Planning for Social Security changes

Social Security benefits play a critical part in many people’s retirement plans, providing a dependable source of income that can be a valuable supplement to individual retirement savings. However, a new report from the board of trustees for the Old-Age and Survivors Insurance (OASI) fund says that the trust fund will begin running out of money toward the end of 2032, several months earlier than previously forecast.

The solvency of Social Security is a big deal for retirees. The program’s administration projects that roughly one-quarter of beneficiaries 65 and older receive 50% or more of their income from Social Security paychecks—and that the population of Americans 65 and older will increase from 61 million in 2023 to 77 million in 2035. The average monthly retirement benefit is about $1,975.¹

Yet three-quarters of Americans worry that the Social Security system will run out of funding before they retire, and 80% fear Congress will cut benefits, according to one survey.²

How secure is Social Security?

By its own estimation, the program’s funding is on an unsustainable trajectory. Since 2021, the OASI fund has been drawing down asset reserves to finance benefits. The trustees have reported that costs have exceeded income for every year since 2021, and that asset redemptions will continue to grow over the next decade, with funds potentially being depleted by 2032 if no action is taken. After 2032, income going into the OASI fund is projected to be able to cover 78% of scheduled benefits, according to the new estimate.³

That shortfall could be averted if members of Congress can come together to bolster the program, as they did in 1983. At that time, the National Commission on Social Security Reform (commonly called the “Greenspan Commission” after Alan Greenspan, who would later become Federal Reserve Chairman) raised the full retirement age to 67 from 65, a move that was phased in over decades and which delayed benefits for younger generations. It also increased the payroll tax for both employees and employers, and for the first time, taxed benefits up to 50% based on income.⁴ (An additional tax on up to 85% of benefits based on income was added in 1993.)⁵

It's important to point out that Congress historically has always achieved compromises to continue funding Social Security. These compromises usually don’t affect current benefit recipients and they result in small changes phased in over the course of years. These past reforms may point the way to future changes.

What does the uncertainty mean for you?

Social Security is a vital component of retirement income for tens of millions of Americans. Consider the high quality of this monthly fixed income: It is, in essence, a government-guaranteed, lifetime, inflation-adjusted pension with preferential tax treatment (a maximum of 85% of the benefit is subject to taxation). That is not easy to replace or replicate.

Still, there are planning strategies to consider, depending on your age, that may help you replace or increase income that you may worry about losing.

Older Americans: Try to take Social Security later

People who are already drawing Social Security benefits are likely to experience the least impact, says Brad Koval, a director for Fidelity’s Financial Solutions Team. "Historically, changes made to the Social Security program to improve its solvency have impacted younger workers," Koval says.

Unfortunately, the program’s current uncertainty may be encouraging some older workers to make hasty decisions about when to start collecting their benefit, says Can Lu, a vice president for Fidelity's Financial Solutions Team. “People in older generations may think Social Security is going away so they claim right now, which isn’t good since there’s a huge benefit to delaying,” he says.

In fact, your monthly benefit will increase until age 70 for every year you delay claiming past your full retirement age, which is 67 for anyone born after 1960. If you take your benefit at age 62 instead of 67, you will reduce your monthly amount by 30%. If you wait until 70 versus 62, you can increase your benefit by roughly 8% each year you delay. Nevertheless, more than a quarter of people do claim at 62,⁶ the earliest possible age, and some surveys show that many Americans are unclear about the financial impact of claiming early.⁷

Younger workers: Try to save more

Younger workers, who may be most affected by changes to benefits in the future, also have more time to make adjustments. Lu suggests that younger taxpayers could potentially mitigate this risk by saving and investing more. Even a 1% increase in saving can make a significant difference in the size of someone’s retirement nest egg down the road due to the math of compounding, he says.

Make the most of catch-up contributions

Workers often start focusing more intently on retirement planning when they’ve reached their 50s, says Lu. “Certainly by age 55 you should be thinking about it, and the earlier the better,” he adds. He notes that from age 50 workers can start to contribute more savings each year to IRA or 401(k) accounts (and, from age 55, to health savings accounts), which can help to offset a possible future cut in Social Security benefits.

Older workers can contribute an additional $8,000 for a total of $32,500 to a workplace retirement plan, and an additional $1,100 to an IRA in 2026. Also continuing in 2026, workers who are age 60 to 63 can increase their catch-up contributions to $11,250 from $8,000. If invested, the additional catch-up contributions could increase over time due to potential compounding. Workplace plans may also come with an employer match, where employers may make contributions according to a formula, such as a dollar-for-dollar or partial-dollar match up to a certain percentage of employee contributions, which can potentially help retirement savings build up faster.

Important to know: For tax-year 2026, if you’re 50 or older, you contribute to a workplace plan, and your Federal Insurance Contributions Act (FICA)-taxable earnings are greater than $150,000, any catch-up contributions to a 401(k) will have to be made to a Roth 401(k) with after-tax dollars. If your wages exceed this threshold and your employer does not offer a Roth option, you cannot make catch-up contributions. Find out more in Viewpoints: Understanding new Roth 401(k) catch-up rules.

Converting traditional 401(k) or IRA savings to a Roth IRA could also help you build a pool of potential savings free from taxes later, though you will need to pay income taxes on the converted amount.

A Roth conversion involves transferring money in a traditional IRA, workplace, or related plan to a Roth IRA or Roth 401(k), and then paying taxes on the pre-tax converted amount. Qualified withdrawals are tax-free, and the Roth IRA or 401(k) is not subject to required minimum distributions (RMDs) for the life of the original owner. Note: Contributions can always be withdrawn tax- and penalty-free, but Roth IRAs must meet the 5-year aging rule before withdrawals from earnings can be taken tax- and penalty-free.⁸

Like traditional IRAs, Roth IRAs have many benefits, including the ability to contribute as long as you are earning income. With more people working during their retirement, that could be an advantage.

Find out more about Roth conversions in Viewpoints: Why convert to a Roth IRA now?

Create your own pension-like income

Another approach to replacing stable income is to purchase an annuity, which can provide guaranteed income either prior to or shortly after retirement. Annuities can be complex, but they offer various ways to create guaranteed income that can be tailored to the number of years you are from retirement.

For example, a tax-deferred variable annuity could be suitable for people who are many years from retirement. These annuities can help you grow savings by giving you market exposure through underlying investment options. Additionally, there are no IRS limits on contributions, while earnings can potentially grow tax-deferred.

Pre-retirees might consider a deferred income annuity (DIA), which can provide guaranteed income for either a specific period of time or for the rest of your life, also potentially reducing the volatility associated with the stock market.

Meanwhile an immediate fixed income annuity, also known as a single premium immediate annuity (SPIA) may be more suitable for someone who is already retired. It can provide immediate income in exchange for a lump-sum investment, and the guaranteed income isn’t subject to market volatility. Immediate fixed income annuities even have optional features and benefits such as a cost-of-living adjustment (COLA) to help keep pace with inflation and beneficiary protection such as a cash refund.

Learn more about annuities in Viewpoints: Understanding annuities.

Talk with a financial professional

Retirement planning can be complex, and coming up with a financial plan that includes guaranteed income is a subject you may want to discuss with a financial and tax professional. No one can predict the future, and while it’s difficult to say when lawmakers will begin to address the Social Security fund shortfall, it is possible to actively plan and adjust for many possible scenarios.