I recently finished a series of pieces that highlighted some Republican lawmakers’ views of, and plans for, Social Security. In this piece, I’ll talk a little bit about how Social Security is funded and the language that politicians use when talking about the program.
**NOTE: When I refer to Social Security, I’m referring to not just retiree benefits but, rather, the entire program, which includes two trust funds: OASI (Old-Age and Survivors Insurance) and DI (Disability Insurance).**
I’m not going to post videos or quotes from politicians talking about how Social Security is in trouble and how it needs to be “fixed.” For that kind of documented evidence, check out my four previous pieces (Mike Pence, Mike Lee, Ron Johnson, Rick Scott). The point is, we’ve all heard many politicians wax distressed, disturbed, and oh so concerned when they talk about the plight of Social Security. They tell us that it’s simply not sustainable because it’s a drain on the American economy and costs the government too much money.
Does Social Security Cost the Government Too Much Money?
With all the talk of how much of the federal budget is used up by paying Social Security benefits, the fact is, Social Security is funded mostly by a tax—but not just any old tax that gets tossed into the general government purse and can be used to pay for anything they want. Rather, it’s funded by a dedicated tax, known as FICA (the payroll tax), which is a tax solely dedicated to paying for Social Security, not for anything else, so it goes into its own purse. It is a completely independent pool of money—or at least it’s supposed to be—and it’s not taking away money from any other programs. Social Security is what AARP describes as “self-funded.” (By the by, the entire article is worth reading; AARP provides important information on Social Security.)
So in reality, Social Security doesn’t affect the federal budget, is not a drain on the economy, and doesn’t add to the debt. In recent years, Social Security has been approximately 20% of the federal budget, and politicians most likely know that quoting that number without providing the rest of the information—that the 20% is already paid for mostly with a dedicated tax that cannot be used for anything else—makes Social Security sound unwieldy and too expensive. Again, though, FICA was created in order to pay for Social Security. That’s why it’s called a dedicated tax. So despite what lawmakers tell us, the truth is that if we didn’t have Social Security, we would NOT have more money in the budget for other things.
Does Social Security Funding Come From Only the FICA Tax?
Politicians make Social Security funding sound complicated, but it’s not, so I don’t know what their motives are for their misleading language. As explained above, Social Security is funded mostly by the payroll tax called FICA; approximately 90% comes directly from FICA. The other approximately 10% comes from two other sources related to FICA: the income taxes that citizens pay on their Social Security benefits and the investment interest on FICA.
Let me explain.
While most people don’t have to pay taxes to the IRS on Social Security because it’s their only source of income, those who earn more than a certain amount in taxable income annually do pay taxes, and this revenue is added to the Social Security purse to help pay benefits. Information on that can be found here. As far as interest, whatever money in the Social Security purse is not being used to pay Social Security benefits in any given year is invested in special Treasury bonds, which, just as any other investment, yields some interest. The Social Security Administration provides the breakdown of where funding came from in 2021 here. That interest also goes into the Social Security purse to help pay benefits.
Who Pays FICA?
The FICA tax is paid not only by employees but also by employers, with each party paying a 6.2% tax into FICA, obviously totaling 12.4% per person. The self-employed pay the entire 12.4% to FICA themselves.
This brings up a question: For the politicians who want to re-structure Social Security, would that include no longer requiring employers to contribute to FICA, thereby leaving consumers to foot the bill for the entire FICA tax? No one has proposed that, but I’m just wondering aloud.
Is There a Social Security Shortfall, and When Will Social Security Go Broke?
Recently, more money started flowing out of the Social Security purse to pay benefits than was coming in, partially because there are more retirees collecting checks and living longer and fewer people in the work force to contribute to FICA. The other reason is the cap on the Social Security tax (which I’ll write about in another post). This shortfall that is forecast means that benefit checks will be for less money in future years than they are now; the forecast of when this will happen usually changes from year to year depending upon the number of retirees and the number of workers, but the latest projections that I’ve seen have them coming in 2034 or 2035.
As far as Social Security going broke, I’m not sure how that can happen—I mean that I’m not sure how we can end up with a balance of literally zero in the Trust Fund. As long as there are employees and employers who pay into FICA, it seems to me that there will be money in the Trust Fund. It might not be much, and it might mean drastic cuts, but can there be literally no money in the account? I’m not an economist, so I can’t say with certainty. What I do know is that with the current trend of more retirees and fewer workers, as well as the aforementioned cap on the Social Security tax (FICA), that most likely means we cannot maintain our current level of payouts to retirees.
Congress does need to do something in order to increase the money going into the Social Security purse. The problem, as I see it, is twofold: 1) the language some politicians use to describe the Social Security problem is less than honest and perhaps even purposely so, and 2) their solutions to the problem never focus on equity in the tax system but, rather, on everyone but the wealthy classes exposing themselves to even more financial risk, usually in the way of forcing younger generations to invest in the instability of Wall Street.
It’s not that complicated. We have a dedicated tax that funds Social Security, and if that tax isn’t bringing in enough revenue, then there are ways to increase the money in the Social Security purse without raising taxes on low- and middle-income earners or without hatching a political plan to have us invest our money in the instability of Wall Street, which would benefit investment account managers and the politicians to whom they donate money as either a thank-you for favorable policy or a way to influence policy, with no guarantee to working Americans.
The Logical Report 