Certain professions are offered the ability to opt out of Social Security. Normally, a tax rate of 12.4% is applied to the first $106,800 of earned income -- half paid by the employer and half paid by the employee. When an individual opts out, the 6.2% of their salary that their employer contributes to the Social Security Administration is deposited into a tax-deferred account specifically for the individual involved. The employee can either invest the 6.2% of his salary that he would normally need to pay in Social Security taxes to the same tax-deferred account, or even spend it.
A case I recently looked at involved a 36-year old male. By projecting his estimated benefit utilizing a tool provided by the Social Security Administration (ssa.gov) we determined that if the man stopped participating in the program, his benefit would be reduced by $310 per month upon reaching age 62. After accounting for inflation, the difference was $8,022 per year. This difference was assumed to grow by inflation of 3% per year.
If this individual contributed the 6.2% of his salary that would normally go towards paying the tax along with his employer's 6.2% contribution, was he able to make up the difference of his smaller Social Security payment? Keep in mind that the S&P 500 (a broad measure of the stock market) has achieved an annualized return of approximately 10% since 1929. If the individual achieved a return of 8% while he was employed and only 6% during retirement, he would have been able to make up for the smaller Social Security payment and still have $177,129 left in his investment account upon reaching age 90.
Of course, investing on your own rather than relying on a steady payment from the U.S. Government involves more risk. However, this analysis doesn't consider the strong possibility that Social Security benefits may be reduced by the time this individual begins taking withdrawals. The takeaway from this example is that if you have the ability to opt out of Social Security, it is worth examining.