In the wake of President Donald Trump’s sweeping tax and spending overhaul—popularly dubbed the “One Big Beautiful Bill Act” by its Republican champions—states across the U.S. are scrambling to reckon with the law’s wide-ranging effects. While the federal legislation has triggered a historic increase in average Social Security benefits, it’s also accelerated the timeline for potential benefit cuts and sent shockwaves through state budgets, particularly in Democratic-led states.
As of May 2025, the average monthly Social Security retired-worker benefit surpassed $2,000 for the first time, a milestone that underscores just how vital these payments are for America’s aging population. According to an analysis by the Center on Budget and Policy Priorities, if Social Security didn’t exist, the poverty rate for retirees aged 62 and over would skyrocket from 10.1% in 2023 to an estimated 37.3%. Gallup surveys over the past quarter-century have consistently shown that 80% to 90% of retirees rely on Social Security income to cover their expenses. For millions, these payments are not just helpful—they’re essential.
But the program’s financial underpinnings are under stress. Social Security’s income comes from three primary sources: a 4% payroll tax on earned income up to $176,100 (as of 2025), interest on its asset reserves, and the taxation of benefits. In 2024, the payroll tax alone accounted for over 91% of the program’s $1.42 trillion in revenue. It’s this crucial payroll tax that’s now under pressure from Trump’s new law.
On July 31, Senator Ron Wyden of Oregon, the highest-ranking Democrat on the Senate Finance Committee, sought clarity from the Social Security Administration’s Office of the Actuary (OACT) about the law’s impact. The OACT’s response was sobering: the “Big, Beautiful Bill” is projected to widen Social Security’s deficit by $168.6 billion between 2025 and 2034. The reason? The law temporarily increases the standard deduction for taxpayers 65 and older by $6,000 (or $12,000 for couples) from 2025 through 2028, allows workers to reduce up to $25,000 in annual tips, and lets them partly deduct up to $12,500 of overtime pay (or $25,000 for couples) during the same period. The cumulative effect is less taxable income, which means less money flowing into Social Security’s coffers.
The result is stark: the exhaustion of the Old-Age and Survivors Insurance (OASI) trust fund’s asset reserves is now projected for the fourth quarter of 2032—one quarter earlier than previously forecast. In practical terms, Social Security is now just seven years away from sweeping benefit cuts for retired workers and survivors, unless lawmakers intervene.
Yet, as significant as the bill’s impact is, the Social Security Board of Trustees has long warned that deeper, more persistent demographic trends are the real culprits behind the program’s long-term funding shortfall. For four decades, experts have pointed to a confluence of challenges: baby boomers retiring en masse, Americans living longer than ever before, rising income inequality that leaves more wages exempt from payroll taxes, a sustained decline in net legal migration (which means fewer young workers paying into the system), and a record-low U.S. birth rate. These factors together have been chipping away at the worker-to-beneficiary ratio, the bedrock of Social Security’s design. Fixing these issues, as the Trustees have emphasized, will be a tough political lift.
Meanwhile, the effects of Trump’s law are rippling through state budgets and social programs, widening the partisan divide over how to respond. On September 29, 2025, New Mexico lawmakers convened a special session to increase funding for food assistance and rural health care, aiming to “minimize the damage from President Trump’s disastrous bill,” as Democratic Governor Michelle Lujan Grisham put it. New Mexico expects to lose about $200 million annually due to the federal tax cuts, but thanks to a windfall from oil production, the state has the fiscal muscle to act proactively. “We’re in a position fiscally to be able to be proactive,” said state Senate Majority Leader Peter Wirth, “and really try and hold New Mexicans as harmless as we can to these cuts that are coming.”
California is taking similar steps. Legislation signed by Governor Gavin Newsom earmarks $255 million to counteract the bill’s effects and other federal changes, including $84 million to reduce errors in Supplemental Nutrition Assistance Program (SNAP) payments and $40 million to help counties implement new SNAP work requirements scheduled to begin in October 2027. The law also sets aside $20 million for emergency food banks, a substantial increase over previous funding. “We have been as diligent, as strategic as we can to backfill as much of those dollars as we can,” Assembly Speaker Robert Rivas told the Associated Press. Still, California budget officials warn of a looming multibillion-dollar deficit, highlighting the precarious balancing act facing state leaders.
Colorado, too, has felt the pinch. In August 2025, Governor Jared Polis called a special session after his administration estimated the federal tax cuts had blown a $783 million hole in the state’s budget. Lawmakers responded by eliminating some corporate tax breaks and authorizing the sale of state tax credits to raise revenue. Oregon’s Democratic officials are considering whether to “decouple” from certain federal tax changes to avoid hemorrhaging state tax dollars, a move that could allow them to continue taxing tips and overtime wages. “It is a very politically risky bill to pass, let alone have a special session again for ANOTHER tax vote,” state Rep. Rob Nosse wrote in a recent newsletter, “but at the same time it will allow us to stave off some of the cuts coming to health care and to food stamps.”
Republican-led states, on the other hand, have taken a markedly different tack. Iowa, Montana, and North Dakota all use “federal taxable income” as the starting point for their state taxes, so federal changes flow through automatically. Montana stands to lose an estimated $114 million annually due to the tax cuts, but lawmakers plan to address it in their next regular session in 2027. “I think it’s a concern, but I don’t think it’s an urgent problem for us,” said state Rep. Larry Brewster, chair of Montana’s interim revenue committee. Iowa expects a $437 million loss to its general fund in fiscal year 2025, and acknowledges the added strain from Trump’s trade war with China, but Governor Kim Reynolds remains optimistic: “We’re in a good position to weather some of the ag and some of the effects of the One Big Beautiful Bill, but we also have to be mindful as we move forward.” North Dakota is considering a session early in 2026, but only to decide how to spend $50 billion in rural health care grants included in the bill—not because of tax cuts.
The divide between Democratic and Republican states underscores a broader partisan schism over the urgency and impact of Trump’s legislative legacy. Some political scientists suggest Democrats may be grandstanding, while Republicans might simply be content with the changes or hesitant to challenge the former president. What’s clear is that, as the clock ticks down to potential Social Security cuts and as states grapple with budget shortfalls, the real test will come in whether lawmakers—at both the state and federal level—can muster the political will to address the underlying challenges before the next crisis arrives.
For now, millions of retirees depend on Social Security to keep them out of poverty, and states are left to navigate the shifting fiscal landscape, each according to its own political calculus and economic realities.
