Are more FICA taxes worth it? Social Security as longevity insurance

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out

Boston University economist Larry Kotlikoff has spent every week, for over two years, answering questions about what is likely your largest financial asset — your Social Security benefits. His Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we feature “Ask Larry” every Monday. Find a complete list of his columns here. And keep sending us your Social Security questions.

Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version. His new book, “Get What’s Yours — the Secrets of Maximizing Your Social Security Benefits,” (co-authored with Paul Solman and Making Sen$e Medicare columnist Phil Moeller) will be published in February by Simon & Schuster.

Lisa — Chicago, Ill.: I am 54 and have been receiving part-time disability payments under a private policy. I work less than 20 hours a week in my own consulting company. I can chose to take a salary of approximately $20,000 or just show it as profit on my S corp. What is better for my future Social Security benefits? Before going on disability I worked for 27 years, and with an income in excess of $100,000 for the last 10 years.

Larry Kotlikoff: Any profits ​you earn in a subchapter S corporation are reported as personal labor income to the IRS and will be subject to FICA taxation. So you can’t shelter labor earnings from Social Security taxation using an S corporation unless you use the income to invest in your company. ​(I guess you can report your profits as dividend income, but I would think that’s illegal.)


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​In that case, if the investment is profitable, it will lead to higher future S-corp profits, which will be subject to FICA taxation. However, the Social Security portion of each year’s FICA tax is limited by the covered earnings ceiling. For 2015, this ceiling is $118,500. So if you were to successfully invest in your S-corp and then take the profits in excess of the ceiling in a single year, you could both defer and reduce your lifetime Social Security FICA taxation.

However, you might find yourself in a higher federal income tax bracket in that year. You need to use a comprehensive lifetime financial planning program that figures out your sustainable spending (living standard) taking into account all future taxes as well as all your future Social Security benefits based on different assumptions about S-corp income. My company’s free software, ESPlannerBASIC, is an example of such consumption smoothing.

The idea is to run such a program with different future self-employment labor earnings paths and see what path generates the highest sustainable living standard. (I say self-employment labor earnings because S-corp income is treated just like self-employment earnings for purposes of FICA taxation.) Those entailing lower lifetime taxes and higher lifetime benefits will produce higher sustainable living standards. And if, as in your case, paying lower lifetime taxes comes at the cost of lower lifetime benefits, you can see whether the tax savings beats the loss in benefits.

Now, one word of caution. Investing in Social Security by realizing your S-corp profits and paying Social Security FICA taxes on them may be a much safer investment than investing in your subchapter S corporation. Also, unlike other investments, investing in Social Security benefits by paying more Social Security FICA taxes is really investing in a longevity insurance policy. Apart from Congress changing benefit provisions, it seems like a very safe policy. Social Security benefits are inflation indexed and continue until you die. There is nothing like them that you can buy on the market.

​Bear in mind that your​ Social Security retirement benefit will be based on ​your ​best 35 years of earnings. So, if ​you​ only ha​ve, say,​ 27 years of Social Security covered earnings, eight years of zero earnings will be averaged into the computation. Replacing those zero years with annual earnings of $20,000 would definitely raise ​your​ future Social Security benefit amount, but ​you ​would have to pay the resulting FICA taxes. ​This, again, is why you need highly sophisticated software to look at everything on a comprehensive basis. ​

Craig — Ben Lomond, Calif: I worked most of my life starting in 1976 and decided to retire in 2011 at age 52. I have been living comfortably since then with income from investments and rental properties. If I am able, I don’t plan to start collecting benefits until age 70. I download my yearly report from and am noticing that my “Estimated Benefits” are steadily decreasing. At what age will these estimates stop decreasing? Also, how could I calculate my eventual benefit amount at age 70 — given that I am no longer working?

Larry Kotlikoff: I can’t understand why your annual benefit estimate would decrease since Social Security assumes zero future economy-wide wage growth and zero inflation in the future. You can contact me directly to discuss this.

​Jerry Lutz, the former Social Security technical expert who reviews all the answers in my column, has this ​guess on the decreasing estimate: ​

The Social Security Administration assumes that the most recent year’s earnings will continue through retirement age, and projects those future earnings into their estimates. So, until the first year of zero earnings were posted to his record, Ben’s estimates would have included assumed future-year earnings.​

If you have your earnings record, you can use a low-cost, highly accurate, Social Security maximization program to understand what your benefits will be at age 70. As I’ve indicated in responding to a prior question, I would not trust Social Security’s own benefit estimates because you are under age 60 and Social Security is assuming no economy-wide wage growth or inflation in any future year. For those under age 60, this can produce a serious downward bias in estimated future benefits even when expressed in today’s dollars.

You can also use the software I have in mind to figure out how much your lifetime benefits would increase were you to go back to work and contribute to the system. Those, like you, with short earnings histories experience the highest returns on additional contributions to the system. Indeed, I’ve run cases of workers with short work histories in which the increase in future benefits far exceeds the increase in current taxes associated with working more and making more FICA contributions.

Question — Roy, Utah: I am 62 and started collecting my Social Security retirement in July 2014. My husband is 60 and started receiving Social Security disability in September 2014. (He was diagnosed with brain cancer and is terminal). Upon his death (doctors say it will be soon) what do I apply for? Widowed or survivor benefits? Or can I receive his instead of my Social Security? I do not work and my Social Security is $896 per month and his right now is $1,705.

Larry Kotlikoff: Terribly sorry about your husband’s health situation. If your husband passes away, the optimal thing for you to do is to continue collecting your own retirement benefit and wait until you reach your full retirement age, 66, and then file to collect a widows benefit off of your husband’s work record. Your widows benefit will be the $1,705 adjusted for inflation.

Mark — Berkeley, Calif: I turn 66 in July 2015. If I continue to work, and my future income is higher than my past earnings, can my future salaried income post-age 66 increase my Social Security benefit? I plan to collect a spousal benefit at 66 and wait until 70 to collect mine.

Larry Kotlikoff: The answer is yes, your retirement benefit can increase beyond Social Security’s adjustment of your benefit for inflation. This reflects Social Security’s annual Recomputation of Benefits, which takes into account additional covered earnings in the prior year. If your retirement benefit is recomputed to be a higher amount, so too will be your spousal, child, divorced spousal, widow (when you pass), and divorced widow (when you pass) benefits to which your current and former relatives may be eligible.

Now for the big but. This will happen if and only if one or more of your future years of covered annual earnings exceeds lower annual covered earnings used by Social Security in its calculation of your Primary Insurance Amount (PIA).

The PIA calculation is based on the average of your highest 35 years of past covered earnings, where earnings prior to age 60 are indexed (blown up) to reflect economy-wide wage growth between the year you earned the income and the year you reached age 60. Your actual covered earnings after age 60, with no adjustment, are also considered in the determination of the 35 years of highest covered earnings.

This practice implies that anyone over age 60 who earns more in a given year than the covered earnings ceiling for that year will automatically experience a PIA increase in excess of the standard inflation adjustment.

How come?

Glad you asked. Each year’s covered earnings is always higher than the prior year’s covered ceiling since its level is also indexed to economy-wide average wage growth. Consequently, the highest your indexed earnings for any year prior to age 60 can be is the earnings ceiling at age 60.

But if your earnings in a year after age 60, say at 68, exceed the covered earnings ceiling in that year, your covered earnings will be the covered earnings ceiling at age 68, which will automatically exceed all earnings prior to age 61. Hence, your earnings at age 68 will necessarily become one of the highest 35 and, therefore, raise your PIA.
Yes, this is complex. But here’s the bottom line: If you are a high enough earner, your retirement benefit and all the aforementioned auxiliary benefits based on your earnings record will rise as you continue to work.

In a prior column I used my company’s Social Security software to consider the higher lifetime benefits I personally would receive if I were to work through age 80. That’s a long time, but I’ve got a physically easy job as an economics professor at Boston University. I also have tenure. I calculated that my lifetime benefits would be 20 percent higher — all thanks to Social Security’s Recomputation of Benefits.

Question — Boise, Idaho: I’m 64 years old. My husband is 48 years old. We plan on quitting our jobs in March of 2015 and bicycling for two years. I will turn 66 in August 2016. I plan on taking Social Security benefits when I turn 68, but will not have been working the last two years. Does this hurt me? Once I take Social Security when will my husband be eligible for survivor benefits?

Larry Kotlikoff: What a cool thing to do. Will not working cost you in terms of Social Security benefits? The answer depends on whether the covered earnings you would otherwise record over ​the next two years would be among the highest 35 years of covered earnings. If the answer is yes, you are, as I described in my answer to Mark, going to have lower benefits than would otherwise be the case. But the biggest issue is more likely to be your deciding to take your retirement benefit at 68 rather than at 70. If you wait until you reach 70, your retirement benefit and the widow benefit your husband will be able to collect, if you predecease him, will be 16 percent higher after inflation.

Question — Independence, Ore.: Larry, why won’t Social Security give me an estimate of my own benefits while am collecting survivor benefits? It makes it very hard to plan for my retirement. Is there a way to do it myself that isn’t too complicated? I already know it will be more than my survivor benefits.

Larry Kotlikoff: I’ve heard that Social Security won’t provide you online access to your past covered earnings history if you are currently collecting your retirement benefit. But I’m not aware that they won’t provide your earnings history or an estimate of your retirement benefit if you are collecting a widow(er) benefit.

​My guess is that if you go into their office and ask them to print out your covered earnings history, they will do so.If you have tried doing this and they have refused to provide ​you with ​your own ​covered ​earnings record, please contact me directly, and I will help you get access to what is, really, your private property.

They will likely also provide you with an estimate of your retirement benefit. The real question is whether you can trust their estimate. The answer, far too often, is no. The reason is that Social Security’s benefit estimates are predicated on two ​highly unrealistic​ assumptions. One is that the economy will experience no average wage growth at any time in the future. The other is that the economy will experience no inflation at any time in the future.

These assumptions produce low-ball benefit ​estimates for those under 60. So anyone under 60 or anyone with a spouse or an ex-spouse under 60 (to whom they were married for 10 or more years) should not ask Social Security to estimate their future benefits.

Social Security assumes no economy-wide wage growth or inflation going forward to ensure people don’t compare their likely future benefit to their current earnings, which for most people will be lower than their earnings at age 60 (i.e., immediately prior to retirement).

The concern here is not directly one of inflation. Social Security provides its benefit estimates in today’s dollars. But the system’s real benefits are not inflation neutral for those working past age 60 and for those with non-covered pensions that aren’t indexed for inflation. So in other words, the system is not fully indexed for inflation.
​You are likely over age 60. So if they provide a retirement benefit estimate, it’s likely to be correct.

But if you weren’t over age 60, I would recommend you take your covered earnings history and enter it into a highly precise, low-cost, commercial Social Security maximization tool. But you’ll want to use one that doesn’t make Social Security’s unrealistic assumptions about future economy-wide wage growth and inflation. The right assumptions here are those contained in Social Security’s annual Trustees Report.

Alternatively, if you are under age 60 and just have Social Security’s estimate of your full retirement benefit, use a calculator that is aware of and corrects Social Security’s benefit estimate.