Sunday, July 31, 2011

An easy 10 step guide as to where your Social Security Payroll Taxes end up. You are not going to like this journey...

1. You and 9 of your friends work this month.

2. Each of you are subject to a mandatory payroll tax of 6.2% of your paycheck for Social Security.

3. Your employer ALSO pays on your behalf 6.2% of y'alls paychecks in Social Security Taxes.

3. Each of you earns $3,000 per month in gross pay (before any deductions). Total income for all of you is $30,000.

4. Collectively you pay $1,860 in Social Security taxes ($30,000 X 6.2%) and your employer pays the same amount. So $3,720 ($1,860 X 2) is submitted to__??___. This is where the story gets murky for most.

5. The payment of Social Security checks to retirees (and others) comes from the Federal Govts "General Fund/Budget" (that monstrosity that the President proposes and the Congress approves)--not from the Social Security Trust Fund, which I believe most people think. This SS tax money you and your employer pay goes directly to the General Fund.

6. Assume this month there are 2 retirees eligible for S.S. checks and each one is entitled to $1,500---for a total of $3,000 in current S.S. obligations. That is a 5 to 1 ratio (10 workers for every 2 retirees)--about right, I believe.

7. The $3,720 arrives in Washington. The US Treasury takes control of it. ALL of it goes into the General Fund BUT only $3,000 goes to retirees. The rest goes into a cash account with the Social Sec.Trust Fund, right??? Not so fast...In an accounting move, the US Treasury issues special Social Security Trust Funds Bonds in the amount of $720 (the amount collected, $3,720) OVER current obligations ($3,000) to the Social Security Trust Fund.  Congress then uses this $720 for, well, whatever they want to spend it on.  Effectively, the Federal Government has borrowed this $720 from itself.  Specifically, they have borrowed from taxpayers. More specifically, they have borrowed from FUTURE taxpayers, but that is for another day...

8. When people say there is no money (to speak of) in the Social Security Trust Fund, they are technically right. Current workers earning money and paying payroll taxes is enough to pay the current obligations for payouts to retirees AND there is some surplus left-over, which Congress borrows every month to pay for other things.

9. Rinse and Repeat

10. As a result of decades of doing this, there is roughly $2.6 Trillion in Bonds (IOU'S) held in the Social Security Trust Fund.  This is a part of the $14.3 Trillion National Debt number that is well known to us all by now.

Have a nice day!!
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