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Archive for the ‘Social Security’ Category

Do You Have A Legal Right to Social Security?

In Social Security, US Supreme Court on August 17, 2011 at 9:45 pm

Do you have a legal right to Social Security?

No.

This is not a matter of opinion.  It is not a recent change.  No nefarious politician stole your Social Security in the middle of the night.

It is old news but not widely known that in 1960, the United States Supreme Court ruled you have no legal claim to Social Security.

But doesn’t Social Security mail you an annual statement of projected Social Security benefits?

Yes, but the annual statement shows “potential benefits”.  It is not legally binding.

Under current law, any American worker who pays into the system will receive benefits upon retirement.  Nevertheless, the benefits may be changed or taken away at any time.  

The Social Security Administration itself explains:

‘The fact that workers contribute to the Social Security program’s funding through a dedicated payroll tax … can be said to establish “rights” to certain government services. This is often expressed in the idea that Social Security benefits are “an earned right.”  ….  But like all federal entitlement programs, Congress can change the rules regarding eligibility–and it has done so many times over the years.  The rules can be made more generous, or they can be made more restrictive. Benefits which are granted at one time can be withdrawn, as for example with student benefits, which were substantially scaled-back in the 1983 Amendments.” [1] [emphasis added]

There has been a temptation throughout the program’s history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit…. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled “RESERVATION OF POWER,” specifically said: “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” [1] [emphasis added]

In Flemming v. Nestor (1960), the US Supreme Court considered the case of Ephram Nestor, whose Social Security payments were denied.  Nestor sued, holding that he had a Social Security contract after he had paid Social Security Withholding Taxes into the system during his career.  The Court ruled it was valid to deny Nestor because a 1954 law forbade deported Communists from receiving Social Security.  Nestor had been deported as a member of the Communist Party.   

Justice John Marshall Harlan’s ruling was explicit, saying “We must conclude that a person covered by the [Social Security] Act has not such a right in benefit payments …. It is apparent that the noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity” [1] [emphasis added]

The Court similarly held there is no legal right to Social Security in Helvering v. Davis (1937).  Then, the Supreme Court ruled “The [Social Security] proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.” [2] [emphasis added]

In other words, Social Security is not a retirement program nor is it an annuity.  You pay FICA “contributions”, which are properly called taxes.  Social Security currently pays retiree benefits in loose relation to amounts paid and in the same manner as an annuity: the benefit lasts until death, is not owned and cannot be bequeathed.

[1] http://www.ssa.gov/history/nestor.html
[2] http://www.cato.org/pub_display.php?pub_id=5776

Pictures from Wikipedia Commons.

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Congresswoman Schakowsky Unclear Why Social Security Trust Fund Might Be Empty August 3

In Social Security on July 21, 2011 at 5:43 am

In a radio interview, Jan Schakowsky (D-IL), a prominent US Congresswoman and frequent commentator on radio and MSNBC cable TV, is confused about the SSA Trust Fund.  Frequent readers of econscius might have directed the Congresswoman to my post https://econscius.wordpress.com/2011/07/18/no-check-for-grandma-wheres-the-social-security-trust-fund/.

Congresswoman Schakowsky cannot explain the contradiction between having a trust fund that will “pay benefits fully until 2037” and the fact Social Security checks may not go out as soon as August 3, 2011.  Schakowsky eventually says, “Social Security is essentially a pay as you go system”, which is the crux of the problem.  Because Social Security’s Trust Fund is solely “invested” in US Treasury obligations, Social Security’s health is completed tied to the decreasing financial health of the US government.

You can find the radio interview linked here at http://www.youtube.com/watch?v=zoDvkhnNdXo with the Trust Fund discussed through the 2:03 mark.

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No Check For Grandma? Where’s the Social Security Trust Fund?

In Economy, Obama Administration, Social Security on July 18, 2011 at 3:39 am

President Obama is threatening Social Security checks may not go out in August because of his dispute with Congress over raising the Debt Ceiling. 

As pointed out in yesterday’s Wall Street Journal editorial page, how can this be possible when Social Security has a Trust Fund? [1] The Social Security Administration (“SSA”) website reports an impressive Trust Fund balance of $2,669,215,081 as of June 30, 2011 [2].   What happened to your money?

Haven’t we been told by the editors of the New York Times, Paul Krugman and others that the Trust Fund is solid as a rock and people are “peddling nonsense” to imply otherwise? 

Back in 2005, the New York Times said:

“At a recent press conference, Mr. Bush exaggerated the timing of the system’s shortfall by saying that Social Security would cross the “line into red” in 2018…. If you had a trust fund to pay your bills when your income fell short, would you consider yourself insolvent?”

“In suggesting that 2018 is doomsyear, [Bush] is reinforcing a false impression that the trust fund is a worthless pile of I.O.U.’s – as detractors of Social Security so often claim.” [3]

Just last year, the Times’ strongly opinionated columnist Paul Krugman opined:

“So where do claims of crisis come from? To a large extent they rely on bad-faith accounting. In particular, they rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century don’t count — because hey, the program doesn’t have any independent existence; it’s just part of the general federal budget — while future Social Security deficits are unacceptable — because hey, the program has to stand on its own.”

“It would be easy to dismiss this bait-and-switch as obvious nonsense, except for one thing: many influential people — including Alan Simpson, co-chairman of the president’s deficit commission — are peddling this nonsense.” [4]

How can Mr. Krugman and the New York Times editors square their confidence in the strength of the SSA Trust Fund against President Obama’s “I cannot guarantee that those checks go out on August 3”?   Is the President just playing a game or is the Trust Fund really empty?

The possible absence of Social Security checks results from an unusual structure.  If you have a private sector pension or 401(k), your retirement funds are set aside in a segregated account and the funds are invested in stocks and bonds. 

The Federal Government receives payroll and regular taxes every day and makes accounting entries for Social Security receipts vs. Social Security payouts.  SSA built up an excess of payroll tax receipts over payouts as working Baby Boomers paid in for decades.  This accounting entry comprises the Trust Funds. [5]

The issue with August’s Social Security checks is the Trust Fund is not invested like a normal pension.  Every dollar of Trust Fund surplus is invested in US Treasury obligations, meaning the Trust Fund was already spent for the general use of the Federal Government. [6]  Despite New York Times claims to the contrary, the SSA Trust Fund holds $2.7 Trillion in IOUs.

US government debt has traditionally been such a safe IOU it was called the “risk-free asset” back when I took Finance classes.   Still, even before the current Debt Ceiling controversy, trillion Dollar annual deficits led ratings agencies like Standard & Poor’s in May 2009 to issue warnings about a possible downgrade of US debt. [7]  

Grandma’s Social Security check could be held up not only in August but again in the future after the current Debt Ceiling crisis is settled.  The SSA Trust Fund is simply a very large claimant on future tax receipts of the US Treasury.  The New York Times misunderstood how safe the Trust Fund supposedly is as we now have the spectacle of an American President threatening Social Security payments may not be made on account of the supposedly separate matter of the federal budget deficit.  There is no lockbox; there is no firewall between Social Security and the overall budget.  SSA is not quite “separate”; it is linked to the overall fiscal health of the US government.

Ida May Fuller with the first Social Security check. Source: Wikipedia Commons.

[1] pg. A12, 7/16/11 print edition or http://online.wsj.com/article/SB10001424052702304521304576446250270069780.html?KEYWORDS=trust+fund

[2] http://www.ssa.gov/cgi-bin/investheld.cgi

[3] http://www.nytimes.com/2005/01/10/opinion/10mon1.html?ex=1263099600&en=24a380642da9ba1b&ei=5090&partner=rssuserland

[4] http://www.nytimes.com/2010/08/16/opinion/16krugman.html?adxnnl=1&adxnnlx=1310953732-DNwzINppkFOQn5GdGjvUXQ

[5] Technically there are two Trust Funds: Old Age Survivor (retirement) and Disability.

[6]  http://www.ssa.gov/oact/progdata/fundFAQ.html#n1

[7] http://www.huffingtonpost.com/2009/05/27/moodys-us-governments-aaa_n_208298.html