The IRS Minister Audit Technique Guide says, "The retired minister may exclude from his/her net earnings from self-employment the rental value of the parsonage or the parsonage allowance received after retirement" (http://www.irs.gov/businesses/small/article/0,,id=210018,00.html). How does the IRS define "retired" in this sense?
IRS Publication 517 also refers to the self-employment tax-free status of post-retirement allowances designated as housing, but does a slightly better job explaining the conditions. Both sources relate to IRS Revenue Ruling 58-359 (yes, from the year 1958!).
If retirement were defined as the-time-I-start-collecting-social-security-retirement-benefits, then many pastors would be elated to stop paying the 15.3 percent SE tax since they often continue ministering to congregations on at least a part-time basis well after reaching typical retirement age.
Unfortunately, this is not the case. A church that allows its pastor to continue living in its parsonage as consideration of his past services, or establishes a plan to provide an ongoing "retirement allowance" in cash designated as housing allowance may do so without the minister being required to pay SE tax. The key is the "past services" stipulation. Retirement is therefore defined as the condition when the pastor is no longer providing services to the congregation. Just because the minister has scaled back to part-time and begun receiving monthly social security checks does not eliminate the SE tax.
On the other hand, ministers whose churches do provide a parsonage or cash "retirement allowance" designated as housing will enjoy the SE-tax free status. Of course, many churches are not in the financial position to do so.
A minister who is able to defer a substantial portion of his compensation into a Internal Revenue Code 403(b) plan can benefit from the SE tax-saving strategy enabled by Revenue Ruling 78-6 (search for other entries in this blog).
If he is older than age 59 1/2, he can take simultaneous retirement distributions from the 403(b) plan without IRS penalty to replace his cash in-flow lost to the large elective deferrals into the plan. These distributions are subject to income tax, but not to SE tax.
He should select his retirement investments wisely, however, since many mutual funds charge fees on these contributions and distributions. Some have found some money market mutual funds effective for these purposes.