Policy Options

This chapter describes the eight Social Security benefit taxation reform options analyzed in this study. Each option represents a different approach to modifying the current two-tier taxation system, with varying implications for revenue generation, taxpayer burden, and trust fund solvency.

Current Law Baseline¶

Under current law, the taxation of Social Security benefits follows a two-tier system based on “combined income,” which equals adjusted gross income plus nontaxable interest plus half of Social Security benefits Internal Revenue Service (2024).

Current Taxation Structure:

Taxpayers who earn less than $25,000 (single filers) or$32,000 (joint filers) in combined income pay no tax on their benefits. Households earning between those thresholds and up to $34,000 (single filers) or$44,000 (joint filers) pay tax on up to 50 percent of their benefits. Above those levels, up to 85 percent of benefits are taxed.

Revenue Allocation:

Income tax revenue collected from Social Security benefits is allocated to the Social Security and Medicare trust funds. The revenue from taxation of up to 50 percent of benefits is dedicated to the Social Security Old-Age, Survivors, and Disability Insurance (OASDI) trust fund, while the remainder goes to the Medicare Hospital Insurance trust fund Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (2024).

Additionally, the One Big Beautiful Bill Act included a “bonus senior deduction” of $6,000 for taxpayers aged 65 and older, which expires at the end of 2028 under current law. This expiration creates a significant change in the baseline tax burden for seniors starting in 2029, which influences the comparative impacts of reforms that extend beyond this date. The baseline used in this analysis is “Current Law” (which assumes expiration), not “Current Policy” (which might assume extension).

Option 1: Full Repeal of Taxation of Social Security Benefits¶

Start Date: 2026

Policy Description: Taxation of Social Security benefits is permanently repealed beginning in 2026.

Revenue Allocation Impact: The effect on revenues to the OASDI and HI trust funds will be allocated as per current law. In other words, the revenue that would have been earned by the respective trust funds under current law is the revenue that they will lose under this option.

def get_option1_reform():
    """Option 1: Full Repeal of Social Security Benefits Taxation"""
    return Reform.from_dict({
        "gov.irs.social_security.taxability.rate.base": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.rate.additional": {
            "2026-01-01.2100-12-31": 0
        }
    }, country_id="us")

Reform Explanation: This reform sets both the base and additional Social Security taxability rates to 0%, effectively eliminating all federal income taxation of Social Security benefits starting in 2026. The policy parameters taxability.rate.base and taxability.rate.additional control the percentage of benefits subject to taxation under the current two-tier system.

Option 2: Taxation of 85% of Social Security Benefits¶

Start Date: 2026

Policy Description: Beginning in 2026, 85% of all Social Security benefits are included in taxable income.

Revenue Allocation: The additional revenue from taxation of benefits (TOB) will be allocated to the OASDI and HI trust funds in a way that maintains the current projected shares of TOB revenue earned by the OASI, DI, and HI trust funds.

def get_option2_reform():
    """Option 2: Taxation of 85% of Social Security Benefits"""
    return Reform.from_dict({
        "gov.irs.social_security.taxability.rate.base": {
            "2026-01-01.2100-12-31": 0.85
        },
        "gov.irs.social_security.taxability.threshold.base.main.JOINT": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SINGLE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SEPARATE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SURVIVING_SPOUSE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.HEAD_OF_HOUSEHOLD": {
            "2026-01-01.2100-12-31": 0
        }
    }, country_id="us")

Reform Explanation: This reform sets the base taxability rate to 85% and eliminates all income thresholds by setting them to $0 for all filing statuses. This means 85% of all Social Security benefits become taxable income regardless of the recipient’s income level, effectively eliminating the current two-tier threshold system.

Option 3: Taxation of 85% of Social Security Benefits and Permanent Extension of the Bonus Senior Deduction¶

Start Date: 2026

Policy Description: Beginning in 2026, 85% of all Social Security benefits are included in taxable income. The bonus senior deduction is permanently extended past 2028.

Revenue Allocation: We want to see the full budget estimates for this proposal before deciding how the revenue raised should be allocated across the trust funds because extending the bonus senior deduction will have negative on-budget effects that we will want to incorporate into our decision. Please let us know if you can easily allocate the costs to the general fund onto the trust funds in your model.

def get_option3_reform():
    """Option 3: 85% Taxation with Permanent Senior Deduction Extension"""
    return Reform.from_dict({
        "gov.irs.social_security.taxability.rate.base": {
            "2026-01-01.2100-12-31": 0.85
        },
        "gov.irs.social_security.taxability.threshold.base.main.JOINT": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SINGLE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SEPARATE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SURVIVING_SPOUSE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.HEAD_OF_HOUSEHOLD": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.contrib.crfb.senior_deduction_extension.applies": {
            "2026-01-01.2100-12-31": True
        }
    }, country_id="us")

Reform Explanation: This reform combines the 85% taxation approach from Option 2 with a permanent extension of the bonus senior deduction. The parameter senior_deduction_extension.applies ensures the $6,000 senior deduction continues beyond its scheduled 2028 expiration, partially offsetting the expanded taxation for older taxpayers.

Option 4: Replace the Bonus Senior Deduction with a $500 Nonrefundable Tax Credit and Tax 85% of All Social Security Benefits¶

Start Date: 2026

Policy Description: Beginning in 2026, 85% of all Social Security benefits are included in taxable income. The bonus senior deduction is repealed in 2026 and replaced in the same year by a $500 nonrefundable tax credit made available to all Social Security beneficiaries. The credit can only be applied against taxes owed on Social Security benefits. For the credit’s purpose, taxes owed on Social Security will be determined by considering Social Security benefits as a person’s “last” income. So if their marginal tax rate is 37%, their last dollar of taxable Social Security income will increase taxes owed by 37 cents.

Illustrative Example: An individual with $5,000 in Social Security income and$10,000 in other income facing a 5% tax on income below $10k, a 10$500 nonrefundable credit.

Credit Amount: The credit is set at $500 per beneficiary. This amount serves as an illustrative benchmark to evaluate the structural shift from a deduction (which favors higher-income beneficiaries) to a flat credit (which is progressive), rather than a specific revenue-neutral target.

Revenue Allocation: The additional revenue raised will be allocated to the OASDI and HI trust funds in a way that maintains the current projected shares of contributions from TOB revenue to the OASI, DI, and HI trust funds.

def get_option4_reform():
    """Option 4: Social Security Tax Credit System ($500 Credit)"""
    return Reform.from_dict({
        "gov.irs.social_security.taxability.rate.base": {
            "2026-01-01.2100-12-31": 0.85
        },
        "gov.irs.social_security.taxability.threshold.base.main.JOINT": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SINGLE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SEPARATE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SURVIVING_SPOUSE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.HEAD_OF_HOUSEHOLD": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.contrib.crfb.ss_credit.in_effect": {
            "2026-01-01.2100-12-31": True
        },
        "gov.contrib.crfb.ss_credit.amount.JOINT": {
            "2026-01-01.2100-12-31": 500
        },
        "gov.contrib.crfb.ss_credit.amount.SINGLE": {
            "2026-01-01.2100-12-31": 500
        },
        "gov.contrib.crfb.ss_credit.amount.SEPARATE": {
            "2026-01-01.2100-12-31": 500
        },
        "gov.contrib.crfb.ss_credit.amount.SURVIVING_SPOUSE": {
            "2026-01-01.2100-12-31": 500
        },
        "gov.contrib.crfb.ss_credit.amount.HEAD_OF_HOUSEHOLD": {
            "2026-01-01.2100-12-31": 500
        },
        "gov.irs.deductions.senior_deduction.amount": {
            "2026-01-01.2100-12-31": 0
        }
    }, country_id="us")

Reform Explanation: This reform implements 85% taxation like Options 2-3 but replaces the bonus senior deduction with a $500 nonrefundable tax credit. The ss_credit.in_effect parameter activates the credit system, ss_credit.amount sets the credit value for each filing status, and senior_deduction.amount: 0 eliminates the bonus senior deduction. The credit can only offset taxes owed on Social Security benefits.

Option 5: Roth-Style Swap: Substitute Income Taxation of Employer Payroll Contributions for Income Taxation of Social Security Benefits¶

Start Date: 2026

Policy Description: Beginning in 2026, all employer payroll contributions are included in taxable income and all Social Security benefits are excluded from taxable income.

Revenue Allocation: Revenue from income taxation of employer Social Security contributions are allocated to the OASDI trust funds. Revenue from income taxation of Medicare contributions are allocated to the HI trust fund. The revenue that would’ve been earned by the OASDI and HI trust fund from TOB is the revenue that they will lose from the end of TOB.

def get_option5_reform():
    """Option 5: Roth-Style Swap"""
    return Reform.from_dict({
        "gov.irs.social_security.taxability.rate.base": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.rate.additional": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.contrib.crfb.tax_employer_payroll_tax.in_effect": {
            "2026-01-01.2100-12-31": True
        },
        "gov.contrib.crfb.tax_employer_payroll_tax.percentage": {
            "2026-01-01.2100-12-31": 1.0
        }
    }, country_id="us")

Reform Explanation: This reform implements a “Roth-style swap” by eliminating Social Security benefit taxation (setting rates to 0%) while making employer payroll contributions (7.65% Social Security + Medicare) fully taxable as employee income. The tax_employer_payroll_tax.percentage: 1.0 parameter means 100% of employer payroll tax contributions become taxable income to the employee.

Economic Incidence: This reform represents a fundamental shift in the tax base. By exempting benefits and taxing contributions, the tax burden is effectively shifted from current benefit recipients (retirees) to current contributors (workers). This creates an intergenerational transfer, increasing the after-tax income of current retirees while reducing the after-tax income of the working-age population.

Option 6: Phased Roth-Style Swap¶

Start Date: 2026

Policy Description: Beginning in 2026, all employer payroll contributions are phased into taxable income by 1 percentage point per year until the full 7.65 percent employer contribution is taxable.

Starting in 2029, the current formula for income taxation of Social Security benefits is phased down by 5 percentage points per year (e.g., 2028: 50/85; 2029: 45/80; 2030: 40/75…, 2038: 0/35; 2039: 0/30…, 2045: 0/0)

Revenue Allocation During Phase-In: During the phase-in, the revenue raised from income taxation of employer contributions is allocated to the OASDI trust funds until the contributions included in taxable income exceed the amount contributed to Social Security (6.2%). So, for example, when just 1pp of employer contributions are taxable, the full amount of revenue raised is directed to the OASDI trust fund. When 7pp are included 6.2/7 percent of the revenue is directed to the OASDI trust funds and 0.8/7 percent are directed to the HI trust fund.

When the policy is fully phased in, the revenues are allocated in the same manner as Option 5.

The revenue loss from the phase-out of TOB is allocated to the OASDI and HI trust funds in a way that maintains the current projected shares of TOB revenue earned by the OASI, DI, and HI trust funds.

def get_option6_reform():
    """Option 6: Phased Roth-Style Swap"""
    reform_dict = {
        "gov.contrib.crfb.tax_employer_payroll_tax.in_effect": {
            "2026-01-01.2100-12-31": True
        },
        "gov.contrib.crfb.tax_employer_payroll_tax.percentage": {
            "2026-01-01.2026-12-31": 0.1307,
            "2027-01-01.2027-12-31": 0.2614,
            "2028-01-01.2028-12-31": 0.3922,
            "2029-01-01.2029-12-31": 0.5229,
            "2030-01-01.2030-12-31": 0.6536,
            "2031-01-01.2031-12-31": 0.7843,
            "2032-01-01.2032-12-31": 0.9150,
            "2033-01-01.2100-12-31": 1.0
        },
        "gov.irs.social_security.taxability.rate.base": {
            "2029-01-01.2029-12-31": 0.45,
            "2030-01-01.2030-12-31": 0.40,
            "2031-01-01.2031-12-31": 0.35,
            "2032-01-01.2032-12-31": 0.30,
            "2033-01-01.2033-12-31": 0.25,
            "2034-01-01.2034-12-31": 0.20,
            "2035-01-01.2035-12-31": 0.15,
            "2036-01-01.2036-12-31": 0.10,
            "2037-01-01.2037-12-31": 0.05,
            "2038-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.rate.additional": {
            "2029-01-01.2029-12-31": 0.80,
            "2030-01-01.2030-12-31": 0.75,
            "2031-01-01.2031-12-31": 0.70,
            "2032-01-01.2032-12-31": 0.65,
            "2033-01-01.2033-12-31": 0.60,
            "2034-01-01.2034-12-31": 0.55,
            "2035-01-01.2035-12-31": 0.50,
            "2036-01-01.2036-12-31": 0.45,
            "2037-01-01.2037-12-31": 0.40,
            "2038-01-01.2038-12-31": 0.35,
            "2039-01-01.2039-12-31": 0.30,
            "2040-01-01.2040-12-31": 0.25,
            "2041-01-01.2041-12-31": 0.20,
            "2042-01-01.2042-12-31": 0.15,
            "2043-01-01.2043-12-31": 0.10,
            "2044-01-01.2044-12-31": 0.05,
            "2045-01-01.2100-12-31": 0
        }
    }
    return Reform.from_dict(reform_dict, country_id="us")

Reform Explanation: This complex phased reform gradually increases employer payroll tax inclusion (starting at 13.07% in 2026, reaching 100% by 2033) while simultaneously phasing down Social Security benefit taxation rates starting in 2029. The base rate decreases from current law (50%) to 45% in 2029, continuing down to 0% by 2038, while the additional rate phases from 85% down to 0% by 2045. This creates a gradual transition from taxing benefits to taxing employer contributions.

Option 7: Eliminate Bonus Senior Deduction¶

Start Date: 2026

Policy Description: Beginning in 2026, the bonus senior deduction is eliminated.

Revenue Allocation: The additional revenue generated from eliminating the bonus senior deduction is directed to general revenues, not specifically allocated to the OASDI or HI trust funds.

def get_option7_reform():
    """Option 7: Eliminate Bonus Senior Deduction

    Eliminates the $6,000 bonus senior deduction from the One Big Beautiful Bill
    that has a 6% phase-out beginning at $75k/$150k for single/joint filers.
    The deduction expires in 2029, so there's only impact from 2026-2028.
    """
    return Reform.from_dict({
        "gov.irs.deductions.senior_deduction.amount": {
            "2026-01-01.2100-12-31": 0
        }
    }, country_id="us")

Reform Explanation: This reform eliminates the bonus senior deduction by setting senior_deduction.amount to 0 starting in 2026. This affects elderly taxpayers who would otherwise receive the $6,000 deduction (subject to phase-out), increasing their taxable income. Since the deduction is already scheduled to expire in 2029 under current law, there is only a revenue impact for 2026-2028.

Option 8: Full Taxation of Social Security Benefits¶

Start Date: 2026

Policy Description: Beginning in 2026, 100% of all Social Security benefits are included in taxable income, regardless of income level. This represents the most comprehensive expansion of Social Security benefit taxation, treating benefits identically to other forms of income such as wages or pensions.

Revenue Allocation: The additional revenue from taxation of benefits (TOB) will be allocated to the OASDI and HI trust funds in a way that maintains the current projected shares of TOB revenue earned by the OASI, DI, and HI trust funds.

def get_option8_reform():
    """Option 8: Full Taxation of Social Security Benefits"""
    return Reform.from_dict({
        "gov.irs.social_security.taxability.combined_income_ss_fraction": {
            "2026-01-01.2100-12-31": 1.0
        },
        "gov.irs.social_security.taxability.rate.additional": {
            "2026-01-01.2100-12-31": 1.0
        },
        "gov.irs.social_security.taxability.threshold.base.main.JOINT": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SINGLE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SEPARATE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.SURVIVING_SPOUSE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.base.main.HEAD_OF_HOUSEHOLD": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.adjusted_base.main.JOINT": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.adjusted_base.main.SINGLE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.adjusted_base.main.SEPARATE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.adjusted_base.main.SURVIVING_SPOUSE": {
            "2026-01-01.2100-12-31": 0
        },
        "gov.irs.social_security.taxability.threshold.adjusted_base.main.HEAD_OF_HOUSEHOLD": {
            "2026-01-01.2100-12-31": 0
        }
    }, country_id="us")

Reform Explanation: This reform makes 100% of Social Security benefits taxable by setting combined_income_ss_fraction to 1.0 (ensuring full SS benefits are included in combined income calculations), taxability.rate.additional to 1.0 (100% taxation rate instead of the default 85%), and all income thresholds (both base and adjusted_base) to $0 for all filing statuses. Unlike Option 2 which taxes 85% of benefits (the current maximum under law), Option 8 taxes the full 100%, treating Social Security benefits identically to wages, pensions, and other ordinary income. This eliminates both the current two-tier threshold system and the 15% exclusion that exists even for high-income beneficiaries under current law.