Eight phrases potentially influencing Social Security's future, uttered by President-elect Donald Trump
In November, approximately 52 million old-age beneficiaries received an average Social Security check of $1,925.46. Despite this not being a substantial sum, it serves as a crucial source of income for many retired workers in the United States.
In accordance with a two-decade-long tradition by national pollster Gallup, a survey conducted in 2024 revealed that 88% of retirees considered Social Security an essential or minor income source. This means that nearly nine out of ten seniors might struggle financially if Social Security ceased to exist.
However, the reliability and stability of this vital program are at risk.
Current and prospective beneficiaries are counting on their elected representatives to reinforce the Social Security system, including the incoming President Donald Trump.
The impending prospect of significant Social Security benefit reductions within a decade
Since the inaugural distribution of retired worker benefits in 1940, the Social Security Board of Trustees has published an annual report detailing the program's financial health. The Trustees Report offers insights into income generation, disbursement targets, and long-term financial viability, which is defined as the 75-year perspective following the report's release.
Since 1985, every Trustees Report has predicted a long-term funding shortfall. Essentially, the Trustees are skeptical that income collection over the following 75 years will be sufficient to cover expenses, including cost-of-living adjustments (COLAs).
The 2024 Trustees Report projected a 75-year funding deficit of $23.2 trillion for Social Security, an $800 billion increase from the 2023 report.
More alarmingly, substantial benefit cuts may become inevitable within the next decade. According to the 2024 Trustees Report, the Old-Age and Survivors Insurance Trust Fund (OASI), responsible for distributing payments to retired workers and survivors, is projected to exhaust its asset reserves by 2033.
It's important to clarify that depleting the OASI's asset reserves doesn't mean Social Security is bankrupt, insolvent, or will vanish. Instead, it indicates that the current payout structure, including COLAs, is unsustainable. If the OASI's asset reserves are depleted by 2033, as forecast, drastic benefit cuts of up to 21% may be necessary to maintain financial solvency through 2098.
Demographic shifts - not "congressional looting" or "undocumented migrants" - are responsible for Social Security's weakening financial foundations. These shifts include a historically low US birth rate and growing income disparity.
President-elect Trump's eight-word pledge to redefine Social Security
Although President-elect Donald Trump steered clear of tackling the sensitive topic of Social Security during his first term, presidential candidates often cannot neglect significant issues during their campaigns.
In July 20XX, during a post on his social media platform, Truth Social, Trump proposed eight words that could potentially reshape Social Security forever: "Seniors should not pay tax on Social Security benefits."
While this doesn't constitute a bill or even a draft of a bill, Trump's words suggest a willingness to eliminate taxes on Social Security benefits.
In 1983, Social Security faced a similar predicament, with its asset reserves projected to be depleted soon. Congress then passed and President Ronald Reagan signed the Social Security Amendments of 1983 into law. This bipartisan overhaul of America's leading retirement program gradually increased payroll taxation and the full retirement age while also introducing benefit taxation.
Beginning in 1984, up to 50% of Social Security benefits could be exposed to the federal tax rate if provisional income (adjusted gross income + tax-free interest + half of the benefits) surpassed $25,000 for single filers or $32,000 for couples filing jointly. A decade later, in 1993, the Clinton administration established a second tax tier, allowing up to 85% of benefits to be exposed to federal taxation in cases where provisional income surpassed $34,000 for single filers and $44,000 for couples filing jointly.
At its inception, the taxation of benefits was anticipated to impact around 10% of senior households. Due to the lack of inflation-adjusted income thresholds, the percentage of retirees subject to this tax has steadily increased over time, as COLAs continue to rise.
Trump's proposed elimination of benefits taxation could potentially augment monthly Social Security payouts for roughly half of all recipients.
Potential unintended consequences of Trump's Social Security plan
While Trump's proposed elimination of benefits taxation aligns with his general agenda of reducing taxes, this seemingly benevolent action might have significant, unforeseen consequences for Social Security.
Besides seniors' common dislike of taxing their benefits, this income is crucial for Social Security's sustainability.
Social Security obtains income through three primary channels:
The 12.4% levy on income derived from work, such as wages and salaries, but not profits from investments, is one aspect. This tax does not apply to income generated from interest on investments in mandatory, interest-bearing, government-issued bonds, held as a legal requirement.
The revenue generated from taxing Social Security benefits is another source of income. Given that Social Security is currently spending more than it's earning, this income from taxing benefits might soon cease to exist. According to projections, scrapping this taxation could result in approximately $944 billion in combined income from 2024 to 2033, for the OASI and Disability Insurance Trust Funds.
If President Trump were to permanently end the taxation of Social Security benefits, it could potentially accelerate the depletion of the OASI's savings and increase the extent of necessary benefit cuts for sustaining payments, including cost-of-living adjustments, for the upcoming 75 years.
The incoming president would encounter a formidable challenge in obtaining the 60 votes required in the Senate to modify the Social Security Act. It's been 45 years since either party held a majority of 60 seats in the Senate. Even if every Republican senator in the incoming Congress backed the removal of the benefit taxation, securing the support of seven Democrats seems extremely improbable.
Even though the prospect of abolishing the benefit taxation might be discussed further, there's no evident financial advantage for legislators to eliminate this critical income source.
After analyzing the potential consequences of President-elect Trump's proposal to eliminate taxes on Social Security benefits, one could argue that this decision might accelerate the depletion of the Old-Age and Survivors Insurance Trust Fund's savings. This could, in turn, increase the necessity for drastic benefit cuts to maintain financial solvency. Additionally, the absence of taxation on benefits might serve as a substantial income source for many retirees preparing for their retirement, thereby easing their financial burdens during their golden years.
