Social Security Fairness Act is an opportunity for professional advice

Social Security provides a financial safety net for retirees, disabled individuals and survivors of deceased workers. It originally ensured individuals met criteria to stay above the poverty line. Today, the Social Security Trust Fund faces challenges due to demographic shifts, legislative shortcomings and increasing obligations.

The Social Security Fairness Act, signed into law by President Joe Biden in January, removes the Windfall Elimination Provision and the Government Pension Offset, increasing benefits for 3.2 million former public servants such as teachers and firefighters. While this is beneficial for those impacted by it, the law increases the strain on the already challenged Social Security Trust Fund, prompting the need for structural reforms for long-term viability.

Understanding the Social Security Trust Fund

Generically referred to as Social Security, the trust fund consists of two funds:

» Old-Age and Survivors Insurance Trust Fund provides benefits to retirees, their spouses, widows and, in some cases, minor children.

» Disability Insurance Trust Fund supports disabled workers.

These funds are primarily financed through payroll taxes under FICA, with employer and employee each paying 6.2% (up to a $176,100 cap in 2025) and the self-employed contributing 12.4%. Projections show potential depletion within a decade. According to the 2024 Trustees Report, the OASI and the DI Trust Fund may be depleted by 2035, with payroll taxes covering only 83% of benefits, unless the problem is addressed.

Demographic shifts are straining the overall Social Security system. The baby boomers are retiring while the birth rate is declining. This has reduced the worker-to-beneficiary ratio from 5.1 in 1960 to 2.8 in 2023, potentially falling further by 2035.

Enter the Social Security Fairness Act

The bipartisan Social Security Fairness Act was crafted to address ongoing inequities in coverage, specifically for public employees affected by 1983 provisions that reduced benefits for those with pensions not contributing to Social Security. Critics argue this penalized public servants. The act repealed these provisions, but concerns remain about strain on the fund without additional support.

Next-step solutions to avoid a deficit

To address projected shortfalls, policymakers have three central ideas:

» Raise revenues through increased payroll tax rates from 12.4% to higher levels.

» Lift the payroll cap to remove the $176,100 cap on taxable wages.

» Apply Social Security tax to investment income for high earners, similar to the Medicare tax.

Reducing benefits could also be considered. Suggestions include raising the full retirement age from 67 to reflect longer life spans and modifying cost of living adjustments to slow growth, although this would affect retirees’ purchasing power. Means testing benefits could reduce expenses by limiting high-income individuals’ benefits.

Experts have suggested structural reforms to Social Security, with several ideas in discussion:

» Invest in the stock market. Investing a portion of the Social Security Trust Fund in the stock market rather than solely in specialized government bond has its its own supporters and critics. Proponents note an investment fund could increase returns for the Social Security Trust Fund. Opponents charge that negative stock market returns would only hurt the Social Security Trust Fund. Additionally, any investment in the stock market could create crony capitalism opportunities for Wall Street. 

» Encourage private retirement savings. The increase in private investment in employer-sponsored retirement plans and individual retirement accounts could reduce the reliance of retirees and widows on Social Security. 

» Implement a hybrid system. Lawmakers argue that shifting Social Security to a combination of traditional Social Security and a private retirement account could lessen chances of a Social Security deficit by allowing a portion of the cash to be invested in the stock market. Higher potential returns in the stock market could offset funding shortfalls of the Social Security Trust Fund. Yet tough issues — like an extended down period in the market and crony capitalism threats — remain. Although this model has been used by many other developed countries facing the same challenges, most stick to a fully public system for programs such as Social Security. 

Any change will impact financial planning

As Social Security faces potential deficits in the Social Security Trust Fund, individuals must carefully consider how these changes may impact their financial future. Some may need to adjust their retirement plans if the full retirement age is to be raised. Others may need to save a higher percentage of their income or start saving earlier. In addition, individuals may consider working longer. 

This uncertainty about future benefits requires reflecting on personal savings through 401(k) plans, IRAs, annuities and other investment vehicles. The changes to spousal and survivor benefits may also require couples to reassess their Social Security claiming strategies. In addition, the 3.2 million individuals who may see an increase in their Social Security monthly benefits may want to reevaluate their current income strategy. 

The increased monthly income from the Social Security Fairness Act could increase a retiree’s taxes, affect high earners’ monthly premiums for Medicare and potentially increase their effective tax rate. Suppose there are changes to the cost of living adjustments with any future Social Security reform. In that case, individuals may want to evaluate their after-inflation return to understand the long-term implications of their Social Security claiming strategies. 

Proactive financial planning is essential to navigate any change to Social Security. Whether through increased savings, tax strategies or optimizing benefit claims, adapting to policy shifts will be key to maintaining financial security in retirement. If you have clients who are among the 3.2 million individuals affected by the Social Security Fairness Act, it would be best to consistently review and update their retirement income plans.