We're just days away from a second Trump administration entering the White House, and like all political transitions, we can expect changes once he takes office. Some of the most interesting for retirees could be those related to Social Security.
The program's currently in danger of benefit cuts in about a decade, and many are disappointed with the way its buying power has declined over the years. While it may not be the most important issue on Trump's agenda, he's made a few comments about changes he'd like to make that could directly or indirectly affect the program. Here's a look at three of the most significant and how they could affect seniors.
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1. Eliminating Social Security benefit taxes
In a social media post, Donald Trump said seniors shouldn't pay any taxes on Social Security. He was referring to the Social Security benefit taxes that seniors owe if their incomes exceed certain thresholds.
Trump isn't able to enact a change like this on his own. Congress would have to pass a law making this change. If it did, it would increase the benefits for many retirees on Social Security, at least for the next few years.
The problem with this strategy is that it would take away one of only three funding sources for the program, leaving it reliant on Social Security payroll taxes and interest income from rapidly depleting trust funds. Right now, the latest projections show that the trust funds will likely be depleted in 2035. If the government can't increase the program's funding, it would have to slash benefits by 23% in about a decade. Getting rid of benefit taxes would only accelerate the trust fund depletion, which could put seniors at risk of sooner and more significant benefit cuts.
2. Eliminating income tax on tips and overtime
Another Trump proposal involves eliminating income tax on tips and overtime pay. On the one hand, this move would benefit those who depend on tips and overtime to make ends meet because they'd have less money withheld from their checks for taxes. But we run into a similar problem as we have with eliminating benefit taxes.
If the government didn't tax this income, that would decrease the Social Security payroll tax income that serves as the program's primary source of funding. This too could accelerate the trust fund depletion date.
This move could also reduce the retirement benefits these workers are entitled to later on. The Social Security Administration only counts income you've paid Social Security taxes on when calculating your benefit. So if the IRS stops taxing tips and overtime, the Social Security Administration won't consider this information when determining the size of their checks.
3. Restricting immigration and imposing higher tariffs on imports
Trump has also floated the idea of restricting immigration to the U.S. and imposing higher tariffs on imports to encourage people to buy more American-made goods. There could be some benefit to American companies if this were to happen, but as with the other two points we've already discussed, there'd be unintended consequences as well.
Immigrants also pay into Social Security. If we restrict the number of immigrants paying into the program without a proportionate increase in the number of American workers paying in, we're reducing the Social Security payroll tax and thus the funding to the program.
Tariffs could also lead to higher costs, which could lead to higher inflation. This would also increase the cost-of-living adjustments (COLAs) on Social Security benefits. But many feel the COLAs are inadequate, so some loss in buying power is still likely over time.
Social Security's issues aren't easy for any president to solve, which is part of why they're hanging around. We don't know what, if any, of Trump's proposals will pass in his second term. But understanding their potential implications on Social Security and taking steps to make ourselves less reliant on its benefits can help us all be more prepared for the future.
