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Debunking Some Internet Myths

MYTHS AND MISINFORMATION ABOUT SOCIAL SECURITY

Myths and misstatements of fact frequently circulate on the Internet, in email and on

websites, and are repeated in endless loops of misinformation. One common set of suchmisinformation involves the history of the Social Security system.

One Common Form of the Myths:

"Franklin Roosevelt introduced the Social Security (FICA) program. Hepromised:

1) That participation in the program would be completely voluntary;2) That the participants would only have to pay 1% of the first $1,400 of

their annual incomes into the program;3) That the money the participants elected to put into the program would bedeductible from their income for tax purposes each year;4) That the money the participants paid in would be put into the independent"Trust Fund," rather than into the General operating fund, and therefore,would only be used to fund the Social Security Retirement program, and noother Government program.;5) That the annuity payments to the retirees would never be taxed asincome."

CORRECTING THE MYTHS AND MISSTATEMENTS

Myth 1: President Roosevelt promised that participation in the program would becompletely voluntary

Persons working in employment covered by Social Security are subject to the FICApayroll tax. Like all taxes, this has never been voluntary. From the first days of theprogram to the present, anyone working on a job covered by Social Security has beenobligated to pay their payroll taxes.

In the early years of the program, however, only about half the jobs in the economy werecovered by Social Security. Thus one could work in non-covered employment and nothave to pay FICA taxes (and of course, one would not be eligible to collect a futureSocial Security benefit). In that indirect sense, participation in Social Security wasvoluntary. However, if a job was covered, or became covered by subsequent law, then ifa person worked at that job, participation in Social Security was mandatory.

There have only been a handful of exceptions to this rule, generally involving personsworking for state/local governments. Under certain conditions, employees of state/local

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governments have been able to voluntarily choose to have their employment covered ornot covered.

Myth 2:President Roosevelt promised that the participants would only have to pay1% of the first $1,400 of their annual incomes into the program

The tax rate in the original 1935 law was 1% each on the employer and the employee, onthe first $3,000 of earnings. This rate was increased on a regular schedule in four steps sothat by 1949 the rate would be 3% each on the first $3,000. The figure was never $,1400,and the rate was never fixed for all time at 1%.

Myth 3:President Roosevelt promisedthat the money the participants elected to putinto the program would be deductible from their income for tax purposes each year

There was never any provision of law making the Social Security taxes paid byemployees deductible for income tax purposes. In fact, the 1935 law expressly forbid this

idea, in Section 803 of Title VIII.

Myth 4:President Roosevelt promisedthat the money the participants paid wouldbe put into the independent "Trust Fund," rather than into the General operatingfund, and therefore, would only be used to fund the Social Security Retirementprogram, and no other Government program

The idea here is basically correct. However, this statement is usually joined to a secondstatement to the effect that this principle was violated by subsequent Administrations.However, there has never been any change in the way the Social Security program isfinanced or the way that Social Security payroll taxes are used by the federal government.

The Social Security Trust Fund was created in 1939 as part of the Amendments enactedin that year. From its inception, the Trust Fund has always worked the same way. TheSocial Security Trust Fund has never been "put into the general fund of the government."

Most likely this myth comes from a confusion between the financing of the SocialSecurity program and the way the Social Security Trust Fund is treated in federal budgetaccounting. Starting in 1969 (due to action by the Johnson Administration in 1968) thetransactions to the Trust Fund were included in what is known as the "unified budget."This means that every function of the federal government is included in a single budget.This is sometimes described by saying that the Social Security Trust Funds are "on-

budget." This budget treatment of the Social Security Trust Fund continued until 1990when the Trust Funds were again taken "off-budget." This means only that they areshown as a separate account in the federal budget. But whether the Trust Funds are "on-budget" or "off-budget" is primarily a question of accounting practices--it has no affecton the actual operations of the Trust Fund itself.

Myth 5:President Roosevelt promised thatthe annuity payments to the retirees

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would never be taxed as income

Originally, Social Security benefits were not taxable income. This was not, however, aprovision of the law, nor anything that President Roosevelt did or could have "promised."It was the result of a series of administrative rulings issued by the Treasury Department

in the early years of the program.

In 1983 Congress changed the law by specifically authorizing the taxation of SocialSecurity benefits. This was part of the 1983 Amendments, and this law overrode theearlier administrative rulings from the Treasury Department.