There is no trust fund for Social Security. Keep that fact in mind whenever you hear your government bloviate about when said “fund” is going to run out of money. It hasn’t got any money to begin with. Social Security has always been a pay-as-you-go tax, not an investment.
Here’s how it works: you and your employer each pay 6.2% of your income into the trust fund (formally known as OASDI, the Old-Age, Survivors, and Disability Insurance program, and you may see “FICA” on your pay stub – that’s the Federal Insurance Contributions Act, the federal law that authorizes collection of Social Security payroll taxes), up to an earnings level of $106,800.
In 2008, FICA’s take was $672 billion, while $615 billion was paid out. The surplus, $57 billion (minus administration costs of $5.7 billion) went into the fictitious trust fund. And what is this so-called “trust fund”? It’s a file cabinet in Parkersburg, West Virginia, full of massive IOUs from the government to itself. (Thanks to the Associated Press article today that pointed this out.) The money has already been spent to fund other government programs, and these bonds were issued by the U.S. Treasury to acknowledge the “loans.” The feds even credit “interest” to the “debt,” some $116 billion in 2008. But neither the interest nor the principal of the trust fund debt can be paid any other way than raising taxes or selling still more debt.
It worked out that way because the excess funds FICA has been collecting since 1977 can only be invested in U.S. Treasury bonds, and that total amounted to $2.4 trillion in 2008. (Technically, the excess could be invested in other investments, but the thinking is that this would distort the markets.) So when you hear projections that Social Security will run out of money by 2037, they’re talking about cashing in all those bonds. In reality, Social Security will pay out more than it collects starting in 2017, another eight years. GULP!
Actually, I’m not worried. As I noted, they FICA tax stops at $106,800. What’s up with that? Raise the income ceiling and we’ll be fine. But what should really happen is that we should demand that our government stop lying about this and keeping phony accounts. Combine the income tax with the FICA and Medicare taxes, call that “national community support tax” and just be honest about where the money is being spent.
PICTURE OF THE DAY