Friday, December 31, 2010

Social Security Withholding is a Tax and Not a Premium

The recent Health Care Bill lawsuits have revealed a common misperception about Social Security. I have always thought about Social Security as a retirement benefit from all the years I paid into it. After all, Social Security sends me an annual projection of the payments I can expect to receive when I reach full retirement age.

In a recent court decision, a judge struck down federal government mandate for all individuals to purchase health insurance as unconstitutional. Specifically, the federal government cannot require individuals to make a specific purchase, even if it is for an individual's own good. However, the federal government can levy a tax that raises revenue to provide services for the good of all citizens. In this case, there is no correlation between the tax an individual pays and the direct benefit the same individual receives. In fact, an individual may receive no direct benefit.

Thus, the common belief that Social Security retirement payments are owed to retirees is not correct. In reality, Social Security withheld from a paycheck is a tax, not a premium, and the federal government is not obligated to provide specific benefits to an individual for paying a tax. Thus, the government could decide to eliminate "guaranteed" Social Security payments at anytime and recipients would have no recourse, except voting out a politician.

When I turned 50, I started including Social Security payments in my retirement planning. Perhaps a better approach would be to stop counting on getting a payment until after I receive my first check :-)

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

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