The Social Security program explained …

Social Security,like the Postal Service, is under attack, perhaps the most deadly such attack in its history. Where Ronald Reagan and George W. Bush launched a full frontal attacks, President Obama is more clever. Reagan’s defeat was so sound that he, for perception’s sake, became a supporter of the program. George W. Bush merely changed the subject, but each attack took its toll.

Obama is working behind the scenes to undermine Social Security by defunding it, claiming that in so doing he is providing a tax break for the middle and working classes.

(OK guys. Democrats have left the room now. We can speak freely.)

The ruse is easily uncovered. If Obama wanted to provide a tax break for the middle and working classes, he could do so without tapping Social Security revenues. It’s a choice he made, and so exposes him as yet another enemy of the program.

The American tax system is a mystery to ordinary people. It is neither simple nor transparent. The owning classes, now known as the 1%, understand it well enough to play it to their advantage, and so have a huge advantage over the rest of us. Obama could not pull his defunding stunt in an informed environment.

What follows beneath the fold is intended for readers who are interested in the actual workings of the Social Security program – non-partisan people of curious mind.

Social Security gets its revenue from three sources: 1) A tax on workers (partially disguised as a tax on employers (in economic terms, known as a “hidden” tax); 2) A tax on beneficiaries instated in 1983 by the Reagan Administration and a Democrat-controlled congress; and 3) interest on the Trust Fund. I’ll deal with each separately.

• The combined tax on workers was raised to its current levels by Ronald Reagan and the Democrats in 1983. At the time he signed the law, it was (and still is) the largest tax increase in US history.
• Pre-Obama the tax was 12.4 % of the first $106,800 in wages, called the “wage base.”
• “Wages” are a distinct category of income. Other categories, like “dividends,” “interest”, “capital gains,” “rents” and “royalties” are exempt from the tax. “Wages” also include self-employment earnings, lottery winnings, certain court settlements – in essence, anything for which direct effort is required to generate the income. (In the past, this was known as “active” income, and all other types listed here as”passive.)
• The wage base goes up each year(currently $110,100) – that is, it is a tax increase on a certain class of workers, those who earn more than the existing wage base. Where all other taxes are tempered to go down with inflation, the Social Security tax is designed to go up. This is a reflection of political power – workers are generally unorganized and ignorant of the tax system, and so get reamed.
• The tax rate levied against the wage base, prior to Obama, was 11.68% – this is not what it appears to be on the surface. The employee had 6.2% of his wages withheld, and the employer paid another 6.2%, but a tax on wages, regardless who sends it in, is a tax on the person earning the wage.
• Since the employee never sees the “employer” 6.2%, it is in effect wages taxed at 100%.
• So the employee’s tax rate is calculated as follows: 12.4% (the entire amount paid in) divided by 106.4%, his wage base plus the hidden tax, resulting in the 11.78% rate of tax.
• Obama reduced the “employee’s share” of the tax to 4.2%, in effect lowering the overall tax down to 9.79%, a 16% reduction in revenue for the program.
• Currently, the General Fund (tax revenues from all other sources, such as the regular income tax and tariffs etc) is reimbursing Social Security for this loss, but the “holiday” created two problems: 1) It is virtually impossible to reinstate the original level of tax while in a seemingly permanent recession, 2) deficit hawks are screaming about it, meaning that the General Fund repayment can be easily axed.
• The Social Security tax is a separate tax from the “Income Tax”, the one that the employee calculates each year using Form 1040. Since there is only one line on that nasty form dealing with the Social Security tax (for employees with more than one employer who might pay in too much FICA tax), wage earners are hardly aware of the extent of the Social Security tax, and instead are distracted by the bottom line on the return, usually a refund generated by regular income tax over-withholding.
• On the government side of the ledger, the tax is accounted for separately – W-2’s are sent to a Social Security Administration processing center in Wilkes-Barre, PA, and SSA keeps track of each individual’s cumulative earnings, which are used to calculate benefits. The money itself is theoretically put in a “Trust Fund.” However, a “fund” is not the same as actual cash in the bank – it is a formal statement of dedicated revenue. More later.

2) The tax on beneficiaries was instated after the failed early 1980’s attack on Social Security during the Reagan Administration.

• In theory,, it is a tax on the portion of benefits generated by the employer’s share of the tax. Remember from above that only one half of the tax is turned over by the employee, the other half by the employer. The Reaganites used this perceptual device to levy a tax on one-half of Social Security income.
• The stated objective at the time was to reach only well-off beneficiaries that were not totally dependent on Social Security for their survival. So the tax was structured only to kick in on individuals when their other income reached $25,000 annually, and with married couples at $32,000.
• When earnings exceed $34,000 for individuals ($44,000 married couples), a full 85% of benefits are taxed. (There is no justification, from a structural standpoint, for the 85% rate of inclusion in taxable income.)
• The tax on Social Security benefits put in place in 1983 was deliberately excluded from indexation provisions that protect other income from tax increases due solely to inflation. So even in 2012 the base levels for taxation of Social Security benefits are still $25,000/32,000 and $34,000/44,000.
• Had inflation been taken into account in setting the floor for taxation of benefits back then, the tax would not kick in today until around $52,000/66,000 and $71,000/92,000. As mentioned before, hidden taxes are most deadly, and this hidden tax increase levied on Social Security beneficiaries each year is monstrous in effect, and largely unmentioned in the business press, certainly not the popular media.

3) Interest on the Trust Fund: As mentioned before, Social Security tax revenues are accounted for separately using a device known as the “Trust Fund.”

• Social Security over the decades has taken in far more revenue than it has paid out in benefits. As of December of 2011, excess revenues were $2,596,371,415.
• All of this money is invested in US Treasury bonds and is given over to the General Fund using a perceptual device called the “Unified Budget.
• The Unified Budget folds the Social Security program over into the rest of government, creating the perception that it is not a separate fund, and worse yet, that Social Security outlays contribute to the deficit.
• The Trust Fund is invested in treasury bonds because 1) treasuries are protected from market swings, and 2) investment of that much money in the private sector would result in government ownership of many private entities.
• However, the use of the treasury for deposit of the bonds has led to the perception often repeated by program enemies that 1) “we owe it to ourselves,” meaning it is not real, and 2) that we don’t have the money to repay it, and so should default.
• In reality, all “bonds” are owed to someone by someone, so that if the group of ‘someone’s’ is made large enough, it can be said of every bond that we owe it to ourselves. Indeed with the Trust Fund there is some overlap – wages earners are both owners and debtors of the Trust Fund.
• But wages earners usually become retirees, and so no longer owe payments to the Trust Fund, so that the more accurate description of the Trust Fund is moneyed owed by all taxpayers to a subset of taxpayers, current retirees, or more specifically, Baby Boomers. (We Boomers, unlike any before us and any after, prepaid our benefits.)
• We can easily afford repayment. $2,6 trillion over twenty years in a $15 trillion economy is easily managed.
• It was predictable in the normal bait and switch of everyday life that taxpayers without political power would have the switch pulled on them, so that there were surely people in the Reagan Administration who understood that the “Trust Fund” would be dishonored in later years.
• Hiding behind the Unified Budget, FICA tax revenues have been used to pay a part of every other government program, including PEW: Pentagon Endless Wars.
• Nonetheless, Social Security recipients have immense untapped political power if only they get educated and organized.

There is one more aspect of “FICA” – Federal Insurance Contributions Act” – that is not well-known: The “Insurance” portion of the program is also for survivors under the age of 19 and widows and widowers and disabled workers.

• The program is often compared to other “retirement” programs, such as IRA’s (defined contribution) and pensions (“defined benefit”) programs.
• But Social Security, as the name states, is an “Insurance” program. If I buy a life insurance policy today and die tomorrow, my beneficiaries get paid without regard to how much I paid in premiums.
• So too with Social Security – if a an unmarried and childless person dies before attaining retirement age, there are no benefits. Sorry Charlie, (or in this case, my brother Joseph, who died single and childless at age 58). If that person has a spouse and children, they are entitled to survivor benefits without regard to how many years tax was paid in.
• “Disabled” people are, as I understand it, taking up an unjustified portion of the revenues – while benefits are small, the term “disabled” extends to even mental illness, meaning that even accountants are entitled.

There is no other private sector program that can touch Social Security in terms of cost/benefit. If you do not believe this, go to any broker or investment advisor and ask for 1) a defined benefit pension, 2) survivor benefits for widow and children under 19, and 3) disability. The advisor will have to sell you three separate policies, and in total they will cost far more than Social Security. (Note: Just using the words “defined benefit” will assure you that it is the last you ever see of the investment advisor/broker.)