Number 29 in Series "Straight Talk on Social Security and Retirement Policy"
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
Note: This document is also available in the PDF format, which many find useful when printing.
|To engraft upon the Social Security system a concept of 'accrued property rights' would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands." U.S. Supreme Court, in Fleming v. Nestor, 363 U.S. 603 (1960).
Many workers believe that the Social Security benefits suggested by current law belong to themthat they have "property rights" to future payments. However, 40 years ago, the Supreme court ruled that this isn't the case: Retirees have no legal right to claim ownership over unpaid benefits. The ruling deters beneficiaries from suing the federal government if an altered benefit formula delivers payments that fall short of expectations. But it frees policymakers: Removing any guarantee that benefits will conform to expectations gives them the flexibility to change the program and address either inequities in the program's current formula or its long-term solvency.
But some reformers don't seem to value this flexibility. Several of their reforms imply that retirees will own benefits. Such an implication restricts the changes policymakers could introduce to Social Security. As a result, whatever the initial gains from these reforms, they could actually thwart subsequent reforms. To understand this conundrum, it is first necessary to distinguish between guarantees and obligations.
A "guarantee" is an irrevocable promise on the part of the government to pay a retiree a certain benefit, the conditions of which are set as early as when a worker begins to pay Social Security taxes. If a worker expects her future Social Security benefits to be 40 percent of her average earnings, for instance, a guarantee would ensure she would see payments no lower than this amount. Future payments might exceed her expectations, but they should never fall below the 40 percent mark. If benefits are guaranteed, any reform of the program raises costs because no one's benefits can be cut.
The Social Security Administration (SSA) avoids describing rights to future Social Security benefits in terms of guarantees, referring instead to "obligations." Obligations imply that, at any given time, Social Security's benefits need only be determined by current law. Many events could move Congress to modify benefits, making them lower than a worker might expect. Such changes do not violate the premise of an obligation. (In fact, if trust funds are depleted, as many analysts predict, even the size of the obligation under current law is uncertain.1) According to SSA, obligations differ from guarantees because they can be changed over time.
Despite efforts to avoid "guarantee" terminology, such language continues to sneak into the Social Security debate. Under some reform proposals, policymakers promise that retirees will only receive altered benefits if the benefits are greater than they would have been without reform. For example, money might be placed in an individual account for a worker. If the account performs well, the worker would receive some portion of the return from the account. If the account were less successful, the worker would have the old benefit to fall back on.
|Supreme Court Rulings
The "analogy between social welfare and 'property' cannot be stretched to impose a constitutional limitation on the power of Congress to make substantive changes in the law of entitlement to public benefits." Furthermore, "[t]he fact that social security benefits are financed in part by taxes on an employee's wages does not in itself limit the power of Congress to fix the levels of benefits under the Act or the conditions upon which they may be paid. Nor does an expectation of public benefits confer a contractual right to receive the expected amounts."
Richardson v. Belcher, 404 U.S. 78 (1971)
"It was doubtless out of an awareness of the need for such flexibility that Congress included in the original [Social Security] Act, and has since retained, a clause expressly reserving to it '[t]he right to alter, amend, or repeal any provision' of the Act. 1104, 49 Stat. 648, 42 U.S.C. 1304. That provision makes express what is implicit in the institutional needs of the program."
Flemming v. Nestor, 363 U.S. 603 (1960)
This arrangement is meant to reassure workers that they don't have to accept a change that pays them less than expected. However, it saddles the reformed system with liabilities equivalent to or higher than those of the current system, usually secured with financing that is anything but secure (such as projected budget surpluses or stock market returns).
Another type of reform proposal threatens a similar rigidity, giving retirees a choice between selecting benefits based on a slightly pared-down version of the current system or opting for lower basic benefits with greater flexibility for investment.2 Again, this is meant to reassure workers. But letting recipients decide between options implies that the relative values of both will remain constant. If Congress later reduces the first option's benefits, the people who selected it will protest, saying that they would have made a different choice had they known the benefits would change. In other words, proposals that present such choices imply guarantees.
Regardless of the type of proposal, guarantees make it difficult to address inequities. For example, many people believe that Social Security discriminates against single heads of household relative to those accorded the protections of spousal and survivor benefits. To rectify thisor anydiscrimination without raising overall costs generally requires that benefits be redistributed to those who suffer the discrimination. But if everyone's benefit is guaranteed, it is impossible to lower one person's benefit in order to increase another's.
Social Security reform will not end with the reforms enacted over the next few yearsnor should it. It is tempting to think that once policymakers address the program's insolvency, Social Security's problems will be solved, making future reforms unneccessary. But this is an unreasonable expectation. As social conditions evolve, so will the needs of workers and retirees. Years ago, the Supreme Court articulated why flexibility is so vital to the Social Security program. If policymakers destroy Social Security's flexibility, we will be left with a program too rigid to respond to ever-changing conditions.
About the Authors
Eugene Steuerle is a senior fellow at the Urban Institute, where his research includes work on Social Security reform. Adam Carasso is a research associate at the Urban Institute.
1. For a more detailed discussion, see Straight Talk No. 17, "Social Security Benefits under Current Law: What Happens When the Trust Funds Run Dry?" The Urban Institute, February 15, 2000.
2. This type of option was offered to many government workers when the Civil Service Retirement System became the Federal Employee Retirement System.
This series is made possible by an Andrew W. Mellon Foundation grant. For more information, call Public Affairs: 202-261-5709. For additional copies of this publication, call 202-261-5687 or visit the Retirement Project's Web site. Copyright ©2000. The views expressed are those of the authors and do not necessarily reflect those of the Urban Institute, its sponsors, or its trustees. Permission is granted for reproduction of this document, with attribution to the Urban Institute.