Which demographic groups gain or lose from eliminating Social Security benefit taxation and raising the payroll tax base?
Executive summary
Eliminating federal income taxation of Social Security benefits would deliver the largest direct dollar gains to upper‑income retirees today while producing only modest relative gains for many middle‑income households, and would worsen long‑run fiscal pressures unless paired with revenue offsets [1] [2] [3]. Raising or eliminating the payroll tax wage base shifts the tax burden upward — mostly onto high earners — and can shore up program finances, but it also changes the incidence of taxation, benefit linkages, and long‑run labor and growth outcomes that can leave younger cohorts and low‑income workers worse off in some scenarios [4] [5] [1].
1. How the two moves interact: repeal of benefit taxation plus expanding the payroll base
The policy package under discussion removes federal income taxes on Social Security benefits while offsetting revenue loss by expanding the amount of earnings subject to the 6.2% OASDI payroll tax (for example proposals would tax wages above $250,000 or remove the cap entirely) [2] [4]. Proponents frame this as returning benefits to beneficiaries while making the payroll tax less regressive; opponents point out that expanding taxable earnings can raise long‑run liabilities and alter the benefit/tax link if additional taxed earnings are not fully credited back into benefit formulas [4] [5].
2. Immediate winners: current retirees and high‑income near‑retirees
Because the federal tax on Social Security currently falls disproportionately on those with higher combined incomes, eliminating that tax produces the largest nominal tax reductions for top earners and households approaching or in retirement; Penn Wharton finds the largest annual gains accrue to the top income quintile ($1,625–$2,450 in 2026, rising by 2054) while middle quintiles see much smaller dollar gains [1]. Media and advocacy briefs emphasize that millions of older Americans could see their taxable amounts reduced or eliminated under companion legislation, producing tangible relief for current beneficiaries [3] [6].
3. Modest relative gains for some middle‑income retirees, limited help for low‑income households
Although high earners get the largest nominal cuts, the biggest relative income boosts (percentage of after‑tax income) may fall in the fourth quintile according to Wharton’s analysis, while lower‑income households see minimal direct benefit — second and third quintiles receive only small average dollar improvements (as little as $15–$340 in 2026) [1]. State‑level differences and existing credits mean many low‑income retirees already pay little or no tax on benefits, so the federal change would not materially alter their position in many states [3] [7].
4. Who pays more when the payroll tax base rises or is eliminated?
Raising or removing the wage base primarily increases taxes on high lifetime earners: Social Security policy briefs and trustee estimates show uncapping or lifting the cap generates large revenue gains (trillions over decades) and would raise payroll contributions by high‑income workers and their employers, with some proposals taxing wages above $250,000 as an intermediate step [4] [2] [5]. Analyses caution that unless those added taxable earnings are credited toward benefits, high earners’ benefit/tax ratio falls and political opposition will stress fairness and perceived linkage between contributions and entitlement [5].
5. Long‑run winners and losers: younger cohorts, growth, and program solvency
Dynamic modeling finds eliminating benefit taxation while financing it by expanding payroll tax exposure can reduce incentives to save and work and increase federal debt in some specifications, producing lower wages and GDP over time and net harm to households under 30 and future generations across the income distribution (Penn Wharton) [1]. Conversely, Social Security Trustees and PGPF analyses argue that expanding the taxable maximum significantly improves solvency — potentially closing a large portion of the 75‑year shortfall — which benefits future beneficiaries by reducing the risk of benefit cuts [4] [8]. Think tanks disagree on magnitude and behavioral responses; the Heritage and Manhattan Institute analyses warn of only partial solvency gains and potential tax‑rate distortions [9] [10].
6. Political economy, implicit agendas, and tradeoffs readers should recognize
Supporters emphasize fairness and targeted relief for retirees and the solvency boost from higher payroll receipts, but proposals carry implicit tradeoffs: they may reduce the perceived progressivity of payroll taxation, shift burdens onto labor or capital via wage adjustments, and force choices about whether new taxable earnings raise benefits — a decision that determines whether high earners truly subsidize the system or merely pay more without comparable benefit increases [4] [5]. Analysts and advocates therefore push competing narratives — immediate tax relief for older voters versus long‑term solvency arguments — and the net winners or losers depend on design details and whether added revenues are converted into higher benefits or retained to shore trusts [2] [5].