Trump’s Tax Law Costs Social Security $168.6 Billion. How Congress Can Make It Up
Trump's new tax law handed seniors a welcome break on their Social Security benefits, but that generosity came with a hidden price tag that now threatens the program's long-term survival. Congress has options, but the clock is running out.
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When President Trump unveiled his One Big Beautiful Bill Act (OBBBA), Social Security recipients had a lot to be happy about. The bill included a temporary $6,000 senior tax deduction that allows people 65 and over to exempt more income from taxes. As a result, fewer Social Security recipients are on the hook for taxes on their monthly benefits.
But that temporary reprieve comes at a serious cost. In fact, thanks to Trump’s policies, Social Security is expected to lose out on a whopping $168.8 billion. And at a time when the program is facing benefit cuts due to a lack of revenue, that’s not a good thing at all.
A notable setback that couldn’t have come at a worse time
Even before the OBBBA, Social Security was having financial difficulties. The program, in a nutshell, is expected to owe more in benefits than it collects in revenue in the coming years.
The reason boils down to a shrinking ratio of workers to retirees. Lower birth rates and immigration policies have led to a smaller labor force. But since Social Security gets most of its revenue from payroll taxes, lower workforce participation rates spell trouble at a time when baby boomers are retiring in droves.
Complicating matters is the OBBBA. The $6,000 senior deduction exempts many Social Security recipients today from taxes on their monthly benefits. But those taxes also serve as an income stream for Social Security. So losing out on $168.6 billion in revenue is the last thing the program needs right now.
In fact, if lawmakers can’t find a way to shore up Social Security’s finances, seniors could be looking at a sweeping 22% benefit cut. That could hurt across the board, but especially for people who get all of their retirement income from their monthly benefits.
Lawmakers can fix the problem, but they’ll need to act quickly
The most recent update from the Social Security Trustees revealed that the program’s Old-Age and Survivors Insurance Trust Fund could be out of money by the final quarter of 2032. At that point, benefit cuts could be on the table. As such, lawmakers can’t just sit on their hands.
There are different options for preventing Social Security cuts, including raising the payroll tax rate or lifting or eliminating the wage cap, which dictates how much income is taxed each year to fund the program. Congress could also vote to raise Social Security’s full retirement age, which is when recipients get to collect their benefits without a reduction.
Some less-popular options include means testing retirees and reducing benefits for those with high incomes. There’s a similar proposal being floated that seeks to cap Social Security benefits for retirees who are entitled to very large checks.
Saving Social Security from benefit cuts may require multiple solutions. There may not be a single fix that solves everything. The sooner lawmakers focus on preventing cuts, the less painful the ultimate solution might be.
But one thing’s for sure. Trump’s OBBBA may have given seniors a big tax break in the near term, but it only made Social Security’s financial problems that much worse.
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Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
