Looking Deeper Into the Mythical Social Security Cookie Jar

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“Fool me once, shame on you. Fool me twice, shame on me.” First time I heard this old saying, I didn’t get it. But at no time does it make more sense than when listening to politicians talk about how they want to “fix” social security.

The politicians fooled us once when they told us they’d keep our Social Security trust funds locked up and separate from their general spending. That turned out to be the greatest fraud ever perpetrated on taxpayers by politicians. Well, now, Democratic lawmakers and President Bush are seriously looking at foisting on us one of the biggest tax increases of all times—one that they say will be designated specifically for that mythical Social Security lock box. If we’re foolish enough to believe the politicians this time, we deserve what we get!

This deal is fraudulent in so many ways, it’s hard to know where to begin. Let me start by explaining the mechanics.

Today, the government takes 12.4 percent of our salary supposedly for Social Security. Half of that is paid by the employer and half by the employee, unless you’re self-employed, in which case you have to pay the entire 12.4 percent. That burden is bad enough, since most young workers understandably doubt that they’ll ever see a penny of that retirement “cash.” It’s also a rip off because the government pays us a measly 2 percent return on our “investment.” But worst of all, the government steals the money collected.

Now, that’s a tough charge. But what happens to the cash collected from you and your boss for your Social Security “trust fund?” It vanishes as soon as it gets to the “lock box.” Politicians use the cash to pay for their pet projects, and the money is replaced by government IOUs. That’s how carefully our Social Security cookie jar is guarded. And unless you’re overly generous or naïve about the way the government is spending your money, you should be genuinely ticked off about this.

Since even the government hasn’t yet had the gall to suggest that Social Security is actually a good bet for investors, they have limited the amount you can be taxed to $94,200. That is, anything you make over $94,200 won’t be bled for Social Security deductions, because there’s no way in hell that you’re going to make back more than that on your Social Security trust fund, non-voluntary “investment.” But that may be about to change.

The idea being floated by Democrats (with indications that President Bush is interested) would be to take the cap of that $94,200 figure. That is, continue to tax folks far above the amount they will ever hope to get back from this mandatory “investment” plan. It’s nothing more than a huge tax increase. Right now the top marginal tax rate is 38.4 percent. Taking the cap off Social Security payments would raise that to over 50 percent. That means taxes would be greater than they were in the Carter years, when we had stagflation—double-digit inflation with a dead-in-the-water economy.

Now those advocating this change are relying on folks believing that this is only going to affect rich people. But while most of us don’t make more than $94,200 a year, millions of small, family-owned businesses (who pay taxes as families, not corporations) do. They’d be socked with huge increases in their tax payments. Many would go out of business. The great growth we’ve had since the Bush tax rate cuts of 2003 is largely because of these small to medium sized businesses. This would clearly affect their bottom line and their ability to do business.

And make no mistake, the bottom line of our economy increased heartily in the past few years precisely because of the Bush tax cuts on investments and income. One way we can track the economy’s growth is by the amount of money the treasury collects in taxes. Even though tax rates were lowered, the U.S. Treasury took in a lot more than it expected because so many more people were doing business. This shocked traditional economists, who thought that the tax rate cuts would “cost” the government revenue. Data just released by the Congressional Budget Office show 2006 revenues of $2.407 trillion, $131 billion higher than CBO projected after the tax cuts were accelerated, and $624 billion higher than the FY 2003 revenues.

Not only that, but the Bush tax cuts led to rich people paying more. I know that doesn’t sound like it makes sense, but no matter how you cut it, the richest people in America now pay more in taxes than they did before the tax rate cuts. Whether you’re looking at the richest 1 percent, 5 percent or 10 percent, their proportion of general tax revenues increased after their tax rates decreased. Why? Because they had reason to expand their businesses and investments, got greater returns and thus paid out much more cash to the tax man. Incentives matter.

While cuts in tax rates clearly helped the economy grow (just as they did with the Reagan cuts in the ‘80s and the Kennedy tax cuts in the ‘60s), tax increases could easily have a negative affect on growth. But even leaving that aside, the final nail in the coffin of raising tax rates to solve anything, least of all the Social Security problem, is what the government does with your money once they get it. The late, great economist Milton Friedman used to say that there’s nothing the government does that the private sector couldn’t do twice as well at half the cost. But that cost accounting is being far too generous to the government when it comes to Social Security. The money Americans have put in the Social Security “lock box” has lost trillions of dollars in potential revenue because of the lousy rates imposed by government accounts. And as I mentioned before, the cash collected has been dolled out to government programs, leaving all-but-worthless IOUs gathering dust in some empty “lock box” in some room deep in the bowels of the U.S. Treasury.

So now, how are we going to vote when the Dems and Bush come out with their plan to “save” Social Security by raising taxes once again? I really don’t believe we’re fools. But if we get fooled again, I may change my mind.

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David Asman is the host of "Forbes on FOX" which airs on the FOX News Channel, Saturdays at 11 a.m. ET.