Donald Trump during his recent presidential campaign promised on several occasions that he would not touch Social Security. But he also proposed eliminating federal income tax on benefits, overtime pay, and tips, all of which provide funding for the Social Security program.
That is particularly consequential because the program is already running annual deficits, such that the Social Security Trust Funds, the source of benefit payments, may be depleted in 2034. Benefits would automatically be cut if that happens. And any tax law changes that reduce program revenue would only make the problem worse.
Specifically, the Committee for a Responsible Federal Budget estimates that ending taxes on benefits, overtime, and tips would accelerate trust fund depletion by three years and increase the size of the subsequent benefit cuts. Here's what retired workers should know.
Image source: Official White House Photo by Shealah Craighead.
The Social Security Trust Fund could be insolvent by 2035
Social Security has been running deficits since 2021, and the losses are projected to persist indefinitely unless lawmakers intervene. The Congressional Budget Office (CBO) estimates the Social Security Trust Funds will be depleted before 2035, at which point the remaining revenue from taxes would cover just 77% of scheduled benefits.
Importantly, that does not mean Social Security is going bankrupt or that benefits will stop. Instead, it means Social Security will lose one of its three funding sources. The trust funds earn interest because assets are invested in Treasury bonds, but the interest income will stop when the trust funds are depleted. That will leave Social Security with two funding sources: (1) taxes collected on payroll and (2) taxes collected on benefits.
One the trust funds are insolvent, the CBO estimates tax revenue will cover only 77% of scheduled payments in 2035. That means Social Security benefits could automatically be cut 23% within a decade unless lawmakers find a fix for the deficit problem. But the timing and severity of the problem would change if President Trump's tax proposals became law.
President Trump's proposed tax cuts would further reduce Social Security revenue
As mentioned, Social Security has three funding sources: interest earned on trust fund assets (5%), taxes on benefits (4%), and taxes on payroll (91%). Trust fund insolvency would eliminate 5% of program revenue, which is about $70 billion in 2025. But changes to tax law, such as those Trump has proposed, would reduce other revenue sources.
A budget model from Ivy League business school Penn Wharton suggests ending taxes on benefits would reduce revenue by $1.5 trillion in the next decade, thereby accelerating the time to trust fund depletion by two years. Ending taxes on overtime and tips would further reduce revenue and hasten trust fund depletion by another year, according to the Committee for a Responsible Federal Budget (CRFB).
In total, President Trump's proposal to end taxes on benefits, overtime, and tips could pull benefit cuts forward to 2032. Additionally, the CRFB estimates those tax law changes would reduce benefits by 33% by 2035, which is 10 percentage points higher than the anticipated reduction under current law.
Importantly, Congress has avoided trust fund insolvency in the past, and there's no reason to expect a different outcome this time. That means automatic benefit cuts are unlikely. But ending taxes on benefits, overtime, and tips would still reduce Social Security revenue, which makes it more likely that the fix Congress eventually puts in place will involve benefit cuts. That could be bad news for retired workers.
