To Opt Out or Not to Opt Out (Part 2 of 2)

To Opt Out or Not to Opt Out (Part 2 of 2)
By Mark Helland, CPA

mark helland tulsa oklahomaMark Helland, CPA is a partner with the accounting firm of Elliott, Dozier and Helland, PC which is located in Tulsa, Oklahoma. For further information on this topic, Mark’s firm has a short report on basic fraud prevention tactics which is available to you at no cost. Mark can be contacted via email at or by phone at (918) 627-2286.

Read the first article in this series by Mark Helland.

In my last article, I addressed the very controversial issue of whether or not pastors should make the election to opt out of the social security system and I explained what exactly this election entails and what the long-term consequences tend to be from my experience. While I attempted to present both sides of this issue, my bias against opting out of the social security system probably came through loud and clear. In this article, I want to accomplish two things – further explain the benefits that are offered under the social security system so that those who are making the decision to opt out can fully understand what they are giving up and provide a “game plan” for those who have already made this irrevocable election.

As discussed in the last article, most people simply think that social security is simply a retirement plan, so it is important to understand the full benefits that the social security system offers. While a full and complete explanation of the benefits offered by social security is beyond the scope of this article, following is a brief list of the key components that pastors need to be aware of:

1. Retirement Benefits – Retirement benefits under social security are earned over the course of a person’s work history. As very simplified explanation of this process is that benefits are earned on a “quarters of coverage” basis and if an individual has paid into the system for at least forty (40) quarters they will have been able to earn at least some benefit under the system. The eventual retirement benefit is then based on a formula that is impacted significantly by number of quarters worked and the amount of income earned. So, it is important to note here that even a pastor who has opted out could still potentially receive at least some social security benefit if they met the quarters of coverage test either from previous secular work or from non-pastoral income for which self-employment tax was paid.

2. Disability Payments – This is not a pleasant topic as to qualify for social security disability benefits, an individual would have to be very disabled, essentially suffering a permanent disability. Also, my understanding is that social security disability often takes a long time to qualify for and supplemental disability insurance is needed as well. However, this is still an important benefit that is offered under the system and the amount of disability payments offered can be significant and are again based upon an individual’s history of contributions to the system.

3. Payments for Dependents – Again, although not a pleasant topic to discuss, social security also offers monthly payments to dependents upon the death of a parent. These payments can be critical to the surviving parent as they can replace lost monthly income and/or augment life insurance proceeds. I can speak first hand on how important this benefit can be. My aunt passed away nearly ten years ago leaving her two year old daughter to be raised by my mother and father. Even though my aunt paid very little money into the social security system over the course of her life, her daughter was able to qualify for over $1,000 of monthly dependent benefits. These benefits have been vital to help my parents with the costs of raising a child and have even enabled them to provide for a private, Christian school education.

4. Payments for Surviving Spouses – In the same context as point three, surviving spouses are eligible for social security benefits based upon their spouse’s employment history under a wide range of rules and qualifications. Again, these benefits are a critical financial planning component for replacing lost income and recovering from the death of a spouse.

So, at this point in reading this article those who have already elected to “opt out” might be asking what options they have available. As mentioned in the first article, my experience has been that those who have elected to opt out of social security generally have not saved enough money for retirement nor have they taken steps to protect against disability or the loss of income upon the death of a spouse. My advice to those who have opted out is that you need to take aggressive planning measures to create your own “private” social security plan which replicates the benefits that social security offers. So, it is critical for pastors who have opted out to do the following:

1. Request a benefits statement from the social security administration immediately for both you and your spouse.

If you qualify for social security benefits you most likely are receiving an annual benefits statement by mail already. This statement provides critically important information such as your earnings history, level of benefits offered at different retirement ages, disability scenarios, etc.

2. Work toward having sufficient retirement savings to at least replace the monthly social security benefit.

These savings could be in a retirement plan offered through your church or through personal IRA’s, taxable accounts, annuities, etc. Many churches do not sponsor retirement plans for their staff, so if your church does not offer a retirement plan, start one or talk to your business administrator about starting one. Denominational churches tend to offer pension plans but non-denominational churches rarely offer such plans so it is incumbent upon non-denominational churches to help their pastors to save for retirement. A good church retirement plan should also offer some sort of employer match for employee retirement plan contributions. It is very important to note that under the social security system Uncle Sam has the investment risk and is on the hook for a set monthly benefit whereas in your own “private” retirement plan you have all the investment risk, so make sure to invest wisely.

3. Set aside the taxes that you saved by opting out toward retirement and do not touch them!

On an annual basis, you should request that your CPA or tax preparer recalculate your most recent tax return as if you had been subject to self-employment tax/not opted out. This is a very easy calculation and will take very little of your CPA’s time to complete. The difference between the tax liability on your actual return and this hypothetical number is the amount of tax that was saved by opting out of social security. This number should be put aside and saved each year for retirement and should not be touched under any circumstances.

4. Make sure that you and your spouse have disability insurance coverage in place.

A good disability insurance plan should cover as much of your current monthly income as possible and you also need to be aware of the waiting period that the policy has before benefits would begin. Unfortunately, many churches do not offer disability insurance to their staff but it can be obtained relatively easily as a personal policy. Also, similar to the retirement plan comment above, talk to your church and see if such a plan could be put in place.

5. Make sure that you also have adequate life insurance coverage in place.

While life insurance agents frequently seem to recommend too much life insurance, it is critical to make sure that you have enough life insurance in place to provide for lost income for your spouse and dependent children. The amount of life insurance needed is always complicated to determine but the key thing to remember here is that the monthly income benefit that would normally be available for dependent children is most likely not available for pastors who have opted out. At todays very low interest rates it takes a phenomenal amount of capital to generate even moderate amounts of monthly income. For example, at a 4% interest rate (which is high by today’s standards) it would take $900,000 of principal to generate $3,000 of monthly income.

Finally, here are some other ideas for pastors who have opted out. Non-ministerial income is subject to self-employment tax even if you have opted out. Perhaps you could create a small business activity that could generate some annual income. This income would be reported on a schedule C and would be income that would count toward a social security benefit. Also, if you operate as a husband/wife pastoral team and one of you has opted out and the other has not opted out there may be some planning opportunities for your combined salary and housing allowance between the two of you. Overall, there are many considerations for pastors who have elected to opt out of social security and planning for your financial security at an early age is critical. Wise counsel is recommended for any pastor who is making this important decision and all sides of the decision should be considered diligently.


This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is shared with the understanding that neither the author nor Tony Cooke Ministries is engaged in rendering legal, accounting, psychological, medical or other professional services. Laws and regulations are continually changing, and can vary according to location and time. No representation is made that the information herein is applicable for all locations and times. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

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