The Limited Benefits of Social Security
Read Time / 3 Minutes
Theme / Retirement
There are many benefits to paying taxes. Some taxes benefit all of us, while others benefit us individually. We all profit from paved roads, law enforcement, and national parks while we gain individually through the taxes we pay into Social Security, in that we collect Social Security benefits when we retire. However, there are a few limits on the benefits of Social Security.
First, we are limited in how much we can contribute to Social Security.
· We pay 6.2% of each paycheck into Social Security, but only on the first $160,200 we earn annually. Wages earned above that are not taxed for Social Security and they don’t contribute to our future Social Security benefits.
· Another contribution limit, but one that works in our favor, is that our eventual Social Security benefits are calculated from our highest 35 years of income, potentially ignoring low earning years.
Second, we are limited in how much we can collect from Social Security.
We can start collecting Social Security as early as age 62 or as late as age 70. However, the longer we wait the higher our benefit. For example, the maximum annual benefit possible at age 70 is $54,660 but $30,864 if we start collecting at age 62.
Also, if we start collecting before our Full Retirement Age (which is between 66 and 67, depending on our birth year), then we are subject to an earnings test. Assuming we continue to work while drawing Social Security, then some Social Security benefits are withheld if we earn over $21,240 annually. For every $2 we earn over that limit, $1 is withheld. We don’t lose the benefits withheld, rather, they are suspended until we reach Full Retirement Age when they will be added on to our monthly benefits.
Once we reach Full Retirement Age, we can earn whatever we want while collecting Social Security, but we may have to pay taxes on the Social Security benefits. The income formula for determining taxes to be paid is 50% of Social Security benefits plus other taxable income plus tax-exempt interest income.
If the total is less than $25,000 annually for an individual filer, no benefits are taxed.
If the total is between $25,000 and $34,000 then 50% of benefits are taxed.
For totals over $34,000 then 85% of benefits are taxed.
Scripture encourages us to pay taxes (Romans 13:6) and to “be as shrewd as snakes and as innocent as doves” (Matthew 10:16). The taxes we pay fund services the Government provides, including our Social Security benefits during retirement. But it is important to understand not only the benefits of Social Security, but also its limits, so we won’t be surprised as we move into our retirement years.
If you want to talk more specifically about your situation, reach out to us at Christian Wealth Management. We are Christian Financial Advisors who will give you financial advice from a biblical perspective.
Doug Hanson, MBA
Wealth Advisor
208.697.3699
doug@christianwm.com
