Like harbingers of doom, it seems every news outlet finds great delight in reporting on the impact of the downturn in the market. Here are a few recent highlights from US News & World Report: The S&P 500 is down almost 20%; Per the latest April 2022, the CPI (consumer price index) increased 8.3%; Unsustainable labor costs due to sluggish business and earnings growth, are forcing many organizations to cut labor; and The Federal Reserve is raising interest rates. That’s a lot of bad news all at once. And for those finalizing their retirement plans, or worse, recently retired, the current downturn in the market impacted their dreams in unimaginable ways compared to just a few short years ago. They are no longer “living the dream.” While this may seem dire, there are two facts to remember during this economic downturn. First, this isn’t the first time our country has experienced financial trouble. It may take time, but we will get through this and find better times on the opposite end of the tunnel. Second, every employee will hit a point when they can no longer work; it is inevitable. Based on these two facts, please don’t depend on the government when it comes to the quality of those retirement years; that responsibility falls squarely on the individual. That is especially true for pastors. For those in vocational ministry, retirement is a sensitive and sometimes confusing topic filled with questions like: should a church provide a retirement plan? If so, what’s available. What if the pastor “opted out” of social security? Won’t God take care of the pastor? Before we dig into those questions, let’s take a step back to understand retirement better.
Economic Bill of Right
For many of us growing up in post-World War II America, the reliance on basic provisions from the government is commonplace. In 2022, It’s hard to imagine America without a formidable military, highway maintenance, and free education. But, these government-provided necessities were born out of Franklin Delano Roosevelt’s State of the Union speech containing the Economic Bill of Rights, the government’s plan to lift the American economy out of the Great Depression. Through the Economic Bill of Rights, the government even began a healthcare and retirement safety net as part of the overarching plan.
The Birth of Social Security
So, in 1935 the government passed the Social Security Act that provided some retirement income at the age of 65. Interestingly, life expectancy in the 1930s was about 60 (58 for men and 62 for women). Today, because of healthier living, advanced medical techniques, and improved medicine, life expectancy is closer to 79. Based on that information alone, it is easy to see that there are apparent shortcomings of the overall, long-term financial sustainability model for Social Security. And, it’s not a substantive retirement plan. According to the Social Security Administration website, the average monthly benefit amount in 2022 is $1,657, or $19,884 annually. It is hard to imagine this is the protection from the economic fears of old age promised in the Economic Bill of Rights. The lesson here is that Social Security is not a retirement fund, and the government recognizes that.
The Need for ERISA
A better solution for creating economic security as we age is through individual responsibility. To reinforce this idea, in 1974, the government passed the Employee Retirement Income Security Act (ERISA). ERISA allows individuals to ensure adequate protection from the financial fears of old age through individual retirement plans that leverage tax-preferred savings accounts such as 401(k) and 403(b) plans. Through this plan, employers can offer a matching contribution as an incentive for employees to participate. For example, an employer might match up to 6% of the employee’s contribution. If the employee makes $2,000 per pay period and contributes 5% ($100) toward the retirement plan, the employer will match that contribution with another $100 making the total contribution $200 per pay period. On top of the “free money” matched by the employer, qualified plans have tax-favored incentives, think pre-tax dollars (the amount is excluded from income tax now but taxed when taken out) or Roth (taxed now, but not when taken out). The lesson here is that the responsibility of planning, sacrifice, and diligence needs to fall onto the individual instead of the government.
Worthy of Double Honor
At the risk of sounding self-serving, I think churches need to take better care of their pastoral staff. The Old and New Testaments teach the laborer is worthy of his wages (Leviticus 19:13, Luke 10:7, and 1 Timothy 5:18). In other words, pay the workers what they are worth. While it sounds carnal to compare the pay of a CEO to a Lead Pastor of a like-sized organization, it shouldn’t be. Both are responsible for developing strategic objectives and direction, defining the culture, overseeing the financial responsibilities, working with a board of directors, and public relations. The reality is that most churches cannot compete with the secular market regarding compensation. And if anyone is getting into ministry to get rich, they shouldn’t get into ministry. But, the idea that working in ministry is akin to a vow of poverty is a narrative that needs to change. In post-Christian America, we need more qualified, dedicated, passionate pastors, not less. But keeping the church staff in broken-down cars, living in low-income apartments, and wearing passed-down clothes is not what the Apostle Paul had in mind when he wrote to his protege Timothy; it is the exact opposite. Look at 1 Timothy 5:17 “The elders who direct the affairs of the church well are worthy of double honor, especially those whose work is preaching and teaching.” According to NAE (National Association of Evangelicals), the lack of compensation is causing pastors to delay retirement because they cannot afford to retire, citing that 58% of pastors have less than $50,000 set aside for retirement. One of the ways to take care of the pastors is for the church to provide and contribute to a qualified retirement plan.
A church budget is a blueprint for a fiscal year as it provides a plan, accountability, and the means to accomplish the mission and vision of the church. You wouldn’t design a house without a bedroom, a place to retire for the evening. Don’t build a budget without a way to contribute to a retirement plan for your church’s pastor(s). That is easy to write, but it is not easy to pull off in tough economic times when many churches face declining attendance and donations. Here are a couple of considerations:
- Ordained or licensed clergy can designate a portion of their ministerial income to a housing allowance. That means the amount specified as housing is excludable from gross income for income tax purposes. When a pastor takes on a housing allowance, they become dual status, meaning they are employees for federal and state tax but are self-employed for FICA. Because the church does not pay the employer portion (7.65%) of FICA, it should apply these substantial savings toward the employer contribution for retirement.
- Find a broker and set up a qualified retirement plan for your church. If your church is a recognized non-profit organization as defined in the IRS code 501(c)(3), then you need a 403(b) or 403(b)(9) plan. These plans allow employees and employers to contribute a portion of their income into tax-favored plans that invest the money for retirement. In 2022, the IRS will allow employees to contribute up to $20,500. Using a simple amortization calculator, if an employee (pastor) contributed the max of $1,700 per month for 30 years at 6% interest, the retirement fund would total $1.6 million. Now imagine if the church made monthly contributions to the pastor retirement fund as well. Pastors could retire without the financial fears that often accompany the elderly.
Even during our current economic downturn, there are few things that we can know for sure. Whatever the economic environment is, it won’t last forever, and everyone, even pastors, will eventually need to retire. The government has never set up a program that makes every citizen wealthy. That means individuals are responsible for their retirement, and churches need to step up and include a retirement plan as part of the total compensation package. The Bible tells us that your pastors are not only worth their wages, but they are also worthy of double honor.