When 2025 began, nearly 52 million retired workers were bringing home an average monthly check of $1,975.34 from Social Security. Though this might sound like a modest amount of income, it’s often a necessity to help aging Americans make ends meet.
For 23 years, national pollster Gallup has conducted an annual survey to gauge the reliance of retirees on their monthly Social Security check. Without fail, all 23 years showed that 80% to 90% of respondents (including 88% in 2024) required their Social Security benefit, in some capacity, to cover their expenses.
While maintaining the health of Social Security should be a priority for elected officials, the reality is that the foundation of America’s leading retirement program has been weakening for 40 years. Current and future beneficiaries are counting on lawmakers — including President Donald Trump — to strengthen the program.
The problem is that not all proposed changes to Social Security improve its financial footing.
President Trump signing paperwork in the Oval Office. Image source: Official White House Photo by Shealah Craighead, courtesy of the National Archives.
Before digging into what President Trump has proposed be done with America’s leading retirement program, it’s important to understand the dynamics of how we got to where we are now.
In each of the last 85 years, the Social Security Board of Trustees has released a report that details every dollar in income the program brings in, as well as where those dollars end up. More importantly, the Trustees Report examines the future solvency of Social Security’s trust funds by taking into account changes to fiscal and monetary policy, as well as myriad demographic shifts.
Since 1985, the Trustees Report has projected a long-term funding obligation shortfall. In this sense, “long-term” refers to the 75-year period following the release of a Trustees Report. This means estimated income collected over 75 years, inclusive of cost-of-living adjustments (COLAs), won’t fully cover outlays, such as benefits and, to a far lesser extent, administrative expenses to run the Social Security program.
As of 2024, Social Security’s long-term funding obligation shortfall was $23.2 trillion, which is up $800 billion from the prior-year report.
The bigger worry is that the Old-Age and Survivors Insurance Trust Fund (OASI) is forecast to exhaust its asset reserves by 2033. Although the OASI is no danger of bankruptcy or insolvency, the existing payout schedule, including COLAs, for retired workers and survivor beneficiaries is at risk beyond 2033.
If the OASI’s asset reserves are fully depleted, the Trustees estimate sweeping benefit cuts of 21% will be needed for the OASI to sustain payouts through 2098, without the need for any further reductions.
The blame for Social Security’s weakening financial outlook has absolutely nothing to do with myths of Congressional theft or undocumented migrants receiving traditional benefits. Rather, it’s a function of ongoing demographic shifts, such as a historically low U.S. birth rate, a more than halving in legal net migration into the U.S., and rising income inequality.
The OASI’s asset reserves are forecast to run dry by 2033. US Old-Age and Survivors Insurance Trust Fund Assets at End of Year data by YCharts.
The unwritten rule of thumb on Capitol Hill is to avoid the proverbial third rail of politics, Social Security. Even though most lawmakers recognize that America’s top social program is ailing, making changes would almost certainly result in select groups of people being worse off than they were before.
However, presidential candidates don’t have the luxury of taking no stance on key issues. While Trump has predominantly taken a hands-off approach with Social Security, he did allude to a big change he’d like to see made in late July.
In a post on the president’s social media platform Truth Social, then-candidate Trump wrote, “Seniors should not pay tax on Social Security.” He reiterated this stance roughly a week later in a Fox & Friends interview.
The taxation of Social Security benefits began four decades ago. With the program’s asset reserves nearly depleted in 1983, a bipartisan Congress passed and then-President Ronald Reagan signed the Social Security Amendments of 1983 into law. This sweeping overhaul gradually increased the payroll tax and full retirement age for workers, and introduced the now-despised tax on benefits.
Starting in 1984, up to 50% of Social Security benefits became taxable at the federal rate if provisional income (adjusted gross income + tax-free interest + one-half of benefits) crested $25,000 for single filers and $32,000 for jointly filing couples. In 1993, a second tier was added that exposed up to 85% of benefits to federal taxation if provisional income topped $34,000 for a single filer or $44,000 for couples filing jointly.
The reason the taxation of Social Security benefits is such a sore spot — and why the president has attempted to capitalize on the popularity of removing it — is because these income thresholds have never been adjusted for inflation. When the initial tax tier was introduced more than 40 years ago, it was only expected to impact around 10% of senior households. But after four decades of higher nominal wages and cost-of-living adjustments, around half of all retiree households are subjected to this tax.
Ending the taxation of benefits would be met with big smiles from retirees, but would also come with a flurry of unintended consequences.
Image source: Getty Images.
The advantage of removing the taxation of Social Security benefits is simple: It would allow around half of all retired-worker beneficiaries to keep more of what they receive. But this shortsighted action has potentially serious long-term consequences that could cost retirees big-time.
In 2023, Social Security brought in $1.351 trillion in income, more than 91% of which came from the 12.4% payroll tax on earned income (wages and salary, but not investment income). Even though the tax on benefits “only” generated $50.7 billion in 2023 for Social Security, it’s becoming a progressively more important source of income.
According to the 2024 Trustees Report, the taxation of benefits was estimated to generate $943.9 billion in cumulative income between 2024 and 2033. While removing this tax would increase what select retirees are able to keep for a few years, it would ultimately widen Social Security’s long-term funding obligation shortfall and shorten the OASI’s asset reserve depletion timeline.
This is a good time to mention that Trump’s desire to reduce/eliminate taxes in other areas could come back to haunt Social Security.
In October, the Committee for a Responsible Federal Budget (CRFB) examined the full effect Donald Trump’s tax agenda would have on Social Security. The CRFB’s analysis determined that Trump’s proposed elimination of taxes on overtime pay and tips would increase Social Security’s 10-year deficit by $900 billion.
Collectively, ending the taxation of benefits and eliminating taxes on overtime pay and tips would widen Social Security’s deficit by an estimated $1.85 trillion over 10 years. This would expedite the OASI’s asset reserve depletion timeline and meaningfully increase how much benefits would need to be cut if/when the OASI’s asset reserves run dry.
The short-term benefits of Trump’s proposed Social Security changes would be more than outweighed by the long-term cost to retirees.
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President Donald Trump Wants to Change Social Security, but It Comes With a Potentially Big Cost to Retirees was originally published by The Motley Fool
