Markets reacted strongly to the reelection of Donald Trump. In the week that followed Nov. 5, the S&P 500 was up about 3.7%. While the likely economic impact of all of Trump’s campaign promises is mixed, the stock market appears to believe that Trump will follow through with those that boost business, like cutting corporate taxes, while not following through with potentially damaging promises like hiking trade tariffs.

How this plays out will have broad implications in the lives of all Americans, but for the millions of Americans who are retired or will soon be so, Donald Trump’s Social Security plans could have an even bigger impact. The program is already on a path toward financial distress, but according to a recent analysis by the Committee for a Responsible Federal Budget (CRFB), many of the proposals put forth on the campaign trail by the President-elect could exacerbate the issues. First, however, let’s take a look at the state of the program.

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Social Security is on the path to insolvency

Social Security is designed as a “pay-as-you-go” system. The payroll taxes that working Americans pay into the program are directly paid out to the retirees enrolled in it. For many years, more taxes were paid into the system than were paid out, leading to a surplus. Now, however — largely because of changes in demographics, especially the falling birth rate and the retirement of the Baby Boom generation — Social Security is running a deficit; more money is paid out than is collected in payroll tax and other sources each year.

For the time being, this isn’t affecting benefits. The program can draw on the surplus it collected in years past to bridge the gap. If nothing changes, however, by 2035, this will no longer be true. At that point, the reserves will be tapped, and the program can only pay out what it brings in, which, according to the Congressional Budget Office (CBO), could mean a 23% across-the-board cut to retirees’ benefits without action from Washington.

Donald Trump’s plans for Social Security could mean this happens sooner

Although Donald Trump has promised to “not touch” Social Security and that beneficiaries will “get what they’re getting,” many of his proposed policies would have an effect on the program’s bottom line, according to the analysis by the CRFB.

Some proposals would reduce the amount of revenue flowing into the program, like eliminating taxes on Social Security benefits, tips, and overtime, or major deportation programs. Others would increase the amount of benefits paid out without increasing retirees’ relative buying power, like imposing inflationary tariffs that would lead to increased cost of living adjustments (COLAs).

When taken in aggregate, the CRFB estimates these policies will accelerate Social Security’s insolvency timeline by three years. That means benefit cuts as early as 2032, just seven years from now. By 2035, the shortfall would be increased to 33% compared to the current estimate of 23%. In the CRFB’s worst-case scenario, benefit cuts in 2035 would be as much as 36%, meaning beneficiaries would only receive 63% of what they would if the program remained solvent.

All told, the CRFB estimates the proposals will lead to a 10-year shortfall of between $1.3 trillion and $2.8 trillion.

There’s a lot at stake

More than 70 million retired Americans received benefits last year. For many, it provides a measure of security as a meaningful supplement to personal savings. For others, it’s almost all they have; for the bottom 40% of earners, Social Security accounts for 80% of post-retirement income. These Americans would be massively impacted by accelerated and increased benefit cuts.

Now, the numbers here are from a single source, and they are predictions, not inevitabilities. What promises are kept, how they are implemented, and their ultimate impact all remain to be seen. There is also the chance that any of these proposals would be balanced by others that would strengthen the program and offset any potential financial damage.

Regardless, it’s clear that personal retirement savings and employee-sponsored programs like 401(k)s are more important than ever. Smart retirement planning must include the possibility that significant cuts will occur in the not-so-distant future.

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