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Friday, December 21, 2007

The Social Security Scam

The Social Security and Medicare tax is one of the worst scams currently being run by the Federal Government.

First, the tax rate is misreported. The average person sees a 7.5% payroll deduction, and their employer pays the other 7.5%. This means that the total tax is 15%. Even though you don't see the money as part of your paycheck, it still counts as an expense. If your employer didn't have to pay the 7.5%, he would have more money available for salaries. Without the employer 7.5% Social Security tax, salaries would be 7.5% higher. Someone who is self-employed "on the books" has to pay the full 15% directly themselves.

Second, there is no obligation for the government to pay any future benefit. There is no contract that guarantees the taxpayer a certain level of future benefits. At any time, the government could reduce benefits. Benefits could be reduced by an outright decrease. Benefits could also be eroded by inflation. The CPI adjustments used are insufficient compensation for the true inflation rate.

Third, the Social Security Trust Fund is a legal fiction. For the entire history of Social Security, taxes collected have always exceeded payments. The surplus money cannot be "stored" in Treasury bonds. A government cannot store value by having a surplus in the currency it issues. A government surplus is deflationary; a deficit is inflationary. If there was $1 trillion in the Social Security Trust Fund, and the government exerted discipline and didn't spend that money, then there would be $1 trillion of deflation. Instead, what actually happens is that the $1 trillion is used to buy government bonds, and that money is spent.

Even worse, interest rates are held artificially low by the Federal Reserve. This means that the interest credited to the trust fund is less than what fair market interest rates would be. That doesn't matter much, because the trust fund is a legal fiction anyway. On the other hand, if the Social Security Trust Fund were credited with a fair free market interest rate, it wouldn't be insolvent.

The idea of investing the Social Security Trust Fund isn't as stupid as newspapers made it sound. By buying stocks of private companies, or buying gold, the Social Security Trust Fund would be invested in something concrete. There is a drawback, that the money would be at risk in the event of a market decline. During a recession, deficit spending to increase the money supply is needed anyway. Guaranteeing the benefits with deficit spending would be a reasonable hedge while investing the Social Security Trust Fund in the stock market or gold.

When you take into account the future obligations for Social Security and Medicare, the government is technically very bankrupt. Either the government is going to have to raise taxes, cut benefits, increase inflation, or some combination of those.

Besides, the real question isn't a lack of productive capacity. It's a lack of purchasing power. There is so much waste in the current economic system. It would be much easier to support retirees under a fair economic system. For example, I pay a direct taxation rate of 50%. If you add all hidden taxes and regulations, my taxation rate is 95% or more. If I didn't have to pay such high taxes, I could easily afford to directly support my retired parents, with money left over to help others.

However, since I have to pay crushing tax rates, I don't have the spare time or wealth to help others. This means that retired people are necessarily dependent on the government for help. Due to crushing taxes, free-market aid organizations can't exist. Before the days of big government, private charities actually did a great job of taking care of people.

The bottom line is that the average person should just view Social Security and Medicare taxes as another tax. You should have no expectation of a future payment or benefit.

1 comment:

David_Z said...

Have you ever taken a look at the "Statement" that SS sends you each spring, which lets you know how much money of yours it's confiscated throughout the years? I crunched the numbers on the last one I received, and was appalled - of course, I've never expected anything more than that, so I wasn't disappointed per se. But still, actually looking at that money as an investment foregone would be eye-opening for a lot of people.

It's also been argued that the single largest impediment to the working poor is that FICA portion of taxes, from which none are exempt, and of which none is returned via "refund" in April. But you're spot-on: most people think it's only a 7.5% hit.

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