President-elect Donald Trump's Social Security proposal brings unexpected consequences

A popular, well-intentioned plan can always backfire.

For an overwhelming majority of retirees, Social Security means more than just a monthly check. It serves as a financial basis for those who can no longer support themselves.

For more than two decades, Gallup has conducted an annual poll that asks retirees about their reliance on Social Security. Between 80% and 90% of respondents – including 88% in April 2024 – indicated that their Social Security benefit is a “major” or “minor” source of income. In other words, nearly 9 out of 10 seniors would have financial difficulties if this program did not exist.

But despite being vital to the financial well-being of our nation's aging workforce, this nearly 90-year-old program is in trouble. Fixing it will take a plan of action from lawmakers — and that includes President-elect Donald Trump.

Former President and President-elect Donald Trump speaking to reporters. Image Source: Official White House Photo by Shealah Craighead.

Radical benefit cuts planned in nine years

Every year since the first benefit check was mailed to retired workers in January 1940, the Social Security Board of Trustees has released a report that examines the current financial health of America's main retirement program. Most importantly, it takes into account changing demographic factors, as well as changes in fiscal and monetary policy, to predict the financial strength of Social Security over the long term, which encompasses the 75 years following the publication of a report .

In the 2024 Trustees' Report, it was estimated that Social Security would face a funding gap of $23.2 trillion through 2098. This represents an increase of $800 billion over the funding gap long-term estimate in the 2023 report, and it's a figure that's increasing quite steadily. since the mid-1980s.

To be clear, Social Security is in absolutely no danger of disappearing or becoming insolvent. The lion's share of revenue that funds this program comes from the 12.4% payroll tax on earned income (wages and salaries, but not investment income). As long as people continue to work and pay their taxes, there will always be money to go to eligible beneficiaries.

But what is at stake is the current timing of payments, including cost of living adjustments (COLAs), if these funding obligation shortfalls persist.

The Old Age and Survivors Insurance (OASI) Trust Fund is expected to deplete its asset reserves – the excess cash accumulated since its inception and invested, by law, in ultra-secure government, according to the latest trustees' report. and bearer of interests. bonds – by 2033. If AVS asset reserves run out in nine years, as expected, drastic benefit reductions of up to 21% could be necessary for retired workers and surviving beneficiaries.

OASI asset reserves are expected to be depleted by 2033. U.S. Old Age and Survivors Insurance Trust Fund assets, year-end data from YCharts.

President-elect Trump's Good Intentions May Inadvertently Harm Social Security

Although new President Donald Trump has largely avoided proposals to change Social Security, he has announced a campaign plan that, on paper, would be overwhelmingly supported by current and future generations of retirees. The only problem is that what's popular isn't always what's best for America's main retirement program.

In a late July post on his social media platform Truth Social, Trump wrote, “Seniors shouldn't pay Social Security taxes.”

By 1983, Social Security's asset reserves were rapidly heading toward depletion, which would have required benefit cuts. The Social Security Amendments of 1983, representing the last major bipartisan overhaul of the program, thwarted the need to cut benefits. He gradually increased payroll taxes on American workers, as well as the full retirement age. Most importantly, he introduced taxation of social security benefits.

Beginning in 1984, up to 50% of benefits could be exposed to the federal tax rate if provisional income (adjusted gross income + tax-free interest + half of benefits) exceeded $25,000 for a single filer or $32,000 $ for a couple filing jointly. . In 1993, the Clinton administration included a second tax tier that exposed 85 percent of benefits to federal tax when provisional income exceeded $34,000 for singles and $44,000 for couples filing jointly.

What makes this one of America's most hated taxes is that these income thresholds have never been adjusted for inflation. As COLAs increase nominal benefits over time, we have seen an increasing number of older households exposed to some form of federal tax on their benefits.

Trump's proposal, plain and simple, is to end this welfare tax and allow retirees to keep more of their income.

While the intent here is to increase benefits for a group of people who have been hit hard by inflation — the purchasing power of a Social Security dollar has fallen since the turn of this century — – ending the taxation of benefits would remove one of the benefits of the program. three sources of income.

Over time, benefit taxation is expected to become more important, in terms of providing Social Security with income to pay to eligible beneficiaries. Between 2024 and 2033, it is expected to generate just under $944 billion in revenue, according to estimates in the trustees' report. With Social Security already facing a long-term deficit of $23.2 trillion, eliminating a key source of revenue would further weaken its foundation.

Image source: Getty Images.

Analysis: Donald Trump's plan could have multibillion-dollar unintended consequences

However, the potential damage to Social Security extends well beyond the president-elect's plan to end taxation of benefits.

According to a recent analysis by the non-partisan, non-profit Committee for a Responsible Federal Budget (CRFB), the multiple proposals made by Trump during his election campaign would have unintended consequences for Social Security.

As expected, eliminating the hugely hated benefit tax would deprive Social Security of valuable revenue through 2035. But there are three additional proposals that are expected to reduce the program's asset reserves and/or decrease revenue collectible.

For starters, ending the taxation of tips and overtime would reduce payroll tax revenue by about $900 billion between fiscal 2026 and fiscal 2035 (the federal government's fiscal year ends on July 30). september).

Additionally, Trump wants to impose tariffs on goods imported into the United States. The idea being that tariffs would promote domestic manufacturing and make U.S. products more competitive with foreign imports. However, the tariffs risk accelerating inflation, which can lead to higher COLAs, damaging Social Security's asset reserves.

The final change that could have unintended consequences for Social Security concerns immigration restrictions. The proposed expulsion of undocumented migrants, coupled with the possibility of stricter legal migration, is expected to reduce payroll tax revenue.

Collectively, the CRFB estimates that ending the taxation of welfare benefits, stopping the tax on tips and overtime, imposing tariffs and overhauling immigration policy will increase the cash flow deficit by Social Security by $2.25 trillion over 10 years.

While President-elect Trump's Social Security plan may be well-intentioned, forecasts suggest it would be a fiscal disaster.

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