The Social Security actuary projects the 2025 budget law Congress passed in July will accelerate insolvency of the program’s retirement trust fund from early 2033 to late 2032.
That may seem like a modest change, but it has enormous political implications. It means the program will go insolvent during the term of the president who succeeds Donald Trump. That soon.
And it means that, without congressional action, scheduled benefits would automatically be cut for all recipients by roughly one-fifth right in the midst of the 2032 election campaign. My Urban Institute colleagues Rich Johnson and Karen Smith estimate that once the trust fund becomes insolvent, monthly benefits for a median income retiree would drop by nearly $500 in 2022 dollars and 3.8 million more seniors would fall into poverty.
Fortunately for both Social Security and Medicare finances, the budget bill did not repeal income taxes on Social Security benefits, despite the Administration’s persistent claims. Without that revenue, their prospects would be much more dire.
Taxing combined income
But how did the budget bill weaken the trust fund’s health? Bear with me. It is complicated.
The Social Security trust fund is financed by payroll taxes, the interest it earns on the government bonds it purchases, and from that tax on Social Security benefits.
Up to half of Social Security benefits are taxable for single filers with income between $25,000 to $34,000 and for joint filers making $32,000 to $44,000.
Up to 85 percent of Social Security benefits are subject to income tax for single filers making at least $34,000 or joint filers making $44,000 or more.
And here is the important part: Income for the purposes of this benefit tax is defined as “combined income,” which includes half (or 85 percent) of your Social Security income plus Modified Adjusted Gross Income (MAGI), which is Adjusted Gross Income (AGI) plus tax-free bond interest and a few other relatively rare income sources.
How the new law weakens Social Security
The budget law reduces trust fund income because it reduces taxable income, pushes some people into lower tax brackets, and lowers marginal tax rates. Several provisions lower the tax rate on benefits.
First, the new law extends the rate cuts and lower tax brackets created by the 2017 Tax Cuts and Jobs Act but were due to expire at the end of this year.
Second, the budget law creates a temporary $6,000 senior deduction for taxpayers aged 65 or older. It phases out starting at $75,000 for singles and $150,000 for joint filers and is gone entirely at $175,000 for singles and $250,000 for couples.
Combined, these provisions reduce the tax on Social Security benefits. In the short run, that helps some older adults, especially those making between about $80,000 and $130,000 annually. But in the long run, it could be very bad for Social Security recipients, both the 55 million getting benefits today and those working-age people who hope to receive promised benefits when they reach old age.
Insolvency
Social Security’s actuaries estimate all the budget law’s changes will drain nearly $170 billion from the Social Security trust fund between 2025 and 2034. And that will be enough to speed up the Old Age and Survivors Insurance fund’s insolvency date into 2032.
The projected insolvency date often fluctuates based on short-term economic trends. But three current factors could accelerate insolvency even more: President Trump’s tariffs, which may already be slowing the economy; his efforts to deport masses of immigrants, who contribute to Social Security by paying payroll taxes even though undocumented immigrants cannot collect benefits; and the real possibility that Congress will extend the new senior deduction, which is due to expire in 2028.
Benefit reductions would have severe consequences for older adults, especially those with low incomes. Ironically, many will get little or no benefit from the tax cuts. For example, a widow with income below $17,000 under the pre-July 4 law already owed no income tax for 2025. That higher senior deduction and continued rate cuts do her no good.
But she will be harmed substantially to the degree these changes result in a quicker automatic across-the-board cut in Social Security.
That income loss may be exacerbated by other Trump Administration initiatives that will increase Medicare costs or limit health care access. Most retirees deduct their Medicare premiums from their Social Security benefits and higher premiums or other health care costs will leave them with less money to pay daily expenses.
For now, few politicians are willing to support the tax increases and benefit reductions that will be necessary to at least delay Social Security’s pending insolvency. And President Trump insists he won’t touch Social Security, though the budget law he pushed clearly did, and in the wrong direction.
If the Social Security actuary is right, Trump’s successor won’t have the option to ignore Social Security. Unless the next president “touches” it with substantial reforms, the retirement system will fall far short of paying promised benefits. At the very least, lawmakers could stop making matters worse.
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