By Dr. Tyler Scott, WCI ColumnistI have to admit that one of the factors involved in choosing which articles to write here at The White Coat Investor is the frequency and repetition of questions I get from my clients. I’ve written about the Backdoor Roth, interest rates, cars, and cash flow—all because I think they are worthwhile topics and, selfishly, so I have a really nice stock email saved in the form of these blog posts that I can forward on when I get the inevitable repeat questions.
This is one of those posts. Anxiety about the solvency of Social Security has been percolating among the public for many years now, but the recent emphasis on government efficiency, debt, and spending (along with considerable market volatility so far in 2025) has seemed to heighten that anxiety for many. The number of clients now saying, in effect, “I fear Social Security is totally hopeless so I want you to build me a plan that assumes that I will never get any Social Security benefits,” has been on the rise in recent months.
I get the fear—it’s not an unfounded one; it’s just an uninformed and unnecessary one. Let’s examine the dangers of believing this bedrock American program will disappear and why we don’t need to worry about that possibility.
The Risks of Believing Social Security Will Dissolve
The Value of Your Benefit
For most readers of this blog, your Social Security benefit is tremendously valuable. To know how valuable it will be for you, just look at your most recent Social Security statement (a practice I think is worth doing once a year as part of your household Annual Financial Review).
My statement shows that if I work until age “full retirement age”—in my case, that’s age 67—my benefit will be $4,066 per month. If I keep working until 70 and delay benefits until then, my benefit will be $5,048. For Megan, my wife, those amounts are $1,700 and $2,100, respectively.
Assuming we stick it out until age 67, that’s ~$5,800 per month or a guaranteed $69,200 per year, adjusted for inflation every year until we die. That is a really valuable benefit. Social Security can be thought of as the best Multi-Premium Deferred Inflation-Adjusted Annuity on the market. If we live to age 95 and get a 3% cost-of-living adjustment each year, we would receive $3.1 million from Social Security.
When using Mike Piper’s tool to come up with an optimal Social Security strategy and more statistically likely life expectancies, we see the net present value (accounting for the time value of money) of our benefit is half a million dollars today at ~40 years old.
This begs the question: if Social Security vanishes, how much would you need to pay to purchase a comparable product? In other words, if you wanted to buy a guaranteed inflation-adjusted income stream at age 67 that paid you an amount similar to Social Security for the rest of your life, how much would that cost you?
First, let me say it is increasingly difficult to find inflation-adjusted annuities, but assuming you can find one, there is also the question of whether it makes sense to buy one over a standard annuity. Stan the Annuity Man (a true character if ever there was one but a good source of annuity education) has discussed that question. His point is that if you buy an inflation-adjusted annuity, your initial payout is lower, with the break-even point likely close to 7-9 years—don’t let the annuity salesperson tell you (sell you) otherwise.
To try to answer our question of how much you would pay at age 67 to purchase a lifetime income stream, I went shopping on the annuity sites for a SPIA (Single Premium Immediate Annuity).
I told an annuity aggregator sales website that I was a man living in Utah who just turned 67, I wanted the payments to start next month, and I wanted an inflation adjustment equal to CPI, with the benefits ending at my death.
I got zero offers. The reason was that “no carriers could be found offering an inflation-adjusted option. Please retry your search without the inflation adjustment rider.” As I said earlier, it’s hard to buy an inflation-adjusted annuity right now.
I ran it again without the inflation adjustment and got offers from 12 insurance companies. The average annual payout across the various insurance companies for a $100,000 purchase was $5,500 or 5.5%. I did it again for Megan, and the rates were not meaningfully different.
Now, we can finally do our math on what it would cost me to purchase a (worse) Social Security replacement. If Social Security pays us ~$70,000 per year and the annuity returns 5.5%, then the math looks like this: $70,000/0.055 = ~$1.3 million.
What Is the Real-Life Application?
You may be saying, “Fun math experiment, Tyler. I am happy for you and bored for me. What exactly is your point?” Excellent question; thanks for staying your boredom this long. I will try to bore you again shortly.
The point is this. If you pretend like Social Security isn’t going to be around when it’s your turn to claim it, you are going to have to save A LOT more money to reach your retirement savings number. For me, it’s $1.3 million more.
What does that look like today?
It means that you must increase your savings rate significantly, which means you get to buy fewer tariff-enriched dolls, eat out less, travel less often, buy a cheaper house, drive your cars longer, and/or otherwise reduce your quality of life.
How much does my savings rate need to increase if I ignore Social Security?
For me, at age 41, to build up an extra $1.3 million by age 67, assuming a 5% after-inflation rate of return for the next 26 years, I would need to set aside an extra $25,433 each year. Our household income is about $280,000, so that means my savings rate needs to go up by 9%. That is a massive variable, and it would represent a fundamental change to our entire financial plan.
If we were unwilling or unable to increase our savings rate that much, how much longer would we need to work to make up for ignoring Social Security?
We expect our retirement expenses to be ~$150,000, so we expect to need ~$3.75 million to retire (25x expenses). If we ignore Social Security, we need $3.75 million + $1.3 million = $5.05 million. If we continue at our current savings rate, assuming the same 5% after-inflation return, it will take an extra seven years to reach $5.05 million compared to $3.75 million. In other words, you have to ask yourself: am I so committed to my nihilistic view on Social Security that I am willing to work seven more years to assuage that anxiety?
I certainly am not, and I don’t think you should either.
Why not? Good question, let’s hop back on the boredom train to its next stop on the geek line for some answers.
More information here:
8 Things You Must Know About Social Security
The Consequences of Ignoring Social Security
Don’t Worry About Social Security Going Away
The Problems
People’s anxiety and water cooler statements that “Social Security is running out of money” are not incorrect. In the past, the Social Security Trust Fund collected more in tax revenue than it paid out in benefits. This resulted in building up a reserve within the Trust. However, over the past 15 years as the Baby Boomer generation has hit retirement age, the program has started to pay out more in benefits than it collects in taxes. In 2024, Social Security received $1.23 trillion in tax collections and paid out $1.385 trillion in benefits.
This is obviously not sustainable. In fact, a review of the most recent report from the Social Security trustees shows that the Trust Fund reserves are expected to be depleted sometime in 2033.
That sounds bad, right? I won’t be 67 until 2051. I must be totally out of luck!
No, not really.
The Solutions
Solution #1: Just Let the Trust Fund Run Out of Money in 2033 (or Whenever)
Sounds nuts, but keep in mind the tax information I just shared above. The program collected $1.23 trillion in taxes in 2024. That’s a heck of an incoming cash flow stream that can be used to turn around and pay for (most) of its obligations. Smart people like Mike Piper have told us that even if the Trust Fund is exhausted, the program could still cover ~75% of current benefits from tax revenue alone.
Is that a bummer for me? For sure, 25% less of $70,000 is a reduction of $17,500 each year.
Does it represent the end of Social Security, leaving me with the only options of increasing my savings rate by 9% or working seven more years? Definitely not. Mathematically, it means I would need to increase my savings rate by ~2.25% or work 1.75 years longer.
Solution #2: Increase the Social Security Tax Rate
The 2024 trustees report showed that if the Social Security tax rate were raised 3.33% to 15.73%, that alone would make the program solvent through the end of the century. For those of us making above the Social Security wage base of $176,100 [2025], that would result in an increased tax burden of ~$5,800 per year. That’s a little painful, but it’s not terrible. At least I haven’t been paying five figures a year for asset management that will underperform an index every year of my life, so, you know, there are worse things than an extra 3.33% Social Security tax.
Solution #3: Eliminate the Social Security Wage Base
The Committee for a Responsible Federal Budget put out a report indicating that if all wages were subject to FICA taxes instead of “just” the first ~$176,000, that would solve for 60% of the funding gap through the year 2098. If you add to that an extra 1.35% FICA tax, the entire problem is solved.
Bad news: This would result in a significant added tax burden for high earners. For someone making $350,000 of W-2 income, their Social Security tax would go from ~$11,000 to ~$24,000. On a financial planning note, I bet we would see much more interest in self-employed people choosing to incorporate (i.e., S Corp election over “just” an LLC or sole proprietorship) and taking more of their earnings as K-1 distributions with less as W-2 salary to avoid some of this added tax on W-2 earnings.
Good news: Your benefit would be much higher, given that you are paid out based on your contributions. Admittedly, there are diminishing returns on this value proposition.
Solution #4: Increase the Full Retirement Age (FRA)
Changing FRA from 67 to age 68 would solve 13% of the problem. Moving FRA to 69 while indexing FRA for longevity would solve ~40% of the solvency issue.
Congress could also change the metric used for the annual inflation adjustment. At present, CPI (consumer price index) is used, but a switch to chained-CPI would solve for ~20% of the projected shortfall.
Solution #5: Reduce Benefits
Another option is just to pay out less in benefits. The trustees report indicates that if benefits were reduced starting today for all current and future recipients by ~21%, that alone would keep the program afloat until the end of the century.
If we wanted to keep benefits the same for current participants and only reduce the benefit for future recipients, that would look more like a ~25% reduction.
Another version of this solution would be to means-test the benefits. Different versions of this could look like:
- A one-time test when benefits begin or at regular intervals after benefits have started.
- Taking into account all income or only so-called “wealth-related” income (i.e., investment income or business income).
- Including all assets or excluding commonly held assets like primary homes and cars.
- The test could completely eliminate benefits for those exceeding some threshold or phase out benefits as income and/or assets exceed the threshold.
- The test could produce impacts similar to those in the Medicare program that increase Part B premiums and the base cost of Part D for high-income participants.
Solution #6: Some Combination of These
This, of course, is the most likely solution. Cobbling together some politically tenable combo of these options in a way that placates whichever voter demographic happens to be most sought after in that given election cycle is probably what we will see.
When will the solution happen? Like most politically charged issues, it will probably happen at the last possible moment. The last time we saw significant legislation passed to address Social Security was in 1983. After eight years of watching the Trust Fund be depleted similarly as it is now, it was estimated that the program would be unable to meet its full obligations by July 1983. Guess when the legislation was passed? In April 1983. Classic 11th-hour problem solving.
The solution at that time was a stitching together of options, such as including government employees in the taxable employee pool, taxing half of the paid benefits for high earners, and raising the payroll tax.
More information here:
10 Reasons Not to Take Social Security Early
What to Do with This Information?
- I don’t think it is reasonable or helpful to ignore Social Security in your retirement planning. The cost to your current quality of life is too great for such a statistically unlikely event.
- If you want to make some adjustments to your financial plan, I think it is reasonable for anyone in their 50s or younger to plan on a 25% reduction in their expected benefits. The subsequent adjustment in your financial plan may look like a modest increase to your savings rate (2%-4%) and/or acceptance of working a couple of extra years.
- If you want to “ignore” Social Security in your simplified retirement projections, I also think it is reasonable to assume any after-tax Social Security income you receive will be roughly enough to offset the taxes you owe on your pre-tax account withdrawals. That is an easy, rational, safe way to not stress too much about how “to plan for Social Security.”
- Don’t hold your breath for a solution. Let’s plan to get back on the boredom train in April 2033 as we emotionally commute into Washington, DC, for a memorable game of political football. Hopefully, we have the senatorial equivalent of Tom Brady to thread the needle on a much-needed, late-fourth-quarter-social-safety-net touchdown pass.
- If you are one of my clients, please don’t be offended that I sent you a link to this post as a response to your question. Your question was good, just not unique.
How worried are you about not getting all of your Social Security? How are you planning for a possible reduction in your benefits when you retire? What else can you do?
(Source)