This page was last updated on January 3, 2013.
Socialist Security and Medicare are very complicated programs, especially when it comes to eligibility issues and who pays how much to whom and for what. Since the purpose of this paper is to give you a general understanding of how these programs operate, it does not get into the gory details.
Though not to the same extent as in the Fuller case discussed below, the Urban Institute (a leftist “think tank”) reported lifetime Socialist Security (SS) and Medicare benefits for the average couple/person still greatly exceed the taxes paid by that couple/person. If you look at SS and Medicare separately, there are some cases in which lifetime SS taxes paid exceed lifetime benefits. As for Medicare, in all cases lifetime benefits ridiculously exceed lifetime taxes paid.
Congress passed and FDR signed Socialist Security (SS) into law in 1935, the first SS taxes were collected in 1937, and the first SS benefits check was issued to Ida May Fuller upon her retirement at the age of 65 in 1940. Miss Fuller paid $24.75 in SS taxes over three years, but ultimately received $22,888.92 in benefits until her death in 1975 at the age of 100. For every SS tax dollar Miss Fuller paid, she received $923.80 in SS benefits. That’s a return of 92,380%.
The original SS tax rate was two percent (employee 1%, employer 1%). (You can learn about the myth of the “employer portion” of SS taxes below.) The maximum taxable earnings amount (MTEA) was a fixed $3,000/year and the retirement age for full benefits was 65. SS is supposed to help replace wage income lost when a person retires. That’s why non-wage income (dividends, interest, et cetera) is not subject to the SS tax.
Beginning at least as far back as 1950, the feds began trying to fix the SS financial problems.
· From 1950 through 1990, Congress increased the SS tax rate 20 times! At 12.4%, the current SS tax rate is 6.2 times its original two-percent rate.
· From 1951 through 1974, Congress gradually increased the MTEA from $3,000/year to $13,200/year. Beginning in 1975, the MTEA now increases every year by law and is more than twice what it was in 1990 ($51,300). In constant dollars, the MTEA of $3,000 in 1937 should have been about $48,000 for 2012, not the $110,100 it actually was for 2012. The MTEA for 2013 is $113,700.
· In 1983, the age to qualify for full SS benefits increased from 65 to 67 depending on your year of birth. According to a USA Today story, “Social Security’s original retirement age of 65 was set in 1935 when life expectancy was 63. Today, life expectancy is 77 - and, for those who live to 65, life expectancy is 83. The system used to benefit financially from people who paid Social Security taxes but died before collecting any benefits.” Translation: SS must pay out more than planned because we live a lot longer than planned.
The reason changes like these fail to fix anything other than pushing back judgment day is, like Medicare, SS is a Ponzi scheme. As designed from the beginning, SS requires an ever-growing SS taxpaying population, a high multiple of current SS taxpayers relative to current SS beneficiaries, a life-expectancy about 15 years less than today’s, and/or ever-increasing SS tax rates, and/or ever-decreasing benefits. Any such system has failure built in. Medicare works the same way.
SS is a pay-as-you-go program. That is, SS tax revenue collected today pays the benefits of today’s SS benefit recipients. If you are retired, SS taxes you paid were not put into an account to pay for your current retirement benefits. The SS taxes you paid were used to pay for people collecting benefits while you were employed. Today’s SS taxpayers are paying for your benefits, not you. This is an important distinction because it means the SS taxes you paid are not your property. You can read more about this below in “No one has rights to receive Socialist Security benefits.”
Each pay period, your employer deducts 12.4% of your pretax pay and sends it to the SS Administration (SSA). If you reach the year’s MTEA ($113,700 for 2013), you pay no more SS taxes for the remainder of the year. If you work multiple jobs, the MTEA applies to the total wages from all of your jobs.
When the SSA receives your tax payment, it goes to one of two places. First, your taxes can be spent immediately to pay the benefits for current beneficiaries. Second, by law, SS tax receipts in excess of benefit payments must be used to purchase federal debt (either special issues or public issues like Treasury bonds). The SSA has no options in this area. You can read more about this below.
When SS is in deficit (benefits paid exceed current SS tax revenue) as it has been since 2010, the SSA must redeem some of its owned debt to help pay for benefits.
As mentioned above, we pay SS taxes on wage income only up to the MTEA. When lefties aren’t saying “There is no Social Security crisis” and “Social Security doesn’t need to be fixed,” they claim removing the MTEA will fix the SS problems they say don’t exist and routinely tell us things like “we wouldn’t be worried about the system failing” if the MTEA were eliminated and doing so “will solve the problem for at least more than 50 years.” As you’ll read below, there has been no MTEA for Medicare since 1994 and its financial shape is even worse than that of SS.
Back in 2005, an Associated Press story (“Social Security tax may mean more money”; Laura Meckler; February 18, 2005) indicated completely eliminating the MTEA would only push back SS’s critical dates by seven years (when outlays exceed tax revenue) and 38 years (when the surplus is exhausted). That’s because SS is a Ponzi scheme and history shows it cannot be fixed by continually raising tax rates.
Further, though SS benefits favor low-income wage earners a bit, it isn’t intended to be an income/wealth redistribution program. That is, SS was not designed primarily to take money from higher-income wage earners and give it to lower-income wage earners. As noted above, SS benefits are determined in large part by how much we as individuals pay in SS taxes over our working life. That is, the more taxes you pay while working, the greater your benefit checks when you retire, up to a point. Therefore, though eliminating the MTEA might generate more tax revenue, it would also increase the benefits (increasing SS future obligations) that must be paid to those wage earners.
Contrary to folklore, 100% of SS taxes come out of the employee’s pocket. The myth employers pay half is simply accounting sleight of hand mandated by law to understate the actual impact on the employee. Here’s how it works. When a business considers hiring someone, it is only because the owner has already determined additional labor may allow the owner to make more profit. Without the incentive of earning more profit for the owner, there is no job. First, though, the business owner must determine the economic value of the potential job.
The economic value of the job determines the total compensation the employer can offer an employee while providing the business with its target profit. Once things like overhead, workman’s comp, et cetera are subtracted from the job’s economic value, the employer can determine the total compensation he can offer an employee. Total employee compensation includes wages/salary, the cost of benefits (vacation, medical insurance, et cetera), and the mythical “employer’s portion” of payroll taxes (SS and Medicare). The gross wage/salary offered/paid to the employee (what appears on the paycheck stub) is the total compensation less the cost of benefits and the “employer portion” of payroll taxes. Since the paycheck stub doesn’t show the payroll taxes held back by the employer or the cost of benefits, most of us think our benefits are “free” and there really is an employer portion of payroll taxes.
Eligibility varies depending on the specific benefit. Retirement benefits currently require a minimum of 40 SS “work credits” and you can earn a maximum of four credits per year. According to the SSA, “In 2013, you receive one credit for each $1,160 of earnings, up to the maximum of four credits per year.” As a result, most of us earn the necessary credits after about 10 years (cumulative, not continuous) of work (paying SS taxes). SS credits also apply to Medicare.
Again contrary to folklore, there is no SS “trust fund” and there never was. The mythical SS trust fund is nothing but a stack of IOUs (the federal debt mentioned above) issued over the years by a federal government with debt currently over $16.4 trillion (as of 2/2/13) and growing. SS went into deficit (benefits paid exceed SS taxes collected) in 2010, and as of their 2012 report, the SS trustees indicate SS will remain in deficit. Therefore, the SSA must redeem IOUs to pay for benefits. When the SSA redeems one of its IOUs to pay for benefits, there is no pot of gold or stack of dollar bills just waiting to honor the IOUs. To repay the SSA, the feds must issue debt or print dollars. The masquerade of a trust fund ended during the last year of the LBJ administration; that’s when “unified budget reporting” began. From 1969 through 1985, SS revenue and benefit payments counted toward the federal deficit/surplus. Congress had to rescue SS in 1982 by borrowing funds from other accounts. Beginning in 1991, SS went back to its pre-1969 status and no longer counts toward the federal deficit/surplus, at least on paper.
As of 12/31/11, the SSA held $2.7 trillion of federal debt. This amounted to about 17.6% of total federal debt ($15.2 trillion) at the time. If there is no pot of gold or stack of dollar bills just waiting to honor the IOUs, what did the feds do with all the SS tax revenue it received when it sold the bonds to the SSA? Those taxes were spent a long time ago by the feds for other programs. That’s why the feds must issue debt or print dollars to honor the IOUs issued to the SSA.
Regarding the SS tax rate, a temporary “payroll-tax holiday” is currently in effect. During the lame-duck session of 2010, President Barack Obama and Congress enacted a “payroll-tax holiday” [H.R. 4853 (111th Congress)] for 2011 (later extended for 2012). The American Taxpayer Relief Act of 2012 [H.R. 8 (112th Congress)] allowed the “holiday” to expire beginning in January 2013. As reported by the media (left & right) and our elected representatives (left & right), the “employee portion” of the SS tax would drop from 6.2% to 4.2%. The consistent reporting from all sides led me to note we were cutting the only funding source for a program already in financial trouble. About 14 months after the bill’s enactment, I learned I was snookered. My mistake was I did not read the bill myself. I occasionally redo my research and while doing that for another critique I found my previous understanding of H.R. 4853 was wrong. Under Title VI, Section 601, I found the following: “TRANSFERS TO FEDERAL OLD-AGE AND SURVIVORS INSURANCE TRUST FUND.—There are hereby appropriated to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund established under section 201 of the Social Security Act (42 U.S.C. 401) amounts equal to the reduction in revenues to the Treasury by reason of the application of subsection (a). Amounts appropriated by the preceding sentence shall be transferred from the general fund at such times and in such manner as to replicate to the extent possible the transfers which would have occurred to such Trust Fund had such amendments not been enacted.” In other words, the general fund would transfer to SS an amount equivalent to the tax revenue “lost” by the so-called “payroll-tax holiday.” All the “payroll-tax holiday” did was switch from which of our pockets the SS tax would be taken and necessitate issuing even more federal debt. As a result, even those of us not subject to the SS tax ended up paying SS taxes plus interest via the transfers from the general fund. Not only was there no tax-rate cut, ultimately we end up paying more than we would have otherwise because we will have to pay the interest on the Treasury-issued debt required to fund the scam. This deception reminds me of “Three-Card Monte” or a shell game.
Because of its large and ever-growing size, some people say we should consider SS benefit cuts to help reduce our deficits and debt. Those who oppose any SS benefit reductions reject that position and claim SS “can’t add one penny to the deficit.” For example, comrade Rep. Raúl M. Grijalva (D-AZ) wrote, “Federal law has always prohibited Social Security from contributing to the deficit.” This is not true. As noted previously, after a period (1969-1985) when SS did count toward the federal deficit/surplus, it no longer does, at least on paper. This, however, ignores the fact the feds must repay the SS with principal AND interest. When the feds issue debt to repay the SSA, the feds eventually must also pay interest to the debt purchaser. Interest paid to both the SSA and the purchaser of debt used to raise funds to repay the SSA does count toward the federal deficit/surplus.
Previously I wrote, “SS taxes you paid are not your property” and noted this was an important point. Here are a couple of reasons why.
First, as noted by the CATO Institute, SS benefits “are not guaranteed legally because workers have no contractual or property rights to any benefits whatsoever. In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled that Social Security taxes are not contributions or savings, but simply taxes, and that Social Security benefits are simply a government spending program, no different than, say, farm price supports. Congress and the president may change, reduce, or even eliminate benefits at any time.”
Second, I noted in the Eligibility section you need a minimum number of SS work credits to qualify for a given benefit. You probably wondered what happens to the SS taxes you paid if you never earn the required credits. There are no refunds. You get nothing other than a warm feeling knowing you contributed to your neighbor’s SS benefit checks.
Though it still would have been wrong because government has no business getting involved with retirement planning, SS could have been designed without all the flaws we’ve been trying to address for over 60 years. Consider the following hypothetical SS, intentionally simple for discussion purposes.
· The SSA places your SS contribution – not a tax - in a personal account. Though still under the oversight and rules of the SSA, the contents (your contribution plus investment returns) of the account remain your property. Your account’s contents would be used to pay for your retirement and no one else’s.
· As the account’s owner, you would choose your account’s investments from an SSA menu of investment options. This is how most private-sector retirement plans operate as well as the Thrift Savings Plan for federal employees and members of Congress.
· When you retire, your monthly check would depend solely on your account’s balance and your and/or your spouse’s life expectancy.
· At your death, the balance of your account would go to your heirs or would be distributed according to your will.
This obviously is not a complete plan, but you get the idea. It addresses the stated goal of requiring wage/salary earners to save for retirement.
While such a plan may make sense to you, it has several big flaws for a politician, especially a leftist politician. First, since your account’s content consists solely of wages you earned plus the investments you made using those earnings, a politician can’t legitimately take credit for your retirement income.
Second, because your payout comes solely from the contents of your account, there is no immediate payout of any significance. For example, a person who made SS contributions for only a few years between SS’s enactment and his retirement would get a pretty small monthly check. It would be like opening an IRA or 401(k) account at age 63 then starting to make withdrawals when you retire at 65. As a result, there would be no opportunity for a politician (read: FDR) to receive immediate hero worship from grateful SS participants.
Third, since the personal-account contents remain your property and you control the investments, a politician would have a tough time scrounging votes by claiming “Bob wants to cut/eliminate your SS checks.”
Fourth, there would be no legal way for government to use your account to fund government spending without your consent. According to SSA records, the net of SS taxes and expenditures gave FDR another $6 billion to spend from 1937 through 1944, the year before his death.
Fifth, a system like this would be easy to dismantle. Though there would be several options to consider ranging from “going cold turkey” to a phase-out, repealing SS would simply be about stopping your forced contributions and returning your account contents to you.
The bottom line is the Ponzi-scheme design of SS (and Medicare later) was not an accident or an honest mistake. FDR conceded this point in response to payroll tax critic Luther Gulick in 1941. FDR said, “I guess you’re right on the economics, but those taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.” The quote was cited by Arthur M. Schlesinger in “The Age of Roosevelt: The Coming of the New Deal,” Houghton Mifflin, 1988 American Heritage Library edition, pages 308-309. Note the “legal … right to collect their pensions and unemployment benefits” comment FDR made. As mentioned above, the Supreme Court ruled no such right exists. In effect, the Ponzi/pyramid scheme employed by SS was FDR’s “poison pill” to keep SS from ever being eliminated.
Medicare is like SS, only more complicated and worse. Most of what I wrote about SS also applies to Medicare. As a result, this section will cover only major differences between Medicare and SS.
Congress passed and President Lyndon Johnson (D) signed Medicare (an amendment to the SS Act of 1935) into law in 1965 and the first Medicare taxes were collected in 1966.
The original Medicare tax rate was 0.70% (employee 0.35%, employer 0.35%). I covered the myth of the “employer portion” in the SS section. The MTEA was a fixed $6,600/year and the retirement age for full benefits was 65. Medicare is supposed to help replace employer-based medical insurance lost when a person retires. That’s why non-wage income (dividends, interest, et cetera) is not subject to the Medicare tax. Some Medicare parts also require beneficiaries to pay a premium.
The feds began trying to fix Medicare financial problems immediately. To believe Congress and LBJ didn’t know about these problems before they made Medicare law strains logic.
· From 1966 through 1986, Congress increased the Medicare tax rate 10 times! At 2.9%, the current Medicare tax rate is over four times its original 0.7% rate.
· From 1966 through 1993, Congress gradually increased the MTEA from $6,600/year to $135,000/year, over 20 times its original rate. The MTEA was eliminated effective in 1994. In other words, all of your wages with no limit are subject to the Medicare tax.
In the SS section I covered the reason changes like these fail to fix anything other than pushing back judgment day.
As with SS and most entitlement programs, more benefits were added to Medicare over the years. Perhaps the biggest was Part D for prescription drugs. In 2003, a Republican-majority Congress and President George W. Bush (R) enacted Part D; it went into effect in 2006. The vote in the House was almost perfectly along party lines. In the Senate, about 10 members from each party voted contrary to their party’s position.
According to Medicare.gov, “Generally, you are eligible for Medicare if you or your spouse worked for at least 10 years in Medicare-covered employment and you are 65 years or older and a citizen or permanent resident of the United States.” Though there are exceptions, if you opt to receive early SS benefits when you’re 62-64, you still are not eligible for Medicare benefits until you turn 65. If you delay receiving SS benefits until after you turn 65, you are still eligible for Medicare benefits at 65. Unlike SS, Medicare benefits are not tied to how much you paid in Medicare taxes throughout your working life. Certain Medicare premiums, however, may cost more for “higher-income” individuals.
© 2004-2013 Robert W. Cox, all rights reserved.