Paying Spouse to Max Social Security Benefits

[thomashackett]

Friends and fellow investors,

I'm analyzing the benefit of paying my spouse in our business for social security benefits. For this, I have been trying to better understand how social security benefits are calculated. I've looked at the inflection points of earnings, which I understand to be 90% of the first $885/month, then 32% of the earnings beyond that to $5,336, and 15% of the amount above $5,336.

I'm purposefully ignoring how inflation is factored into the formula, as I'm trying to isolate the value of paying my spouse in increasing her social security benefits.

Based upon these inflection points, I thought we would get more benefit from making sure my wife earned at lest $885/month for at least 35 years (as only highest 35 years of earnings are counted for social security benefits), or $10,620/year, as I thought each year was treated as an independent event. However, when I look at how benefits are calculated, it seems that each year of earnings (subject to maximum of $127,200 currently) are added to get a total amount of earnings, which is then divided by 420 (35 years of 12 months). Given this formula, it seems I was wrong about each year being an independent event.

As each year is not an independent event, for me it makes more sense to think of the lifetime earnings and the inflection points associated with those lifetime earnings. Now I see the inflection points as 90% of the first $371,700 of earnings ($885/month * 420 months), then 32% of the earnings beyond that to $2,241,120, and 15% of the amount beyond $2,241,120.

Assuming my wife already has $371,700 of lifetime earnings, all her future earnings are only only providing about 1/3 of the benefit (32% v. 90%) relative to her previous earnings, right?

Feedback on my analysis is appreciated, including pointing to resources that may already discuss this, which my research failed to uncover.

Thank you!

Thomas

[FIREshrink]

You have your information correct. Once you get past the first bend point in your social security AIME calculation, the benefit is only 32% instead of 90%. After the second bend point it drops to 15%.

However, there is another issue which may make all of this moot. If your full retirement age SS benefit based on your own earnings will be more than double what your wife will receive in SS benefits based on her own earnings, then it will be advantageous for her to claim on your record than on hers. Her benefit will be half of your FRA benefit, which she can claim without reduction at her own FRA. Under the SS system, this is one of the benefits to being a married couple. The downside is all of her SS taxes are basically for nothing.

Since you are an estate planning attorney, you may well make over the lifetime SS wage base, which is 35x127,200 = $4,452,000 in 2017 dollars. If you make at least $127,200 in each of 35 years, you will accrue the maximum SS benefit, which is $2687 at your full retirement age (these figures are approximate). Your wife could then claim $1343 beginning at her full retirement age. You can defer taking your benefit until age 70, to add an additional 24% to your benefit for a monthly income of $3332, if your full retirement age is 67. Note your wife cannot increase her benefit based on your benefit by deferring past her FRA. For the spouse, FRA is as good as it gets.

[ReFinDoc]

FIREshrink nails it. I always liked this post : https://thefinancebuff.com/early-retirement-social-security-benefits.html

Your Soc Security COLA continues to go up no matter what. To a long term high earner with a large IRA/401k, paying more into Soc Security make no sense. If you are paying  your spouse out of 1099 income you will be paying both sides of SS/Medicare  tax or 15.3%. Going to be very hard to make up that deficit with benefits. There is benefit for  consistently low earners to contribute up to the first bend point. Soc Sec is definitely a wealth transfer process. Remember to high earners, Soc Security benefits are highly taxed. I view Soc Sec as a inflation adjusted annuity with spousal benefits. Essentially low grade longevity insurance especially if high earning spouse takes benefits at age 70 and lives a long time.

How about paying your kids up to age 18? No SS tax and tax deductible.

[DevinCarroll]

To get an accurate estimate of your wife's future benefit amount, you'll need to include some inflationary indexing. The formula just doesn't work without it. It sounds like you already have a better-than-average understanding of the SS benefit calculation, but just for review here are the steps.

• Historical Earnings  up to age 60 are indexed.
  
  
  
  • the SSA has a list of indexing factors on their site  https://www.ssa.gov/cgi-bin/awiFactors.cgi
  
  
  • Earnings for age 60 and beyond are not indexed but used at face value
  
  
  
  


• Highest 35 years are taken and divided by 420.
  
  
  
  • Result is the AIME (Average Indexed Monthly Earnings)
  
  
  
  


• AIME is applied to bend points 
  
  
  
  • The result is the PIA or full retirement age benefit amount
  
  
  
  

I made a video on this topic at  https://socialsecurityintelligence.com/how-to-calculate-social-security-benefits/. (This video was pre quality equipment. Sorry about the echo.)

Here's why the indexing is so important to use in a benefit projection. For example, take someone who is turning 62 this year and assume they had made $11,000 in 1980. For the calculation, that earnings amount that would be used would be $42,281 (indexing factor of 3.8438).

For historical earnings, this is pretty easy. For future earnings it becomes slightly less precise.

The best way to calculate the future benefit of an individual using BOTH historical earnings and projected future earnings is to use to Detailed Calculator on the SSA website. It's pretty cumbersome to use but there is a built in help function. Here's a link https://www.ssa.gov/OACT/anypia/anypia.html

My suspicion is that by using this calculator you'll confirm what FIREshrink articulated so well. However, this calculator will give you the opportunity to run the numbers out and model multiple scenarios.

-Warmly,

Devin

[PhysicianOnFIRE]

Personally, I wouldn't voluntarily pay in to SS in order to get a benefit out. It's a pretty lousy ROI. It's a long ways off, but it's most likely my wife will go with 50% of my benefit as I will be past the second bend point and should see a decent sized check.

I built an excel based calculator to estimate future Social Security benefits, too. Also shows your AIME and  whether or not you've reached the first and second bend point.  Details explained in plain English in this post.

 

[Hank]

The ROI up to the first bend point is pretty awesome. (90% back for every dollar subject to social security tax.) The ROI if you get the maximum monthly benefit is far less impressive.

Since a lower earning spouse can take 50% of a high earning spouse's monthly social security benefit, this negates the social security benefit of their own high ROI contributions at the 90% and 32% levels.

Based on longevity and age, the higher earner often should hold off until 70 to get all deferred retirement credits and get an inflation adjusted stream of income for the typically lower earning, longer living spouse.

While there may be changes to social security in the future, right now waiting until age 70 is about the most attractively priced longevity insurance policy you can find.

[q-school]

Hank wrote:

The ROI up to the first bend point is pretty awesome. (90% back for every dollar subject to social security tax.) The ROI if you get the maximum monthly benefit is far less impressive.

Since a lower earning spouse can take 50% of a high earning spouse’s monthly social security benefit, this negates the social security benefit of their own high ROI contributions at the 90% and 32% levels.

Based on longevity and age, the higher earner often should hold off until 70 to get all deferred retirement credits and get an inflation adjusted stream of income for the typically lower earning, longer living spouse.

While there may be changes to social security in the future, right now waiting until age 70 is about the most attractively priced longevity insurance policy you can find.

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that's something that spouses of the pension people who don't contribute to SS should know for retirement planning.  in some ways, especially if they have the opportunity to be high earners.

 

[Steven Podnos MD CFP]

I'd make two points here:

 

1)  It usually pays to pay a spouse to work in the business enough to max out a salary deferral in a retirement plan.  If your wife does not participate in a salary deferral plan like a 401k elsewhere, pay her the max allowed deferral (18K or 24K) plus 2K for SE taxes.  Your "cost" (assuming that you have personally maxed out on SE taxes) will be 12.2% for both sides of her SE taxes, but you get a big deduction towards retirement.  In some cases including a spouse in a retirement plan causes other employee costs to rise quite a bit, so check first with your plan designer.

 

2)  Everything above assumes that SS will be around and pay as promised for many more decades-especially to higher income people.  I'll take the other side of that bet.

[q-school]

Steven Podnos MD CFP wrote:

I’d make two points here:

 

1)  It usually pays to pay a spouse to work in the business enough to max out a salary deferral in a retirement plan.  If your wife does not participate in a salary deferral plan like a 401k elsewhere, pay her the max allowed deferral (18K or 24K) plus 2K for SE taxes.  Your “cost” (assuming that you have personally maxed out on SE taxes) will be 12.2% for both sides of her SE taxes, but you get a big deduction towards retirement.  In some cases including a spouse in a retirement plan causes other employee costs to rise quite a bit, so check first with your plan designer.

 

2)  Everything above assumes that SS will be around and pay as promised for many more decades-especially to higher income people.  I’ll take the other side of that bet.

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regarding 2, what changes do you foresee?  means testing?  lower payments?  elimination to higher wealth people?

what time frame do you foresee the change to occur in?  do you envision a scenario where they would retroactively change payments to retirees, or just announce a plan to slowdown payouts in the future?

 

thanks

 

[Steven Podnos MD CFP]

Your guess is as good as mine.  The first step is probably to make 100% of benefits taxable (instead of the current maximum of 85%).  But the Social Security system is completely a mirage.  It holds "government bonds" that are nothing but a promise to pay. As soon as the money coming in drops below the money going out-either the benefits will drop or the government will have to spend general tax dollars to support it (unlikely for long).  The Social Security disability side is already insolvent, and the general fund is expected to be so within 10-15 years.

[jfoxcpacfp]

Steven Podnos MD CFP wrote:

Your guess is as good as mine.  The first step is probably to make 100% of benefits taxable (instead of the current maximum of 85%).  But the Social Security system is completely a mirage.  It holds “government bonds” that are nothing but a promise to pay. As soon as the money coming in drops below the money going out-either the benefits will drop or the government will have to spend general tax dollars to support it (unlikely for long).  The Social Security disability side is already insolvent, and the general fund is expected to be so within 10-15 years.

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I will respectfully disagree. We've been hearing predictions of the untimely death of SS for decades. Sure, there has been a lot of monkey business with the "lockbox" but that's not the only program to boast of that.

If SS goes, every other entitlement will already have been sacrificed on the dust heap of history. Senior citizens make up our most active and vociferous voting block and legislators pay attention. Grandma over the cliff just because Paul Ryan wanted to open the discussion to privatize Medicare and all that nonsense. Plus SS is the one entitlement program that includes recipients' own savings.

Instead, what will happen is what has already happened - changes to the rules such as delaying FRA, tweaks to the calculation formula, higher taxes, perhaps some modification of benefits calculation based upon prior year's AGI (such as with Medicare costs), full taxation of benefits also based on AGI, and, yes, even allowing a choice to privatize.

Who knows if I'll be proven right or wrong in my lifetime, but that's what we're telling our clients.

 

[Steven Podnos MD CFP]

Johanna, we are not disagreeing at all.  All the potential changes you mention in the future will in most ways reduce the net benefit to recipients with higher incomes and degrees of wealth.  That was my point.  I'm not saying SS disappears, but that counting on future benefits to be as currently promised (especially for higher income families) is a shaky proposition