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SOCIAL SECURITY - A Tax, Investment, Or Insurance?

SOCIAL SECURITY - A Tax, Investment, Or Insurance?

April 25, 2017

Technically, Social Security tax, or what we affectionately know as FICA, is indeed a tax, but it's not like any other ordinary tax. The acronym FICA stands for the Federal Insurance Contributions Act, but the word “contributions” is not to be mistaken for retirement plan contributions, but there are similarities. The mandatory payment of the tax through payroll deductions and tax returns (for self-employed) accumulate in individual accounts, to ultimately be paid out following years of compounded growth; that sounds a lot like investing. The payments are guaranteed by the U.S Government and will continue for your lifetime and provide options as to when and how much benefits will be received – sounds a lot like a type of annuity.  Dependents and spouses may be eligible for survivor benefits at your passing, but your benefits will cease when you pass away – even if you die within a few months after you begin receiving payments – that sounds a lot like a type of insurance.

 Although formally a tax, treating future Social Security benefits as returns from investments (contributions) isn’t such a far-fetched idea. It requires competent planning. Once payroll taxes are deducted, we have no control over how they are invested. However, we do maintain control over when and what type of benefits to receive.

Below is a brief overview of the various types of benefits available through Social Security and various aspects of their specific rules. The material below is general information about Social Security benefits. Please contact us if you have further questions regarding the blog. We will be more specific (examples) on particular strategies in future blog posts.


Retirement Benefits:

You become eligible to receive monthly retirement benefits beginning at age 62. An individual’s past work history determines the Primary Insurance Amount (PIA), which is the amount an individual is entitled to at their Full Retirement Age (FRA). An individual’s PIA amount will contain other adjustments that are designed to recoup as much pre-retirement income as you were receiving while working (within limitations).

Option To Take Reduced Benefit


  • You become eligible to receive retirement or spousal benefits at age 62, and widow (survivor benefits) at age 60.
  • In some situations, collecting reduced benefits may make sense since you are permitted to switch between survivor benefits (if your spouse or ex-spouse dies) and your own retirement benefits.
  • Since your spouse cannot receive spousal benefits unless you are also receiving benefits (except for ex-spouses, see below), it may make sense for you to file for early reduced benefits so your spouse (who has already reached FRA) can file spousal benefits while their own benefit increases by 8% a year - both spouses receive monthly benefits and one of you is earning 8% a year on their future retirement benefits.


  • Filing for early benefits is a PERMANENT reduction. If your turning 63 or younger in 2017, and plan to file for reduced benefits (early) before you reach Full Retirement Age, your benefits will be reduced whether the benefits are classified as retirement, spousal, or survivor.
  • If you continue to work or decide to go back to work prior to reaching FRA, your benefits may be reduced by the earnings cap restriction. In other words, your social security benefits may be reduced depending on the amount of wages you earn each year. This rule applies regardless of the type of benefit – retirement, spousal, or survivor. The earnings cap penalty is in addition to the reduced benefit for filing early. @

Option To File For Benefits At Full Retirement Age (FRA) (if you turn 63 to 74 or older in 2017, your FRA is 66-years old).


  • There is no longer a “working penalty" for working past your full retirement age (benefits are not reduced).
  • You may be eligible to file for spousal benefits only (a good thing) and allow your own benefits to grow by 8% a year until age 70 (must turn 64 or older in 2017 to qualify to file for spousal benefits only).


  • Potential loss of an additional 8%, tax-deferred, guaranteed, annual increase from age 66 to 70 (32% total) - especially if the benefits are not  greatly needed at FRA..

 Option To Delay Filing For Benefits


You can delay your benefits beyond FRA – This maneuver can increase your future income by 8% a year for each year delayed until age 70. I am not aware of an investment opportunity that exists today that provides 1)a four-year guaranteed 8% income growth 2) No default risk, 3) Adjusted for cost of living, and 4) an increased life insurance amount (increased monthly benefit) for your spouse (provided the survivor benefit is larger than he or she would receive on their own PIA).


In most cases, it wont' make financial sense to delay benefits for someone who is terminally or chronically ill and have a shorter life-expectancy than most. 

Spousal Benefits

One of the unique features of the Social Security system that differs from retirement contributions to a retirement plan is the ability for one spouse to collect monthly benefits that are based on the other spouse’s working record (PIA) while both spouses remain alive. Maximizing overall benefits for married couples requires a thorough analysis to determine if receiving spousal benefits are in their best interest. Once you reach full retirement age, you are eligible to receive a maximum 50% of your spouse’s PIA. If you turn 64 or over in 2017, you are entitled to file “restricted” spousal benefits, which means when you reach FRA, you can file for spousal benefits (50% max) while allowing your own retirement benefits to increase through delayed retirement credits.


Option To File for Spousal Benefits

  • If you are turning 64 or older in 2017 (and haven’t filed for benefits yet), you could file for “restricted” spousal benefits when you reach age 66, which entitles you to a maximum 50% of your spouse’s PIA amount while your own retirement benefits grow by 8% a year. @
  • If you are turning 63 or younger in 2017, you cannot file for restricted benefits any longer. When you do file (either reduced benefits or at FRA) for benefits, you will be paid the greater of your own retirement benefits or 50% of your spouse’s PIA (assuming they have already filed). @


Divorced Spouses

  • The rules for ex-spouses are essentially the same as they are for married couples with a major exception – Once you’ve been divorced for at least two years, there is no requirement that your ex-spouse be receiving their retirement benefits in order for you to file for spousal benefits, as is the requirement for married couples.
  • To be eligible for spousal benefits as an ex-spouse, the following conditions must be met:

       a) You are unmarried;

       b) You are 62 or older;

       c) Your ex-spouse is entitled to Social Security or disability benefits, and

       d) The benefit you are entitled to receive based on your own work is less than the benefit you would receive based on your ex-spouse's work.


Survivor Benefits

 You are eligible to receive survivor benefits for your spouse or ex-spouse that are based on 100% of what the deceased spouse was entitled to receive at the time of his or her death. In other words, if the deceased spouse had chosen to receive their benefits early at a reduced amount, then the reduced amount will be what you are eligible for (and will receive unless your own retirement benefits are larger). The same applies if your deceased spouse had delayed retirement credits – the surviving spouse would receive the increased amount including delayed retirement credits.

Who can get survivors benefits based on your work?

  • Your widow or widower may be able to get full benefits at full retirement age. Your widow or widower can get reduced benefits as early as age 60. If your surviving spouse is disabled, benefits can begin as early as age 50.
  • Your widow or widower can get benefits at any age if they take care of your child younger than age 16 or disabled, who’s receiving Social Security benefits.
  • Your unmarried children, younger than age 18 (or up to age 19 if they’re attending elementary or secondary school full time), can also get benefits. Your children can get benefits at any age if they were disabled before age 22 and remain disabled.

Disability and Dependent Benefits

Disability Benefits

Benefits are also available for the following individuals (once certain conditions are met)

In general, to get disability benefits, you must meet two different earnings tests:

  • A recent work test, based on your age at the time you became disabled; and
  • A duration of work test to show that you worked long enough under Social Security.


Dependent Benefits

Your child can get benefits if they’re your biological child, adopted child, or dependent stepchild. (Sometimes, your child could also be eligible for benefits on their grandparents’ earnings.)

To get benefits, a child must have:

  • A parent who’s disabled or retired and entitled to Social Security benefits; or
  • A parent who died after having worked long enough in a job where they paid Social Security taxes. The child must also be:
  • Unmarried; younger than age 18 or younger than 19 years old and a full-time student (no higher than grade 12); or 18 or older and disabled (The disability must have started before age 22).


 In addition to the above classification and rules, there are possible strategies to lower overall tax liability since not all benefits receive the same tax treatment (depends on the amount of other income).

Carr Wealth Management, LLC can assist you in identifying the optimal claiming strategies for you that maximize overall benefits, provide spousal life insurance (survivor benefit), and minimize taxes. Please contact us for a no-charge initial consultation.


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@Social Security Administration