Impact of Flexible Spending Accounts Contributions on payroll taxes and Social Security benefits
A Chat GPGT Calculation
The Case for CHATGPT:
Look out world! I have discovered ChatGPT. This tool is a race car. Pedestrians and readers be wary.
Chat GPT Can be used to quickly obtain answers to arcane financial questions, which would take most analysts several days or more to create a spreadsheet and more to check its accuracy. I get a quick answer in minutes using CHATGPT with a few simple questions.
The tool is better with some question types than others.
Some finance applications using extensive time series or cross sectional data require the use of the pro version.
I am finding the free version can be used to give accurate responses to several fairly complex tax questions.
Topic Wednesday July 2, 2025: Impact of Flexible Spending Accounts on payroll taxes and Social Security
Questions: Consider a person making $50,000 per year for 35 years, retiring and claiming Social Security benefits at age 62.
What is the payroll tax payment for this person?
What is the person’s Social Security benefit at age 62:
Now consider a person with the identical salary and career history who chooses to contribute $5,000 to a Flexible Spending Account. The contribution to Flexible Spending Accounts reduces the amount of income subject to the payroll tax and the amount of income used to calculate Social Security benefits.
What is the annual payroll tax for the person making the Flexible Spending Account Contribution payment?
What is the benefit at age 62?
Analysis: CHATGPT described every calculation for the payroll tax and for the benefit. The benefit calculation included the calculation for Average Index Monthly Earnings, the Primary Insurance Amount (PIA), and an adjustment for early retirement.
I ended up with the following information,
A $5,000 contribution to a Flexible Spending Account leads to a -10 percent drop in payroll taxes.
The repeated contribution of $5,000 per year will reduce Social Security benefits by 6.6 percent.
Implications: The big, beautiful bill contains provisions increasing permissible contributions to Flexible Spending Accounts. This is not good policy.
A previous memo argued that the changes will not benefit people having the hardest time saving for retirement.
As shown here, this bill reduces payroll taxes and annual benefits.
The reduction in payroll taxes will lead to earlier depletion in the trust fund, NOT GOOD.
The reduction in benefits will reduce retirement resources for retirees many of whom are highly dependent on Social Security.
Remember around half of all contributors to Flexible Spending Account contributors forfeit part of the contribution. (It would be useful the use-or-lose stipulation was eliminated or if part of the forfeited funds went to a retirement account.)
Note, under current law, contributions to 401(k) plans do not reduce payroll taxes or Social Security benefits. The tax law should be modified so all contributions to all tax preferred saving accounts – all retirement and health care savings accounts -- are subject to payroll tax and do not reduce eventual Social Security benefits.