The FICA slush fund

Posted: Apr 12, 2004 12:00 AM

This time each year, as we all go through the ritual torture of filling out our income-tax forms, we hear a crescendo of complaints from friends, neighbors and co-workers about how unfair, complex, onerous and contradictory the tax code is - and they're right. However, what we lack is an annual day to lament the burden of FICA taxes that come out of our paychecks every payday, depleting household savings, diminishing wealth and leaving so many totally dependant upon the federal government for retirement income.

Since the inception of Social Security, payroll tax rates have skyrocketed. The tax originally stood at 2 percent. Today, the payroll tax has reached 15.3 percent. In addition, this 15.3 percent rate applies to every tax bracket, regardless of income, making it regressive, as well. As a result, for a large number of lower-income workers, many of whom have essentially been removed from the income-tax rolls, FICA taxes loom as the greatest obstacle to personal wealth creation. Today FICA taxes contribute 33.2 percent of all federal revenues, bringing in $648 billion to the Treasury in 2003.

 With the recent release of the 2004 Annual Trustees' Report on Social Security, much of the debate has centered on the long-term financing of the system and the consequential effects it will have on our payroll taxes and retirement benefits. Numerous solutions have been put on the table, but most do not resolve the structural problems inherent in the system.

Recently some Democrats have called for an immediate FICA tax cut or a payroll tax holiday. While this proposal may resonate politically, it's disingenuous if we put their rhetoric into historical context. With a financial crisis looming, any immediate cut in payroll taxes that is not coupled with substantial reform of the current pay-as-you-go system would jeopardize the benefits of current retirees, leaving current workers and future workers with even higher taxes in the long run.

Their proposal is disingenuous because these same politicians could have enacted these "reforms" during the 1980s or early 1990s instead of raising payroll taxes, yet again, in an effort to make the system "solvent." What's worse, the $738 billion in surpluses (excluding interest) generated from the tax increases since 1984 and increased taxes on Social Security benefits enacted in 1993 have been wasted on other government programs instead of utilizing these proceeds to fund the transition to a fully funded personal retirement accounts program.

The leading Democratic proposals for Social Security reform all consist of tax increases, benefit cuts or some combination of the two. And none of them offers any hope of fundamentally reforming the current system. These proposals are not politically feasible or economically rational. As the recent trustees' report indicates, at least a 50 percent increase in payroll taxes dedicated to Social Security, a 33 percent reduction in benefits or some combination of the two would be necessary to avoid financial peril without fundamental reform.

The AARP, formerly known as the American Association for Retired Persons, would keep the American people dependent on government, so they oppose all efforts to empower individual workers with personal accounts. They first deny any problem exists with Social Security, and when forced to admit there will be a financing shortfall in the future, they fall back on the tired and failed liberal ideology of tax and spend. One frequently heard palaver is an increase in the income cap that can be taxed for Social Security benefits.
Former Social Security Commissioner and AARP poster boy Robert Ball supports increasing the tax on benefits to 90 percent of all earnings instead of the current 85 percent.

It is time to transform payday from a tax event into a saving event for individual Americans. It is time to transform the FICA tax and its surpluses from a slush fund for the spending-addicted Congress into a source of wealth and prosperity for workers.

I, along with former House Majority Leader Dick Armey and former Social Security Commissioner Dorcas Hardy, have created the Alliance for Retirement Prosperity ( We want to make it possible for today's workers to move half of their payroll taxes into personal accounts that would be there for their retirement. For a single worker earning $30,000 a year and a two-earner married couple earning $30,000 and $40,000 that would mean annual savings of $2,000 and $4,500, respectively.

Most importantly, large personal retirement accounts would be a real source of prosperity and ownership and bring to fruition our vision of democratizing the American dream - making every American worker a shareholder and investor in our capitalistic system.

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