Public Policy Risk

Posted January 6, 2026, By Cole Ferrier

Key Takeaways:

• Public Policy Risk is the danger that changes in laws and government programs—related to taxes, Social Security, Medicare, or estate planning—will negatively impact your financial plan.

• This risk is completely outside your control, as the rules of the financial game can be rewritten by legislative bodies at any time.

• Recent history is filled with examples, from major federal tax reforms and the SECURE Acts to new state-level taxes on capital gains and estates in Washington.

• The most powerful defense is not to predict the future, but to build a resilient and diversified plan that is not overly dependent on any single rule or tax break staying the same forever.

We have now reached the final risk in our 18-part series. We’ve debugged your portfolio, fortified your defenses against health and family shocks, and built a plan for a long and uncertain journey. But there is one final, overarching risk that can alter the very landscape on which our journey takes place: Public Policy Risk.

This is the risk that the government changes the rules of the game. It’s the danger that the tax laws you built your plan around will be rewritten, the Social Security benefits you counted on will be reduced, or the estate plan you carefully crafted will be made obsolete by a shift in exemptions. Unlike Market Risk, which is a feature of the game, Public Policy Risk is the referee changing the rulebook in the middle of the fourth quarter.

From my engineering perspective, this is the ultimate environmental variable. It’s like designing a complex piece of hardware based on today's operating system, knowing that a future mandatory OS update could render it inefficient or even incompatible. A fragile plan is hard-coded to today's rules. A resilient financial blueprint, however, is built with flexible, adaptable architecture, designed to remain functional no matter how the underlying code of law changes.

By the Numbers

• 2033: The year the Social Security Administration's Old-Age and Survivors Insurance (OASI) Trust Fund is projected to be depleted, at which point ongoing tax revenues would only be sufficient to pay about 77% of promised benefits if Congress does not act. (Source: 2023 Social Security Trustees Report)

• $15 million vs. ~$6 million: The dramatic swing in the federal estate tax exemption. The Tax Cuts and Jobs Act of 2017 roughly doubled the exemption, which then the One Big Beautiful Bill Act of 2025 has slightly increased in 2026. (Source: Internal Revenue Service)

• 10-Year Rule: The provision in the SECURE Act of 2019 that eliminated the "stretch IRA" for most non-spouse beneficiaries, fundamentally changing decades of estate planning wisdom for retirement accounts overnight.

From the Case Files

Meet a high-net-worth couple in Washington State. In 2020, their estate plan was in perfect order. Their $8 million estate was well below the federal exemption, and Washington had no capital gains tax. They planned to sell a highly appreciated business interest to fund the early years of their retirement. Then, the rules changed. As we've discussed in my previous blog posts, Washington introduced a new 7% capital gains tax and, in 2025, raised its estate tax rates significantly. Suddenly, their "tax-free" (from the state perspective) business interest sale had a six-figure tax bill attached, and the amount their heirs would owe in state estate tax jumped dramatically. Their once-perfect plan was now dangerously inefficient, all due to public policy changes at the state level.

Understanding the Risk: The Four Fronts of Policy Change

Public Policy Risk is a constant, simmering threat that can flare up on multiple fronts:

1. Income & Capital Gains Taxes: Tax brackets, deductions, and capital gains rates at both the federal and state level are in constant flux, directly impacting your after-tax retirement income.

2. Entitlement Program Changes: Social Security and Medicare are not ironclad promises. Benefit formulas, eligibility ages, and premiums (like the income-related adjustments, or IRMAA) can and do change.

3. Estate & Gift Taxes: The laws governing how you pass wealth to the next generation are a political football, with exemption amounts and tax rates subject to wild swings based on the legislative environment.

4. Retirement Account Rules: Congress frequently modifies the rules for 401(k)s and IRAs, as seen with the sweeping changes in the SECURE and SECURE 2.0 Acts.

The Impact on Your Plan: A System-Wide Recalibration

A single policy change can force a complete redesign of your financial blueprint.

• Interaction with Longevity Risk: This is a crucial link. The longer you live, the more legislative cycles you will experience, and the higher the probability that one of those cycles will produce a major policy shift that impacts you. A 50-year retirement will see many more changes than a 20-year one.

• Impacts High-Net-Worth and FIRE Retirees Differently: For high-net-worth families, changes to estate tax law are a primary threat that can alter multi-generational legacy plans. For a young FIRE retiree, a threat is a long-term reduction in Social Security benefits, a program their plan may count on to fund the later decades of their life.

• Undermines Long-Term Strategies: A Roth conversion strategy is based on an assumption about future tax rates. A "stretch IRA" strategy was based on rules that no longer exist. Public Policy Risk can undermine the very foundation of a long-term plan, forcing a reactive, and often costly, pivot.

Solutions & Your Risk Mitigation Toolkit

You can't control Congress, but you can build a plan that is diversified and flexible enough to adapt to whatever new rules they create.

• Tool #1: Tax Diversification. This is your single most powerful defense. Do not concentrate all your savings in one type of account. By holding assets in a mix of pre-tax (Traditional 401(k)/IRA), tax-free (Roth 401(k)/IRA), and taxable (brokerage) accounts, you create flexibility. If income tax rates rise, your Roth assets are protected. If capital gains rates rise, your tax-deferred accounts are unaffected. This diversification gives you the power to manage your tax bill no matter what the future tax code looks like.

• Tool #2: Proactive and Flexible Estate Planning. Don't rely on a "set it and forget it" estate plan. For those with estates near or above the exemption levels, this means using flexible tools like trusts with disclaimer provisions and regularly reviewing your gifting strategy to adapt to the current legal landscape. As we saw in my article on Washington's estate tax, this is not a federal-only issue.

• Tool #3: Conservative Projections. For younger planners and those in the FIRE community, it is prudent not to count on 100% of today's promised Social Security benefits. Building a plan that works even with a 20-25% reduction in future benefits creates a powerful buffer against potential changes.

• Tool #4: Stay Informed (The Advisor's Role). Public policy is complex and constantly changing. A key value of an ongoing relationship with a fiduciary advisor is having a professional who stays on top of these changes, alerts you to how they impact your specific situation, and helps you make the necessary adjustments to your plan in a timely manner.

A Strategic Framework for Managing Public Policy Risk

Strategically, Public Policy Risk is the danger that the government will change the rules of the game, altering the tax, entitlement, and estate laws upon which your financial plan is built. A plan is most vulnerable when it is hard-coded to today's laws—overly reliant on a single tax strategy or a specific rule staying the same forever. This lack of flexibility can render a once-optimal plan inefficient or obsolete overnight.

A resilient plan is engineered for adaptability. The primary defense is tax diversification, holding assets across pre-tax, tax-free (Roth), and taxable accounts to create flexibility no matter how the tax code changes. This is complemented by using modular estate planning tools that can adapt to new laws and by building a plan with conservative projections, creating a buffer against future changes to programs like Social Security.

Conclusion: The Great Balancing Act

The fundamental trade-off in managing Public Policy Risk is between optimizing for today and building resilience for an unknown tomorrow. It can feel tempting to go "all in" on a strategy that is maximally tax-efficient under current law. The "great balancing act," however, is recognizing the wisdom of diversification. By sacrificing a small amount of potential optimization today to build a plan that is diversified across different tax structures and legal strategies, you are creating a blueprint that is far more likely to remain robust and effective over the long run, no matter which way the political winds blow.

Create Your Financial Compass with Us

Staying ahead of the ever-changing legislative landscape is a full-time job. We can help you understand how new laws impact your financial plan and build the flexible, tax-diversified strategy you need to be prepared for the future. Contact us today.

Resources:

• Social Security Administration - Trustees Report: The annual report on the financial status of the Social Security trust funds. (www.ssa.gov/OACT/TR/2023/)

• Congressional Budget Office (CBO): Provides nonpartisan analysis of legislative proposals and long-term budget outlooks. (www.cbo.gov)

• Tax Foundation: A non-profit that provides research and analysis on federal and state tax policy. (taxfoundation.org)