Social Security’s Little Secrets

Social Security’s Little Secrets

Jun 10

Social Security has a few little secrets that make it very good for the government.

Social Security, unlike other income – earnings, investments or IRA’s – is taxed three times (Secret 1).

Here is how it works. Let’s say your earned income is $50,000. You pay in your Social Security which would be $2,100 for 2011. It’s normally 6.2% but in 2011 it’s 4.2%. Does that mean you are taxed at a reduced amount or the full amount?  You pay your Social Security dollars (tax 1) and you pay taxes on the full amount, effectively paying a tax on the money that went in for Social Security (tax 2) thus paying a tax on the tax. That occurs because Social Security taxes are not deducted from your taxable income.

Now it is years later and you start to receive your Social Security check. Social Security income is taxable and the rate depends on your AGI threshold. Now we come to another little secret. The threshold is not inflation adjusted (Secret 2).

If SS is so good for the government, why is it going broke? Its going broke because of secret number 3. The government is robbing Peter to pay Paul. Congress uses the money in Social Security to support government expenses; thus cleaning out the coffers of your retirement dollars. The people working now are paying for the people receiving SS now.

The solution lies in raising the cost (more taxes), raising the age when SS income starts or eliminating the cap. There is no cap on Medicare taxes, so why is there one on Social Security?

As I’ve said previously the simplest solutions are the hardest for the government to embrace. What’s a simple solution? Just tax everyone until they stop working and take the cap off.