December 23, 2003

I recently watched, in disbelief, as two friends engaged in a screaming match in my kitchen over Social Security. One individual asserted there would not be any money left in his Social Security retirement account because President Bush was stealing the funds to pay for the war in Iraq. He claimed this is unconstitutional because the federal government is contractually obligated to pay him retirement benefits for all the money “contributed” to his account. The other individual countered that the President could not spend “all his money” because it is locked away in the “Social Security Trust Fund.” He stated the “contributions” he makes from his wages, which are matched by his employer, could only be spent to pay out Social Security benefits. Thus, the President could not spend Social Security “contributions” to pay for the war in Iraq. After five minutes of listening to the yelling and political barbs, I decided it was time to sit my friends down and attempt to interject some facts into their debate.

When I told them that there is no “retirement trust fund” because their so-called “contributions” are actually additional income taxes that are deposited in the federal government’s general fund, and Social Security is nothing but a federal welfare scheme disguised as a retirement program, you could have heard a pin drop. Since this was contrary to everything they had been told about Social Security, they demanded I substantiate my assertions.

I showed them that immediately after going into effect in 1935, various parts of the Social Security Act were challenged as unconstitutional and reached the Supreme Court for decision in 1937. In Helvering v. Davis (301 US 619), the Court sustained the Act under Congress’ power to impose taxes. In its decision, the Court revealed some of the truths about Social Security.

First, employees are not making contributions into a retirement program, but are, in reality, paying a “special income tax” which is deducted from their wages and paid to the federal government by the employer. This “special income tax” is imposed on the employee for the so-called “privilege” of being employed by an employer.

Second, employers are not making matching contributions into a retirement program for their employees, but are, in reality, paying an excise tax for the privilege of having individuals in their employ.

Third, there is no retirement trust fund. The Court stated:“[t]he proceeds of both taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way.” (Bold added) Neither of the taxes are set aside to pay Social Security benefits. Both are general fund income taxes, which are used to pay the everyday expenditures of the federal government.

Since one of my friends is self-employed, I told him that he is paying at least 3 different federal income taxes. One on his so-called income and two under Social Security. Two he asked? Yes I replied because for tax purposes, you are treated as the employee and the employer all in one. This means, if you read between the lines, that you are paying one tax for the “privilege” of being employed by yourself as the employee, and the other for the “privilege” of employing yourself as the employer.

At this point, my friends were outraged and wanted to know why Social Security is a tax scheme as opposed to a legitimate retirement program. I told them the answer is basically two-fold. Since the federal government was never granted the constitutional authority to force the American people to participate or contribute to a retirement program, the only way Congress could extract the money was through taxation.

The second reason is―it’s a covert way to tax the American people. Since Social Security is a tax scheme disguised as a retirement program, Congress can structure the rates so the federal government collects more money in taxes than it pays out in benefits without enraging the people. Congress can then pat itself on the back and announce to the nation that there is a Social Security surplus for the year. This projects the illusion that Congress is fiscally responsible and doing a wonderful job protecting the retirement of seniors.

In 1999 for example, then Senate Majority Leader Trent Lott stated that the projected federal budget surplus was $110 billion¾ “all from Social Security taxes.” Translation―Social Security taxes in 1999 generated approximately $110 billion more than was paid out in so-called benefits. And, since these were general fund dollars that were not earmarked in any way, Congress was free to spend the money as it saw fit.

My friends were now seething with anger and wanted to know why individuals who have not paid a penny in Social Security taxes can receive various benefits under the program. I told them the answer is quite simple. Social Security is nothing but a government welfare or assistance program. The Founders would have classified it as a form of “poor relief.” In 1960, in Flemming v. Nestor (363 US 603), the Supreme Court stated:“...eligibility for benefits...[does] not in any true sense depend on contribution through the payment of taxes.” If Social Security was a legitimate retirement program, only those individuals who had contributed to the program would be eligible for benefits. But, since Social Security is a tax and social welfare scheme, Congress has total discretion to determine the qualifications for receiving various benefits under the program.

If Social Security is a welfare program, one of my friends asked, does that mean the federal government is not contractually obligated to pay out promised benefits even though he had paid into the program for 40 years? That’s correct I replied. The Supreme Court, in the Nestor case, ruled that individuals paying Social Security taxes do not acquire any property or contractual rights, as they would in an insurance or annuity plan. In addition, the Court stated:“[c]ongress included in the original Act, and has since retained, a claim expressly reserving to it…‘[t]he right to alter, amend, or repeal any provision’ of the Act.”

The truth about Social Security was finally beginning to sink in. One of my friends asked if he could take a stab at explaining Social Security. I told him to go ahead. Social Security, he said, is nothing but a tax and welfare scheme masquerading as a legitimate retirement program. Payroll deductions are not retirement contributions and do not guarantee the receipt of any benefits. They merely qualify the individual for consideration in a federal charity program that can be modified at any time. If Congress decided to abolish Social Security, the American people would not have any legal claim for promised benefits. You’ve got it I replied!

At the conclusion of the discussion, my friends were finally in agreement―Social Security is one of the biggest scams ever perpetrated on the American people and nothing but a tax and welfare scheme disguised as a retirement program.

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