The Uncompromising Truth Surrounding President-elect Donald Trump's Social Security Strategy
For many retirees, Social Security serves as more than just a monthly income source. Being America's leading retirement program, it acts as a financial lifeline for numerous beneficiaries who might struggle without it.
Over the past 23 years, Gallup has surveyed retirees to understand the role of their Social Security income. Ranging from 80% to 90% of respondents, between 88% in 2024, noted that their Social Security check significantly contributes to their income, either as a major or minor source.
The financial stability of Social Security is critical for the prosperity of our aging population. Regrettably, this financial foundation has been weakening for decades. The responsibility to address these concerns falls upon the elected officials, including President-elect Donald Trump.
However, not all proposed Social Security solutions are favorable.
Potential Social Security benefit reductions within nine years
Since the first Social Security retired-worker advantage check was delivered in January 1940, each year the Trustees have released a report analyzing the program's financial health. Every report since 1985 has issued a warning about a long-term funding shortfall.
In simpler terms, the Trustees do not anticipate collecting sufficient revenue through Social Security to fulfill future obligations, including cost-of-living adjustments (COLAs), for seven and a half decades from now. In 2024, the Social Security Board of Trustees projected the program's unfunded obligations to amount to an astounding $23.2 trillion (and growing) until 2098.
Not only does the Old-Age and Survivors Insurance Trust Fund (OASI), responsible for providing monthly payments to retirees and survivor beneficiaries, forecast to exhaust its reserves by 2033, but this does not necessarily imply bankruptcy or insolvency for Social Security. However, it does suggest that sweeping benefit reductions of up to 21% might be imminent if no action is taken within nine years.
While some people attempt to pinpoint "congressional theft" or "undocumented workers" for the program's downfall, on-going demographic shifts are the true culprits.
The challenges facing Social Security can be attributed to:
- The increasing number of baby boomers retiring, causing a decline in the worker-to-beneficiary ratio.
- Improved life expectancy (Social Security was never designed to fund retirements for extended periods).
- A historically low birth rate, which will eventually affect the worker-to-beneficiary ratio.
- A significant decrease in net legal immigration into the U.S. since 1998 (Social Security relies on a consistent influx of legal immigrants to boost payroll tax revenue).
- The escalating income inequality, leading to a higher percentage of income escaping payroll taxation as time progresses.
The grim outlook: Donald Trump's Social Security plan exacerbates the situation
Most politicians have remained hesitant to tackle Social Security's issues due to the difficult task of improving the program without adversely affecting some beneficiaries. As presidential candidates, they are encouraged to put forth a plan to resolve America's most important retirement program.
During his campaign, Donald Trump presented two proposed options related to Social Security. Unfortunately, neither proposal would enhance the program or its beneficiaries over the long term.
The first suggestion advocated by the incoming president is to maintain Social Security as is. Ineffectively deferring action has become commonplace among political administrations, and Trump endorsed this idea earlier in the year by proclaiming that "you don't need to touch Social Security."
Adhering to the status quo as suggested by the Trustees Reports has proven to be an inadequate solution. While avoiding uncomfortable conversations may save politicians from public scrutiny, it will not prevent the program's funding gap from expanding or improve the OASI's dwindling asset reserves, set to deplete within a decade.
Eliminating the taxation of benefits could expedite the need for drastic benefit reductions
The second, more prominent proposition made by President-elect Donald Trump is the elimination of Social Security benefits taxation. He vehemently advocated for this stance on social media platform Truth Social in July by stating, "Seniors should not be taxed on their Social Security benefits."
Although retirees widely support this proposal due to its popularity as America's most disliked tax, eliminating this tax while Social Security's financial situation remains precarious is an unwise decision.
With Social Security's asset reserves in a critical state, Congress enacted and then-President Ronald Reagan signed the Social Security Amendments of 1983 into law. This landmark bipartisan overhaul of America's leading retirement program gradually increased the full retirement age and payroll taxes for workers, as well as mandated federal taxation of Social Security benefits.
Commencing in 1984, around half of the benefits could be subjected to federal taxation at a rate of up to 50%, if the provisional income (sum of adjusted gross income, tax-exempt interest, and half of the benefits) surpassed $25,000 for an individual filer or $32,000 for joint filers. In 1993, the Clinton administration introduced a second tier, making up to 85% of Social Security benefits liable for federal taxation if the provisional income for an individual or joint filers exceeded $34,000 and $44,000 respectively.
The issue with taxing Social Security benefits, beyond the misguided notion that it's a case of double taxation -- is that these provisional income thresholds have remained unadjusted since their inception four and three decades ago. However, given that Social Security is presently dispensing more in benefits than it's amassing in annual income, eliminating one of its primary revenue sources could be catastrophic.
It's predicted that the taxation of benefits will yield a total of $943.9 billion for Social Security between 2024 and 2033. Discontinuing this tax would severely compromise Social Security's financial status and possibly expedite the timeline for drastic benefit reductions.
In light of the projected Social Security funding shortfall, the elimination of benefits taxation, as proposed by President-elect Donald Trump, could potentially exacerbate the situation. This move could reduce Social Security's revenue by a significant amount, potentially expediting the need for drastic benefit reductions within nine years.
Many retirees rely heavily on Social Security, with the majority noting that their checks significantly contribute to their income. Given this reliance, any significant changes to the program, such as benefit reductions, could impact their retirement finances significantly.
