SE tax is paid by the self-employed. This is similar to the payroll taxes (Social Security and Medicare) paid by employees and their employers.
People are increasingly trying to avoid paying SE tax. They just do not think they get any value out of tax payments from social security.
This may not be true. The answer depends on your age and your income level. Most will get more benefits from the system than was paid. The return on investment is not high.
Amendments to the Social Security Act in 1983 taxed certain benefits. The system needed extra revenue, but the “theory” was that system benefits should be taxed when the benefit exceeded what was paid.
To protect lower-income earners, 1983 legislation exempted those with less than $ 25,000 in income from taxation of benefits. Most recipients fell below this income threshold.
The wage base is not indexed to inflation. Now 56% of all beneficiaries pay tax on their social security.
For the taxpayers, either 50% or 85% of the benefits are included in the tax base. If the recipient got a return of 50% or 85% of their investment, it would make really good sense.
The tax system is obviously not perfect. When it was first adopted in 1983, it was possibly close. Without inflation adjustment of the excluded income, it is no longer so close.
The City Institute’s tax policy center has estimated the benefits and costs for different types of beneficiaries. Performance estimates are based on life expectancy, which is unisex.
Because women live longer than men, the estimates overestimate the benefits for men and underestimate the benefits for women. Similarly, because life expectancy is longer for people with high incomes, the benefits for people with high (low) income are below (above) stated.
Still, the estimates are interesting. They are presented to a recipient who turns 65 in the years from 1960 to 2060. The figures for 2020 are based on assumptions about the future benefit structure.
Estimates are shown for four income levels – low ($ 26,600), medium ($ 59,100), high ($ 94,600) and maximum for the social security tax base ($ 142,800 in 2021).
Estimates are shown for single beneficiaries, male and female, and married beneficiaries with varying combinations of income.
Single low-income men reaching the age of 65 by 2020 will receive $ 203,000 in benefits for $ 143,000 paid. This is a little more than a return of 40%.
Single men in average income are not doing so well. They receive $ 335,000 in benefits for $ 319,000 in payments. This is a return of 5%.
Single men with high incomes pay $ 510,000 in exchange for $ 444,000 in expected benefits. As you might guess, the same recipients fared better in 1960 – $ 151,000 in payments for $ 28,000 in payments.
The single man with high income did not “lose” in this agreement until 2010. Yet the figures I have shown so far are only social security. When Medicare is included, even the high income earners.
Medicare services are exploding. Who knows what will happen in the future. For now, the combination of Social Security and Medicare benefits makes winners of everyone except the maximum income recipients.
The estimates are interesting. You can review them yourself on the Urban Institute’s website. Remember that they are only estimates and are presented as such.
Projections after 2020 should be particularly suspicious. The financial burden on the system can force changes in the benefits that are not included in the analysis.
An interesting fact is that when the law was passed in 1935, the life expectancy for men was 58 and for women 62. With a benefit age of 65, the system seemed to be a scheme.
The reality is more complicated. Life expectancy was low because infant mortality was high. For those who reached 21 years of age are expected to be in the labor force, 54% of men and 61% of women lived to 65 years of age.
Men living to 65 years of age were expected to receive benefits for 13 years. The system was still solvent. There are now four times as many citizens aged 65 or over.
System solvency is increasingly a problem. In younger people may find that your pay-to-benefit calculation is turned upside down.
James R. Hamill is Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be met at [email protected]