The Myths about Social Security

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By Bill Koch, editor

By Bill Koch

While Social Security serves as a financial safety net for more than 60 million Americans, the federally insured retirement system has suffered from a variety of rumors, misinformation and unusual tales.

Following President Franklin D. Roosevelt’s signing Social Security into law on Aug. 14, 1935, the myths began circulating, many of them warranted and based on political promises.

Participation is voluntary. All income generated by employment is subject to the FICA tax, which has never been voluntary. Everyone working on jobs covered by Social Security has to pay taxes.

Initially, Social Security covered only about half of the economy’s jobs. If you worked for an employer who wasn’t yet covered under Social Security, you obviously didn’t have to pay that tax. That also meant you couldn’t collect Social Security benefits for that time you were working for that employer.

If you worked for an employer in a job covered by Social Security, you had to pay the tax. It was mandatory. Exceptions may have included government workers who could choose to not pay the taxes for coverage.

You’ll only have to pay 1 percent on the first $1,400 of your income.That was what Roosevelt had promised. The 1935 law stipulated 1 percent on the first $3,000 in income. That rate increased to 3 percent by 1949.

The number was never $1,400 and the rate was never set permanently at 1 percent.

The payroll taxes for Social Security would be deductible. Although Roosevelt promised taxpayers could elect that option, it was never part of the law. Section 803 of Title VIII of the 1935 law prohibits that deduction.

Your money would only be put in a “trust fund.”More promises. The idea was that the tax money would go into the trust fund, and not the operating fund, and only be used for Social Security.

This is partially correct, but it is linked to the assertion that subsequent politicians repeatedly violated this section of the law.

The way Social Security is funded or how payroll taxes are used, however, has never been altered since the law’s creation.

Another misconception is the trust fund being dropped into the federal government’s general fund. The confusion may stem from Social Security’s financing and how the trust fund’s accounting is managed in the federal budget.

President Lyndon Johnson moved accounting for trust fund transactions into the government’s “unified budget,” which provides more concrete oversight of Social Security in one budget.

The trust fund was moved “off-budget” in 1990 as a separate account.

Retirees’ benefit payments would never be taxed as income. This was another promise Roosevelt made. Social Security income was initially not taxed, although this provision was not included in the original law. The president did not have the authority to remove Social Security from taxation; the Treasury Department in the early days, however, was able to ensure taxes weren’t collected on benefits.

Congress changed the law in 1983 to allow taxation of Social Security benefits. Congress’ amendments overrode earlier Treasury Department rulings prohibiting taxation.

Read next week’s article on more myths and misconceptions about Social Security.