Imagine waking up tomorrow to news that Social Security has been abruptly canceled—entirely and immediately. No payments would enter or exit the system. In 2025, the Social Security system is projected to pay more than $1.5 trillion in benefits to approximately 69 million Americans. Many people rely on those checks as their primary or sole source of income, and without it, consumer spending would grind to a halt. With Social Security gone, what should you do?
If you work with a financial advisor, the first thing the two of you should do is review how the loss of Social Security impacts your ability to pay your bills and achieve your goals. For example, clients of Berkshire Money Management can log in to their financial planning portal and use the interactive “Play Zone” feature to stress-test their retirement portfolio against various scenarios, calculating their new outcome. (It is sometimes referred to as the “what are you afraid of” tool.)
If you are still in the investment phase of your retirement plan, your first step might be to exit certain stocks and allocate the proceeds to selected bonds and cash to reduce your risk exposure.
Understanding the immediate impact of Social Security cuts
If Social Security were to vanish overnight, lower-income retirees would experience immediate and severe economic distress. Nearly 40 percent of seniors and people with disabilities who collect Social Security depend almost entirely on these benefits for income, meaning millions could slide into poverty.
This sudden financial pressure would drastically reduce discretionary spending. Industries reliant on retiree spending, such as travel, hospitality, dining, and home renovation, would suffer significant downturns.
Equity markets would likely crater, reflecting expected declines in corporate earnings due to falling consumer spending and general uncertainty.
The Federal Reserve would likely respond aggressively, cutting interest rates aggressively to stimulate economic activity and offset recessionary pressures. Financial markets would initially panic, with equities declining sharply and investors flocking to safety in bonds and cash.
Defensive strategies: Protecting your portfolio
In the immediate aftermath, investors should play defense, prioritizing capital preservation and income stability for the first nine months.
Given that older households (those aged 65 and above) account for approximately 22 percent of total U.S. consumer spending, a sudden decline in their expenditures will have a significant impact on the economy. Virtually every area of discretionary consumption in which seniors participate would be affected. For example, older Americans traditionally account for more than one third of all spending on cruise ship travel and about 30 percent of spending on full-service restaurant dining. Those expenditures would likely evaporate as retirees cancel vacations and dining out. Even spending on home services could fall—seniors contribute nearly 45 percent of spending on home repair and remodeling services.
Meanwhile, working-age Americans and businesses could benefit from tax relief. The cessation of payroll taxes (12.4 percent of wages split between employer and employee) effectively boosts workers’ take-home pay and reduces employers’ labor costs. Many younger households, recognizing that Social Security will not be around for their own retirement, may opt to save a significant portion of their new take-home pay rather than increase their spending. (Analysts estimate that if Social Security were to disappear, Americans would need to double or triple their savings rate to build a sufficient retirement nest egg on their own.) This behavioral shift toward caution means that the net effect in the first six to nine months will likely decrease consumer spending and GDP.
Bond markets would begin pricing in a rapid policy easing—yields on Treasuries would fall in anticipation of rate cuts, and the Fed could restart quantitative easing to ensure financial stability. Short-term interest rates could swiftly be cut by several percentage points (from their pre-shock levels) to stimulate borrowing and offset the demand shortfall. The U.S. might also see a flight to safety in the immediate panic: Investors fearing a recession could turn away from riskier assets and rush into U.S. Treasury bonds and cash.
In summary, the initial shock would bring recessionary conditions characterized by weaker consumption, a potential uptick in unemployment (especially in sectors such as retail, travel, and leisure that experience a decline in demand), and strong policy responses, including rate cuts and tax relief, aimed at stabilizing the situation. This environment favors a defensive investment stance. Here are the critical steps to take in response to the potential elimination of Social Security:
- Reduce high-beta equity holdings significantly and rotate sector allocation to “defensive” stocks (consumer staples, high dividend payers).
- Boost high-quality long-term bond holdings.
- Increase cash reserves.
No stocks are risk free, but stocks of consumer-staple companies, such as those in the grocery, household-products, and utilities sectors, typically withstand economic downturns better than more growth-oriented options. Their steady cash flows and dividends become attractive in uncertain times. These sectors should outperform, at least on a relative basis, in a downturn as their revenues are less sensitive to discretionary-spending cuts.
Equity investors should initially avoid the sectors that have been hardest hit. Travel, leisure, luxury retail, restaurants, and senior-dependent services would suffer immediate demand losses. Companies that rely on spending by seniors and low-income households face immediate sales declines. Casinos, cruise lines, tour operators, and RV manufacturers would likely experience a sudden decrease in demand. Non-essential retail would also feel the pinch as those customers pull back.
Initially, banks may face headwinds as loan defaults could rise among affected borrowers. Additionally, overall credit demand may dip during a recession, and ultra-low interest rates can compress banks’ lending margins.
Opportunities amid turmoil: Offensive investment moves
Looking beyond the immediate panic, strategic investors could capitalize on medium-term opportunities as the economy adjusts. By two years after the Social Security shutdown, the U.S. economy will have adjusted to a new equilibrium in several ways. The initial shock and recession (likely centered in the first few quarters) would gradually give way to a recovery, albeit from a lower base of consumer spending.
Many near-retirees likely delayed retirement or rejoined the labor force. Labor-force participation among seniors (ages 62 to 70) could rise substantially as those who are physically able seek work to replace lost benefits. This infusion of experienced workers can increase the labor supply, which may help keep wage growth in check and alleviate worker shortages in some industries.
However, not all affected seniors can work; those who are very elderly or disabled may rely on family support or means-tested assistance (e.g., Medicaid, food aid) to survive. We may see an increase in multi-generational households as adult children care for their parents or grandparents to share living costs. This social adjustment means a portion of seniors’ consumption will be funded by their families. Every dollar a family uses to support an elderly relative is a dollar they might not spend on other goods, so some of the younger cohort’s tax-cut gains are getting redirected to elder care rather than pure new consumption. Overall, the personal saving rate in the economy is likely higher than it was before the cancellation—those in their 30s, 40s, and 50s are saving more for retirement through 401(k)s, IRAs, and brokerage accounts because they know they must self-fund a much more significant portion of it. This is a long-term positive for capital formation but a headwind for consumer spending.
Household debt may rise for some seniors, as we could see an increased use of home equity loans or reverse mortgages among older Americans who tap into their assets to generate cash. The financial industry may promote products to fill the gap left by Social Security. After the initial shock, there will be investment opportunities in select areas:
- Financial services: Without Social Security, Americans would likely significantly increase their private retirement savings. Money-management firms and investment brokers are poised to benefit from increased inflows into retirement accounts, including 401(k) rollovers, IRAs, and mutual funds.
- Discount and value retailers: Companies catering to price-sensitive consumers will likely gain market share as retirees and their families tighten their budgets.
- Consumer discretionary: Luxury travel, leisure, and hospitality companies that survive initial shocks can rebound. Contrarian investors may gradually accumulate stocks in those sectors once prices stabilize. Not all retiree spending will be gone forever; some will be replaced by wealthier seniors (who did not need Social Security) and younger consumers taking advantage of low rates and tax relief.
- Automotive: Car sales may dip initially as older consumers hold off, but younger consumers with extra cash and low interest rates could spur auto demand, especially for used or lower-cost vehicles. Thus, certain auto industry stocks or suppliers might recover by year two.
- Housing: Increased multi-generational living arrangements may boost demand for affordable housing and home-improvement services. Homebuilders specializing in affordable homes or floor plans accommodating extended families could see stronger demand. There may be a trend toward houses with accessory dwelling units (ADUs) or in-law suites as families seek to house elderly parents. Companies supplying home renovation products for such additions are likely to benefit.
- Technology and communication services: Technology firms focused on cost-effective solutions offer stable growth prospects. Technology usage is expected to increase as more people work longer hours and families coordinate care remotely. Tech was likely resilient through the downturn, and after the initial shock, it could be thriving thanks to low interest rates and secular trends. Big tech firms often serve global markets and are less tied to U.S. retiree income, so their earnings are expected to grow.
Tailored advice for retirees who were taking Social Security
Replacing lost Social Security income becomes crucial for those at or near retirement. Consider these targeted moves:
- Prioritize steady income: Increase holdings of reliable dividend-paying stocks (utilities, consumer staples) and investment-grade bond ladders to secure consistent cash flow.
- Utilize home equity: Downsizing or utilizing reverse mortgages can effectively supplement retirement income.
- Healthcare planning: Ensure robust Medicare and supplemental insurance coverage to protect against rising healthcare costs, which would be a significant expense without cost-of-living adjustments from Social Security.
The process of “war-gaming” helps me identify protective measures and strategic investment opportunities that investors can take should their Social Security benefits be seriously compromised. However, I do not see Social Security going away any time soon.
My colleague, Zack Marcotte, makes a compelling case for why Social Security is very likely here to stay in this thought piece “Will Social Security be cut? Understanding the facts amid a shifting political climate,” which I encourage you to read as a supplement to my thoughts.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
