Author Topic: Social Security Earnings  (Read 6579 times)

oldtoyota

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Social Security Earnings
« on: July 15, 2013, 08:54:49 PM »
I was reviewing my statement and looking at the column labeled "taxed social security earnings." The column labels those earnings for each year I've worked. However, the earnings listed are lower than my salary since I have health insurance and other things taken out pre-tax.

My question is whether the social security benefit is based on my salary or on the "taxed social security earnings." The website probably answers this question somewhere, but I can't find it.

Micheal

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Re: Social Security Earnings
« Reply #1 on: July 15, 2013, 11:59:20 PM »
Last I heard your SSI benefits after a certain age are based on your last 10 years average income, and has very little to do with what was withheld from your pay.

BigRed

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Re: Social Security Earnings
« Reply #2 on: July 16, 2013, 12:28:10 AM »
Last I heard your SSI benefits after a certain age are based on your last 10 years average income, and has very little to do with what was withheld from your pay.

That's wrong.  SSI benefits are based on your highest 35 years of taxed SS earnings over your lifetime.  Each year's earnings are adjusted for average wage growth before deciding which 35 are highest.  Your average wage indexed monthly salary over those 35 years determines your monthly benefit, via an income tax-like formula that has 3 brackets.

Dee18

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Re: Social Security Earnings
« Reply #3 on: July 16, 2013, 05:19:21 AM »
SS tax for 2013 will apply to the first $113,700 (up from $ 110,100 last year) of income.  If you make more than that,the additional income is not taxed for SS.

Micheal

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Re: Social Security Earnings
« Reply #4 on: July 16, 2013, 05:32:51 AM »
Good to know, I was just going on hearsay ^^

smalllife

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Re: Social Security Earnings
« Reply #5 on: July 16, 2013, 05:45:33 AM »
SS taxes the first $113,700 of taxable income - that is, after pre-tax deductions have come put (Cafeteria plans, etc.  Usually health related). 

If you have pre tax deductions and look at your last W-2 you will see that your FICA taxable earnings (Box 3) are lower than your gross earnings (Box 1) because your pre-tax deductions have been subtracted from the gross before FICA taxability is calculated.  401k contributions are after FICA but before federal and state income taxes and therefore subject to SS.

The website is stating that they will only use up to the maximum taxable earnings in their calculations, which leads me to believe that they are referring to taxable wages rather than gross wages.  That in turn makes complete sense - basing benefits on the taxes paid into the system rather than total wages, which would penalize those without access to pre-tax health plans.

fiveoclockshadow

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Re: Social Security Earnings
« Reply #6 on: July 16, 2013, 06:51:23 AM »
My question is whether the social security benefit is based on my salary or on the "taxed social security earnings." The website probably answers this question somewhere, but I can't find it.

Your benefit is only based on what is taxed by SS.  For a high income earner SS wages will be well below their federal taxable W-2 income because SS caps at above 113K this year.  For a lower income earner with full 401k contributions the SS wages will actually be higher than their federal taxable W-2 income because 401k contributions do not reduce your SS wages.

The benefit calculation scales past SS wages for inflation.  Also be aware the calculation is very progressive - more and more lifetime SS wages give you less and less return in retirement while your first SS wages give you a lot.

The SS website has a helpful estimator.  It already knows all your SS wages to date from your SSN and it allows you to enter projections of future salary and retirement date.  Be advised - for early retirees it always assumes you start taking SS as early as possible, which is a stupid thing to do - you shouldn't draw until 70.  So when scenario planning take the numbers it gives you for your earliest withdrawal date and then correct them for drawing at 70.  That's an easy conversion to do as it is just a fixed ratio.  Figuring out the benefit based on your wages is hard, which the website is really good at.

oldtoyota

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Re: Social Security Earnings
« Reply #7 on: July 16, 2013, 07:14:10 AM »
My question is whether the social security benefit is based on my salary or on the "taxed social security earnings." The website probably answers this question somewhere, but I can't find it.

Your benefit is only based on what is taxed by SS.  For a high income earner SS wages will be well below their federal taxable W-2 income because SS caps at above 113K this year.  For a lower income earner with full 401k contributions the SS wages will actually be higher than their federal taxable W-2 income because 401k contributions do not reduce your SS wages.

The benefit calculation scales past SS wages for inflation.  Also be aware the calculation is very progressive - more and more lifetime SS wages give you less and less return in retirement while your first SS wages give you a lot.

The SS website has a helpful estimator.  It already knows all your SS wages to date from your SSN and it allows you to enter projections of future salary and retirement date.  Be advised - for early retirees it always assumes you start taking SS as early as possible, which is a stupid thing to do - you shouldn't draw until 70.  So when scenario planning take the numbers it gives you for your earliest withdrawal date and then correct them for drawing at 70.  That's an easy conversion to do as it is just a fixed ratio.  Figuring out the benefit based on your wages is hard, which the website is really good at.

At one point, I was a lower wage earner and still my taxable income is less than my official salary. Would that be due to non-401k deductions?

smalllife

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Re: Social Security Earnings
« Reply #8 on: July 16, 2013, 07:24:23 AM »
My question is whether the social security benefit is based on my salary or on the "taxed social security earnings." The website probably answers this question somewhere, but I can't find it.

Your benefit is only based on what is taxed by SS.  For a high income earner SS wages will be well below their federal taxable W-2 income because SS caps at above 113K this year.  For a lower income earner with full 401k contributions the SS wages will actually be higher than their federal taxable W-2 income because 401k contributions do not reduce your SS wages.

The benefit calculation scales past SS wages for inflation.  Also be aware the calculation is very progressive - more and more lifetime SS wages give you less and less return in retirement while your first SS wages give you a lot.

The SS website has a helpful estimator.  It already knows all your SS wages to date from your SSN and it allows you to enter projections of future salary and retirement date.  Be advised - for early retirees it always assumes you start taking SS as early as possible, which is a stupid thing to do - you shouldn't draw until 70.  So when scenario planning take the numbers it gives you for your earliest withdrawal date and then correct them for drawing at 70.  That's an easy conversion to do as it is just a fixed ratio.  Figuring out the benefit based on your wages is hard, which the website is really good at.

At one point, I was a lower wage earner and still my taxable income is less than my official salary. Would that be due to non-401k deductions?

Exactly, any pre-tax medical deductions come out before social security and are therefore not included in taxable wages.

oldtoyota

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Re: Social Security Earnings
« Reply #9 on: July 16, 2013, 07:41:59 AM »
My question is whether the social security benefit is based on my salary or on the "taxed social security earnings." The website probably answers this question somewhere, but I can't find it.

Your benefit is only based on what is taxed by SS.  For a high income earner SS wages will be well below their federal taxable W-2 income because SS caps at above 113K this year.  For a lower income earner with full 401k contributions the SS wages will actually be higher than their federal taxable W-2 income because 401k contributions do not reduce your SS wages.

The benefit calculation scales past SS wages for inflation.  Also be aware the calculation is very progressive - more and more lifetime SS wages give you less and less return in retirement while your first SS wages give you a lot.

The SS website has a helpful estimator.  It already knows all your SS wages to date from your SSN and it allows you to enter projections of future salary and retirement date.  Be advised - for early retirees it always assumes you start taking SS as early as possible, which is a stupid thing to do - you shouldn't draw until 70.  So when scenario planning take the numbers it gives you for your earliest withdrawal date and then correct them for drawing at 70.  That's an easy conversion to do as it is just a fixed ratio.  Figuring out the benefit based on your wages is hard, which the website is really good at.

At one point, I was a lower wage earner and still my taxable income is less than my official salary. Would that be due to non-401k deductions?

Exactly, any pre-tax medical deductions come out before social security and are therefore not included in taxable wages.

Thank you. Would it be accurate to say then that it benefits the employee to pay lower health insurance costs because it would increase taxable wages--just for the sake of calculating SS benefits? Since SS is calculated based on the 35 years of highest salary, wouldn't it be better to have a higher taxable income? Of course, I am not taking the savings from lower taxes into account, I realize.



fiveoclockshadow

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Re: Social Security Earnings
« Reply #10 on: July 16, 2013, 08:51:26 AM »
Thank you. Would it be accurate to say then that it benefits the employee to pay lower health insurance costs because it would increase taxable wages--just for the sake of calculating SS benefits? Since SS is calculated based on the 35 years of highest salary, wouldn't it be better to have a higher taxable income? Of course, I am not taking the savings from lower taxes into account, I realize.

That's a complicated question.

In general you would prefer to shelter as much income from the 6.2% SS tax as possible.  Most people consider the return on that 6.2% in their own investment account to be higher than what SS offers.  This is especially true the higher lifetime earnings you have - first earnings yield benefit at 0.9, higher earnings at 0.32, highest earnings at 0.15 (look up calculation of PIA for the details).  Keep in mind this is *lifetime* earnings (35 years) and for FIRE folks if they make lots of money fast and retire early they may actually have relatively low lifetime earnings despite making buckets of money for the short time they worked.  So it's complicated.  At the PIA conversion of 0.15 you definitely want your 6.2% back.  At 0.9 you might actually like the additional benefit.

Now, if what is sheltering you from SS tax is also sheltering you from income tax - then my goodness gracious you most certainly want that deduction.  If most people think they'd be better off with their 6.2% then the eventual SS benefit than you'll be much, much better off with say 30-35% back once accounting for federal and state taxes!

So - in general you always want deductions rather than more SS wages.

Now the health care insurance question is another issue.  Is expensive health insurance worth it?  Would you be better off with a lower cost policy?  The details of course matter a lot, but in general the Mustachian way to do things is to view insurance as only for catastrophes you can't possibly afford rather than as some sort of service plan.  So cheaper high deductible policies on cars, houses and medical (one *huge* difference is if you are about to have a baby, you do not want to have a baby on a high deductible plan).

So really the question is what health insurance plan do you want and the tax deductions only come into the question tangentially when estimating your real cost for the insurance.
« Last Edit: July 16, 2013, 08:53:44 AM by fiveoclockshadow »

oldtoyota

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Re: Social Security Earnings
« Reply #11 on: July 17, 2013, 06:06:36 PM »
Thank you. There's a lot to chew on in your post.