Should You Take Social Security Early Given the Scary Trust Fund Report?

The 2025 Social Security Trustees Report is out and the news is bleak. This episode of the Power of Zero Show looks at the potential repercussions if nothing changes by 2033.

If things don't improve, Social Security will face a cash flow deficit that triggers a 23% across-the-board benefit cut - and that's one year earlier than predicted.

But that's not all… in fact, it gets far worse, says host David McKnight.

The system is already $72.8 trillion in the red, an unfunded liability that's twice the size of the national debt and $10 trillion worse than 2024.

This is by no means a temporary funding glitch, it's a permanent structural crisis.

The first finding of the 2025 Social Security Trustees Report is that the Trust Fund goes insolvent a year earlier than anticipated in last year's report.

And there's no wiggle room: Absent intervention on the part of Congress, benefits will drop automatically by 23% for all recipients.

The next noteworthy aspect is the program's unfunded obligations, the present value of future benefits not covered by future taxes.

That gap is a staggering $72.8 trillion, which is $10 trillion more compared to 2024.

The cause for this $10 trillion jump? The removal of some pension offsets and benefit boosting by last year's Social Security Fairness Act…

The final revelation of the report  is that trustees chose to focus on the 75-year deficit and ignored the infinite horizon that is so relevant in a pay-as-you-go system.

The main tool to try to change the status quo and fix the issue is either cutting benefits, raising taxes, or some combination of the two.

David addresses all three scenarios. The first one revolves around Congress permanently okaying a 30% across-the-board cut starting today - alternatively, they could wait until 2033 and implement a 23% cut by default.

The second scenario sees an increase of the Social Security's FICA payroll tax from 12.4% to 17.6%.

Thirdly, a combination of smaller tax increases and moderate benefit cuts.

David touches upon the possible consequences of not addressing these issues immediately.

The 1983 Greenspan Commission only patched half of the long-term hole in Social Security, leading to the problem being 2.5 times bigger today and requiring even more aggressive solutions to create a permanent fix.

David explains that, if you count all the government's off-the-book promises, Medicare, defense, debt service, the fiscal gap is around 7% of GDP.

That translates to the country having a fiscal shortfall year in and year out of 7% of GDP FOREVER.

How bad is the situation? "You'd have to fire every federal employee, cancel every NASA mission, basically shut everything down… and you still wouldn't plug in the hole in our long-term fiscal outlook," says David.

David is very clear on what's needed: Major structural reform to healthcare entitlements, taxes and benefits.

David shares two things to consider before you decide to draw your Social Security benefits early.

A quote by Dr. Larry Kotlikoff highlights the fact that taking benefits early won't protect you from reduced benefits later, and that the reduction could indeed be less for those who waited in order to provide equity with those who collected early.

David recommends saving as much as you can so that you can compensate for any future cuts to Social Security, as well as modeling multiple scenarios (drawing now vs. drawing later), keeping an eye on Congress and the news, and to focus on other risks your retirement may face - think longevity risk and tax rate risk, for instance.

In conclusion: notwithstanding all that bad news from an actuarial standpoint, it still makes sense to push off Social Security just as long as you can.

 

 

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

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