Who Pays for “Social Security”?

WHO pays for the benefits that go to people in need? What kind of burden is this placing on those who have to pay?

In some lands the benefits, such as pensions for elderly people, are paid directly out of government funds. In the Soviet Union and China the entire amount is financed by the place where a person has worked, or by supplementary payments from the government.

Generally, though, the term “social security’’ is attached to programs where both the worker and the employer pay into the arrangement. For example, the system in the United States requires that part of the salary of an employee be deducted from each paycheck. During 1975 this tax rate for social security alone was 5.85 percent, which included coverage for medical benefits. The employer was also required to pay 5.85 percent.

Thus, a worker who paid this 5.85-percent tax on an income of $5,000 a year had $292.50 deducted from his paychecks. And his employer had to contribute another $292.50 of the company’s funds to the program.

However, not all of a person’s income is taxed for social security. In 1975 this special tax was paid up to $14,100 of an employee’s annual income. Income beyond that was not taxed for this specific purpose.

Growing Burden?

Over the decades, some people have come to regard these payments as an evergrowing burden. They feel that the tax, especially for low-income families, is really beginning to hurt.

When social security was first introduced in the United States, the employee had to pay only 1 percent of his salary for this tax. The employer added another 1 percent. But in 1975 the rate was nearly six times as much.

Not only has the tax rate jumped nearly sixfold, but the amount subject to the tax has risen dramatically too. At first, the maximum amount of income that could be taxed for social security was $3,000 a year. But that figure kept rising, reaching $14,100 a year in 1975. And late in 1975 the government announced that during 1976 the income taxable for social security would rise to $15,300.

Thus there has been a double-barreled rise​—in the percent of income contributed, and also on a larger amount of the income. How huge this kind of tax rise has become can be seen by making a comparison: 1 percent of the $3,000 at the start was only $30; but 5.85 percent of the $14,100 in 1975 was $824.85, and in 1976 it is scheduled to be $895.05. That represents a gigantic increase in the maximum deductions from one’s paychecks​—about thirty times as large as when the program began. This is far greater than any cost-of-living increase in that same period due to inflation.

A main reason why some regard this as a growing tax burden is that it is in addition to all the other taxes a person has to pay. And these, too, have been increasing over the years. City sales taxes, once nonexistent, have gone up significantly, now 6 to 8 percent in some places. There are state income taxes today where there were none years ago. Property taxes have also risen. And then there is the federal income tax. Now American workers are so heavily taxed that many of them pay more than one third of their income for these various taxes.

Other countries have also seen similar increases in social security taxes. In West Germany, during 1975, the average monthly payment was 9 percent apiece from employee and employer alike on a maximum amount of 33,600 Deutsche Marks a year (about $13,400). If an employee earned less than 280 D.M. a month (about $120), then the employer was required to pay the entire 18 percent. Regarding that nation’s system, U.S. News & World Report said:

“West Germany’s social-security system, already so costly some managers say it hampers their investment planning, will be even more expensive next year.

“The Government has decreed a 50 per cent increase in employer and employe payments to Bonn’s unemployment-insurance fund. . . .

“To the average German industrial worker, this means a personal contribution of almost $130 a month. His employer hands over a matching $130 and bears some other social-security-type items. . . .

“Social-security costs have soared recently​—from some 128 million dollars annually for one group of German firms to 240 million three years later.

“That’s why executives say the room for investment maneuver is vanishing.”

Cutting into Savings

In recent times, taxes and the cost of living have increased faster than the real income of people. So, many now are having great difficulty saving money for their old age.

Americans find that, on the average, they are not able to save much more than they did thirty years ago. And, of course, due to inflation the money saved is now worth far less, indeed, only a fraction of what it used to be. In view of this, the rising social security tax takes a bigger bite out of those savings. The Detroit News observed:

“In 1942 the average American household, after all tax deductions and living expenses were paid, could afford to put $767 in the bank. During that year, for every $100 that Americans could afford to save, $3.70 was being taken out of U.S. payrolls by the Social Security Administration for the retirement fund. . . .

“By 1950 the payroll bite had grown to $20.40 for every $100 and . . . In 1960 . . . $63.90 for every $100 . . .

“Last year was the worst in history. Even though the average American household was saving at slightly above 1945 levels, the Social Security Administration took $84 for every $100 we saved.”

For such reasons, economist Milton Friedman termed the last twenty years of social security “a crushing defeat for the average wage earner,” since it took such a growing portion of his meager savings. And for low-income workers, the tax represented a more significant burden, since it was greater than their federal income tax payments.

Still, there is this to consider: In today’s industrial society, if workers had to pay directly for those in need, such as the pensions and medical payments that elderly members of their own families now get, could they afford it? Few would be able to. Thus, without question, social security systems do take much of the burden of caring for those in need off the workers.

Yet, how much real security is this growing tax burden buying? What is happening to those in need, such as the elderly retired who desire to live in reasonable dignity and comfort?