“The new tax plan ill use the Chained CPI method of calculating inflation for tax purposes instead of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) that the Internal Revenue Service (IRS) currently uses.”
Rumors and speculation fill the air about President Trump’s proposed tax bill, which bears the official moniker, the Tax Cuts and Jobs Act. If you have been listening to the news, reading the paper, or talking with friends, you could be asking, how might the new tax bill affect Social Security?
For the 34% of Americans receiving Social Security benefits who rely on it for at least 90% of their retirement income, the prospect of losing even a small portion of their monthly checks strikes terror in the heart. Since millions of seniors live below the poverty level with no safety net, even a slight reduction in their primary or only source of income could mean hardship and hunger.
The new tax plan would use the Chained CPI method of calculating inflation for tax purposes instead of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) that the Internal Revenue Service (IRS) currently uses. Both methods examine financial data to determine how much inflation happened during a year, but the Chained CPI assumes that people will just switch to less expensive goods when the prices go up. What are the less expensive goods that we can switch to from milk, eggs, and health insurance?
Why the COLA Calculation Matters to Social Security Recipients
Every year, the Social Security Administration (SSA) decides if Social Security benefits will get a raise. If the CPI-W showed that there was inflation as of the third quarter of the year, Social Security checks will be higher the next year, because they will receive a Cost of Living Adjustment (COLA). If there was no inflation or if there was deflation, there will be no change, as Social Security checks cannot go down.
Indirect Impact of the New Tax Plan on Seniors
The tax plan will double the standard deduction and water down the state and local itemized deductions. These two changes will wipe out the tax benefit of making contributions to charities. Many seniors count on charitable organizations for some of the goods and services they need to survive.
There Might Be a Silver Lining
Using the Chained CPI is expected to result in less generous COLAs. Lower COLAs mean that the Social Security system will deplete its reserves more slowly. Using the current method of calculating COLAs, the Social Security system is expected to take in less money from paycheck withholdings than it pays out in benefits by the year 2022, and run out of reserves completely by the year 2034.
As with any legislation, things can change quickly, and your state’s laws may affect how the new tax plan, if passed, will impact you. You should talk with an elder law attorney in your area to protect your rights.
USA Today. “The GOP tax plan could negatively affect your Social Security benefits.” (accessed December 19, 2017) https://www.usatoday.com/story/money/personalfinance/retirement/2017/11/23/the-gop-tax-plan-could-negatively-affect-your-social-security-benefits/107865406/
Forbes. “What The GOP Tax Cut Will Mean For Older Adults.” (accessed December 19, 2017) https://www.forbes.com/sites/howardgleckman/2017/12/15/what-the-gop-tax-cut-will-mean-for-older-adults/#250e345615ad