Social Security's (Missing) Guarantee

By on July 6, 2015 in Current Events with 64 Comments
“It’s pretty simple to understand the appeal of earning a guaranteed 8% per year for every year you postpone collecting Social Security beyond your full retirement age up to age 70.”
Mary Beth Franklin – InvestmentNews.com

Social Security benefits are not guaranteed. This isn’t my opinion.  It is the opinion of the Supreme Court, Flemming V Nestor.

In its ruling, the Court held that entitlement to Social Security benefits is not a contractual right.  Benefit levels are what Congress says that they are. The Social Security Administration recognizes the case.  PolitiFact delivers research on it. Notch Babies provide evidence of it.  There is no guarantee.

If Social Security were a contract, the Trustees would not provide estimates of automatic benefit reductions.  Today the Trustees project that in the early 2030s, Social Security will draw in insufficient revenue to pay its bills.  At that time, benefits are reduced to the level of revenue that we collect.

The Nestor case traces back to a 1954 law which denied Social Security benefits to persons deported for, among other things, having been a member of the Communist party.  Mr. Nestor was deported for having belonged to the Communist Party, and his benefits were terminated.  Nestor argued that Congress could not renege on the promised Social Security benefits which were a contractual obligation of the system.

He lost.  The Court’s opinion is not about specific groups of people.  The Court’s ruling is not limited to Communists.  It is not limited to people who have been deported. It applies to everyone.  In 1983, Congress lowered the scheduled benefit levels of more than 100 million of workers, none of whom enjoyed any legal recourse to the lost benefits.

The case plays out on the internet in the politics of extremes.  Bernie Sanders, for example, says “Social Security has paid every nickel it owed to every eligible American, in good times and bad.” He can make that claim because in bad times, Congress can redefine what it says Social Security owes.

On the other end of the political spectrum, the CATO Institute says that the decision demonstrates that Social Security is not an insurance program at all. “It is simply a payroll tax on one side and a welfare program on the other.”  Never mind that benefit levels of welfare programs rarely involve 35 years of contributions.

To make sense of the system, you have to step away from the hyperbole. Welfare by definition cannot require contributions.  In the case of Social Security, the program provides the highest levels of benefits to the benefit who have enjoyed the most productive and prolonged careers.  Until working a long and successful career causes need, Social Security will never be welfare.

Insurance does not come with a guarantee.  This fact was adequately demonstrated by AIG’s collapse in the face of billions of dollars owed on its portfolio of credit default swaps. So CATO’s reasoning on the basis of insurance is questionable.

When you strip out the hyperbole, you have a contributory benefit system which collects revenue in exchange for the promise of future benefits. In effect, it borrows money from current workers in order to pay benefits to retirees today.  Hence the system is self-financed.

The problem with the mechanics is that Social Security makes promises for which it does not expect to generate cash. Since its inception, Social Security has created more than $1.50 of broken promises for every $1 that it has ever collected.  In 2013, every penny of benefits delivered by the system came at the projected expense of a future retiree.

Most of the effective policy options under consideration involve benefit reductions, because beyond the savings in benefit payments, the system saves the financing cost as well.  It is like paying down your mortgage every two weeks instead of every month. It is almost a mathematical certainty that someone’s benefits are getting cut.

The Nestor case provides an interesting example of how far a benefit cut can reach.  The man was retired, and already collecting benefits.  He hadn’t been in the Communist Party in more than a decade.

Whether it is means testing, increases in retirement age, or changes to inflation adjustments, benefit cuts are coming.  It is as close to guaranteed as anything gets in Social Security.

© 2016 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.

Tags:

About the Author

Brenton Smith (A.K.A. Joe The Economist) is the founder of “Fix Social Security Now” which provides information on all alternatives in the public debate on Social Security through its site www.FixSSNow.Org.

Top