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Name:
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MythBuster
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Subject:
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Social Security
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Date:
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9/15/2008 5:58:54 PM
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Facts ARE facts, but wrong is also wrong; a little research can help you discern real facts from internet fodder. Case in point: this popular email that you have posted, which is easily busted by Snopes.
"The Social Security system has been a contentious political issue ever since it was proposed by President Franklin D. Roosevelt and implemented in 1935. Arguments regarding how the system should be used, administered, and funded — and even whether it should exist at all — have been the subject of debate for many decades now. In this vein, the above-quoted item seeks to enumerate (and assign blame for) alterations to Social Security that have supposedly betrayed the intent of the system as originally conceived back in the 1930s. Most of the entries contained therein, however, are inaccurate regarding what changes were made and/or who was responsible for making them:
. . . participation in the Program would be completely voluntary
There was no provision in the Social Security Act of 1935 (nor has there ever been any provision) for the payment of Social Security payroll taxes (now commonly known as FICA, from an acronym for the Federal Insurance Contributions Act) to be voluntary. Since the inception of the Social Security program, the law has required that payroll taxes for persons working at jobs covered by Social Security "shall be collected by the employer of the taxpayer by deducting the amount of the tax from the wages as and when paid."
It is true that Social Security provisions originally applied only to "workers in commerce and industry (except railroads) under age 65 in the continental United States, Alaska and Hawaii, and on American vessels," and thus those who worked in fields not designated as "commerce and industry" (e.g., government workers, farm workers, doctors, lawyers) neither paid into the Social Security fund nor received benefits from it. Nearly all of those exemptions have been since phased out.
. . . participants would only have to pay 1% of the first $1,400 of their annual incomes into the Program
Social Security taxes were never limited to the first $1,400 of annual income, nor was there any provision in the Social Security Act of 1935 to permanently fix the tax rate at 1%. The Social Security Act of 1935 set the original rate at 1% of the first $3,000 of annual income, with provisions to gradually increase that rate to 3% over the next twelve years:
1) With respect to employment during the calendar years 1937, 1938, and 1939, the rate shall be 1 per centum.
(2) With respect to employment during the calendar years 1940, 1941, and 1942, the rate shall 1 1/2 per centum.
(3) With respect to employment during the calendar years 1943, 1944, and 1945, the rate shall be 2 per centum.
(4) With respect to employment during the calendar years 1946, 1947, and 1948, the rate shall be 2 1/2 per centum.
(5) With respect to employment after December 31, 1948, the rate shall be 3 per centum.
These figures have been adjusted many times over the years. Under the Federal Insurance Contributions Act, as of 2005 participants pay 6.2% of the first $90,000 of their income (with their employers contributing a like sum) into what is commonly known as OASDI (from an acronym for Old Age Survivors and Disability Insurance, the official name of the basic retirement benefits portion of the Social Security program).
. . . the money the participants elected to put into the Program would be deductible from their income for tax purposes each year
The original Social Security Act of 1935 specifically stated that Social Security payroll taxes were not to be allowed as income tax deductions:
For the purposes of the income tax imposed by Title I of the Revenue Act of 1934 or by any Act of Congress in substitution therefor, the tax imposed by section 801 shall not be allowed as a deduction to the taxpayer in computing his net income for the year in which such tax is deducted from his wages.
Social Security payroll taxes have never been deductible from income for tax purposes, either when the program was originally instituted or at any time since.
. . . the money the participants put into the independent "Trust Fund" rather than into the General operating fund, and therefore, would only be used to fund the Social Security Retirement Program, and no other Government program
The Social Security Trust Fund was established in 1939 to receive monies collected for Social Security through payroll taxes. The monies in this fund are managed by the Department of the Treasury; they are not, nor have they ever been, put into the "general operating fund."
However, whether the Social Security Trust Fund can truly be said to be "independent" is problematic. The Social Security Act specifies that the monies in the fund may only "be invested in securities backed by the full faith and credit of the Federal government," such as treasury bills, treasury notes, and treasury bonds, as well as special issue bonds. So, essentially, the government can "invest" Social Security funds by lending them to itself, then spending that money on programs not related to Social Security (e.g., defense, foreign aid, education). The government "pays back" this money when the Social Security program redeems the bonds, but critics of the program contend Social Security will eventually fall into deficit by 2018, and the Treasury won't have the necessary cash on hand to redeem the bonds and pay back the fund. As the Social Security and Medicare Trustees themselves noted in their 2005 Annual Report:
In 2005 the Social Security tax income surplus is estimated to be more than offset by the shortfall in tax and premium income for Medicare, resulting in a small overall cash shortfall that must be covered by transfers from general fund revenues. The combined shortfall is projected to grow each year such that by 2017 net revenue flows from the general fund to the trust funds will total $515 billion, or 2.3 percent of GDP. Since neither the interest paid on the Treasury bonds held in the HI [Hospital Insurance] and OASDI Trust Funds, nor their redemption, provides any net new income to the Treasury, the full amount of the required Treasury payments to these trust funds must be financed by some combination of increased taxation, increased Federal borrowing and debt, or a reduction in other government expenditures. Thus, these payments along with the 75 percent general fund revenue contributions to SMI will add greatly to pressures on Federal general fund revenues much sooner than is generally appreciated.
. . . the annuity payments to the retirees would never be taxed as income
It is true that Social Security benefits were not originally considered taxable income. However, that status was not due to any promise or act on the part of President Roosevelt, nor was it specified in the Social Security Act (or any other law); it was the result of a series of rulings by the Treasury Department in 1938 and 1941 that excluded Social Security benefits from federal income taxation. Those rulings were overriden by amendments to the Social Security act enacted in 1983.
Q: Which Political Party took Social Security from the independent "Trust" fund and put it into the General fund so that Congress could spend it?
A: It was Lyndon Johnson and the Democratically-controlled House and Senate.
As noted above, the monies paid into the Social Security trust have never been "put into the general fund." The requirements for how the Social Security Trust Fund is to be financed and invested have not changed since the fund's inception in 1939. The reference to Lyndon Johnson indicates that someone was probably confused by a change implemented at the end of the Johnson administration (1969) that a
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