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Fix SSI? No Thanks, Just Give Me My Money Back

August 11, 2011

I joined the workforce fulltime in 1980.  That means for thirty-one years I’ve been paying FICA taxes.  Lately, I’ve wondered at what I receive in return for this tax.  While no one likes paying any tax, the necessity of financing the government requires some sort of tax.  This is where all the arguing begins and politics become life’s only true quagmire.

Rather than getting caught in the endless political debate over this or that tax, let’s look at just how the system actually works compared to how is should work.  The system is overwhelming to look at as a whole so focusing on just FICA allows us to at least see the path through out nation’s taxation swamp.

Just what is FICA anyway?  If you ask someone, they might tell you it is Social Security or it is the money you can’t get back on your tax return.  While correct, there is more to it than that.  FICA stands for the Federal Insurance Contributions Act.  It came to be during President Roosevelt’s New Deal in the 1930s.  Back then, it did simply fund Social Security to address three specific issues, retirement, disability due to injury, or congenital disability.  In the 1960s, Medicare and Medicaid were added and the percentage tax increased to cover the additional costs.  So, FICA is a way to fund federal assistance programs for citizens in what is called a “pay-as-you-go” system.

“Pay as you go” simply means our payments today are used for people who paid in before.  There are, of course, exceptions.  No one expects a two-year old to be denied access to this system because they have not paid in yet, but eligibility is a whole other argument – remember, it is a swamp in there.  The idea is this: as our population increases, more people pay the tax and cover the costs of prior generations of workers. Sounds great in theory… in theory!

Had our wonderful elected officials in Washington simply put the system described above in action and invested the money in US Government bonds, it would work.  Of course, that is not what happened.  Rather than buying bonds as most people think of them, they came up with a whole new type of bond that is closer to an IOU than a typical government bond.  The tax we pay for FICA does not go to fund Social Security Issuance (SSI), Medicare, or Medicaid.  It goes to the US Treasury, who writes the IOU-type bond to the various programs concerned.  When one of the programs needs money, they send Treasury a bill.

Here’s the problem.  The Treasury spent the money.  It is a way for our government to use this money for whatever they want and not raise our taxes to do it.  The money has been used for everything from sending men to the moon to fighting wars in far off places.  Now, as more citizens retire or otherwise draw on the programs, the monthly intake in FICA tax no longer covers the outlay.  In other words, the Treasury is paying more to the programs (in principal and interest) than it takes in.  Now, the federal government must take money raised for other uses to pay for the programs they took the money from in years past.

Had they truly invested the money, we would simply be drawing down the participle of our investment.  If in time, more money is needed to cover expenses, the FICA tax would need to increase to cover it.  It would be a case of paying for what we get, or “pay-as-you-go,” the way the system was initially envisioned.

This is also where the argument over “entitlements” begins.  We call them entitlements because we, the citizens that paid into the system, have no property right claim to the money we paid in as we would with some sort of private insurance.  In 1960, the Supreme Court settled the argument.  Congress gave to themselves the authority to add, limit or do away with benefits as it sees fit.  In other words, they took our money; made us a promise and we are powerless to make them keep that promise.

As it stands, the government ran up a huge tab (part of our national debt) by converting the money we paid into FICA, into IOUs the government does not have a legal responsibility to pay.  Of course, not paying it will be political suicide but changes to payments or reducing the payments may be more palatable to the general public.  This is why officials wishing to reduce payments frame the issue as people gaming the system or taking advantage of a system of “entitlements.”  They try to make is seem they want to fix a dysfunctional system while looking after the good of the people.  What they really want is for us to keep paying the money so they can spend on their programs rather than its intended purpose.  They don’t care we paid the money to have these programs.

In the end, I am not against changes to the system.  Especially if the government collects the money, spends it, then complains about paying the system back.    So, there is the truth, the government cannot give me my money back because they spent it on things none of us gave them permission to spend it on.  If anyone of us tried that; we would be put in jail for embezzlement.

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