Retirement Matters – October 2025

By Joanne Bump

2026 Social Security (SS) Cost of Living Adjustment (COLA) — is projected at 2.7 percent by an early estimate from the Senior Citizens League. The estimate is based on inflation data and would provide an average monthly increase of about $54. This rise is in keeping with the 2.5 percent COLA provided for 2025, which didn’t keep up with the high cost of living that seniors rely on such as medical costs. This announcement is scheduled for October 15, 2025, but the federal government shutdown could delay this announcement.

Senior Deduction — The “One Big Beautiful Bill Act” (OBBBA) didn’t eliminate SS taxes. But it provides a temporary deduction for seniors, which may cut your taxes on benefits, within income limits. Starting in 2025, there is a senior deduction that eligible individuals may take on their tax returns. For many taxpayers receiving SS benefits, a portion of the benefits have been, and will continue to be, includible in their income. Depending upon their income from other sources, as much as 85 percent of the benefits could be taxable. The intent of the new deduction is to offset SS includible in income without having to change the calculation of what amount of SS is taxable.

Below are some important items to understand about this new deduction:

Taxpayers aged 65 or older get up to a $6,000 deduction in 2025-2028.
Both spouses on a joint return can get the deduction if each of them is 65 or older.
However, a married couple must file a joint return to get any deduction, there is no deduction on a married filing separately return.
A taxpayer must file a tax return to get the deduction – many older taxpayers do not have enough income to be required to file a tax return and, therefore, would not benefit from the deduction.
A taxpayer does not have to be receiving SS benefits to take the deduction – many taxpayers 65 or older have not yet begun taking their SS.
Deduction “Phaseout” – higher-income seniors may lose some or all of the deduction if their income exceeds certain amounts.
Single and head of household filers begin to lose the deduction when their income exceeds $75,000. The deduction is reduced by 6 percent of each dollar above this threshold.
Married, filing jointly filers begin to lose the deduction when their income exceeds $150,000. The deduction is reduced by 6 percent of each dollar above this threshold.
So, for single and head of household filers, the entire deduction is lost when their income exceeds $175,000 and for married, filing jointly filers the entire deduction is lost when their income exceeds $250,000.
The person or persons taking the deduction must have a valid SS number.
Persons who do not have an SS number may be filing a tax return using what is called an “Individual Taxpayer Identification Number” or ITIN. Such persons are not eligible to take the senior deduction.

OBBBA Tax Cuts Will Reduce SS Income — According to the Center for Budget and Policy Priorities, by increasing the standard deduction for all tax filers, and raising it more for some seniors, less SS beneficiaries will pay taxes on their benefits. If they do pay taxes, it will be at lower rates. The increase in the standard deduction will deliver little or no benefit to the low- or moderate-income families and will reduce the income to the SS trust funds.

Revenues from taxing SS go to finance SS benefits. Without this revenue, SS will run out of funds earlier than they otherwise would. Below are the estimates of insolvency dates and benefit cuts, according to a Congressional Budget Office (CBO) or Chief Actuary projections.

“Without OBBBA: The combined SS trust funds (OASI and DI) were projected to be insolvent in late 2034, leading to a 19 percent benefit cut.

“With OBBBA: The combined trust funds’ insolvency is accelerated to early 2034, and the required benefit cut is deepened. A typical couple retiring near the new insolvency date is projected to face an annual benefit reduction of $18,400.”

While retirees would like to pay less taxes on their SS income, they should keep their eye on the ball. That is, see that SS revenues are not drained further so seniors are more likely to receive their full SS benefits.

State Government Costs Up — OBBBA is increasing Michigan’s cost share of Medicaid and Food Assistance programs, pushing state spending up to a total of over $1 billion by Fiscal Year (FY) 2032.

State Government Revenues Drained — The OBBBA tax changes are estimated to cut state revenue by $677 million in FY 2026. These revenue losses are forecasted to slowly fall to $613 million in FY 2027 and $444 million in FY 2028. A portion of this state revenue loss is linked to the favorable tax treatment of some business expenditures, under the federal corporate income tax, impacting state corporate income taxes, as they are tied to the federal tax base definition. (See the “Estimated State Revenue Loss Under the OBBBA. FY2026 to FY2034” chart.)

Michigan Takes Action — Fortunately, in late September, Governor Whitmer and the Legislature took action to avert this crisis for now. As reported in the October 3 Gongwer, House Bill (HB) 4968 was passed, asking the federal government to give Michigan a transition period. This would allow the Medicaid provider taxes time to remain in place while Michigan finds another revenue source. It also provides unilateral authority to the executive branch to structure a new funding plan if the federal government spikes the state’s funding mechanisms. In addition, the Legislature passed an appropriations bill, HB 4706, that included new contingency language in the Department of Health and Human Services budget’s boilerplate. It removed $9 billion and reappropriated it by setting up contingency authorizations of $9.3 billion. These contingency funds allowed the state to prepare for the loss of funding. The boilerplate allows the state to spend the money as long as they are available.

(Editor’s Note: Joanne Bump serves as feature columnist for “Retirement Matters.” Column content is time sensitive and is based on information as of 10/5/25. Sources are primarily from non-profit, and government policy research organizations. Joanne can be contacted by e-mail at joannebump@gmail.com.)