Here are 3 Practical Reasons for your coming Social Security haircut.
Short History of Social Security
The government formed the Social Security System in 1935. Monthly benefits began in 1940. As part of President Franklin Delano Roosevelt’s New Deal during the Great Depression, this initiative aimed to provide economic relief and reform.
In 1950, a decade after the first monthly benefit check was issued, 16.5 workers contributed for every person collecting Social Security benefits. Economists refer to this as the Worker- to- Beneficiary Ratio.
In 2025, this ratio has dropped down to 2.5 workers for each beneficiary.
Seventy-Five years ago, there were 16.5 workers contributing for each beneficiary. Now there are only 2.5 workers contributing.
Let that sink in.
1) The Math Behind the Trust Fund
The media would like you to believe that the Social Security Trust Fund will be bankrupt by 2033. It will not be bankrupt. Based on current projections the Social Security Trust Fund will be insolvent.
Neither are fun but there is a significant difference between bankrupt and insolvent.
Insolvent here means, based on current estimates, that Social Security benefits will need to be reduced for current beneficiaries and future beneficiaries by 23%. This would equate into an average social security beneficiary losing $5,500 a year.1) 2)
The Political Will
Does the government have time to address these issues? Yes, they do. Does this mean they will address this issue?
History has suggested they will not.
Exhibit A here is the most recent government shutdown, which began on October 1, 2025, and ended on November 12, 2025. The longest shutdown in history. It is fascinating, when the planes stop flying in the sky, the phones in Congress start ringing off the hook. Magically, the shutdown comes to an end.
This has not been the first government shutdown, nor will it be the last. There have been 22 federal government shutdowns in the last 50 years. Prior to this one, the longest government shutdown occurred during the first Trump administration. It lasted 35 days and it ended in January, 2019.3)
The frequency and duration of shutdowns tell us everything we need to know.
The government has not been, is not, and will never be a well-oiled machine.
They excel at kicking the can down the road.
Today, on paper, they have seven years to address this issue. The sooner they get on it, the easier it will be. Wait too long, and it is too late.
Lawmakers have introduced six bills to address this matter. Regrettably, they are just bills at this point.
2) The Governments Response
Raise taxes, increase full retirement age and cut spending.
Currently the payroll tax employees pay is 6.2% for Social Security and 1.45% for Medicare, a total payroll tax rate of 7.65%. The employers match this amount and send it into the government. In 2026, the maximum amount of wages or self-employment earnings you will pay Social Security Tax is $184,500. After this amount, you only pay the 1.45% Medicare tax. The Social Security Wage Base increases every year based on an index.
The Social Security Board of Trustees has run projections. They are looking at a deficit over the next 75 years. One option would increase what both employer and employee would pay into Social Security. Currently they are paying 6.2% each. This proposal would increase this to 8.1% each. This projection would not increase the Social Security Wage Base.
For folks born in 1960 or later, their full retirement is age 67. There have been discussions to raise this to age 68 and, even age 69. Again, these are just discussions at this point.
I did mention cutting spending. I am just not sure that it is on the table. Looking back to the start of the year, it appears the Department of Government Efficiency (DOGE) accomplished very little of what it set out to do. Elon Musk, who served as a special government employee and lead DOGE, initially projected savings of $2 trillion. He later revised that estimate down to $150 billion. They claimed savings of $214 billion. POLITICO could only verify $1.4 billion in contract savings. 4)
3) You Are on Your Own
What can you do to plan accordingly? All the Average Joe’s will need to know their numbers.
It is not what we recommend, but you can start to collect Social Security at age 62. If you do this, you will have to accept a discount for your monthly benefit. If your full retirement age is 67, the discount on your benefit is approximately 30%. 5)
30%, that is a huge haircut.
Are there valid reasons to consider collecting Social Security at age 62? Yes, there are three:
• You Need the Money (more on this in a minute)
• You Have Health Issues
• You Do Not Have Longevity in Your Family
All possible valid reasons.
If you need the money, there is another consideration at work here. If you are aged 62 and still working and collecting Social Security benefits, there is a cap on what you can earn in wages or self-employment income before you start paying back some of the benefit. You can only earn up to $24,480 in 2026. For any earnings over this amount, the Social Security Administration will withhold $1 of benefits for each $2 earned over this amount.
Said differently, it really does not pay to collect early and continue working.
Practical Considerations
There is no one-size-fits-all solution here. Everyone is on their own unique path. Many folks are at different stations in their life.
Having said that, consider where you are and what you can do to prepare for this. Retired individuals who are already collecting their social security benefits, may find few options available to them. Other than going back and working part-time or tightening their belts now in anticipation of what might be coming down the road.
For folks that are still working, there are options. The key here is to take advantage of all tax favored savings vehicles.
Tax Advantaged Tools
First, start with your employer sponsored 401(K) plan. In 2026, employees can contribute up to $24,500. For employees that are aged 50 or older, they can contribute an additional catch-up contribution of $8,000 for a total contribution of $32,500.
For employees aged 60-63, there is a higher catch-up contribution of $11,250, if their employer’s plan allows for it. This would make their annual contribution $35,750.
Second, although there are income limitations, it is helpful to understand the difference between an IRA and a Roth IRA. If you have earned income from either wages or self-employment income of at least the maximum amount allowed, you can contribute to an IRA or Roth IRA subject to the income limitations. The maximum amount you can contribute for 2026 is $7,500. If you are aged 50 or older you are allowed a catch-up contribution of $1,100 for a total of $8,600.
If you want to dig deeper into tax-advantaged saving strategies, here are three related posts that expand on this topic:
Everyone Knows You Need to Diet and Exercise
3 Reasons You Need a Financial Life Boat Drill
3 Easy Reasons to Open a Roth IRA
Third, if you are eligible, funding a Health Savings Account (HSA) is an excellent tool. Here are 3 Great Reasons to Fund a Health Savings Account.
Fourth, invest in a taxable brokerage account. If you have any long-term capital gains (assets held for at least a year and a day), they are taxed at the preferential long-term capital gains tax rates. These long-term capital gains tax rates are 0% for lower income, 15% for middle income and 20% for higher income earners.
There is also a modest tax loss if you incur capital losses. After netting capital gains and losses, if you end up with a capital loss, you can deduct up to $3,000 on your income tax return. If your losses exceed $3,000, any excess losses can be carried forward and deducted in future years.
Collecting Benefits
Finally, for many folks, full retirement age for purposes of collecting your Social Security Benefits is 67. Like the discount you get when you start collecting your Social Security Benefits early, you earn a premium to wait beyond your full retirement age. They will pay you 8% per year, 24% more, from age 67 to age 70. If you go down this path, start collecting at age 70. They no longer continue to increase your benefit by 8% annually after this age.
As someone you has guided clients through Social Security, tax planning and retirement strategies for decades, I have seen how important it is to prepare for changes like this.
Conclusion
If you need any help with 3 Practical Reasons for Your Coming Social Security Haircut, please call Thomas Scanlon, CPA, CFP® at 860-645-1515 or e-mail Thomas. Scanlon@ raymondjames.com.
1) Kiplinger.com – August 13, 2025
2)wplr.org – June 18, 2025
3)usatoday.com – October 1, 2025
4) politico.com – August 12, 2025
5) ssa.gov/benefits
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, it does not constitute a recommendation. Any opinions are those of Thomas F. Scanlon and not necessarily Raymond James.