How Social Security’s Coming Insolvency Should — And Shouldn’t — Change Your Retirement Plan

The Social Security retirement trust fund is rapidly approaching insolvency. Congress needs to act at some point, and Americans need to adjust their plans.

Social Security is one of the financial foundations of retirement for most Americans, and it becomes more important as they age.

The benefits are guaranteed for life, no matter how long the beneficiary lives. They’re also the only inflation-adjusted guaranteed lifetime benefit most U.S. retirees have.

The coming insolvency of Social Security has been well-known for years, and the reasons for it are clear.

The Baby Boomers are in or entering their retirement years. Since 2011, 10,000 Baby Boomers per day have been turning age 65.

Beginning in 2024, when the large middle-section of the Boomer generation begins turning 65, that number jumps to 12,000 per day. There aren’t enough younger workers joining the workforce to replace the Boomers and pay taxes into the program.

Each year, the Board of Trustees of Social Security issues a report on the solvency of the program, estimating results for the next 75 years.

The 2022 report had some good news. The retirement trust fund was projected to last through 2034, one year longer than in the 2021 report.

But the assumptions about inflation and demographics seem optimistic. If that’s the case, the trust fund will run out of money before 2034.

The consequences of the trust fund’s depletion are widely misunderstood. The Social Security retirement program won’t end when the trust fund runs out of money. Payroll taxes and self-employment taxes continue to flow into the program each year.

The trustees estimate the annual tax revenue will be enough to pay 75% to 80% of benefits for at least 75 years. That means the worst-case scenario, if Congress doesn’t act to shore up the program, will be an across-the-board reduction in benefits of 20% to 25%.

Congress is likely to act before that happens. Current and future retirees also need to act. But retirees and pre-retirees need to avoid taking some actions being recommended.

Some people advise that, because of the pending insolvency, the Baby Boomers should claim their retirement benefits as soon as they are eligible to, at age 62, or at least no later than their full retirement age.

The reasoning is that they should grab the promised benefits as soon as possible, before any cuts are made.

But it’s generally better for people to wait as long as they can (but no later than age 70) to claim their benefits. The annual benefit increases by up to 8% for each year claiming is delayed through 70. That’s a guaranteed, tax-free annual increase, a return most people can’t obtain anywhere else.

Plus, each year Social Security benefits are increased by the amount of the latest for inflation rate. Over the years, there’s a significant benefit to having that inflation indexing compounded on a higher beginning benefit.

Also, once Congress finally acts, I expect it will do as it has done in the past. People already receiving Social Security benefits and probably those within five to 10 years of claiming them will be protected. The current promised benefit levels will be grandfathered for them.

Even if Congress doesn’t grandfather this group, I’d rather have a benefit cut imposed on the higher benefit gained from waiting to claim than the lower benefit paid to those who claim early.

Higher income and net worth individuals might not be protected. I suspect they’re likely to be subject to some combination of lower benefits and higher income taxes regardless of age.

The most likely scenario is that younger workers (those ages 50 and under) will bear most of the burdens of higher taxes during their working years and lower benefits after their careers. The longer Congress waits to act, the more severe these changes will be.

There’s another option for Congress. It can declare that any shortfall in Social Security will be covered by a contribution of general funds from the Treasury Department. The Social Security shortfall would add to the annual budget deficit and to the federal debt.

Whatever Congress does or doesn’t do, Social Security’s fiscal difficulties aren’t a good reason to change your Social Security claiming strategy if you’re within 10 years of retirement. Most people should wait to claim their benefits as long as possible in order to maximize lifetime benefits. This advice might change when Congress debates specific proposals. You should also build flexibility in your retirement plan.

Because Congress mismanaged the program and didn’t act quickly enough when the shortfall became apparent, your plan should be able to absorb a reduction of 20% to 25% in Social Security benefits beginning in the early 2030s. I don’t expect that to happen, but the prudent action is to have some flexibility in your spending in case it does.

Bob Carlson is the editor of the monthly newsletter and website Retirement Watch, which he founded in 1991. He also serves as chairman

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