2 Big Changes Washington Wants To Make to Your Social Security Payments

It's estimated that 74.5 million people receive monthly Social Security benefits in the United States, with over 67 million receiving retirement benefits alone. With an average monthly payout of $1,865, every little bit helps.

While some senior citizens are now eligible to receive a tax deduction as part of the recently passed One Big Beautiful Bill Act (OBBBA), this deduction is only valid through the 2028 tax year. Senator Ruben Gallego (D-AZ) is attempting to permanently eliminate federal taxes on Social Security benefits to help you keep more money in your pocket by introducing the You Earn It, You Keep It Act.

The You Earn It, You Keep It Act could affect Social Security in two major ways. Here's how the changes of eliminating federal taxes on Social Security benefits and raising the payroll tax cap could affect your wallet.

How Social Security is currently funded

One way Social Security benefits are financed for both retirees and those receiving disability is through a payroll tax known as the Federal Insurance Contribution Act (FICA). This payroll tax collects 6.2% of your gross income for Social Security benefits that are distributed to retirees and disabled workers. In comparison, 1.45% of your gross income goes towards Medicare.

Your employer then matches your payroll tax, resulting in a total of 15.3%. The money collected for Social Security is then placed into a trust known as the Old-Age Survivors Insurance (OASI) Trust Fund and then distributed to current retirees who collect benefits. In practice, the more you work, the more you contribute, which means a higher benefit payment when it comes time to retire.

Another way Social Security is funded is by retirees paying federal tax on their Social Security benefits. As of now, Social Security benefits are taxable once you meet a certain income threshold. Currently, individuals can be taxed on their Social Security benefits once they earn $25,000 or more in combined income per year, while couples filing jointly start to pay taxes at $32,000 or more in combined income.

In other words, you are paying to access your own benefits despite paying into them your whole life. While the rate varies, some people can be taxed on up to 85% of their benefits. You Earn It, You Keep It would change that.

Eliminating federal tax on Social Security would positively impact retirees

Senator Gallego has stated, "Like a lot of Americans, I've been paying into Social Security since my first job at fourteen. But despite decades of paying into the system, seniors are still forced to pay taxes on their hard-earned benefits – all while the ultra-wealthy barely pay into the system at all."

While there have been cost-of-living adjustments to Social Security, it's not necessarily enough to cover increased everyday expenses, such as groceries and rent.

Retirees who collect Social Security benefits would no longer be required to pay federal taxes on these benefits, potentially resulting in a significant increase in the amount they receive each month. This means more money in your pocket to help support your finances in retirement, hopefully lessening financial burden and providing a more secure financial future.

Raising the cap on the Social Security payroll tax

If federal taxes are to be eliminated on Social Security benefits that are collected, it would have a significant impact on how much and how quickly OASI can replenish itself, especially with an aging population that will require more benefit payments as individuals leave the workforce. Eliminating this tax would leave the OASI at risk of running out of money, even more than it already is. The You Earn It, You Keep It Act could potentially strain the OASI Trust Fund, as it would reduce the amount of money flowing into the fund from tax revenues.

As mentioned above, payroll deductions cover most of the funding for OASI; however, employees and employers only have to pay the FICA payroll tax on earned income up to $176,100 per year. This means that any income earned above this amount is no longer subject to the Social Security portion of the FICA tax, leaving more money in that individual's pocket. The You Earn It, You Keep It Act would lift the FICA payroll tax cap for workers earning more than $250,000 annually.

Gallego and other lawmakers believe that raising the taxable income cap will help fund and extend the OASI beyond the current trust's prediction date of running out of money in 2034 to a new one of 2058.

"This legislation provides long-overdue tax relief for seniors who have worked hard and paid into Social Security their entire lives. Eliminating federal taxes on Social Security benefits is a commonsense step to ensure older Americans can keep more of what they've earned," states Shannon Benton, who is currently Executive Director of the nonpartisan advocacy group, The Senior Citizens League.

What it would mean for retirees' checks

A majority of workers would see no impact on their payroll checks. However, those who earn more than $250,000 a year would now pay more into Social Security to cover the current funding shortfall, which is currently being offset by federal taxes on benefits.

On the other hand, retirees would now keep more of their benefits by not being subject to federal taxes. This is what is at the heart of the You Earn It, You Keep It Act — passing the burden of Social Security funding from retirees to higher-income workers.

In fact, the current income threshold for Social Security taxes has not been adjusted for inflation since 1983. This means that every year, an increasing number of retirees are losing out on benefits due to this federal tax.

As of October 2025, this legislation has not been passed into law. But previous similar proposals have not advanced as far in the legislative process as the You Earn It, You Keep It Act, which could be a positive sign for retirees.

Bottom line

Although this proposal has not been passed, its potential benefits and tradeoffs are readily apparent.

One potential benefit of the bill may be that the average retiree has more income to help with living expenses at a time when the ability to earn more may be limited. Another benefit is fairness, ensuring that everyone, including high earners, pays their fair share in FICA contributions. This helps ensure that the OASI is fully funded and can provide prompt and full payment to all eligible individuals for an extended period than is currently projected.

However, despite contributing more, the maximum amount someone can currently collect on Social Security as a retiree is $5,108 a month, which means higher earners would be contributing more into Social Security without reaping higher benefits come retirement age.

No matter how close you are to retirement, it's best to stay informed and follow the news for more. It's important to stay updated on the progress of the You Earn It, You Keep It Act and other potential changes to Social Security policy, as these could have a significant impact on your retirement finances.