SOCIAL SECURITY & THE BUSINESS OWNER - A CLEAR CASE OF DISCRIMINATION

"Jury awards mother more than $185M in damages in pregnancy discrimination case against AutoZone" reads one headline. "Denver jury awards nearly $15 million in racial discrimination case" reads another. And finally, "Equal pay for equal work" reads a third. Discrimination is a very big deal and as a business owner, whatever you do, don't discriminate! 

Unless, of course, you're the Social Security Administration.

Few people are aware of this, so allow me to explain. Everyone pays Social Security taxes on their W-2 income. When both the employee and employer contributions are considered, the rate is 12.4% for the Social Security portion of your W-2 income (up to a maximum of $118,500 in 2015). And don't let anyone tell you that the part the employer pays shouldn't count. Remember, if the employer didn't have to send its portion to Social Security on your behalf, it could give it directly to you and you would have an immediate pay raise. It's a cost that you pay, even if it is a hidden one. Simple math shows that someone making $100,000 pays $12,400 in Social Security taxes and someone making $50,000 pays $6,200 in Social Security taxes.

While paying more in taxes because your income is higher than someone else's income is no fun, if everyone's Social Security benefits are proportional in retirement to their income, then everything just comes out in the wash...right? Well, that's what most people assume.

The problem is that most people are wrong.

The chart below tells the story and the results are striking.

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Category	2015 Income	2015 Tax	Social Security Annual Benefit @ Age 67	Replacement Ratio
Maximum SS Wage Base	$118,500	$14,694	$33,216	28.03%
Average High Income	$71,821	$8,906	$26,676	37.14%
Average Income	$44,888	$5,566	$20,100	44.78%
Average Low Income	$20,199	$2,505	$12,204	60.42%

Assumptions: (1) Recipient born in 1967 and worked 35 years from 1999 to 2034 (2) Benefits are based on each Category. 2015 Income represents income for each Category in the year 2015, (3) Inflation in benefits and income starting in 2015 is 0%, (4) Benefits were calculated using the Social Security Administration's "SSA Benefit Calculator" using current law.

If your income over your working life is always at the Social Security Wage Base maximum (which is currently $118,500), you will pay a heck of a lot more in Social Security taxes than someone that is in the Average Low Income category. That's a no-brainer. Look at the replacement ratios at the different levels of income though! If you're a high earner, Social Security is going to replace only 28% of your income, but it will replace 60% of the Average Low Income earner's income. The more income you make and the more taxes you pay, the less you receive proportionally from Social Security. That, my dear readers, is state sanctioned discrimination.

ADDING INSULT TO INJURY
If that wasn't bad enough, think about the possible taxation of your Social Security benefits. If you are saving money in IRAs, 401(k)s, profit sharing plans, municipal bonds, and brokerage accounts in your working years, when you start pulling that money out in retirement, those dollars are counted in a formula to determine a Social Security term called "provisional income." Depending on how much of this provisional income you have - and the thresholds are very low - a substantial portion of your Social Security benefits could be taxable. And those benefits might be taxed at relatively high marginal income tax rates! 

Social Security clearly discriminates against business owners and other higher income people. Higher income individuals and families pay more in Social Security taxes, receive less in benefits per tax dollar paid, and then pay taxes - at higher marginal income tax rates - on a substantial portion of the Social Security benefits they do receive. 

Is it any wonder that people are doing all they can to learn how to maximize their Social Security benefits?

FINAL THOUGHTS
We know that Social Security wasn't designed to make anyone rich. In fact, it was designed to keep people from being destitute. I believe a lot of people support that concept. But let's not delude ourselves into believing that these benefits come out of thin air. It is important to remember that, with very limited exceptions, the government doesn't have any of its own money to give to people in need. It must TAKE from some to GIVE to others. That is exactly what you see happening with the replacement ratios in the chart above.

Most higher income earning individuals and families I know are great people. They usually do not - unlike what the press would have you believe - come from wealthy families. Like many people, they've work hard...or have taken risks...to have what they have. And most of these high earners believe that helping their fellow man (or woman) is important. 

As a society, we should probably learn to say "thank you" to them every once and a while. 

I hope you found this an interesting read. Enjoy the warmer weather this week!

Stay well,
Bruce