Donald Trump promised during his recent presidential campaign that he would not touch on social security many times. But he also proposed to remove federal income taxes on benefits, overtime pay and tips, all of which fund the Social Security program.
This is especially important because the program is already running in an annual deficit, so the Social Security Trust Fund (the source of benefits payments) may be depleted in 2034. If this happens, benefits will be automatically cut. Any tax law change that reduces planned income will only make the problem worse.
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Specifically, the responsible Federal Budget Commission estimates that termination of taxes on benefits, overtime and tips will accelerate the depletion of trust funds for three years and increase the scale of subsequent welfare cuts. This is what retired workers should know.
Social security has been weak since 2021, and the losses are expected to continue indefinitely unless legislators intervene. The Congressional Budget Office (CBO) estimates that the Social Security Trust Fund will be exhausted by 2035, when the remaining income from taxes accounts for only 77% of the scheduled benefits.
Importantly, this does not mean that Social Security will go bankrupt or the benefits will stop. Instead, this means that Social Security will lose one of its three sources of funding. The trust fund won interest because the assets were invested in Treasury bills, but when the trust funds were exhausted, the interest income would stop. This will provide two sources of funding for Social Security: (1) collection of wages and (2) collection of taxes on welfare tax.
The CBO estimates that one of tax revenue is insolvency, which accounts for only 77% of pre-order payments in 2035. This means that Social Security benefits can be automatically reduced by 23% over a decade unless legislators find solutions to the deficit problem. But if President Trump's tax proposal becomes law, the timing and severity of the problem will change.
As mentioned earlier, Social Security has three sources of funding: interest (5%) earned on trust fund assets, welfare tax (4%) and payroll tax (91%). Trust bankruptcy will eliminate 5% of planned revenue, about $70 billion in 2025. But Trump’s proposed changes to the tax law will reduce other sources of income.
