Most opinions on the Social Security System are based on a lack of understanding of the underlying mechanics of the system. This is a shame, because the workings of the system are actually very simple.
The Social Security System is based on a wage tax or “payroll” tax. It is not a benefit system and has been upheld as a “tax” system several times in the Supreme Court by the Federal Government. A benefit system would not be constitutional {the federal government is restricted from forcibly collecting anything not considered a “tax” from its citizens} and the Supreme Court is well aware of this fact. The Supreme Court has also established {Flemming v. Nestor} that no one has a “right” to Social Security benefits.
6.2% is deducted from wages and salaries up to an income of $106,800. The same percentage is paid into the fund by the employer. The self employed must pay both portions. Although this amount is calculated with income tax, it is not in any way refundable, unless there has been a mistake in calculation by employers. The money goes directly from the employee and employer to the Social Security Fund. Medicare is handled with a separate tax.
The tax collected for the year is then distributed to those citizens presently collecting benefits. Their benefit amounts are determined in various ways and have been altered over the years, but do have a connection to the amount they have paid into the program and the portion of their total income that is subject to the tax. For instance, capital gains are not subject to social security tax. Examples like this and the $106 limit on the tax have caused many to believe that the system redistributes money from the poorer to the richer.
In most all years, there has been a “surplus” of tax collections. This surplus is put into the Social Security Surplus Fund which in 2008 stood at about $2.5 trillion dollars. This surplus is then used to purchase Treasury Securities. The latest are known as “special” securities, which means the US Government cannot “resell” these securities. The US Government must “personally” repay these funds back into the Social Security Trust Fund when they are required to fulfill the benefits of citizens in future years when the tax collection falls below the total benefit amount for that same year.
What exactly does this mean {and, this is extremely important!}?
There is only one reason that the Treasury Department issues securities and that is to fund the government. Securities {which are simply IOUs} are issued when the income taxes collected are not enough to cover the expenditures of government for that year. The federal government through the Treasury issues these securities to the Social Security Surplus Fund and then uses the funds received from the surplus fund on other expenditures of the government. What remains in the SS Surplus Fund is a collection of notes that say the Treasury will repay the SS Surplus Fund at some future time, with some interest.
Now, the government has only a couple of options when it comes to repaying these loans back to the Social Security Fund. The primary way would be to get the money from the current year’s income tax collection. However, since our most recent collections have been around a trillion dollars a year, getting a substantial amount from income tax is unlikely without directly taxing everyone with the intent of diverting the tax to the Social Security fund is unlikely. And, a direct tax would not only cripple the economy but the Supreme Court would most likely find it unconstitutional. The pathway to the “general fund” has a one way valve on it.
The government can also issue more securities and pay off the Social Security debt with more debt. If you believe that the federal debt, which presently stands at 13 trillion, will have to be paid off some day that must also come from taxes.
The third option is what is known as “monetizing” debt. The Federal Reserve, which has been vested by congress with the power to “create” money, can purchase the debt from the Treasury and issue new money to cover the cost. This would be somewhat in defiance to the promise not the “sell” the securities, but they could probably get around that by having the Fed purchase “new” treasury securities and the new cash would be used to extinguish the “special” securities owed the SS Surplus Fund. A move like this of such magnitude would certainly cause large scale inflation, which simply means the value that it would take to create the new funds would come from money already in circulation. In other words, we would all have less purchasing power with the dollars already in circulation due to the large influx of new money.
What do all three of these possible options the government has have in common? They are all variations of having the American taxpayer repay him/herself for what he/she has already paid into the fund supposedly to aid old age retirement. For every dollar that is used from the surplus portion of the Social Security Fund for a payment to a retiree, two dollars and whatever interest accrues will have to be paid by the taxpayer. This is due to the fact that every dollar that is invested in a Treasury security through Social Security taxes is a dollar used for other programs of the federal government, whether they might be defense, welfare, infrastructure, corporate subsidies or whatever. So, to recover that dollar, the taxpayer must repay that dollar either through taxes, more debt or inflation.
It’s that simple. If the portion of the payroll tax is used that same year, then it goes directly to a retiree’s benefits. This is referred to as “pay as you go”. If it is surplus, it is used by the federal government in other government programs with the “promise” that the government, through one of the three means above, will repay what it has already used, when it is needed.
If you understand those mechanics, and they are so bizarre that it takes some effort to comprehend, then you should be able to come to a more knowledgeable position on this issue. It may also help you come to a more knowledgeable position on other more comprehensive issues, such as who is the government really taking care of?