Republicans want to "reform" social security. They say social security is broke. Not so. There's $2.5 trillion in the Social Security Trust Fund (SSTF). The way the funding for social security works is this. Workers pay a payroll tax otherwise known as a FICA tax. The rate is 7.65% of gross earnings up to $106,000 for employees. Employers pay a similar amount. Any money earned above $106,000. is not subject to the FICA tax. 6.2% goes to social security and 1.45% goes to Medicare. In 2011 the rate was temporarily lowered to 5.65% for employees to spur the economy. If you're self-employed, you pay both the employee's and the employer's shares which amounts to 15.3% of your gross earnings which is more than what a hedge fund manager pays. They pay the capital gains rate of 15%. There are no deductions or exemptions for the FICA tax. So no matter how poor you are, there's no escaping paying 7.65% if you're other-employed or 15.3% if you're self-employed. Even if your income is so meager that you pay no income tax at all, you still pay FICA tax.
In 1983 and 1984 President Ronald Reagan conspired with Alan Greenspan to raise the FICA tax and reduce benefits ostensibly to protect the long term security of social security. They made social security benefits taxable income for one thing. This resulted in more money coming in in FICA taxes than was being paid out to social security recipients. Reagan and Greenspan took the balance of the money, after social security recipients were paid, and put it in the General Fund along with income tax receipts. They then put a similar amount in the form of a non-marketable, "special" Treasury bond in the SSTF. The ostensible rationale was that, when payouts exceeded FICA receipts at some later date, the SSTF would simply cash in those Treasury bonds as any investor would and use the money to make up the difference between FICA receipts and payouts to recipients. These "special" Treasuries supposedly had the "full faith and credit" of the United States Government. Only in reality they didn't. The reality is that Reagan raised taxes on the poor so that he didn't have to raise progressive income taxes on the rich. There is no $106,000. limit on income taxes. You pay income taxes on the full amount of your income not just the first $106,000. of it.
Well, the time is here when social security payouts exceed what is collected in FICA taxes. So the SSTF should simply be cashing in those "special" Treasuries to make up the difference, right? So why are Republicans in a tizzy about reducing social security benefits? Because the Reagan/Greenspan plan was a scam from the beginning. It was a Ponzi scheme on top of a fraud. They knew that at some later date Republicans could raise Holy Hell about social security and the American people would be too dumb to demand their benefits based on the $2.5 trillion that still exists in the SSTF. Instead they paid their regressive FICA taxes for years only to reach the point where those "special" Treasuries were supposed to be cashed in to continue paying out to social security recipients at the same rate. But what happens when the "special" Treasuries are cashed in? Why that amount has to be paid out of the General Fund back into the SSTF so that it can make payments to recipients. That means that the government either has to raise income taxes or other forms of revenue or has to borrow the money which is to say that it has to issue marketable Treasury bonds to investors which it has to pay interest on. These marketable Treasuries then get added to the deficit and the national debt whereas they weren't counted as part of the debt as long as they existed in the SSTF in the form of "non-marketable" Treasury bonds.
So the government either has to issue marketable Treasuries to investors or raise taxes to pay back the SSTF when it cashes in its Treasury bonds in order to make up the difference. But you will never hear Republicans mention the fact that there is $2.5 trillion in the SSTF which has the "full faith and credit" of the US government. Instead, they have their panties in a wad over the fact that taxes would have to be raised or the national debt would have to be increased every time the SSTF cashes in some of the Treasuries it holds. So Republicans want you to believe that social security needs to be "reformed", that benefits must be reduced in order to keep taxes low and reduce the deficit. They want you to watch the movie over here while ignoring the reality over there. I have explained all this in a previous blog.
So all that would be necessary is for Americans to demand their rights based on the fact that they have paid into social security with the understanding that the money in the SSTF would be paid out to social security recipients and, until that money is depleted, there should be no reason to lower social security payouts or benefits, just as Reagan and Greenspan promised and under the "full faith and credit" of the American government. But here is the shocker. As it turns out a Supreme Court decision (Flemming vs Nestor) determined that no individual American has a claim on the funds in the SSTF even if he or she paid into it over their whole working career. Furthermore, 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." So all that would be necessary to do away with social security altogether is for Republicans to gain control of all three branches of government. They then could just abolish social security completely and legally. Think it couldn't happen. Consult the Tea Party crowd and the rabid right wing libertarians and the Ayn Rand acolytes.
I maintain that Reagan and Greenspan knew exactly what they were doing. They created a regressive tax on the American poor and lower middle class that they knew could be scammed at a later date when payouts exceeded what was paid in or in other words when the regressive tax had lost its usefullness as a supplement to the General Fund. With all the concern about the debt crisis today and all the anxiety over whether or not the US will default on its debts, no one is the least bit worried over whether the US will default on its "special" Treasuries held in the SSTF. The default on Treasuries in the SSTF is not even on anyone's radar - least of all the bond market's. The rating agencies are not the least bit concerned about downgrading the US AAA credit rating because of default on the "special" Treasuries. Why? Because it knows that Congress can simply change the rules at any time either by reducing benefits or by raising FICA taxes to guarantee that these non-marketable "special" Treasuries will never be converted into marketable Treasuries! So the Reagan/ Greenspan plan consisted of a fraud on top of a Ponzi scheme. All that would have been necessary to guarantee the legitimacy of the bonds in the SSTF in the first place would have been to make them marketable Treasury bonds. In a previous comment Art a Layman said that the SSTF actually did have the right to purchase Treasuries and other securitites on the open market. If so, why didn't they do it? They simply could have purchased Treasuries and other securities on the open market when FICA taxes exceeded payouts. But then that money couldn't have been transferred into the General Fund and used for Federal expenditures! However, the bonds held by the SSTF would have been redeemable or salable just like any other investor owned Treasury. The SSTF would then have had enlarged fiduciary reponsibilities to invest and manage their investments wisely. This is what most countries which have sovereign wealth funds actually do. Norway's sovereign wealth fund which provides pensions for Norwegians actually invests in the open market in a basket of securities. But Reagan and Greenspan knew what they were doing when they didn't reform social security in this way. They knew that they were essentially raising taxes on the poor and lower middle class in lieu of raising taxes on the rich.
The Federal receipts from FICA taxes are almost the same as the Federal receipts from income taxes - both FICA taxes and income taxes constitute approximately 40% of Federal revenue receipts. This was the plan all along. Now when the Democrats want to raise taxes on the rich, Republicans call this heresy. They won't stand for raising taxes on the rich, but they didn't have a problem when regressive taxes on the poor were raised by Reagan and Greenspan, and these have been in effect for over 30 years. And the American public is not even aware. Again it's watch this movie over here and ignore that reality over there. Congressman and Tea Partier Joe Walsh doesn't want to have his children have to pay off the national debt, but the fact that he's over $100,000. behind in child support payments doesn't seem to bother him at all.
I am not against social security reform, only the kind of social security reform Republicans would bring us which amounts to cutting benefits on the poor and middle class and raising regressive FICA taxes. Instead, what I propose is a drawdown of the "special" Treasuries in the SSTF. This would provide benefits at current rates for the next 25 years or so. At that point social security FICA taxes could be enhanced very simply by raising the cap which presently is $106,000. By taxing the rich on their whole income instead of just the first $106,000., social security could be made solvent into the indefinite future. Any positive balance in the SSTF at that time should be invested in marketable securities including but not limited to US Treasury bonds. Furthermore, benefits could be reduced for the rich while enhancing benefits for the poor. People with retirement incomes over $100,000. don't need an additional $1000. a month in social security benefits. This money would be better spent enhancing the incomes of those with little or no retirement income other than social security. However, social security should still be there if for some reason the retiree with $100,000. in retirement income suddenly lost that income. So increasing benefits for the elderly poor while reducing benefits for the elderly rich would be a social security reform that I would endorse. Not all social security reform is bad, just social security reform brought to you by Republicans. Democrats should embrace social security reform based on democratic principles not simply reject any and all reform out of hand.
But again Republicans are demagoguing and being their usual duplicitous selves when they say social security is in trouble. It's not. They want you to watch their movie over here while ignoring the reality over there. Granted their movie is more entertaining than the reality, and American consumers would have to exert some effort to find out what the reality actually is. They might have to pull themselves away from their reality shows and football games to do some research. What! Should the average American be expected to do "research" instead of relying on the "research" conducted by Fox so-called News and Rush Limbaugh? And as this movie is being played out, the reality is that the Republicans in Congress just want to reneg on the "full faith and credit" of the American government when it comes to the Treasuries in the SSTF while the bond market could care less because after all those Treasuries represent money owed to the American people, not to wealthy investors.
