It can happen in certain situations

Fact checked by Kirsten Rohrs Schmitt
Reviewed by Margaret James

The relationship between the stock market and your monthly Social Security check should be on your mind. In certain situations, sizable investment gains from the market could decrease your benefits or cause them to become taxable. However, this is rare. Still, careful planning and a thorough understanding of the rules can help ensure that your benefit checks don’t dwindle.

Key Takeaways

• Social Security does not invest any of its funds in the stock market, so stock price fluctuations do not directly impact benefits.
• A booming stock market might increase your personal retirement portfolio’s earnings and make your Social Security benefits taxable, thus reducing them.
• If you begin taking Social Security before your full retirement age and exercise non-qualified employee stock options, your benefits could end up being further reduced.

How Social Security Benefits Are Generated

First, some basics. Your benefits are paid out of the reserves of the Social Security Trust Fund. Money in the trust fund (which actually consists of two funds: the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund) comes from payroll taxes collected from workers and employers (that is, from that category marked “FICA deductions” on your pay stub).

Note

People who are self-employed contribute to Social Security in the form of the self-employment tax.

So your benefits are being funded by contributions from people in the workforce, along with the investment earnings generated on those contributions and federal income taxes.

However, the Social Security Trust Fund has no direct connection to the stock market. Funds left after payment of all benefits are invested in special-issue government bonds on a daily basis. They are similar to U.S. Treasury bonds, except they don’t trade publicly. These interest-bearing bonds are a form of IOU, to be paid from future FICA tax receipts.

Stock-Oriented Scenarios

Your individual Social Security benefits are determined in much the same way that a defined-benefit pension plan works. The amount you receive is based, in part, on how long you worked and how much you earned during your working years. None of the calculations that go into determining your benefits have anything to do with the stock market, bond market, or the prime interest rate, either.

However, there is a way that the stock market could affect your Social Security benefits. That scenario would arise if you opted to start taking those benefits before your full retirement age (e.g., if you were born in 1960 or later, it’s 67) and, at the same time, exercised non-qualified employee stock options (NSOs). Profit generated by the exercise of those options is considered work or earned income. If your total work income for the year, including profit from the sale of NSOs, is more than the legal limit, your benefits will be reduced by $1 for every $2 over the limit.

This only applies to NSOs, however. Profit from exercised stock options bought on the open market or from employer-granted incentive stock options (ISOs) are considered capital gains, not earned income. As such, they do not affect your benefits, as long as you have held those options for at least a year.

Tax Consequences

Once you reach your full retirement age, no amount of income, no matter the source, has an effect on the amount of your Social Security benefits. However, if at any age your total reportable income (including interest payments, dividends, stock options, capital gains, and any other investment-related items) exceeds a certain amount, a portion of your Social Security benefits may be considered taxable. So a great year for the market and your portfolio could effectively reduce your benefits—by imposing taxes on them.

Say you’re a single filer. In 2024, if your combined income is over $34,000, your benefits may be up to 85% taxable. If your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable.

Say you file a joint return. In 2024, if your combined income is over $44,000, your benefits may be up to 85% taxable. If your combined income is between $32,000 and $44,000, up to 50% of your benefits may be taxable.

Note: The definition of “combined income” is a bit tricky. In this case, your “combined income” equals:

Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits

Other factors, including the age at which you begin receiving benefits, your work history, and any additional income you receive while getting benefits, can directly or indirectly affect your Social Security bottom line. If you receive a government pension, it could result in a reduction of your benefits through either the Government Pension Offset (GPO) or Windfall Elimination Provision (WEP).

Social Security Fairness Act

The Social Security Fairness Act, concerning the Windfall Elimination Provision and Government Pension Offset, was signed into law on Jan. 5, 2025. It eliminates the reduction of Social Security benefits while entitled to public pensions from work not covered by Social Security. The Social Security Administration is evaluating how to implement the act.

The Future of Social Security

Social Security’s exposure (and yours, as a benefits recipient) to the stock market is pretty limited. However, that could change.

The funding crisis that surrounds the Social Security Trust Fund has generated much discussion about finding better ways to finance the program. One suggestion involves investing all or part of the Social Security Trust Fund in the equities markets. Another argues for allowing individual workers to invest all or part of their FICA contributions in instruments of their choosing.

While some observers insist that it’s time for Social Security to invest in the market—or allow employees to do so—and take advantage of the higher rates of return that would be possible, others warn that involvement in the stock market would not make a difference and could, in fact, insert an element of danger in the event that the market collapses or enters a prolonged bear period. Presumably, the trust fund would be a conservative investor, opting for the safest blue-chip stocks, but some degree of risk always exists when investing in equities.

Do Self-Employed People Pay into Social Security?

Yes, self-employed people pay into the Social Security system via the self-employment tax.

What Is the Social Security Administration?

The Social Security Administration is part of the federal government in the United States. It generates Social Security numbers, tracks earnings, and distributes benefits.

What Is the Average Social Security Benefit?

The average Social Security benefit for a retired worker for November 2024 is $1,925.46.

The Bottom Line

If you’re worried whether stock market slumps can affect your Social Security benefits, the short answer is no. For the most part, the stock market has no direct impact on your Social Security benefits.

Should the Social Security Trust Fund begin investing in the stock market (or allow workers to do so with their contributions), there would be no doubt that market results—good or bad—would have a direct effect on Social Security benefits. While there are no definite plans for that to happen, the possibility can serve as a reminder that you should have your own personal retirement accounts in place, and not rely solely on Social Security.

Yes, loaning money to friends and family is still a bad idea. 

That being said, there may be some exceptions. Maybe this person helped you in the past, and you want to repay the favor. Or, you’re fairly certain that the loan will be paid back.

Whatever the reason for the loan, it’s important to set boundaries to help preserve your relationship with this person and eventually get your money back. Before handing your money over, consider the following risks of lending money to friends and family. 

Key Takeaways

• Lending money to friends and family could lead to strained relationships if expectations aren’t clear from the start.
• One significant risk of lending money to loved ones is that you may not get your money back.
• Charging interest on loans, even to family and friends, could mean that you’ll need to pay taxes on the amount you earn. 

You May Not Get Your Money Back

It’s noble to want to help out friends and family, especially if they’re in a financial bind. The truth is that you may never see the money again. Even if you have a formal agreement in place, it could be extremely difficult to recoup your losses. 

Your Relationship Can’t Survive the Strain

Ideally, you’ll have an open and honest conversation with your loved one before lending this person money. You could express your hesitation or fear about getting the money back or hearing what your loved one has to say about their plans to repay the loan. 

If your repayment terms or expectations aren’t clear, it can put a strain on the relationship. Or, if the loan isn’t paid back on time (or at all), it could lead to further resentment. 

You Could Be On The Hook For Taxes

If you decide to charge interest, any amount you earn from lending out money may count as ordinary income in the eyes of the IRS. Not setting aside money from the interest you earn could lead to an unpleasant surprise come tax season.  

Fast Fact

If you lend over $18,000 to a loved one, you may need to file a gift tax return if the loan is interest-free. 

You Could Be Expected to Constantly Help Out Others

In your mind, you’re doing a one-off favor for a close friend who needed some extra cash during the holiday season. You don’t want them to struggle and can afford to lend them the money.

Unfortunately, other friends or family members may want to take advantage of your generous nature and expect you to help them. Or, the same person may ask you for additional loans. To prevent friends and loved ones from constantly believing you’ll open your wallet for them, carefully consider what boundaries you’ll set before lending any money. 

Important

Find out more on this topic with the do’s and don’ts of lending to friends or family.

The Bottom Line

Even though you may want to help, you must think carefully before lending money to friends and family. There is the potential that you may not see the money ever again, be asked to lend money repeatedly, and end up with a lot of resentment toward people you are close to. If you decide to grant a loan, ensure you are explicit in your expectations and whether you can truly afford to part with the funds.