You may get senior discounts from local stores when you retire, but not from the government. Retirement doesn't cut your responsibility to pay income tax or Social Security and Medicare -- known as FICA taxes. If your sources of income change in retirement however, you may be able to leave FICA behind. Social Security benefits, for example, aren't subject to FICA taxes.
If you've set things up to live off your investments, you're off the hook. Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings as far as the Social Security Administration is concerned. If you contributed your wages to a retirement account, such as a 401(k) or IRA, you paid FICA taxes when you earned the money, so you don't have to pay them again.
If you start a second career in retirement, you pay FICA tax on your income, just as you did when you were younger. If you go into business for yourself, you pay self-employment tax any time your net income tops $400. Self-employment tax is twice the regular FICA tax. Employers normally match the employee tax rate but when you're self-employed, you're both employer and employee, so you pay both halves.
Deferred compensation plans postpone some of your salary until after you leave the company. Because you don't receive the income right away, you don't pay tax on it right away either -- not income tax, not FICA tax. If there's a point at which you vest -- that is, if you have a guaranteed right to the income, even if you don't collect it immediately -- you pay FICA and income taxes on it then. If you don't vest until you collect the cash in retirement, that's when your tax bill comes due.
If you receive severance pay when you leave your job, whatever you get -- one month, two months -- is subject to income and FICA taxes. One possible exception is if you get the pay because your company went out of business. The Sixth Circuit Court ruled in 2012 that in that case, severance pay wasn't subject to FICA. This ruling doesn't affect severance pay received in other court jurisdictions. At the time of publication, the government hadn't announced whether it would appeal.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.