In November, nearly 52 million retired worker beneficiaries received an average Social Security check of $1,925.46. While that’s not a huge amount of money, it’s proving to be an important source of income for our nation’s aging workforce.
Each year for the past 23 years, national polling group Gallup has completed a survey questioning retirees’ dependence on funds provided by America’s leading social programs. Since 2002, 80% to 90% of respondents (including 88% in April 2024) have cited Social Security as a “primary” or “secondary” source of income. In other words, without Social Security, nearly nine out of 10 seniors would likely struggle to make ends meet.
But while Social Security plays an undeniably important role in shoring up the financial foundations of tens of millions of retirees, the dependable program is faltering.
Current and future beneficiaries are counting on their elected officials to strengthen Social Security — including incoming President Donald Trump.
President Donald Trump addresses the nation. Photo credit: Official White House photo by Joyce N. Boghosian.
Since the first benefit checks for retired workers were mailed in January 1940, the Social Security Board of Directors has issued an annual report detailing the program’s financial status. In addition to showing how revenue is collected and where those funds end up, the annual trustee report also projects Social Security’s financial health over the long term (defined as 75 years after the report is issued).
For forty years (since 1985), every trustee report has predicted shortfalls in long-term funding obligations. In short, the trustee believes that total income over the 75-year period after reporting is insufficient to cover expenses, including annual cost-of-living adjustments (COLA).
The 2024 Trustees Report identifies Social Security’s 75-year funding gap at $23.2 trillion, an increase of $800 billion from the 2023 report.
More worryingly, across-the-board cuts to retiree benefits may be coming. The Old Age and Survivors Insurance Trust (OASI), which is responsible for making monthly payments to retired workers and survivors of deceased workers, is expected to exhaust its asset reserves by 2033, according to a 2024 trustee report.
Before we go any further, let’s be clear: depleting OASI’s asset reserves does not mean that Social Security is bankrupt, insolvent, or will disappear. It does demonstrate that current payment plans, including COLA, are unsustainable. If OASI’s asset reserves are depleted by 2033, as forecast, benefits may need to be slashed by as much as 21% to avoid further cuts in 2098.
Ongoing demographic changes – no “Congressional theft” or “undocumented immigration” – such as the historically low birth rate and rising income inequality in the United States, are the reasons for the collapse of the financial foundation of social security.
OASI’s asset reserves are expected to be exhausted by 2033.
While President-elect Donald Trump has avoided discussing the controversial topic of Social Security during his first term in the Oval Office, presidential candidates rarely have the opportunity on the campaign trail not to take a stance on a key topic.
In late July, the now-president-elect uttered eight words in a post on his social media platform, Truth Social, that could promise to change Social Security forever: “Seniors shouldn’t have to pay taxes on Social Security.”
Granted, this is not a bill or even a draft of a bill. But there are real benefits for the incoming president to eliminate taxes on Social Security benefits.
In 1983, the situation at the Social Security Administration was similar to what the trustees expected would happen nine years later. With the program’s asset reserves expected to be depleted, Congress passed the Social Security Amendments of 1983 and President Ronald Reagan signed them into law.
Bipartisan reforms to America’s leading retirement plans gradually raise payroll taxes on workers and extend the full retirement age over time. It also introduced a welfare tax.
Starting in 1984, up to 50% of Social Security benefits may be available if provisional income (adjusted gross income + tax-free interest + one-half benefit) exceeds $25,000 for a single filer or $32,000 for a couple filing jointly Will be affected by federal tax rates. Nearly a decade later, in 1993, the Clinton administration added a second tax tier that allowed up to 85% of benefit contributions if provisional income exceeded $34,000 for individual filers and $44,000 for joint filers. Federal taxes.
When the welfare tax is first implemented, it is expected to affect around 10% of older households. But because these income thresholds are never adjusted for inflation, COLA increases steadily increase the share of retirees who pay the tax over time.
Donald Trump has suggested that eliminating the welfare tax could increase monthly payments for about half of Social Security recipients.
Image source: Getty Images.
While President-elect Donald Trump’s haphazard proposal to eliminate taxes on Social Security benefits fits his overall theme of cutting taxes, this seemingly well-intentioned action could have dire consequences for America’s leading retirement plans.
Putting aside the well-known fact that seniors overwhelmingly dislike taxes on their benefits, this revenue is absolutely necessary for Social Security.
Social Security generates revenue in three ways:
A 12.4% payroll tax on earned income, which includes wages and salaries but excludes investment income
The interest income earned from its asset reserves is required by law to be invested in specially issued interest-bearing government bonds.
Taxation of Social Security Benefits
With Social Security spending more than it takes in every year, the program’s ability to generate interest income could soon disappear. Eliminating the benefit tax would eliminate another revenue source that is expected to generate nearly $944 billion in cumulative revenue for OASI and the Disability Insurance Trust Fund from 2024 to 2033, according to trustee estimates.
In other words, if Trump were to permanently change Social Security by no longer taxing benefits, it would likely accelerate the depletion of OASI’s asset reserves and increase the magnitude of benefit cuts needed to maintain spending, including COLAs. 75 years.
In addition, the incoming president will face the difficult task of obtaining the 60 votes needed to amend the Social Security Act in the Senate. For 45 years, no political party has had an absolute majority of 60 seats in the upper house of parliament. Even if every Republican senator in the incoming Congress votes to eliminate the welfare tax, Trump would still need seven Democrats to join his cause, it seems. high Not likely.
While this may not be the last we hear about eliminating the Social Security benefit tax, lawmakers simply have no financial incentive to eliminate this necessary revenue source.
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8 quotes from President-elect Donald Trump that could change Social Security forever Originally published by Motley Fool
