Opting Out of Social Security Can Be Costly
You have an option as a clergyperson that most U.S. workers do not have: to apply for an exemption from Social Security taxes. At first it may sound tempting, but opting out can be a costly decision down the line— and one that is irrevocable. If you have already opted out, make sure that you take the steps to protect yourself and your family.
Guidelines for Opting Out
Few ministers meet the strict IRS guidelines required to apply for an exemption. Clergy must certify:
“I am conscientiously opposed to, or because of my religious principles I am opposed to the acceptance (for services I perform as a minister…) of any public insurance that makes payments in the event of death disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care.”
The clergyperson must also inform the ordaining, commissioning or licensing body of The United Methodist Church that he or she takes the aforementioned stance. If approval is granted by the IRS, the exemption is irrevocable.
Unlike certain other denominations, The United Methodist Church does not oppose Social Security or public insurance. The Church’s retirement and health plans operate under the assumption that clergy will receive Social Security and Medicare benefits.
How Opting Out Can Hurt
While many believe the Social Security taxes are costly now, opting out could cost you much more later—at a time when you can least afford it. When you opt out of the Social Security system, you may lose the following benefits:
Medicare—At age 65, most individuals become eligible to apply. Part A, which covers hospital costs, ordinarily has no premium. If you opt out, you may need to purchase comparable health insurance.
Disability—Social Security disability offers monthly income if you qualify due to catastrophic illness or injury. If you opt out, consider purchasing a comparable disability income insurance policy. The cost will depend on your age, health status and other factors.
Note: Disability benefits from the Comprehensive Protection Plan are reduced by the amount of benefits you would have received from Social Security had you not opted out.
Retirement benefits—Monthly retirement benefits are provided from as early as age 62 if you are eligible (must have at least 40 quarters of income). The average Social Security benefit is $15,228 annually. To provide this same level of benefit for 20 years of retirement, you would need more than $300,000 in retirement savings. If you lived longer, you would need significantly more—and that doesn’t even take into account the fact that Social Security benefits increase with inflation.
Survivor benefits—After you die, Social Security may provide benefits to some surviving family members. If you opt out, you may need to purchase a comparable life insurance policy to provide for survivors.
It all adds up. Opting out would mean you might need to pay out of pocket to replace the benefits offered by Social Security. And, you would likely need to save more to have adequate funds to support your retirement. And even if you opt out, you still must pay Social Security taxes on income earned from secular employment.
If you have already opted out, consider working with a financial planner to help you determine how much additional insurance and savings you need. Wespath Benefits and Investments (Wespath) offers confidential consultations with financial planners at no charge.* To take advantage of this service, contact EY Financial Planning Services at 1-800-360-2539. Financial planners are available Monday through Friday from 8:00 a.m. to 7:00 p.m., Central time.
* Costs for these services are included in Wespath’s administrative expenses that are paid for by the funds. Services are available to active participants and surviving spouses with account balances, and to retired and terminated participants with account balances of at least $10,000.