What happens to the money you pay as payroll taxes for Social Security?
If comments received on this blog are any indication, most people think “their money” is used to pay their benefits. That’s wishful thinking, but you are not alone. A new Rasmussen poll indicates that only 10% of Americans know that the federal government can spend Social Security taxes anyway it wants to.
Here is how it works. Incoming taxes are used to pay current benefits to old folks like me, the excess over what is needed to pay current benefits is used to buy special treasury bonds that pay interest to the Social Security Trust Fund. The government then takes the proceeds from the bonds it sold and … you guessed it … spends the money on everything the government spends money on. Think of it this way. Your last several payroll tax deductions helped pay the $1500 tax credit I received when I installed efficient central air conditioning … and I appreciate it.
There is one problem with all this. The incoming taxes are no longer sufficient to pay the current benefits so interest on the bonds already purchased is also being used to pay the benefits. At some point both incoming payroll taxes and the interest will not be enough to pay benefits. When that happens the Social Security Trust will knock on the Treasury Department’s door and redeem the bonds it purchased.
Now, since the proceeds from these bonds has already been spent where is the Treasury going to get the money to give to the Trust Fund to pay benefits? That’s a good question. Where do you think they money is going to come from? You might want to ask Sen Bernie Sanders of VT he thinks talk about Social Security going broke (projected in 2036 by the way) is “total nonsense.” He also thinks Social Security has nothing to do with the federal budget or deficit – where is Treasury going to get the cash to give to the Trust Fund? Think about it
One other conundrum to consider; if the current payroll taxes are insufficient to pay benefits how can it be prudent to further reduce that source of revenue by having a Social Security payroll tax holiday as proposed by the President? On the surface it seems absurd, but the idea is that by getting more people working they too will be paying Social Security taxes and thereby increase the revenue. Of course, that assumes hiring is stimulated and these workers are able to stay on the payroll beyond 2012. Let’s hope that is an accurate assumption.
However, in the short run Treasury is simply going to issue more debt to provide IOUs to the Trust Fund to offset the lost tax revenue.
Now you know what happens to the Social Security payroll taxes you pay.
- Should We Be Concerned About Deeper Cuts to the Payroll Tax? (woodgatesview.wordpress.com)
- Payroll tax cut plan: questions and answers (sfgate.com)