Taxes on Social Security benefits could shift in a significant way under a new bipartisan proposal aimed at public sector retirees who receive retroactive Social Security payments.
The No Tax on Restored Benefits Act would create a gross income tax exclusion for retroactive Social Security benefits paid to people who also receive pensions—especially those who saw their benefits reduced or eliminated in the past because they didn’t pay Social Security payroll taxes while working.
Why It Matters
The proposal primarily affects public sector retirees, though Social Security remains a critical income source nationwide, with roughly 70 million Americans receiving benefits each month.
For years, many pensioned retirees—often teachers, firefighters, and police officers—had their Social Security benefits reduced under prior rules. That began to change after reforms passed last year, but some recipients then faced an unexpected tax problem.
What To Know
After the Social Security Fairness Act took effect last year, many affected retirees became eligible for restored benefits, including retroactive payments.
Supporters of the new bill say those one-time retroactive lump sums can push retirees over taxation thresholds and trigger surprise tax bills—especially for people who were previously below the taxable income cutoff.
Democratic Representative of Maine Chellie Pingree, a co-sponsor of the bill, said the Social Security Fairness Act “was truly transformative” for many Americans, but added it “was never intended to saddle widows, low-income seniors and dedicated public servants with an unexpected tax bill.”
“The No Tax on Restored Benefits Act addresses this problem in a fair, commonsense way by protecting people who were previously below the taxation threshold from being unfairly punished because of a one-time, retroactive increase in their earned benefits,” Pingree said.
The bill has also drawn support from the National Association of Police Organizations, as some retirees who benefited from the earlier reform later discovered they owed more in federal taxes than expected.
The Social Security Fairness Act reversed the Windfall Elimination Provision and Government Pension Offset, but the resulting retroactive payments created unintended tax consequences for some recipients.
As finance expert Michael Ryan, founder of MichaelRyanMoney.com, explained to Newsweek, the issue stems from how the restored benefits hit recipients’ taxable income:
“The new bill appears to target beneficiaries who got hit with surprise tax bills because their restored Social Security benefits pushed them into higher taxable income brackets,” Ryan said.
He added that many recipients didn’t have taxes withheld from those payments, which made the situation worse:
“The real problem: Most of these beneficiaries didn’t withhold taxes from their Social Security payments. The SSA started issuing lump sums in February 2025. Tax day was April 2025. People who didn’t make estimated quarterly payments got hit with underpayment penalties on top of the tax bill.”
What People Are Saying
Not everyone is convinced the change is justified.
Kevin Thompson, CEO of 9i Capital Group and host of the 9innings podcast, told Newsweek:
“I think this is just another political talking point. How are you not going to tax benefits that weren’t supposed to be provided in the first place? They should be taxed like everyone else who has received those very benefits. Again, where is this money coming from and who is going to pay for it?”
Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, argued the proposal could create broader budget pressure:
“While the proposal to exempt restored Social Security benefits from federal income tax may feel like attempting to level the playing field for some retirees, it also carries broader fiscal implications. Social Security is already facing solvency challenges in the coming years, and any reduction in tax revenue tied to benefit payments adds pressure to the system and to the federal budget.”
Ryan described the proposal as a response to a problem created by the retroactive payment structure:
“This bill is damage control for a tax surprise Congress created when they retroactively restored benefits without telling people to withhold taxes upfront. The $6k OBBB deduction already covers most affected seniors. If this new bill passes, it’s extra cushion. If it doesn’t, the existing deduction still helps, but some high-income public retirees will owe taxes on their lump sums.”
What Happens Next
With the SSA facing a funding crunch projected to arrive as early as 2033, Beene cautioned people against assuming the proposal will become law—or fix larger fiscal problems:
“Even if the short-term revenue loss appears smaller relative to total federal spending, policies that create additional tax exclusions can add up over time,” he said. “This debate reflects a growing tension between providing immediate relief to retirees and addressing the funding gaps in Social Security’s future.”
