28 September 2012

Social Security

At least once a week I get an e-mail with claims about the Social Security System.  Almost invariably the claims are so far from reality as to be ludicrous.  But people believe the claims because they don't know any better.  With that thought in mind, here are some pertinent facts about "Social Security."

Social Security is, and always has been, a wealth transfer system.  It takes wealth from the working young and transfers it to old farts like you and me.  There is no investment aspect to Social Security; whatever taxes are taken in from FICA are immediately paid out to all the old farts (and some not so old farts).

The Social Security Trust Fund is an accounting gimmick.  It is a myth.  The Social Security Trust Fund was created to justify increasing the FICA tax rate to, allegedly, fund expected future shortfalls in Social Security funding.  That's a crock.  The federal government did a simple trick:  The Treasury issued a special issue of bonds to the Social Security Administration to account for the extra FICA revenues not used by the Social Security Administration and added the excess tax collected to the general fund.  That, of course, was spent.  That special issue of Treasury bonds is nothing but IOUs.

Contrary to common belief, Social Security is not just the Old Age benefit that is usually referred to.  There are four components to Social Security:  (1) The Old Age Benefit; (2) The Disability Benefit; (3) The Survivors Benefit; (4) Medicare.  The FICA taxes collected go out as payments to all four of those components.  The main problem is that over time the federal government, SPECIFICALLY, THE US CONGRESS, has gotten more and more generous (but then that's what happens when you're spending other peoples' money).  Worse than that, the number of recipients of the Disability Benefit has ballooned as lawyers have gotten into the business of suing on behalf of people who don't really qualify for the benefit.  The simple definition for the Disability Benefit used to be that the disabled person was unable to do ANY USEFUL WORK.  Lawyers and judges have corrupted that and driven the system deeper into insolvency.

The FICA tax rate has not always been 15%; it used to be much lower.  It has crept up over the decades as THE US CONGRESS has gotten more and more generous with other peoples' money.  In addition to that, since Social Security payments are based employment, the employers pony up another 15% payment into FICA.  If you happen to be self employed you get to pay BOTH sides of FICA.

Comments about Social Security payment not being benefits are totally false; the claim is being made by people who knows nothing factual about the Social Security System.  Social Security payments are technically indemnification because they were originally intended to be part of an insurance scheme.  Ever wonder what the acronym FICA stands for?  It stands for Federal Insurance Contributions Act.  Note that second word:  Insurance.  The system was designed from the start to be indemnification for the risk of growing too old to work.  The other components came later to cover the risks of becoming permanently disabled and dying during one's working years.  The justification for Medicare is a lot more murky, but politicians being what they are, in 1965 (when Lyndon Johnson was president and Democrats ruled Congress) the US CONGRESS came up with the justification that most medical care goes to those who are old and not very capable of working.

Note that indemnifications are not supposed to be taxed.  Indemnifications restore one to an economic position before a loss occurred.  Therefore they are not taxed.  Note that you don't pay tax on any insurance payments made to you after you suffer a loss., whether the indemnification is from an auto policy, a homeonwers policy, a life insurance policy, or any other kind of private insurance.  The Old Age Benefit of Social Security used to be that way.  Politicians, Democrats in particular but some Republicans also, decided in the 1980s that the Old Age Benefit should be taxed.  That action may have started the notion that Old Age Benefits are earned income.  They are not.

Finally, the Social Security System, in case you missed it before, is a pay-as-you-go system.  The FICA revenues collected go right back out again as benefit payments of Social Security recipients (except for whatever excess goes to the Treasury general fund).  If this were a private plan, THE US CONGRESS would demand that it be FULLY FUNDED.  The term FULLY FUNDED means that there must be sufficient funds available at all times to be able to pay the present value of all legitimate claims on the system.  Not so the Social Security System.  The justification for the initial setup was that, first, the federal government can use its taxing power to cover any shortfalls, and, second, there were a lot more workers than beneficiaries of the Social Security System.  That is no longer the case.  The UNFUNDED part of Social Security grows larger every day.

Once, during the ten years or so that I taught the subject of Social Security at University of Nebraska, Lincoln, one of the former chief actuaries of the Social Security Administration came on campus and gave an hour long discussion on the Social Security System.  He focused on how it originated and how it was set up.  A lot of actuaries from the insurance companies in/around Lincoln Nebraska were in attendance.  The revelations made in that hour stunned those actuaries.  When they walked out of the hall I heard several actuaries talking among themselves.  They kept saying, "It's pay-as-you-go!"  They were stunned because to them a pay-as-you-go system was not only not acceptable under government rules, it was unthinkable from an actuarial point of view.

That is what THE US CONGRESS has bestowed on us.

No comments: