Should Your Plan Anticipate Future Social Security Benefit Cuts (Part 2)?

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 exhaustionThe
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.SummaryMost
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.