What Property Right to Benefits?

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.

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