Recently, Congress passed a law offering a payroll tax holiday. The payroll tax pays for Social Security. Here are the top 10 things you need to know about Social Security retirement income benefits and the payroll tax deductions.
1. Who Gets Social Security?
Social Security Retirement Income (SSRI) provides income for 54 million retired Americans. These expenditures added up to $1 trillion dollars in 2019. The average paycheck is $1,502.85 per month, and most of these checks go to women. Some 54% of SSRI recipients under the age of 85 are female and 63% of SSRI recipients over the age of 85 are women.[i]
2. Who Pays Payroll Taxes?
Employees pay 6.2% of every paycheck into FICA (Federal Insurance Contributions Act). In addition, employees pay another 1.45% Medicare tax. Employers also pay the same amount on behalf of their employees. Self-employed people pay both employer and employee portions of payroll taxes, 12.4% plus 2.9%. In other words, if you’re self-employed, you pay twice as much payroll tax.
The tax for Social Security is capped and annually adjusted upward for inflation. In 2020, the maximum income subject to the 12.4% tax is $137,700.[ii] SSRI taxes are not due on income above that amount. Medicare, however, is taxed on every dollar earned regardless of the income level. In other words, there is no cap on the income for the 2.9% Medicare tax.
3. A Payroll Tax Holiday in 2020
A payroll tax holiday began on September 1, 2020 and runs through the end of the calendar year. Optionally, employers may give employees a boost to their paychecks of 6.2%, equal to the employee’s portion of the Social Security tax. It is a temporary benefit, however, because in January 2021 employees will be subject to a double-withholding to pay back the short-term loan.
The payroll tax holiday could be made permanent with an act of Congress.
It is widely expected that many employers will not participate in the payroll tax holiday because either their software or payroll company does not allow for it. The IRS has not issued guidance on how they will handle changes to payroll taxes.
4. Bankrupt in 2032 or 2034?
Most Americans are at least a little bit worried about the future of Social Security. Only 18% of Americans are confident they will receive SSRI.[iii] SSRI expenditures are expected to grow to nearly $2 trillion by the year 2030.[iv] As a percentage of America’s gross domestic product, SSRI is expected to increase from just under 5% to over 6% GDP by the year 2030.[v] That’s a big increase!
Americans spend more on income tax and Social Security than any country in the world outside of Europe or Australia.[vi] In spite of that, the Congressional Budget Office (CBO) regularly makes dire predictions for Social Security solvency. On the other hand, a new school of economics—called “Modern Monetary Theory”—posits that the U.S. government can afford to pay for SSRI.
It’s best to build a solid personal financial plan to carry you through retirement and not to worry about things outside our control, like national politics and the federal budget.
5. Full Retirement Age
Full retirement age is the year that a person receives the full Social Security Retirement Income (SSRI) benefit. For people who have not already started taking SSRI, the full retirement age is somewhere between age 66 and age 67. People born in the year 1960 or later reach full retirement at age 67. People born before 1960 will be able to start SSRI sometime during age 66, depending upon what year they were born.
6. Taking it Early is Expensive!
For many reasons, people start SSRI early. Some people cannot wait until full retirement age before taking benefits for financial reasons. Others take SSRI for political reasons, afraid that the government may not pay the full promised benefit.
If a person pulls SSRI early, she will permanently reduce her income and surviving spouse’s income, for life. The earliest a person can make a withdrawal is age 62. For someone who has a full retirement age of 65 but who started SSRI as early as possible, she is receiving only 80% of her full benefit. For someone who has a normal retirement age of 66, he will receive 75% of his full benefit at age 62. A 70% benefit goes to someone who at age 62 starts SSRI but who has a normal retirement age of 67. The benefit increases 5/12th of 1% per month until full retirement age.
7. Maximum Income at Age 70
If a person waits until age 70, he receives the maximum SSRI. Each year he waits from Full Retirement Age until age 70 gives him another 8% income per year. Many people choose to work longer and delay SSRI. They may pull income from other sources, such as a retirement account, if they are healthy and can afford to wait. Talk with a CERTIFIED FINANCIAL PLANNER™ professional to find out the right decision for you.
8. Health Insurance in Retirement
SSRI and Medicare go hand-in-hand, but the years do not line up. A person may start SSRI at any time between age 62 and age 70, but Medicare does not start until age 65. An early retiree faces the dilemma of paying for health insurance before starting Medicare. The costs of individual insurance plans can be prohibitive. Working with a CFP® professional can help you decide how to pay for it, and help determine benefits you may receive. For example, you might qualify for subsidized insurance rates.
9. 40 Quarters and 35 Years
Anyone who works 40 quarters is entitled to Social Security. The amount of payment is based on the highest 35 years of income. People who work for the federal government, or other governments, may have their SSRI benefits reduced. Generally, Social Security benefits are reduced by two-thirds of the non-FICA-taxed government pension.[vii]
10. Survivor Benefits
Spouses are entitled to one-half of the highest earning spouse’s Social Security benefits, while both are alive. A surviving spouse loses the lower income stream after the first spouse passes away. She keeps the higher of the two Social Security payments, but not both. Importantly, any income paid to a decedent must be returned to Social Security. If automatic monthly payments are set up, then the surviving spouse should stop income quickly by reporting the death to the Social Security Administration.
In conclusion, Social Security Retirement Income is an important income source for retirees. The laws are confusing, and the choices may seem overwhelming. In today’s world, information is omnipresent and often partisan. Emotions can run high. This makes it difficult to make a prudent, long-term decision. A CFP® practitioner can help you decide what is best for you and your unique situation.
[i] SSA.GOV as of July 1, 2020
[ii] www.gotaxfreebook.com accessed 21 September 2020
[iii] EBRI 2020 Retirement Confidence Survey Summary Report published April 23, 2020 https://www.ebri.org/docs/default-source/rcs/2020-rcs/2020-rcs-summary-report.pdf?sfvrsn=84bc3d2f_7
[iv] https://www.cbo.gov/system/files/2020-01/56020-CBO-Outlook.pdf accessed 21 September 2020
[v] Statista forecast from CBO data, access September 21, 2020. https://www.cbo.gov/data/budget-economic-data#3
[vii] https://www.ssa.gov/pubs/EN-05-10045.pdf for more information on the Windfall Elimination Provision