:
Policy Options: Detailed descriptions of the seven reform scenarios analyzed
Prior Research: Review of existing analysis from CBO, CRFB, and Tax Foundation
Methodology: Description of our microsimulation modeling approach using PolicyEngine
Policy Impacts: Quantitative analysis of federal budgetary impacts for each option
Household Impacts: Distributional analysis showing how reforms affect different income groups and household types
Scope and Limitations¶
This analysis focuses on federal budgetary impacts and household-level distributional effects. It does not evaluate:
State-level tax implications
Economic behavioral responses beyond those captured in the microsimulation model
Administrative implementation challenges
Political feasibility considerations
The estimates should be interpreted as projections based on current law baseline assumptions and may vary with changes in economic conditions or policy environment.