Grand Illusion: Social Security Is a Government Insurance Program

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I received this email from a self-professed fan. But in his note, he felt obliged to add this:

I do take one strong exception to your statement that Social Security is the largest Ponzi scheme ever. Social Security is an insurance policy. We pay real money to receive real benefits. It currently has over 2 trillion dollar surplus. And, if we simply remove the cap so that the wealthy continue to pay in at the same rate as everyone else, it will be solvent for all time.So, instead of painting yourself as one of the few intellectual right-wing extremists out there, why don’t you use your obvious intellect and be honest about Social Security instead of parroting Fox News talking points?

It never ceases to amaze me that there is anyone out there who still believes any of this. At the age of 17, in 1959, I was taught the truth in a high school civics class. The program is not funded in terms of any insurance program.

First, the Supreme Court of the United States in 1960 declared that the Social Security program is not an insurance program. The case was Fleming v. Nestor. On the Social Security website, we read this.

There has been a temptation throughout the program’s history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled “RESERVATION OF POWER,” specifically said: “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.In this 1960 Supreme Court decision Nestor’s denial of benefits was upheld even though he had contributed to the program for 19 years and was already receiving benefits. Under a 1954 law, Social Security benefits were denied to persons deported for, among other things, having been a member of the Communist party. Accordingly, Mr. Nestor’s benefits were terminated. He appealed the termination arguing, among other claims, that promised Social Security benefits were a contract and that Congress could not renege on that contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not contractual right.
Second, there is no money in the Social Security Trust Fund. There is merely a stack of IOUs issued by the Treasury Department. The SSA says of these assets,

By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury. Such securities are available only to the trust funds.

There is no money in this fund. The government has spent every dime.

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