Social Security Cuts: Separating Fact from Fear
Introduction
Franklin D. Roosevelt, the 32nd President of the United States, signed the Social Security Act in 1935.
At the time, Social Security was designed to provide at least some measure of protection for Americans facing unemployment, old age, poverty, and other financial hardships.
When I think about Social Security, my mind usually goes straight to the retirement benefit. That makes sense. Millions of Americans rely on Social Security as a substantial part of their retirement income. Many rely on it as their primary source of income.
But Social Security was never meant to be just another line item on a retirement spreadsheet. It was built as a safety net.
And for retirees, that safety net matters. I see it firsthand when I run retirement income projections. Social Security can be the difference between a plan that works comfortably and a plan that needs adjustments. It is income that lasts for life, adjusts for inflation, and provides a baseline of security that many retirees simply cannot replace on their own.
That is why I wanted to write about the recent headlines surrounding Social Security, especially the articles warning about benefit cuts, trust fund depletion, and the future of the program.
I have received a lot of questions on this topic. Let’s separate the facts from the noise and talk about how I think retirees and pre-retirees should actually plan around it.
Social Security Funding Mechanics
Payroll Taxes
For those still working, you are probably familiar with the OASDI deduction coming out of your paycheck. Yes, I know it leaves you with less take home pay, but those payroll taxes are the primary funding source for Social Security benefits.
This is an important point!
Even if the trust fund reserves are eventually depleted, Social Security does not just disappear. Payroll taxes would still be coming in. Current workers would still be paying into the system. That ongoing revenue would still fund a large portion of scheduled benefits.
That does not mean there is no issue. But it does mean the “Social Security is going to zero” crowd is missing a very important part of the story.
The Trust Fund
The trust fund is where most of the scary headlines come from.
The retirement and survivor trust fund is currently projected to be depleted by the early 2030s. If Congress does nothing, Social Security would still be able to pay benefits, but not the full scheduled amount.
That is where the potential benefit cut comes from.
Depending on which part of the system you are looking at, the projected shortfall is roughly in the 17% to 22% range.
That would be painful…. For some retirees, very painful.
But again, that is very different from Social Security going away entirely.
Levers Congress Can Pull
Congress has several levers it can pull to address the shortfall. None of them are painless and all of them are politically difficult.
A few commonly discussed options include:
Raising the Social Security taxable wage base
Increasing payroll tax rates
Gradually increasing full retirement age for future retirees
Adjusting how benefits are calculated for higher earners
Changing taxation of benefits
Using some combination of revenue increases and benefit adjustments
Could they use one or multiple of the levers above? Yes.
Could they do nothing until the last minute? Also yes.
Here is the problem. No matter which lever gets pulled, somebody is going to be upset. Workers do not want higher taxes. Retirees do not want lower benefits. Younger generations do not want the rules changed on them. Politicians do not like making voters angry.
That is why this issue has been kicked down the road for so long.
My Take
I think most people fall into one of three camps.
The first camp puts their head in the sand and says, “We will see what happens.”
The second camp assumes Social Security will completely disappear.
The third camp acknowledges the risk, builds it into the plan, and keeps monitoring the situation. (This is the camp I prefer)
Here is how we think about it in a retirement income plan.
First, we need to understand how much income you actually need throughout retirement.
Second, we need to understand where that income will come from. That could include retirement accounts, taxable investment accounts, pensions, cash reserves, Social Security, etc.
Third, we stress test the plan. One simple way to do that is to model a 20% reduction in Social Security benefits and see what happens.
Does the plan still work?
Do we need to adjust spending?
Do we need to rethink the claiming strategy?
Do we need to build more flexibility into the investment accounts?
Do Roth conversions, tax planning, or withdrawal sequencing become more important?
That is real planning. Not panic. Not politics. Planning.
Final Thought
Social Security is not perfect. It was not perfect when it was created, and it is not perfect today. Think back to the quote I included from FDR, “A cornerstone in a structure which is being built but is by no means complete.”
That line still fits.
Social Security is an incredibly important retirement income tool. It is a lifetime, inflation-adjusted income stream backed by the federal government. For many retirees, it is one of the most valuable assets they have.
So no, I would not ignore the headlines. But I also would not let the headlines drive your retirement plan.
Plan based on what we know today. Stress test for what could happen tomorrow. Build enough flexibility so that if changes come, you are not reacting from a place of fear.
That is the goal.
When people start chirping about Social Security cuts, you do not need to guess. You do not need to panic. You just need to know what it means for YOUR plan.
What I’ve Been Reading:
When Will Social Security Run Out of Money?
If this month’s Financial Planning Corner caught your interest, here’s an article that takes a deeper dive into the topic.
More Couples Keeping Separate Bank Accounts
Fewer couples are fully combining their finances, and that seems to be becoming more common. In my mind, if you take that approach, communication becomes even more important.
Tens of Millions of Taxpayers May Be Eligible for Significant Tax Refunds
The article explains that tens of millions of taxpayers may be eligible for refunds or abatements of certain COVID-era IRS penalties and interest, but taxpayers must file a claim by July 10, 2026 to protect their rights.
That wraps up the July edition of the Financial Planning Corner. I hope you found it helpful!
One quick ask. I’d love your feedback. If there is a topic you would like me to cover, or a question you have been turning over in your own planning, shoot me a note and let me know. And if any of the ideas above connect to your personal situation and you want to go deeper, I am always happy to talk it through.
Yours in Planning,
Pat Kalish, CFP®
