Social Security Changes Proposed by President-Elect Donald Trump Could Be Bad News for Retirees, According to a Recent Report
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In November, Republican presidential nominee Donald Trump won a decisive victory over Democratic rival Kamala Harris. With Trump officially returning to the White House for a second term, many retired workers on Social Security are undoubtedly hoping he can bring about much-needed change.
Trump during his campaign wrote on social media, "Seniors should not pay taxes on Social Security." He also promised during his campaign not to cut benefits, and to "fight for and protect Social Security" as president. I have no doubt that Trump (like presidents before him) has good intentions, but he has provided few specific details.
Importantly, the Committee for a Responsible Federal Budget, a nonpartisan and nonprofit organization, argues the changes proposed by Trump could actually be bad news for Social Security recipients. Specifically, they could widen the program's funding deficit and hasten the timeline to benefit cuts. Read on to learn more.
Donald Trump supports eliminating the taxation of Social Security benefits
Social Security benefits were not always subject to federal income tax. Instead, Congress in 1983 approved that change with widespread support from both political parties for the purpose of keeping the trust fund solvent. Since then, several politicians (including President-elect Donald Trump) have signaled support for eliminating that tax.
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The problem with such proposals is Social Security is once again dealing with a major financing problem. In fact, the trustees estimate the combined trust funds -- the source of benefits paid to retired workers and other beneficiaries -- will be depleted by 2035. At that point, revenue from payroll taxes would cover just 83% of scheduled benefits, meaning a 17% benefit cut is possible within 10 years.
There are only two ways to fix that problem: The program's cash inflows must increase (i.e., raise taxes) or its cash outflows must decrease (i.e., cut benefits). Trump's proposal to eliminate the taxation of Social Security benefits falls into neither category. Instead, it would eliminate one of the program's funding sources, which would actually make the financing problem worse.
Donald Trump has proposed eliminating other taxes and imposing tariffs
Trump during his campaign also proposed eliminating taxes on tips and overtime pay. But Social Security gets over 90% of its revenue from payroll taxes, and reducing those cash inflows would make the funding problem worse. Ending taxes on tips and overtime pay could collectively reduce federal revenue by nearly $2 trillion over the next decade, according to the Committee for a Responsible Federal Budget (CRFB).
Meanwhile, Trump also proposed imposing tariffs, including an across-the-board price increase of 10% on all imports, and a 60% price hike on imports from China. Numerous economists argue that tariffs will raise inflation, which would weaken Social Security by increasing the size of cost-of-living adjustments (COLAs). In other words, high inflation leading to larger COLAs would force the Social Security program to spend more money. That said, tariffs could also boost federal revenue, so the ultimate impact is difficult to discern.
Policy changes suggested by Donald Trump may hasten benefit cuts
In summary, President-elect Donald Trump has proposed eliminating the tax on Social Security benefits. He has also proposed ending the taxation of tips and overtime pay, while imposing a baseline 10% tariff on all imported goods and a 60% tariff on imports from China.
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Those changes could collectively reduce revenue for Social Security by $2.3 trillion through 2035, which would hasten the timeline to benefit cuts by three years, according to estimates from the CRFB. "I don't think I've ever seen a plan that would have this big of a negative effect on solvency in a general election campaign," said Marc Goldwein, senior policy director at CRFB.
However, Karoline Leavitt, national press secretary for Donald Trump, responded to the CRFB report. "President Trump will quickly rebuild the greatest economy in history and put Social Security on a stronger footing for generations to come, all the while eliminating taxes on Social Security for America's well-deserving seniors."
That reassurance is nice to hear, but the commentary once again fails to explain how Trump will accomplish those goals. So, retired workers and other Social Security recipients should monitor the situation, but I expect few (if any) changes to the program in the near future. Congress has historically waited until the last minute to tackle Social Security problems.
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Social Security Changes Proposed by President-Elect Donald Trump Could Be Bad News for Retirees, According to a Recent Report was originally published by The Motley Fool