An Interesting Calculation

In the last month I’ve had 2 extremely interesting conversations regarding maximizing Social Security benefits and minimizing FICA & Medicare taxes.  Many people are unaware that if you continue working after FRA (Full Retirement Age) and receiving Earned Income from your job, you must continue to pay FICA and Medicare Taxes even if you are on Medicare and receiving Social Security Benefits. Now this creates an interesting dilemma in that your Social Security benefits could increase by doing so, but let’s first take a look at the formula and see the impact.

Social Security benefits are determined by taking the highest 35 years of earnings, indexing it to inflation which determines your AIME (Average Indexed Monthly Earnings).  The AIME is then used to determine your PIA (Projected Insurance Amount) which is your benefit at FRA.  This is example of an individual born in 1958 (who is 62 in 2020).  AIME maximum is $10,683 per month.

Maximum Benefit at FRA is  $ 3,142.70

As you can see this is an Extremely Progressive Formula, which means those who make the least get the biggest bang for their buck!

Thus, an individual who continues to work and paying payroll taxes could be increasing the overall benefits, because they still take the highest 35 years of earnings.  Now payroll taxes are currently 6.2% Social Security and 1.45% for Medicare.  If you own your own company then you pay both sides, thus the maximum tax is 15.3% up to $137,700 or $21,068 in 2020.  Once you exceed $137,700 you no longer pay FICA taxes, but you will continue to pay Medicare taxes of 1.45% (x 2 if you own your own company).  Next year the maximum earnings subject to FICA will grow to $142,800.

Extremely Interesting Case Study

John will be 68 in December, he is currently still working and has delayed claiming his own Social Security Benefits.  He is also claiming spousal benefits (Restricted Claiming Provision) since he was born prior to 1954.  His question to me is does it make sense to continue paying FICA taxes on his earnings in order to increase his own benefits at age 70?  He owns his own company thus he has the ability to direct his earnings, to himself, his wife or profits to the company.

John’s PIA is $2,344 per month if he claims now, he would receive $2,547 but would lose his spousal benefit of $756 per month and stop earning the 8% delayed credit between now and his 70th birthday.

I ran an analysis that showed him earning $10,000 per year and $100,000 per year.  His check at age 70 if he earns $10,000 per year would be $3,218 / mo.  if he earns and pay FICA on $100,000 his check at age 70 would be $3,301 or $83 more per month.  However, he would pay an additional $13,770 per year in payroll taxes or $41,310 total over the next 3 years.  It would take 516 months or 43 years to make up the difference, thus it makes absolutely no sense to try and improve his own Social Security benefits!

DISCLAIMER:  I know there are rules and regulations as to how much an individual must recognize as earned income and I will leave that decision for you to determine!  It is not my position to make any recommendations since I don’t know what rules or laws that may apply.

What I’ve attempted to show is that due to the progressive nature of the Social Security formula, high earners get very little bang for the buck when attempting to maximize their own benefits.  It might make more sense to direct earned income to their spouses?

The Social Security claiming decision is the single biggest financial decision that most American’s will ever make, thus it is imperative to run a thorough unbiased analysis of their options which is what I’ve been doing for the past 10 years.  I’ve charged a flat fee of $250 for this personalized 28 page analysis, a phone consultation and assisting them claim online vs their standing inline at SSA when the time comes to file, as well as being available if they have questions in the years to come.  I’ll continue to charge $250 for this process, but if I need to run different scenarios relating to different income levels, I may charge a slightly higher fee.

Never hesitate reaching out if you think I can be of assistance,

Dave Zander, CFP®