Howdy! My name is Jade Chapman, and I’m honored to serve as the Economic Analyst Intern at TWA for the 2025–2026 academic year, continuing the great work of Greysen Golgert. I’m a senior at Texas A&M, beginning an accelerated master’s program this fall. I join TWA at a dynamic time for the U.S. economy, and over the next year, I’ll provide analysis and commentary on key macroeconomic trends. As I begin this exciting chapter, I find myself analyzing a particularly consequential development in the macroeconomic landscape: the recent downgrade of the United States’ credit rating.
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The United States’ credit rating has long served as a benchmark for fiscal strength and reliability. Ratings from the three major credit agencies—Standard & Poor’s (S&P), Fitch Ratings, and Moody’s Investors Service—assess the creditworthiness of sovereign nations, with AAA indicating the strongest capacity to meet financial obligations. Holding this top-tier rating has traditionally allowed countries to borrow at lower interest rates and demonstrated overall economic stability.

Historically, the U.S. maintained at least one AAA rating. That changed gradually: S&P downgraded the U.S. to AA+ in 2011, citing political disputes over the debt ceiling, and Fitch followed suit in 2023. In May 2025, Moody’s—the last of the major agencies to rate the U.S. at AAA—lowered its rating to Aa1, pointing to worsening fiscal trends and persistent political dysfunction. This marks the first time the U.S. lacks a AAA rating from any of the three major credit agencies.

Moody’s decision was rooted in several key concerns. Foremost is the growing national debt, which recently surpassed $36 trillion and is projected to push the debt-to-GDP ratio beyond 130% by 2035. Chronic budget deficits and rising interest payments, which may consume nearly a third of federal revenue within a decade, also factored heavily. These trends reduce fiscal flexibility and hinder the government's capacity to respond to future challenges. Additionally, Moody’s cited the intensifying political gridlock in Washington, where protracted disputes over budgeting and debt limits have cast doubt on lawmakers' ability to implement sustainable fiscal policy.

While largely symbolic, the recent U.S. credit rating downgrade reflects long-standing structural considerations rather than signaling immediate financial risk. U.S. Treasury securities continue to play a central role in global finance and are widely regarded as stable and liquid assets. The announcement was followed by a brief rise in 30-year Treasury yields to levels not seen since 2023. Although the Aa1 rating remains within investment-grade, some institutional investors with specific rating criteria may review their holdings. Broader market impacts, such as shifts in long-term interest rates or short-term volatility, may reflect evolving market perceptions rather than abrupt changes in economic fundamentals.

Despite the ratings shift, the U.S. financial system remains among the world’s most robust. Deep capital markets, a solid institutional framework, and the dollar’s international dominance continue to underpin investor confidence. Rather than a crisis, the downgrade should be viewed as a call for reform—an opportunity for policymakers to craft bipartisan solutions that address long-term fiscal imbalances and restore top-tier credit standing.

Will you pay income tax on Social Security in retirement?
For now, the answer in many cases is yes.

This could change in the coming years as lawmakers debate changes to Social Security, including a proposal to eliminate the federal income tax on Social Security completely. While retirees might welcome this change, the idea faces political headwinds.
For now, about 2 out of every 5 Social Security recipients will pay federal income taxes on their benefits, usually because they have other income in addition to their benefits, according to the IRS.
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Some also will pay state income taxes, if they live in one of the few states that doesn’t exempt Social Security benefits.
Let's look at the formula for federal income tax and the states that still tax Social Security income.

Social Security and federal income tax. The IRS uses a “combined income formula” to determine if you must pay taxes on your benefits. Combined income includes typical forms of income such as wages, interest, dividends, pension payments, and taxable distributions from traditional 401(k)s and IRAs (less adjustments), as well as nontaxable interest and half of Social Security benefits.

Whether you will have to pay federal income tax on your Social Security benefits depends on your combined income:

• If you file as an individual:
  • Up to $25,000: No tax
  • $25,000–$34,000: Up to 50% of your benefits may be taxed.
  • More than $34,000: Up to 85% of your benefits may be taxed.
• If you file a joint return:
  • Up to $32,000: No tax
  • $32,000–$44,000: Up to 50% of your benefits may be taxed.
  • More than $44,000: Up to 85% of your benefits may be taxed.

Tip: There are ways to save on taxes in retirement. Read Viewpoints on Fidelity.com: 2 ways to save on Social Security income tax.
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Do states tax Social Security income? Most states do not tax Social Security income. But some portion of your benefits may be subject to state tax if you live in one of these 9 states: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, or West Virginia. The rules vary widely from state to state. Some states may allow you to exclude federally taxable Social Security benefits for state income tax purposes based on your adjusted gross income, or AGI, so keep this in mind when reviewing the information below.

Quick refresher: What is adjusted gross income? Your AGI is income for the year after you subtract amounts—or “adjustments”—that are not taxable. The IRS uses your AGI as a starting point for calculating how much income tax you owe for the year.

Here's a closer look at how those states tax Social Security benefits for 2024:
Colorado

• Under 65: Up to $20,000 of federally taxable Social Security benefits are not taxed by the state of Colorado. Beginning in 2025, individuals ages 55–64 will be able to deduct all federally taxable Social Security income if their AGI is $75,000 or less for an individual and $95,000 or less for a couple filing jointly. Above those thresholds, $20,000 of federally taxable Social Security income may be excluded.
• 65 and older: No state taxation of federally taxable Social Security benefits.

Connecticut
Up to 25% of benefits may be taxed above these thresholds:

• Single filers: Federally taxable Social Security benefits are not taxable in Connecticut if AGI is below $75,000.
• Married filing jointly: No tax if AGI is below $100,000.

Minnesota

• Single or head of household filers: Federally taxable Social Security benefits are exempt from Minnesota state income tax if AGI is $82,190 or below for 2024. Starting at $82,191 in income, federally taxable Social Security benefits receive a partial exclusion from Minnesota state income tax, and at $118,191 and above, all federally taxable benefits are subject to state tax.
• Married filing jointly: Federally taxable benefits are exempt if AGI is at or below $105,380. Starting at $105,381 in income, federally taxable Social Security benefits receive a partial exclusion from Minnesota state income tax, and at $141,381 and above, all federally taxable benefits are subject to state tax.

Montana

• Social Security benefits are taxed as they are at the federal level.

New Mexico

• Single filers: No tax on federally taxable benefits if AGI is below $100,000.
• Married filing jointly: No tax on federally taxable benefits if AGI is below $150,000.

Rhode Island
The following apply once residents reach their full retirement age (66 or 67, depending on year of birth):

• Single filers: No tax on federally taxable Social Security benefits if income is below $104,200.
• Married filing jointly or qualifying widow(er): No tax on federally taxable Social Security benefits if income is below $130,250. If only one spouse has reached retirement age and both are receiving Social Security benefits, only the percentage of taxable Social Security benefits attributable to the spouse who has reached full retirement age are exempt from taxation.

Utah

• Single filers: Federally taxable Social Security benefits are taxed if modified adjusted gross income (What is MAGI?) exceeds $45,000. A state tax credit may reduce the amount of income tax paid.
• Married filing jointly: Federally taxable Social Security benefits taxed if MAGI exceeds $75,000. A state tax credit may reduce the amount of income tax paid.

Vermont

• Single filers: Federally taxable Social Security benefits are not taxable in Vermont if AGI is $50,000 or below. Federally taxable Social Security benefits are partially exempt from state income tax if AGI is above $50,000 and less than $60,000. If AGI is $60,000 and above, federally taxable benefits are fully taxable in Vermont.
• Married filing jointly: Federally taxable Social Security benefits are not taxable in Vermont if AGI is below $65,000. Federally taxable Social Security benefits are partially exempt from state income tax if AGI is above $65,000 and less than $75,000. If AGI is $75,000 and above, federally taxable benefits are fully taxable in Vermont.

West Virginia
West Virginia is one of the latest states to phase out taxes on Social Security benefits. Single filers with AGI at or below $50,000 and married filers with AGI at or below $100,000 can exclude 100% of federally taxable Social Security benefits from West Virginia state income tax. If they have AGI above their respective thresholds, they can deduct the following percentages of federally taxable Social Security benefits until they are fully exempted for all income levels in 2026:

• 2024: 35% exempt
• 2025: 65% exempt
• 2026: 100% exempt

State and federal income tax rules can be confusing, especially as they can change year to year. That’s just one of the things that can make managing taxes through retirement complicated. Working with a tax professional can help you better understand the potential tax impacts of any planning decisions. Please contact Laurie, [email protected] with questions.

U.S. Credit Rating Downgrade Marks a Historic Shift

• 3 major credit agencies: S&P, Fitch, Moody’s
• Credit rating scale: AAA (highest) to D (default)
• AAA rating benefits
  • Low borrowing costs
  • Investor confidence
  • Indicator of economic stability
• Recent history
  • S&P downgrade: 2011 (AAA to AA+)
  • Fitch downgrade: 2023 (AAA to AA+)
  • Moody’s downgrade: May 2025 (AAA to Aa1)
  • Significance: First time U.S. has no AAA rating from any agency

Reasons for the Moody’s downgrade:

• Debt levels:
  • $36 trillion national debt
  • Debt-to-GDP projected >130% by 2035
• Chronic Deficits:
  • Ongoing gap between spending and revenue
• Interest payments:
  • Expected to consume nearly 1/3 of federal revenue by next decade
• Political instability:
  • Gridlock, shutdowns, debt ceiling standoffs
  • Lack of bipartisan fiscal reform

Macroeconomic Implications:

• Symbolic but meaningful
• Impact on Treasuries
  • Still seen as safe, but perceived risk has risen
  • Higher yields demanded by investors (30-year yield >5%)
• Potential outcomes:
  • Increased borrowing costs
  • Crowding out of private investment
  • Weakened business/consumer confidence
  • Policy complications
• Institutional effects:
  • Some funds may be restricted from holding Aa1-rated securities
  • Possible portfolio rebalancing

What this means for clients:

• More of a signal than a shock
• U.S. Treasuries remain among the safest and most liquid assets
  • Short term effects:
    • Modest changes in interest rates (especially on long-duration fixed income instruments)
    • Treasury yields have already risen slightly
    • Equity markets may experience short-term volatility

Conclusion & Reassurance

• U.S. strengths remain:
  • Deep capital markets
  • Strong institutions
  • Dollar’s reserve currency status
• Opportunity for reform:
  • Downgrade = wake-up call, not crisis
  • Time for long-term bipartisan fiscal policy solutions
  • Goal: restore AAA status and ensure stability