Is Social Security Heading Toward Insolvency?

Andrew Busa, MSPFP, CFP^®, MPAS^®, CCFC

Director of Financial Planning

This week’s reader question:

Is Social Security Heading Toward Insolvency?

You heard right. As part of its annual report on the financial health of Social Security and Medicare, the Social Security Board of Trustees said last week that Social Security would be insolvent one year sooner than previously projected. The increased shortfall—which was less than many analysts had expected—occurred because payroll taxes took a hit when businesses shut down during the COVID-19 crisis.

This means that—without government intervention—retirees could experience a cut of about 24% to their Social Security benefits beginning in 2033. Do we think this will come to pass? Not likely.

The first thing to know is that Congress has a means to solve this problem…but it’s a political hot potato. Why? To get Social Security back on track, Congress needs to make the unpopular decision to raise Social Security taxes. If you’re seeking reelection, you probably don’t want to raise your hand for that sort of proposal. It’s easier to kick the can down the road to the next person.

At the same time, if you’re trying to get reelected, you also don’t want to cut the benefits your voters are counting on.

That makes the timing of any congressional action difficult to predict, but we expect lawmakers will step up and keep benefits cuts off the table by acting before the clock runs out in 2033.

Having said that, what actions, if any, should you be taking? In most cases, we suggest sticking to your current financial plan.

We caution against taking Social Security benefits early, and encourage most of our clients to wait to file until at least their full retirement age (FRA) to draw the maximum benefit. Every year you delay taking benefits beyond FRA until age 70 results in an 8% per year increase over the base FRA amount in benefits, so for those who can afford to wait, it makes sense.

We will continue to stress-test your financial plans under worst-case scenario conditions and keep you updated should a change of course be required. As always, feel free to contact us with questions and concerns.