Charlotte Cowles is a financial advice columnist for The Cut, “a New York Magazine site dedicated to women’s lives and interests, including politics, work, money, relationships, style, and parenting.” She recently lost $50,000 when she fell for a scam, put that amount in cash in a shoe box, and handed it over to a stranger that she was duped into thinking was an undercover CIA agent.

The scam she fell for is not that unusual. According to the Federal Trade Commission (FTC), consumers reported losing nearly $8.8 billion to scams in 2022. The FTC received fraud reports from 2.4 million consumers. The top five scams were imposter scams; online shopping scams; prizes, sweepstakes, and lotteries; investment-related reports; and business and job opportunities.

Not mentioned by the FTC or reported on by any magazine is that the federal government operates two of the biggest scams that have deceived Americans for decades: Social Security and Medicare.

Instituted during the New Deal of President Franklin Roosevelt in 1935, Social Security is the federal Old-Age, Survivors, and Disability Insurance (OASDI) program that provides monthly benefits for retirement, disability, survivorship, and death to about 65 million Americans, including survivors and dependents, making it the largest federal domestic program.

Instituted during the Great Society of President Lyndon Johnson in 1965, Medicare is government-funded health care for Americans 65 years old and older and for those who are permanently disabled, have end-stage renal disease, or ALS (Lou Gehrig’s disease). About 65 million Americans are enrolled in Medicare, and it is the second-largest federal domestic program.

The Federal Insurance Contributions Act (FICA) of 1935 (amended in 1965) imposes on every person’s gross income an employee payroll tax designated for Social Security and Medicare, with matching contributions from employers. The Self-Employed Contributions Act (SECA) of 1954 requires that self-employed individuals pay Social Security and Medicare tax on their net earnings if they are at least $400.

Social Security is funded by a 12.4 percent payroll tax (split equally between employers and employees) on the first $168,600 of employee income. Medicare is funded by a 2.9 percent payroll tax (split equally between employers and employees) on every dollar of employee income. Employees (but not employers) pay an additional 0.9 percent Medicare tax on wages over $200,000 for individuals and $250,000 for married couples filing jointly. Self-employed persons pay the full 12.4 percent Social Security tax and 2.9 percent Medicare tax but receive a tax deduction equal to 50 percent of the amount of payroll taxes they paid. They are also subject to the additional 0.9 percent Medicare tax, if applicable.

Although labeled as such, these taxes are anything but “contributions.” Employers who don’t properly withhold Social Security taxes face fines and imprisonment. Although you can opt out of Social Security and Medicare by not signing up for them when you are eligible in your 60s, you can never opt out of having to pay Social Security and Medicare taxes your entire working life. And no one is entitled to get any of his “contributions” back should he decide not to enroll in Social Security or Medicare.

Social Security and Medicare taxes withheld from paychecks are not invested or deposited in an account with the taxpayer’s name on it, and there is no real trust fund or physical lock box where these taxes are set aside for future use. All payroll taxes collected end up in the U.S. Treasury along with personal and corporate income taxes, estate and gifts taxes, and excise taxes. Social Security and Medicare benefits are paid out of current government revenues.

The Supreme Court has ruled that no one is entitled to receive Social Security or Medicare benefits because he “paid into the system” his whole working life. In fact, there is no correlation between payroll taxes collected and Social Security and Medicare benefits paid. Congress could at any time raise or eliminate the Social Security wage base and/or increase the payroll tax rates for Social Security Medicare (or both) on employers or employees (or both) while not changing benefits a whit.

Social Security and Medicare benefits could be reduced at any time. Benefits for both programs could be means tested. The retirement age for Social Security could be raised. The eligibility age for Medicare could be raised. Cost-of-living adjustments for Social Security could be reduced or eliminated. Medicare could eliminate coverage for certain medical procedures, raise deductibles, and/or increase co-payments. And payroll taxes could be raised at the same time.

Social Security and Medicare taxes exist simply for the purpose of raising revenue. If the taxes extracted from Americans’ paychecks were called by the government simply “payroll taxes,” instead of Social Security and Medicare taxes, then the fact that these programs are just welfare programs would be quite evident.

Don’t be scammed by the government, politicians, and the AARP about Social Security and Medicare. View them for what they are: intergenerational income-transfer schemes and wealth-redistribution programs.

Laurence M. Vance

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