An explanation of social security

Most people don't really understand the nuts and bolts how Social Security works.

Here is a brief primer.

Social Security taxes, "FICA" on your paystub, come out to 15.3% of your earned income.

2.9% of that is actually Medicare, so 12.4% goes to Social Security. Some portion of that (1.9 I think) actually goes to disability and death benefits but we'll keep it simple for now.

The 12.4% tax is applied to your GROSS income. This is very different from income tax, which is applied to your Adjusted Gross Income (AGI). AGI is what you have after you make all your deductions (which includes 1/2 of your FICA, more on that later). The FICA is taken right off the top.

This makes it one of the most regressive taxes we have.

Half of that 12.4% is paid by your employer, and half is paid by you. This means that technically, half of the FICA is really tax deductible and half of it isn't. Any of you who have ever earned your own money know how this works. If you are self-employed you pay the full 12.4% and then you deduct half of that from you AGI. If you are an employee you just get the 6.2% taken off the top by your employer (thus, making it essentially tax deductible) and you pay the other half on your Gross Income.

There is a FICA cap which means FICA is only applied to wages up to a certain amount, which is around 100K. Everyone who makes over 100K pays the same total FICA.

So, all wages paid in this country, up to 100K per person, are taxed at 12.4% for Social Security.

But what happens with that money?

It goes directly into the general fund. Do not pass go do not collect $200. There is a lot of talk about the "Social Security" fund, which is nonexistent. There is no such thing.

Now, the general fund can be used for anything. The promises made re: Social Security are no different than a promise to build a road, or to fund a military base, or anything else that Congress has promised to do with our money. There is even a court case that sets a very interesting precedent about Social Security wherein it is explicitly stated that no citizen has any claim whatsoever to Social Security. There is no obligation by the US Govt to pay any of us a single dime of Social Security retirement.

Every year the SSA mails you a summary of your wage history and projected benefits based on that. This gives the aura of a promise but it is not. This is a guess, at best.

The Social Security picture has changed drastically over the years and it is certain to do so again. For example, the FICA started off at 1%, and eventually rose to 3% over the next decade or so. Your payout rates are not set in stone and will definitely be modified as the financial realities materialize.

THE "TRUST FUND"

If FICA all goes directly into the general fund what is all this talk of the "TRUST FUND".

The Social Security trust fund is similar to a situation where your boss gives you a big christmas bonus and instead of saving if for your child's education you decide to buy a new boat. You know you really should put it away so that you an afford Junior's college tuition later but you really want that new boat. So you write yourself a note that says "I promise to pay for junior's college education when the time comes".

This is your trust fund. And of course, if you go broke or lose your job you really won't be able to pay for junior will you?

The so-called trust fund exists because the revenues from FICA exceed the current payouts from Social Security. Why overtax people now just to piss it away? Why not just collect enough to make the current payouts and adjust it each year as necessary? (hint: FICA is not really tied to SS in any way financially, even though it is framed that way. See above).

So that's how the biggest financial scam in the history of the world has been perpetrated. Congress declared that in order to handle the future payouts from Social Security, the FICA rate had to increase and the money needed to be collected NOW.

But the money isn't saved. The money actually CANT be saved for reasons I'll detail below.

But here's the kicker: Congress could have just made the promise to pay later and not collected any money now and *nothing* would be different.
Collecting money now and spending it does nothing to change the future obligation. So the justification for high FICA rates is a massive lie. You are being scammed.

But it gets worse. Some may feel outraged that Congress spent the money instead of saving it but THEY CANNOT SAVE THE MONEY. It's not even possible.
There are three options and none of them are viable.


1. Hold onto the cash. You can't just hold onto the cash (cash you printed in the first place) because it depreciates at the rate of inflation. I guess you *could* literally hold onto the cash but that would be even stupider than most things government does.

2. Invest it in the market. You can't put it into the market because it is a significant amount and would enable direct government control of industry. This is far too politically unpalatable and is a genuinely dangerous road to go down, not to mention I would not trust government bureaucrats to successfully manage a 2 trillion dollar investment fund! HAHAHA.

3. Buy foreign treasuries. This is also politically unpalatable and even worse, enables the USA to play currency manipulation games and nation building even moreso than they do now. Think of China pinning the rinmibi to the dollar only on a massive scale that affects nearly every other currency of value. It's bad enough how we screw with nations throught the IMF. If the US were directly buying up entire nations worth of treasuries it would be a disaster.

The only thing to do with the extra money is to SPEND it. "We're saving this money for your future" is an incomparable lie. It is probably the biggest lie our government has ever foisted on the public. We will all be taxed more heavily in the future for Social Security, regardless of how much we pay into it now.

We will be paying exactly the same as if we had enjoyed a correctly balanced FICA-to-payout ratio for the last several decades. I shudder to think of the economic growth and extra wealth we have burned up for the lowest earners in this country.

The joke is on us.

PS: Let me quickly address the standard rebuttal from Social Security apologists.
Some may claim that the FICA revenues offset what would be an even bigger yearly deficit so in essence we have made good use of our "Trust Fund" and it will help our ability to pay later. But that is obviously nonsense. It is clear that the budget can handle only a certain level of debt, and it is clear that the public will only abide a certain size deficit before the political backlash gets to be too great. Without the fraud that perpetrated the extra FICA revenues (which amount to about 2 Trillion so far), the budget deficits might have been slightly bigger but there is no way they'd be anywhere near the 2 Trillion that has been collected and spent by Congress under the guise of saving for your future.