Understanding Social Security’s Financial Challenges: Insights for Retirees

At the start of 2025, approximately 52 million retired workers relied on an average monthly Social Security check of $1,975.34. This income, while modest, plays a crucial role in helping older Americans meet their financial needs.

For 23 consecutive years, the national polling organization Gallup has surveyed the dependence of retirees on their Social Security benefits. The findings consistently show that between 80% and 90% of respondents, including 88% in 2024, consider these benefits essential for covering their costs.

Where to invest $1,000 right now? Our analysts have identified the 10 best stocks to consider. Learn More »

While ensuring the stability of Social Security should be a priority for legislators, the program’s foundation has been deteriorating for the past 40 years. Future and current recipients hope lawmakers, including President Donald Trump, will take action to reinforce the program.

However, not all proposed modifications will strengthen Social Security’s fiscal health.

President Trump signs documents in the Oval Office. Image source: Official White House Photo by Shealah Craighead, courtesy of the National Archives.

Benefit Cuts Projected Within Eight Years

To understand President Trump’s proposals regarding Social Security, it’s vital to recognize the factors that have led to the current situation.

For 85 years, the Social Security Board of Trustees has published detailed reports accounting for each dollar in income and expenditure. A significant component of these reports is the assessment of the long-term solvency of Social Security’s trust funds, considering changes in fiscal policies, monetary policies, and demographic trends.

Since 1985, every Trustees Report has indicated a projected long-term funding shortfall. This projection spans 75 years, meaning that the estimated income collected over this period, even with cost-of-living adjustments (COLAs), will not fully meet the program’s payout obligations, including benefits and minimal administrative costs.

As of 2024, the long-term funding shortfall for Social Security stood at $23.2 trillion, reflecting an increase of $800 billion from the previous year.

An alarming concern is that the Old-Age and Survivors Insurance Trust Fund (OASI) is expected to exhaust its reserves by 2033. Although the OASI is unlikely to face full bankruptcy, the current payout framework, including COLAs for retirees and survivors, may be vulnerable after 2033.

If the OASI reserves are depleted, the Trustees expect substantial benefit reductions of 21% to ensure continued payouts through 2098 without requiring further cuts.

It is essential to dispel the misconceptions surrounding Social Security’s financial issues, which do not stem from alleged Congressional theft or benefits provided to undocumented migrants. Instead, these difficulties are largely a result of demographic changes, including a historically low U.S. birth rate, decreased legal immigration, and rising income inequality.

OASI’s reserves are expected to run dry by 2033. Data: US Old-Age and Survivors Insurance Trust Fund Assets at End of Year by YCharts.

Proposed Changes to Social Security by President Trump

Addressing Social Security is often seen as the “third rail” of politics. While many politicians recognize the program’s issues, altering it could negatively impact various groups.

Presidential candidates, however, must take a position on significant matters. Trump has mostly maintained a hands-off stance regarding Social Security but hinted at wanting a substantial change in July.

On his social media platform, Truth Social, Trump stated, “Seniors should not pay tax on Social Security.” He reiterated this in a subsequent appearance on Fox & Friends.

The taxation of Social Security benefits began four decades ago when reserves were nearly depleted in 1983. A bipartisan Congress passed the Social Security Amendments that year, signed by then-President Ronald Reagan. This led to increased payroll taxes, elevated full retirement ages, and the introduction of taxation on benefits.

From 1984 onwards, if provisional income (adjusted gross income + tax-free interest + half of benefits) exceeded $25,000 for singles and $32,000 for couples, up to 50% of benefits became taxable. A second tier was established in 1993, under which up to 85% of benefits could be taxed for provisional incomes surpassing $34,000 for single filers or $44,000 for joint filers.

This taxation issue is contentious because the thresholds have remained unchanged for inflation. Initially expected to affect 10% of senior households, rising wages and living costs have since subjected nearly half of retirees to this tax.

While eliminating the tax on benefits may bring immediate relief to many retirees, it could lead to significant unforeseen drawbacks.

Image source: Getty Images.

Potential Consequences of Ending Social Security Taxation

Removing the tax on Social Security benefits offers a straightforward advantage: it would allow nearly half of retired beneficiaries to retain more funds from their payments. However, this short-sighted decision could result in serious long-term repercussions for retirees.

In 2023, Social Security generated $1.351 trillion in income, with over 91% originating from the 12.4% payroll tax on wages. Though the tax on benefits yielded only $50.7 billion in 2023, its role is increasing in terms of revenue.

The 2024 Trustees Report anticipates that taxation on benefits will account for $943.9 billion in cumulative income through 2033. Abolishing this tax might initially boost retirees’ incomes but would ultimately exacerbate Social Security’s long-term funding shortfall and hasten the depletion of OASI reserves.

Notably, Trump’s broader tax proposals could further complicate Social Security issues.

In October, the Committee for a Responsible Federal Budget (CRFB) assessed the impact of Trump’s tax proposals on Social Security. Their analysis suggested that eliminating taxes on overtime pay and tips could lead to a $900 billion increase in Social Security’s 10-year deficit.

Combining the removal of tax on benefits with eliminating other taxes could widen Social Security’s deficit by an estimated $1.85 trillion over ten years. Such actions may hasten the depletion of OASI’s asset reserves and significantly increase the necessary benefit reductions when reserves are exhausted.

The potential short-term gains from Trump’s proposed Social Security changes could be easily overshadowed by the long-term costs to retirees.

The Potential $22,924 Social Security Bonus Many Retirees Miss

If you find yourself behind on retirement savings, certain undisclosed “Social Security secrets” might increase your future income. For instance, one simple strategy could yield as much as $22,924 more annually! Maximizing your Social Security benefits could empower you to retire with greater confidence and security. Click here to explore these strategies further.

View the “Social Security secrets” »

The Motley Fool has a disclosure policy.

The views and opinions expressed herein reflect those of the author and do not necessarily represent those of Nasdaq, Inc.