The projected depletion of Social Security’s retirement trust fund around 2032 is no longer a distant concern. In an interview, Jason Fichtner, executive director of the Retirement Income Institute at LIMRA, said policymakers are running out of time to address a funding shortfall that could result in an across-the-board reduction in benefits if Congress fails to act.
But the conversation extends beyond Social Security.
During a wide-ranging discussion, Fichtner and Jae Oh, CFP, author of Maximize Your Medicareand a fellow at the Retirement Income Institute, argued that retirement planning itself is changing.
Health care costs, taxes, Medicare premiums, Social Security claiming decisions and retirement income strategies increasingly influence one another in ways many retirees and advisers fail to fully account for.
Below is a transcript of the interview with Fichtner and Oh, edited for brevity and clarity.
Social Security’s trust fund faces a rapidly approaching deadline
My summary
Fichtner stressed that Social Security itself is not disappearing. The issue is the retirement trust fund, which supplements payroll tax revenue. If Congress does nothing and the trust fund is depleted, benefits would need to align with incoming revenues, resulting in an estimated reduction of roughly 20%.
Transcript
Robert Powell: Social Security’s primary retirement trust fund is projected to reach insolvency between late 2032 and 2033. If Congress doesn’t intervene, incoming payroll taxes will only be sufficient to pay roughly 75% to 80% of scheduled benefits. How do we solve it?
Jason Fichtner: Social Security, by law, cannot borrow money. Historically, excess payroll tax revenues were invested in special Treasury securities held by the trust fund.
Today, we’re collecting less in payroll tax revenue than we’re paying out in benefits. The difference is being covered by redeeming those Treasury securities.
The trust fund is projected to be depleted around 2032. That’s only a short time away.
If Congress does nothing, Social Security can only pay out what it collects in revenues. That means a shortfall of roughly 20%.
There are several ways to address that. Congress can increase revenues, reduce benefits, borrow money, or use some combination of those approaches.
On the revenue side, lawmakers could raise payroll tax rates, increase the taxable wage cap or identify alternative revenue sources. On the benefit side, they could adjust retirement ages, modify benefit formulas or change cost-of-living adjustments.
The challenge is finding the mix that has the least impact on those least able to absorb the burden.
Congress has delayed action for decades
My summary
The Social Security funding challenge is not new. Fichtner noted that trustees have warned Congress for years that the trust fund was heading toward depletion. The closer lawmakers get to the deadline, however, the harder the solutions become.
Transcript
Jae Oh: We’ve known about this issue for decades. Why hasn’t there been movement?
Jason Fichtner: The answer is yes to everything you mentioned: politics, procrastination and human nature.
People hear that Social Security is insolvent and assume the program is disappearing. That’s not true. The trust fund is projected to be depleted. Social Security itself remains.
Every trustees’ report for decades has warned Congress that action is needed. The sooner you act, the smaller the changes can be. The longer you wait, the larger the changes become.
Politicians also face electoral realities. Raising taxes or reducing benefits isn’t popular.
As we get closer to 2032, though, I think we’re going to see much more urgency around the issue.
Younger workers may bear more of the burden
My summary
Most reform proposals protect current retirees and those nearing retirement. As a result, younger generations could ultimately face both higher taxes and lower future benefits.
Transcript
Robert Powell: Do you anticipate that younger generations will bear most of the burden?
Jason Fichtner: Most proposals hold current retirees harmless. Many also protect people in their 50s because they have less time to adjust.
That means younger generations are likely to bear more of the burden, both on the tax side and the benefit side.
When younger workers say Social Security won’t be there for them, I disagree. It will be there. But it may look different.
The concern is that younger generations could end up paying higher taxes while receiving lower benefits.
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Health care costs are creating more anxiety than Social Security
My summary
While Social Security remains a concern, Oh said many households are more focused on health care costs, inflation and uncertainty surrounding future medical expenses. When people become ill, they tend to focus less on investment balances and more on whether they have adequate coverage.
Transcript
Robert Powell: Should retirees be planning for a possible reduction in Social Security benefits?
Jae Oh: For people nearing retirement, that’s certainly worth considering. But I don’t think it’s front of mind for most people.
There’s still a great deal of faith that Social Security will pay scheduled benefits.
What people are worried about right now is volatility in expenses, especially health care costs.
When someone gets sick, they don’t look at their brokerage statement first. They look at their insurance coverage and ask, “How am I going to pay for this?”
That’s where much of the uncertainty is coming from today.
The traditional three-legged stool no longer works the way it once did
My summary
Fichtner believes the classic retirement model of Social Security, pensions and personal savings still provides a useful framework. The challenge is that traditional pensions have largely disappeared, shifting more responsibility onto workers.
Transcript
Robert Powell: You wrote that the retirement model is broken.
Jason Fichtner: Traditionally, retirement security rested on a three-legged stool: Social Security, a defined benefit pension and personal savings.
Social Security was designed to replace roughly 40% of pre-retirement income for the average worker.
The pension made up much of the rest.
Today, that pension leg is largely gone in the private sector.
Instead, workers have defined contribution plans such as 401(k)s. That’s shifted the responsibility for creating retirement income from employers to individuals.
We’ve done a very good job telling people to save and accumulate assets.
Then they retire and we essentially tell them, “Good luck.”
The challenge now is helping people convert those assets into income.
Retirement planning must shift from accumulation to income
My summary
Fichtner argues that retirement planning should focus less on maximizing investment returns and more on creating reliable income streams that can support spending needs throughout retirement.
Transcript
Jason Fichtner: Too often, retirement planning still focuses on maximizing returns.
Maximizing returns is important when you’re accumulating assets.
When you’re retired, the goal changes.
Now you’re trying to minimize risk, create certainty and make sure your income lasts as long as you do.
The conversation should start with spending needs and income planning.
The conversation around annuities is changing
My summary
Fichtner said public attitudes toward annuities have evolved over the past decade. He believes many people reject annuities because they focus on the label rather than the function the product provides.
Transcript
Robert Powell: We’ve made progress since you wrote that paper.
Jason Fichtner: We have.
The conversation has changed dramatically.
Ten years ago, many articles simply criticized annuities. Today, the discussion is much more balanced.
People are beginning to understand that annuities are one way to create protected income.
Social Security itself is an inflation-protected annuity that lasts as long as you do.
One of the behavioral challenges is what economists call the annuity puzzle.
Ask someone whether they want a paycheck in retirement. They’ll say yes.
Ask whether they want income they can’t outlive. They’ll say yes.
Then ask whether they want an annuity, and many say no.
The issue isn’t the function. It’s often the label.
Money has a naming problem
My summary
One of the most memorable moments in the discussion came when Oh argued that many financial products suffer from a branding problem. Consumers often value the benefits but react negatively to the terminology.
Transcript
Jae Oh: Money has a naming problem.
People hear a word like “annuity” and stop listening.
But if you describe what it does – a paycheck that lasts throughout retirement – the reaction changes completely.
The same thing happens throughout finance and health care.
We need to focus on function rather than labels.
Health care planning and tax planning cannot be separated
My summary
The central argument in Oh’s forthcoming Retirement Income Institute paper is that health care decisions, taxes, Medicare premiums, ACA subsidies and retirement income planning are interconnected. Advisers who evaluate them separately risk missing important consequences.
Transcript
Robert Powell: Walk us through the paper.
Jae Oh: The starting point is the person.
We spend a great deal of time focusing on market returns and asset allocation.
What often gets overlooked is that health care costs are tied to taxes.
Once you begin looking at health care through that lens, a number of other issues emerge: tax-efficient investing, Roth conversions, retirement income planning, Medicare and ACA planning.
The point is that these decisions are connected.
Two households with similar assets can require very different strategies because their health care needs are different.
Everything affects everything
My summary
Oh repeatedly returned to a simple idea: decisions rarely occur in isolation. A transaction intended to lower taxes may trigger higher Medicare premiums or health care costs later. Fichtner agreed, noting that retirement planning increasingly requires a longer-term perspective.
Transcript
Jae Oh: One of my clients has a saying: “Everything affects everything.”
Someone might sell investments to lower taxes and end up triggering higher ACA premiums.
Someone else might create a Medicare IRMAA surcharge that affects both spouses.
These interactions happen simultaneously.
That’s why planning needs to be holistic.
Jason Fichtner: What you do today can affect Medicare premiums two years from now.
That’s one of the things advisers and clients often miss.
The decisions aren’t isolated. They affect future taxes, health care costs and retirement income.
Retirement planning is becoming more holistic
My summary
Both experts agreed that retirement planning is moving beyond investment management. Future planning will require integrating health care, taxes, longevity, Social Security and income planning into a single framework.
Transcript
Jason Fichtner: Retirement planning isn’t just about investments.
It’s about income.
It’s about health care.
It’s about taxes.
It’s about longevity.
And it’s about making sure people have the resources they need to live the retirement they want.
Jae Oh: That’s really the goal.
Focus on the person first.
Then build the plan around that person’s circumstances rather than treating every issue as a separate conversation.
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