It's my understanding that SS is paid out of a specific fund. That fund currently has 2.3 trillion dollars in it. The SS withholding was doubled in the 70's I believe. The purpose was to compensate for the baby boomers who are starting to retire right now. If contributions would have stayed at 6.4% for employee and 6.4% for employer the fund would have paid for SS for 29 years based on projected birth rates. After 29 years benefits will still be paid at 80%. Right now there is more paid out than taken in each year. That is the purpose of the surplus fund. When the babyboomers start tipping over, things will equal out some.
I dont depend on Wikipedia for facts, but this seems like a reasonable look at the question. Remember, in the example in this exerpt the 2020 date is just a date picked out for the example, talking about one specific dollar put in the system. It does not have anything to do with when the Trust Fund will run out or become insolvent.
http://en.wikipedia.org/wiki/Social_Security_Trust_Fund
The following two scenarios help illustrate the concept. Depending on which scenario is right, Social Security is either an accounting fiction or represents real economic savings.
Scenario 1 (Trust Fund is an accounting fiction):
1984: $1 payroll tax collected in 1984
1984: $1 lent by Social Security to the federal government
1984: Federal government increases spending on government programs by $1
2020: Federal government raises taxes by $1 plus interest to repay the loan to Social Security
2020: $1 plus interest transferred from Federal Government to Social Security.
Scenario 2 (Trust Fund represents real economic savings):
1984: $1 payroll tax collected in 1984
1984: $1 lent by Social Security to the federal government
1984: Federal government increases spending on government programs by $0
2020: Federal government raises taxes by $0 to repay the loan to Social Security. Any tax increases that occur in 2020 would have happened anyway without Social Security.
2020: $1 plus interest transferred from Federal Government to Social Security.
Then you get his from the Social Security website.
http://www.ssa.gov/oact/progdata/fundFAQ.html#n7
As stated above, money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future. Without legislation to restore long-range solvency of the trust funds, redemption of long-term securities prior to maturity would be necessary.
Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.
The collateral backing these securities is the full faith and credit of the U. S. Government. That depends on the governments Constitutional power to collect taxes, fees, and tariffs. Others obviously have different opinions, but I do not see that the SS Trust Fund has resulted in a net of zero in government collections and spending. I see it that the SS Trust Fund has delayed raises in other taxes, fees, and tariffs depending upon the amount of surplus each year. It has not affected spending at all. It has delayed us paying for that spending in other ways. When outgo exceeds income, the difference will have to be made up from taxes, fees, or tariffs.
I dont agree with the analogy that the special-issue securities are as safe as savings bonds. If you buy a Savings Bond from the government, that is a two party transaction. You loan the money to someone else and get it back with interest. If you buy a savings bond from yourself and spend that bond money now, then you owe yourself the amount of the bond with interest when the bond comes due. If you put money aside each month to cover the principle and interest, then you had a net increase in savings. If you do not put money aside to pay that personal savings bond off when it becomes due, you do not have a net increase in savings.
Im not saying that Social Security is worthless or that someone will not get any money from Social Security in the future. Im not saying it is going to go broke. I think taxes, fees, and tariffs will cover the shortfall, the benefits will be cut sometime in the future, or probably a combination. I do think that the idea that surplus money invested in this trust fund is increasing the value of this trust fund is false.
Since it has been reduced to 4.4% that means the money will not accumulate at the same rate and will therefore run out faster. They will continue paying at the same percentages, it just won't last as long. Personally I don't expect it to return to the 6.4% rate. Once you give the public a cut, it's there to stay. Especially in this financial climate. I know it's supposed to be one year. The Bush tax cuts were supposed to expire in 2010. Even though it's costing us a trillion dollars over 10 years when everyone is so concerned about the deficit. They still got extended for 2 years. From a personal stand point I'm glad they did. From a perspective of what is good for the country, it's a bad thing. You will notice that the deficit hawks on the TV and radio were ok with it though.
You are probably right about whether this historic separation of what the employee pays versus what the employer pays becomes permanent. I see it as fairly irrelevent from that viewpoint. All it does is bring the day closer that the power of the government to collect other taxes, fees, and tarriffs come into play.