Potentially, President-elect Donald Trump Intends to Alter Social Security; Historical Evidence Offers Unambiguous Insights.
In November, more than 51 million retired individuals received an average Social Security payment of $1,925.46 from the country's most significant social assistance program. This sum might not seem substantial, but it plays a crucial role in supporting the expenses of a majority of retirees.
For the past 23 years, pollster Gallup has conducted surveys to determine the significance of Social Security income for retirees. Ranging between 80% and 90%, the majority of respondents have consistently identified their Social Security benefit as either a major or minor income source. In simpler terms, this income is vital and nearly indispensable for most senior citizens.
Even though Social Security is an integral part of senior financial well-being, it is facing structural difficulties. Although the program is not on the brink of collapse, the long-term viability of its current payout system, which includes cost-of-living adjustments (COLAs), is questioned.
Future generations' Social Security needs will necessitate action from political leaders – including the next president, Donald Trump.
Potential significant Social Security benefit reductions may come by 2033
For 85 consecutive years, the Social Security Board of Trustees has released reports analyzing the program's financial state. These reports detail how each dollar is earned and spent, as well as making predictions about Social Security's future stability based on economic and demographic trends.
The 2024 Trustees Report projects an unfunded obligation shortfall of $23.2 trillion for Social Security through 2098.
Amore pressing concern is the depletion of the Old-Age and Survivors Insurance Trust Fund (OASI), which pays out retirement benefits and survivor benefits. The OASI's asset reserves are projected to be exhausted by 2033, according to the report.
If the OASI's asset reserves run out in nine years, as predicted, drastic benefit reductions of up to 21% may become necessary to maintain ongoing payouts and COLAs without resorting to additional reductions.
Donald Trump seeks to transform Social Security
Typically, lawmakers avoid suggesting Social Security changes. However, presidential candidates do not have this luxury. Despite initially avoiding discussions on Social Security policy, Trump made a major change proposal while campaigning.
In July, Trump suggested, via his social media platform (Truth Social), that seniors should not be required to pay taxes on their Social Security benefits.
This proposal, to remove taxes on Social Security benefits, is likely to be met with widespread support. A poll by nonpartisan senior advocacy group The Senior Citizens League found that over 90% of respondents believe that Social Security benefits should not be considered taxable income.
In the 1980s, with Social Security reserves nearing depletion, Congress passed the Social Security Amendments of 1983, which President Reagan signed into law. This legislation introduced taxation of benefits to generate additional revenue.
Since 1984, up to half of benefits have been subject to federal tax rates if provisional income, defined as adjusted gross income, tax-exempt interest, and half of benefits, exceeds $25,000 and $32,000 for individual and joint filers, respectively. In 1993, the Clinton administration added a second tax tier, allowing up to 85% of benefits to be taxed if provisional income surpassed $34,000 and $44,000 for individual and joint filers, respectively.
The primary criticism of these income thresholds is their failure to be adjusted for inflation. As a result, the number of seniors impacted by the taxation of benefits has grown as COLAs have led to increases in benefit amounts.
If Trump's proposal becomes law, about half of beneficiaries would no longer be subject to federal income tax on a portion of their Social Security payments.
History as a guide: Will Trump's Social Security proposal become law?
However, translation from a proposal to enactment in Congress poses significant obstacles for President-elect Trump. Historically, changes to Social Security have proven to be nearly impossible to implement while in office.
The first challenge Trump will face is the lack of sufficient support in the Senate to amend Social Security. Changing Social Security requires 60 votes in the Senate, and no political party has controlled a majority of 60 seats since 1979. Even if every Republican senator in the incoming Congress supports Trump's proposal, they would still require at least seven Democrats to pass amendments, which is unlikely.
Another hurdle for President-elect Trump is that the proposed change could potentially worsen the program's financial situation. The Trustees Report estimates that taxing benefits will generate approximately $944 billion in revenue for Social Security between 2024 and 2033. Eliminating this income would hasten the depletion of the OASI's asset reserves and potentially expedite the need for significant benefit reductions.
These unwanted outcomes make it extremely slim that even individuals from his very own political group would support these adjustments.
Regarding President-elect Donald Trump potentially altering Social Security, it's worth mentioning that historically, legislators have a tendency to tackle issues with America's significant retirement program at the last possible moment.
To elaborate, legislators stepped in to save Social Security back in 1983 by increasing revenue (implementing the taxation of benefits and gradually boosting the payroll tax) as well as decreasing payments ( Gradually elevating the complete retirement age). Both major parties usually find agreement when time is of the essence.
However, considering that it's estimated that we have approximately nine years left before the OASI exhausts its financial reserves, we're far from encountering that critical last-minute scenario. Though it would be beneficial if legislators took a proactive approach instead of reacting, past trends imply that the political deadlock in Washington D.C., when it comes to Social Security, will persist throughout Trump's second term.
The potential reduction of significant Social Security benefits by 2033 due to the depletion of the Old-Age and Survivors Insurance Trust Fund (OASI) could significantly impact retirement Finance for many senior citizens. In this scenario, Donald Trump's proposal to remove taxes on Social Security benefits might provide some relief for beneficiaries, as most seniors believe that Social Security benefits should not be considered taxable income.
