Is Social Security a Good Investment

Most farmers view social security as a tax and not an investment. It is an extremely good investment if we can optimize our income.

Photo by Melissa Askew on Unsplash

Many farmers, especially younger farmers, view social security as a tax and not an investment. We believe that social security when we optimize our income levels is an extremely good investment.

Your monthly benefit is determined by the highest 35 highest indexed earnings. Each year, the Social Security Administration updates the national average wage index. This means that $10,000 of wages earned in 1988 might be the equivalent of $35,000 of wages in 2023.

For 2023, the cost-of-living adjustment for social security recipients was 8.7% but the wage index adjustment was 8.9%. Almost every year’s wages go up by more than inflation which is good for benefits (only in 2009 did we have a negative adjustment since 1951).

Once that total number is determined we divide it by 420 to arrive at the Average Indexed Monthly Earnings (AIME). This number then has two bend points. The first $1,115 of AIME is multiplied by 90%. From $1,115 to $6,721 is multiplied by 32% and the excess over $6,721 is multiplied by 15%.

As you can see, the first amount is almost three times better than the second and six times better than the third section.

As example, assume the following:

•Susan is a farmer in Iowa. 

•The total of her highest 35 years of adjusted earnings are $2,457,420.  This divided by 420 is $5,851. 

•The first $1,115 multiplied by 90% equals $1,003.50. 

•The next $4,736 ($5,851 minus $1,115) multiplied by 32% equals $1,515.52. 

•The sum of these two amounts is $2,519.02. 

•Her PIA is then rounded to $2,519.00 (SSA rounds down to the nearest $.10).

Also, if your spouse does not get paid for working, they will get up to 50% of your retirement benefit. Also, when the first spouse passes away, the surviving spouse will receive the highest benefit.

We calculated some rates of returns based on various assumptions.

If a farmer can simply report the equivalent of 35 years of indexed earnings to equal $1,115 in today's dollars, then the rate of return over 10 years ranges from 5% on the low end to almost 22% on the high end. If they make it 20-30 years, then the minimum rate of return is at least 15% and will top out around 25%.

There is no other investment that will yield this rate of return plus be inflation protected and backed by the federal government.

We also did the calculations if you report adjusted earnings equal to $6,721 in today’s dollars. As expected, the rate of return was lower, but even for 10 years, the return was positive in certain situations. If you last at least 20 years, the return ranged from 3-11%.

Finally, we calculated the return assuming you paid in enough FICA tax to have an average of $10,000 in indexed earnings. Here, you need to last at least 15-19 years to have a positive rate of return.

The bottom line is if you can optimize your self-employment earnings into the second bend point, you still will generate a good rate of return and provide income that will last the rest of your life and your spouse’s lifetime with cost-of-living adjustments. This extra income can also make it easier to transfer the farm operation to the next generation.

We know that some changes will be coming for younger farmers, but as of yet, social security can be a great investment.

We will likely provide a webinar on this as a later point in time.