Understanding the Future of Social Security Benefits and Their Cuts

As of January, nearly 52 million retired workers received an average Social Security check of $1,978.77 per month. Although this amount is modest, it plays a crucial role in helping older Americans manage their living expenses.

Importance of Social Security for Retirees

For over the last 23 years, Gallup has surveyed retirees to assess the significance of Social Security income for their financial stability. The results consistently show that 80% to 90% of retirees rely on their Social Security payments to cover their expenses. The most recent survey in April 2024 reported that 88% of retirees still depend on these benefits.

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Lawmakers in Washington, including President Donald Trump, should prioritize protecting and bolstering Social Security. However, not all proposed solutions, even those made with good intentions, positively affect this vital retirement program.

President Trump speaking with reporters. Image source: Official White House Photo by Andrea Hanks, courtesy of the National Archives.

Projected Benefit Cuts Coming Within Eight Years

Before considering the future, it’s essential to reflect on how Social Security reached its current state.

For the past 85 years, the Social Security Board of Trustees has published an annual report detailing the program’s income sources and expenditures. These reports project financial health for a 75-year span, taking into account shifts in demographics, fiscal policy, and monetary policy.

Over the past four decades, Trustees have consistently highlighted a long-term funding shortfall. Simply put, the income collected during the subsequent 75 years will not match the expenses, primarily benefiting retirees, including annual cost-of-living adjustments (COLAs) and minor administrative expenses. As of the 2024 report, this shortfall reached $23.2 trillion.

Adding to concerns, the Trustees predict that the Old-Age and Survivors Insurance Trust Fund (OASI) will deplete its asset reserves by 2033. It’s important to clarify that this does not mean Social Security will go bankrupt. However, it suggests the current payout schedule, including COLAs, is not sustainable. If reserves run out, retired workers and survivors could face a 21% reduction in Social Security benefits in eight years.

The ongoing decline in Social Security’s financial health results from demographic transitions. Factors like a significant drop in legal net migration, increasing income inequality, and a historically low birth rate challenge the program’s sustainability.

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

Trump’s Commitment to Social Security

While most lawmakers acknowledge the challenges facing Social Security and the annual Trustees report, they often steer clear of proposing changes, fearing that adjustments may harm certain individuals.

Presidential candidates, though, must address this issue. Trump has committed to preserving Social Security, except for one aspect: the taxation of benefits.

On July 31, Trump announced on his social media platform, Truth Social, “Seniors should not pay tax on Social Security.” He reiterated this sentiment during an interview with Fox & Friends. Now in office, he aims to fulfill this promise.

In February, a White House official confirmed to CNBC that Trump remains dedicated to eliminating the taxation of Social Security benefits.

Taxing benefits began in 1984, following the bipartisan Social Security Amendments of 1983. This allowed up to 50% of Social Security benefits to be taxable based on provisional income exceeding $25,000 for individual filers and $32,000 for joint filers.

A separate tax tier was introduced in 1993, subjecting up to 85% of benefits to federal taxation for provisional incomes over $34,000 for singles and $44,000 for couples.

Since these thresholds have not increased with inflation since their implementation, many more senior households now face this tax burden.

Trump’s intent to abolish this tax could increase monthly checks for nearly half of all aged beneficiaries, especially benefiting those with higher Social Security income.

Image source: Getty Images.

Implications of Ending the Social Security Tax

The idea of removing an unpopular tax to enhance benefit checks is likely to garner widespread support. However, what is popular isn’t always in the financial best interest of Social Security.

Social Security generates income through three primary channels:

• In 2023, 91.3% of the $1.351 trillion in income was derived from payroll taxes.
• Interest income accounted for 5%.
• Taxation of benefits contributed 3.8%.

While ending the taxation of benefits might seem insignificant, it would eliminate one of the three income sources. Although this tax only contributed 3.8% in 2023, it has increased as a revenue stream over time. Moreover, if OASI’s assets deplete as predicted by 2033, interest income may drop to virtually zero.

US Old-Age, Survivors, and Disability Insurance Trust Fund Income from Taxation of Benefits Receipts data by YCharts.

According to the Trustees’ forecast, eliminating the taxation of benefits would result in a loss of $943.9 billion in income from 2024 to 2033. A separate analysis by the nonpartisan Penn Wharton Budget Model (PWBM) estimates an even more significant reduction of $1.452 trillion in revenue from 2025 to 2034.

The PWBM anticipates that repealing this tax could hasten the depletion of Social Security’s assets by two years, moving the timeline from December 2034 to December 2032.

While seniors may overwhelmingly support the elimination of this tax, doing so would compromise Social Security’s financial stability at a critical time when benefit cuts may be looming in just eight years. Therefore, breaking this promise might be a prudent decision for Trump.

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