Prefer to listen in? Play the audio here:

During his campaign, Donald Trump promised to end taxes on Social Security benefits. This would seem like a welcome relief for those whose other income pushes 85% of their Social Security retirement benefits into the taxable range. But when you consider the impact on the Social Security trust fund, the proposal may not be so great. Income taxes on benefits added about $50 billion to the trust fund last year. Without that income—and with the loss of payroll taxes arising from other Trump proposals, Social Security’s finances would worsen at a quicker pace which could threaten future benefit amounts sooner.

Trump promised not to cut Social Security benefits, but if his proposals accelerate already-projected cuts and compress the timeline in which Congress must act to restore solvency to the system, we could possibly be worse off financially (either through much higher taxes or lower benefits). Either way, the window to act on insolvency is quickly closing and reducing taxes going into the SS Trust Fund will certainly not help. SS recipients who will likely make out the best are those who already pay tax on 85% of their benefits, are in a high tax bracket, and whose tax and benefit cuts (if it comes to that) end up in a net wash. Worse off will be those who have managed to avoid or minimize taxes on their benefits, either through smart tax planning or an unfortunate lack of resources, who won’t be taking full advantage of the tax cut and will face the same benefit cuts (again, if it comes to that).

What about the trust fund?

The Committee for a Responsible Federal Budget (CRFB) has analyzed the effects of Trump’s proposals and found that they would widen Social Security’s cash deficits.

In its report What Would the Trump Campaign Plans Mean for Social Security? it found that Trump’s agenda would:

Increase Social Security’s ten-year cash shortfall by $2.3 trillion through FY 2035.
Advance insolvency by three years, from FY 2034 to FY 2031—hastening the next President’s insolvency timeline by one-third.
Lead to a 33% across-the-board benefit cut in 2035, up from the 23% the CBO projects under the current law.
Increase Social Security’s annual shortfall by roughly 50% in FY 2035, from 3.6% to 4% of payroll.
Require the equivalent of reducing current law benefits by about one-third or increasing revenue by about one-half to restore 75-year solvency. This part is what I meant by “much higher taxes” mentioned above in the second paragraph.

Proposals from President Trump that would weaken Social Security’s finances include:

Ending taxation of Social Security benefits, which would eliminate a revenue stream currently used to help finance Social Security.
Ending all taxes on overtime pay and tips, which would reduce payroll tax collection accruing to the Social Security trust funds.
Imposing large tariffs on imports, which would either increase cost-of-living adjustments (COLAs) through higher inflation or reduce taxable payroll.
Enhancing border security and deporting unauthorized immigrants, which would reduce the number of immigrant workers paying into the Social Security trust funds (most of whom, by the way, never collect SS retirement benefits).

But let’s not stop just at Social Security Retirement Benefits...

These proposals would also affect Medicare. An earlier analysis, in July, which dealt only with the elimination of taxes on Social Security benefits, the CRFB found that the HI (Part A) trust fund would run out six years earlier than current projections.

Here’s the good news:

Realistically, these measures are not likely to pass Congress. Any changes to Social Security would require at least 60 votes in the Senate, and Republicans have just 49 seats. Republicans tend not to vote for measures that increase deficits anyway.

We may have to chalk this proposal up to a campaign promise that may have gotten Trump some votes but isn’t workable in the end. The silver lining may be that at least it brings attention to Social Security’s finances and will, perhaps, ignite some interest among members of the new 118th Congress in finally getting it fixed.

Whether you’re planning to file for Social Security, or you’re already drawing it, our team at Aspire Planning Associates, welcomes the opportunity to help you and your family make good choices about "when and how" to manage your available options. Contact us at (925) 938-2023. We look forward to hearing from you!