Over the past year, the Social Security program has undergone various administrative adjustments under the previous administration. These reforms included reductions in administrative expenses, an enhancement in the recovery rate of overpayments, and the adoption of a new telecommunications platform intended to curb fraud while enhancing customer service.
Additionally, on July 4, the One, Big, Beautiful Bill Act (OBBBA) was enacted into law, introducing a new senior deduction designed to offset federal income taxes on Social Security benefits for certain beneficiaries aged 65 and above. However, while this measure provides some tax relief, it fell short of fully eliminating taxation on Social Security benefits as promised.
Despite this, legislative efforts continue in Washington to fulfill the goal of abolishing taxes on Social Security. Parallel to tax concerns, there is also advocacy for revising the methodology the Social Security Administration (SSA) uses to determine annual cost-of-living adjustments (COLAs). Understanding these potential changes is vital for current and future retirees.
Eliminating Federal Income Tax on Social Security Benefits
President Trump had pledged to end federal income taxation on Social Security benefits. Official White House statements claimed that the OBBBA had realized "No tax on Social Security". However, a detailed examination reveals this statement to be misleading. The legislation introduced an additional senior deduction, which partially offsets income tax obligations on Social Security benefits for certain seniors, but it does not equate to a complete repeal of such taxes.
This deduction applies exclusively to beneficiaries aged 65 and older and is further limited by income thresholds. Single beneficiaries with incomes exceeding $75,000 and married couples with incomes above $150,000 experience a phaseout of the deduction. Moreover, this deduction is scheduled to expire universally after 2028, thereby potentially reinstating the original tax burden thereafter.
In light of these limitations, several lawmakers have introduced bills with the explicit intent to entirely eliminate Social Security taxation:
- In 2025, Senator Ruben Gallego (D-Ariz.) and Representative Angie Craig (D-Minn.) proposed the "You Earned It, You Keep It Act."
- Also in 2025, Representative Thomas Massie (R-Ky.) and Representative Daniel Webster (R-Fla.) introduced the "Senior Citizens Tax Elimination Act."
Senator Gallego emphasized the difference between these proposals and previous actions by stating, "Trump claimed he ended taxes on Social Security. My bill actually does it. Permanently." Representative Massie echoed this with, "My bill would exempt Social Security retirement benefits from taxation and boost the retirement income of millions of older Americans."
While these bills promise significant tax relief, they come with notable fiscal trade-offs. The Social Security Trust Fund, which accumulates surplus tax revenues to finance future benefits, is currently projected to be exhausted by 2034. Eliminating taxation on benefits would remove a crucial source of funding, potentially advancing the depletion date by over a year, according to analyses from the Committee for a Responsible Federal Budget.
Reassessing the Calculation of Cost-of-Living Adjustments
Another focal point of proposed reforms involves how Social Security's cost-of-living adjustments are calculated annually. The Senior Citizens League (TSCL), a nonpartisan organization advocating for senior citizens, has critiqued the current methodology for failing to adequately reflect seniors' true inflation experience.
Under the existing system, COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index tracks inflation using the spending patterns of hourly wage workers, a demographic that spends differently compared to typical Social Security recipients. As a result, the CPI-W may underestimate the inflation pressures faced by seniors.
Alternatively, some experts propose adopting the Consumer Price Index for the Elderly (CPI-E), which closely mirrors the consumption habits of people aged 62 and older. TSCL estimates that if COLAs were pegged to the CPI-E, a typical retiree who began collecting benefits in 2024 might receive an additional $12,000 in lifetime Social Security payments due to more responsive inflation adjustments.
In this context, new legislation was introduced earlier this year by Senator Richard Blumenthal (D-Conn.) and Representative Nikki Budzinski (D-Ill.), supported by over a dozen co-sponsors. Their "Boosting Benefits and COLAs for Seniors Act" aims to replace the CPI-W with the CPI-E in determining COLAs.
The Social Security Administration's Office of the Chief Actuary projects that this change would increase annual COLAs by approximately 0.2 percentage points on average. This increment would translate into larger annual benefit increases for retirees, thereby improving their purchasing power over time. However, a higher cost burden would result, leading to a quicker exhaustion of the Social Security Trust Fund, which reduces the timeframe Congress has to devise measures to prevent across-the-board reductions in benefits.
What Retirees Should Keep in Mind
The prospect of eliminating federal taxes on Social Security benefits and adopting a more senior-focused inflation index for COLAs presents appealing opportunities for retirees to increase their disposable income. Nevertheless, these initiatives also pose significant challenges regarding the long-term financial health of the Social Security program.
Beneficiaries are advised to closely monitor legislative developments, considering both the immediate advantages of tax relief and enhanced cost-of-living increases, alongside the broader implications for the sustainability of benefits. Financial planning should incorporate the potential uncertainties associated with these policy changes and their impact on future Social Security payments.