Don't Mess With Taxes

As Congress continues to haggle over how best to prevent falling off a tax cliff when myriad Internal Revenue Code provisions expire at the end of 2025, two other critical deadlines involving popular U.S. social safety net programs were announced.

The news is not good for those who currently rely on or one day hope to collect Social Security and Medicare benefits.

The report by the trustees of the Social Security and Medicare trust funds, which annually assesses the state of and future outlook for these federal retirement and medical benefits, says both programs will face fiscal shortfall sooner than ever.

Tight time frames for Social Security, Medicare: Social Security’s Old-Age and Survivors Insurance (OASI) component pays retiree benefits. It will be sufficient to cover all scheduled benefits until 2033, unchanged from last year’s report.

But when Social Security disability insurance (DI) benefits also are considered, the combined trust funds’ are projected to run out of money to fully pay beneficiaries in 2034. That’s a year sooner than forecast in last year’s report.

Funds to cover Medicare’s hospital bills, known as Part A, would be depleted even sooner, in 2033. That’s three years earlier than expected.

The main reason for the Medicare hospital shortfall, say the trustees, is increased medical spending in 2024. That’s not surprising, given the continued aging of the U.S. population. More elderly residents also play a role in the trustees’ projected growth in the inpatient and hospice sectors in coming years.

Medicare Part B, which covers basic healthcare services (for example, doctor’s visits, outpatient treatments, medical supplies, and preventative care), and the Part D prescription drugs segment, are financed through beneficiary premiums and federal contributions that are adjusted annually to cover costs. These funds are on better fiscal footing.

More Social Security benefits being paid: The trustees noted that Social Security’s OASI and DI reserves could not actually be combined unless there were a change in the law. But the combined projection of the two funds’ fiscal outlooks is frequently used as an indicator of the overall status of the Social Security program.

The projected long-term finances of the combined Social Security funds worsened this year primarily due to three factors.

The first fiscal hit is due to the Social Security Fairness Act that became law on Jan. 5. The law repealed the Windfall Elimination and Government Pension Offset provisions of the Social Security Act.

The law change increased the federal benefits for around 3 million federal, state, and local public sector workers, such as teachers, firefighters, and law enforcement officers.

These public service employees are eligible for government pensions from jobs where they didn’t pay into Social Security, but they also paid into the federal retirement program through other jobs or their spouses, for whose survivor benefits they are eligible, did.

The new law removing the Social Security benefits barrier these workers faced easily cleared both the House and Senate. Congressional members who voted against it generally cited concern that it would speed up Social Security’s insolvency.

That fear was well-founded.

“The impact of this legislation on the OASI Trust Fund was the primary contributor to the change in the combined OASDI fund depletion date this year,” according to the Social Security trustees.

Shrinking population problems: The second contributor to the speedier depletion of Social Security reserves is that the United States population decline. It’s also a political, and tax, concern.

The Trump administration is supportive of the pronatalism movement, which advocates efforts to increase more births. A larger population, the theory goes, will produce a growing U.S. economy, as well as bolster a return to what is generally seen, usually by the GOP, as a more traditional nuclear family system.

The trustees report said that it “extended the assumed period of recovery from historically low levels of fertility by 10 years,” moving it from 2040 in last year’s report to 2050. Basically, the Social Security trustees think it will take longer for more children to be born in the United States.

Family financial support solution, or not: The current One Big Beautiful Bill through which Congressional Republicans plan to implement many of the White House’s tax policies could also play a role here.

Lawmakers are considering creation of new tax-favored Trump Savings, some of which will get a $1,000 government starter contribution, to help families with young children.

Most family advocacy groups, and many would-be parents, are skeptical about how much these accounts will encourage people to have children.

First, the $5,000 maximum annual contribution limit is too small. A LendingTree study released in March found that that the annual costs associated with raising a small child (from food and apparel to transportation and child care) are $29,419. That was an almost 36 percent increase from the online lending marketplace’s last study in 2023.

Second, similar efforts by other countries have shown the futility of fertility boosting payments. The efforts have ranged from one-time lump sum payments to recurring benefits to a combination of both to new parents. All did little to increase the nations’ birth rates, although the funds did improve beneficiaries’ health and economic conditions.

Immigration enforcement also costs: Trump administration immigration policies also are contributing to Social Security’s long term viability, which plays into the third factor cited by the trustees report.

Specifically, the report said it “lowered the assumed long-term share of Gross Domestic Product (GDP) that accrues to workers in the form of labor compensation.”

The Department of Homeland Security’s (DHS) mass deportation program has targeted industry sectors where employers have long been suspected of (okay, known for) hiring undocumented workers. But the removal of people who have been living and working in the United States, also will cut into Social Security tax contributions.

“Even if they themselves will not become eligible to receive benefits in their lifetimes, immigrants improve the solvency of a program that provides almost all workers with a foundation of income for their retirement,” notes a recent analysis by the Center on Budget and Policy Priorities.

The deportations also will reduce the U.S. Treasury’s overall balance.

In addition to the payroll tax amounts that go to the Social Security and Medicare programs, the undocumented workers also pay income tax. Many file annual tax returns, using Individual Taxpayer Identification Numbers (ITINs) instead of Social Security numbers, because they believed that the act would help their attempts to attain legal residence status.

However, since the DHS received court approval to obtain information on undocumented  individuals from their Internal Revenue Service filings, that will change. Now, in addition to losing the deported workers tax contributions, undocumented workers likely will no long be so tax filing compliant.

You also might find these items of interest:

• Social Security taxable wage base goes to $176,100 in 2025
• Some Social Security recipients owe tax on federal retirement benefits
• Undocumented immigrants in U.S. pay nearly $100 billion in federal and state taxes

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