Social Security’s Old-Age and Survivors Insurance Trust Fund is currently projected to run through its reserves by 2033. At that time, the fund will only be able to pay out about 77% of owed benefits, based on incoming tax revenues.

In order to prevent benefits reductions, Social Security will have to be reformed in some manner by that time. But should advisers account for the possibility that cuts to Social Security will occur, whether by legislation or legislative inaction? If so, how?

Top of Everyone’s Mind

The possibility of dramatic cuts to Social Security “is something we think about, and it is absolutely something we talk about with clients,” says Robert Pagliarini, an ambassador with the Certified Financial Planner Board and the president of Pacifica Wealth. In fact, “it is often something that clients bring up first.”

According to Pagliarini, the issue is one of great anxiety for clients of all ages, though younger ones can be particularly cynical about Social Security’s future as it relates to their financial security.

Pagliarini notes that though the conversation might be more urgent as 2033 grows nearer, the possibility of major cuts to Social Security and its solvency “has been a question mark for a while.” Social Security represents a large portion, and often a majority, of the income people expect to receive in retirement. Pagliarini therefore encourages them to “look at that from an objective standpoint: ‘Can we count on this?’”

He expects Social Security will be reformed in some manner to prevent insolvency, because “it’s too important: It can’t possibly go away.” Social Security has been around for so long, and so many depend on it. All the same, “I need to look at worst-case scenarios,” Pagliarini says.

When planning for Social Security income, a financial planner should model different scenarios, according to Pagliarini, such as Social Security being cut in half. “Look at the worst-case scenarios,” he says, and consider other factors such as inflation, health costs and other sources of income.

If a model shows that plausible Social Security outcomes, such as the OASI Trust Fund’s insolvency, lead to unfavorable or even alarming outcomes, “then we need to have some interesting conversations,” Pagliarini says.

He advises clients to focus on controlling the costs over which they have the most control and their “fixed expenses,” such as housing. He also advises some clients that they may have to work for additional years before retiring to achieve the security they want. He suggests people nearing retirement allocate their assets more conservatively to avoid sudden shocks to their savings.

Pagliarini notes that cuts to Social Security are likely to affect younger savers more, but younger savers also have more time to take the corrective actions and planning necessary to adjust.

Social Security Bridging

Social Security bridging—postponing claiming Social Security assets to “bridge” the gap between when a person retires and the age at which a person claims the federal benefit—is one tactic Pagliarini recommends, “especially for wealthier clients, who don’t necessarily need Social Security” because they have enough assets to bridge successfully.

Claiming Social Security later, at age 70, for example, can “lock in a much higher [payout] rate.” By waiting until age 70, a retiree can collect approximately 8% more each year, as compared with starting to collect at age 62, and “an 8% return is pretty good.”

However, this strategy is not appropriate for everyone. It does not always work for people with little savings to bridge the gap and, “in that case, they just have to take Social Security.”

Similarly, if a person’s “health is questionable, just take it now,” because that client may not live to see 70, “and at least they get something out of it,” Pagliarini says. Conversations about a client’s mortality can be awkward, he acknowledges, but for the most part, “it’s not like they haven’t thought of these things themselves,” especially if they are thoughtful enough to consult a planner or adviser.