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Is Social Security Welfare?

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Since the Department of Health, Education, and Welfare became the Department of Education and the Department of Health and Human Services in 1979, the term “welfare” has fallen into disuse. “Income security,” “entitlement,” or “public assistance programs” are now the usual terms for what used to be called “welfare programs.” Even the food-stamp program has been renamed the Supplemental Nutrition Assistance Program (SNAP).

Regardless of what they are called, it is without dispute that in addition to SNAP, federal programs such as Head Start, Temporary Assistance to Needy Families (TANF), Supplemental Security Income (SSI), the National School Lunch Program (NSLP), Medi-caid, Low Income Home Energy Assistance Program (LIHEAP), the State Children’s Health Insurance Program (SCHIP), subsidized housing, and Women, Infants, and Children (WIC) are welfare programs.

Other welfare programs that are often not viewed as such include the refundable portion of tax credits, unemployment compensation, and Medicare.

Regular tax credits that provide a dollar-for-dollar reduction of the amount of income tax owed are not welfare. They may reduce the tax owed to zero, but if there is no taxable income to begin with, then no credit can be taken. But other credits that are partially (American Opportunity Credit) or fully (Earned Income Credit) refundable are certainly welfare, because if the tax-credit “payment” is more than the tax owed, the taxpayer receives a refund of money he never paid in; that is, he receives some other taxpayer’s money.

The federal government imposed the unemployment-compensation program on the states by means of Titles III, IX, and XII in the Social Security Act of 1935 and the Federal Unemployment Tax Act of 1939 (FUTA). The U.S. Department of Labor oversees the program, but it is administered and mostly funded by the states. Federal unemployment taxes are paid by employers at a rate of 6 percent on the first $7,000 of each employee’s income. The 50 states likewise assess employers an unemployment tax whose maximum can range from 5.4 to 13.5 percent on a wage base of $7,000 to $37,300. (Employers that pay state unemployment taxes are allowed a credit against their federal unemployment tax liability up to 5.4 percent.) Only a few states actually levy some amount of unemployment tax on employees. But regardless of what the tax rate and wage base are, the amount of unemployment compensation received has no relation to the amount of tax paid in. And of course, the unemployed worker who receives benefits most likely never paid anything in anyway.

Medicare is government-funded health care for Americans who are age 65 or over or are permanently disabled. It actually consists of four parts: Part A (hospital insurance), Part B (supplemental medical insurance), Part C (Medicare Advantage Program), and Part D (prescription-drug benefit). Part A is funded, at least on paper, by a payroll tax of 2.9 percent (split between employer and employee) on all of an employee’s earnings. Participation in Parts B, C, and D is voluntary. They are funded by a combination of income-based beneficiary premiums and taxpayer subsidies. Less than 25 percent of the Medicare prescription-drug program is funded by premiums. There is absolutely no relation between the Medicare taxes paid and the benefits received. Enrollment in Medicare is open to all those who are U.S. citizens or have been permanent legal residents for five continuous years and who (or whose spouses) have paid Medicare taxes for a minimum of 40 quarters (ten years). Someone who has paid Medicare taxes continuously since the program began in 1966 receives the same benefits as someone who just began paying Medicare taxes 10 years ago. Someone can pay Medicare taxes his whole working life and, if he is healthy, not receive a dime in benefits or otherwise get any of his “contribution” back.

All of those welfare programs are clearly unconstitutional and illegitimate functions of the federal government. They are socialistic, they foster dependency on the government, they are income-transfer programs, they shift responsibility from the individual and families to society and the state, they are wealth-redistribution plans, they contribute to class warfare, they are collectivist, they crowd out real charity, they are social-engineering schemes.

The mechanics of Social Security

Although Social Security is all of those things and more, rarely is it ever viewed as a welfare program.

Social Security is properly a federal Old-Age, Survivors, and Disability Insurance (OASDI) program. It provides benefits for retirement, disability, survivorship, and death to about 55 million Americans at a price to approximately 157 million taxpayers of more than $800 billion a year. The program actually consists of two separate parts. Under the Old-Age and Survivors Insurance (OASI) part of the program, monthly benefits are paid to retired workers, their families, and survivors of deceased workers. Under the Disability Insurance (DI) part of the program, monthly benefits are paid to disabled workers and their families.

Like Medicare, Social Security is “funded” by pay-roll tax deductions from both employers and employees. After beginning at a rate of 2 percent (split between employers and employees) on a taxable wage base of $3,000, by 1990 the rate was up to 12.4 percent with a wage base of $51,300. The wage base is currently up to $110,100. But as part of a deal reached between Democrats and Republicans in late 2010 to extend the Bush income-tax cuts, the rate of the employee share of Social Security taxes was lowered from 6.2 percent to 4.2 percent for one year (2011). And then, after first being temporarily extended until the end of February 2012, the rate cut was extended until the end of 2012.

The original retirement age to receive full benefits was 65. For those born after 1937, the age has been gradually increased. For those born during the period of 1943–1954, the full retirement age is 66. For those born after 1960, it is 67. Reduced benefits are available for those who have reached the age of 62 and wish to begin receiving their benefits. However, the amount doesn’t increase once the full retirement age is reached. Those who delay receiving benefits until after their full retirement age earn credits that increase their benefit until they reach age 70.

Also like Medicare, one must pay Social Security taxes for a minimum of 40 quarters to be eligible. Social Security benefits are figured  on the basis of one’s Primary Insurance Amount (PIA), the average of a worker’s 35 highest years of earnings (up to a particular year’s wage base), adjusted for inflation.

But aside from the mechanics of the Social Security system that many Americans are familiar with, there are some things about the system that are unknown to most Americans or better left unsaid.

Social Security is the cornerstone of the welfare state. It is a relic from the New Deal. It is the third rail of American politics — touch it and you commit political suicide. It is the largest annual expenditure of the federal government. It has trillions in unfunded liabilities. It is the first plank in the federal government’s effort to create a class of citizenry that is dependent on the government.

Social Security does not have a real trust fund. It does not have a physical lock box. It is not an insurance program. There is no contractual right to receive it. Its taxes are not actually invested. It is not a safety net. It is not funded by premiums or contributions.

Social Security is not a retirement account. It is not an investment account. It is not a pension plan. It is not an IRA. It is not a savings account. It is not a return on investment. It is not a government 401(k) or 403(b) plan. It is not an annuity.

Social Security is an intergenerational, income-transfer, wealth-redistribution welfare program. The federal government takes taxes from the youth and adult working population and spends the money on the boondoggles that 90 percent of the federal budget consists of. Then, as those populations reach retirement age, it takes new taxes from the current group of working youths and adults and gives it to the former group and calls it Social Security benefits.

Social Security is welfare.

Most Americans would never consider Social Security to be welfare because they think that they paid, or are paying, into the system their whole working lives and therefore earned, or are earning, their benefits and are just receiving, or will be receiving, their contributions back with interest.

But there are several reasons that Social Security is welfare.

Some people think that Social Security isn’t welfare simply because part of the payroll tax collected under the Federal Insurance Contributions Act (FICA) is listed on pay stubs as being taken for Social Security and the other part as being taken for Medicare. That’s it. If the taxes extracted from Americans’ paychecks were called simply “payroll taxes,” then the notion that Social Security is not just another form of welfare would vanish overnight. Social Security would then be viewed as welfare for seniors, just as TANF is viewed as welfare for the poor, WIC is viewed as welfare for new mothers, and SSI is viewed as welfare for the disabled.

Social Security is welfare because there is no connection between the taxes paid and the benefits received. Take two men who are the same age and have identical incomes. One works for exactly 35 years, reaches full retirement age, and then retires. The other works for 45 years, reaches full retirement age, and then retires. Since Social Security benefits are based on the average of a worker’s 35 highest years of earnings, as related above, the benefit amount that these two men receive every month will be substantially the same. The fact that each man paid vastly different amounts into the system yet received basically the same benefits is irrefutable proof that there is no connection between Social Security taxes and benefits.

Social Security is welfare because Congress may, at will, change the Social Security benefit schedule at any time. According to Title XI, section 1104 of the Social Security Act, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to Congress.” That means that Social Security taxes can be changed at any time with no change in Social Security benefits; conversely, Social Security benefits can be changed at any time with no change in Social Security taxes. According to the Social Security Administration website,

• Your earnings may increase or decrease in the future.

• After you start receiving benefits, they will be adjusted for cost-of-living increases.

• Your estimated benefits are based on current law. The law governing benefit amounts may change because, by 2036, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.

• Your benefit amount may be affected by military service, railroad employment or pensions earned through work on which you did not pay Social Security tax.

When the Social Security tax rate was lowered to 4.2 percent beginning in 2011 (and where it will probably stay, since neither party wants to be seen as raising taxes on low-income Americans), no one’s Social Security benefits were cut, nor will future benefits be cut because of the reduction in the tax rate (although benefits may be cut for other reasons). Social Security taxes exist simply for the purpose of raising revenue. And they have been increased some 20 times since the program began.

Social Security is welfare because there is no contractual right to receive benefits. The Supreme Court already ruled as much many years ago. In the case of Helvering v. Davis (1937), the Court ruled that “the proceeds of both [employee and employer] taxes are to be paid into the Treasury like internal revenue taxes generally, and are not earmarked in any way.” In Fleming v. Nestor (1960), the Court held,

The noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits are [sic] based on his contractual premium payments.

To engraft upon Social Security a concept of “accrued property rights” would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands and which Congress probably had in mind when it expressly reserved the right to alter, amend or repeal any provision of the Act.

Title VIII, section 807, of the Social Security Act simply reads, “The taxes imposed by this title shall be collected by the Bureau of Internal Revenue under the direction of the Secretary of the Treasury and shall be paid into the Treasury of the United States as internal-revenue collections.” This tax collection began on January 1, 1937. The so-called Social Security Trust Fund was not instituted until January 1, 1940.

Social Security should be considered welfare because it is not an investment with a rate of return. Roosevelt falsely promoted Social Security to Americans as a “savings account for the old age of the worker” with contributions made by employers and employees through payroll taxes “held by the government solely for the benefit of the worker in his old age.” The first beneficiary to receive a Social Security check was Ida May Fuller in 1940. After paying in just $24.75 in Social Security taxes, she went on to collect $22,888 in benefits. According to a 2002 Congressional Research Service report on “Social Security Reform,” workers who retired at full retirement age in 1980 got back all they paid into Social Security, with interest, in 2.8 years. On the other hand, someone can pay into the system his whole working life and, if he dies upon retirement without dependents, his “savings account” dies with him. Even George W. Bush recognized the nature of the system:

Some in our country think that Social Security is a trust fund — in other words, there’s a pile of money being accumulated. That’s just simply not true. The money — payroll taxes going into the Social Security are spent. They’re spent on benefits and they’re spent on government programs. There is no trust. We’re on the ultimate pay-as-you-go system — what goes in comes out.

Social Security is welfare because the government can tax up to 85 percent of Social Security benefits. Although Social Security benefits are generally not taxable, individuals have to pay income tax on 50 percent of their benefits if the total of one-half of their benefits and their other income (including nontaxable interest income) is between $25,000 and $34,000 ($32,000 and $44,000 if married filing jointly) and on 85 percent of their benefits if their combined income is above $34,000 ($44,000 if married filing jointly). If an American is entitled to Social Security benefits because he earned them by paying Social Security taxes his entire working life, then what is the government doing taxing them just as it taxes unemployment benefits?

Conclusion

Social Security should not be saved, reformed, or privatized. The Social Security system is currently, has always been, and will forever be a system where money is taken from those who work and is given to those who don’t. Taking someone’s income in order to give it to someone else, whether the government takes it or a thief takes it, whether the taker has a good motive or evil intentions, or whether the receiver needs or just wants the money, is unethical, immoral, and criminal.

Social Security must be recognized for what it really is before it can ever be humanely, efficiently, and completely eliminated.

This article was originally published in the September 2012 edition of Future of Freedom.

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