Social Security Misfortune

Al Jacobs

Greetings to those of you either paying into or collecting from the Social Security system – and that’s whole lot of people. You should be aware things are changing. For payors, the costs may be going up; for collectors, the payments may be coming down. The system is in flux as the federal government tries to figure out how to make ends meet.

For you payors, whose annual earned incomes are in six figures, the amount on which the federal government will be assessing the FICA tax has risen from $118,500 in 2016 to $127,200 this year. This means 15.3 percent on as much as $8,700, or up to $1,331.10, will be added to your tab. Employees will pay half the bill, with employers picking up the other half; the self-employed must handle it all up by themselves. And in case you want to know who to blame for this, you may glance in the direction of prior Federal Reserve Chairman Alan Greenspan who, in 1981, headed the commission recommending these annual raises as a way to keep the system in business.  He’s still around at the age of 91, so if you’d care to express an uncomplimentary remark, he just might hear you.

For you collectors, the amount in social security benefits you receive is tied to a variety of factors, some of them quite abstract. In theory, the FICA taxes you paid into the system over the years should relate to the monthly payments you receive.  But, in reality, the amount may vary based upon all sorts of regulatory provisions. Though it might be helpful if the administrators made this information readily accessible to the public, this is asking for something not meant to be. If you request specific details from a Social Security employee, you’ll possibly receive them; if it’s general advice you want, it’s not there for your benefit. I can only guess why this situation exists – and it’s not encouraging.

If there’s a fundamental defect in the Social Security system, it’s what you’d expect from any other pyramid scheme. For those of you unfamiliar with the term, this is a type of business model which recruits members via a promise of payment in exchange for enrolling others into the scheme, rather than actually investing in or marketing anything in particular. As the number of participants increase, recruiting new members becomes ever more difficult.  In time the pyramid scheme proves to be unsustainable and the latter enrollees lose whatever they may have contributed. This sort of contrivance was appropriately ridiculed in a comment attributed to the late British Prime Minister Margaret Thatcher concerning governmental programs, to the effect: “Eventually you run out of other peoples’ money.”

This now gets us to a fundamental question: What can we Americans who are impressed into the system do to rescue ourselves? Let me respond by saying I have some good news and some bad news. First, the bad news: For most of you there’s nothing you can do. If you’re an employee receiving wages, salary, tips or other taxable employee pay, it’s classed as “earned income,” If you’re self-employed, and your source of income is either from a business or a farm, it falls into the same category – and as such, subject to FICA tax. If it’s to escape the 15.3 percent burden, it must fall into the category of “unearned income,” generally comprising interest, dividends, rent, retirement payments, social security, unemployment benefits, alimony or child support. Unhappily, it goes without saying for those of you earning a living in the customary manner, FICA has you tied hand and foot. There’s no legitimate way you may escape.

We’ll now move on to the good news I alluded to. Among the many who cannot avoid mandatory contribution to the Social Security system will be persons with flexibility. These are generally the self-employed, with a certain amount of investment or other non-earnings income, who possess the ability to opt out of the system, either wholly or partially. The method employed is essentially conversion of income subject to the FICA tax into income not subject to the tax. As manipulative as this may seem, if done fully in accordance with the rules and procedures presently in effect, it can be accomplished in a thoroughly acceptable manner. For the arrangement to be fully effective, there are details to be adhered to. You’ll find a general discussion of the procedures in a Newsletter on my website, At the bottom of the entry page, click the Newsletter link and scroll to the article titled “Social Security Prognosis.”

This seems an appropriate time to make a disclaimer of sorts. Despite my general aversion to the Social Security system as it evolved over the decades to penalize the nation’s middle class, it nonetheless offers a vital benefit to a certain portion of the general public. There’s a substantial segment of the American population consisting of modestly paid workers, who live frugally while regularly paying their bills, but never accumulate an appreciable amount of wealth. At best, they will have, early in their lives, purchased a small home with a minimal down payment, and systematically paid off its mortgage one installment at a time. Thanks only to a home, free and clear of any loan, and receipt of a regular Social Security check each month, supplemented by their accompanying Medicare health coverage, they can manage to get by satisfactorily. These are the people who are well served by the system as it functions today.

Before I leave the subject of benefits derived from the system, I must acknowledge the health provision tie-in offered through Parts A, B and D of Medicare. All system recipients sixty-five and older automatically receive hospitalization entitlement under Part A, for a reasonable monthly premium there’s physical and other medical services under Part B, and pharmaceuticals under Part D. The extent of services is unrelated to the amount of social security payment received; mere qualification, requiring 40 calendar-quarters of contribution, provides full Medicare benefits. Where else can equal medical coverage be obtained at such a favorable price?

I’ll conclude this topic with a troubling prognosis. There’s no way the majority of future recipients of the system can avoid the unhappy future in store for Social Security.  It will ultimately morph into a pseudo-welfare system to which all will contribute, but from which only the most modestly endowed will collect. Whatever you can do to avoid its grasp will be to your individual benefit. Unfortunately, those of you who are unable to escape will have no choice but to simply hope for the best.

Al Jacobs, a professional investor for nearly a half-century, distributes a monthly newsletter in which he shares his financial knowledge and experience. You may view it on


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