Obsolete Government Programs, Part 1

"Free at last! Free at last! Thank God Almighty, we are free at last!" ~ MLK, Jr.

The Federal Insurance Contributions Act (FICA) is codified at Title 26, Subtitle C, Chapter 21 of the United States Code. The FICA tax is a United States payroll (or employment) tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers. Social Security benefits include old-age, survivors, and disability insurance (OASDI); Medicare provides hospital insurance benefits. The amount that one pays in payroll taxes throughout one's working career is indirectly tied to the social security benefits annuity that one receives as a retiree. Some folks claim that the payroll tax is not a tax because its collection is tied to a benefit. The United States Supreme Court decided in Flemming v. Nestor (1960) that no one has an accrued property right to benefits from Social Security. [1]

There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled "RESERVATION OF POWER," specifically said: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor. [1]

In this 1960 Supreme Court decision Nestor's denial of benefits was upheld even though he had contributed to the program for 19 years and was already receiving benefits. Under a 1954 law, Social Security benefits were denied to persons deported for, among other things, having been a member of the Communist party. Accordingly, Mr. Nestor's benefits were terminated. He appealed the termination arguing, among other claims, that promised Social Security benefits were a contract and that Congress could not renege on that contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not a contractual right. [1]

So did you think that Social Security Benefits were an inalienable right? Think again.

The Center on Budget and Policy Priorities states that three-quarters of taxpayers pay more in payroll taxes than they do in income taxes. The FICA tax is considered a regressive tax on income (with no standard deduction or personal exemption deduction) and is imposed (for the years 2009 and 2010) only on the first $106,800 of gross wages. The tax is not imposed on investment income (such as rents, interest and dividends). As a side note, the Earned Income Credit was enacted in 1975 to “offset the burden of social security taxes and to provide an incentive to work”. More recently the Making Work Pay Credit of 2010 and the 2% Payroll Tax Cut of 2011 were enacted with a redundant goal: “to offset the burden of social security taxes”. Why are Social Security taxes deemed to be so over-burdensome?

Perhaps Social Security has outlived its usefulness. In the 1930s, the New Deal introduced Social Security to rectify the following three problems: retirement, injury-induced disability, or congenital disability. It introduced the FICA tax as the means to pay for Social Security. Following are some of the difficulties that existed for working-class Americans prior to the Great Depression, countered with modern day private-sector innovations meant to address the same.

But times have changed. Prior to the Great Depression there weren’t many incentives in place to encourage saving towards retirement, nor were there as many options available as there are today. Nowadays employers, employees and the self-employed can choose between numerous retirement plans not limited to the following:

This isn’t 1933 anymore. The time to end Social Security is now. Since we are able to choose between so many pre-tax options which result in the deferral of income taxes until the funds are withdrawn, why are we still stuck on pouring good money down a bad hole? By now, everyone knows that any surplus once heralded by the Social Security Trust Fund has been confiscated and comingled into the government’s general fund. And we all know that the government’s general fund is more than a whopping $14 trillion in the hole. If working folks and their employers weren’t chained by the bonds of mandatory contributions to Social Security we would be living on easy street.

If we were not forced to pay this mandatory tax of 6.2% (12.4% for the self-employed) on earned income up to the limit of $106,800, we would be able to save a greater portion of our own money into the modern retirement vehicles mentioned above. Loosing employers from burdensome payroll taxes will likewise allow them to provide a greater portion of benefits to employees. However, with government-run Social Security literally robbing us of our retirement savings, and ‘investing’ it in the abyss of debt and irresponsibility, known as Washington, DC, there is little leftover for most Americans to save. In fact, if every dollar of Social Security tax paid on my behalf since I began working had instead been invested in the S&P 500 Index; I would now be a millionaire. But since I haven’t had any choice in the matter, I may just have to settle for the paltry poverty level rations offered by Social Security. What’s worse is that thanks to Social Security, on the day that I die the government-squandered fruit of my labors will go with me.

Nowadays, most employers offer mandatory and voluntary disability insurance plans through legitimate insurance companies. Likewise, all employers are required to provide Workers Compensation. Many of us would be able to afford our own portable disability insurance plans were we loosed from the bands of the FICA Act.

Nor is there any such government-mandated disability income insurance today, the key word being insurance. Who in their right mind believes that the federal government provides insurance? If the federal government wants to provide real insurance for persons in need, then the responsible thing to do would be to pay for private-sector insurance policies, on behalf of those in need.

Social Security is an idea that has outlived its usefulness. It’s time for the United States to begin weaning itself off of Social Security. Let’s stop pretending that we are living in 1933. We have options in the 21st Century that didn't exist in the 20th, but our options are severely constrained by the bonds of old stale ideas. Although it’s doubtful whether Social Security ever served its original purpose, it is indisputable that times have changed. In the 1930’s Americans had no safety net, today we know that we must provide for our own retirement security. However, the amount we are able to save is limited by the amount of money being confiscated from our earnings to cover past obligations. Get a clue. Three-quarters of all taxpayers pay more in payroll taxes than income taxes. Do you get it? It’s time for this to change. It’s time to phaseout Social Security. The age of federal government mandated retirement looting is over.

So, granted that we are all the victims of a Ponzi scheme, to what extent are we “entitled” to clawback the money stolen from us ?

When the perpetrator of a Ponzi scheme is convicted, any assets and income streams available are seized to pay back those victims defrauded. It’s a given that the US government does not have the cash on hand to return to us, but it does have the capacity to pay back the benefits promised over time. We need a graceful way to transition from SS to mandatory private retirement savings.

BTW, your article misses directly addressing the issue of “mandatory” savings prior to SS in 1933. All your examples of savings opportunities are still voluntary, and voluntary savings was ALWAYS an option even prior to 1933. SS was implemented on the basis that people had historically FAILED to prepare voluntarily. We can’t pretend this isn’t true. Mandatory retirement savings should be required, but it should belong to YOU and your heirs, and not go into a slush fund that the government redistributes as welfare.

Even if only the 6.2% employee share was saved and grew 5% faster than inflation, your account would pay you 70% of your pre-retirement income for 30 years. Private accounts are the solution for those still contributing, while the employer-side 6.2% can carry those already collecting and repayment of what younger workers are owed.

When I retired I calculated the lump sum amount that I could have received had I invested my own money and I used several different rates of return.

During my 40 plus years of working and investing in the private markets, my own average rate of return was 13.5%, which is higher than a conservative investment portfolio because when I was working I invested in higher risk/reward stocks etc.

For my lump sum of money that I would have received from Social Security if I had been allowed to make my own investments using only 5% as a rate of return, the Feds would have owed me $3.3 Million instead of the couple of thousand per month that I now get.

Regardless of how long I live, I'll never break even from the confiscation of my money that has been "shared" with those that are less fortunate.

The amount that the feds stole from me for my "medicare" is even worse.

The word ‘mandatory’ implies a negative incentive. Although I had some thoughts about a positive incentive for retirement savings, I didn’t mention it here, under the ‘keep it simple’ principle. A positive incentive would reward those who save at least 6.2% of their pay voluntarily through some form of a tax credit, while denying such credit to those who don’t save voluntarily. The same could apply to health insurance. Rather than punish those who don’t, you reward those who do, thus giving incentive for slackers. Our current government suffers from backwards thinking.

It’s good to know that I’m not alone. I’m 50 now and I calculated what my payout would be using monthly returns of the S&P 500. Even through all the ups and downs of the market, I would have well over a million dollars today. I’m trying to save more on my own, but I am limited by what the government is stealing and squandering on every pay day. From 1979 to 2010 we’re talking about annual returns (not even CAGR) of 420%. What’s amazing is that like you said, it would only take annual returns of 5%, something well within reason. Over the same timeframe, the national debt grew by a whopping 303%. So instead of my savings being invested in real assets which would have returned 420%, the government has stolen my money and lost 303%. I thought I was the only one who gets this, but I know that I’m not alone.

Government mandates are never my first choice, either, but there is just no way around the fact that too many people convince themselves they just “can’t afford” to save money regardless of any positive incentives. Tax credits large enough to offset the amount people should save for retirement creates net-zero tax contributors. Net-zero tax contributors have no skin in the game and vote for bigger government because it won’t cost them personally. In the meantime, the tax credit (unless you would “means test” it) would require higher tax rates to pay the credits — eg, instead of a 10% flat income tax you would need a 15% income tax. The EITC was implemented precisely to offset the FICA taxes low-wage workers would otherwise have to pay. It was a bad idea in 1973 and a worse one now.

Remember that SS was implemented at a time when the people who really needed to save for retirement paid little Federal Income Tax - the first $40K exempt and 4% on the next $65K. Arguably, they had much more of their earnings available to save, yet were revealed by the Great Depression to have failed their responsibility to do so.

If this were Atlantis, such people would work til they died or be the sole responsibility of family. In America today, leaving these people to their own devices is less politically feasible than requiring them to be responsible during their earning years. I think requiring them to set aside some of their earnings, but have it be truly THEIRS when they retire or leave to heirs would be a reasonable compromise and a big improvement over the current system.

PS. *The $65K figure is 2010 dollars, inflation adjusted from the $4,000 in 1933 tax brackets and the $2,500 exemption.

“For the time being, I feel as though I am being robbed every month.”

As long as there is legally no guarantee of being repaid, it’s tough to feel any other way. Or if, like me, you paid the maximum into SS and will be cheated even if they *keep* the promises currently made.

I think there is merit to the idea that any other Ponzi scheme operator would be forced to make restitution if they had the resources. This is why people don’t worry — the Federal government can print money and tax people, therefor has the resources. They just don’t understand the consequences of the government getting to the point where it has to do that.

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