A New Look at Social Security and Medicare Taxes

Matthew Apodaca, CPA

The U.S. Social Security and Medicare systems are quite possibly the greatest financial investment available to every American. Since its inception in 1934, when it was simply individual retirement and disability insurance for direct premium payments, it has grown to embrace the needs of dependent spouses and children, surviving spouses and dependents, and the unexpectedly disabled. Additionally, it provides medical care AND cost of living adjustments for all beneficiaries. One in six Americans receives a Social Security benefit of some kind today. It is one of the most misunderstood, misaligned, and valuable benefits available to Americans.

The Truth about Social Security / Medicare
The current financial statistics published in 2009 Social Security and Medicare Trustees Report (www.socialsecurity.gov) shows our current funding dilemma:

2009 Unfunded Social Security & Medicare Liabilities
(Trillions of Dollars)

We do not disagree with the current reports that without reform the system will soon consume all U.S. income tax revenues. However, what the naysayers do not report is that there are many potential corrections that could substantially change unfunded projections. Some potential corrections that would provide some relief are: increasing the full retirement age; restriction of early retirement benefits; removal of the FICA wage ceiling; offsetting benefits against unearned income, and increasing tax rates. Another correction option is to start closing the system to new benefit accruals. Similar to many State Police and Fire pensions, everyone will get paid the benefit they have accrued but new benefits will not accumulate. However, we believe that this and other less popular options that include reduction or reversal of benefits and entitlements are less likely. We believe there is simply too much political pressure for any Congress or President to take away any of the earned benefits of the American taxpayer. Most politicians are not willing to risk their careers promoting intensive Social Security / Medicare reductions; they will likely continue to produce incidental changes that continue to push the unfunded dates out into the future.

More Than Just Retirement Benefits
While many contributors to U.S. Social Security /Medicare think only in terms of future retirement benefits, there are other important benefits to consider.

For the worker:

• Disability benefits in the event of injury today
• A full medical system (Medicare) at age 65 for life
• Retirement benefits once initiated, for life

• Retirement benefits for worker’s spouse, for life – even after worker’s death
• Death benefits for worker’s surviving spouse
• Dependent benefits for disable, minor, or dependent children, even after the worker’s death
• Dependent benefits for the worker’s dependent parents

The most amazing aspect of these benefits has to do with what it actually COSTS you to participate in them. With just a minimum of earned income activity, you can participate in these benefits. If, in 2009, you earned just $4,360, you received the maximum four credits in the Social Security system for the year 2009. The cost to you for these credits would have been about $334 if you were a W2 employee (plus employer matching) or $667 if you were self-employed. To receive complete minimum coverage under the system, you would need to do this for the next nine years. So, for just $3340 over 10 years (40 quarters) you would receive complete retirement and medical coverage for the rest of your life AND the associated benefits for your dependents listed above. You just cannot pick up these kinds of benefits at a cheaper price.

Those that earn income from self-employment are often surprised by the additional Social Security and Medicare taxes that are due on their earned income. More often than not, these business owners want to know how they can avoid paying these taxes entirely. Instead of understanding that these benefits are a safety net for them and their loved ones, they treat them as an added burden. I can assure you, for the folks that are receiving these benefits today, these payments are a blessing.

I am convinced that Social Security / Medicare benefits, as one of the top U.S. benefits today are going to continue for many, many years to come. There may be revisions and adjustments, but this entitlement is here to stay for the U.S. citizen. Not contributing to it today is to lock out participation in its benefits in the future.

These kinds of conversations are all part of our overall services to our clients at NCH Wealth Advisors. Please contact our office if you have any questions: (866) 729-6425. We are happy to help provide the direction you need.

Please feel free to pass this along to anyone you think might benefit from this information. We appreciate all referrals.