Social Security is not only the cornerstone of the welfare state, it is the most expensive item in the federal budget. The Social Security system provides benefits for retirement, disability, survivorship, and death to 54 million Americans at a price to its 157 million taxpayers of more than $700 billion a year.

Social Security is a relic from the New Deal. The first taxes were levied in 1937. The program has always been funded by payroll tax deductions, unlike the income tax, which was not withheld from paychecks until the passage of the Current Tax Payment Act of 1943.

The original Social Security tax rate was 2 percent, split between employers and employees, on the first $3,000 in earnings. The rate was not supposed to rise above 6 percent, and the maximum taxable earnings were not supposed to change. We know this because of a 1936 government pamphlet on Social Security that said so:

... During the next 3 years, beginning January 1, 1937, you will pay 1 cent for every dollar you earn, and at the same time your employer will pay 1 cent for every dollar you earn, up to $3,000 a year....

After the first 3 year [sic] — that is to say, beginning in 1940 — you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. This will be the tax for 3 years, and then, beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. After that, you and your employer will each pay half a cent more for 3 years, and finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.

The Social Security tax rate did not increase to 3 percent (1.5 percent for both employers and employees) until 1950. It was not until 1954 that it went up to a total of 4 percent and not until 1960 that it reached 6 percent. But that was not “the most” that Americans would ever pay. By 1970 the rate was more than 8 percent, and by 1980 the rate was more than 10 percent. Although Ronald Reagan is often praised as a great tax cutter, I hasten to point out that the Social Security tax rate increased from 10.7 percent when he took office to 12.12 percent when he left. After one more increase under George H.W. Bush, the rate has held steady at 12.4 percent since 1990.

As part of a deal reached between Democrats and Republicans late last year to extend the Bush income tax cuts for two years, certain tax cuts were extended, the estate tax was reinstated, unemployment benefits were extended, and the Social Security tax rate was lowered for employees from 6.2 percent to 4.2 percent for one year (2011). The Democrats were the winners there. The income tax cuts were extended (that is, taxes were not cut), the estate tax (which had fallen to zero) was revived with a $5 million exemption and a maximum rate of 35 percent, unemployment benefits (that is, paying people to not work) were extended, and the payroll tax was cut (which mainly helps Democratic constituents).

Beginning with one of his weekend radio addresses a few months ago, Barack Obama proposed extending the temporary payroll tax cut: “There are things we can do right now that will mean more customers for businesses and more jobs across the country. We can cut payroll taxes again, so families have an extra $1,000 to spend.”

It was a surprise that congressional Republicans in both the House and the Senate were not very excited about the idea. And neither were some Republican presidential candidates.

With the end of 2011 looming, various plans to extend the payroll tax cut were discussed, including an idea to also lower the employer share of the Social Security tax that fell by the wayside.

In a commentary posted on December 12, Charles Blahous, a research fellow with the Hoover Institution and one of six members of the Social Security Board of Trustees (made up of two public trustees, the Social Security commissioner, and the secretaries of the Departments of Treasury, Labor, and Health and Human Services), maintained that extending the payroll tax cut “could eventually end Social Security as we know it.”

Because of the current and potential future decreases in Social Security tax revenue, Blahous reasons that “the ongoing effort to partially convert Social Security from payroll-tax-financing to income-tax-financing — by further cutting the payroll tax as a stimulus measure and replacing the funds with general revenues — may in short order put an end to the longstanding conception of Social Security as a benefit earned by worker contributions.”

According to some estimates, funding for Social Security in 2011 was $105 billion less than expected because of the payroll tax cut. Extending the cut for 2012 is projected to cost the Social Security Trust Fund another $119 billion. Democrats want to increase other taxes to pay for the payroll tax cut; Republicans want to offset the shortfall by cutting spending.

On December 13, the House passed a 370-page bill (H.R.3630) called the “Middle Class Tax Relief and Job Creation Act of 2011.” Among many provisions, such as extending unemployment benefits, it included a provision (sec.  2001) to extend the payroll tax cut until the end of 2012. The Senate then passed a greatly reduced, 34-page version of the bill with the new title “Temporary Payroll Tax Cut Continuation Act of 2011.” The bill, which also extends unemployment benefits, extended the payroll tax cut for only two months. A comparison between the House and Senate versions of the bill can be seen here. But after voting 229-193 against the Senate version of the bill, the House, bowing to intense pressure from the Senate, the White House, and the general public, reversed course and agreed with the Senate on a slightly modified version of the bill on December 23, which Obama promptly signed into law.

But even if no more reductions in payroll taxes are ever enacted, the Social Security system will still require massive subsidies from the general fund to maintain its solvency. For years Social Security generated more in tax revenue than it spent on benefits. The balance makes up part of the $2.68 trillion Trust Fund balance. However, since 2010, the system has run a deficit. According to Social Security trustee Charles Blahous, 5 percent of the Trust Fund balance is a subsidy from the general fund. That percentage is projected to grow as more baby boomers retire and more is paid out in benefits than is received in taxes, and more so depending on how long and to what extent the payroll tax cut is extended in the future.

But as Blahous also acknowledges, 60 percent of the Social Security Trust Fund is made up of interest credits from the general fund; that is, IOUs from one part of the government to another. Interest payments to the Trust Fund are “simply a further liability facing subsequent income taxpayers.”

The whole Social Security system is one gigantic fraud. There is no real trust fund. There is no physical lock box. There is no individual retirement account in the name of each taxpayer. There is no pension plan for every American. There is no correlation between what is paid in taxes and what is received in benefits. The whole thing is based on fictitious accounting principles instead of generally accepted ones.

Extending the payroll tax cut will not end Social Security as we know it. It doesn’t matter how much or how little is collected from the payroll tax. The money is spent as soon as Congress gets its greedy hands on it. Social Security checks are drawn on the U.S. Treasury, not some mythical trust fund. And benefits could be paid in perpetuity regardless of the amount in taxes that is collected.

In order to really end Social Security as we know it, it must be recognized for the income-transfer, wealth-redistribution plan that it is and abolished in its entirety.

Laurence M. Vance is a policy advisor for the Future of Freedom Foundation and the author of The Revolution That Wasn’t. Visit his website: www.vancepublications.com. Send him email.