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In August, the average perceived probability of missing a payment over the next three months was 13.6%. That’s the highest reading in over four years.
Americans are growing more concerned about missing debt payments and entering delinquency as high prices and interest rates weigh on borrowers.
New survey data from the Federal Reserve Bank of New York showed a decreasing level of confidence among consumers in their ability to make the minimum debt payments for loans and credit cards.
In August, the average perceived probability of missing a payment over the next three months was 13.6%. That was the highest reading in over four years. It’s also an increase from 11.1% a year ago and 13.3% a month ago.
According to a separate release of Federal Reserve data on Tuesday, total consumer debt increased by $25.5 billion month over month, which was the largest increase since November 2022.
Young Americans seem to be in the worst shape as far as keeping up with their debt payments. Here are consumers’ perceived probabilities of missing a payment in the next three months, broken down by age:
- Under 40: 18.51%
- Ages 40 to 60: 15.01%
- Over 60: 8.55%
The survey also found that many people with lower incomes are at risk of missing payments. Among those earning less than $50,000, the perceived chances of missing a payment are nearly 20%, according to the New York Fed.
People earning over $100,000 have a better grip on their debt obligations, with only a 6.4% chance of missing a payment.
Consumers have mixed economic expectations
In addition to looking at debt, the New York Fed’s survey takes the pulse of consumer expectations on other topics, including inflation and the job market.
Even though inflation has largely cooled, it’s still on the minds of many Americans. Elevated goods and services prices are challenging budgets — likely part of the reason that consumers are worried about keeping up with their debt payments.
Americans said they expect prices in the economy to rise between 2.5% and 3% annually over the next 1 to 5 years. That’s roughly in line with the current rate of inflation — 2.9% as of July — and would be an improvement from the much higher rates observed in 2022 through the first half of last year.
Consumers said they expect their earnings to grow at a rate of 2.9% over the next year, but they also expect their household spending to increase by 5%.
What to do if you can’t afford a minimum debt payment
Borrowers should avoid missing minimum payments at all costs. If you don’t pay a loan or a credit card, your credit score will likely take a major hit, and your account could go to collections.
If you’re facing a temporary financial hardship, communicate with your lender and see if they can offer you any flexibility to pay at a later time.
Credit card minimum payments are often only $25 to $50 per month. It’s crucial to make that payment even if you can’t pay your full balance, or else you’ll face late fees and hurt your credit.
Personal loans and other lending options could help you afford your payments in a pinch, but taking on more debt is likely not a long-term solution to your problems. Budgeting, growing your income, and building up an emergency fund can help you get to a sustainable financial situation.
Ahead of November’s election, former President Donald Trump is calling for an end to the federal income taxes on Social Security benefits.
Trump posted a video to his social media platform Truth Social on Monday railing against the “cruel double taxation” of Social Security, referring to the payroll taxes that workers pay to fund the program and then the federal income taxes some owe on a portion of benefits once they are received.
“I’m promising no tax on Social Security benefits,” Trump said in the clip, adding that the tax “only came into existence in 1984” and is putting pressure, especially on older adults who are struggling with inflation.
Trump voiced support for the policy earlier this summer, and it’s now becoming a cornerstone of his presidential re-election bid.
‘No tax on Social Security’: What would happen?
Over 72 million Americans collect Social Security benefits each month. Most recipients — about 60% — already do not pay taxes on their benefits, according to the Social Security Administration.
Like Trump said, Social Security payments were not federally taxed until 1984, when the Reagan administration implemented rules that taxed up to 50% of benefits if the recipient’s income exceeded certain thresholds. A decade later, the Clinton administration increased the portion of benefits that could be taxed to 85%, where the cap stands today.
As a singular policy shift, recent analyses show that ending taxes on Social Security would have mixed results.
On one hand, it could certainly put more money in the pockets of the beneficiaries who are subject to federal taxes on part of their benefits. On the other, it could decrease tax revenues and put the program on a faster track toward insolvency.
More money in people’s pockets
An analysis by Morningstar found that, over the next few decades, the policy would help millions of Americans fully fund their retirement. Without the Social Security tax change, the financial firm estimates that 45% of U.S. workers won’t be able to cover their projected expenses in retirement. With the tax cut, that share of workers is reduced to 41%.
That’s an improvement of 4 percentage points, “but it’s still a low percentage,” the Morningstar researchers wrote, noting that the proposal only “sort of” gets at the broader issue of improving Social Security.
Overall, what they found is that the perks of cutting taxes on Social Security benefits disproportionately help affluent retirees.
“These gains simply mean retirees who we already project would meet their expenses in retirement would be better off,” they said.
That’s largely because the current tax is only levied on beneficiaries who have incomes above certain thresholds (between $25,000 and $34,000 of combined income if you’re a single filer). Wealthy retirees who take distributions from various retirement plans like IRAs, 401(k)s, and pensions would easily meet those income thresholds and therefore benefit from the tax break.
However, some retirees who work to make ends meet might also exceed the income thresholds and stand to benefit, as well. “A few extra thousand dollars a year could make a meaningful difference” to people in those circumstances, the researchers said.
Draining Social Security coffers
The elephant in the room is that Social Security is already on flimsy financial footing. The trust funds that pay out the program’s benefits are projected to be depleted by 2035.
This deadline is based on current tax policy. While the program’s finances were not the focus of Morningstar’s analysis, the researchers noted that nixing taxes on benefits and losing the associated revenue would accelerate Social Security’s insolvency timeline.
A separate analysis by the right-leaning Center for a Responsible Federal Budget tackles this head on. It found that an end to taxes on Social Security would result in a $1.6 trillion reduction in tax revenues for the Social Security and Medicare programs. As a result, both programs would run out of money sooner: one year sooner for the retirement benefits fund and five years sooner for the Medicare fund.
Because Social Security is funded by payroll taxes, insolvency would not mean the program would shut down. However, in this scenario, there would not be enough people working to adequately fund full benefits each month. Checks could be cut by 20% or more.
For now, at least, that seems unlikely. Congress still has a decade to fix Social Security’s financial problems.
One recent proposal by U.S. Rep. Angie Craig, D-Minn., aims to do both. Dubbed the “You Earned It, You Keep It Act,” Craig’s bill seeks to end taxes on Social Security benefits while raising the income cap that shields high-income earners from paying into Social Security. Currently, earnings above $168,600 for 2024 are not subject to Social Security payroll taxes. She wants to increase that cap to $250,000. An analysis of the proposal by the Social Security Administration determined that the changes would push back the agency’s insolvency date by 20 years.
Craig frames the bill as a “win-win” that both cuts taxes on seniors and ensures full Social Security benefits pay out long into the future. While there’s bipartisan appetite for ending taxes on Social Security, it’s not clear whether a proposal like Craig’s would pass Congress.
The bill was introduced in the U.S. House of Representatives in January and has not come to a vote.
The inflation-adjusted median income of U.S. households rebounded last year to roughly its 2019 level, overcoming the biggest price spike in four decades to restore most Americans’ purchasing power.
The proportion of Americans living in poverty also fell slightly last year, to 11.1%, from 11.5% in 2022. However the ratio of women’s median earnings to men’s widened for the first time in more than two decades as men’s income rose more than women’s in 2023.
The latest data came Tuesday in an annual report from the Census Bureau, which said the median household income, adjusted for inflation, rose 4% to $80,610 in 2023, up from $77,450 in 2022. It was the first increase since 2019, and is essentially unchanged from that year’s figure of $81,210, officials said. (The median income figure is the point at which half the population is above and half below and is less distorted by extreme incomes than the average.)
“We are back to that pre-COVID peak that we experienced,” said Liana Fox, assistant division chief in the Social, Economic and Housing Statistics Division at the Census Bureau.
The figures could become a talking point in the presidential campaign if Vice President Kamala Harris were to point to them as evidence that Americans’ financial health has largely recovered after inflation peaked at 9.1% in 2022. On Wednesday, economists predict that the government will report that inflation fell from 2.9% in July to 2.6% in August. The Federal Reserve, whose target level for inflation is 2%, is poised to start cutting interest rates next week.
Former President Donald Trump might counter that household income grew much faster in his first three years in office than in the first three years of the Biden-Harris administration, though income fell during his administration after the pandemic struck in 2020.
The data showed that while the typical American household regained its 2019 purchasing power in 2023, it essentially experienced no rise in living standards over that time. That is a sharp difference from the preceding four years when inflation-adjusted median incomes rose 14% from 2015 through 2019.
The data is based on pre-tax incomes, including Social Security and other benefit programs, though it excludes noncash benefits such as food stamps and Medicaid.
The jump in incomes reflects solid job creation last year, which helped reduce the unemployment rate to a half-century low of 3.4% in April 2023. The proportion of Americans in the so-called prime age group of 25-to-54-year-olds with jobs averaged 80.7% last year, the highest level in 23 years. Economists often focus on prime-age workers because they exclude younger people, who are often still in school, and older workers, who are more likely to retire or reduce their hours.
By racial groups, median household income rose 5.4% for whites to $84,630, increased 2.8% for Black Americans to $56,490, and was unchanged for Hispanics at $65,540. Asian incomes were also largely unchanged at $112,800.
While the overall poverty rate declined from 2022 to 2023, under an alternative measure of income the proportion of children in poverty rose from 12.4% to 13.7%. The bump in child poverty comes two years after it had plunged to just 5.2% when the pandemic-era expansion of the child tax credit provided enhanced benefits to families. But the credit expired in 2022.
“If you want to reduce poverty in the short run, you transfer income to poor families,” said Steven Durlauf, an economist at the University of Chicago.
Census also calculated that 92% of Americans had health care in 2023, largely unchanged from the previous year, though the proportion of uninsured children ticked up a half-point to 5.8%.