This Is Security?
The orthodontist has the dubious distinction of being among those individuals who are taxed the most for Social Security. If he is incorporated, he matches his employees' contributions of 6.7% of their salaries, and, as both employer and employee himself, he pays twice that much or 13.4% of his gross adjusted salary up to a maximum taxable base of $35,700 for 1983. If he is unincorporated, or self-employed, his tax rate is 9.35% of his $35,700 plus 6.7% of his employees' salaries. Since the average orthodontic practice payroll closely approximates the $35,700 maximum taxable income base, it is likely that the average incorporated orthodontist will pay a total Social Security tax of 20.1% of $35,700, or $7,175.70; and the average unincorporated orthodontist will pay 16.05% of $35,700, or $5,729.85.
These figures for the total tax paid have more than doubled in the last five years. Not only are Social Security taxes large and getting larger, there is an increasing difference between tax paid by the incorporated and unincorporated orthodontist. It now costs almost $1,500 a year in Social Security tax differential for the average orthodontic practice to be incorporated. While there are large potential benefits from being incorporated, the Social Security tax differential must be thrown on the scale when weighing the costs and benefits.
Another consideration is whether orthodontists have a realistic expectation of getting a Social Security benefit when they reach retirement age, and whether the benefit--if received--would be enough to compensate for an extra $1,500 paid into the Social Security fund this year, more in future years.
Until 1951, self-employed persons were not included in the Social Security system. In 1951, we were included and the tax on the then maximum taxable income base of $3,600 at a rate of 2.25% amounted to $81. The accompanying chart shows the increases in tax rate and in maximum taxable income since 1951. Medicare was added to the system in 1966.
It is impossible to predict what will happen to the Social Security system. It has been a Ponzi-type scheme in which current taxpayers pay increasing taxes to provide increasing benefits for an increasing number of beneficiaries. As longevity increases, benefits are owed to retirees for a great many more years than was true at the start of the system. Inevitably, the number of taxpayers required to support one retiree approaches one-on-one, which is an absurd situation. In October 1982, the Social Security fund reached a point of deficit. Reports are that the likely stopgap "solutions" include accelerating Social Security tax increases, slowing the cost of living adjustment in current benefits, taxing the benefits of those earning more than a certain amount, and dragging government employees into the system.
If an orthodontist had been in the system from the start of the inclusion of the self-employed in 1951, and if he had paid the self-employed tax on the maximum taxable income each year, by now he would have paid $22,876.50 into the system. If he were to retire this year at age 65, he would begin receiving $729 a month or $8,748 a year. Even with no increase in benefits, in the not unlikely event that he lived another 10 years, he would receive $87,480 from the system; and, in the not unlikely event that his wife would survive him by another five years, she would receive 80% of his benefit, or $34,992. He put in $22,876.50 and would take out $122,472. That's like making 7% a year tax free. In addition, each would have the added benefits of Medicare.
If the money paid in Social Security tax had instead been invested at an average yield of 8%, and tax paid on the yield, the total sum at the end of the period would have been much less than the Social Security benefits, because of the income tax paid on both the principal investment and the annual yield, and because the Social Security benefits until now far exceed the amount put in plus a reasonable return. However, when the Social Security tax exceeding $3,000 for the self-employed and $4,500 for the incorporated orthodontist, the situation is reversed. The fund that one could accumulate investing that amount annually for 35 years at an average of 8% a year--even paying taxes on the principal and on the annual yield--would be substantial. The amount that could be accumulated in a tax-sheltered retirement plan would be enormous.
