For more than eight decades, Social Security has been providing a financial foundation for aging workers who could no longer do so for themselves. Even though the average retired-worker benefit for 2025 is estimated to be a modest $1,976 per month, Social Security income has played a key role in dramatically lowering the senior poverty rate in America.

Despite the undeniable importance of Social Security for many of its nearly 52 million retired-worker beneficiaries, this leading program is in trouble. Although it’s in no danger of going bankrupt or becoming insolvent, its existing payout schedule, including cost-of-living adjustments (COLAs), doesn’t appear sustainable.

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Strengthening Social Security will require action by our elected officials, including President-elect Donald Trump.

The unfortunate problem for current and future beneficiaries is that not every idea proposed by our elected officials is positive for Social Security.

President Donald Trump giving remarks. Image source: Official White House Photo by Shealah Craighead, courtesy of the National Archives.

Social Security is in a $23.2 trillion (and growing) financial hole

In January 1940, the Social Security Administration mailed out the first-ever retired-worker check. Every year since this initial payment, the Social Security Board of Trustees has released a report outlining the current financial health of the program, which allows anyone to see how income is collected and where those dollars end up.

More importantly, the annual Trustees Report provides forward-looking estimates concerning the health of Social Security that are based on a number of dynamic variables, including fiscal and monetary policy as well as demographic shifts. Ongoing demographic changes, such as rising income inequality, a historically low U.S. birth rate, and a more-than-halving in net legal migration into the U.S. over the last 25 years, have played a key role in Social Security’s crumbling financial foundation.

For 40 years, every Trustees Report has cautioned that Social Security was contending with a shortfall in the long-term (75-year) funding obligation. In simpler terms, the Trustees believe that income collection in the 75 years following the release of a report would be insufficient to cover outlays, including COLAs. As of 2024, this cash shortfall has reached a staggering $23.2 trillion.

What’s even more worrisome is that benefit cuts may be just eight years away. The 2024 Trustees Report estimates the Old-Age and Survivors Insurance Trust Fund (OASI), which is responsible for paying benefits to retired workers and survivor beneficiaries each month, will exhaust its asset reserves by 2033.

If the OASI’s asset reserves are fully depleted, sweeping benefit cuts of up to 21% may be necessary to support payouts (inclusive of COLAs) through 2098 without the need for any further reductions.

The OASI’s asset reserves are forecast to be depleted by 2033. US Old-Age and Survivors Insurance Trust Fund Assets at End of Year data by YCharts.

Trump’s tax cut proposals take center stage, with a focus on Social Security

When Donald Trump officially takes office for his nonconsecutive second term in a little over two weeks, he’ll be aiming to lower taxes for consumers and businesses. Keeping in mind that campaign promises aren’t guaranteed to translate into proposals on Capitol Hill, Trump suggested doing away with the taxation of tips and overtime pay prior to his November victory.

However, the flagship tax cut proposal intimated by Trump while on the campaign trail in late July is to do away with the taxation of Social Security benefits. While posting on his social media platform Truth Social, the incoming president said, “Seniors should not pay tax on Social Security.”

In 1983, with Social Security in a similar financial predicament to what it finds itself in now, Congress passed and then-President Ronald Reagan signed the Social Security Amendments of 1983 into law. This bipartisan overhaul gradually increased the payroll tax on workers and the full retirement age for future retirees, as well as introduced the taxation of benefits.

Starting in 1984, up to 50% of Social Security benefits could be taxed at the federal rate if provisional income (adjusted gross income + tax-free interest + one-half of benefits) surpassed $25,000 for a single filer and $32,000 for a jointly filing couple. In 1993, a second tax tier was added that allowed up to 85% of benefits to be subject to the federal rate if provisional income topped $34,000 for individual filers and $44,000 for couples filing jointly.

Retirees despise this tax because of the misconception that it’s a form of double taxation and the fact that these provisional income thresholds have never been adjusted for inflation. As COLAs have risen over time, a higher percentage of senior households have become subjected to the taxation of benefits.

Eliminating the taxation of benefits would increase take-home benefits for around half of all beneficiaries.

Image source: Getty Images.

The president-elect’s tax cut proposals come with unforeseen consequences

On the surface, the idea of allowing Social Security beneficiaries, overtime workers, and tipped employees to hang onto more of their money probably sounds fantastic and has a lot of support. But what you’ll sometimes find is that what’s popular isn’t always what’s practical for Social Security.

America’s leading retirement program has three sources of funding:

• The 12.4% payroll tax on earned income, which includes wages and salary but not investment income.
• Interest income earned on the program’s asset reserves, which are invested in special-issue government bonds, as required by law.
• The taxation of Social Security benefits.

If the OASI’s asset reserves disappear, so will Social Security’s ability to generate meaningful interest income. Even though the payroll tax supplies the lion’s share of income for the program, eliminating the taxation of benefits would make Social Security’s financial situation even more precarious.

Between 2024 and 2033, the taxation of benefits is forecast to provide $943.9 billion in income for Social Security. Without this income, the need for sweeping benefit cuts could occur well before 2033.

But this isn’t all.

Based on an analysis conducted by the nonprofit, nonpartisan Committee for a Responsible Federal Budget (CRFB), ending the taxation on tips and overtime would increase Social Security’s deficit by an estimated $900 billion between fiscal 2026 and fiscal 2035 (the federal government’s fiscal year ends on Sept. 30). This reduction is a reflection of the payroll tax being applicable to less earned income over time.

Collectively, the CRFB sees Trump’s tax cut proposals increasing Social Security’s cash shortfall by $1.85 trillion over 10 years. For a series of proposals designed to put more money in American’s wallets, this is quite the set of unforeseen consequences.

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