Disinformation Versus Social Security Reform

The other day I received an unsolicited mailing from a group called the Council for Government Reform, which revealed the yawning gap between the general understanding of Social Security, especially among the elderly and their advocates, and the reality.

It began: "(Washington D.C.) Senior Alert: Congress CONTINUES the Raid on the Trust Fund. . . . Trust Fund STILL headed to bankruptcy." Then it asked me to sign a petition demanding a "Senior Bill of Rights" such as fair annual Social Security COLAs, assurance that Social Security and Medicare benefits would be guaranteed from cuts, and exemption of these programs from means testing. "The Social Security Trust Fund is fast headed for bankruptcy as a result of massive government mismanagementu2014and despite its promises, Congress is NOT paying back the money owed to the Social Security Trust Fund." The letter added that "Social Security is not the problem: Congress is!" "Fact is, your Social Security benefits have BEEN EARNED and PAID FOR. They ARE NOT THE SAME as other government expenses and they should {never} be cut! Your petition . . . reminds [Congress] you {paid for your benefits} with special taxes withheld from your paychecks . . . "

The mailing demanded not only the foregoing guarantees, but that "The Government should STOP BORROWING from the Social Security Trust Fund to pay for wasteful pork barrel projects."

My signed petition, the author added, would have "tremendous impact," because he would be urging all Senators and Representatives to support the "Social Security Benefits Guarantee Bill" (H.R. 3135/S. 1558), which would give seniors "a legal guarantee that their Social Security benefits can never be taken away, a guarantee Seniors do not currently have."

A brief survey accompanied, asking if I agreed that "Monies paid into the Social Security Trust Fund are for payment of future Social Security checks and NOT to fund current federal spending" and "Do you agree Congress should EXCLUDE Social Security from any CUTS since Social Security is earned and paid for with special payroll taxes, unlike welfare, farm subsidies, and other so-called entitlements?" (original emphasis throughout) Finally, a request to – surprise, surprise – send them money.

Let's sort out the truths, half-truths, and flat-out falsehoods here.

Yes, seniors paid payroll taxes for Social Security. But if they believe that their benefits are "earned and paid for," that is what Franklin Roosevelt and the other architects of Social Security wanted them to believe. To a complaint that the Social Security payroll tax was regressive, hitting the working poor the hardest, Roosevelt replied, "I guess you're right on the economics, but those payroll taxes were never a problem of economics. They were politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions. . . With those taxes in there, no damn politician can ever scrap my Social Security program." So the Social Security tax wasn't about financing the program. It was about creating a sense of entitlement, a belief that benefits are an "earned right." But as we shall see, the "earned right" is a fiction.

As for the "Social Security Trust Fund," this is simply an account at the U.S. Treasury. The original Social Security Act of 1935 created an Old-Age Reserve Account at the Treasury, to which monies would be appropriated by Congress for paying benefits, with any money not needed for benefits invested in interest-bearing Treasury debt. Social Security tax collection began in 1937; benefit payment wouldn't start until 1942. Therefore, critics charged, the government was spending the Social Security tax money on general expenses and issuing itself an IOU. Some critics even accused Congress of embezzling the money. As part of the 1939 Social Security amendments, the Reserve Account was renamed the "Old-Age and Survivors Insurance Trust Fund." The reason for this, Social Security Board chairman Arthur Altmeyer told the Senate Finance Committee, was "to allay the unwarranted fears of some people who thought Uncle Sam was embezzling the money." Adoption of the term "trust fund," then, was simply a public relations move.

Is Congress looting or mismanaging the Trust Fund? Nonsense. Social Security taxes are collected by the Treasury; it credits the Trust Fund with an equivalent amount of unmarketable Treasury debt; when benefits are paid, the Treasury writes the checks and debits the Trust Fund for an equivalent sum; anything left over is the Social Security surplus. Social Security is off-budget, so when the budget runs a deficit, yes, the Social Security surplus helps cover it. But so what? Since the Trust Fund can hold neither cash balances nor private securities, it has nowhere else to go but into government debt. This isn't looting or mismanagement; it's the law. It's the way the Trust Fund has operated all along. And since the Fund never holds cash, Congress is not "borrowing" anything.

The mailing is right about one thing: there is no legal guarantee that seniors will get their benefits. Section 1104 of the original Social Security Act reads as follows: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." There is nothing sinister about this. Congress routinely reserves the right to amend legislation as circumstances affecting it change.

While Congress has usually increased benefits, it has also occasionally cut them, and Section 1104 gives it all the authority it needs. The original Act contained a money-back guarantee; in no case would the worker (or his estate) receive less than he had paid in in taxes. Just four years later, the guarantee was removed in order to offset the cost of adding survivors' benefits. Of course, this made nonsense of the "earned right," but Social Security's publications, naturally, never pointed that out.

In 1954, other amendments authorized, among other things, benefit termination for anyone deported for subversive activity. Two years later, one Ephram Nestor was deported for being a Communist in the Thirties. He had applied for and begun receiving his benefits the year before; after his deportation, his benefits were cut off. He sued, citing statements by politicians that his Social Security benefits were an "earned right" which he had paid for. In Flemming v. Nestor (1960), the Supreme Court ruled that there was no accrued property right to benefits, and that a taxpayer's situation regarding Social Security "cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments." So much for benefits being "earned and paid for."

Year after year, millions of impressionable senior citizens who don't know any better receive manipulative, misleading mailings like this one. Is it any wonder they're convinced that they have a right to their benefits, that Social Security faces no problems caused by an aging population, and that if it weren't for those blankety-blank-blanks in Congress rifling that trust fund, everything would be just fine? Is it any wonder they're dead set against overhauling Social Security, and let Congress know it, so that reform is politically next to impossible?

Plenty of interesting plans are circulating for reforming Social Security. But until Americans' minds are cleared of the disinformation illustrated by this mailing, Social Security reform isn't going to go anywhere.

September 26, 2002

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.