Social Security is a unique guaranteed source of income in retirement and one of the essential components in everyone’s retirement plan. Findings from the Annual Social Security Trustees Report for 2022 shows that at the current rate, existing reserves will be depleted in 2034. It is also estimated that on depletion, continuing social security tax income will provide for 77% of guaranteed benefits.

Social Security is inflation adjusted (COL). The 2022 COL was 5.9% and increased to 8.7% for 2023. This increase will certainly accelerate the level of depletion. We don’t yet know if the trust reserve will be amended to last beyond 2034 so we need to consider how to stress test your retirement plan for this potential risk. How might we prevent depletion of the trust?

1. Raise social security retirement age again?
   This is least likely since the benefits take a long period of time to be effective and the impact is highest on those with least savings. Can you imagine the reaction if the full retirement age was changed from age 67 to 70? This strategy would need to be implemented early enough to have an impact.
2. Raise the income cap or eliminate it as we did with Medicare?
   This is more likely and, in a small way, is already taking place. For example, Social Security taxable earnings in 2022 were capped at $147K and increased 9% to $160K for 2023. This should provide additional assets for the Social Security benefit trust, BUT it will also reduce disposable income and impact economic growth.
3. Follow an IRMAA-type of income/means testing of benefits?
   It has been suggested that Social Security benefits should be reduced like Medicare based on your retirement income (means tested). This appears to have traction since it is currently working for Medicare (which uses the IRMAA annual tables to increase Medicare premiums on those with higher retirement income).
4. Target a % Reduction of Social Security benefit?
   This is possible and much easier. This approach will occur by default if congress doesn’t take some alternative accommodation before 2030. The estimates are that we are looking at a 21%-25% reduction in benefits.

On a positive note, although the potential fixes outlined above are outside of our control, they nevertheless could push back the depletion date of this essential benefit or reduce the benefit reduction that will be required if the trust is depleted.

Either way, we include social security stress testing once we have a functioning retirement plan and after we’ve considered all other risks (like long term care).

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com