4 ms·

Never really thought about it. I’d love for someone with knowledge to weigh in on this: Does it ever make sense to pay more SS tax, based on a present-value an

by mwint 5y ago

Never really thought about it. I’d love for someone with knowledge to weigh in on this: Does it ever make sense to pay more SS tax, based on a present-value analysis? I guess it’s really three questions: 1) For each dollar to SS taxes, do I expect to get more than a dollar from SS in the future? 2) Same question as 1, but inflation-adjusted future dollars. 3) If the expected return is positive, does it beat reasonable market returns? Guessing the answer depends on age, income levels, etc. I just don’t know how to do the math myself.

TAForObvReasons 5y ago
(not a financial professional, not advice) You need at least 40 "credits" over your working life to be eligible for social security benefits. Each calendar year you can earn up to 4 "credits", which in 2021 corresponds to $1470 in earnings that are taxed. So it definitely makes sense to earn the credits every year e.g. $6000 in 2021. SSDI looks at the last 10 years of earnings if you're older than 30, which still incentivizes hitting that minimum target. As for the actual income in retirement, that is a complex subject. For example, the optimal money move is to continue working to full retirement age, but you may want to take the early retirement option (even if the payout is smaller) to enjoy the extra healthy years.
- caturopath 5y ago
  > the optimal money move is to continue working to full retirement age Only your highest-earning-of-SS-income 35 years matter, so it's conceivable (and probably not too rare for many HN readers) to have had 35 max-income years before FRA.
  - deleted 5y ago
    [deleted]
caturopath 5y ago
After the first "bend", the ROI for SS tax is super-duper low. If you're working for 35 or more years, this would be ~12k/year in 2021 dollars a year. Thus, if your income will put you over the poverty line, paying more unnecessary SS tax past that won't help very much. (I'd put a number on the ROI, but it depends on how old you are.) It's not very hard to make a spreadsheet to play with numbers if you want. I'm considering retiring soon, decades before eligibility, and I've enjoyed playing with the numbers, as I have the opportunity to contribute more or less in the coming years fairly easily.
- caturopath 5y ago
  FWIW, given my history and current payout schedules and that I die at 85 (when actuarial tables say I will) and counting the employer portion of the SS tax as tax paid and assuming I retire very soon, SS tax payed by me has a 1.4% real rate of return. That being said, SS has some benefits that make it more attractive than other investments with that return (in that it's an inflation-indexed annuity backed by the US government), especially when mixed with my other investments. Still not a fantastic deal for me and it will only get worse in the likely event I get more SS income over the years, but like all welfare programs it isn't meant to help someone in my current situation. Part of getting into my current situation was benefiting from welfare when I was part of a household wasn't in such an amazing situation financially.
einpoklum 5y ago
> Does it ever make sense to pay more SS tax, based on a present-value analysis? Of course it does. Social Security is social, not individual. If you're a rich man - and a person who makes 160 KUSD / annum probably is - it makes a lot of sense to contribute more to social security, whether voluntarily or involuntarily.
- caturopath 5y ago
  They specified "based on a present-value analysis". They were interested in SS as a personal money-returning interest for that question. That doesn't mean they don't think that people should pay taxes for welfare programs like social security or for other governmental functions, it just wasn't what the question was about. Certainly if you're after the second bend (very realistic for a lot of folks) there is minimal return on contributing.

by mwint 5y ago

TAForObvReasons 5y ago

(not a financial professional, not advice) You need at least 40 "credits" over your working life to be eligible for social security benefits. Each calendar year you can earn up to 4 "credits", which in 2021 corresponds to $1470 in earnings that are taxed. So it definitely makes sense to earn the credits every year e.g. $6000 in 2021. SSDI looks at the last 10 years of earnings if you're older than 30, which still incentivizes hitting that minimum target. As for the actual income in retirement, that is a complex subject. For example, the optimal money move is to continue working to full retirement age, but you may want to take the early retirement option (even if the payout is smaller) to enjoy the extra healthy years.

caturopath 5y ago
> the optimal money move is to continue working to full retirement age Only your highest-earning-of-SS-income 35 years matter, so it's conceivable (and probably not too rare for many HN readers) to have had 35 max-income years before FRA.
- deleted 5y ago
  [deleted]

caturopath 5y ago

After the first "bend", the ROI for SS tax is super-duper low. If you're working for 35 or more years, this would be ~12k/year in 2021 dollars a year. Thus, if your income will put you over the poverty line, paying more unnecessary SS tax past that won't help very much. (I'd put a number on the ROI, but it depends on how old you are.) It's not very hard to make a spreadsheet to play with numbers if you want. I'm considering retiring soon, decades before eligibility, and I've enjoyed playing with the numbers, as I have the opportunity to contribute more or less in the coming years fairly easily.

caturopath 5y ago
FWIW, given my history and current payout schedules and that I die at 85 (when actuarial tables say I will) and counting the employer portion of the SS tax as tax paid and assuming I retire very soon, SS tax payed by me has a 1.4% real rate of return. That being said, SS has some benefits that make it more attractive than other investments with that return (in that it's an inflation-indexed annuity backed by the US government), especially when mixed with my other investments. Still not a fantastic deal for me and it will only get worse in the likely event I get more SS income over the years, but like all welfare programs it isn't meant to help someone in my current situation. Part of getting into my current situation was benefiting from welfare when I was part of a household wasn't in such an amazing situation financially.

einpoklum 5y ago

> Does it ever make sense to pay more SS tax, based on a present-value analysis? Of course it does. Social Security is social, not individual. If you're a rich man - and a person who makes 160 KUSD / annum probably is - it makes a lot of sense to contribute more to social security, whether voluntarily or involuntarily.

caturopath 5y ago
They specified "based on a present-value analysis". They were interested in SS as a personal money-returning interest for that question. That doesn't mean they don't think that people should pay taxes for welfare programs like social security or for other governmental functions, it just wasn't what the question was about. Certainly if you're after the second bend (very realistic for a lot of folks) there is minimal return on contributing.