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As Social Security marked its 89th anniversary, the program faces looming fund depletion dates.
Lawmakers have suggested tax changes, including eliminating taxes on benefits or raising how much the wealthy must contribute to the program.
Here’s what those changes would mean for benefits.

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Voters say Social Security is a ‘top’ election issue

President Franklin D. Roosevelt signs the Social Security Act into law on Aug. 14, 1935.
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On Wednesday, Social Security reached the 89th anniversary since President Franklin D. Roosevelt signed the program into law.
The program now faces an uncertain future, as its combined trust funds are projected to run dry in 2035. At that time, unless Congress acts sooner, beneficiaries may see an across-the-board 17% benefit cut.

The program’s trust fund that pays retirement benefits is due to run out even sooner, in 2033, risking a 21% cut to those benefits.
Social Security’s future is “one of the top” or a “very important” issue in how voters plan to choose candidates in the November presidential election, a new CNBC poll finds.
“I believe, from my conversations with lots of people on both sides of the aisle on Capitol Hill, that there’s the will to actually examine this and extend it for many, many years to come,” Social Security Commissioner Martin O’Malley told CNBC “Squawk Box” on Wednesday.

Social Security fixes likely to include tax changes

Trump is not the first to suggest the elimination of taxes on Social Security benefits. One Democratic bill introduced in January in the House of Representatives — the You Earned It, You Keep It Act — likewise calls for excluding Social Security benefits from gross income for federal income taxes.
If enacted, the bill would save the typical senior household almost $560 per year, the Senior Citizens League, a non-partisan senior group, recently estimated.
But the move would increase federal deficits by $1.6 trillion to $1.8 trillion through 2035, non-partisan public policy organization Committee for a Responsible Federal Budget, found in a recent analysis of Trump’s idea. Moreover, it would increase Social Security’s 75-year shortfall by 25%.
A Trump campaign spokesman did not return a request for comment by CNBC.

Republican presidential candidate and former U.S. President Donald Trump gestures as he leaves, after casting his ballot for early voting in Florida’s primary election, in West Palm Beach, Florida, U.S. August 14, 2024. 
Marco Bello | Reuters

Larson is instead touting a broader reform package — the Social Security 2100 Act — that would broadly make benefits more generous and pay for those increases by imposing higher taxes on the wealthy.
The bill would include a 2% across-the-board benefit increase, as well as more targeted increases for lower-income seniors, widows and widowers and students. The proposal would also eliminate current rules that result in reduced benefits tied to public servants, known as the Windfall Elimination Provision and Government Pension Offset.
To pay for those changes, the bill calls for raising the Social Security payroll tax thresholds for wealthy earners. In 2024, up to $168,600 in earnings are subject to those levies. The bill calls for reapplying the tax on earnings over $400,000. It would also apply a higher net investment income tax rate for those higher earners.

Altogether, the bill’s provisions could help extend the program’s ability to pay full benefits by 32 years, the Social Security Office of the Chief Actuary estimated last year.
The Social Security 2100 bill has been reintroduced in various sessions of Congress. Larson, who is running for reelection, said he plans to reintroduce it again in the next session.
While the current version has 188 Democratic co-sponsors, Larson said he hopes for the backing of two other notable leaders — Democratic presidential candidate Kamala Harris and her running mate, Tim Walz.
As senator, Harris was a co-sponsor of a bill that similarly called for making benefits more generous while raising taxes for the wealthy. As vice president, the White House administration likewise called for expanding Social Security and taxing the wealthy.
Meanwhile, Walz was an original co-sponsor of Social Security 2100 during his time as a congressman representing Minnesota, according to Larson. As governor of Minnesota, Walz increased the state tax exemption for Social Security benefits.

Rep. John Larson, D-Conn., and other lawmakers discuss the Social Security 2100 Act, which would include increased minimum benefits, on Capitol Hill on Oct. 26, 2021.
Drew Angerer | Getty Images News | Getty Images

The Harris-Walz campaign did not return a request for comment from CNBC.
While Republicans have considered other changes to Social Security — such as raising the retirement age — Larson hopes he can eventually lure leaders from the other side of the aisle to support his proposal.
“We’re going to lift the cap on people [earning] over $400,000 and the other side says, ‘Here you go again. It’s tax the wealthy,'” Larson said. “No, it’s have them pay their fair share.”
In congressional hearings on the program, Republican lawmakers have raised concerns about the costs associated with reforming the program. Ultimately, restoring Social Security’s solvency may require a compromise including both tax increases and benefit cuts.
Rep. Jodey Arrington, R-Texas, commended Larson for his passion and for putting a proposal on paper during an April Ways and Means Social Security subcommittee hearing.
“Even if I disagree, and in some cases wildly disagree, with his way of solving it, we’re going to have to get in a room and we’re going to have to hold hands and leap off the cliff of those who criticize us who do anything to reform the program,” Arrington said.
While critics question whether lawmakers will bring the bill forward for a vote, Larson said he hopes to see progress on Social Security in the next Congress or in the coming lame duck session. More

As new government data shows inflation subsiding, Social Security beneficiaries may expect a lower cost-of-living adjustment in 2025.
The prospective Social Security COLA for 2025 could be the lowest since 2021, according to a new estimate.

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Even as new government inflation data shows inflation subsiding, many retirees are still struggling under the weight of higher costs.
Next year’s Social Security cost-of-living adjustment, or COLA, may not provide much relief.

In 2025, the Social Security COLA may be 2.6%, according to Mary Johnson, an independent Social Security and Medicare policy analyst.
That’s down from the 3.2% boost to benefits Americans saw in 2024. It’s also substantially lower than the 8.7% COLA Social Security beneficiaries received in 2023, and the 5.9% increase for 2022.
The prospective Social Security COLA for 2025 would be the lowest since 2021 but in line with the average cost-of-living adjustments for the past two decades, according to Johnson.

The estimate for 2025 is still subject to change. The annual Social Security cost-of-living adjustment is calculated based on third-quarter data from a subset of the consumer price index, known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.  
The size of the official increase may change as new CPI data comes in.

The Social Security Administration typically announces the COLA for the following year in October.

Older Americans feeling ‘lingering effects’ of high costs

More than half of adults ages 50 and up — 61% — worry they will not have enough money to support them in retirement, according to a recent AARP survey.
Inflation is also a persistent concern for those older Americans, with 37% worried about covering basic expenses such as food and housing. Meanwhile, 70% are worried about prices rising faster than their incomes.

High inflation tends to hurt retirees more than near-retirees, since retirees’ income is less likely to go up as prices rise, according to the Center for Retirement Research at Boston College.
Social Security benefits — which are adjusted annually for inflation — are an exception.
However, some experts argue the annual increases to benefits have fallen short.
The average Social Security benefit has lost 20% of its buying power since 2010, according to recent research from the Senior Citizens League, a nonpartisan senior group.
Today’s average monthly benefit for retired workers would have to increase from $1,860 to $2,230 — nearly 20% — to keep pace with 2010 buying power, the group’s research found.
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Another measure for the cost-of-living adjustment — the Consumer Price Index for the Elderly, or CPI-E — may better reflect the costs retirees face, advocates including the Senior Citizens League have said.
However, not all experts agree the cost-of-living adjustment measure should be changed.
While the annual adjustments are now calculated using a backward-looking method, they tend to fully compensate for inflation over time, Alicia Munnell, director of the Center for Retirement Research at Boston College, previously told CNBC.com.
Though the CPI-E has previously risen faster than the currently used measure for the cost-of-living adjustments, that gap narrowed in recent years, research from the Center for Retirement Research found. Consequently, switching to the CPI-E may not be the most effective move, the authors argued.

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Buying a knockoff used to be a consumer’s dirty little secret, largely because a “fake” was considered inferior to the real thing.
These days, brand imitators, also known as dupes, have elbowed their way into the mainstream.
In many cases, buying a dupe is just more “financially responsible” at a time when many consumers feel cash-strapped, one expert said.

Klaus Vedfelt | Digitalvision | Getty Images

From leggings to lip gloss, there’s a dupe for almost any brand-name product.
Buying a knockoff used to be a consumer’s dirty little secret, largely because a “fake” was considered inferior to the real thing, not to mention the economic cost and intellectual property rights infringement.

But brand imitators, also known as dupes — short for duplicates — have elbowed their way into the mainstream and are now even cool.
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“It’s not necessarily because the consumer doesn’t love the brand, sometimes it just makes more financial sense to buy the dupes,” said Sara Walker, a Los Angeles-based influencer and fashion industry expert.
Unlike illegal counterfeit goods, which tend to carry an unauthorized trademark or logo of a patented brand, these dupes are cheaper, typically legal alternatives to premium or luxury consumer products, and in some cases preferred to their pricier counterpart.
“It’s not a direct knockoff, it’s kind of revising something that’s very chic from a designer world into a more accessible product,” Walker said.

Brand imitators have found “this narrow little aisle to operate in that satisfies consumer demand” and keeps them safe from actual legal action from the companies they are duping, according to Ellyn Briggs, brands analyst at Morning Consult.
Even when consumers can get the real thing, nearly 33% of adults intentionally purchased a dupe of a premium product at some point, according to a report by Morning Consult. The business intelligence company polled more than 2,000 adults in early October.

TikTok is ‘ground zero’ for dupes

“The online culture of dupe shopping, accelerated by TikTok … has flipped the script,” according to Briggs.
“TikTok is ground zero for where all this is happening,” she said.
TikTok Shop, especially, “has become the storefront for dupes,” Briggs said.
Younger generations use TikTok Shop, which launched as an e-commerce platform within the short-form video app in September of last year, more than older cohorts: About 40% of Gen Zers between the ages of 18 and 26 have made at least one purchase. Similarly, 37% of millennials have bought at least one item on TikTok Shop, according to a Morning Consult poll conducted in December.
But designer look-alikes can also be found at retail giants such as Amazon and Walmart, as well as Costco, home to the viral floor mirror dupe of an Anthropologie mirror.
“Dupes are everywhere now. That’s just how it is,” Walker said.

Dupes are a sign of the times

Often, shopping for dupes is a way to participate in a trend without breaking the bank — especially at a time when styles cycle through faster and faster, according to Walker, who said she has tried dupe leggings, dupe perfume and dupe sunglasses.
“It’s not always financially responsible to buy the original,” Walker said.
Briggs said that in some ways, dupe shopping is a form of bargain hunting, which has been “repackaged” into a new subset of online shopping — just as other viral trends on TikTok are repackaging longstanding or pre-existing behaviors.
The quality may vary, however. In other words, you get what you pay for.

“Trends come and go and if you are constantly updating your wardrobe based on the trends, that can get expensive,” Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners in Jacksonville, Florida, told CNBC earlier this year, speaking about the “mob wife” fashion trend.
McClanahan is a member of CNBC’s Financial Advisor Council.
These days, more Americans are struggling in the face of sky-high prices for everyday items, and most have exhausted their savings and are now leaning on credit cards to make ends meet, recent reports show.
As consumers continue to stretch to cover rising rent, increased food prices and higher borrowing costs, there is less disposable income left for discretionary spending, according to Brett House, economics professor at Columbia Business School. That has helped open the door to dupes.

“Sustaining recent consumption patterns is making people potentially susceptible to the promise that a dupe offers,” House said.
The “sustained interest” for dupes also reflects how increasingly cautious consumers are about making big purchases in this economy, said Briggs.
In the end, price is “the No. 1 factor for purchase decisions,” she added, whether a shopper is cash-strapped or not.

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Nearly 60% of Americans aren’t comfortable with their emergency savings, up from 48% in 2021, according to a Bankrate survey.
Regardless of the economic climate, investors need emergency savings to cover expenses in the event of a job loss or other unexpected bills, experts say.
However, savings benchmarks can depend on your family’s circumstances.

Pascal Broze | Onoky | Getty Images

As investors face economic uncertainty, financial advisors have guidelines for how much cash they should have set aside.
Despite second-quarter economic growth, nearly 60% of Americans wrongly think the U.S. is currently in a recession, according to a June survey of 2,000 adults from Affirm.

While Goldman Sachs and JP Morgan raised recession forecasts in August, other experts still expect an economic “soft landing,” meaning the Federal Reserve’s policy won’t cause a downturn.
Meanwhile, inflation continues to ease, but a weaker-than-expected jobs report for July triggered stock market volatility last week.
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Amid the uncertainty, nearly 60% of Americans aren’t comfortable with their level of emergency savings, up from 48% in 2021, according to an annual Bankrate survey that polled more than 1,000 U.S. adults in May.
As of the polling, some 27% of those surveyed had no emergency savings — the highest percentage since 2020, Bankrate found.

Regardless of the economic climate, investors need emergency savings to cover expenses in the event of a job loss or other unexpected bills. Here’s how much cash to set aside, according to financial advisors.

Dual earners: Three months is a rule of thumb

Double-income families should aim to save at least three months of living expenses, according to certified financial planner Greg Giardino, vice president of Wealth Enhancement Group in Oakland, New Jersey. 
However, you could adjust that guideline “depending on the reliability of those income sources,” he said. For example, commissioned workers with unpredictable cash flow may need more than tenured professors.
Building that level of cash reserves isn’t easy. Only 44% of Americans have three months of expenses saved for emergencies, according to Bankrate’s survey.

Single income: Save six months or more

Generally, single individuals or families with a single income should save at least six months of expenses, experts say.
But higher levels of cash reserves could offer more flexibility when faced with a job loss or economic downturn.
Douglas Boneparth, a CFP and president of Bone Fide Wealth in New York, prefers six to nine months of savings for single earners.
“I’ve never come across someone who was upset that they had a little bit more cash than they needed,” said Boneparth, who is also a member of CNBC’s Financial Advisor Council.

Boston-based CFP and enrolled agent Catherine Valega, founder of Green Bee Advisory, said she is “more conservative than most other advisors” and recommends 12 to 18 months of living expenses in “safe, liquid investments” for single earners.
Although the Federal Reserve could start cutting interest rates in September, investors still have “high-yield savings opportunities,” she added.

Entrepreneurs: Keep up to one year of expenses

With unsteady income, entrepreneurs or small business owners could also benefit from higher levels of savings — eight to 12 months of expenses, according to Giardino of Wealth Enhancement Group.
Of course, the exact amount for emergency savings depends on your unique circumstances and your family’s needs.

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The consumer price index rose 2.9% in July 2024 from a year earlier, according to the U.S. Bureau of Labor Statistics.
That was the lowest reading since March 2021.
Inflation for consumer staples has eased considerably, economists said.

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Inflation continued to retreat in July, aided by easing price pressures for consumer staples like food and energy and physical goods like new and used cars.
The consumer price index, a key inflation gauge, rose 2.9% in July from a year ago, the U.S. Department of Labor reported Wednesday. That figure is down from 3% in June and the lowest reading since March 2021.

The CPI gauges how fast prices are changing across the U.S. economy. It measures everything from fruits and vegetables to haircuts, concert tickets and household appliances.

“I think it’s right down the strike zone,” Mark Zandi, chief economist of Moody’s, said of the CPI report.
Perhaps the most important thing for consumers is inflation for groceries “continues to grow very slowly,” Zandi said.
Combined with similar good news for other necessities like gasoline and market rents for new tenants, “that’s really encouraging news, particularly for the lower-income consumers that are the most hard pressed,” he added.

Inflation guides Fed interest rate policy

The July inflation reading is down significantly from the 9.1% pandemic-era peak in mid-2022, which was the highest level since 1981.

It’s also nearing policymakers’ long-term target, around 2%.
“We think we’re though the worst of it from an inflation perspective,” said Joe Seydl, senior markets economist at J.P. Morgan Private Bank.

The U.S. Federal Reserve uses inflation data to help guide its interest rate policy. It raised rates to their highest level in 23 years during the Covid-19 pandemic era, pushing up borrowing costs for consumers and businesses in a bid to tame inflation.
Recent labor market data has spooked some investors, who fear it signals a U.S. recession may be near. Many economists say those concerns are overblown, at least for now.

Nonetheless, easing inflation coupled with a cooler labor market make it likely that Fed officials will start cutting interest rates at their next policy meeting in September, economists said. Doing so would reduce borrowing costs, helping buoy the economy.
“In short, this CPI report represents more good data and adds to the evidence supporting a [0.25 percentage point] September rate cut,” Paul Ashworth, chief North America economist at Capital Economics, wrote in a note Wednesday.

Housing is a stumbling block

Housing is the one major impediment keeping inflation elevated above the Fed’s target right now — on paper, at least, economists said.
Shelter is largest component of the CPI, and therefore has an outsized effect on inflation readings.
The shelter index has risen 5.1% since July 2023, accounting for more than 70% of the annual increase in the “core” CPI, the BLS said Wednesday. (The core CPI is economists’ preferred gauge of inflation trends. It strips out food and energy costs, which can be volatile.)

After declining to 0.2% in June on a monthly basis, shelter inflation jumped back to 0.4% in July, the BLS reported.
Housing inflation moves up and down at glacial speed due to how the government measures it, economists said. Such data quirks mask positive news in the real-time rental market, which has seen inflation flatline for about two years, Zandi said.
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Excluding shelter — which is likely warranted given measurement issues — “we’re at the Fed’s target and then some,” Zandi said.
“Mission accomplished, in my view,” he said of the fight against inflation.
After stripping out shelter, the CPI rose 1.7% in July, below the Fed’s annual target.
Economists broadly expect shelter CPI inflation to continue to throttle back slowly given prevailing trends for market rents.

Other ‘notable’ categories

Motor vehicle insurance, medical care, personal care and recreation are some other indexes with “notable” increases over the last year, according to the BLS.
Prices in those categories are up 18.6%, 3.2%, 3.4% and 1.4%, respectively.
A surge in new and used car prices a few years ago is likely now fueling high inflation for car insurance premiums and vehicle repair, since it generally costs more to insure and repair pricier cars, economists said.

Insurance inflation should ultimately fade alongside falling car prices, they said. New vehicle prices are down 1% over the past year, and those for used cars and trucks have declined almost 11%.
Egg prices — which had surged in 2022 due to a historic outbreak of bird flu — are rising again following a reemergence of the deadly disease. They’re up 19% from a year ago.
Other food categories including bacon and crackers are up over the past year (by 8.5% and 3%, respectively), but their prices fell during the month of July, suggesting more potential declines ahead.
Overall annual grocery inflation was 1.1% in July, down from an average 11.4% in 2022, which was the highest since 1979.

How supply and demand impacted inflation

Inflation for physical goods spiked as the U.S. economy reopened in 2021. The Covid-19 pandemic disrupted supply chains, while Americans spent more on their homes and less on services such as dining out and entertainment.
It is a different story now. Goods inflation has largely normalized, while the services sector is a fly in the ointment, economists said.
However, services inflation — generally more sensitive to labor costs — should ease further due to a slacker job market and declining wage growth, economists said.
High interest rates have also served to reduce overall inflation by reducing demand, Seydl said.

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With the fate of federal student loan forgiveness programs facing uncertainty, borrowers should explore the many state-level relief options available, experts say.
“Most states have [a program], especially if you’re in health care,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.

Halfpoint Images | Moment | Getty Images

With the federal government’s ability to forgive student debt up in the air, experts say it would behoove borrowers to explore the many state-level relief programs available.
“Most states have one, especially if you’re in health care,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that helps borrowers navigate the repayment of their debt.

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A student loan forgiveness initiative for nonprofit and hospital nurses in Minnesota has gotten some attention of late, because Vice President Kamala Harris’ running mate, Tim Walz, signed it into law last year. Under that program, registered nurses who work at a nonprofit or public hospital in Minnesota are eligible for up to $12,000 in student debt relief.
Different states have programs focusing on various fields.
“There’s a bunch for teachers and public defenders, and some oddball ones,” Mayotte added. “And some of them are really generous.”

What’s happening with federal forgiveness programs

Currently, the federal government’s ability to forgive student debt is in jeopardy.

The Biden administration’s new repayment Saving on a Valuable Education plan, known as SAVE, that leads to expedited forgiveness for certain borrowers is on hold amid a barrage of Republican-led legal challenges. President Joe Biden’s broad-based forgiveness effort could be finalized this fall, but is likely to end up in court, too.

State forgiveness often based on occupation

Most state-level student debt forgiveness programs offer relief to borrowers in specific occupations, said higher education expert Mark Kantrowitz.
“So they should look for forgiveness based on their job, especially for their state,” Kantrowitz said.
For example, in California, licensed mental health professionals who work at certain facilities may be eligible for up to $15,000 in student loan assistance. (The next application deadline is Aug. 26.)
The Maine Dental Education Loan Repayment Program offers a total of $100,000 in student loan repayment assistance to dentists in underserved areas of the state.

One benefit of the state loan forgiveness programs, Mayotte pointed out, is that private student loans are often eligible. The federal government, meanwhile, excludes private loans from its relief.
Other state programs may offer forgiveness based on your finances rather than your occupation.
In New York, the Get On Your Feet Loan Forgiveness Program, rolled out in 2015, allows certain residents to get loan forgiveness for up to 24 months of their payments. Among other qualification requirements, borrowers must have an adjusted gross income of less than $50,000 a year.
The Institute of Student Loan Advisors has a database of student loan forgiveness programs by state.

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Former President Donald Trump and Vice President Kamala Harris both want to end taxes on tips — and some policy experts have already criticized the idea.
In 2023, there were roughly 4 million U.S. workers in tipped occupations, representing 2.5% of all employment, according to estimates from The Budget Lab at Yale University.
If enacted, the plan could face administrative hurdles and be costly, experts say.

U.S. Vice President Kamala Harris and Republican presidential nominee and former U.S. President Donald Trump.
Brendan Mcdermid | Elizabeth Frantz | Reuters

Former President Donald Trump and Vice President Kamala Harris both want to end taxes on tips — and some policy experts have already criticized the idea.
Harris expressed support for tax-free tips at a rally on Saturday in Las Vegas. Her comments come roughly two months after Trump shared a similar idea, also at a rally in the service economy hotbed.

Nevada is a key battleground state where the hospitality sector accounts for roughly one-quarter of the workforce, according to the state’s June employment data.
“It is my promise to everyone here, when I am president, we will continue to fight for working families, including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers,” Harris said at her rally.
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In 2023, there were roughly 4 million U.S. workers in tipped occupations, representing 2.5% of all employment, according to estimates from The Budget Lab at Yale University.
Generally, tipped workers are lower-income individuals, and some 37% weren’t subject to federal income tax in 2022, the report found. As a rule, employed workers who make less than their standard deduction don’t owe federal income taxes.

Not taxing tips is “a fairly narrowly targeted tax exemption,” said Garrett Watson, senior policy analyst and modeling manager at the Tax Foundation.
Still, the idea has some bipartisan support in Congress with a bill introduced in the Senate in July and a House companion bill.

No tax on tips ‘fails every score’

Despite support for no tax on tips from Harris and Trump, some experts have voiced concerns about future plans. 
Experts consider equity, efficiency and revenue when weighing policy, explained Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center. “The striking thing about this proposal is it fails every score that you might make for tax policy.”

If enacted, the idea could face administrative hurdles and possible abuse, experts say. For example, some workers could try to reclassify wages as tips to avoid the tax.
After Harris’ weekend comments, a campaign official told CNBC that, if elected, Harris would work with Congress to enact a law with an income limit and requirements to prevent “hedge fund managers and lawyers from structuring their compensation in ways to try to take advantage of the policy.”
Trump’s campaign did not respond to CNBC’s request for comment.

The striking thing about this proposal is it fails every score that you might make for tax policy.

Steve Rosenthal
Senior fellow at the Urban-Brookings Tax Policy Center

The idea of not taxing tips could also present a fairness issue for similar low-income workers who don’t earn tips, Rosenthal said.
“Why should someone whose compensation is a mix of tips and wages be better off after taxes than somebody who just gets wages?” he added.

The cost of no tax on tips

There are also critiques about the cost of the idea, particularly amid concerns about the federal budget deficit.
At Saturday’s rally, Harris called for no tax on tips and a higher minimum wage. The two ideas could collectively raise the deficit by $100 billion to $200 billion over 10 years, assuming the minimum wage increased from $7.25 to $15 per hour, according to an estimate from the Committee for a Responsible Federal Budget.

It’s unclear whether Harris’ and Trump’s plans would include an exemption from payroll taxes or just federal income taxes, which could impact revenue.
The cost could also be higher “depending on behavioral assumptions and avoidance questions,” Watson from the Tax Foundation said.

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Home equity is “not like bread,” said Greg McBride, chief financial analyst at Bankrate. “It won’t go stale if it just sits there,” he said.
But if you do have major home improvements or repairs, tapping home equity is a viable solution, experts say.

Iuliia Isaieva | Moment | Getty Images

Homeowners are sitting on $17 trillion in equity as of the end of the first quarter of 2024, according to CoreLogic. The average homeowner gained $28,000 in equity compared to a year earlier.
For many people, there’s no need to touch that money.

Home equity is “not like bread,” said Greg McBride, chief financial analyst at Bankrate. “It won’t go stale if it just sits there.”
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There is one exception, however: If you need to make major home improvements or repairs, tapping home equity can be a viable solution, experts say.

Home equity is ‘a less expensive borrowing option’

Among polled homeowners, 55% see home improvements or repairs as a good reason to tap home equity, according to a new survey by Bankrate. The site surveyed 2,294 U.S. adults, including 1,133 homeowners, in late June.
Using home equity is “certainly a less expensive borrowing option than resorting to personal loans or credit cards,” McBride said. 

As of Aug. 7, the current average home equity loan interest rate is 8.59%, according to Bankrate. The average HELOC interest rate is 9.37%.
To compare, the average personal loan interest rate is 12.38% , Bankrate found. The average credit card interest rate stands at 24.92%, according to LendingTree.

While cash from savings continues to be the most common way homeowners fund renovation projects, or 83%, credit card use has increased, according to the 2024 U.S. Houzz & Home Study. Houzz surveyed 33,830 homeowners of ages 18 and older from Jan. 19 to Feb. 27.
About 37% of homeowners paid for their repair projects with credit cards, up from 28% who did so in 2022, Houzz found.
While tapping equity is cheaper, it still has risks. Rates are higher given the Federal Reserve’s spate of rate hikes, and you need to go in with a plan to pay off the debt.

Remodeling can add value

Using home equity to invest in your home can make sense, said Jessica Lautz, deputy chief economist at the National Association of Realtors. Such projects not only help preserve the house, they may even enhance its value, boosting profits when you eventually sell.
The highest percentage cost recovered for exterior projects was from new roofing, at 100%, according to the latest Remodeling Impact Report by NAR. For interior projects, the highest percentage cost recovered was from refinishing hardwood floors, at 147%, and installing new wood flooring, at 118%, NAR found.

“We’ve found that hardwood floors have more universal appeal,” said Lautz. “For something like a roof, it’s a big project. … People may want to have that completed before they move into a home, make sure that the roof is in good working order.”

Tapping home equity for vacations, big purchases

More than 1 in 10 millennial homeowners said vacations or buying big-ticket items are good reasons to tap your home equity, according to Bankrate. But experts say this move is a “don’t.”
“If you have to finance the cost of your vacation, you can’t afford the vacation,” McBride said.
Plus, big-ticket items, such as a car or electronics, are depreciating in value from the point of purchase, he explained.
“You’re not only buying a depreciating asset, but you’re financing the purchase of that depreciating asset,” McBride added.

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