Barack Obama has put forth a plan to issue refundable income tax credits so that people who pay no income taxes will get “refund” checks from the federal government. Obama justifies these payments as being a refund of “regressive” payroll taxes. At the same time, Obama proposes to uncap the limit on wages subject to social security taxation without a corresponding increase in benefits. Obama’s proposals undermine the foundation of social security by divorcing contributions from benefits, and converting social security tax contributions into a wealth redistribution mechanism.

The Social Security Act was signed in 1935, to provide a variety of benefits to a variety of people, including unemployment assistance and aid to dependent children. In his signing statement, President Franklin Roosevelt emphasized that the goal of the legislation was the protection of citizens against job loss and poverty in old age:

“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”

Over the decades, the benefits provided under the rubric of social security expanded greatly, to include disability and death benefits, spousal benefits, and cost of living adjustments.

Social security, however, is not truly a “benefit” bestowed by government. Rather, workers pay into the system through Federal Insurance Contributions Act (FICA) payments on wages. Employers “match” these worker contributions. While the worker does not see a deduction from his paycheck for the employer contributions, employer contributions constitute a tax on the worker’s wages. When the employer sets the worker’s wage, the employer takes into account the employer’s matching contribution.

While often referred to as FICA “taxes,” these “taxes” really are contributions to a system — contributions which a worker is supposed to “get back” when the worker qualifies for benefits (usually at retirement age, but possibly earlier in cases such as disability). There are other sources of revenue, such as the contributions made by self-employed individuals, but FICA is by far the largest source of funding for our social security system.

Social security revenues go into the social security “trust fund.” Of course, there is no bank account holding such trust funds. Most of the funds have been “loaned” to the federal government to cover government expenses. The social security system is owed a massive “IOU” by the federal government, and it is federal income tax revenues that ultimately are used to pay back this IOU and thereby to pay social security benefits.

FICA is a “tax” on wages, not a tax on income. You pay FICA on wages regardless of your taxable income. FICA is the heart of the social security system. Yet it is that very heart that is at risk from Obama’s tax plan.

The core of Obama’s tax cut plan is that even those taxpayers who pay no federal income tax (estimated to be 30-40% of taxpayers) will get a tax “refund” check. In formulating this program, Obama confuses FICA payroll contributions with income taxes. In Obama’s own words, here is the rational:

“Barack Obama will restore fairness to the tax code and provide 150 million workers, including 1.7 million Iowans, the tax relief they deserve. Obama will create a new “Making Work Pay” tax credit of up to $500 per person, or $1,000 per working family. This refundable income tax credit will provide direct relief to Iowa families who face the regressive payroll tax system. It will offset the payroll tax on the first $8,100 of their earnings while still preserving the important principle of a dedicated revenue source for Social Security. The “Making Work Pay” tax credit will completely eliminate income taxes for 10 million Americans nationally, and nearly 175,000 hardworking Iowa residents. The tax credit will also provide relief to nearly all of Iowa’s 200,000 self-employed small business owners who struggle to pay both the employee and employer portion of the payroll tax. The “Making Work Pay” tax credit offsets some of this self-employment tax as well.”

So how does Obama’s use of income tax refunds of payroll (FICA) tax contributions endanger the social security system?

Obama’s tax plan amounts to double dipping. Approximately 30-40% of taxpayers who pay no federal income taxes get a refund now of their payroll tax contributions through refundable income tax credit. These same people get those payroll tax contributions back a second time when they collect social security.

Many commentators have noted that Obama’s refundable tax credit plan amounts to welfare for people who pay no federal income taxes. I have not seen any commentators, much less the mainstream media, question the double-dipping nature of Obama’s tax plan as it relates to social security.

Equally important, Obama’s tax plan changes the very nature of social security. No longer will social security be a system in which workers contribute now in order to “get back” the contributions at retirement. For a large percentage of the population, there will be no real contribution to the social security system; those contributions will have been “refunded” through “income tax credits” long ago.

As a nation we are struggling to meet the social security obligations to workers who pay into the system. Obama has yet to explain how we will meet those obligations in the future when a large percentage of contributions already will have been refunded once before.

To make matters worse, Obama plans to remove the wage limit on FICA taxes for upper income taxpayers without a corresponding increase in social security benefits down the road. FICA payments for upper income taxpayers will truly become a tax to fund general government spending, rather than a contribution to a retirement system.

The net result of Obama’s tax plan is to change the nature of social security in ways not seen since the Social Security Act was signed in 1935. Regardless of whether you are a low or middle income taxpayer who pays no federal income tax, or a high income tax payer who pays higher marginal rates and unlimited wage taxes, social security will no longer be a system in which you contribute now and receive back those contributions later.

As with so many things in Obama’s tax plans, social security “taxes” or “contributions” become just one more method of redistributing wealth. By separating contributions from benefits, however, Obama threatens the foundation of the social security system, and opens the social security system to all manner of political maneuvering.