Why We Reduce Social Security Benefits in Our Financial Plans


Social Security estimates are essential for our planning, but the system needs a change in order to continue to pay 100% of its payouts indefinitely.

Social Security is Underfunded

Social Security is a general pension for the working population that pays into this system. While the OASI (Old Age and Survivors Insurance, better known as Social Security) Trust fund does satisfy the short term test of 10 years (having 100% in reserves), the long term projections are poor.

From the latest annual summary report available, done at the end of 2017, it states that the "OASI Trust Fund reserves become depleted in 2034" and "Social Security’s total cost is projected to exceed its total income in 2018 for the first time since 1982." (1) This means, that as of 2018 workers have been paying less money into the program from paycheck withholdings than the program is paying out to retirees in benefits. Therefore, the SSA (Social Security Administration) will have to start pulling money from the reserve fund to pay out 100% of its current payment obligations. By 2034, the reserves would be depleted because of the amount needed to cover the deficit from lack of income annually between 2018 and 2033. At that time, the SSA will only have the income coming from current workers still paying into the program and it will not be enough to wholly pay current or future recipients.

The notice on current Social Security statements reads, "* Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 percent of scheduled benefits."

As of now, the system needs to change in a significant way to cover 100% of its projected future payouts as they currently are being reported.

Social Security Will Change

There has to be a change to Social Security to keep the system running, but what the change will be and when it will happen are the biggest questions.

"Recent Reports call for informed discussion, creative thinking, and timely legislation to address expected future deficits. Many policy makers have developed proposals and options to address this long-range solvency problem." (2) The good news is, they are not short of ideas. Here is a 32-page document explaining all of the proposed options.

There are 8 categories of changes proposed:

  • Cost-of-Living Adjustment (COLA)

    • Modifying the annual COLA applied to benefits after initial eligibility.

  • Level of Monthly Benefits

    • Modifying the formula used for calculating the basic Social Security monthly benefit called the Primary Insurance Amount (PIA).

  • Retirement Age

    • Modifying the normal retirement age (NRA), earliest eligibility age (EEA), or both.

  • Family Members

    • Modifying the specific benefit amounts received by widow(er)s, spouses, and/or children based on a worker's Social Security account.

  • Payroll Taxes (including maximum taxable)

    • Increasing the payroll tax rate and/or the current-law taxable maximum.

  • Coverage of Employment

    • Extending or reducing the categories of workers or the amount of earnings covered under the Social Security system.

  • Trust Fund Investment in Equities

    • Invest a portion of the Social Security Trust funds in marketable securities (e.g., equities, corporate bonds), rather than in special-issue government bonds as under current law.

  • Taxation of Benefits

    • Revise the current rules for subjecting Social Security benefits to personal income tax.

These are some of the most profitable proposed changes to the system:

  • Price indexing of PIA factors beginning with those newly eligible for OASDI benefits in 2025: Reduce factors so that initial benefits grow by inflation rather than by the SSA (Social Security Administration) average wage index. (75 year test, 180% reserves)

  • Increase the payroll tax rate (currently 12.4 percent) to 15.5 percent in 2031-2060, and to 18.6 percent in years 2061 and later. (75 year test, 139% reserves)

  • Increase the normal retirement age (NRA) 3 months per year starting for those age 62 in 2019 until the NRA reaches 70 in 2033. Thereafter, index the NRA to maintain a constant ratio of expected retirement years (life expectancy at NRA) to potential work years (NRA minus 20). We assume the NRA will increase 1 month every 2 years. Also, increase the earliest eligibility age (EEA) from 62 to 64 at the same time the NRA increases from 67 to 69; that is, for those attaining age 62 in 2021 through 2028. Keep EEA at 64 thereafter. (75 year test, 61% reserves)

  • Starting December 2019, reduce the annual COLA by 1 percentage point. (75 year test, 55% reserves)

  • Apply a 6.2 percent tax on investment income as defined in the Affordable Care Act (ACA), with unindexed thresholds as in the ACA ($200,000 for single filer, $250,000 for married filing jointly), starting in 2020. Proceeds go to the OASDI Trust Fund. (75 year test, 27% reserves

From all the options and expert opinions, it seems the most likely change (even though not the most profitable) would be to increase the age at which individuals can apply for benefits. This also makes sense given the life expectancy of individuals has increased. Social Security is now paying out more to every individual as they are living longer than when the system was first created. This has also been done before, the Full Retirement Age was increased from 65 to 67, making this option seem more likely to do again over getting approval for a new fix.

No matter what the change, it will affect how much of a benefit our clients take home and for this reason, we have reduced the expected Social Security income in our financial plans for those planning to take social security after 2034.

We Don't Want Our Plans Projected Success to be 100% Dependent on Social Security

We believe all of our clients will collect some amount of Social Security, but we are taking a conservative approach as it goes through legislation to become adequately funded for a longer time period.

By reducing Social Security benefits in our plans, we show clients how to fund their retirement years with other sources of income or assets. If they get more Social Security income than assumed then it is icing on the cake. Our goal is to protect our clients from being dependent on the income from this underfunded general pension program.

Americans have generally considered this system to be invincible but that is not the case. It is important to be saving more for retirement. We should all be able to financially support ourselves in the case this income is not available or reduced.

Alicia Butera, CFP® is a Financial Planner for Planning Within Reach, LLC (PWR) located in Scripps Ranch, San Diego, CA. Alicia is the Director of Financial Planning and Marketing for PWR. Alicia manages the financial planning process from start to finish with her clients, answering their questions and providing them guidance. Alicia has 8 years of experience in wealth management and works virtually with clients all over the US.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego, CA. PWR is a virtual firm that is woman-owned and serves busy families and impact investors. Planning Within Reach, LLC and their advisors never receive any type of commissions for sales and does not have any insurance licenses or brokerage relationships.