In light of the recent release of the 2025 OASDI Trustees Report, there has been considerable news concerning Social Security’s financial status and the possibility that if Congress does not act prior to the projected exhaustion of the trust fund (2033 for OASI and 2034 for OASDI), benefits may effectively be reduced in the first full year of trust fund exhaustion by about 20% (for OASDI) or about 23% (for OASI). Reductions could increase in subsequent years absent any action by Congress.
It should be noted that these dates are projected dates of trust fund exhaustion based on intermediate assumptions and assume no intervening action by Congress. An actual trust fund exhaustion date (and associated amounts of across-the-board cuts) could differ based on actual future experience and whether the DI and OASI funds are merged or not. Of course, if Congress acts prior to the anticipated date of trust fund exhaustion, any enacted benefit cuts at that time may not be across-the-board and would, most likely, be mitigated to a significant degree by enacted tax increases (or other new sources of revenue). However, if enacted cuts are not across-the-board in nature, they could be higher for individuals with higher levels of income.
Will Congress take action prior to the projected trust fund exhaustion date to address the system’s short-term and long-term financial problems? If so, what tax and benefit provisions will Congress enact at that time? Will the benefits of some groups of Social Security beneficiaries or near beneficiaries be grandfathered? We don’t know the answers to these questions.
In light of these uncertainties, how should retirees plan for the future? Should they assume that their benefits under current law will remain unchanged, or should they assume they will be reduced? And if more prudent retirees want to plan for reduced benefits, how much and when should they assume that their benefits will be reduced?
The purpose of this post is to discuss how to use the Actuarial Financial Planner models to plan for a future decrease in your current Social Security benefit assuming that the benefit reduction will be take place in 2034, 9 years from 2025. For this purpose, we will look at an example.
Example
Bill and Betsy are both age 65 and in 2025 are collecting total Social Security benefits totaling $45,000 per annum ($25,000 for Bill and $20,000 for Betsy). Based on the current default assumptions, the present value of their Social Security benefits (not counting projected survivor benefits) as of January 1, 2025 was $1,075,437 ($561,069 for Bill and $514,368) for Betsy.
Bill and Betsy have other assets with a present value of $2,000,000 and spending liabilities totaling $2,400,000 in present value, so their Funded Status as of January 1, 2025 was 128% [($1,075,437 + $2,000,000 = $3,075,437)/$2,400,000 = 128%].
Bill and Betsy want to be reasonably conservative, so they plan on experiencing a 20% reduction in their Social Security benefits in 2034; remaining at that 20% reduction level thereafter.
Instead of entering $25,000 and $20,000 respectively for their Social Security benefits, Betsy enters $20,000 for Bill and $16,000 for herself (80% of their current benefit). The total present value of these streams of payments is $860,350 (80% of the non-reduced stream). To this amount, they will add the present value of 20% of their current benefits payable for the 9 years from 2025 to 2033) representing the non-reduced payments they expect to receive during the next 9 years. The present value for Bill of this 9-year payment stream is $41,720 determined by entering:
- $5,000 in an “other income” row in column E (Annual Payment),
- 0 in Column G (deferral period),
- 9 in Column H (payment period),
- 3% in Column I (annual rate of increase), and
- 0% in Column J (% upside)
And the present value calculation is shown in the PV Calcs tab
Similarly, Betty determines the present value of her “extra” Social Security payments for the next 9 years to be $33,376.
Thus, the revised present value of Bill and Betty’s Social Security benefits under this 20% reduction in 9 years scenario would be $935,445 ($860,350 + $41,720 + $33,376), or $139,992 less than the present value of their unreduced benefits as of January 1, 2025. This represents a decrease in the current present value of their Social Security benefits of about 13%. Note that if they waited 9 years to reflect the decrease and their benefits were, in fact, decreased by 20%, the percentage decrease at that time would be 20%.
If we subtract $139,992 from the total present value of their actuarial balance sheet assets of $3,075,437 and divide the result ($2,935,445) by the present value of their spending liabilities of $2,400,000, we get a revised Funded Status of 122%, or about six percentage points lower than their Funded Status assuming no future reductions.
If Bill and Betty incorporate these adjustments and future cuts are less than they assumed, they will incur actuarial gains in the future that will increase their Funded Status when enacted. If they make these adjustments or make no adjustments and cuts are larger than assumed, they will incur actuarial losses in the future that will decrease their Funded Status when they occur.
Summary and take-aways
A 20% decrease in Social Security benefits nine years from now is not a small amount. If Congress acts before trust fund exhaustion, it is likely that the actual cuts, if any, will not be this damaging. On the other hand, this scenario does not represent the worse-case scenario. Instead of assuming a 20% cut in 9 years, Bill and Betty could always see how a 10% reduction enacted five or six years from now might affect their Funded Status.
For our example couple, the present value of the assumed decrease in their benefits (20% in 2034) amounted to $139,992), or about 13% of the current present value of their Social Security benefits.
Because they have other assets, this assumed decrease is expected to reduce the present value of their total assets and their current Funded Status by about 6%.
It is arguably more prudent and conservative to assume some level of benefit cuts will occur than to assume none. We will leave it up to our readers to select the level of pain they believe is most likely. We also encourage our readers to put pressure on their representatives to resolve this issue quickly so that retirees in the U.S. can reasonably plan for the future.
