As soon as they are licensed, many pastors jump at the chance to opt out of Social Security. Social Security taxes total about 15.3% of a pastor’s salary, so opting out represents significant savings. However, there are certain benefits that Social Security provides that must be replaced if you opt out.
Most people think of Social Security as retirement income. But it’s more than that. A lot more. Failing to realize this could leave you exposed to a lot of risk if you decide to exempt yourself as a pastor. (If you’re in the process of making that decision, be sure to read this article.) So that you understand how your decision will impact your family’s finances, let me explain what Social Security is comprised of:
Retirement Benefits
This is the obvious one. Social Security makes up about 1/3 of the income of the elderly. If you are not a part of the Social Security system you will be responsible for 100% of your retirement income. That means you need to start saving and start saving now. (Follow that link to see where.) You should be saving 15-20% of your income for retirement or you could end up dependent on your family when you can no longer work.
Disability Benefits
Social Security also pays benefits in the event that you become disabled and cannot work. In fact, by the end of 2019, over 8.3 million people were receiving Social Security disability benefits. Once you opt out of Social Security it is your responsibility to purchase disability insurance so that you can keep the lights on even if something happens to you. Yes, even pastors need disability insurance. It’s not just for those in “dangerous” professions.
Survivor Benefits
If you die under the Social Security program, your survivors receive benefits. As of July 2020, the average monthly benefit for a widow(er) was $1,431 and for a child was $903. If you’re not a part of the Social Security program, they don’t get that. You need to make other arrangements or your family will be left to fend for themselves once you are gone.
To replace the Social Security survivor benefits you need to purchase life insurance. You should have life insurance coverage for as long as you have people financially dependent on you. If you don’t have a family or no one depends on your income then you don’t need life insurance.
Medicare
The big surprise for most people opting out of self-employment taxes is Medicare. You can still get Medicare coverage if you opt out, but you will have to pay for it while everyone else gets it for free. In 2020, the cost of monthly premiums for Part A is $458 for someone who has not paid into the system. This will increase your expenses during retirement, which means you’ll need to save even more for retirement than you previously thought.
Financial Analysis
I was going to do a comprehensive financial analysis with real numbers of the cost of opting out of self-employment taxes, but Devin over at SocialSecurityIntelligence.com already did an excellent one. You can see his analysis of the true cost and savings of opting out of Social Security here.
Now that you know what you’re missing out on by opting out of Social Security, you can take action to make up for it. If you have already opted out of Social Security, or plan on doing so, here is your to-do list:
- Begin saving for retirement. If you aren’t saving enough, start where you can and raise it by 1% every year until you meet your goal.
- Buy disability insurance.
- Buy life insurance.
28 Responses
Jayme
March 21, 2018Hi,
I opted out of SS as a new pastor but I am now worried about not being eligible for Medicare. My wife is a full time employee, will I be able to receive Medicare through spousal benefits? I currently have life insurance and disability and currently put about 8% of my salary into retirement.
Amy
March 21, 2018Jayme, It’s too long to cover here, so I will answer your question and discuss Medicare in next Monday’s post. Here is the link to the article: http://pastorswallet.com/medicare-works-pastors-opted-social-security/
Shannon
April 25, 2019Amy, discovering this site has been so helpful to me; thank you for your gift to us!
Am I understanding correctly that the Medicare portion of Social Security is the only portion of benefit retained by those who have paid into the system for the minimum 40 quarters and then opt out?
If a person who opts of out SS on clergy income is still paying in through another job, is he then still considered to be under SS for all purposes?
Do you have any information about companies offering disability insurance specifically to those in ministry?
Amy
April 26, 2019Shannon, I’m so glad that you’ve found this site helpful.
If you have paid into Social Security for the minimum 40 quarters then you will be eligible for benefits, even if you later opt out for your ministerial wages. Also, even if you opt out, you will still pay into the system for any secular work that you do. Your benefits will be calculated based on your secular wages (where you have no choice but to be a part of the system) and your ministerial wages (that you opted out for) will not be calculated.
I would recommend that you set up an account at https://www.ssa.gov/myaccount/ with the Social Security Administration where you can see your estimated benefits and your work history. The work history should include all secular employment. If you find any errors, get them fixed now, before you start needing your benefits.
At this time I do not have any recommendations for disability insurance companies, sorry.
Shannon
April 26, 2019Thank you, Amy.
Do survivor benefits based on non-clergy income still apply after opt-out? Is there a certain time frame after the last earned Social Security credit in which the benefit expires (as for disability: 20 of your 40 credits must have been earned within the last 10 years in order to qualify)?
Amy
April 29, 2019Survivor benefits based on non-clergy income do still apply after opting out. However, I’m not sure if the time frame in which they were earned affects them the way it does for disability benefits. The Social Security website does not give enough detail to determine that: https://www.ssa.gov/planners/credits.html
Shannon
April 29, 2019Yes, that’s kind of what I came up with in reading it. Appreciate the extra eyes on in case I missed something.
Amy
May 2, 2019I’m glad to help!
Robert
June 16, 2020I am 43 years of age and about to enter into a paid pastoral position. I have never been paid as a clergy before. Up until now, I have put in $23,470 into social security / Medicare taxes. I have been self employed for the past 20 years, working a side trade business. I will receive a full time salary from my church, all the while I continue my side trade business.
If I opt out of social security and medicare tax, will I still be able to claim social security benefits, disability benefits, and or medicare benefits at retirement age? Doesn’t opting out only prevent social security and medicare taxes being deducted from my church pay checks only, but it doesn’t effect my side trade business! If I opt out of social security and medicare by filling out form 4361, does this mean I loose my $23,470 paid forth thus far and any other amounts paid from now until retirement age?
Amy
June 16, 2020Robert, you are correct. Opting out of Social Security only affects your ministerial income. If you continue to pay into the system with your business then you will continue to accrue Social Security credits. You can set up an account at ssa.gov to see what benefits you are currently eligible for and the work history that they are based off of. You will not lose any credits that you have already accumulated and opting out for your ministerial income should not affect any benefits that you are eligible for through your business.
Robert
June 16, 2020If needed, will I still be eligable for medicare at retirement, because I opted out with form 4361? Can I collect medicare benefits because I paid into it?
Robert
June 16, 2020If needed, will I still be eligible for medicare at retirement, because I opted out with form 4361? Can I collect medicare benefits because I paid into it?
Amy
June 20, 2020At age 65 you will be eligible for Medicare. If you have enough credits, then you will be able to receive Part A for free. If you don’t have enough credits because of opting out, you are still eligible for Medicare, you just have to pay premiums for Part A.
Robert Shank
June 20, 2020That really helps! I did look at my Social Security record and it informed me that I have enough credits!
Amy
June 21, 2020That’s great to hear, Robert!
Jay
November 30, 2020I only took my first full-time ministerial position at age 52. I’ve worked, and accumulated SS credits since I was 17 years old. I’ll never make as a pastor what I’ve made in my secular career. If this is the case, why not opt out of SS?
Amy
December 2, 2020Jay, technically you are not allowed to opt out of Social Security for economic reasons, though as you’ve said, your pastoral income will likely not make much difference in the benefits you will receive.
JW
January 23, 2021Your site is exactly what I’ve been looking for, Amy – thank you! I’m 46, opted out of SS in my 20’s when I was first ordained, but have accumulated 12 SS credits through other work. My wife also works and is fully eligible for SS/Medicare. We’ve invested consistently and are on track for retirement but I’ve been trying to figure out the healthcare piece. I’m relieved to hear I can buy into Medicare and pay the premium beginning at 65, but the monthly premium for Part A & B (roughly $600 in today’s $$) is nothing to sneeze at. I have a chance to work a very part time side job that could help me get the remaining 28 credits I need (the hours/pay would meet the SSA requirements for credits). It won’t add much to my retirement income (maybe $100-200/mo from SS) but if I’m understanding you correctly, doing it for 7 years and hitting the 40 credits would eliminate the out-of-pocket monthly premiums making the value more like $700-800. Am I understanding you correctly? Do you have any thoughts given my circumstances? Thanks again for your ministry and perspective!
Amy
January 25, 2021JW, everyone pays the Part B premium, it is the Part A premium that you get for free if you pay into Social Security. Technically, you should be eligible for premium-free Part A based on your wife’s benefits. This article explains it: https://pastorswallet.com/what-social-security-spousal-benefits-can-a-pastor-who-has-opted-out-receive/ It was designed so that homemakers could receive benefits on their husbands’ records. I will warn you, though, that some people have had to fight really hard for spousal benefits. One woman I have been corresponding with had to go as far as getting someone from her State House of Representatives involved before they would award her pastor husband premium-free Part A based on her record. Your idea to work very part-time to get enough credits would also work. If you did that, it might be a little bit easier because you would be filing based on your own earnings and not on your wife’s.
Tay
February 26, 2021Hi, there! I would like to know if this affects me forever, even if I decide to stop pastoring and start working on a regular job.
Thanks in advance!
Amy
February 28, 2021Tay, this does affect you forever, but only for ministerial compensation. If you get a regular job, you will have to pay Social Security & Medicare taxes just like regular people.
Daesun
July 28, 2021Thank you so much for this page. I opted out of the Social Security at the beginning of my ministry many years ago. Now I am 60 and thinking about retirement. I have a ministerial pension. According to the Social Security office I am eligible for the benefits. However, I wonder if WEP (Windfall Elimination Provision) applies to my SS benefits. If it does, how does it apply?
Amy
July 28, 2021Daesun,
It is my understanding that WEP does not apply to ministers, as I outline in this article: https://pastorswallet.com/are-pastors-subject-to-the-windfall-elimination-provision/ However, I have heard from readers who were told otherwise by Social Security Administration employees. I would recommend that you read the article I linked to and then also discuss it with someone from the SSA.
Richard
December 18, 2022I am currently 65 years old. I started receiving my SS retirement benefits at age 62 and Medicare benefits at 65, all from previous secular employment. In January of this year I was ordained a priest within my denomination and took a part-time position at a local church that pays me a housing allowance only. (My housing allowance if far below my actual housing costs.) If I file a Form 4361 will it affect my current SS benefits or my Medicare benefits?
Frances
January 30, 2023Hi there!
My husband is a pastor, W2 employee, and his employer does not contribute to social security. He still has to submit his 4361 form to opt out of his contributions and we plan to do that this tax season!
Since he has not yet met the 2 year employment maximum to submit the 4361 form, will he be responsible for paying the required social security taxes for 2022 if the form is submitted before taxes are due?
Amy
April 9, 2023He will need to pay the taxes but once his form is approved, he can get them refunded.