The Real Truth About Social Security

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The
impending “crisis” in the Social Security system is surprisingly
simple to explain and to understand, as are the solutions, once
the distortion, mythologies, and outright lies about the system
are punctured.

The
True FICA Tax Rate

The
best place to start is with the lie about the actual Social Security
tax rate on the individual. This lie sets the tone for the total
misrepresentation throughout the system.

In
American commerce, by far the biggest expense for most on-going
competitive businesses is direct labor costs. No employer can afford
not to intelligently and with discipline painstakingly manage the
cost of labor. All positions must be filled with employees who contribute,
on average, sufficiently to the enterprise’s bottom line a value
in excess of the cost to the employer of its labor. All other things
being equal, the mismanagement of labor costs will doom a business
in the competitive marketplace. Across all industry, the percent
of revenues managed to the bottom line of the average business is
less than 5%, after taxes. Mismanagement of labor costs by fractions
of a percent can affect the net bottom line by double-digit percentages.

Under
current tax laws, if the direct labor cost budget for a particular
salaried position is $50,000, the salary offered can not exceed
$46,446.82, because of the cockamamie, politically-influenced tax
code designed to make it appear as if the employer “pays” the “employer
share” of the employee’s Social Security tax, which is 7.65% of
his reported “salary." Once this amount ($3553.18) is added to the
reported “salary” of $46,446.82, the employer will thus meet its
budgetary limit of $50,000 for the position. Thus for an employee
for which a company is willing to pay $50,000 per year, the employer
is forced to offer a salary of no more than $46,446.82; the employee
will receive $ 42,893.64 before income tax withholding, and $7106.36
in FICA taxes (14.21% of the $50,000) will be sent to the U.S. Treasury.

Does
the employer pay 1/2 of the employee’s FICA tax? Yes, as a matter
of fact the employer pays ALL of the employee’s FICA tax. Every
dime of the employee’s take-home pay, his federal income tax withholding,
and his FICA tax is paid directly by the employer. It makes not
a twit of difference to the employer’s bottom line how that $50,000
is distributed. It is all booked as labor expense. The percentage
of the $50,000 that winds up in the employee’s pocket, versus the
percentage that is submitted to the U.S. Treasury as payroll taxes
and federal income tax withholding, is a matter between only the
employee and his federal government.

For
all employees for whose “salary” is $87,900 or less (from the published
“Maximum Earnings Taxable” for 2004), the true FICA tax rate suffered
by the employee is 14.21%.

On
that foreboding note, having established one of the most insidious
lies at the core of the Social Security system, let us note some
additional incontrovertible facts:

There
is no Social Security Trust Fund
.

Every
year a simple arithmetic notation is made somewhere in the federal
government. It is the difference between two numbers:

  1. The sum
    of all Social Security payroll taxes withheld from all employees
    and submitted to the U.S. Treasury.
  2. The sum
    of all Social Security benefits paid.

Throughout
the history of Social Security, the first number has been larger
than the second. Throughout the history of Social Security, the
population has been led to believe that the first number has been
securely stuffed into a cookie jar somewhere, to be repaid, with
interest, to the employee when he retires. Only the first statement
is true. In actuality, to date, the first number has been the source
of funds for the second number. The difference between the two sums
has been summarily spent on other forms of federal spending, and
it has been spent the month it was collected.

So
why even keep track of the difference? Why, so the federal government
can report to the American public that it has carefully accounted
for the FICA taxes collected that were spent on other government
programs by recording these expenditures as an interest-bearing
loan to the Treasury from the Social Security Administration and
calling it the Social Security Trust Fund!

If
you draw a circle around the entire federal government behemoth,
the Social Security System is INSIDE THAT CIRCLE! Politicians have
told us for decades that all excesses in FICA taxes collected above
benefits paid have been painstakingly “invested” in U.S. Treasury
notes in the Social Security Trust Fund’s behalf. How stupid do
they think we are? Hauling wheelbarrows full of U.S. Treasury Notes
from the U.S. Treasury to another element of the federal government,
the Social Security Administration in Baltimore, is an “investment”?
For years, on the Cato Institute’s web site dedicated to the Social
Security fiasco (www.socialsecurity.org), there have been articles
trying to explain this nonsense. The best one I have read offered,
in so many words, this explanation:

If
the Social Security Trust Fund were worth a bazillion dollars, when
the SSA needed to cash in some of its trust fund to raise, say,
$50 billion to pay beneficiaries, what would then ensue? We must
suppose the SSA would cart $50 billion worth of its carefully saved
U.S. Treasury notes back over to the U.S. Treasury and demand the
cash. What would the U.S. Treasury then do? It has run at a deficit
for decades. It borrows money every month, renewing previous loans
to the public, and making new ones. It does not have $50 billion
in loose cash lying around; it cannot raise taxes; it cannot talk
the SSA into lowering benefits, (thus obviating the need for the
$50 billion), so what does it do? It has no choice but to sell the
SSA’s $50 billion worth of Treasury Notes to the public to raise
the cash. In other words, it has to borrow the money. It has to
increase the national debt.

Now
assume there is no Social Security Trust Fund, but the SSA is facing
a $50 billion shortfall in beneficiary payments. How will the government
raise that cash, if it cannot raise taxes or lower benefits? It
will borrow $50 billion, by selling U.S. Treasury Notes to the public.
It will raise the national debt.

A
$bazillion trust fund is exactly equal to no trust fund.

There
IS not a Social Security Trust Fund. It is a figment.

One
comical addition to the Trust Fund myth: Not only does the federal
government loan itself the difference between FICA taxes collected
and benefits paid, it also pays itself a handsome interest rate
on the loan it has made to itself. And guess how it pays that interest?
Why, it simply ups its loan to itself by the amount of the interest
due to itself. Cute.

The
“Obligations” of the Social Security System.

Much
is said about the poor taxpayers who have been paying FICA taxes
all their working lives, and the horror of the prospect that the
SSA will somehow renege on its “obligation” to pay those taxpayers
the benefits they’re due when they retire.

If,
as an individual, I purchase a U.S. Treasury Bond, then I have in
my hands a legally negotiable instrument of debt obligation by the
federal government to me. When I choose to redeem it, the federal
government is legally bound to pay me.

If
I am a government contractor, in possession of a signed government
contract for goods or services, which defines the conditions under
which I and the federal government have formed a business relationship,
then, when I meet the conditions of the contract, it is a legally
negotiable instrument obligating the federal government to pay me
my due.

I
challenge any citizen who has paid Social Security taxes to search
his desk for some negotiable contract with the federal government
obligating it to pay him Social Security benefits when he retires.
There is no such thing. Current benefits are dictated by current
law, which can be changed tomorrow by a majority of both houses
of congress and a presidential signature.

The
Social Security Administration has absolutely NO legally negotiable
obligations to the citizens of the United States.

Bankruptcy
and the Social Security System

For
those who may be worried about the Social Security System going
bankrupt, I can offer good news and bad news. The good news is that
there is absolutely no way the Social Security System can ever go
bankrupt. The bad news is WHY there is absolutely no way the Social
Security System can ever go bankrupt.

Webster
defines “bankrupt” as “a person or enterprise that has become insolvent."
Webster defines “insolvent” as “having liabilities in excess of
a reasonable market value of assets held." Thus those terms have
absolutely no relevance to any enterprise which has neither assets
NOR liabilities. Journalists who intersperse such words in articles
about the Social Security System are editorially irresponsible.

What
IS the “Social Security System”?

The
Social Security System is now, forever has been, and forever will
be a system where money is taken from people who work and given
to people who do not work. It is also one of the most incredible
cons ever perpetrated on a citizenry. It is fraught with mistruths,
as well as built-in psychological aspects that have so cleverly
perpetuated its misconceptions.

If
you want to hear desperation in a person’s voice, confront him with
the notion that his employer is not really picking up half his FICA
tax burden; rather he is suffering the entire expense out of the
sum his employer is willing to pay for his labor. Nobody wants to
believe that. One can hardly blame them.

There
is no retired millionaire anywhere, upon receiving his $2800 Social
Security benefit check and as he is spending it on green fees each
month, who is psychologically prepared to accept that it requires
a combined 14.21% taxation on ten $2000/month fry cooks at Denny’s
to fund his benefit check. He will cling to the myth that his benefit
check is simply a return on the investment of all those Social Security
taxes he paid while he was working. One can hardly blame him.

Try
explaining to a fry cook at Denny’s what his true FICA tax rate
is, and where his FICA taxes are really going. No, on second thought,
don’t do that to him.

As
Aunt Josie struggles each month, after cashing her $750 Social Security
benefit check to pay for her housing, her heat, her medicine, and,
with whatever may be left, her food, it would be cruel to point
out that her successful nephew Jamie, the $435,000 per year tax
lawyer, is only helping support Social Security with a measly 3%
FICA tax rate

It
might also be a good idea to explain the situation to Jamie. He,
too, would resist the truth, but perhaps he would understand enough
of it to be willing to go help poor old Aunt Josie once in a while.

What’s
to be done about Social Security
?

Simple
question, simple answer. There are only three things to choose from.

Many
uninformed citizens mistakenly believe that all our government needs
to do to pay for government programs is to print more money. Actually,
the government is pretty limited not to spend money it cannot raise
from the private sector, through fees and taxes or through borrowing.
So the only solutions to the so-called Social Security crisis are
these:

  1. Raise Taxes
  2. Raise the
    Federal Debt
  3. Reduce
    Benefits

Some combination of these three things will happen. There absolutely
is no avoiding it. As it is very unfortunate for a person with a
brain tumor to be told he has a headache, and to treat it with aspirin,
so, to, would the Social Security situation benefit from an honest
appraisal of what it is and what it is not. It is not a retirement
program

So
long as the notion persists that this is a retirement program, the
cancer will continue to grow unchecked. One example is the currently
proposed folly of “privatizing” Social Security. As conservative
as I am, and as much of a believer in personal investments as I
am, it gives me nightmares to contemplate new ways of talking of
“investment” in relation to Social Security.

Taxes
must be raised, or the federal debt must be raised, or the benefits
must be reduced to solve the problem. THERE ARE NO OTHER CHOICES!!!
How to do that fairly will become clear as soon as responsible journalism
surfaces to inform the public about the nature of the problem itself.
This is a huge news story. In the absence of that, we are now talking
about going in the opposite direction – by lowering taxes. By lowering
taxes, I mean reducing what we pay to the U.S. Treasury in FICA
taxes, so we can (bureaucratically, I’m sure) “invest” in private
retirement accounts. Cannot everyone see the perils of that, when
coupled to a program like Social Security? Not only are we going
to suffer the loss of tax revenue while the crisis is still growing,
the whole scheme is nothing but a political gamble that the process
of having our own private investments will somehow soften the blow
from the inevitable reduction in benefits that must surely come
in the future. When market conditions deteriorate in the future,
and the government must begin to subsidize those self-financed benefits
that are no longer sufficient, it will be as if nothing had changed,
only worse.

This
situation needs an explosion of understanding among the population
about the true nature of Social Security to happen first, and then
the citizenry needs to demand of our politicians an admission of
the realities of the current system. Then sane, sensible remedies
will arise through simple logic:

  1. Cut the
    BS and expose the current system for what it is. Face up to the
    fact that its cost is all on the backs of employees, not shared
    by employers, and be honest about the tax rate.
  2. Means test
    benefits.
  3. At least
    tax everyone at the same rate, instead of the horrifically regressive
    rates we have now.
  4. Once the
    system has been corrected so that it properly and correctly reveals
    itself as nothing but an old-age welfare system, merge it into
    the Department of Health and Human Services, where it belongs.
  5. Encourage
    private investing (as a start, by eliminating the capital gains
    tax), but otherwise, for God's sake, leave the federal government
    out of it.

March
11, 2004

Wm.
A. “George” Hale [send him mail]
is the owner of SSC Group, Inc., an information technology consulting
company in Texas.


        
        

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