By Laurence M. Vance
Social Security benefits will soon be increasing, as they do almost every year, but Social Security taxes will not be increasing, as they haven’t for over 30 years. This shows once again the arbitrary nature of Social Security (OASDI) benefits.
The Old-Age and Survivors Insurance (OASI) part of Social Security provides monthly benefits to retired workers, families of retired workers, and survivors of deceased workers. The Disability Insurance (DI) part of Social Security provides monthly benefits to disabled workers and families of disabled workers. According to The 2022 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds:
At the end of 2021, the OASDI program was providing benefit payments to about 65 million people: 50 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 9 million disabled workers and dependents of disabled workers. During the year, an estimated 179 million people had earnings covered by Social Security and paid payroll taxes on those earnings. The total cost of the program in 2021 was $1,145 billion.
Social Security is ostensibly funded by a 12.4 percent payroll tax (split equally between employers and employees) on the first $147,000 of the employee’s annual income. Although self-employed individuals pay the full 12.4 percent, they receive both a reduction in their net earnings from self-employment and a tax deduction equal to 50 percent of the amount of the Social Security tax they paid. To be eligible for Social Security benefits, one must pay Social Security taxes for a minimum of 40 quarters. Benefits are determined based on one’s Primary Insurance Amount (PIA) — the average of a worker’s 35 highest years of earnings (up to a particular year’s wage base), adjusted for inflation. For those born in 1960 or later, the retirement age to receive full benefits is 67. Reduced benefits are available for those who have reached age 62. According to CNET, “The average Social Security benefit for 2022 is $1,657 a month.”
Since 1975, the Social Security Administration (SSA) has based benefit increases (cost-of-living adjustments, or COLAs) on related increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Some years — most recently 2010, 2011, and 2016 — there were no COLAs granted. Since 2011, COLAs have generally been about 2 percent or less. The SSA has just announced that the COLA for 2023 will be 8.7 percent — the largest increase since the 11.2 percent increase in 1981.
Yet, the Social Security tax rate has held steady at 12.4 percent since 1990. And when the rate was lowered by 2 percentage points for employees in 2011 and 2012, future benefit cuts were not announced for workers who enjoyed the lower tax rate.
This means that there is no connection between the taxes one pays into the Social Security system and the benefits that one receives from the Social Security system. The Social Security Administration (SSA) even acknowledges: “The money you pay in taxes is not held in a personal account for you to use when you get benefits. Today’s workers help pay for current retirees’ and other beneficiaries’ benefits.”
Social Security benefits are arbitrarily set by Congress according to an arcane formula, loosely based on one’s earnings, not Social Security taxes paid. At any time, and for any reason, Congress can change the tax rate, the wage base, the retirement age, the benefit amounts, the way it calculates benefits, or the way it determines COLAs. The Supreme Court has even ruled that there is no contractual right to receive Social Security benefits. Congress can even tax away any benefits that are received. Currently, up to 85 percent of benefits are taxable if one’s income is over $34,000 for individuals or $44,000 for married couples.
What is so important, then, about the arbitrary nature of Social Security benefits?
Most Americans are under the impression that they are entitled to Social Security benefits because they have “earned them” or “paid into the system.” But nothing could be further from the truth.
Social Security is, and always has been, a welfare program, just like food stamps; Temporary Assistance for Needy Families (TANF); Women, Infants, and Children (WIC); Medicaid; section 8 housing vouchers; and Supplemental Security Income (SSI).
Social Security is simply an intergenerational, income-transfer, wealth-redistribution scheme that takes money from those who work and gives it to those who don’t. There is no other way to accurately describe it.