Social Security Buzz
2034 is coming
Social Security is a trending topic.
What are the implications of the “Big Beautiful Bill?”
A $4,000 tax deduction per filer from 2025-2028 with income limitations. More details in the attached PDF.
What you need to know:
It is not the law yet. Still, there are existing conditions worth consideration.
The tax rate applied to earnings and withheld from most paychecks remains 7.65%.
Social Security retirement benefits remove inflation risk and provide an important cash flow for retirees.
The Social Security benefit structure and its financing remain a problem.
DOGE is finding waste in the system, which helps lower costs.
What about the trade-off? Will the service levels change?
We do have a marker in the public domain. Click through and check out the data.
Proportions don’t speak to individual experiences, many of which have been lousy. We know about the bad ones, but we don’t think much about the good ones. Processing time transparency helps us understand the system as a matter of informing policy.
How You Can Plan for Change:
The prospect of changes to taxes and benefits causes financial uncertainty. “How will it affect me? " is a common thought. This is where financial advisors can help us feel better. The predicted outcomes are generally reasonable because most changes are determined by political negotiation. What if payroll taxes go up by 10%? Or is the retirement age pushed out to age 70? Personal Finance Economics can assess it.
Your Next Move:
Younger or older, drop a comment or ask a question.
Social Security change and cross-generational impact: a short story
Mother’s Day 2022, 54-year-old Tricia Scott and her daughter, Shelby, were pretty in pink. Close knit. Bright smiles. Dad Jack, the photographer. Shelby was back from Atlanta, where she works for an advertising agency in “Midtown,” visiting Tampa to be with her parents. Their photo a legacy for future Scotts. Ten months later, life was more unsettling for Tricia.
Many news outlets have reported that the Social Security system will be insecure and out of money in 2033 or 2034. Tricia knows nothing about the news. A few years ago, she switched off her regular news-watching habits and has moved on to a happier life. Not many current events are on her radar today, except what she hears from friends.
Today was Tricia’s friend day.
Tricia’s day started normally. Coffee, home Yoga, then tennis with the ladies at the Racquet Club, a typical Tuesday ritual of social engagement without the guys. Forehands, backhands, and a lot of “thaaat is a cute skirt,” took the morning toward lunch when serious conversation began. Tricia’s close friend Peggy said, “Did you read that the Social Security system is going broke?” “2033.” “That is about the time we would take it.” Tricia contemplated: “I wonder what that means for Beth.” Beth is Tricia’s older sister, who is single, just getting by, and desperately wants to retire from a retail job at Pottery Barn in Pensacola. “She can’t afford not to have her social security,” Tricia thought.
You may know a Beth.
Lunch ended late.
Tricia went for a walk around Cypress Point Park. She needed to talk with Jack, but he was in a lengthy deposition. It took until 7:00 p.m. for Tricia to feel she could finally relax as she looked beyond Old Tampa Bay toward Clearwater and a blood orange sunset fading toward the Gulf waters. Most of the day, Tricia was overly anxious, which required moving to the balcony lounge chair with a mojito for a meditation. Twenty minutes of refreshing, minty-flavored mantra thinking helped Tricia see the world more clearly.
Tricia’s Life Experienced Social Security Problems
Tricia Hudson grew up in Miami and was ready to leave the state for college. But, UGA? Those were fighting words. Vince Dooley. Herschel Walker. The grave site of UGA I, UGA II, UGA III, ….UGA IX resting around the well-groomed hedges at Sanford Stadium.1 Makes most Gators snap their jaws.
Tricia wasn’t a rebel or a clueless co-ed. She didn’t care about the Florida/Georgia line in the same way. Loved the rolling hills and hardwoods of north Georgia during the annual family rides in the Minivan to Charlotte, where extended family roots had become well-embedded. A fan of Kim Basinger, her commitment to the area was affirmed when she learned the actress bought a town nearby. Funny, because then Braselton, GA, got in the way of Hwy 53. Still, Tricia’s brain lit up at the thought, “Hollywood is coming!”
Tricia’s college years were during a time of much public attention on Social Security.
I was in the same neck of the woods as a doctoral student at UGA in the business school before it was named “Terry.” Taught principles of risk management classes and once a social insurance class to undergrads. The Social Security system was a hot topic, much like today. I recall most college students were cynical that the system would be there for them.
In the early 1980s, the Greenspan Commission had shed light on the financing problems with our primary social safety net.2 Demographics were changing. Booming babies and longer lives changed finances. The taxed worker-to-beneficiary ratio was getting smaller. The job title “actuary” was at risk of becoming a household word.
The more recent headline, “Social Security Reserves Projected to Run Out Earlier Than Expected“ in the Wall Street Journal rang a familiar bell. What would a change in financing really mean?
The good news is that we have a solution in these pages. PFE can provide an answer. If you have a financial advisor or accountant, send them my way. I have a book for them. If you’d like to discuss this with me, send me a direct message.
We have the software to consider any change in taxes and benefits, and the effect, while measurable, is sensitive to the individual's and household's age and financial characteristics. Whatever the change, there is no need to speculate about its effect.
Congress cuts benefits?
De-link benefits from inflation?
Raise the tax rate?
Extending the full retirement date is another possibility, but that comes with Macron-level social upheaval, which we need less of, not more. Do 'em all? Certain changes impact the young more than near and existing retirees. The latter will not care much about the rise in FICA tax because they are not working, but they will be biased toward a higher rate because their retirement benefits will be funded. The young will feel the hurt in a lower standard of living today if payroll taxes are increased.
In playing “what if,” I think the most likely change will be to leave the benefit structure alone and trick up social security taxes from their 6.2% level (which is 12.4% because the employer matches).3 Let's see what a change does for the living standard of two types of people.
What If Payroll Taxes Increased to Maintain Benefits?
We consider the living-standard effect of a payroll tax increase on Tricia’s 58-year-old sister Beth and 28-year-old daughter Shelby.
Shelby is 28, single, living in Atlanta as a renter, and has accumulated savings and a 401(k) plan.
Beth’s financial circumstances are tenuous. She is 58 and worked in retail after post-high school stints as a beach attendant in South Florida. Always single and earns $40,000 today without an employer-sponsored retirement plan. Beth has a small amount of funds in an IRA and tries to contribute $1,000 yearly, but has relied on Tricia’s annual $5,000 checks to help sustain life. Beth would like to retire at age 62, but thinks it may take until age 65. Tricia plans to continue the $5,000 checks, but knows Beth needs more. Younger sib taking care of older sib, but Tricia fears it will have to be more.
Both Shelby and Beth have a measurable lifetime living standard dependent on their future incomes up to the point of their retirement, and income cash inflows are partially replaced by Social Security retirement benefits and any distributions from their retirement plans. Income tax, Social Security tax, and Medicare tax leave less money to save and spend, and inflation and asset investment projections play an important role in determining a lifetime living standard. Basic housing, food, and clothing needs impose a cost, too.
Living Standard Changes Can Be Minor for the Near Retiree
Given Beth’s financial condition under the current payroll tax and benefit structure, the economics for Beth reveal today’s value of lifetime discretionary spending equal to about $243,000, broken down into equal annual increments until the end of her life. Interestingly, Beth’s lifetime discretionary total is about the same if the payroll tax increases by 10% in 2025. Not a big deal, and the reason is obvious. Beth doesn’t have many working years ahead of her. Beth at work until age 65 commits her to slightly higher payroll tax for the last 5 years of her work life, from her age 60 through 64, unlike Shelby’s work life, given that she is 28. Beth’s optimal standard of living (I used MaxiFi) under the increased tax scenario represents a lifetime living standard reduction of only $1,663, less than 1%.
By contrast, the cost is different for Shelby. Shelby is young, with an above-median income and a bunch of years under a higher payroll tax structure. Benefits to Shelby remain unchanged from the current law. Shelby’s lifetime living standard in today’s dollars, given her financial condition today and future prospects, is just short of $1 million, which declines by 1.68% under a 10% increase in payroll taxes. Not too consequential.
Congress can move the law in a number of directions, including keeping it unchanged. The spirit of the Social Security system is to support the principle of social adequacy, so that we can expect a bias toward lower-income workers and retirees. Benefits as a proportion of pre-retirement income will be higher for historically lower-paid workers, and the costs to keep the program viable will be higher for historically higher-paid workers.
Any change in the law that manifests itself should be included in household financial plans to inform households how their spending and saving should change.
That is standard practice, economics-based personal finance.
Subscribers may be interested in the law resulting from the National Commission on Social Security Reform.
I appreciate the point that we can model policy changes and prepare for them in our personal finances. We don't know what will happen with social security, the economy, and many other things that impact our household balance sheets. Still, we can look at different scenarios to help inform our plan, and we can always update our plan once changes come to fruition.