Break Even, for what you actually get

[Sandy & Shirley]

I’ve seen a lot of break even calculations based on getting 75% of your PIA when you start your benefits 4 years early. The numbers all seem to come back at 16 years. So I decided to look at Break Even from another angle, the amount of Social Security you actually get AFTER the IRS gives some of it back to the “Trust” fund.

I live in Cecil County Maryland, so those are the State and Local taxes that I used. The basis for my calculations was an individual who would get $32,000 a year as their PIA which would be $24,000 a year if they retire 4 years early. My lifestyle target was to get $60,000 a year after all taxes. Here are my results:

SSB + Other Taxable Income – Fed – State = $60,000
$24,000 + $46,005 - $6,992 - $3,013 = $60,000
$32,000 + $34,521 - $4,398 - $2,123 = $60,000

Then I recalculated both Federal Tax Dues forcing the amount of Taxable SSB to zero, like the 1983 and 1993 legislation requires. The differences in Federal Taxes Due were $3,441 for $24,000 and only $2,225 for the full $32,000 benefit.

I then ran Break Even based on getting $20,559 four year early vs getting $29,775 at your full retirement age. The break-even calculation dropped from exactly 16 year to less than 13 years!

The government give you your Social Security Benefit with one hand, then calculates your Federal Taxes with and without the amount of taxable benefits, then takes some of your benefits back with their IRA hand and puts that amount back into the “Trust” fund.

Ever wonder why I keep putting the word “Trust” in quotes? One of our biggest retirement problems is that we are “Trusting” the Federal Government to manage your retirement savings via Payroll Taxes!

 

[jebmke]

AFAIK, income taxes on SS do not go into the SS Trust Fund.

 

[Sandy & Shirley]

AFAIK, income taxes on SS do not go into the SS Trust Fund.

If you look at the www.ssa.gov/history/taxationofbenefits.html page:

If the taxpayer's combined income (total of adjusted gross income, interest on tax-exempt bonds, and 50% of Social Security benefits and Tier I Railroad Retirement Benefits) exceeds a threshold amount ($25,000 for an individual, $32,000 for a married couple filing a joint return, and zero for a married person filing separately), the amount of benefits subject to income tax is the lesser of 50% of benefits or 50% of the excess of the taxpayer's combined income over the threshold amount. The additional income tax revenues resulting from this provision are transferred to the trust funds from which the corresponding benefits were paid. Effective for taxable years beginning after 1983.

The entire purpose for passing this legislation was that the trust fund was going to go broke and the needed a way to build it back up. Basically taking some of the benefits back from “wealthy” Americans.

If you adjust the $25,000 and $32,000 starting points for taxability of our benefits for COLA / Inflation, the starting points would be something like $95,000 and $125,000 today, so they all bragged that they were only taxing the rich, but when the legislation was passed it included wording that says the starting points for the taxation was not COLA adjustable.

There is some controversy over exactly where the extra taxes go, some goes into the Social Security Trust Fund and some goes into Medicare Trust Fund.

Bottom line, they are taking back some of our benefits!

PS: By the way, the fact that the starting points for SSB taxation are not COLA adjustable is why the 2002 legislation that made different COLA adjustment for married individuals and single individuals to eliminate the taxation marriage penalties were not applied to the taxation of our SSB. That is why there is still a Marriage Penalty for retired couples!

 

[Al18]

Thanks for the info. I really wish the government would adjust the SS taxation limits to account for inflation, but I don’t think it will happen because SS will just run out of money sooner.

 

[Gumby]

I say social security should just be 100% taxable from dollar one. It's income, isn't it? No different than income you receive from a private pension or an IRA draw. Then we could be spared all the whining.

 

[Montecfo]

I say social security should just be 100% taxable from dollar one. It's income, isn't it? No different than income you receive from a private pension or an IRA draw. Then we could be spared all the whining.

Well, yeah except this: we all paid into it, and those payments were not deductible.

 

[TheWizard]

I say social security should just be 100% taxable from dollar one. It's income, isn't it? No different than income you receive from a private pension or an IRA draw. Then we could be spared all the whining.

It's been a decade since last I was a W-2 employee but I don't think the 7.xx% taken from my paycheck for FICA was before taxes. I think it was after taxes.

But it's been a while, so correct me if I'm wrong...

 

[Gumby]

Well, yeah except this: we all paid into it, and those payments were not deductible.

To be clear, you paid ~7% taxes every year to the federal government. Those specific taxes were used to fund the social security benefits of people who were then retired. They were not put into an account with your name on it. My federal taxes have never been deductible.

You can have your own opinion as to whether Social Security benefits should be taxable. But the system is what it is. People should just deal with it and stop whining.

 

[pb4uski]

To be clear, you paid ~7% taxes every year to the federal government. Those specific taxes were used to fund the social security benefits of people who were then retired. They were not put into an account with your name on it. My federal taxes have never been deductible.

You can have your own opinion as to whether Social Security benefits should be taxable. But the system is what it is. People should just deal with it and stop whining.

I think the taxation of SS is about right, albeit very broad brush. Taxing a portion of SS benefits makes the taxation of SS similar to contributory pension plan benefits where the return of your contributions are not taxed but growth is or also similar to withdrawals from non-deductible IRAs where the portion of benefits representing return of contributions isn't taxed. Or also taxation of life annuity benefits where a portion of benefits paid are not taxable. And while the mechanism is crude, the 85% is broadly commensurate with the ratio of benefits to contributions.

 

[Exchme]

It's been a decade since last I was a W-2 employee but I don't think the 7.xx% taken from my paycheck for FICA was before taxes. I think it was after taxes.

But it's been a while, so correct me if I'm wrong...

Unfortunately, no. SS and income taxes are completely independent systems and are not deductible from the total when figuring what's due for the other, you pay both on the gross income. Don't forget that your employer (or you if self-employed) pays SS taxes too. So 6.2% from you and 6.2% from your employer for SS up to the maximum income that is taxed that year. Plus 2.9% (1.45% each from you and the employer) for Medicare taxes that apply to all W-2 income, those are not capped.

But calling some of those taxes the "employer" side is mostly a fiction, if it costs the company money to employ you, it is the equivalent to coming out of your pocket. For most folks, the sum of their and their employer's side of SS taxes far exceed their income taxes.

 

[pb4uski]

It's been a decade since last I was a W-2 employee but I don't think the 7.xx% taken from my paycheck for FICA was before taxes. I think it was after taxes.

But it's been a while, so correct me if I'm wrong...

No, its before taxes.... IOW SS taxes are not deductible... it is a % of gross wages.

 

[pb4uski]

...if it costs the company money to employ you, it is the equivalent to coming out of your pocket. ...

Under that logic, did my company laptop that was provided by the company come out of my pocket too? I don't think so. If you think that if SS taxes were eliminated by the government that all employees would get the 6.2% that employers' pay then I have a bridge that you might be interested in buying.

 

[Exchme]

Under that logic, did my company laptop that was provided by the company come out of my pocket too? I don't think so. If you think that if SS taxes were eliminated by the government that all employees would get the 6.2% that employers' pay then I have a bridge that you might be interested in buying.

Silly jokes aside, when folks went on contract, it was pretty much automatic that I had to gross up their salary for the lack of benefits and the fact that they have to cover both sides of SS themselves, so yes it is obvious that it is coming from the employee's pocket.

 

[Sandy & Shirley]

I say social security should just be 100% taxable from dollar one. It's income, isn't it? No different than income you receive from a private pension or an IRA draw. Then we could be spared all the whining.

There are two types of IRA accounts.


The money that you put into a traditional IRA, or 401K, is tax deductible. You don’t pay any taxes on the money you put into the account, it grows tax free, then, 100% of what you take out is taxable income during your retirement years.


The money that you put into a ROTH IRA, or convert from traditional into a ROTH, is fully taxed income. You already paid your taxes on the money you put into the account, it grows tax free, then, 100% of what you take out is tax free income during your retirement years.


The legislation they passed in 1983 matched both IRAs. The half of the contributed money that you put into the “TRUST” fund was already taxed just like a ROTH IRA and your employer’s matching half was tax deductible to the employer just like a traditional IRA. SO, the taxation of up to half of you Social Security income was logical. The 1993 legislation was overreach by the government, but it was our fault for “TRUSTING” the government with our retirement money, as if we had the option not to do just that!

 

[mrfeh]

To be clear, you paid ~7% taxes every year to the federal government. Those specific taxes were used to fund the social security benefits of people who were then retired. They were not put into an account with your name on it. My federal taxes have never been deductible.

You can have your own opinion as to whether Social Security benefits should be taxable. But the system is what it is. People should just deal with it and stop whining.

+1

The notion that SS payments are "getting money back that was paid in" is simply wrong.

 

[Exchme]

I’ve seen a lot of break even calculations based on getting 75% of your PIA when you start your benefits 4 years early. The numbers all seem to come back at 16 years. So I decided to look at Break Even from another angle, the amount of Social Security you actually get AFTER the IRS gives some of it back to the “Trust” fund.

I live in Cecil County Maryland, so those are the State and Local taxes that I used. The basis for my calculations was an individual who would get $32,000 a year as their PIA which would be $24,000 a year if they retire 4 years early. My lifestyle target was to get $60,000 a year after all taxes. Here are my results:

SSB + Other Taxable Income – Fed – State = $60,000
$24,000 + $46,005 - $6,992 - $3,013 = $60,000
$32,000 + $34,521 - $4,398 - $2,123 = $60,000

Then I recalculated both Federal Tax Dues forcing the amount of Taxable SSB to zero, like the 1983 and 1993 legislation requires. The differences in Federal Taxes Due were $3,441 for $24,000 and only $2,225 for the full $32,000 benefit.

I then ran Break Even based on getting $20,559 four year early vs getting $29,775 at your full retirement age. The break-even calculation dropped from exactly 16 year to less than 13 years!

The government give you your Social Security Benefit with one hand, then calculates your Federal Taxes with and without the amount of taxable benefits, then takes some of your benefits back with their IRA hand and puts that amount back into the “Trust” fund.

Ever wonder why I keep putting the word “Trust” in quotes? One of our biggest retirement problems is that we are “Trusting” the Federal Government to manage your retirement savings via Payroll Taxes!

Folks definitely need to think through their cash flow and taxes in retirement and evaluate taking SS with the full picture of federal and state income taxes, Roth Conversions, IRMAA, etc. in mind. Your example is a little stretched though as it seems you are equating cash flow to ordinary income.

Treating cash flow requirements as ordinary income is putting your tax calculations into a high bracket that doesn't seem applicable to your case though. Most folks will use dividends or sell appreciated assets. Let's say you had to sell some stock that had doubled, then to raise that $46K in your first example, that would be $23K in capital gains. According to the tax calculator at:

https://www.mortgagecalculator.org/calcs/1040-calculator.php

That would be $0 federal income taxes.

 

[Time2]

+1

The notion that SS payments are "getting money back that was paid in" is simply wrong.

I'm not so sure about that, most people get money back because they did pay in.
At one time, I was sure I could have done better with my 6.2%, but now that I'm creeping up on 70, I'm very happy to see the amount my wife and I will get. I'm also aware making people pay into a system that provides an income for their children if they would die, and a disability policy if they are disabled is a good deal for society, otherwise taxpayers would need to support them.

I think I have and exceptionally good deal, My total FICA payments 1970 to 2018 was $123,936, I paid $109,038 and employers paid $14,898, (I was self employed many years). I expect I'll get a little over $35,000 a year, that's about a 3.5 yr payback. Ya, I know, that misses all the interest I could have got on the money, but I also had a disability policy and my children's benefits if I died.

 

[VanWinkle]

I say social security should just be 100% taxable from dollar one. It's income, isn't it? No different than income you receive from a private pension or an IRA draw. Then we could be spared all the whining.

It's actually insurance!! Let's see if you would like your health Insurance premiums taxed in the same way?

"The Social Security Act was signed into law by President Roosevelt on August 14, 1935. In addition to several provisions for general welfare, the new Act created a social insurance program designed to pay retired workers age 65 or older a continuing income after retirement.

 

[ShokWaveRider]

We should all be happy we get it. "It is what it is". Like any other benefit, it is non-negotiable. Unless they get the amount wrong the first time of course.

 

[Gumby]

There are two types of IRA accounts.


The money that you put into a traditional IRA, or 401K, is tax deductible. You don’t pay any taxes on the money you put into the account, it grows tax free, then, 100% of what you take out is taxable income during your retirement years.


The money that you put into a ROTH IRA, or convert from traditional into a ROTH, is fully taxed income. You already paid your taxes on the money you put into the account, it grows tax free, then, 100% of what you take out is tax free income during your retirement years.


The legislation they passed in 1983 matched both IRAs. The half of the contributed money that you put into the “TRUST” fund was already taxed just like a ROTH IRA and your employer’s matching half was tax deductible to the employer just like a traditional IRA. SO, the taxation of up to half of you Social Security income was logical. The 1993 legislation was overreach by the government, but it was our fault for “TRUSTING” the government with our retirement money, as if we had the option not to do just that!

Oh, please. I was 24 in 1983. I doubt you were much older. It has been this way for virtually our whole working lives.

P.S - I know exactly how IRAs work. I think everyone here probably does.

 

[MRG]

To be clear, you paid ~7% taxes every year to the federal government. Those specific taxes were used to fund the social security benefits of people who were then retired. They were not put into an account with your name on it. My federal taxes have never been deductible.



You can have your own opinion as to whether Social Security benefits should be taxable. But the system is what it is. People should just deal with it and stop whining.

+1
Folks are trying to equate SS with a personal savings account and it's not. The notion of insurance is beyond their savings. All the widows, children and disabled among us know.

 

[The Cosmic Avenger]

I wanted a simple visual of what changes when you take SS earlier or later, so I made this spreadsheet where you can put in your FRA benefit and see the annual and cumulative amounts, then I highlighted the breakeven points. https://docs.google.com/spreadsheets/d/1UjBqWxGYEc3OO82G9Q4o6wJWWZYK6yfv50gQxglq8II/edit?usp=sharing

 

[PatrickA5]

I wanted a simple visual of what changes when you take SS earlier or later, so I made this spreadsheet where you can put in your FRA benefit and see the annual and cumulative amounts, then I highlighted the breakeven points. https://docs.google.com/spreadsheets/d/1UjBqWxGYEc3OO82G9Q4o6wJWWZYK6yfv50gQxglq8II/edit?usp=sharing

Your spreadsheet pretty much agrees with what I've seen at other sites. Breakeven taking at 62 instead of 70 is in the early 80s.

As far as taxation of SS, I don't really have a problem with it. Sure, I wish the cutoffs were adjusted for inflation, like everybody else. Most people on this forum will be taxed on 85% of benefits due to other income.

I'd venture a guess that many, if not most, are paying very little income tax on their benefits. Many retirees don't have the nest egg to generate the income needed (when added to 1/2 SS) to reach those thresholds.

 

[Calico]

We should all be happy we get it. "It is what it is". Like any other benefit, it is non-negotiable. Unless they get the amount wrong the first time of course.

+1
Folks are trying to equate SS with a personal savings account and it's not. The notion of insurance is beyond their savings. All the widows, children and disabled among us know.

+100

 

[pb4uski]

Silly jokes aside, when folks went on contract, it was pretty much automatic that I had to gross up their salary for the lack of benefits and the fact that they have to cover both sides of SS themselves, so yes it is obvious that it is coming from the employee's pocket.

Yes, but their net comp ended up being the same.

If you get $100 gross, less $6 in SS and the employer pays $6 in SS then you still net $94.

OTOH, if you gross $106 as a contractor and pay $12 in SE tax then you still net $94.

And it is common to gross up for some other benefits too to make contractors whole compared to being employees... they are paying for their own health insurance vs employer subsidized health insurance, etc.

But that still doesn't mean that if SS taxes were eliminated that employers would automatically increase employee comp for the SS taxes that they were paying... to think that would happen is frightenly naive.