Sunday, June 26, 2011

Guaranteed Social Security benefits is a myth

Published in The Tennessean, Sunday, June 26, 2011

by Richard J. Grant

One evening some years ago, I went to a restaurant with a famous actor. As we entered, and were about to pass the crowded bar, he turned to me and said, “Watch this, I can be anybody I want to be.”

I am reminded of this when observing how politicians can make Social Security appear to be anything they want it to be. When seeking support for the program, they tout it as a freestanding, self-financing, off-budget pension program. But when they need to use the Social Security “surplus” to reduce the federal government's budget deficits, it has been convenient to include the program within the total budget.

When the original law passed in 1935, Social Security was presented in different ways to different audiences. It is a myth that there was public demand at the time for a compulsory, government-run, old-age pension program. Public opinion at the time was not much different with regard to Social Security than it was in 2010 with regard to health-care reform and passage of the Patient Protection and Affordable Care Act.

To gain public acceptance for Social Security, it was sold as an old-age “insurance” program, not a welfare program. Although compulsory, the payroll taxes were referred to as “premiums” or “contributions.” But in the face of a Supreme Court challenge, the presentation had to change.

Too direct a connection between the tax and benefits within the same act put the legislation in conflict with the Constitution, particularly the 10th Amendment. All use of such terms as “insurance” and “benefits” was deliberately avoided while the case was pending before the courts. But as soon as the act's constitutionality was upheld by the U.S. Supreme Court, the publicly acceptable sales language returned.

We see parallels in the marketing of the health-care reform bill to members of Congress and their constituents in 2010 versus the language used to fend off court challenges in 2011. To make the political sale, the Obama administration insisted that the individual mandate provision, which requires the purchase of medical insurance or the payment of a fine, was not a tax. But forcing citizens to purchase such a product is unconstitutional, so in the face of court challenges the administration now insists that the individual mandate really is a tax.

Many citizens believe that they have a right to Social Security benefits because they have “paid in” to the system – and plenty of politicians pander to this belief. Certainly, under the present law there is a menu of benefits and a set of criteria by which an individual may qualify. But this is not a contractual right. As affirmed by the U.S. Supreme Court in the 1960 case, Flemming v. Nestor, Congress can change or eliminate Social Security benefits at any time without consideration to those who have paid the payroll taxes. FICA is a tax, not a “contribution.”

Since 1939, Social Security has been a pay-as-you-go system. This enabled politicians to grant benefits, but to levy taxes that were too low to fully fund the program. It has also enabled politicians to use program surpluses to finance other programs in the federal budget.

The “trust fund” exists only to give statutory authority for payment of Social Security benefits without an appropriation from Congress. But in the political world, it can be anything we want it to be.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011