This post is a follow-up to our post of July 2, 2025. In that post, we talked about the possibility of future Social Security benefit cuts and how you can use the Actuarial Financial Planner to estimate the financial impact on your current Funded Status of possible future reductions in your benefit(s).
It is almost a year later, and we have no more certainty as to policy changes that might be implemented on or prior to the system’s forecasted trust fund exhaustion. We do know that this issue has gained significant attention in the U.S. as both political parties are proclaiming that they will be the party to “Save Social Security” and the other party will not. Unfortunately, no one knows exactly what that phrase means, except that it presumably involves policy changes that would prevent the trust funds from becoming insolvent. It is still unclear, however, how much of the projected funding gap would be closed through increased revenue or though reductions in benefit payments. In this post, we will discuss how much of the trust fund exhaustion problem can, or possibly will, be solved by increased revenue and/or benefit cuts.
Default Option—No legislative action taken prior to trust fund exhaustion
The default option for Social Security is that if no action is taken, benefits would be reduced across-the-board by about 20% in the first full year of trust fund exhaustion with potentially greater percentage reductions in subsequent years. There are some experts who believe that the President could take executive action without congressional legislation and make alternative benefit reductions on or before trust fund exhaustion. These experts argue that to protect benefits for less wealthy individuals such benefit reductions would need to exceed 20%. So, it is possible, under the default option/executive action alternative that benefits for some (presumably wealthier) beneficiaries could be reduced by even more than 20%.
What may happen if Congress takes action prior to trust fund exhaustion.
The key factor in the planning process for retirees or individuals who currently are (or who will become) eligible for Social Security benefits prior to enactment of possible system changes is whether or not their benefits will be grandfathered at time of enactment. If benefits are grandfathered for all eligible individuals at time of adoption, then planning for such individuals is relatively easy—there would presumably be no future benefit cuts to anticipate.
However, if benefits are grandfathered for all eligible individuals at time of enactment, then almost all of the solution to the trust fund exhaustion problem must come from increased revenues at this point in time. In their recent Issue Brief, the American Academy of Actuaries estimated that revenues would have to be increased by about 25% from current levels if benefits are grandfathered. They also note,
“When Congress has amended Social Security in the past, benefit reductions were applied only to individuals not yet eligible for benefits,” and they base their Issue Brief policy alternatives on the assumption that Congress will want to continue this “tradition.”
If Congress waits until 2030, for example, to implement changes and choses to grandfather the benefits of all individuals eligible for Social Security benefits at that time, it would have to grandfather the benefits of all Silent generation, all Baby Boom generation and as many as 20% of the Gen X generation. Based on a recent survey of total net worth held by U.S. generations by UBS, Global Wealth Report 2025, these potential grandfathered generations currently hold almost 70% of the total estimated net worth in the U.S. of about $163 trillion.
In planning for the future, current retirees must ask themselves whether it is reasonable to assume that younger taxpayers and their employers will be willing to pay 25% more and probably receive lower levels of future benefits so that the generations currently holding most of the nation’s assets won’t suffer Social Security benefit reductions.
There are plenty of other experts who believe that saving Social Security should involve benefit reductions for individuals who may currently be eligible for benefits. In his recent article, Brenton Smith said,
“Through the years, this sentiment on the Hill has metastasized into institutional indifference, and the men and women of Capitol Hill do little more than posture about protecting Social Security on terms far removed from reality. This environment has preserved Washington’s best-kept secret: Benefit cuts are coming to Social Security, and they will hit existing retirees hard.”
He also said,
“…the government has warned those currently collecting benefits that checks would be reduced starting in the mid-2030s for more than 30 years unless Congress takes action. Voters can’t really be shocked that the government was telling the truth for once. Nor can current beneficiaries be surprised that future retirees do not wish to absorb all of the pain caused by Congressional inaction.
In a better world, Congress would have increased the payroll tax rate in 1994 in response to the system’s decline. That debate would have triggered a discussion about the cost of runaway benefits, which would have reined in the size of benefit checks long ago.
In order for the current retirees to be exempt from the cleanup of Social Security, younger workers would face the prospect of paying the equivalent of 4% more in payroll taxes because voters over the last 40 years have been unwilling to pay a penny more in taxes.”
Will Social Security be saved from trust fund exhaustion through significant tax increases alone without reducing benefits for individuals eligible for benefits or will some benefit cuts be involved for some wealthier recipients? We don’t know.
As noted in my February 26, 2024 Advisor Perspectives article, my recommendation is for Congress to adopt changes that would anticipate having a sustainable level tax rate with automatic adjustments in the future similar to the approach used for the Canada Pension Plan. This approach would involve some benefit cuts for wealthier currently eligible individuals and some revenue increases.
Summary
Most older Americans want Congress to “save Social Security (and Medicare).” Many of those individuals believe (hope) that Congress will not reduce their benefits, but will, instead, save the system through increased revenue, from some source that will presumably not negatively affect them. And maybe this will be what happens, or maybe not.
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 more reasonably plan for their future.
