President-Elect Donald Trump's Social Security Proposal Comes With Unintended Consequences

For an overwhelming majority of retirees, Social Security represents more than just a monthly check. It serves as a financial foundation for those who can no longer provide for themselves.

For more than two decades, Gallup has been conducting an annual poll that questions retirees regarding their reliance on Social Security. Between 80% and 90% of respondents -- including 88% in April 2024 -- have noted that their Social Security benefit is a "major" or "minor" source of income. In other words, close to 9 out of 10 seniors would financially struggle if this program didn't exist.

But despite being vital to the financial well-being of our nation's aging workforce, this nearly 90-year-old program is in trouble. Fixing it will require a plan of action from lawmakers -- and this includes President-elect Donald Trump.

Former President and President-elect Donald Trump addressing reporters. Image source: Official White House Photo by Shealah Craighead.

Sweeping benefit cuts are an estimated nine years away

Every year since the first retired-worker benefit check was mailed in January 1940, the Social Security Board of Trustees has issued a report that examines the current financial health of America's leading retirement program. More importantly, it takes into account changing demographic factors, as well as shifts in fiscal and monetary policy, to predict how financially sound Social Security will be over the long term, which encompasses the 75 years following the release of a report.

In the 2024 Trustees Report, it was estimated that Social Security is facing a $23.2 trillion funding obligation shortfall through 2098. This was up $800 billion from the estimated long-term funding deficit in the 2023 report, and it's a figure that's been climbing fairly steadily since the mid-1980s.

To make one thing clear, Social Security is in absolutely no danger of disappearing or becoming insolvent. The lion's share of the income that funds this program comes from the 12.4% payroll tax on earned income (wages and salary, but not investment income). As long as people continue to work and pay their taxes, there will always be money to disburse to eligible beneficiaries.

But what is at stake is the current payout schedule, including cost-of-living adjustments (COLAs), if these funding obligation shortfalls persist.

According to the latest Trustees Report, the Old-Age and Survivor's Insurance Trust Fund (OASI) is projected to exhaust its asset reserves -- the excess cash built up since inception that's invested, by law, into ultra-safe, interest-bearing government bonds -- by 2033. If the OASI's asset reserves deplete in nine years, as forecast, sweeping benefit cuts of up to 21% may be necessary for retired workers and survivor beneficiaries.

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.

President-elect Trump's good intentions would inadvertently hurt Social Security

While incoming President Donald Trump has largely avoided proposals to change Social Security, he did announce a plan on the campaign trial that would, on paper, be overwhelmingly supported by current and future generations of retirees. The only problem is that what's popular isn't always what's best for America's leading retirement program.

In late July, while posting on his social media platform, Truth Social, Trump wrote, "Seniors should not pay tax on Social Security."

In 1983, Social Security's asset reserves were rapidly headed for exhaustion, which would have necessitated benefit cuts. The Social Security Amendments of 1983, which represent the last major bipartisan overhaul of the program, thwarted the need to cut benefits. It gradually raised the payroll tax on working Americans, as well as increased the full retirement age. Most important, it introduced the taxation of Social Security benefits.

Starting in 1984, up to 50% of benefits could be exposed to the federal tax rate if provisional income (adjusted gross income + tax-free interest + one-half of benefits) topped $25,000 for a single filer or $32,000 for a couple filing jointly. In 1993, the Clinton administration included a second tax tier that exposed up 85% of benefits to federal taxation when provisional income surpassed $34,000 for single filers and $44,000 for couples filing jointly.

What makes this one of America's most hated taxes is that these income thresholds have never been adjusted for inflation. With COLAs increasing nominal benefits over time, we've witnessed a growing number of senior households be exposed to some form of federal tax on their benefits.

Trump's proposal, plain and simple, is to end this tax on benefits and allow retirees to hang onto more of their income.

While the intention here is to lift benefits for a group of people who've been hit hard by inflation -- the buying power of a Social Security dollar has plummeted since this century began -- ending the taxation of benefits would remove one of the program's three sources of income.

Over time, the taxation of benefits is expected to grow in importance, in terms of supplying Social Security with income to disburse to eligible beneficiaries. Between 2024 and 2033, it's expected to generate just shy of $944 billion in income, based on estimates from the Trustees Report. With Social Security already contending with a $23.2 trillion long-term shortfall, removing a key source of income would further weaken its foundation.

Image source: Getty Images.

Analysis: Donald Trump's plan has, potentially, multitrillion-dollar unintended consequences

However, the potential damage to Social Security extends far beyond the president-elect's plan to end the taxation of benefits.

Based on a recent analysis by the nonprofit and nonpartisan Committee for a Responsible Federal Budget (CRFB), multiple proposals made by Trump while on the campaign trail would have unintended consequences for Social Security.

As expected, eliminating the overwhelmingly disliked taxation of benefits would deprive Social Security of valuable income through 2035. But there are three additional proposals that would be expected to reduce the program's asset reserves and/or lower collectable income.

The begin with, ending taxation on tips and overtime would reduce payroll tax income by an estimated $900 billion from fiscal 2026 through fiscal 2035 (the federal government's fiscal year ends on Sept. 30).

Additionally, Trump wants to impose tariffs on goods imported into the U.S. The idea being that tariffs would promote domestic manufacturing and make American goods more cost-competitive with overseas imports. However, tariffs run the risk of ramping up inflation, which can lead to higher COLAs that are detrimental to Social Security's asset reserves.

The final change that might have unintended consequences for Social Security is immigration restrictions. The proposed deportation of undocumented migrants, coupled with the possibility of more stringent legal migration, would be expected to lower payroll tax income.

Collectively, ending the taxation of benefits, stopping the tax on tips and overtime, imposing tariffs, and revamping immigration policy is estimated by CRFB to increase Social Security's cash deficit by $2.25 trillion over 10 years.

While President-elect Trump's Social Security plan may be well intentioned, forecasts suggest it would be a fiscal disaster.

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