It's Not Your Money: Americans Have no Right to Social Security Benefits

June 22, 1999

by Deroy Murdock

New York commentator Deroy Murdock, a co-founder of Third Millennium, serves on the Cato Institute's Advisory Board on Social Security Privatization.

Social Security advocates defend it as an unalienable entitlement. The checks will be in the mail, they say, come Hell or high water.

Social Security "is fair, because it is there for everyone," states a leaflet from the liberal 2030 Center in Washington. "No matter what, benefits are guaranteed," it purrs.

None other than FDR said Social Security revenues "are collected in the form of taxes...held by the government solely for the benefit of the worker in his old age." Roosevelt added: "We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions."

This rhetoric is as warm as a fireside. Too bad the notion of guaranteed benefits - like so many of Social Security's supposed advantages - is all wet.

Americans actually have no property rights to their Social Security "contributions." Unlike private pension funds, which actually belong to workers, Americans have no legal claim on the money Uncle Sam theoretically salts away for their golden years.

This startling news broke 39 years ago in the case of Fleming v. Nestor. Bulgarian immigrant Ephram Nestor was deported in 1956 for being a Communist in the 1930s. After Congress prohibited Social Security benefits for deportees in 1954, Nestor sued. He claimed title to his FICA tax payments between 1936 and 1955. The Supreme Court disagreed. As it ruled, "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."

This decision reflected the Court's precedent in Helvering v. Davis. In 1937, it ruled that Social Security taxes "are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way."

Compare these cases to the property rights that capital-market participants enjoy. Workers with corporate pensions are protected by ERISA, the 1974 Employee Retirement Income Security Act. Trustees of such funds must "manage the money solely for the benefit of the participants in that plan," says Michele Varnhagen of the Pension Rights Center in Washington. "Once you're vested, the law says you have 'a non-forfeitable right to benefits.'"

Alas, some unscrupulous companies disregard such property rights. "In a typical example, an employer withholds employees' 401(k) contributions from their pay checks, but holds those contributions longer than necessary in order to keep an ailing business afloat," Assistant Secretary of Labor for Pension and Welfare Benefits Olena Berg told a House Appropriations subcommittee on February 25, 1998.

The Labor Department enforces ERISA and recovers funds from firms that swipe employees' pension deposits. In fiscal 1997, the Pension and Welfare Benefits Administration concluded 4,506 such cases, according to Ms. Berg. Through both voluntary settlements and litigation, it returned to employees over $360 million in embezzled or otherwise diverted pension assets.

Too bad Capitol Hill is an ERISA-free zone. If Congress voted tomorrow to "invest" next year's Social Security benefits in Cruise missiles and Food Stamps, seniors only could watch in horror. While such a scenario seems unthinkable today, once Baby Boomers start retiring, demographic pressures will force Washington to make increasingly excruciating choices.

In 2014, FICA will drift into the red as benefit payments start to outrun payroll-tax revenues. By 2030, the Concord Coalition estimates, Social Security and Medicare will consume 34 and 24 percent of federal revenues, respectively (compared to 22 and 12 percent in 1998), with just 42 cents-per-tax-dollar remaining for the Pentagon, the FBI and Yosemite.

As Baby Boomers age, Social Security will ravage the budget. Meanwhile, life spans will rise thanks to medical advances and improved health-consciousness. This may force Congress to cut Social Security benefits, in essence denying seniors at least some retirement "assets" which they mistakenly believe they own.

If this sounds paranoid, consider how Washington already has re-written Social Security's "contract" with America. Hiking the retirement age, delaying cost-of-living adjustments and taxing benefits are among the ways Congress and the White House repeatedly alter the rules for millions of pensioners. While some reforms have made economic sense, those who felt defrauded had no right to seek justice in court.

Since Congress has changed its end of the bargain while FICA is in the pink, why wouldn't it chop benefits once the so-called Trust Fund hemorrhages red ink?

Social Security privatization is the exit from this morass. Allowing Americans to invest their FICA taxes in personal retirement accounts would let them own their pension assets. What America needs is a retirement system based on property rights rather than promises.

A longer version of this column appears in the July-August issue of The American Enterprise.

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