by John Koraska

March 19, 2005

Updated: September 4, 2006

 

For Social Security updates please visit my new website US Public Policy

 

 

In this so-called "Information Age", the TRUTH often gets buried beneath the noise. The government frequently releases information that is disseminated by the mass media. The information is sometimes true, based on fact, but quite often is inaccurate. It may be misinformation that is simply incorrect information or disinformation that is devised to mislead the general public. 

 

The Social Security program is likely the most misunderstood issue in this country. The "Social Security Act of 1935", was created to provide an equity based, retirement "Safety Net" for the working-poor, and for other purposes. It has evolved into a system that often penalizes working couples and subsidizes many who enjoy high income and wealth.

 

Social Security is widely popular and is supported by the vast majority of the people. However, an examination of the manner in which revenues that fund the program are manipulated reveal significant accounting defects that if not corrected will have dire consequences for future beneficiaries.  Accounting defects in the Social Security program are only symptomatic of a larger problem and that is an income tax code that is fundamentally flawed. Purpose of this website  is to identify the flaws to level the playing field between employees and their employers. Both the Social Security program and the IRS tax code are heavily biased toward profits over wages. Facts will be presented to prove these assertions.

 

....................September 4, 2006 - Article Update....................................

 

Social Security Trust Fund Surplus

There is NO Security, NO Trust, NO Funds, and NO Surplus!

 

Recently, President Bush stated his plan to focus on Social Security and tax reforms in early 2007. Even if the President enjoyed bi-partisan political support, Social Security cannot be reformed because politicians refuse to acknowledge that the program is so fundamentally flawed it is beyond repair. On August 23, 2006, (on C-Span), Dick Armey, former House majority leader, stated:  “Social Security is headed for the biggest catastrophe in the history of the world.” Mr. Armey is one of many who are sounding alarms. No one is listening!

 

The truth is so outrageous it is almost impossible to believe. What Mr. Armey, nor any other public official, will admit is that Social Security is already being subsidized from general treasury revenues and the shortfall is growing exponentially. Economic calamity could be avoided, but only if the truth is revealed so solutions can be found and a new, more just social welfare system may be created.

 

Reports that Social Security is currently running cash-flow surpluses are a lie. Social Security OASDI is running current cash-flow deficits. No one will acknowledge this fact, although it can be documented. An examination of federal policies and accounting practices exposes disinformation that is designed to conceal government deception. The media is as guilty of covering up the truth as is the government.

 

One irrefutable legal fact is: An employer may retain approximately one third of the individual Federal Income Taxes (FIT) and Federal Insurance Contributions Act (FICA) income taxes withheld from employee paychecks; although workers are lead to believe these taxes are sent to the Internal Revenue Service (IRS) or the Social Security Administration (SSA). 

 

The 2006 Social Security Trustees “Summary of 2005 Trust Fund Financial Operations” reported that the OASDI Trust Funds received total income of 701.8 billion (Contributions 592.9, Taxation of Benefits 14.9 and Interest 94.3) and expended 529.9 billion. "Assets increased by $171.8 billion in 2005 to $1.86 trillion because income to each fund exceeded expenditures."

 

The 2006 OASDI Trustees Report stated: “Under the intermediate assumptions, the OASDI cost rate is projected to decline slightly during 2006 through 2008 and then increase up to the current level within the next 2 years. It then begins to increase rapidly and first exceeds the income rate in 2017, producing cash-flow deficits thereafter. Despite these cash-flow deficits, beginning in 2017, redemption of trust fund assets will allow continuation of full benefit payments on a timely basis until 2040, when the trust funds will become exhausted.” 

 

Commingling Withheld FIT and FICA Taxes

 

Commingling of individual taxpayer FIT and FICA income taxes withheld from wages produces results so complicated; even lawmakers cannot explain the contradicting absurdity.

 

The 2005 surplus of $171.8 billion reported by the Trustees is an accounting misrepresentation. Gross FICA (OASDI) Contributions reported to the Social Security Administrations (SSA) HAVE NOT been adjusted for Corporate “Business Expense” tax deductions.

 

The net amount of FICA (OASDI) taxes collected by the IRS may be estimated by subtracting the “Business Expense” deduction from the gross amounts reported to the SSA. A nominal corporate income tax rate is approximately 35 percent. Gross contributions - $592.9 billion reduced by business expense deductions - $207.5 billion = net IRS OASDI collections of $385.4 billion. Net IRS collections of $385.4 billion plus taxation of benefits $14.9 billion and reported interest income of $94.3 billion = $494.6 billion. The net amount is $35.3 billion LESS than the reported OASDI expenditures of $529.9 billion. And, that does not include approximately $37 billion of FIT & FICA taxes refunded to low-wage workers via Earned Income Tax Credits (EITC). (Note: In the tax year 2004, more than 21 million taxpayers received approximately $37.5 billion in EITC.)

 

Reverse Accounting

 

To cover up huge discrepancies between gross OASDI revenues reported to the SSA and the net OASDI tax collections by the IRS, the US Treasury resorts to reverse accounting. The IRS totals individual FIT and FICA taxes withheld from paychecks. The Treasury Secretary estimates total FICA taxes, subtracts the FICA estimate from the total, and identifies the remainder as individual federal income taxes.

 

.........................................End Update ....................................

 

By identifying program and tax code defects, essential reforms may be developed that can improve both. The primary purpose is to make Social Security financially sound for future generations by changing course from perpetual debt to perpetual prosperity.

 

Social Security Act of 1935

 

The Social Security Act of 1935 requires all surplus contribution amounts be invested only in US government securities or Securities guaranteed by the US government. This restriction on Trust Fund investment has created a "SLUSH FUND" of IOUs instead of a "TRUST FUND" of real assets. The law needs to be changed so that any surplus amounts and earned interest may be placed in other savings and investment alternatives other than government loaning money to itself.  By backing the program with real assets instead of US Treasury IOUs, the Trust Fund could enjoy real compound earnings growth.

 

The US Government Loans Trust Fund Money to Itself!

Government Accounting of Bogus Surplus

 

By restricting the surplus cash to investment in government securities, means government can only loan money to itself. This is the same as spending money and calling the same money, savings. An analogy to private savings is placing IOUs in a container and spending the cash, instead of putting the cash in the container or putting it in a bank. To achieve the objective for the savings, at some point the IOUs must be redeemed. Since the cash intended for deposit in the Social Security Trust Funds has already been spent, it is the redemption of the IOUs that is the problem.  To redeem the IOUs, in the Trust Funds, government will be required to raise taxes, cut benefits, print or borrow more money, and/or increase the retirement age, again.

 

Had the law been changed in 1983, we would now have over $1.6 trillion in a REAL Trust Fund with real assets compounded daily instead of $1.6 trillion in a Slush Fund filled with debt, also compounding daily. One simple change back then and we would not have this enormous problem. The question would be where to invest the money NOT how can we redeem the IOUs. The $3.2 trillion difference between the debt and what should have been assets is more money that the entire U.S. government will spend this year.

 

The 2005 Social Security Trustees Report, included these projections: "The combined assets of the OASI and DI Trust Funds are projected to increase from $1,531 billion at the beginning of 2004, or 306 percent of annual expenditures, to $3,584 billion at the beginning of 2013, or 442 percent of annual expenditures in that year." If the Law were changed, by 2013 current IOUs will have been redeemed and a REAL TRUST FUND will have REAL ASSETS of over TWO TRILLION DOLLARS, instead of TRILLIONS falsely accounted for in government IOUs. 

 

There is nothing in the US Constitution, as amended, that grants the federal government the POWER to provide direct welfare payments to citizens. The 16th Amendment grants the government the POWER to collect taxes on income; but nothing in it may be construed to authorize those revenues or any other revenues to provide direct welfare or to arbitrarily take money from one citizen and transfer it to another. If the Framers of the Constitution wanted a Welfare Clause in the document, it would be there.

 

The laws with regard to Social Security and Federal Income Tax Code are loaded with contradictions. The public is told one thing and what is encoded into law may be significantly different. The public has been informed that funding of Social Security is based on "Contributions" (Federal Insurance Contributions Act, FICA). This is false. The law states: Social Security is based on an income tax and an excise tax on wages. In the beginning, employees were required to pay, in addition to other taxes, an income tax of 1% on a maximum of $3,000 of annual wages. Employers were required to pay, in addition to other taxes, an excise tax at the same rate on the same amount as the employee. The maximum benefit (based on cumulative wages) at the time was only $85, providing undeniable proof the program was designed for low-income workers and benefits relied primarily on cumulative equity, based on wages. 

 

Social Security and Medicare (FICA) Taxes

 

The public and employers are told: "The Federal Insurance Contributions Act (FICA) is a federal law that requires two separate taxes be withheld from employee wages: a social security tax and a Medicare tax." The law also requires an employer to pay the employer's portion of these taxes at the same time. "The employer's portion will be the same amount as that required to be withheld from employees' wages. Each of the FICA taxes is imposed at a single flat rate. Currently, the social security tax rate for employees is 6.2 percent and the Medicare tax rate is 1.45 percent." The current ceiling (2005) on the social security tax is $90,000.and the Medicare tax, unlimited. Clearly stated the employee antes up a buck, the employer matches it, a one to one (1/1), ratio.

 

Contradiction: The Federal Income Tax Code (FITC) authorizes an employer to deduct, as business expense, not only its own FICA tax, but also to deduct as business expense; both the FICA and the FIT taxes deducted from the employee's paycheck. The Social Security Act of 1935 states: "Employers will pay "in addition to other taxes" an excise tax on wages. An employee is required to pay federal income tax on the FICA tax (an income tax on an income tax is absurd). This is an astounding example of how the tax code favors profits over wages.

 

Note: By allowing  corporate expense deductions of wages and taxes the so-called "matching contributions" ratio is altered significantly. It also helps explain why corporate profits and assets are increasing at the same time federal DEBT is experiencing exponential growth. These accounting deficiencies and tax flaws are reasons I have advocated  Eliminate Corporate Income Tax .

 

Business Expensing of the FICA Tax Exposes Deception

 

On a wage income of $40000.00 an employee pays a FICA tax of 6.2% Social Tax  ($2480) and 1.45% Medicare Tax ($580) PLUS FIT. An employer with a nominal tax rate of 35% may deduct as business expense the wage earners FICA tax ($3060) plus the employer's matching FICA tax ($3060) resulting in a corporate expense deduction of $6120 from corporate profits. The net result is the employee pays $3160 FICA tax and the Employer pays only $918. The net ratio is not 1/1. It is more than three to one 3/1. This proves employees pay over 3 times the net FICA taxes than their corporate employers. This practice provides an advantage to the employer to the detriment of the employee. Prior to 1983, the government's explanation for this double standard was that the double income tax on employee wages was necessary because the Benefits were not taxed. In 1983 Social Security Benefits were subjected to Federal Income Tax. The double income tax on employee wage income continued and a third income tax (on benefits) was added. Contrast the combined taxes on wages & benefits with the 15% tax on Capital Gains. Makes one wonder if there is anyone in Congress looking out for the interest of their VOTING constituencies or if they have all sold out to the highest bidder.

 

What is the current explanation for triple taxation on wage income (twice when you earn the wages and again when you receive the benefit)? The short answer is the politicians don't want to talk about it. To do so would reveal that today's workers (those that really pay FICA taxes, after tax-credit adjustments) not only pay for their parent's retirement; but also the generous (gross) benefits they are promised to receive will be significantly reduced by the (third) tax on benefits. Wage inflation and the generous benefits formula (under current law) promise higher (gross) benefits, but the tax code indicates the future (net) amounts will be less than that of current beneficiaries. This is why Social Security CANNOT be reformed without concurrent adjustments in the tax code. To do so will just continue the deception of promising more than the system can deliver.

 

As previously stated, the most important actions that can be taken to reverse course of unsustainable debt and to increase government revenues is to eliminate the corporate income tax and disallow ALL deductions of interest expense from federal income taxes, enjoyed privately and by business. Cup your hand around your ear! Can you hear the anguished outcries? But, why should debt free taxpayers continue to subsidize those who choose debt to finance consumption and live beyond their means? Isn't it time to reward thrift and let debtors suffer the consequences for their own irresponsible behavior? Isn't it time for corporations to focus on profits and growth instead of tax evasion and avoidance?

 

Warning of Perpetual Debt

 "I place economy among the first and most important virtues and public debt as the greatest dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt. If we can prevent the government from wasting the labor of the people, under the pretense of caring for them they will be happy."  --Thomas Jefferson

 

In February 2005, President Bush, in several speeches to arouse support for  Social Security, Private Retirements Accounts (PRA); said this:

 

 "As a matter of fact, in 2018, the system goes into the red. And by the way, there's not a Social Security trust. In other words, people think your money goes into the trust and it's held for your account and then you get it out. That's not the way it works. It's pay as you go. It goes in and it goes out. And to the extent that there's money more than the retirees receive, like it is today, it goes to other programs. And so what you've got is an IOU, kind of a bank of IOUs. It's an important concept." NOTE: It is an important concept! Too bad the Prez doesn't fully understand what his speech writers are telling him.

 

President Clinton said this:

"Trust Fund balances are available to finance future benefits...but only in a bookkeeping sense...they do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes or borrowing." --President Bill Clinton in his Analytical Perspectives section of the 2000 budget.

 

Both Presidents have admitted the Trust Funds are a farce (my word).   The practice of spending the surplus cash and putting IOUs in the Trust Fund circumvents the law that requires Social Security Social Security Trust Funds (OASDI) may only be used to pay Social Security Beneficiaries and administrative expenses.  Why do they not just change the law and stop the embezzlement?

 

This is the alternative to doing nothing:  According to the 2004 Social Security Trustees Report, the government will have to start making annual payments on its debt to Social Security in 2018 when Social Security benefit payments begin to exceed the annual revenue generated by the payroll tax. By the year 2035, the government would have to come up with $747 billion from the general fund to pay interest and principle on their debt in order for full Social Security benefits to be paid. In 2040, interest and principle payments that would have to come from the general fund would total $959.8 billion!

 

If I were a young worker, I would consider forming a Class Action Lawsuit against the Federal Government to force them to "Cease and Desist" from spending my money intended for my retirement and giving it to someone else in the form of a welfare check or subsidized retirement for the wealthy. It may accomplish nothing, but focus attention on the problem and cause Congress, the Executive Branch, and the Supreme Court to act under the pressure of public scrutiny.

 

"Injustice, cleverly disguised as justice, crafted by well intentioned men is still injustice" .. John Koraska November 27, 2004

 

Social Security funding is not unlike retirement schemes established for Federal Civil Service employees and Military Members. Their Trust funds are filled with IOUs just like those in the Social Security SLUSH FUND. The accumulation and projected growth of these collective IOU's is already beyond the projected capacity of the government to redeem them. What draconian measures will the government embrace to avoid bankruptcy? Will there be a second "NEW DEAL" that led us into this mess? Answers to these questions will not be found in self-serving political rhetoric. Responsible young citizens must begin early to develop plans (independent of government promises) to take care of themselves in their old age or risk becoming just another member of the wandering herd begging for a government handout.

 

"Law cannot be properly evaluated by the quality of its words or intent; but, by the quality of fairness and justice found in the results produced by its application." John Koraska January 1,2005

 

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The Truth About Social Security (Art#11)