Would Teachers Be Better Off Paying Social Security Taxes?
November 19, 2006
Zero Social Security Tax!
How would like to open your paycheck and see zero Social Security withheld? Well you can, become a school teacher!
I couldn’t believe it when a teacher friend told me she didn’t pay into Social Security. Instead of paying 6.2% of her salary for FICA, she pays 11.5% into a public school retirement system trust.
Pros and Cons
My first thought was, “Lucky lady, she’s not throwing money down the drain like the rest of us”. Since the state trust is much more likely to be around 40 years from now probably see her money again some day.
But then I thought about the 11.5% of her salary that was being deducted for the state trust. Even though she pays no money into Social Security, the state government is keeping almost double the FICA tax for their trust.
The good part about her current setup is that she’s forced to save 11.5% of her salary and the probability of getting the money back is much higher than Social Security. The bad part is that she’s only getting 6% interest, calculated and applied once annually, on her contributions, just enough to barely keep ahead of inflation.
Which is Better?
My question is this. If she had the choice, would she be better off not contributing the 11.5% to the state trust, paying 6.2% into Social Security, and investing the additional 5.3% of her salary into the stock market? The assumptions would be a $40,000 salary (1.5% annual salary increase), a 40 year time frame, and an average annual return of 10% on her stocks.
My first take is that not paying into Social Security would be great. However, I know a low rate of return over an extended period of time can really kill the ability of money to grow, especially when you take inflation into account. Anyone out there a finance whiz? Which would work out better in the end?
All posts by Ben Edwards
Actually, with the use of a simple compound interest calculator, you can find out the answer to your question rather quickly.
With your friends contribution of 11.5% of the current income of $40,000 ($4,600/yr) at a rate of 6%, after 40 years she would have $754,619.34.
If she were to instead put 5.3% of her income into an individual retirement account that averaged 10% each year over the course of 40 years, that account would be valued at: $1,032,125.84.
Of course all of this is assuming that she never makes more than $40,000 each year for the next 40 years! Hope that helped.