What Is Social Security Tax Used for?
What Social Security taxes are used for ought to be a simple question to answer, but it isn't. First, what is called the "Social Security tax" is collected under a law called FICA, and FICA collects for more than just Social Security. Second, most of the time Social Security is running a surplus. What happens to that surplus is only explainable in the arcane world of government accounting, and is therefore a tricky and contentious issue.
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The Tax
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Social Security directly taxes the pay of all wage-earners in America, whether they be employed by another or self-employed. On a pay stub, this tax is identifiable under the FICA deduction, which stands for Federal Insurance Contribution Act. Employees pay 6.2 percent on their gross incomes, and their employers pay a matching 6.2 percent (as of 2009). However, there is a separate tax of 1.45 percent, plus matching tax paid by the employer, to cover the related expenses of Medicare. The total rate is 7.65 percent. Self-employed persons must pay both the employer's and employee's share, for a whopping 15.3 percent, but half of the tax paid is later deductible from their federal income taxes.
Benefits
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The immediate purpose of the taxes covered under FICA is to pay for existing government obligations under Social Security and Medicare. According to the Government Printing Office, in 2008 $994 billion was paid out through these two programs. FICA taxes brought in about $927 billion dollars, creating a rare deficit in the program. Usually, FICA taxation exceeds payments made by Social Security and Medicare, creating a surplus.
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The Trust Fund
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The Social Security Trust Fund was created in 1939, for the purpose of investing the frequent surpluses created by the program's taxes into government securities. However, for decades after that the Congress treated the surplus as something of a cookie jar, and raided it regularly. This loophole was plugged in 1983 as part of a comprehensive Social Security reform package. From that point on, surpluses were always invested into government securities, generating interest for the program. In 2008, the surplus accumulated plus the interest was over $2.4 trillion dollars.
Accounting Gimmick
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Many critics of either the Congressional budgeting mechanism, Social Security, or both call the Social Security Trust Fund a mere accounting gimmick. They claim that despite the 1983 reforms that placed the Trust Fund outside of the annual Unified Budget, Congress effectively goes on raiding the surpluses to pay for other programs anyway. This is a tricky issue, because when Social Security buys government securities, it is effectively buying up government debt. The government is, in effect, loaning itself the money.
Real Savings
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The question of whether surpluses from Social Security are being spent by the government in an inter-governmental loan can only be answered by looking at what happens down the road. If the government takes the money, increases spending, and then has to increase taxes decades later to pay back the loan with interest, the Trust Fund becomes an accounting gimmick and the money was indirectly raided by Congress. Otherwise, it was either not raided or at least not picked clean. The best way to see this from the outside is to monitor government budget deficits year by year. If they are stable or declining, then the surpluses in the Trust Fund are real. If they are rising, they probably are not.
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References
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- Photo Credit Wikimedia Commons, Government Accounting Office
