What are advisors telling clients as Social Security becomes less secure?

What should advisors be telling clients as Social Security grows increasingly less secure?

For fiscal year 2025, the federal government recorded a deficit of approximately $1.78 trillion, roughly the same as the prior year, driven by $7.01 trillion in spending and $5.23 trillion in revenue, according to the US Treasury. Total federal debt, meanwhile, surpassed $39 trillion, partially driven by high interest payments.

This is unsustainable for any business or borrower, even Uncle Sam.

At the same time, the total projected Social Security benefit payments for 2025 are approximately $1.6 trillion. The Congressional Budget Office (CBO) projects the Social Security Old-Age and Survivors Insurance (OASI) Trust Fund will be depleted in 2032. And if this fund is not replenished, it is estimated that only about 72% of promised benefits could be paid by the Social Security Administration.

Add it all up and it looks increasingly doubtful that Social Security benefits will remain intact for today’s retirees unless something changes both drastically and quickly.

So should advisors be telling clients to plan for reduced payouts? Or any payouts at all? 

Jamie Hopkins, CEO of Bryn Mawr Trust, believes current retirees already receiving Social Security benefits are unlikely to see cuts directly. In his view, this would be hard to maneuver both politically and practically. That said, be believes reasonable cuts to Social Security in the future are both possible and likely.  

“Either the government needs to raise more money through taxes or reduce benefits. Arguably either solution equates to a cut in benefits – raising the cost of benefits or reducing them down. However, I don’t see a world where we let social security go away and fail, but I expect changes,” Hopkins said.

Not helping is the fact that higher interest rates are crowding out Federal flexibility. The yield on the benchmark 10-year Treasury has risen from 1.6% to 4.3% in the past 5 years, further straining Uncle Sam’s pocketbook.

That does not mean Social Security disappears, but it does increase the likelihood of gradual changes, whether that is higher taxes, later retirement ages, or moderated benefits.

“It is a pressure that will have to be addressed. Higher interest rates are likely slowing down economic growth which in turns puts more pressure on the social security funds, depleting them faster and forcing Congress to act sooner,” Hopkins said.

If Social Security becomes less certain, the value of guaranteed income increases. And whilea nnuities are not the answer for everyone, they can play an important role in replacing the pension-like income stream many retirees are missing today, according to Hopkins.

“Retirees with a floor of income often see more confidence about their retirement and more retirement satisfaction as their basic needs are taken care of by this income. If social security is reduced I would expect more annuities utilized in planning than today where social security provides a better than market source of guaranteed income,” Hopkins said.

Along similar lines, Andrew Mescon, CEO of Ballast Rock Private Wealth, says it is unlikely that today’s retirees would see Social Security disappear entirely, primarily because a substantial portion, roughly 75%, of these proceeds are funded by ongoing payroll taxes. However, if Congress fails to enact legislation to support the existing trust fund before its expected depletion, in 2032, retirees could experience a meaningful reduction to their anticipated retirement income beyond that point.

“While disbanding Social Security has historically been considered the ‘third rail’ of public policy, consistent erosion of the value this income has provided relative to inflation appears to have made the program much more vulnerable to legislative assault. For clients under the age of 60, planning for a reduction to these benefits would be most prudent,” Mescon said.

To mitigate legislative risk, Mescon recommends clients diversify their retirement income streams beyond Social Security. This typically entails utilizing traditional 401(k)/IRA accounts, but may also require leveraging Roth conversions, real assets, and guaranteed income products tied to life insurance and annuities. 

Finally, Sue Gardiner, founder of South County Wealth Planning, says it is reasonable to plan for less than the full scheduled Social Security benefit if Congress delays action.

“As a financial planner, I am always considering the risks to my clients’ financial outlook. This scenario is a possible reality, so we need to consider the what-if, just as we would a job loss or early retirement. Then we look at the whole financial picture and make plans for the what-ifs that matter,” Gardiner said. 

Gardiner also points out that higher interest costs do not directly fund or defund Social Security, but they do make the broader fiscal picture tighter and the policy choices harder. Social Security is financed primarily by dedicated sources: payroll taxes, taxes on benefits, and trust fund interest.

And while annuities can be helpful for some retirees, Gardiner says they should be evaluated as part of a broader income plan, not just as a reaction to Social Security headlines.

“In practice, I would rather see people build a retirement income plan that stress-tests multiple scenarios: lower Social Security, higher healthcare costs, longer life expectancy, and market volatility. For some households, that may include an annuity. For others, a well-structured portfolio, flexible spending, and delayed claiming may be the better answer,” Gardiner said.