Social Security

In honor of the receipt of my very first Social Security check deposit this week, I thought it appropriate to look into some of the myths of the Social Security Administration.  In these days of off-the-chart deficit spending, raising the debt ceilings, and subsequent raising payroll taxes, there never is a day when I don’t hear a Washington D.C. bureaucrat decry that “if we don’t fix the deficit we’ll have to cut Social Security.”  In fact, just the other day I heard the President of the United States say “ … if we don’t fix the debt ceiling we won’t be able to guarantee payments to our seniors …” I thought that statement was particularly interesting because I had absolutely no idea what it meant!  So, I decided to do some research to find out what the real story and history of Social Security is.  What I found was really quite astonishing.

First I offer the following link entitled “Historical Background and Development of Social Security” If you are tired of talking out of your ass about Social Security or you are tired of listening to politicians doing the same, then this is #1 on your reading list.  It took a while to get through, but I assure you it is worth it.  I learned a lot.  For those who are not inclined to follow the link, I have put together some common myths that we all hear consistently in political speeches of all parties.

  • Above I alluded to the current juxtaposition between the Federal deficit and Social Security payments that we constantly hear from our elected officials.  Here is the fact check:

Most likely this question comes from a confusion between the financing of the Social Security program and the way the Social Security Trust Fund is treated in federal budget accounting. Starting in 1969 (due to action by the Johnson Administration in 1968) the transactions to the Trust Fund were included in what is known as the “unified budget.” This means that every function of the federal government is included in a single budget. This is sometimes described by saying that the Social Security Trust Funds are “on-budget.” This budget treatment of the Social Security Trust Fund continued until 1990 when the Trust Funds were again taken “off-budget.” This means only that they are shown as a separate account in the federal budget. But whether the Trust Funds are “on-budget” or “off-budget” is primarily a question of accounting practices–it has no effect on the actual operations of the Trust Fund itself. The Social Security Trust Fund, established in 1937, has never been put into the general fund of the Government and money in the Trust Fund cannot legally be used for purposes other than to provide Social Security and Medicare to the American people.

There’s always some anger about the idea that our Social Security benefits are taxed.  After all they took this money from me while I was working so it’s already a tax, right?  So they’re taxing a tax?  What’s up with that? Well, it’s NOT a tax; it’s a pre-tax contribution, by you, to your retirement fund, just as Medicare is a pre-tax deduction, by you, to your medical insurance fund.  After all, the acronym FICA stands for Federal Insurance Contributions Act.  Here’s the fact check:

The taxation of Social Security began in 1984 following passage of a set of Amendments in 1983, which were signed into law by President Reagan in April 1983. These amendments passed the Congress in 1983 on an overwhelmingly bi-partisan vote.  The basic rule put in place was that up to 50% of Social Security benefits could be added to taxable income, if the taxpayer’s total income exceeded certain thresholds.

The thought was that Social Security was designed as a safety net, not as a means to help the rich get richer.  So, if you are already getting $200,000 in various forms of income, (dividends, capital gains, pensions) Social Security is no longer your safety net.  There are different ways of looking at this one.  First, some person works their whole life, makes a lot of money and pays the maximum into the Social Security system every year.  On at least some level, hasn’t that person earned the right to receive back what they put in?  Second, President Reagan was right that the Social Security system is designed for the people who need it.

  • How many times have we all heard “ the Social Security Administration is running out of money and if we don’t do something quickly …” Here’s the fact check:

Since 1935, more than $8.7 trillion has been paid into the Trust Fund, more than $700 billion has been added as interest earned, and more than $7.4 trillion has been paid out in benefits. The remainder ($2 trillion) is currently on reserve in the Trust Fund and will be used to pay future benefits.  In 2006 for example, the Social Security Trust Fund took in $644.4B from your paychecks.  It also had $102.4B in Interest Income for a total Income of $744.873B.  It paid out $555.4B and its reserve increased by $189.4B to $2.05 Trillion.  In 1981, the Social Security Trust Fund had a surplus of $24.5B.  That surplus has increased every year, without fail, to its current surplus of over $2 Trillion.  In times of full employment it grows faster, (more contributions) in a recession, it grows more slowly or sometimes the surplus goes down (fewer contributions).

Hopefully some of you caught that $102.4B in Interest Income.  That looks good, right?  Well, you know that $2 Trillion in surplus?  The Social Security Trust Fund lent it all to the Federal Government at 5% interest.  $2 Trillion X 5% (.05) = $100 Billion.  $2 Trillion of the $16 Trillion in Federal debt is held by the Social Security Trust Fund.  So when the President says, “If we don’t raise the debt ceiling [read default], I can’t guarantee payments to seniors,” that’s what he means.  If the Federal Government defaults on its debt obligations, the Social Security Trust Fund will be wiped out.  This is why so many seniors’ organizations are so interested in the debt ceiling and the overall budget deficit negotiations in Congress.

© J T Weaver, 01/16/2013

About J T Weaver

The author of "Uphill Both Ways," a thought provoking series of stories about life, family, and growing up.
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3 Responses to Social Security

  1. Pingback: Social Security – Redux | J T Weaver

  2. leotoribio says:

    Welcome to the community, J.T.!

    Politicians seem to treat Social Security as though it is nothing more than an aid to getting elected. On both sides of the aisle, some of them like to use threats (real or imagined) to Social Security as a scare tactic. And on the right, they like to describe it as a “socialist” program. The truth is that the original social security program was instituted by a very conservative Chancellor of Germany, our own program is based upon the success of that one.

    And if our politicians really wished to solve any problems (real or imagined) regarding Social Security, they would eliminate the cap (if they did that, they could reduce the rate of taxation as well). Removing the cap, i.e., raising Social Security withholding, would serve to greatly increase the money in the trust and would make it less necessary for the government to borrow money from foreign governments to whom we would also have to pay interest. Instead, the interest we pay on our debt would go back into the trust and strengthen it that much more.

    And if you believe politicians who describe Social Security as a “giveaway,” consider this: I have been living almost exclusively on Social Security for the past eight years, and during that time I have been called on to render technical assistance to people with computer, TV and other problems. I do not accept compensation for my services, explaining that they are already paying me through their Social Security contributions. And in no way do I believe that I am alone among Social Security recipients in that regard. What’s more, I believe my performance record will compare favorably against what our elected representatives are doing, and they receive exorbitant amounts in pay and benefits. Why should politicians be paid for leaving problems unsolved, isn’t that an “entitlement?”

    Leo Toribio
    Pittsburgh, PA


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