In this episode, Michael, Ben, John, and Tommy discuss Social Security, an issue currently making waves in the news. Their confusion comes from conflicting signals: there are constant warnings of potential benefit cuts, but there is also talk of proposed changes that will make this issue worse. As they explain the situation, you will be reminded why it is essential to have expert guidance in navigating this complex landscape.
Listen in as they highlight an interesting aspect: individuals relying solely on Social Security income are exempt from paying taxes. You will learn the issue with the two proposals—the Social Security Fairness Act and tax exemptions for the wealthy and federal employees—as both could exacerbate the existing problems.
Listen to the full episode here:
What you will learn:
- Why Social Security news is currently quite confusing. (1:45)
- Why living off of Social Security isn’t so sad. (4:05)
- What you need to know about being taxed on Social Security. (8:00)
- Who will benefit from this tax law. (12:00)
- The age demographic problem that should be acknowledged. (17:00)
- The importance of having a professional help you decipher the news. (22:30)
Ideas worth sharing:
- “If your only income is Social Security, you do not pay income taxes.” - Mason & Associates, LLC
- “Many people in Congress are changing rules that they don’t understand.” - Mason & Associates, LLC
- “We should be tightening the belt and cutting spending during a recession. It’s not responsible to go and run up your credit card debt during hard times.” - Mason & Associates, LLC
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, I'm Michael Mason, certified financial planner. Also chartered financial consultant and chartered life underwriter.
Across the table for me and your co-host today, Ben Raikes, certified financial planner, IRS enrolled agent, John Mason, President of Mason & Associates, also a certified financial planner, and Tommy Blackburn, certified financial planner and CPA.
Today's topics, guys, it's going to be Social Security in The News, and We're Kind of Confused. Why are we confused, John?
John Mason: Mike, number one, before we jump into this topic, I'm just excited we're recording this episode, I think it is April 4th. So, a little bit, this is not April Fool's Day joke, just want to get that out there.
We are confused about what's going on, but it’s spring break, I know we have a lot of fun stuff going on. Carter, was at the office today before the recording, so it's been really great.
And thank you to everybody, all my teammates here, mom, everybody helping us during the spring break season.
But we're confused because if you download a social security statement today, if you created, a my social security account on ssa.gov and you downloaded a statement, I think it still says on there in bold print, “The social security system is going to not be able to pay benefits to the current amount in this year.”
And it's giving us warnings. And I don't remember the exact verbiage. And then we heard recently, state of the union, there was some talk during the president's speech about changes to social security.
There's so much going on right now, and I think we're just confused because anybody whose acknowledged a problem, there's not enough in the social security system from a revenue or reserve standpoint to pay current benefits. So, that's number one, we've acknowledged that.
Why are we confused? Because there's a lot of proposals out there that seem like it's going to make the problem worse. And not only that, these potential things that are going to change have a lot of approval.
People are very excited about these changes that's going to make the biggest problem worse. So, we're very confused.
Michael Mason: I was listening to Joe Lieberman the other day and he was on Newsmax with Eric Bolling. And this kind of got me thinking, do they really know what they're doing in Washington DC. Because Lieberman suggests that there's bipartisan support to change the way social security is taxed actually to just carte blanche say it's not taxed at all.
And Tommy, as we think about this, the statistic he used is that 60% of the people receiving social security today, that's their only income. And we laugh because if that's your only income-
Tommy Blackburn: You pay a goose egg in income taxes, at least federally, and most likely at the state level. If your only income is social security (which we're saying it loud, please hear us), you do not pay income taxes. If that's your only form, you definitely don't pay them federally. You most likely don't pay them at the state level.
John Mason: And maybe we can also say this while we're talking about it. Not only are you not paying taxes, when you hear — and I was just guilty of this, Mike, when you said, “60% of America only has social security,” my default way of thinking was that's sad.
Tommy Blackburn: Was because it was phrased as like only has.
John Mason: Right, I was like, that's sad. But then you flip it to like, what if a married couple is drawing 60, 70, $80,000 a year of social security and not paying any taxes? That doesn't sound so sad anymore.
So, in a way, it's like, yes, it is sad that you didn't … I shouldn't say do anything, but you didn't do anything to have a 401(k) or another pension or investments, so that's all you have. All you have maybe isn't so bad.
Michael Mason: Well, think about it, because I've done this math, if you delayed social security, you and your spouse, you could have $100,000. A hundred is a really good number to use.
100,000 of social security, you're not going to pay any federal tax. Most states, you're not going to pay any state tax. When you're retired, you don't have to pay the Medicare tax, you don't have to pay the social security tax.
So, you're literally netting $100,000 a year compared to the guy that's your neighbor down the street that makes 100 grand. And he loses seven and half percent to social security and Medicare, he has to operate on 80 some thousand dollars of net and you're the one getting all the discounts. You're retired, yeah. Oh, by the way-
John Mason: Senior coffee baby, senior coffee.
Michael Mason: And Ben, what are they on? They're on a, oh, sad-
Ben Raikes: They're on a fixed income.
Michael Mason: They’re on a fixed income that in the last two years has a 15% pay hike, right?
Ben Raikes: Poor them on the 15% pay hike. No, I'm just kidding. I wanted to take a step back and I think we've all talked about these really simple ways in which social security is taxed.
If you only have social security income, you don't pay anything. But if you have other income sources coming in, maybe IRA distributions, maybe capital gains, maybe dividends, maybe some other sources of income, we're confused about social security because that calculation can get really confusing, anyway.
I was just pulling up the IRS publication 915 as we were talking, and if you want to find out how much your social security is taxed (if you have those other income sources), you have to run through a 19-step worksheet in order to find out how much tax you're going to pay.
Tommy, maybe you can walk us through a little bit of how that calculation works. And like you said, some people pay zero, some people might pay a little bit more, right?
Tommy Blackburn: I would probably take 19 steps to walk through it. I know who can do it very quick, and that's going to be either John or Mike. I know they've got some quick examples here.
John Mason: Yes, and maybe we should do a call out first. We have a social security mini-series. We did four episodes on how social security works, how it's taxed.
But Ben, to your point for this episode, in its simplest form what you do is you take your gross social security for the family, you divide it by two.
So, let's say I had 100,000 divided by two is 50, then we add any extra income or what we call bad income because that bad income makes some of that social security taxable.
So, TSP withdrawals, interest income, which we have again, FERS pension, any other sort of income-
Michael Mason: Tax free municipal bonds.
John Mason: Yeah, all of these sources, as you start adding in that bad income, it makes social security being a non-taxable event to a taxable event.
And what we mean by that is, on your tax return, there's a line for social security and there's an A and a B, and on A it says gross social security and on line B, it says how much is subject to federal tax.
What we're talking about is when you add in that other bad income, Ben, it moves more money from A to B. It makes it all of a sudden flow through to be subject to federal tax, but not necessarily generate a federal income tax bill.
So, hopefully I did a good job explaining that.
Michael Mason: But again, 60% all they have, is social security. So, an easy example for me is husband has 32,000, wife has 32,000. John just said 32 and 32 is 64. But the first step in this nine-
Tommy Blackburn: Cut it in half.
Michael Mason: Is cut it in half. So, 64 is now 32. And the rules say, if your number is 32 or less, absolutely none of it is taxed. And then from 32 to 44, every dollar you make between those two points, 50 cents on the dollar can be taxed.
So, even if it was 88,000, right, 88 cut in half is 44. Well, now you've got that 12,000 that is 50 cents on the dollar tax. So, it's 6,000 flows over to line B. 6,000.
John Mason: And even the way you're saying it, is confusing. Because it's like, is taxed, is taxed, is subject, and it's like it's still not taxed.
Tommy Blackburn: Because you have a standard deduction itemized. I mean, you've got a number of things working there. And that's where I was thinking, so we've got a whole mini-series to try to dive into some of these nuances.
I think the simplest thing here is that if all you have is social security, I know we did the math and I think it was an astronom, nobody's getting these social security tax for social security to ever be taxable.
So, the people who only have social security that could have on average, I think it's 64,000 coming in, they're paying nothing.
So, I think these proposals to make social security across the board tax free, it's like, well, who are we making it tax free for? Because if it's to help those who only have social security, well they're already getting it.
Michael Mason: They're already helped. And the social security bill is like 570 billion a year, let's just call it 600 billion. Well, 60% of 600 billion is 360 billion of income that nobody's touching anyhow. So, who are the ones that are paying tax on it?
Well, the people that are listening to this podcast, because if you're FERS, you're going to have social security at a high level, but then you're going to have this other income, FERS pension, TSP income that's going to make 85% of your social security flow through to income.
And maybe you're doing back flips that Congress actually wants to give you that tax free, I would gladly take my social security tax free if I believed my country wasn't going in the toilet bowl for it.
John Mason: Well, I think that's the biggest question, Mike, is who is it helping? Tommy said that, who's this bill — and social security we're confused, it's in the news. Because again, we know that there's a problem, there's a funding problem they're talking about.
And maybe, hopefully I'm not derailing us too much, but there's proposals out there that would say, John, Tommy and Ben can't get their social security until 70 or even later maybe.
Or that we as business owners should pay more above and beyond the income base that it's currently set at or there should be a donut hole provision.
So, in the news is also substantial changes to people like the three of us that would have us pay more into a system that's already not funded well, to delay it to where we may be dead before we're actually able to draw it.
So, that's confusing because now you're penalizing the youth and you could argue maybe the three of us deserve to be penalized because we make good income. I don't know, but that's confusing.
In addition, what's confusing is this bill would help the wealthy, it would help federal employees. It would help think of the most wealthy person you know audience and put their head on a pillow right in front of you. The rich are the ones that are going to benefit from this tax law, and it doesn't make any sense.
Michael Mason: So, all it reminds us of is that many people in Congress are changing rules that they don't understand.
That's the thing because if it's got bipartisan support, there's not a Democrat out there that wants to give a tax benefit to wealthy Republicans. There's not one out there that wants to do that. And that's exactly what this bill would do.
You mentioned a lot of things there, John, you mentioned the fact that more tax revenue, longer delaying. So, they take these baby steps to get more money in the system and then they start talking about these bills that would destroy what they just gained and then some.
So, the other one would be, go back to episode, whatever it was, you'll find it, government pension offset, GPO. They want to get rid of that and give people with wealthy pensions, social security cheques that they didn't deserve, don't deserve, didn't pay for. And that's a multi-billion-dollar addition to social security liabilities.
John Mason: And these changes like Social Security Fairness Act, guys, these changes like making social security just plain tax free for everybody who's anybody. These are like flippant, is that the right word?
Tommy Blackburn: Yeah, I think that's where we're going. It's like, has much thought been put into this, this is one of the most important retirement systems for this country, social security.
I mean, how many people rely on social security, at least as a major form. And we're talking about draining this trust fund. Making it not be able to pay out 100% of benefits faster.
And yeah, I think that's our confusion. It's like where are we coming up with these things? Are we not concerned about the sustainability of this system?
John Mason: And Tommy, to your point, what continues to be confusing is if this is in the news right now, everybody's doing back flips. So, our audience is doing back flips, financial advisors and planners are doing … they're like, “This is great.”
Financial planners are happy because they don't know how to do the math and now, they won't have to learn how to do the math if it's passed. So, that's just a little dig at some of our perceived competition out there.
But it's amazing that these changes are going to happen so fast, so flippant, flip in, flippant, whichever one it is. And then how long does it take to raise the retirement age? Six months.
I think the last major reform to social security as far as revenue age that you could claim benefits, guys, what was it 20, 25 years ago? It’s taking decades.
We've known this day was coming for decades and we haven't done anything to solve the problem. Yet, in a day we're going to pass legislation that makes it infinitely worse, and America’s going to celebrate it.
Number one, during our strategic planning meetings that are coming up — and this is funny. During our strategic planning meetings, we've heard clients say, “Well, should I count on social security, I don't know if I should count on it?” And then we say, “Yes you should.”
And now, the news is going to say it's going to be tax free for everybody and they're going to celebrate that. Not thinking that last year the concern was potentially, is the trust fund going broke and now is it going broke faster.
Michael Mason: And I want you to think about this again, 60% of the retired population only has social security.
So, let's say everybody in that population was 65 when they retired. That means they're going to go from age 65 until the second of the two of them dies with no financial obligation whatsoever to their country.
25, 30 years with no financial obligation to their country other than the gas tax that they pay when they fill up their cars.
Now, if I'm harsh there, maybe I'll be a little harsher. If all they have is social security, they probably spent the majority of their working career with not much of a financial obligation to their country.
You don't have a country when you're not collecting revenue from 90% of the population, you just don't have it.
John Mason: And I'm not an expert, none of us are on this table on demographics and trends as far as it relates to age and percentage of the population that are old versus young. But I think we all know that Japan's got a problem.
Their older population is very much larger than their younger population, which means we don't have enough people paying into the system. China is similar and-
Tommy Blackburn: France, I mean in the news right now; France is the one rioting in the streets about-
Michael Mason: Well, they go from 60 to 62.
Tommy Blackburn: Yeah, or was it the 64? I mean it's something that we would laugh at in this country, because it's pretty generous already.
John Mason: But there's definitely an age demographic problem in some of these other countries in the world.
And we have that here in America as well to a certain extent. Maybe not as large, but if you have younger people not paying into social security, so you've got that income tax and you have a replacement ratio of humans, that's not what it needs to be to keep up, this demographic problem and this financial problem is going to continue getting worse.
And again, it's all been acknowledged. It's all been acknowledged, it's all been talked about. And rather than celebrating these changes because it instantly benefits me, we would hope, I guess the call to action here is do we have it in us?
And I'll look at you Mike, and then Tommy and Ben, like, do we have it in us to vote against ourselves? And that's a very interesting question. Like can you vote against yourself? Can I vote to pay more social security tax if it's what's best for the country?
Can I vote against something that seems great for me? Can I do that? And I think that is something that's so powerful and this is not a political episode, but just really thinking why this is so hard to fix and it's like you're not going to vote against yourself 9 times out of 10.
Tommy Blackburn: Well, you hit the nail on the head of what I was thinking, is that most stuff we hear about social security right now and any changes to it should probably sound a little painful.
We shouldn't be out there celebrating in the streets because the system needs help, we think there are certainly solutions out there to help it. You name some of them, whether they're fair or not fair, but it just seems that's why we're confused.
We shouldn't be hearing about we're enhancing benefits or we're cutting the revenue to this system. It seems like it should be information where you're like, “Well, that's going to hurt me a little bit or I wish it wasn't that, but I realized that's the greater good,” kind of news is what should be coming out.
John Mason: And we just released an episode, this is amazing where this goes. We just released an episode, it was know the end and the beginning.
And I think Mike and Tommy, you did that one, you two and I was listening to that in the car and it was like, wouldn't it just be a lot less stressful if you knew that your first pension was going to be this? Wouldn't it be nice to know, wouldn't the journey be better?
Well, I want to know that my social security job — I'd like to know what it is. I'd like to know the end in the beginning, but we have so much uncertainty in this system and it's really just not fair.
So, yeah, I want to know the end in the beginning. I want to know that if America's going to step up and make material changes that we all win from this somehow.
Ben Raikes: Well, I think this is a perfect place for a call to action. If there's one word that you've heard in this podcast, it's confusion, confusion, confusion. So, as the current system exists, 60% of you have zero tax.
If you're in that other 40%, you need a 19-step worksheet to find out how much of your social security could potentially be taxed.
Tommy Blackburn: Or you need Mason & Associates.
Ben Raikes: Or you need Mason & Associates. We've also said, “Okay, well how are we going to fix social security?” We know that the funding isn't there and maybe we could rage the retirement age.
Maybe we could add an additional tax, increase the social security wage base and what's the current law in the books? Actually, we're going to make everything tax free to generate less revenue.
So, how does one that's thinking about all these things swirling in their head, how do they figure out what's right for them? You really need a qualified professional; you need a certified financial planner.
You need someone that's going to dig through your financial plan. You really need someone like Mason & Associates to help you figure this all out because it's truly impossible to do it on your own.
John Mason: And we can't ask Mike, can we, for clients to be really educated or the consumers to be educated on these topics. Because let's face it, a lot of folks, one, maybe can't afford to hire a financial planner or two maybe have chosen not to for whatever reason.
And they hear these sound bites in the news and they're trying to make educated and informed decisions on that without any education. And we know financial planners don't know this information, clearly leaders in America don't know this information. It's really a conundrum.
We really have a big problem because we can't expect anybody, Ben, to your point, to be educated on this topic because there's not enough people like us spreading the word.
It's just not possible for the general public to be informed of everything that we're informed about on a daily basis.
Michael Mason: And I would say, it's incumbent on our audience to listen and know that when we say it, these are the facts and they cannot be disputed.
Yeah, when we say if all you have is social security, it's not taxed, just understand that's 100% accurate.
And now, if your mom and dad only have social security and you're listening to this, then go look at their tax return because they may be 75 next year and they're forced to have an RMD and now all of a sudden, they go from no tax to some tax, but they could avoid that.
So, here's how you win, is you listen to all of our podcasts because we've covered all these things. We've covered qualified charitable distributions in a podcast. We've covered the Social Security Fairness Act.
Let me tell you why this is so important to me. Because I remember the scariest day and it was 2015 and it was Halloween and it was 12:31 of 2015, and here's how they changed social security.
They didn't give you a warning, John, there was no warning. You woke up the next day and it was a tri partisan change to social security where all of your planning strategies were killed and the president was behind it, the Democrats were behind it.
Well, in France, you know how they changed the age from whatever it was, 62 to 64.
John Mason: Wasn't it almost like an executive order?
Michael Mason: It was like an executive order. So, if we don't get out on the front end of this and you don't listen to the Social Security Fairness Act, you don't pay attention and you don't tell your members of Congress do not burn social security faster by minimum benefits, that everyone's going to get a minimum benefit, 125% of the poverty level, which is in Social Security 2100.
Don't let them burn it down faster by giving millions of illegals benefits. Don't let them burn it down faster than that, by giving Dr. Fauci and people with pensions not subject to social security, giving them benefits.
You can't fix it when you wake up December 31st of 2023 and it's done. You have to try and fix it before they make these changes in the dark, at night.
So, call your members of Congress, tell them don't destroy social security while you're talking about fixing it.
John Mason: Well, maybe summarizing Mike and your point is (and Tommy made this earlier), any changes that come out should be painful right now. We should be tightening the belt as a population. We should be more frugal, we should be spending less, we should be doing all the things that Mason & Associates is doing in a recession.
Looking at the balance sheet, looking at the budget, seeing where we can eat out a little bit less or what have you. Like we should be tightening the belt and cutting the budget, we shouldn't be expanding it during hard times.
And acknowledging that our country is in hard times and acknowledging that the systems in hard times is important. And when you do that, you don't run up credit card debt. That's not responsible to go out and get more credit cards and run up the debt and make the problem worse.
So, maybe I don't even know the pathway. And we always say, or people always say, “Tell your congressman.” I don't know what that means. And we'll probably go down a rabbit hole if we try to define it.
So, I don't know how any of us make a difference, but the changes that are coming to Tommy's point should be painful. And I guess my last thought, and maybe we go around the table with any action items. I have two final thoughts.
This proposal, both of them, Social Security Fairness Act and making social security tax free for the wealthy and for federal employees, both of those are inflationary.
We already have an inflation problem and we probably still when this will air, but if you give people more money, they will spend more, that's inflationary. If you give them more disposable money because they're not paying taxes, that will also be inflationary.
So, I don't see how either of these would help fight the inflation battle that we find ourself in for the last two years either.
Thank you, audience, thank you, clients. Thank you, audience, thank you for being here with us at Mason & Associates. We're not wrapping up yet, I just want to make sure.
Thank you for downloading, thank you for sharing. Thank you for those who have migrated over to the YouTube channel and have started watching those videos too, we really appreciate it.
We're having fun, we hope you are too, listening to this Federal Employee Financial Planning Podcast. I'm not committing to it now because my partners would get mad at me, but we may start increasing the cadence of these if we get more material, but for now, we're going to continue on the every twice a month.
But stay tuned, we're going to be releasing more content and we appreciate you.
Tommy Blackburn: Head on over to the YouTube channel if you need a higher cadence, because I think there's quite a few coming out over there so you can get your hearts filled if you need some more.
Michael Mason: I think we're about 25 minutes into this and to know how sincere we are and how much we love our country. Everybody around this table is suggesting that they don't want their own social security tax free, and we've also suggested that we're willing to be part of the fix.
Alright, so we're fiduciaries, we're fiduciaries in our financial plan, we're fiduciaries as U.S. citizens. I would say the best thing you can do is just send to everybody you know, ask them to listen to this podcast.
Just send it as far as you can send it to everyone and maybe it actually hits somebody with a big voice, a Hannity, an O'Reilly, it actually hits somebody and they say, “What in the world is our government doing, giving the rich tax-free social security?”
John Mason: Folks, this has been another episode of the Federal Employee Financial Planning Podcast. Big shout out, thank you to all of our audience. Thank you to all of my co-host for another awesome, what we think was an awesome episode.
We’re Mason & Associates, masonllc.net . Thank you again and we'll see you next time.
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.