The Social Security Trap

According to the Social Security Administration, 90% of retired seniors depend on Social Security for at least one-third of their income.  More than 50% depend on Social Security for more than 90% of their income, and for unmarried persons, 45% depend on Social Security for 90% or more of their income.[1]

Here’s the trap:

One must report earned income for at least 35 years consecutively to receive the maximum Social Security payment once retired.  Years where no earned income is reported, even though you may have had passive income from investments or unemployment, affects the potential to earn the maximum Social Security Income payment in retirement.

Most employees, except those who work in certain fields where state law prohibits them from contributing to Social Security, must pay 6.2% of their earnings, up to $137,000, into Social Security.  Employers are required to match their employee’s contributions.

Someone earning $132,900, from age 31 to age 66, would be required to contribute $8,239.80 to Social Security annually. Between their own 6.2%, and the 6.2% match from their employer, the total contribution would come to $16,479.60 per year.  This is what is required to receive the maximum benefit in retirement which is  $3,770 monthly if they retire at age 70.  If they retire at age 62 the payment would only be $2,209 .[2]

$3,770 per month provides a $45,240 annual Social Security income. This amount of income is above the Combined Income limits allowed for Social Security Beneficiaries. Single filers earning between $25,000 and $34,000 will trigger a tax on 50% of their Social Security Income.  Anything above $34,000 and this Combined Income tax increases to 85% of Social Security Benefits received.  For married couples, $32,000 to $44,000 triggers the 50% tax and anything over $44,000 triggers the 85% tax.

Therefore, the regulations prevailing over the Combined Income tax will reduce the actual spendable income for the maximum Social Security earner to only $41,394.60 not $45,240.  This can become problematic.

Don’t Fall into the Trap:

The maximum income which can be taxed to fund Social Security has increased dramatically since 1937 when it was first initiated.  Back then $3,000 of income was the maximum that could be assessed for Social Security tax.  In 1951 it was raised to $3,600, then in 1955 it was raised to $4,800.  It has been raised quite regularly ever since and today the maximum income taxable for Social Security is $137,000.

In 1972 under the guise of “minimizing the added burden for low and moderate income workers”, Carter signed into law the wage-indexing initial benefits and increasing the tax max by greater amounts than indexing alone would have provided”.[3]  Obviously, this has not been the case as minimum wage earners still pay 6.2% of their income and there are caps on what larger income earners have to pay into Social Security.

The major Social Security trap however, is how poorly the program has been run.  Social Security is the most expensive social program in the world.  It is 21% higher than what is spent on national defense, 68% higher than what is spent on Medicare, and 10% more than what is spent on education.[4]  Federal law requires funds collected in excess of costs be loaned to the Treasury.  As of January 2019, $35.2 trillion of unfunded obligations are owed by the Social Security Administration, which comes to 35 times what was collected in Social Security Taxes in 2018. To balance this deficit it would require an additional $200,030 from each  person who paid into Social Security in 2018.  It is estimated that payroll taxes will have to be increased by 25% in 2035 and rise to 33% by 2093 to ensure that Social Security doesn’t fail.

Besides all of this, if it is determined that Social Security has mistakenly been paid to a recipient for 4 years then it will continue to be paid, unless fraud was involved. This policy alone is costly to tax payers and should stop immediately.

Finally, as the Social Security Administration cannot by law accumulate assets greater than their annual liabilities, the system will always be a tax on future generations instead of a claim of earned income by beneficiaries. Such a system is a trap for those who believe that Social Security will be there for them in the future.

Only careful planning today, using guaranteed contracts that keep your money safe while compounding for you and the next generation can eliminate the risk of being trapped into having to live on Social Security for the rest of your life.

Dr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here. 

[1] https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
[2] https://money.usnews.com/money/retirement/social-security/articles/what-is-the-maximum-possible-social-security-benefit
[3] https://money.usnews.com/money/retirement/social-security/articles/what-is-the-maximum-possible-social-security-benefit
[4] https://money.usnews.com/money/retirement/social-security/articles/what-is-the-maximum-possible-social-security-benefit