06 Feb 2025 The Future of Social Security

It’s no secret that Social Security is in trouble. For years, the annual report prepared by the Board of Trustees for the Federal OASDI (Old-Age, Survivors and Disability Insurance) program has warned us that the trust fund that bridges the gap between benefits paid and revenues collected is being depleted. In their most recent report, the trust fund projects to run out of money in 2034.

What happens then? Thankfully, the vast majority of benefits are paid for via FICA taxes (more colloquially: payroll taxes). Oft-forgotten, payroll taxes amount to 12.4% of wages, are assessed on the first $176,100 of income (in 2025), are split equally between employee and employer (6.2% each), and are deducted directly from an employee’s paycheck. Annual collections are expected to fund 79% of benefits once the trust fund goes to zero. In other words, if no changes are made on the tax or benefit side, payroll taxes are sufficient to pay 79% of Social Security benefits until the end of this century.

That nearly 80% of benefits would continue to be paid is, understandably, small comfort. Especially to those living on a tight budget.

Knowing that less than a decade remains, the most recent Trustee report presents single-policy solutions that would allow the trust fund to pay 100% of benefits through the year 2098:

• Increase the payroll tax immediately from 12.4% to 15.73%. Because it’s shared between employee and employer, an individual earning $100,000 a year will pay an additional $1,665 in FICA taxes. An individual earning the maximum of $176,100 will pay $2,905 more.
• Reduce benefits by 20.8% for both current and future recipients.
• Keep benefit amounts for current recipients intact but reduce benefits for future claimers by 24.8%.

Other solutions exist. For example, the earnings cap could be lifted so that wages in excess of $176,100 are subject to the FICA tax, all sources of income–not just wages–could be subject to payroll taxes, the full retirement age could increase from 67 to 68, 69, or higher. Better yet, and this is more likely, the solution could incorporate a little bit of everything: higher taxes, lower benefits, a different definition of income, later full retirement age, means testing, or a change to how the annual cost of living adjustment is calculated.

Using The Reformer: An Interactive Tool to Fix Social Security, you can create your own proposal to shore up Social Security. I was able to correct decades of mismanagement in five minutes by slowing benefit growth for the top 20% of earners, increasing FICA taxes by .5%, applying them to wages in excess of $400K, and raising the full retirement age to 68. You’re welcome, America!

Of course, this solution won’t appeal to everyone (I’m not even sure it works for me, but the calculator was fun to play around with) which is why finding a fix has remained out of reach. Both Republicans and Democrats are worried about alienating voters and being labeled as the party that wants to end Social Security, which is how we wind up ten years from an empty trust fund.

If I were a betting man, which I am most definitely not, my money would be on there being no change to current recipients’ benefits, an increase in the full retirement age, a slight increase in the payroll tax and, if I wanted to get a little spicy because America seems to love parlays, limiting benefits for future retirees’ with income in excess of $200K.

Knowing Social Security is in trouble, how should you plan? First, remember that it is fully funded until 2034, and then payroll taxes will continue to cover 80% of benefits until 2098, so it’s not going away. Seeing how your financial plan functions with a 20% reduction might ease your concerns. For example, I reduced me and Emily’s benefits by 20% and it decreased our plan confidence by 4%. How it impacts your plan will be different: The closer you are to retirement and the more you rely on it, the greater the impact. Second, if you’re already retired, remember that previous alterations involved raising taxes, not reducing benefits, so you are probably in the clear. Third, if you’re still working, consider running your financial plan with lower benefits while simultaneously reviewing your budget to see how higher taxes would impact you. Remember that higher taxes could come in a few ways: an increase in the payroll tax, a lifting of the cap on earnings, or the taxation of additional categories of income.

In short, Social Security is in a challenging place, but it’s not going away. If you are worried about the prospect of reduced benefits, let’s schedule a time to review your plan, incorporating some of the ideas mentioned above.

A recent white paper from the Nerd’s Eye View blog was a big help in writing this. You can read that article here: https://www.kitces.com/blog/social-security-sustainability-trust-fund-benefits-taxes-legislation-financial-planning/

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