Social Security Faces a $23.2 Trillion Shortfall: What This Means for Future Retirees

For over 80 years, Social Security has been a crucial support system for retired workers unable to sustain themselves financially. The average benefit for 2025 is expected to be $1,976 per month, which, while modest, has significantly reduced the poverty rate among seniors in the U.S.

However, despite its importance for nearly 52 million beneficiaries, Social Security finds itself in a precarious position. Although it is not facing bankruptcy, the current payout structure, including cost-of-living adjustments (COLAs), seems increasingly unsustainable.

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Strengthening Social Security requires intervention from elected officials, including President-elect Donald Trump. Unfortunately, not every proposal from these officials benefits the program.

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

Social Security’s Growing Financial Crisis

In January 1940, the Social Security Administration sent out its first retirement check. Since then, the Social Security Board of Trustees has issued annual reports about the program’s financial health, detailing how income is generated and where those funds are directed.

These annual reports not only reflect current conditions but also make projections about Social Security’s sustainability. Factors such as rising income inequality, a declining U.S. birth rate, and a significant decrease in net legal migration to the U.S. over the past 25 years have contributed to the program’s financial woes.

For four decades, Trustees Reports have warned of long-term funding challenges. As of 2024, projections indicate a cash shortfall of $23.2 trillion over the next 75 years.

Moreover, benefit cuts could potentially be only eight years away. The 2024 Trustees Report suggests that the Old-Age and Survivors Insurance Trust Fund (OASI), which pays benefits to retirees and their survivors, may exhaust its reserves by 2033.

If the OASI depletes its reserves, benefits could be slashed by up to 21% to maintain payouts through 2098 without 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 Proposed Tax Cuts and Their Implications for Social Security

As Donald Trump prepares for his second term, he aims to reduce taxes for businesses and consumers. Before his victory in November, he hinted at eliminating taxes on tips and overtime pay.

Notably, Trump has proposed removing taxes on Social Security benefits, stating on his social media platform: “Seniors should not pay tax on Social Security.”

This situation mirrors 1983, when Congress and President Ronald Reagan enacted the Social Security Amendments in response to similar fiscal challenges. This bipartisan initiative raised payroll taxes and the retirement age while also introducing the taxation of benefits.

From 1984, if a taxpayer’s provisional income exceeded $25,000 for individuals or $32,000 for couples, up to 50% of benefits could be taxed. A further 1993 amendment allowed up to 85% of benefits to be taxed for those with provisional income over $34,000 for individuals and $44,000 for couples.

Many retirees oppose this tax, believing it to be double taxation, especially since the thresholds have never been adjusted for inflation. This has resulted in more seniors facing benefit taxation as COLAs increase over time.

Removing benefit taxes could boost take-home pay for about half of all beneficiaries.

Image source: Getty Images.

Unforeseen Consequences of Proposed Tax Revisions

While it sounds appealing to let Social Security recipients retain more of their earnings, such cuts may harm the program’s viability in the long run. Social Security funding comes from three primary sources:

• A 12.4% payroll tax on earned income, not including investment income.
• Interest earned on Social Security’s asset reserves, which are legally required to be invested in special-issue government bonds.
• Taxation of Social Security benefits.

If OASI’s reserves are depleted, it will lose the ability to generate significant interest income, while eliminating the taxation on benefits could worsen Social Security’s financial situation.

From 2024 to 2033, the taxation of benefits is expected to generate $943.9 billion for Social Security. Without this critical income, the need for benefit reductions could arise sooner than 2033.

Furthermore, a study by the Committee for a Responsible Federal Budget (CRFB) estimates that ending the taxation on tips and overtime could increase Social Security’s shortfall by about $900 billion from 2026 to 2035. Overall, CRFB projections suggest that Trump’s tax cuts could worsen Social Security’s deficit by $1.85 trillion over the next decade. These consequences reflect the complexity of balancing tax relief with the sustainability of critical programs.

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