What Property Right to Benefits?

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June
20 marks another landmark anniversary in Social Security’s history.
On this date in 1960, the Supreme Court handed down the Flemming
v. Nestor
decision, which starkly revealed the mendacity
and duplicity with which Social Security had been foisted on the
American people since 1935.

The
1954 Amendments to the Social Security Act provided that anyone
deported after August 1954 for illegal entry, conviction of a crime,
or subversive activity was not to get old-age benefits. On July
7, 1956, Ephram Nestor, a Bulgarian-born alien who had been a Communist
in 1933-1939, was deported.

Nestor
had turned 65 and had become eligible for monthly benefits in November
1955. On December 2, 1955, he applied for benefits and began receiving
them as of November. The Attorney General notified Social Security’s
Bureau of Old-Age and Survivors Insurance in August 1956 that he
had been deported. Effective September 1956, his benefits were suspended.

Nestor
appointed his wife and an attorney to represent him, and in May
1958, filed suit in the U.S. District Court for the District of
Columbia, alleging that the benefit suspension was illegal and unconstitutional.
He argued that “throughout the history of the Social Security Act,
old age insurance benefits have been referred to as a right of the
recipient which he has earned and paid for.” He cited remarks by
such politicians as President Eisenhower and Senators Eugene Millikin
and Walter George, “all of which,” the government’s appeal noted,
“in effect state that Social Security benefits are not charity or
a ‘hand-out,’ but rather are paid to the recipient as an earned
right” and linked partly to his earnings. Nestor also reasoned that
his benefits “were, in fact, earned through his work and are assured
as a matter of statutory right.” In short, he was asking Social
Security to stand by its advertising.

Nestor
won in the District Court, which ruled that his benefit termination
had deprived him of a “property right” which had “fully accrued”
to him.

Secretary
of Health, Education and Welfare Arthur Flemming appealed to the
Supreme Court. In September 1959 the Justice Department filed a
brief on Flemming’s behalf – that is, on the Social Security
Administration’s behalf, Social Security then being part of HEW.

One
of the issues, the brief acknowledged, was whether an alien who
had begun receiving monthly benefits “has a vested or ‘property’
right to the continued receipt of such benefits,” such that suspending
them as the law provides following his deportation “deprives him
of property without due process of law.” The brief denied it, exploding
the insurance myth promoted since 1935:

The
OASI [Old-Age and Survivors Insurance] program is in no sense
a federally-administered ‘insurance program’ under which each
worker pays premiums over the years and acquires at retirement
an indefeasible right to receive for life a fixed monthly benefit,
irrespective of the conditions which Congress has chosen to impose
from time to time.

While
the Act uses the term ‘insurance,’ the true nature of the program
is to be determined from its actual incidents. (italics added)

No
comments necessary.

As
for the payroll tax, which Social Security pamphlets had described
as “a sort of premium on what might be called an insurance policy,”
the brief said: “The ‘contribution’ . . . is a true tax [italics
in original]. It is not comparable to a premium under a policy of
insurance promising the payment of an annuity commencing at a designated
age.”

Well,
well!

The
Trust Fund is simply “a contingency fund,” to cover revenue shortfalls.

“The
beneficiary or prospective beneficiary of the OASI program acquires
no interest in the fund itself.” Translation: you have no property
in the Trust Fund – an official admission that this “trust
fund” is not a true trust.

When
Justice wrote this brief on the Social Security Administration’s
behalf, it was presumably saying what the SSA wanted said. Presumably
too it consulted with the SSA so as to ensure accurate depiction
of Social Security. So when Justice wrote these things, its was
describing Social Security as it really is, using information “from
the horse’s mouth.” In other words, the government was admitting
that is own depiction of Social Security for public-relations purposes
was a big lie.

Since
the core issue was whether Nestor had been denied due process by
being shorn of a “fully accrued property right” – that is,
“the right to the continued receipt of social security benefits
once they have been awarded” – the government understandably
devoted much effort to arguing that “this view that such benefits
are ‘fully accrued property rights’ is wholly erroneous.”

For
one thing, the Supreme Court had frequently distinguished between
insurance and annuity programs, which create property rights, and
pensions, which, being gratuities, do not. It had ruled that when
Congress granted pension benefits, it didn’t create vested rights;
Congress could, if it chose, withdraw benefits conferred by gratuities.
It had also ruled that pensions were gifts, not vested rights. Citing
these precedents, the brief maintained that “the right to federal
social security benefits is a statutory, conditional right, which
the possessor enjoys subject to all the conditions which Congress
has attached and may attach.”

As
for Section 1104 of the Social Security Act – “The right to
alter, amend, or repeal any provision of this Act is hereby reserved
to the Congress” – the brief observed, quite rightly, that
“No contractual obligation on the part of the Government and no
contractual right of a beneficiary could coexist with this reservation
of power.”

The
brief summed up: ” . . . social security must be viewed as a welfare
instrument to which legal concepts of ‘insurance,’ ‘property,’ ‘vested
rights,’ ‘annuities,’ etc., can be applied only at the risk of a
serious distortion of language.” Understanding the difficulties
of Social Security policymaking “will be obscured by Procrustean
efforts to force the social security program into the mold of inappropriate
analogies.”

Yet
Social Security itself had perpetrated just such “distortion of
language” and “inappropriate analogies” for decades!

If
one has a “right” to benefits, the brief added, it is “subject to
amendment or repeal as Congress in its wisdom feels will best promote
the general welfare.” One has “a statutory ‘right,’ . . . subject
to the expressly reserved power of Congress to amend or repeal any
provision of the law.” The only restraint on Congress was that such
amendment not be “arbitrary or unduly discriminatory.”

If
Social Security indeed isn’t insurance and involves no vested rights
– and given the program’s history, the brief’s arguments are
irrefutable – Nestor’s position was untenable. But then so,
necessarily, is all the “insurance,” “trust fund,” and “earned right”
propaganda disseminated since 1935.

Voting
5-4, the Supreme Court decided Flemming v. Nestor in the
government’s favor. Justice John Harlan wrote the opinion. On Nestor’s
purported “accrued property right,” Harlan was brutally blunt. “Appellee’s
right to Social Security benefits cannot properly be considered
to have been of that order.”

“Of
special importance in this case,” he noted, is the fact that eligibility
and benefit amounts “do not in any true sense depend on contribution
to the program through the payment of taxes, but rather on the earnings
record of the primary beneficiary.” (Correct. Benefit amounts have
always been calculated with a formula based on averaged monthly
earnings. The beneficiary’s tax payments made while working have
nothing to do with it.)

Since
a worker’s benefits “are not dependent on the degree to which he
was called upon to support the system by taxation,” Harlan concluded
that “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, whose right to benefits is bottomed on his contractual
premium payments.” (italics added)

Social
Security was meant to exist “into the indefinite future,” Harlan
observed, but its provisions “rest on predictions as to expected
economic conditions which must inevitably prove less than wholly
accurate,” as well as on decisions about resource allocation which
will be modified as conditions change. Therefore, he concluded,

 

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. It
was doubtless out of an awareness of the need for such flexibility
that Congress included in the original Act, and has since retained,
a clause expressly reserving to it “[t]he right to alter, amend,
or repeal any provision of the Act. . . .

We
must conclude that a person covered by the Act has not such
a right in benefit payments as would make every defeasance of
“accrued” interests violative of the Due Process Clause of the
Fifth Amendment. (italics added)

One’s
interest does give, Harlan conceded, the same protection from arbitrary
governmental action as does the Due Process Clause. But this merely
meant that the government couldn’t act arbitrarily: “Particularly
when we deal with a withholding of a noncontractual benefit under
a social welfare program such as this, we must recognize that the
Due Process Clause can be thought to interpose a bar only if the
statue manifests a patently arbitrary classification, utterly lacking
in rational justification.”

Harlan
was right, obviously. Social Security has no contract. It is welfare,
not insurance. The original money-back guarantee had been removed
in 1939. And the benefit cuts enacted in 1983 (gradually raised
retirement age, benefit taxation, gradual cuts in the early retirement
benefit) are further proof that one in fact has no real property
rights.

So
there you are: you have no accrued, vested property right
to benefits, and you shouldn’t, because your Uncle Sam just
simply can’t tie his hands by giving you real property rights. He
has to be free to shaft you if he has a “rational justification”
for it, such as averting national bankruptcy when the retiring baby
boomers cause the Treasury to bleed to death. (If that isn’t a “rational
justification” for benefit cuts, it’s hard to see what would be.)
He has to have that freedom, so he does. If you were born after
1945, Uncle is going to cut your benefits. Mine too. I was born
in 1956. I’ll be 67 in 2023, by which time Social Security is projected
to run cash deficits of hundreds of billions of dollars a year.

Does
anybody really think Social Security will pay everybody all benefits
mandated by current law under such circumstances, which will keep
getting worse as tens of millions of us baby boomers flood the beneficiary
rolls?

The
projected cost of Social Security benefits under current law for
2025 is almost $2 trillion (about $1 trillion in 2003 dollars);
for 2045 it’s $5.2 trillion ($1.5 trillion 2003 dollars). Do you
really think workers are going to cough up trillions in taxes every
year for Social Security alone? Don’t be silly. Uncle will
cut our benefits. He’ll have to. And he has all the legal cover
he needs to do it. If you think you can stop him with a lawsuit,
remember Ephram Nestor. He thought so too.

June
20, 2003

John
Attarian (send him mail)
is a writer in Ann Arbor, Michigan, with a Ph.D. in economics. His
book Social
Security: False Consciousness and Crisis
, which treats the
myths and realities of Social Security in detail, has just been
published by Transaction Publishers.

John
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