Summary

President-elect Donald Trump has made big promises about changes to Social Security in the next four years, including eliminating federal income taxes on benefits. While this may sound like a welcome development for millions of retirees, it could have serious unintended consequences that could worsen the cash shortfall and deplete the trust funds.

The Proposal: Eliminating Federal Income Taxes on Benefits

During his presidential campaign, Trump promised widespread tax cuts, including no tax on tips or overtime and cutting federal taxes on Social Security benefits. The latter, specifically, could have a direct impact on millions of retirees who currently owe taxes on their benefits. Around 40% of those collecting benefits will pay taxes on up to 85% of their benefits if they have a combined income above $34,000 per year or $44,000 for married couples filing jointly.

The Unintended Consequence: Worsening the Cash Shortfall

While eliminating federal income taxes on benefits may sound promising on the surface, it could contribute to Social Security’s cash shortfall and the depletion of the trust funds. Social Security is primarily funded by taxes – payroll taxes paid by workers and employers as well as income taxes on benefits paid by retirees. In recent years, these taxes have not been enough to fully fund benefits, resulting in a deficit.

The Current State of the Trust Funds

Social Security’s two trust funds (one reserved for retirement benefits and the other covering disability benefits) are quickly running out of money. According to the Social Security Administration’s latest estimates, the trust funds will be depleted by 2035, with only enough income to pay out around 83% of scheduled benefits. This means that benefits could be slashed by around 17% by 2035 – unless Congress finds a solution before then.

The Impact of Eliminating Taxes on Benefits

If taxes on benefits are eliminated, it could force the Social Security Administration to pull even more from its trust funds, causing them to run dry sooner than expected. In fact, eliminating federal income taxes on benefits could increase Social Security’s cash shortfall by $2.3 trillion over the next decade, according to a report from the nonpartisan Committee for a Responsible Federal Budget.

The Potential Consequences

If benefits are reduced by 17% as is currently projected, that could slash the average retiree’s checks by close to $4,000 per year. But if taxes on benefits are eliminated, that would give Social Security one less income source to continue paying out future benefits – meaning payments could potentially be reduced even more than expected.

Conclusion

While Trump’s tax promises may benefit many retirees in the short term, they could spell more trouble down the road. The cash shortfall and depletion of trust funds are ongoing problems that require careful consideration and a solution that takes into account the long-term implications of any changes to Social Security benefits. Only time will tell what’s in store for Social Security – but it’s clear that the road ahead will be fraught with challenges and uncertainties.

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