The Harsh Reality of President-Elect Donald Trump's Social Security Plan Can't Be Ignored
Sean Williams, The Motley Fool
6 min read
In October, more than 51 million retired workers took home a benefit check that averaged $1,924.35. While this is a relatively modest amount of money, it's nevertheless foundational for most retirees.
Since 2002, national pollster Gallup has been surveying retirees annually to gauge how important their Social Security income is to making ends meet. For 23 years, between 80% and 90% of respondents have noted that it accounts for a "major" or "minor" source of income, including 88% in the latest survey (April 2024). Put another way, nearly 9 out of 10 retired workers would struggle to cover their expenses if Social Security didn't exist.
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Despite the important role Social Security has played in supporting our country's aging workforce, its financial well-being is now floundering. Current and future beneficiaries are looking to elected officials, as well as President-elect Donald Trump, for solutions that'll strengthen America's top retirement program.
President Donald Trump giving remarks. Image source: Official White House Photo by Shealah Craighead.
Social Security's funding obligation shortfall has surpassed $23 trillion
For more than 80 years, the Social Security Board of Trustees has released an annual report outlining the current financial health of the program, as well as its projected long-term health -- i.e., the 75 years following the release of a report.
Since 1985, the Trustees Report has warned of a long-term funding obligation shortfall. In other words, the Trustees foresee more being paid out in benefits and administrative expenses than is collected as income. This funding deficit has been steadily growing for four decades and sits at $23.2 trillion, as of 2024.
The forecast for the Old-Age and Survivors Insurance Trust Fund (OASI), which is responsible for making monthly payouts to retired workers and survivor beneficiaries, is even more pressing. The latest report predicts the OASI's asset reserves will be exhausted by 2033, which would lead to sweeping benefit cuts of up to 21%.
Before going any further, let's make it clear that Social Security is in no danger of going bankrupt or becoming insolvent. Social Security generates over 91% of its income from the 12.4% payroll tax, which ensures that income is always flowing into the program for distribution to eligible beneficiaries. What is at risk for current and future beneficiaries is the existing payout schedule, including near-annual cost-of-living adjustments (COLAs).
President-elect Trump has a plan -- but it makes things worse for Social Security
While on the campaign trail, prior to his November victory, Trump offered up a Social Security proposal that drew thunderous applause from most retirees.
In July, on Trump's social media platform, Truth Social, the former and future president posted, "Seniors should not pay tax on Social Security."
The taxation of Social Security benefits was part of the last bipartisan overhaul of America's leading retirement program. The Social Security Amendments of 1983 gradually increased the full retirement age and payroll tax, as well as introduced the taxation of benefits.
Starting in 1984, up to 50% of Social Security benefits could be exposed to federal taxation if provisional income (adjusted gross income + tax-free interest + one-half of benefits) surpassed $25,000 for single filers and $32,000 for couples filing jointly. In 1993, a second tier was added that allowed up to 85% of Social Security benefits to be taxed at the federal level if provisional income topped $34,000 for single filers and $44,000 for couples filing jointly. Neither of these thresholds have ever been adjusted for inflation, which means more households have been exposed due to COLAs over time.
The thesis for eliminating this hated tax is that it would allow beneficiaries to hang onto more of their Social Security check in order to fight back against inflation. The value of a Social Security dollar has declined by 20% since 2010 due to the effects of rising prices, according to an analysis by nonpartisan senior advocacy group The Senior Citizens League.
But eliminating one of Social Security's three sources of income would have dire consequences for a program contending with a rapidly widening long-term funding shortfall and the possibility of sweeping benefit cuts in nine years.
The taxation of benefits is expected to bring in almost $944 billion for Social Security from 2024 trough 2033. Removing this income source, or even adjusting it for the effects of inflation over the last couple of decades, would expedite the timeline to OASI benefit cuts.
Image source: Getty Images.
Study: Trump's core proposals would speed up the timeline to Social Security benefit cuts
However, it's not just Trump's proposal to eliminate the taxation of Social Security benefits that has the potential to financially weaken Social Security.
In October, the Committee for a Responsible Federal Budget (CRFB), a nonpartisan, nonprofit organization based out of Washington, D.C., issued a report analyzing the impact of numerous Trump proposals on Social Security. As expected, eliminating the federal taxation of benefits has a deleterious effect on this vital program. But there are ancillary impacts, too.
For example, Trump's campaign proposals also included eliminating taxes on tips and overtime, imposing a 60% tariff on goods imported from China and up to 20% on all other countries, and expanding deportations of undocumented migrants in the U.S. All three of these additional proposals have the capacity to hurt Social Security.
Ending the tax on tips and overtime would likely reduce payroll tax income.
CRFB finds that sizable tariffs on imports can lead to higher cost-of-living adjustments, which would drain the OASI's asset reserves even faster. Additionally, tariffs run the risk of increasing the prevailing rate of inflation, which might reduce taxable payroll.
Strengthening the U.S. border would remove undocumented workers who've had a decisively positive impact on Social Security, and might discourage legal net migration, which is critical to the financial health of the program.
According to CRFB's study, the median projection of Trump's core proposals would expand Social Security's cash deficit by $2.25 trillion over 10 fiscal years (2026 through 2035) -- the federal government's fiscal year ends on Sept. 30. More importantly, it would move the date of projected benefit cuts forward by three years to 2031 from the Congressional Budget Office's (CBO's) current projection of 2034.
Lastly, it would eventually lead to larger sweeping benefit cuts of 33% (based on CRFB's central estimate), compared to the CBO's current forecast of a 23% benefit cut.
The harsh reality of Trump's direct Social Security plan and adjacent proposals is that the program would be notably worse off than it is now.
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