We all have heard rumors about the social security system’s need for overhaul and its eventual inability to make benefit payments at current inflation adjusted levels to future retirees. However, what if it could continue at current levels – do I ever get the money back in full, from social security tax paid by the employee? Do I get any return on the full tax (employer & employee side?) If I do, what rate of return do I get? Is there any level of tax, with reasonable return expectations?
This article is the first in a series that will begin to address these questions. There are many factors that impact returns on social security payments at the individual level so the answer is not going to be the same for any two people. Some examples of these differences are very clear, for example the life expectancy of the worker and the age an individual decides to take retirement. Other unique factors at the individual level that may be less evident would be the life expectancy of a spouse, disability prior to retirement, earnings by spouses, family maximums, and whether there are dependent children under 18 at the time a worker dies.
Ok, so there are a lot of unknowns and unique situations which individuals should be aware of and have discussions with their tax and financial advisors about. What about the averages? The social security tax and system is setup primarily to meet some of the basic needs of retirees and their families. So, at lower income levels the returns are generally ok. As income goes up for a worker’s average over his or her lifetime, the returns on higher levels of income are quickly diminished and for many result in negative marginal returns, even for individuals with high life expectancy.
The social security administration at SSA.gov shows the formula for the tiers where the benefit payments are reduced for each additional dollar of income. While there are multiple factors, the “primary insurance amount” formula may be the best illustration of these “bend points” or tiers. As you can see below, the benefits are dramatically higher (90% of income level) for the first $9,800 of annual income in today’s wages. The benefits are much lower for the next tier (32% of income level), from $9,800 to $59,000 and for wages above $59,000, even the return of capital (tax paid in) is generally not likely (benefits received at 15% of income level up to social security maximum benefits.)
For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2014, or who dies in 2014 before becoming eligible for benefits, his/her PIA will be the sum of:
(a) 90 percent of the first $816 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $816 and through $4,917, plus
(c) 15 percent of his/her average indexed monthly earnings over $4,917.
So, what does this tell me about the returns from the social security tax I pay in? What can I do about it? There are some frequently used tax strategies that may reduce a taxpayer’s burden. For business owners and some independent contractors the ability to use tax strategies greatly increases. For more information or for a personal assessment of your situation, you can contact me at firstname.lastname@example.org.
Soon I will post part 2 in the series of articles which will give more detail on the expected rates of return. This will be posted to our website at The Goldstein Firm, CPA, LLC and also sent our current clients as a value add service we provide.
The Goldstein Firm, CPA, LLC is a CPA firm located in the metro Atlanta area in the city of Alpharetta. Founder Eric Goldstein has 20 years of private and public experience helping small business and big business as well.
Circular 230 regulations require all attorneys and accountants to provide extensive disclosure when providing certain written tax communications to clients. We would like to inform you that since this document does not contain all of such disclosures, you may not rely on any tax advice contained in this document to avoid tax penalties.
By Eric Goldstein