Preparing Social Security Plans Before Congress Acts
Every few months, yet another Social Security rescue plan surfaces. And every few months it dies. The latest comes from the Committee for a Responsible Federal Budget, which has revived a cost-of-living-adjustment cap that co-chair Tim Penny first introduced in Congress in 1987. It went nowhere then. Consensus is that it will go nowhere now.
But as the projected Social Security shortfall approaches, some type of reform will likely pass sooner than many expect. Don’t wait for the new Social Security legislation to become a reality before adjusting client plans. Otherwise, you’ll be doing remedial work under significant time pressure. Advisors who understand the shape of the likely outcome can position clients now, while the choices are still affordable.
It’s a Math Problem
This much we know. The Social Security trustees are projecting the depletion of the Old-Age and Survivors Insurance trust fund to be 2033. The CRFB, incorporating the revenue effects of the 2025 tax legislation, moved up the combined shortfall date to 2032. The Congressional Budget Office is projecting the same date. Demographics do not lie.
In 1960, there were five workers supporting each income beneficiary. Today that number is down to three. By the mid-2030s, studies show the ratio will be closer to two workers for each beneficiary. Once the trust fund is zero, the law requires a pay-as-you-go transfer program. In other words, the current year’s payroll taxes are the only funding available to pay the current year’s benefits. The pay-as-you-go transfer program will require a reduction in benefits across the board unless a legislative change is implemented.
Depletion Doesn’t Mean Bankrupt
If nothing else, please remind clients that when the Trust fund is fully depleted, it is not the end of Social Security. Under current law, when the fund is exhausted, benefits are automatically reduced to an amount that continuing payroll tax receipts will support — roughly 77% to 81% of scheduled benefits. That’s not zero! This is a benefit reduction of about 19% to 23% the day the fund is exhausted. This is a planning opportunity, not a catastrophe.
What’s Likely to Happen
Congress will likely postpone taking action on Social Security until the last possible minute. Some form of phased pain will be pushed far enough into the future so that no sitting member of Congress will have it happen on “their watch.”
Here’s my estimation of what the new Social Security package will include after its likely passage between 2030 and 2032:
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Roughly two-thirds tax increases to one-third benefit reductions.
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Taxable wage base will be raised sharply or eliminated entirely. There may be a “donut hole” to exempt wages between the current cap and roughly $400,000.
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A COLA method change—chained CPI or a progressive variant of the Penny cap because it’s a cut that does not look like a cut.
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Higher full retirement age, but one that’s phased in for workers currently under 50 and fully exempts anyone near claiming age.
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Current retirees and near-retirees will likely be grandfathered in.
Full privatization, or means-testing down to the indigent, or a decision to simply let the automatic reduction take effect, are non-starters. Allowing the auto reduction is the outcome clients fear most and is the one Congress will avoid at all costs. The only real option is to increase taxes and reduce future benefit increases.
Seven Actions to Consider Taking Now
As advisors, our job is not to forecast the actions of Congress. Our job is to conduct contingency planning for clients with an eye toward helping them mitigate the potential impact of Social Security changes. Here are seven things you can do now to help put clients at ease:
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Show clients the difference in dollars between 100% and 77% of scheduled benefits. Run their plan at 100% of scheduled benefits and again at 77% beginning in 2033. This gives clients a reality check. If they have time to plan, it should motivate them to take action.
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Work with clients who are most likely to be impacted first. Clients over 60 should plan on scheduled benefits. Clients aged 50 to 60 will likely have a modest COLA-method exposure. Clients under 50 should plan on taking Social Security at an older age. Clients under 40 should plan around Social Security reductions as a reality.
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Protect clients from making bad claiming decisions. Claiming at 62 creates a permanent reduction of roughly 30% against full retirement age. Delaying retirement age adds about 8% annually to age 70. If your clients opt in early, they are guaranteed a lower Social Security benefit. This has significant ramifications.
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Manage provisional income deliberately. The taxation threshold ($25,000 and $32,000) has never been indexed and there is no pressure to do so. More and more retirees face this challenge. A Roth conversion in the low-income window between retirement and the benefit start date remains one of the highest value moves available. The enhanced senior deduction enacted in 2025 is temporary. Clients who are counting on this need to know when it lapses.
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Fund the bridge. Clients who wish to delay claiming benefits until age 70 need gap income. As their advisor, you want to help them plan for this scenario while protecting them from sequence risk. This planning needs to be in place before they retire. This is where cash value life insurance, deferred annuities and a withdrawal sequence from the fixed income portfolio can be beneficial.
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Business owners should look at their exposure. Should the employer-side cap disappear, then include fringe benefits. This will be a material cost. Owners will want to project the potential cost to include in their long-term compensation planning. This is not a topic most business owners have considered.
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Document your options. Various income and tax models will have a variety of assumptions. But documenting those to the clients gives them something to refer to in the future. It also highlights your planning skills and advice.
Due to demographics, math and political pressure, expect Social Security fixes to be an ongoing exercise—like updates to your computer—not a permanent solution.
As advisors, we are asked to deal with what Social Security is today, not what it could be. We have no control over the future. This is why we build plans that are independent of political influence. Clients who treat Social Security as margin and fund their security from personal assets are exempt. The rest will need to plan for the gap. Getting them to understand the gap and helping them fund it is your opportunity to provide lasting lifetime value to clients and their families.
