Trump & Your Social Security: Tax-Free Or Bankrupt? | Get The Facts

Trump and Musk cutting Social Security. Is it at all likely or just political hype? Hello Member Super Savers and Bond Course fans. I hope you're healthy and well. This was the question that one of you asked us shortly after the holidays and it's clearly top of mind for many of you because no one wants a smaller Social Security check or worse no Social Security check at all. But there's a lot of contradictory headlines out there currently. Cuts to Social Security, Social Security going bankrupt or at the other extreme tax-free Social Security checks. Which one should you really expect from the incoming Trump administration that's going to be inaugurated this coming Monday? So as quite a few of you have asked and as we like to do on this channel, let's talk about the real facts and forget the fiction. Here are the three topics that we'll be covering in today's video. One, how close is Social Security to running out of money? Two, why is Trump proposing no tax on Social Security checks and how realistic is this? And three, what should you do now? As usual, here's our front of video disclaimer. For a detailed disclaimer, please refer to the end of this video. Let's dive in now, folks. How close is Social Security to running out of money? As many in our community know, Social Security, along with the closely related expenses for Medicare are the two largest expense positions in the federal budget. According to the U.S. government's official website, together they make up almost a third of the obligated spending in the federal budget for 2024, which is why both are always on the very top of the potential chopping block when the need for government savings comes up. So, the good news first for retirees here. According to ABC News, House Speaker Mike Johnson has gone on the record to say that cuts to Social Security and Medicare won't be part of the legislative package being worked out to fund President-elect Donald Trump's agenda. The president has made clear that Social Security and Medicare have to be preserved. Moving on now to the not so good news, though. The question of how close is Social Security to running out of money? Well, the answer is that it really depends on your time horizon. One fact is clear. Since 2021, and only since 2021, which coincidentally or not was the year after the pandemic, Social Security has been running a deficit every year, meaning it spends more money writing out checks to retirees than it takes in from Social Security contributions, taxation of Social Security benefits, and the interest earned on its trust fund. And this deficit, the shortfall, is not an insignificant amount, a somewhat shocking $41 billion in 2023. The 2024 numbers weren't out yet at the time of this taping. But the silver lining is Social Security also has a trust fund, essentially savings from the good years between 1984 and 2020, when it took in more money than it spent. This trust fund has about $2.8 trillion saved at the moment. So still a nice chunk of change. That said, as the baby boomer generation prepares to retire and the birth rate in the U.S. continues to decline, this money may not last as long as one would expect. And Joe Biden's Social Security Fairness Act that he signed as one of his parting gifts just recently on January 5th might mean the trust fund could be depleted in less than 10 years, in the early 2030s, as Newsweek reports. At which point Social Security would become insolvent, unable to mail out all those checks every month, unless its revenue was increased or the benefits cut. Now, almost 10 years can feel like a long time in politics, so it's not clear how immediate the urgency will be for Trump to act now to stabilize Social Security for a time long after his presidency, despite election promises for no taxes on Social Security checks. More on this shortly. In my mind, if our federal government follows the same strategy with Social Security as they do with our debt ceiling crisis, which many of our diamond nest egg regulars are all too familiar with, my expectation would be more campaign promises in upcoming elections and the actual fix, whatever that may be, coming only much closer to the actual time of potential insolvency, whenever that may be. And yes, I did use the word potential insolvency. Please keep in mind that all the existing doomsday scenarios of insolvency are also based on existing laws around Social Security, which can change and actually have changed over time. Hard as it may be to believe, we've been here before, so there's even a precedent. The last time the Social Security Trust Fund started to run low was in the 1980s, and Congress did step up and pass a series of measures that stabilized Social Security again. In fact, the bulk of the money that is currently in the Social Security Trust Fund has been built up since those days, as you can see here, and not during the booming immediate post-war years, as many would intuitively suspect. The last round of safe Social Security measures were passed by Congress in an overwhelming bipartisan vote and signed into law by President Reagan about 40 years ago in 1983 and 1984. These measures included increases in Social Security contributions, increases in the retirement age, a reform or tightening of disability benefits to combat fraud, and last but not least, the taxation of Social Security benefits, which provides us with a nice transition to the next question for today's video. Why is Trump proposing no tax on Social Security checks? And how realistic is this? So as I just said, Social Security checks were initially completely tax-free, and they only started getting taxed in the first half of the 1980s as part of the reforms signed into law by President Reagan. But even then, the law shied away from making Social Security payments completely taxable. Instead, it introduced a somewhat complex system that kept some or all of the payments tax-free. This column shows your federal tax return filing status. This column shows your combined income. And this column shows the percentage of your Social Security benefits that may be taxable at the time of this taping, based on your filing status here and your combined income here. Here's a quick snapshot from the Social Security website on how to calculate your combined income. So, if you're single with a combined income of less than $25,000, you pay 0% taxes on the Social Security benefits that you receive, meaning the Social Security check that you receive is completely tax-free. On the other hand, if you're single with a combined income of more than $34,000, up to 85% of your Social Security check may be taxable. And to be very clear, this 50% and 85% here are not your tax rates. It's not what you pay to the IRS. It's just the proportion of your Social Security check that you will have to pay taxes on. Let's walk through an example to show you how this works. Assume that you have a marginal federal tax rate of 25% and you exceed a threshold and 50% of your Social Security income, or check, will be taxed. This means that you would pay an effective 12.5% federal income tax rate on your total Social Security income, or check. That's your marginal tax rate of 25% here, multiplied by the 50% of your Social Security income that is taxable. So in this example, 50% of your Social Security check remains tax-free and the remaining 50% of your Social Security check is taxed at 25%, your marginal tax rate here. Depending on your situation, this may still be better than for your fully taxable income streams. That said, the taxation of Social Security benefits has always been extremely unpopular, as people consider it unfair and detrimental to their retirement. Plus, many new retirees are surprised to find out that they have to pay taxes on their Social Security check at all, and shocked when they are hit with a tax bill much earlier than they thought from these very low thresholds. This effect is often called the retirement or Social Security tax torpedo. Bondmasters folks, please refer to Module 7, the Decumulation Phase, and specifically the video on Decumulation Tax Considerations for more details on the three different tax buckets that various streams of retirement income fall into. So, the retirement or Social Security tax torpedo. It may hit you hard when you expected the least. No wonder then that one of the more prominent campaign promises of our very soon-to-be President again Trump was no tax on Social Security. Now, nothing seems to be decided, and we haven't found a reliable estimation of the cause of this proposal yet, and what it would mean for the Social Security Trust Fund. But it's clear that eliminating taxes on benefits could only drain the Social Security Trust Fund even faster. That said, there is one good argument for having a fresh look at the taxation of Social Security benefits. The thresholds from which taxation kicks in haven't really been adjusted since the early 1980s. So one could make a good argument that they should be increased in line with inflation. After all, if Social Security checks are adjusted for inflation, these taxable thresholds here should also be adjusted for inflation. If we take the average annual inflation rate over the past 40 years of 3.3%, this would mean that for single or individual filers, if your combined income is less than $91,600, you would pay 0% taxes on your Social Security benefits. That's up from the current $25,000. And if your combined income is between $91,600 and $124,600, then up to 50% of your Social Security benefits would be taxable. Again, that's up from the current range between $25,000 and $34,000. And if your combined income is more than $124,600, only then would up to 85% of your Social Security check be taxable. Again, that's up from the current $34,000 threshold. And here's what the combined income threshold numbers would look like for folks married filing jointly, again taking the average annual inflation rate of 3.3% over the past 40 years. And these inflation-adjusted numbers, they're quite different from these old non-inflation-adjusted thresholds that we currently have. More realistic in my view. But I guess we'll need to wait and see what Trump and his new administration will actually try to do after Inauguration Day, and how Congress will react to these proposals, which of course begs the question in the next section of today's video. What should you do now? As I posted in our Member Zone a few days earlier, please note that much of what you're hearing at the moment is what could happen. Nothing is set in stone yet, given that Inauguration Day has not even happened. And Trump, like many presidential candidates before him, would not be the first to make campaign promises that may not completely play out as expected, or perhaps even at all. Here are the three things, though, that we do know with some degree of certainty. 1. Social Security has been spending more money than it takes in since 2021. 2. If nothing changes, Social Security will run out of money at some point. Current projections quote a 10-year timeline, or even a bit shorter, but the reality is most of these models, or at least the ones we've seen, are a bit fluffy, for lack of better term. 3. Biden's Social Security Fairness Act and Trump's proposed tax-free Social Security checks would speed up the pace of potential bankruptcy, meaning that in my mind, tax-free Social Security checks may be a hard sell in Washington. If we look at these three points taken together, what we see is that for the average American individual, there's nothing that we can do to really influence Social Security at this point. What we can do, though, is what many of you in our DiamondNested community have done and or are already doing. Save as much as we can personally for retirement, and to the extent possible, look at other sources of guaranteed lifetime income, whether that's a company pension, if we're lucky enough to have one, or annuities. And yes, we are working on the rest of our annuities 2025 series for you. It's clear something does need to change. Social Security is way too central to American retirees to let it go into an uncontrolled insolvency. But, as I mentioned earlier, that change will likely only come when Social Security is much closer to insolvency, in my mind, and not at a time when the Social Security trust fund still has about $2.8 trillion in it and the brink of bankruptcy is about a decade away. Drop a comment below, though. If you were in charge, how would you fix Social Security? We have a few thoughts of our own here at DiamondNested, but I'll save those for another video if there's enough interest. As always, though, we'll be watching the space carefully so that you'll be among the first to know what's actually happening, and what we might be able to recommend as possible reactions. Alright, members, super savers, and BondCourse fans, I hope you enjoyed this video and learned something new. And as always, if you want to build other sources of stable, predictable income in retirement, especially while bond yields are still quite attractive, then check out this video here on our Beginner and Intermediate-Level Bond Courses, which we are in the process of updating. Use coupon code BONDS2025 to get an additional 10% off of our popular Bond Course bundle before the end of January. The 10% coupon code BONDS2025 can also be used to purchase Bond Beginners or our Intermediate-Level Course Bond Masters individually. And as a reminder, our next Bond Beginners Live Course Session is today, Sunday, January 19th at 5pm Eastern Time, 2pm Pacific Time. We'll be diving deeper into this month's 20-Year T-Bond and 10-Year Tips Auctions. And our next YouTube Member Live will be next Sunday, January 26th at 5pm Eastern Time, 2pm Pacific Time. We'll be diving deeper into this month's 2, 5, and 7-Year Treasury Auctions and all things fixed income. I've also linked all the details on our Bond Courses and YouTube Super Super Saver Membership below this video for your convenience. And see you again very soon with more brand new wealth building content for your financial journey.