Sen. Ruben Gallego, Democrat of Arizona, has introduced a bill that would wipe out federal income taxes on Social Security benefits for every retiree in the country. The legislation, S.2716, known as the You Earned It, You Keep It Act, would pay for that tax cut by applying the 12.4% Social Security payroll tax to wages above $250,000, a threshold that sits well above the current taxable maximum of $184,500 for 2026. Gallego’s office says the measure would keep full benefits payable through 2058, but the bill’s fixed dollar threshold creates a structural tension that could erode its own revenue base within a decade.
Why the $250,000 payroll tax threshold matters right now
Social Security benefits first became subject to federal income tax under laws enacted in 1983 and 1993, according to the Congressional Research Service. The revenue generated by taxing those benefits flows directly into the Social Security trust funds, the Medicare Hospital Insurance fund, and Railroad Retirement accounts. Eliminating that tax stream without a replacement would accelerate the trust funds’ depletion timeline. The Gallego bill addresses this by creating a new revenue source: wages earned above $250,000 would be subject to the standard OASDI rate of 6.2% for employees and 6.2% for employers, as detailed in the bill text filed with Congress.
The structure produces what budget analysts call a “donut hole.” Workers currently pay Social Security payroll taxes on earnings up to the taxable maximum, which the Social Security Administration sets at $184,500 for 2026. Under S.2716, earnings between that cap and $250,000 would remain untaxed for Social Security purposes, while earnings above $250,000 would be taxed again. Medicare’s payroll tax, which already applies to all wages with no cap, would not change.
The bill achieves its benefit-side goal by terminating Section 86 of the Internal Revenue Code, the provision that currently includes a portion of Social Security benefits in taxable gross income. That repeal would affect retirees at every income level who now owe federal tax on their benefits. Under current law, as the Social Security Administration explains in its guidance on taxable benefits, up to 50% or 85% of a beneficiary’s payments can be counted as taxable income depending on combined income thresholds. Eliminating Section 86 would remove that calculation entirely from federal returns.
Solvency claims, CBO projections, and a competing House bill
Gallego’s office states the bill would extend Social Security solvency so that full benefits remain payable through 2058, citing the 2024 Trustees Report as a baseline. That baseline, published by the Office of the Chief Actuary, projects an earlier depletion date under current law and anticipates an automatic benefit cut unless Congress intervenes. No independent actuarial score specific to S.2716 has been released, so the 2058 figure rests on the sponsor’s internal analysis rather than a formal government estimate.
The Congressional Budget Office has separately analyzed a menu of options for shoring up Social Security, including raising or eliminating the taxable maximum and subjecting high earners to additional payroll taxes. Those studies generally find that extending the payroll tax to more earnings can meaningfully improve solvency, but the long-run impact depends on how thresholds are defined and indexed. A fixed dollar figure, like the $250,000 cutoff in S.2716, loses real value over time as wages and prices rise, pulling more workers into the higher tax bracket and altering the distribution of who pays.
That design choice interacts with the existing taxable maximum in ways that matter for both politics and policy. Because the $184,500 cap is already indexed to wage growth, it will continue to climb automatically. If Congress does not adjust the $250,000 line, the donut hole between the cap and the new threshold will shrink in real terms and could eventually close. In the short run, however, the gap creates a visible zone of untaxed earnings for upper-middle-income workers, while very high earners pay on their first dollar of wages and again above $250,000.
Advocates for the bill argue that this trade-off is worth making to deliver an immediate tax cut to retirees while tapping the fastest-growing segment of the wage distribution. Opponents are likely to question whether relying so heavily on high earners is sustainable, and whether repealing benefit taxation is the best use of new revenue when the program faces a sizable long-term shortfall. Without a public score from the Social Security actuaries or CBO, those debates will hinge on competing projections and assumptions.
The House is considering its own ideas for reform, including proposals that would also expand payroll taxes on high earners but direct the proceeds toward benefit increases rather than tax relief. That contrast underscores the central policy question raised by S.2716: should new revenue be used to shore up the trust funds while preserving the existing tax treatment of benefits, or should Congress prioritize delivering a visible tax cut to current retirees even if it requires steeper payroll contributions from future high earners?
For now, the You Earned It, You Keep It Act serves mainly as a marker in that broader debate. Its promise to end federal taxation of Social Security checks is simple to explain and likely popular with seniors, but the mechanics embedded in its $250,000 threshold and donut-hole structure ensure that any serious consideration will revolve around the less visible math of long-term solvency and who ultimately pays for the system.
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