Argus Hamilton

 By DOUGLAS COHN and ELEANOR CLIFT WASHINGTON — What single country or organization owns the largest block of the U.S. national debt? China? The European Union? Petroleum-rich countries? No. It is the Social Security Trust Fund, and it owns a whopping 22 percent of that debt (compared to seven percent held by China). But who controls the Social Security Trust Fund? The U.S. government. In other words, America’s largest creditor is itself. But that is not possible, which is why in truth there is no Social Security Trust Fund and there never was. If an individual, a company, or a country places money into a savings account and then borrows it, the money is gone. If that savings account had been earmarked for a special purpose such as a child’s college education, employees’ retirement, or Social Security payments for future retirees, the money would not be there. The individual, the company, or the government would have to find another source of funds to pay those obligations when they became due. This is the situation for Social Security. The government has no trust fund to tap. It will be compelled to pay retirees just as it pays any other current obligation. The money will come out of the Treasury. The question is where will the Treasury get the money? Only two options are possible. The government can borrow it or draw it out of tax revenues. If the economy is humming, existing tax revenues might cover the debt. If not, taxes would need to be increased. But the more important question is where is the current Social Security tax going? From 1937 to 1949 the Social Security tax, known as Old-Age, Survivors, and Disability Insurance (OASDI), was one percent. Since 1990, it has been 12.4 percent, and for 2009 the tax is levied against the first $106,800 of income. This figure has been regularly increased from year to year. What this means is that middle and low income earners are paying an additional income tax. The wealthy pay a much lower percentage because they are not taxed on amounts in excess of $106,800. For example, an individual earning $213,600 would only pay 6.2 percent. An individual earning $427,200 would pay just 3.1 percent. The public is being double fooled. First, they believe they are paying money into a trust fund that will fund their retirement, but the fund does not exist; it is emptied as quickly as money comes in. Second, they believe their employers are paying half the tax. In fact, anything an employer pays for or on behalf of an employee is the same as paying it to the employee. Every employer factors in everything paid to or for every employee. An employee earning $50,000 pays a 6.2 percent Social Security tax and so does the employer. Each pays $3,100. But the employer looks at this in the only rational way possible. The employee is costing the employer $53,100. The same logic applies to employer-paid health insurance and pension plans. The difference is that those benefits are true benefits because the employee gains an advantage from group rates. No such advantage exists for the Social Security tax, and no benefit is received. A portion of the money is going to current retirees, and the balance is going to the government. For their own Social Security benefits, employees will have to depend upon payments from the next generation of employees or from general tax revenues or federal borrowing. Quite simply, the Social Security tax is nothing more than a supplemental tax paid by middle and low income people. Published in The Messenger 11.30.09

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