7-Minute Read

As I write this, a few weeks have passed since the end of the most extended government shutdown in US history. Perhaps it’s fitting to discuss and explain the largest income support program in the US. You know it as the Social Security System.

When you hear about Social Security, does it make you feel secure or anxious? Depending on what you’re reading, I find that these days it’s usually the latter. The biggest concern I often hear is some variation of the following: “Social Security will not be there for me when I need it.” So, let’s start there and address this fear. If we’re to succeed, it will help to understand the true state of the Social Security system.

I want to thank Adam Van Duesen and the team at Kitces.com for compiling the latest thinking and strategies on this. In this brief piece, I’ll attempt to distill some of their main points and add insights of my own.

First, we’ll review the current state of the Social Security system, so you understand why there’s a “funding gap.” Then, we’ll consider potential policy measures to address this gap and conclude by discussing some actions you can take for your own financial plan today.

What is the State of the Social Security System?

Let’s start with the Social Security Trust Fund. This is the account where large portions of your payroll taxes while working are deposited. Those receiving Social Security (SS) benefits draw from this same trust fund. While the fund’s main source of income is payroll taxes, it also grows through interest earned on the treasury securities it holds and taxation of some of the benefits it pays.

The fund has two parts: the Old-Age & Survivors Insurance (OASI) and Disability Insurance (DI). Among them, the OASI is significantly larger, with an asset reserve of about $2.5 trillion at the end of 2024. In comparison, the DI part had around $183 billion at the same time.

These numbers may seem large—and they are—but the main concern is the overall trend. The trust fund experienced surpluses—that is, income exceeded expenses—from the mid-1980s until around 2010. After that, the growth rate of asset reserves slowed down, and by around 2020, those reserves began to decrease. That decline shows no signs of stopping anytime soon.

The 2024 Social Security Trustees report states that the trust fund is expected to run out of money in 2034. Several assumptions support their calculations. The health of the trust fund relies on factors like labor force size, worker productivity, and demographic changes.

The practical question is what happens to the SS benefits people can expect to receive if the trust fund is exhausted. According to the same report, they estimate that 81 percent of benefits can continue to be paid. The main reason SS benefits don’t go to zero is that the trust fund’s primary income source is ongoing payroll tax contributions. In other words, people who are not retired will continue to pay into the system.

I suppose you could interpret this result in a couple of ways. The glass-half-full view is that you’re almost certain to receive some Social Security income in the future. This can be helpful, especially for younger people who might not be relying on any SS benefits in their plans.

The downside is that nearly a 20 percent cut in SS benefits could significantly affect many people’s future well-being. The challenge that lies ahead for this country is closing the funding gap so that Social Security remains sustainable for decades ahead. One silver lining is that there are several ways to address this gap, and we’ll examine a few of those options next.

What are Possible Policy Measures to Close the Gap?

One way to address the funding gap is to identify the simplest action that can be taken. This falls into the category of “single policy measures.” This has actually been calculated.

Currently, the Social Security portion of the payroll tax rate is 12.4 percent. If you’re an employee, you pay half of this amount (6.2 percent), and your employer pays the other half. To ensure full SS benefits are maintained for the next 75 years (until 2099), the tax rate would need to increase by 3.65 percent, rising from 12.4% to 16.05%.

Other “single policy” options include cutting benefits for both current and future recipients by 22.4%, or reducing benefits for only future recipients by 26.8%.

These single policy solutions are extreme and unlikely to gain broad support from the current political parties. Instead, it seems more probable that a combination of approaches could help close the gap. Such measures might involve any or all of the following:

• Implement a “smaller” increase to the payroll tax
  • Presumably, this would be smaller than the 3.65 percent increase noted above.
• Raise the full retirement age from 67 to 68 (or higher)
  • For most people, SS can be claimed anywhere between the ages of 62 and 70. But the common reference point is your benefit at your full retirement age. If you were born in 1960 or later, that age is 67. Your benefits reduce if you claim before that age, and they increase if you claim after it.
  • They could also implement an even higher full retirement age for those who earn above a certain threshold.
• Slow benefit growth for top earners
  • This could also include putting a cap on monthly benefits, which can accomplish a similar result.
• Increase the number of working years used to calculate benefits
  • Currently, the formulas use your highest 35 years of inflation-adjusted earnings. If they increase the requirement to 40 years (for example), more people will have years of $0 earnings included in their benefit calculations. I’m not sure how viable this strategy is, as it could disproportionately hurt lower-earning people.
• Change the Cost-of-Living Adjustment (COLA) formula
  • Currently, if you’re receiving SS, you typically get some cost-of-living-based increase each year. The increase in effect for next year (2026) is 2.8 percent. If they change the formulas used to calculate that increase, it will simply be a way of slowing future benefit growth across all recipients.
• Subject all (or a higher percentage) of wages to the payroll tax
  • For reference, the current (2025) wage base is $176,000. Wages above that level aren’t subject to the part of the payroll tax that funds Social Security.
  • If the wage base were to increase, those higher earners can expect to pay more in payroll taxes, but they will also receive higher SS benefits in the future. The formulas can still be designed so that inflows exceed the outflows.

 

One thing to remember about all this is that we probably shouldn’t expect Congress to act on these measures anytime soon. History suggests that decisions might come down to the last minute before significant changes happen. The recent shutdown underscores the difficulties of negotiations. The more challenging the issue at hand, the more likely it is that decisions will be postponed. Hopefully, we’ll have more clarity on this issue well before 2034.

With the various policy options available, some of which are summarized above, there’s cause for optimism. On the other hand, things can also get worse before they improve. Recent legislation that repealed the so-called WEP/GPO and lowered taxes on seniors might provide immediate help to those in need. Still, these measures have already been shown to speed up the depletion of the trust fund.

How Does this Impact Your Financial Plan?

While there’s uncertainty about the future state of the SS system, the focus can shift to what you can do individually to build your resilience, no matter how things turn out.

One great thing about financial planning, assuming you have the right tools in place, is that you can model various “what if” scenarios. It’s hard to say precisely what the “worst case scenario” in all of this is. But based on what you’ve read, a couple of planning possibilities stand out:

• Model a 20 to 25 percent reduction in your scheduled benefits.
  • One place to start if you’re not sure what your schedule benefits are is to review your Social Security Statement. But as I noted in an earlier blog, that statement may not tell the full story.
• Model a payroll tax increase of 3 to 4 percent – applicable for those still in their working years

 

Modeling either of these is likely to show that some change may be needed, such as saving more or retiring later. Or if your plan is already in solid shape, it may not show that much action is required. Either way, it could help reduce some anxiety. Then we can look at further nuanced modeling depending on how close you are to receiving SS benefits.

For those of you nearing retirement or already receiving Social Security benefits, remember that full benefits are expected to be paid through 2033. Even after that, it’s more unlikely that you’ll see benefit reductions simply because it’s harder (but not impossible) for governments to take away benefits already in place. But you could still look at the impact of reduced cost-of-living adjustments that could apply to the future benefits you receive.

Understand your future claiming options.  This is particularly important if you’re married, which leads to a variety of claiming strategies that may be more optimal than what you’re assuming now. I wrote in more depth about this in our earlier blog post: The Top Four Questions I’m Asked About Social Security

Consider Claiming SS Sooner. This topic is more controversial, even among financial planners. There are many valid reasons to delay claiming Social Security as long as possible, but not beyond age 70. Benefits can be claimed as early as age 62 if you’re willing to accept a significant reduction in your monthly benefits.

However, since some changes are likely to happen in the Social Security program—though we don’t know the specifics—a natural response might be to claim what you can as early as possible before any reductions take effect. While this approach has some validity, I’m not sure it should alter your overall claiming strategy. That’s because this decision really should be based on the impact of a lifetime of benefits.  

Still, there could be other reasons—beyond the current state of the Social Security system—to justify claiming benefits earlier. With some limited exceptions, claiming SS is an irrevocable decision, so you should evaluate it carefully and consult with your financial planner.

If you have comments or questions on this piece, please drop me a line at: [email protected]

References

1. https://www.ssa.gov/oact/TR/2025/index.html
2. https://www.ssa.gov/benefits/retirement/social-security-fairness-act.html?tl=2
3. https://krishnawealth.com/your-social-security-statement-may-not-tell-the-full-story/
4. https://krishnawealth.com/the-top-four-questions-im-asked-about-social-security/

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