Editor’s note: Steve Parrish is a columnist with Rethinking65. Read more of his columns here.
Steve Parrish
In the past few months, there’s been a flurry of proposals, rumors and accusations about the Social Security system. Especially in this hyper-politicized environment, it is challenging to separate law from rumor, fact from fiction. Much like physicians working with patients, advisors are dealing with clients worried about the condition of their benefits. This makes clients susceptible to misinformation and inclined to make hasty decisions.
So, let’s take a wellness check on Social Security, and assess how it’s doing. Let’s consider who is covered, how benefits are taxed, and whether benefits will be reduced. Armed with this information, we will be better equipped to help our clients with their Social Security planning. Fair warning: after reading this, it may feel like you just came back from the doctor’s office. You may have more questions than answers.
Taking the Patient’s History
A lot has happened with Social Security over the past year. Last spring, in letters to Congress about its 2024 Trustees Report, the board of trustees of the Federal Old-Age and Survivors Insurance (OASI) and Federal Disability Insurance (DI) Trust Funds wrote, “ … we project that the reserves of the OASI will be depleted … during 2033, and only about 79 percent of benefits … will be payable at that time if no legislative action is taken.” OASI and DI are programs of the Social Security Administration (SSA).
This scary assessment came out at a time when the country was gearing up for a contentious election, and, not surprisingly, Social Security was a topic of concern. During the presidential campaign a few candidates proposed reforms to this bedrock retirement system, but they quickly found that any suggestion of either a reduction in benefits or an increase in retirement age was not a popular position.
All this was going on while a mini-scandal was brewing with the SSA. It had been revealed that the SSA had overpaid billions to people, and the agency was demanding the money be paid back. Newly appointed SSA Commissioner Martin O’Malley quickly promised reforms that would end the “clawback cruelty” of demanding that beneficiaries immediately repay these excess benefits.
‘A Hatchet Rather Than a Scalpel’
Then, this past December, during a lame duck session of Congress, the Social Security Fairness Act (SSFA) was passed. The SSFA repealed the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) provisions, which reduce Social Security benefits for certain retirees who also receive pension income. The challenge with this law is that Congress used a hatchet rather than a scalpel. Instead of addressing the unfairness that the current law subjects some government workers and/or their spouses to, it just threw out the decades-old protection provisions.
While the law has been hailed as needed reform by many, others feel that countless government employees and spouses will enjoy a Social Security benefit windfall that is not available to workers in the private sector. Whatever your feelings about the law, it entails a significant fiscal cost during a time when Americans are worried about the depletion of the Social Security Trust Fund.
Tax and DOGE Considerations
With the election of a Republican-led Presidency and Congress, the heat has increased significantly over tax issues related to Social Security. Both as a candidate and now as President, Donald Trump has advocated eliminating income taxation of Social Security benefits. Adding this to his talk about getting rid of taxation on tips, citizens started taking an interest in not only what Social Security benefits they will be entitled to, but how these benefits will be taxed.
And now, particularly with DOGE dominating the headlines since January 2025, Social Security has moved to the epicenter of the debate over the country’s future. Bogus statements about benefits being paid to centurions and unsubstantiated rumors about massive fraud in the Social Security system have become talking points. The implication is that what ails Social Security can be fixed through mere efficiency moves.
Further complicating the debate is the often-cited comments by politicians, including the President, that Social Security benefits “won’t be touched.” This statement raises a vexing dilemma: If Social Security isn’t touched, the trust fund is projected to be depleted in a decade, and maybe even sooner because of the Social Security Fairness Act.
Presumably, this scenario is not what is intended by these politicians. Status quo is not a cure. Social Security will need to be more than touched in order to maintain current benefits.
The Diagnosis
In purely actuarial terms, Social Security is sick. Funding does not match up with its promised benefits. Much of this malady is simply a matter of demographics. The graying of America means there will be fewer workers available to pay for the benefits of more retirees. Compounding this condition, our current legal framework prohibits an immediate cure. By law, Social Security benefits cannot be paid out of the general budget. Once the trust fund is exhausted, benefits must be funded through the employment taxes imposed on workers. This is why Americans will have to accept a prorated reduction in their benefits, likely starting in less than a decade when the trust fund is depleted.
What’s the Treatment?
The challenge is that Social Security retirement benefits are caught up in the national debate about government spending, taxes and social safety nets. Until these issues are resolved, there is really no way to project where Social Security will end up. The best that can be offered is a guess as to how things may transpire in the coming months.
First, we must deal with the fulfillment of the provisions in the new Social Security Fairness Act. While the effective date is December 2023, this law doesn’t just take care of itself; three different stakeholders — the Social Security Administration, Congress and consumers — must take steps.
A fundamental question is how will the SSA implement this new law? Judging by its current website, the SSA has as many questions as we have. At least this week (on Feb. 25) the SSA indicated it will send out retroactive payment and higher monthly benefits for current beneficiaries.
Teachers, firefighters, police officers and retirees under the old civil service system are asking about obtaining their benefits; the SSA doesn’t yet have many answers. The agency has suggested that full implementation of the law could take as long as a year, but Congress quickly exerting pressure on the SSA to move up this timeline.
Speaking of Congress, it’s the second stakeholder that must act. The Congressional Budget Office estimates that the SSFA law will cost nearly $196 billion over a decade. Since the Social Security trust fund is already projected to be depleted soon, this additional strain on the system will need to be addressed legislatively. Congress must abandon the “won’t be touched” campaign promise, and instead figure out how it wants to proceed with matching benefits to funding. Congress’s enactment of the SSFA accelerates the need to act.
Finally, the biggest stakeholder is the consumer. The subset of individuals who are affected by the SSFA will need to take steps in order to enjoy these new benefits. Many of these workers and spouses did not bother file for Social Security because the Windfall Elimination Provision (WEP) or Government Pension Offset (GPO) provision made it a wasted effort. But now that these provisions are gone, qualified beneficiaries should proactively seek out their benefits. In many cases, the SSA has no way to automatically identify and generate payments. It will take detailed individual planning by the eligible workers to determine the best path forward to maximizing their personal retirement income.
Taxation Disconnect
The next issue to address in the coming months is taxes. There is a definite disconnect in this area of government policy. Tax reduction and benefit funding are conflicting goals, and this has long been an issue for legislators.
At its core, the last reform of the Social Security system, in 1983, entailed a combination of increased taxes and reduced benefits. President Ronald Reagan and Speaker of the House Tip O’Neil had to bury the hatchet and provide tough medicine to consumers to make the system solvent. They changed the system to save the system, and this included additional taxes. However, the current mood in D.C. is more focused on tax reduction.
For example, if service provider’s tips are to be eliminated as a taxable form of income, this will also reduce these workers’ covered wages for their Social Security benefits. The wage earner will pay less in income taxes, but they will also receive less in retirement benefits. Further, if the income taxation of Social Security benefits is eliminated, this will significantly reduce the tax revenue the government has available to shore up our retirement benefits system.
The Penn Wharton Budget Model projects that eliminating taxes on Social Security benefits will reduce federal revenues by $1.5 trillion over a decade. Congress must recognize this challenge, and make changes in taxes and/or benefits to cure the patient.
The Prognosis
This wellness check for the Social Security system is concerning. The patient is sick, but there is not yet a consensus as to the best treatment plan. Putting aside the rumors about and the attacks on the system, Congressional action is needed. Although there have been many proposals, nothing concrete has emerged.
I can only offer a guess as to what course we may see happen to address this challenge.
Congress is deep into the details about addressing taxes. A substantial tax proposal is likely to be introduced soon. Because Social Security has become a hot topic as well, Congress will hopefully factor this important retirement benefit into their deliberations over tax policy.
Consumers have also been awakened to the Social Security debate. While they may get distracted by the bizarre rumors that are flying around, they are increasingly conscious of the fact that their personal retirement benefits may be in jeopardy. We have the consumer’s attention, and this will likely result in more political pressure.
Advisors are attuned to what is happening. They can be the voice of reason in a contentious environment. Much like the physician dealing with a vexing diagnosis for a patient, the advisor can be the professional who helps sort through the clutter, identify planning opportunities, and help the client plan for retirement.
This wellness check is being conducted at a time where the debate over Social Security is still ill-formed and ill-informed. The best advisors can do is to follow the progress of the deliberations, encourage clients to stay-the-course, and help them plan for the future.
Steve Parrish, JD, RICP, CLU, ChFC, AEP, is Professor of Practice and Scholar in Residence at The American College of Financial Services. With over 45 years’ experience as an attorney and financial planner, Parrish frequently addresses the financial challenges of individuals, business owners, and executives nationwide. The American College for Financial Services is holding its first Horizons retirement conference March 3-5 in Coronado, Calif.
