Happy New Year


Well at least 2020 will not soon be forgotten!  As we start a New Year and a new political party takes over at the White House (maybe) we need to project how the events of 2020 might affect Social Security in 2021 and beyond!

Social Security Tax Limit / Withholding Taxes

The Good News is the rate stayed the same 6.2% the Bad News is that the Social Security Wage Base goes from $137,700 to $142,800.  Thus, a higher earner in 2021 will pay $8,853.60 and if they are self- employed they’ll have the privilege of paying $17,707.20.  This does not take into consideration the 1.45% Medicare tax that is paid on ALL EARNINGS even if they exceed $142,800 and increases to 2.35% for individuals who earn more than $200,000 (Individual) or $250,000 (Couples filing jointly).

NOTE:  Less than 6% of workers will earn more than $142,800 thus the great majority of American’s will pay FICA taxes on all their earnings!  To put this in perspective, when I got out of college in 1974 the maximum earnings subject to FICA taxes was $14,100.

There is also Democrat Party Proposal that would create a donut hole and reinstitute the paying of FICA taxes if earnings exceed $400,000 per year.  Ex:  If I was still with the Green Bay Packers and was making $1,000,000 per year, I’d get to pay FICA taxes on an additional $600,000 x 6.2% = $37,200.  I sold beer at Lambeau Field back in the early 70’s while in college.

Social Security Benefit Formula

In determining one’s benefits, SSA takes the highest 35 years of earnings, indexes them to inflation which determines your AIME (Average Indexed Monthly Earnings).  The AIME is then used to determine the PIA (Primary Insurance Amount) which is your check at FRA (Full Retirement Age).  If you were born in 1959 (turn 62 in 2021).   Went to work at 22 and paid maximum earning subject to FICA taxes;

AIME is $11,098

Your PIA is $3,262.70  at your FRA which is 66 & 10 months for an individual born in 1959

Claim at 62 would mean approximately 30% reduction in benefits or $2,284

Claim at 70 would mean approximately 24% increase in benefits to $4,045

None of these calculations take into consideration the COLA which has average 2.6%.

Rule of thumb:  Whatever your check is at 62 it is DOUBLE at 70!         

Observation:

  • As you can see this is an extremely PROGRESSIVE formula which means those who make the least will receive the greater percentage return on taxes paid.
  • In regards to the 3rd tranche $5,096 @ 15% (46% of AIME) is being credited at much lower rate. So a high earner is getting very little bang for their buck as it relates to a much higher amount subject to Employment taxes.
  • Should the Democrat Proposal go thru who knows if the crediting rate would remain at 15% or be lower on that 3rd or maybe 4th tranche? I’d bet the ranch it won’t be higher!

Planning Opportunities

With today’s non existent interest rates, high stock prices and relatively low tax brackets it might make a great deal of sense to draw down on Qualified Plans and delay claiming Social Security until age 70.  This is extremely sound advice if either spouse is in relatively good physical condition and longevity runs in the family.

Possibly using a Hybrid Strategy of having lower earning spouse claim early and have higher earning spouse delay claiming until age 70.

Retiring early or having the ability to recategorize income might dramatically reduce Withholding taxes without adversely affecting one’s benefits!  Have to run the numbers, which I can and do in my analysis.

If you claim benefits prior to FRA and continue working, not only are you subject to a penalty, but you are also subject to the Earnings Test (lose $1 for every $2 you earn in excess of $18,960).  In the year you reach your FRA you lose $1 for every $3 you earn (up until your birthday) over $50,520.

With 2700 different rules relating to Social Security, no one should claim benefits until they examine and explore all their options.  When you look at the amount of Social Security taxes that are paid during a lifetime of work, spending $250 to run an analysis is just good common sense!


Never hesitate reaching out, if you have any questions or would like to discuss any aspects of Social Security planning!

Happy New Year

Dave Zander, CFP®
260-615-0078
dzander@Back9Pro.com