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Social Security Funding Misconceptions Explained


Ida May Fuller; a name that made history. The date was January 31, 1940, and the check in Fuller’s mailbox in Ludlow, Vermont was from the U.S. Social Security System. Ida May had recently retired as a legal secretary when she received the first ever Social Security benefit check in the amount of $22.54. 

Fuller had worked for 3 years under the newly established Social Security System, and had paid in (through the Payroll Tax Deduction) a total of $24.75.  Her first payment was the smallest check she would receive in 35 years of collecting benefits, having lived to age 100. She collected $22,886.92 tax-free during those 35 years. At the time, Social Security benefits were not taxed as income. That was a promise the U.S. Government made to us at the time; no taxes, ever. We now know what that promise was worth, as Social Security benefits are now taxed according to income, with higher income earners taxed on 85% of benefits received, at their marginal tax rate. 

For decades, more people were working and paying into the Social Security Trust Fund than were collecting monthly benefits. Funding for the System was based on ever-increasing contributions from payroll deductions. Of course, it helped that life expectancy at the time was under 63, and the earliest benefits could be claimed was at age 62. The Social Security Trust Fund was flush with money, and growing monthly.

But that was then, and this is now. Life expectancy has grown steadily, with babies born today expected to live 78 years, on average. Coupled with a huge Baby Boomer generation retiring, with no concurrent increase in employment, the Trust Fund has been shrinking.

Recent proposals to make temporary cuts to Social Security Payroll Taxes made me uncomfortable, as any decrease in funding would bring the System closer to insolvency. Today’s Trump proposal calls for a 4-month Payroll Tax reduction of 6.2%. Obama implemented a similar reduction in 2011, and then extended it through 2012. Politicians loved the Obama Plan, and now detest the Trump Plan. They cite the reason (excuse) that it would cripple the ability of the Trust Fund to pay ongoing benefits. I initially agreed, until a little research changed my mind.

Most of us assume that Social Security is funded by only one source; the Payroll Deduction. That assumption is, however, incorrect. There are actually three funding sources. Payroll deductions are supplemented by the amount of income tax Americans pay on their Social Security benefits. Thirdly, when a “special situation” arises, Congress reimburses the Trust Fund from General Revenues.

These reimbursements have been used many times, including reimbursement of the Payroll Tax Holiday in 2011 and 2012. For some reason, politicians today can’t seem to remember that this process is simply “business as usual.” We suspect that the nearness of the next Presidential election plays a role in their collective amnesia.

Most Americans agree that the coronavirus pandemic required stimulative action by the government, and that has been done. Unfortunately, the stimulus expired, and there has been no replacement. Both sides are in “lockdown” mode, refusing to negotiate with each other. Losing are the remaining workers who were displaced by the nationwide economic shutdown last spring. Sadly, although they claim to be talking again this week, there is no end in sight.

Several days ago, the Trump Administration announced that the 2020 voluntary Plan would be implemented immediately. Yet, the whining continues, citing the “Big Lie” regarding insolvency of the Trust Fund. Now you know the truth, and you should be able to see through the smokescreen. What you will find is politics at its worst.

For the record, I understand that the “Trust Fund” has been spent and replaced by government “I.O.U.s,” but they are as good as the American Dollar is printable by the FED. It’s all we have for now.

Van Wie Financial is fee-only.  For a reason.