Wednesday, April 20, 2011

Obsolete Government Programs, Part 1 | FICA

My Roots, circa 1918

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

~ By: Larry Walker, Jr. ~

Are Social Security Benefits an Inalienable Right? ~

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.

Times Have Changed: Social Security is Obsolete

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.

  • The U.S. had no federal-government-mandated retirement savings; consequently, for those people who had not voluntarily saved money throughout their working lives, the end of their work careers was the end of all income.

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:

  1. Defined-Benefit Plans

  2. Defined-Contributions Plans

  3. 401(k) Plans

  4. 403(b) Plans

  5. Individual Retirement Accounts (IRAs)

  6. Roth IRAs

  7. Qualified Insurance Annuities

  8. Simplified Employee Pension’s (SEP)

  9. Savings Incentive Match Plan for Employees (SIMPLE)

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.

  • The U.S. had no federal-government-mandated disability income insurance to provide for citizens disabled by injuries (of any kind—work-related or non-work-related); consequently, for most people, a disabling injury meant no more income (since most people had little to no income except earned income from work).

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.

  • There was no federal-government-mandated disability income insurance to provide for people unable to ever work during their lives, such as anyone born with severe mental retardation.

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.

References:

[1] http://www.ssa.gov/history/nestor.html

http://en.wikipedia.org/wiki/Federal_Insurance_Contributions_Act_tax#cite_note-4

Related:

Social Security - A Breach of Trust

The Social Security Bust Fund

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