Monday, December 03, 2012

Supreme Court, in 1960, said that retirees don't have a "property right" to Social Security benefits based on their FICA contributions; another argument for means testing?


Here’s an obscure fact for the ABC “Millionaire” game whose consequences may not be so trivial. The Federal Insurance Contributions Act tax (FICA), which most wage earners pay to fund Social Security (usually with employer match), does not confer a “property right” (to use Cato-like, libertarian parlance) to promised future benefits from Social Security.  This point is made in the Wikipedia article on FICA, well worth reading, link here.

The Supreme Court case that is relevant is Flemming v. Nestor in 1960, with the Opinion available on FindLaw here

The Social Security Administration has an informative page on this matter here

The plaintiff had been denied benefits, despite his contributions, in 1954 because he had been deported and had been a member of the Communist Party. (Yes, in the 1970s, I remember tables from “The Party” right in front of the West 4th Street Subway station in NYC.)

The Social Security Administration on this page admits that Social Security benefits are an entitlement, subject to the (political) determinations of Congress, and not a contractual right or property.
In one sense, that may feed arguments in some circles that all benefits should be means tested, even for current beneficiaries, in a fiscal emergency.  As far as the Supreme Court is concerned, it is conceivable that future retirees could get zero benefits (especially wealthier ones), even if that is not what we think should happen. 

The legal case also has another alarming potential corollary.  Should Congress not extend the debt ceiling (the next deadline is in February, 2013, probably), the treasury could delay or deny existing benefits, and Social Security beneficiaries, who would certainly try to sue under class action, could not be guaranteed winning in court (as I had thought in 2011) because of this precedent. In worst case scenarios, some benefits could be lost permanently.

In a column in the Washington Post Monday, December 3, 2012 Robert Samuelson argues, on p A19, argues in a column called “Bad-Faith Bargaining”, orders “Put Social Security on the table – clearly and irrevocably.”  The consequences seem vague until the end of the piece, where he does argue for gradualism in changing the inflation-adjustment formula, taxing Social Security benefits as ordinary income (at least for higher earners), and raising the retirement age more rapidly than before.  His link is here.  I would add that it makes no sense at all to continue the 2% FICA tax "holiday" in 2013 given these problems,  

While these incremental changes seem appropriate as part of a “deal”, I don’t know how effective they will be.  I am left with the queasy feeling that my entire Social Security benefit could be yanked away as part of an emergency because I seem to have other resources.  Why shouldn’t it be my turn to be unlucky?  (I get this out of some of the unwelcome proposals that people make to me, given their knowledge of my generational karma.)   Any change will stiff some people.

I do have a “modest proposal”.  I would like to see an actuarial calculation of the benefit that would be paid based on FICA contributions (including employer match, or the “self-employment” tax explained in the Wikipedia article) had these “contributions” instead been made to purchase a private annuity from a life insurance company.  One immediate complication is that life spans increasing, which would make a justifiable lifetime annuity benefit less.  Indeed, private insurance companies may be finding the rapid increase in longevity (sometimes with heroic medical tricks) a real challenge for them.  Another problem would be that something would have to be subtracted from the monthly benefit to make up for the fact that in the 1930s the original beneficiaries had contributed nothing. 

I could propose, pass a law that gives me legal contractual right to that amount and nothing more.  In other words, partially privatize.  Maybe it would go back to being tax free. 

Then there is still another problem.  There is still a presumption that the government has “borrowed the money” from me (and, I'm afraid, spent it on other things and just wrote soem IOU's back to Social Security).  A life insurance company has to account for the annuity premiums collected in a specific way that protects the ownership rights of the policyowner (hence the word “owner” – and performing  these accounting calculations are a very big deal in life insurance valuation I.T. systems like Vantage  -- no wonder that company “rules the world”)   Remember, too, that in the insurance world, some products have “value” (like Whole Life) and other cheaper policies (term) are really just “insurance”.   That raises still another philosophical question about the intention of FICA (however regressively it was set up): is it really a premium for a pseudo-annuity, or is it “insurance” against old age poverty (that is, welfare).  In any case, if we accept the idea that the FICA tax payment amounts to an annuity premium payment for a “hybrid” concept (insurance and annuity, which is somewhat progressive anyway in that lower income retirees do get a little bit of a break compared to typical annuity payouts), we have to deal with the fact that the government will have trouble collecting enough “premiums” from current and future workers to pay back even this actuarial amount owed.  That’s because the birth rate is lower, and also because middle class wages have not risen properly in recent years.   (Ever since Sandy, “hybrid” has become a bad word.)

Still, I think that doing this calculation and informing all beneficiaries where they stand now is an important first step to reform.  And that reform should include some partial ownership rights, beyond the reach of politicians. 

The Young Turks talk about Boehner’s proposal in 2010 to stop all benefits to wealthier people, regardless of what they put in:


The FICA (and related self-employment) tax is not an effective vehicle for helping just the poor in old age.  From the way it was set up, it sounds as if that was not the intention, regardless of the Flemming Supreme Court case in 1960. Responsibility for the elderly poor (who sometimes collect no Social Security now) is then in some sense a wealth redistribution question that cannot escape political consequences.  It belongs in the debate of general tax policies, as well as family law (like filial responsibility laws), and volunteerism.  Admittedly, the problem makes us ask very basic questions about family and marriage.  

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