The Real Truth About Social Security

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 (, 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