Social Security plays a vital role in the finances of tens of millions of Americans. But one of the hallmarks of the Social Security program is that there isn't any means testing to receive benefits. As long as you've worked long enough to qualify, you'll be eligible to get monthly checks in retirement or if you become disabled. That's true for you, for me, and for billionaires like Warren Buffett.
Each year, anyone who works pays Social Security taxes. If you're like most people, you probably see that money coming out of your paycheck week after week, month in and month out. As a paid employee of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), this applies even to Buffett.
However, Buffett's Social Security tax bill reflects a couple of things many people don't realize about the Social Security system. Many critics have looked at these issues as reasons to reform the way Social Security funding works. Below, we'll look into exactly what Buffett's Social Security tax bill likely looks like and what it means for you.
Just a humble CEO
Warren Buffett is Berkshire Hathaway's chief executive officer, but he doesn't have the lavish salary that many big-name CEOs pull down. For decades now, Buffett has received a $100,000 salary for his work in Berkshire's executive suite. That's not the token $1 salary that some execs take, but it's a far cry from what many would think he's worth.
At first glance, that move might seem like a savvy one from a Social Security tax standpoint. $100,000 is below the current wage base limit of $137,700 for 2020, so it'd be reasonable to believe that Buffett pays the 6.2% Social Security payroll tax only on $100,000.
However, Buffett also receives other forms of compensation. Specifically, Berkshire typically reports around $275,000 to $300,000 in costs for personal and home security services for Buffett in its compensation disclosures. If those amounts are included as wages for Social Security payroll tax purposes, they'd be more than enough to take Buffett up to the $137,700 limit -- meaning that he'd pay the maximum $8,537.40 in 2020.
Even that amount might not seem like much for a billionaire to pay. But Social Security payroll taxes are based on earned income from work, not on interest, dividends, or other types of investment income. The only people who pay more than that $8,537.40 amount are those who are self-employed -- and even they are limited to paying double that amount, reflecting the total employee and employer contributions that get made for most workers.
A little more off the top at tax time
In addition to payroll taxes, it's likely that Buffett pays some income tax on Social Security benefits. Given his work history, it's likely that Buffett qualifies for the maximum monthly Social Security benefit, which at the time he turned 70 years old was $1,752 per month. After cost-of-living adjustments, that monthly amount had grown to about $2,675 by 2020.
Buffett's tax returns aren't publicly available, but based on his salary, Buffett has enough income that he likely has to include the maximum 85% of his benefits in his taxable income. Based on a maximum Social Security benefit, that would mean including 85% of $32,100 or $27,285 in benefits on his tax return. That would be taxed at Buffett's ordinary income tax rate, which could be as high as 37% and add another $10,095 to the Oracle of Omaha's tax total.
Social Security reform might be coming
Interestingly, some recent suggestions for reform efforts might not result in Buffett paying any more in taxes. For instance, one proposal from President-elect Joe Biden would subject wage income above $400,000 to Social Security tax. But even if you include the full amount of security services for 2019, the $375,000 total wouldn't leave Buffett owing an extra penny above what he already pays.
Social Security is an essential part of the financial protection retirees need, but the program doesn't always work the way you'd think it does. The fact that wealthy individuals have relatively small caps on what they pay into the system is something that a lot of people are watching more closely.