Bob’s Journal for 3/6

Income Taxes and Social Security Retirement Benefits

First, I want to thank the many subscribers who joined our subscriber-only teleforum last week. I enjoy these interactions with my readers and the opportunity to learn what’s on your minds.

The federal income taxation of Social Security retirement benefits was of interest to many of you who were on the call.

As you know, during the 2024 campaign Donald Trump said he wanted Social Security benefits to be tax free.

When the program was created, the federal government didn’t tax Social Security benefits. In 1983, income taxes were imposed on up to 50% of Social Security benefits of taxpayers with incomes above certain levels.

In the 1990s, up to 85% of benefits became taxable for taxpayers with higher incomes. (Most states exempt some or all of Social Security benefits from their income taxes. Details are in the Bob’s Journal of September 19, 2024.)

The Social Security reform commission in 1983 proposed taxing some of the benefits so that they would be taxed similarly to private pensions. A pension from an employer is taxable to the extent that it consists of pre-tax contributions from the employer or employee and tax-deferred compounding of investment income.

The number of taxpayers who pay taxes on their Social Security benefits steadily increases each year because the income levels at which benefits are taxed aren’t indexed for inflation. Currently, about half of recipients pay taxes on their benefits. It won’t be long before about three quarters of beneficiaries pay income taxes on their benefits. Initially, only upper-income taxpayers paid the tax.

There has been no change yet in the tax status of Social Security benefits. The benefits received in 2024 are taxable on your 2024 income tax return.

There’s also unlikely to be a change for 2025. Congress would have to pass a law exempting Social Security benefits from income taxes. It’s unlikely to put together a new tax law before mid-year and probably won’t act until later in the year.

Any exemption of the benefits is unlikely to be retroactive to the start of 2025, so I expect the first year the benefits might be tax free is 2026.

The big issue for Congress is how to provide this and other tax breaks without increasing the budget deficit or depleting the Social Security trust fund.

Congress might choose to change the taxation of Social Security benefits this year, or it might wait to include it in a comprehensive reform of the program. That needs to be done before the trust fund is exhausted around 2033.

One way to avoid the fiscal problems from exempting the benefits was in a bill sponsored in the last Congress by Rep. Angie Craig of Minnesota. The bill would exempt Social Security benefits from income taxes and pay for that by increasing the level of earnings on which FICA taxes are paid by both employers and employees.

If you’re interested, you might contact the President and your congressional representatives to let them know that you favor making the benefits tax free and paying for that by increasing the level of wages on which FICA taxes are imposed.

How 401(k) Accounts Changed in 2024

U.S. workers increased their 401(k) contributions in 2024. That action, plus investment gains, led to substantial increases in account balances.

Those are a few of the findings from the annual report and analysis from Fidelity Investments of the more than 50 million retirement accounts it administers.

Account balances reached a peak in the third quarter of 2024 before declining in the fourth quarter. But the year-end balances were higher than at the start of the year. Average balances of 401(k) and 403(b) accounts increased 11% for the calendar year, while the average IRA increased 8%.

The average 401(k) balance was $131,700 at the end of the year, the second highest level in Fidelity’s history.

The average savings rate increased by 0.2% to 14.1%. About 40% of workers increased their contributions, and their average increase was 2.9%.

Employees contributed to their 401(k)s at a rate of 9.4% of compensation while employers added 4.7%. About 90% of employee accounts received employer contributions.

As is usually the case, the accounts of older workers increased the most. Balances of employees in Generation X increased by 18% on average to $589,400. The average balance of Generation Z increased by 66% to $52,900.

Workers also are staying in the labor force longer, according to Fidelity’s data. Of those age 65 or older, 41% have worked, are currently working, or are seeking employment. The majority say they want to work for the mental stimulation.

How Do We Use Gasoline Price Data?

It used to take some work to compare local gasoline prices. The frugal driver had to drive around and look at the prices posted at each gas station. Station owners had to do the same to see what their competitors were doing.

Now, various apps and websites allow us to quickly and easily see the range of prices available in the area and enable us to compare prices over a wider area than if we were driving around looking for a good price.

But how do consumers use this information?

Consumers generally use the price sites and apps more when prices are rising than when they are falling or stable, according to research by Clemson University economist Matthew Lewis.

High and rising prices cause the most use of the price aggregators and changes in purchasing behavior. When prices are low or falling, consumers are less likely to shop around for prices. Since the prices are lower than the higher prices they remember, consumers believe they are getting a good deal without shopping around.

Lewis also found that the ability to compare competitors’ prices changes the behavior of station owners, but not in the way he anticipated.

Station owners are less likely to try to compete on price when they know competitors can easily compare prices and match a lower price.

That’s especially the case when station owners know that consumers tend to shop around only when prices are rising. The station owners apparently have decided to preserve profit margins by not trying to match the lowest price in their area.

The Data

The Personal Consumption Expenditure (PCE) Price Index increased 0.3% in both January and December. Over 12 months, the index was up 2.5% through January and 2.6% through December.

The core PCE Price Index, which excludes food and energy prices, rose 0.3% in January after rising 0.2% in December. The 12-month increase in the core PCE Price Index was 2.6% through January and 2.9% through December.

Personal income increased 0.9% in January, the biggest increase since January 2024 and the second highest since July 2022, following a 0.4% rise in December.

Compensation rose 0.4% while income from assets increased 1.1%, led by a 1.7% increase in dividend income.

Personal consumption expenditures (PCE) fell 0.2% in January after rising 0.8% in December. January is the first monthly decline in PCE since March 2023 and the biggest monthly decline since February 2021.

Pending home sales fell 4.6% in January after falling 4.1% in December. Pending home sales in January were 5.2% lower than 12 months earlier. In December, they were 5.0% lower than 12 months earlier.

Total pending home sales in 2024 were the lowest level since 1995, which also was the case at the end of 2023.

In January, 14.3% of home sale contracts fell through, according to Redfin. That’s an increase from 13.4% a year earlier and the highest level for January since 2017.

Durable goods orders jumped 3.1% in January, following a decline of 1.8% in December. But a major portion of the January increase was in volatile transportation orders, especially aircraft.

A good measure of business investment is durable goods orders minus defense and aircraft orders. That measure increased 0.8% in January and 0.2% in December. The January increase tied November 2024 for the highest monthly increase since August 2024.

The ISM Manufacturing Index was 50.3 in February, down from 50.9 in January.

The ISM Services Index increased to 53.5 in February from 52.8 in January.

The PMI Manufacturing Index increased to 52.7 in February from 51.2 in January.

The PMI Services Index ended February at 51.0, down from 52.9 at the end of January.

The PMI Composite Index fell to 51.6 at the end of February. That’s better than the 50.4 recorded in mid-February but down from 52.7 at the end of January and the lowest end-of-month level since April 2024.

The Kansas City Fed Manufacturing Index fell to negative 13 in February from negative 9 in January.

Factory orders rose 1.7% in January after declining 0.6% in December. A good proxy for business investment is factory orders minus transportation orders, which increased 0.2% in January following a 0.3% rise in December.

GDP increased at an annualized rate of 2.3% in the fourth quarter of 2024, according to the second estimate which matched the first estimate. That’s the second-lowest growth rate since the second quarter of 2022.

The private sector created 77,000 new jobs in February, according to the ADP Employment report, down from 186,000 in January. February’s number of new private sector jobs was the lowest since July 2024 and second lowest in the last 12 months.

New unemployment claims increased by 22,000 to 242,000 in the latest week. That’s the highest level in more than two months. The layoffs of federal employees that were announced recently aren’t included in this data, because there’s a separate unemployment compensation program for federal employees.

Continuing claims, which lag a week behind new claims, decreased to 1.862 million from 1.867 million.

The Markets

The S&P 500 lost 2.92% for the week ended with Tuesday’s close. The Dow Jones Industrial Average dropped 2.42%. The Russell 2000 declined 4.17%. The All-Country World Index (excluding U.S. stocks) fell 0.70%. Emerging market equities retreated 2.37%.

Long-term treasuries gained 0.32% for the week. Investment-grade bonds increased 0.21%. Treasury Inflation-Protected Securities (TIPS) added 0.57%. High-yield bonds climbed 0.01%.

On the currency front, the U.S. dollar declined 0.48%.

Energy-based commodities lost 1.70%. Broader-based commodities fell 1.50%. Gold rose 0.13%.

Bob’s News & Updates

A recent review on amazon.com of my latest book said, “Carlson is a unique national Asset while alive! Get the book, dude!” Look for “Retirement Watch: The Essential Guide to Retiring in the 2020s” (Regnery Capital: 2023) at amazon.com, barnesandnoble.com, booksamillion.com and regnery.com.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.