Spectrum Management Blog

By Tia M. Lee | October 1, 2014

Will our government take back the promise to pay Social Security benefits?

I wish I had a nickel for every time I heard someone say that by the time they are ready to collect Social Security benefits there will be no money to pay the benefits. All things considered, this thought is certainly understandable. Before you, too, come to that conclusion, let us look at a relatively recent Supreme Court decision and consider the dynamics of our political system. 

What is our government's legal obligation to pay benefits to those workers who made contributions to the Social Security trust fund, also known as FICA income tax withholding? This question was answered by the Supreme Court in the 2011 case of Flemming versus Nestor. Below is an excerpt from that case:

Flemming versus Nestor -- United States Social Security Administration -- accessed January 5, 2011: 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.

From a legal perspective, it appears that the answer is "yes," Congress could stop paying the benefits by simply changing the law. 

Now let's look at the July 2014 testimony Laurence Kotlikoff, professor of economics at Boston University, gave to the members of the Ways and Means Subcommittee on Social Security regarding the surety of these payments. Kotlikoff testified that the benefit payments are more certain than the repayment of all the 30-year U.S. Treasuries outstanding today. The primary reason he gave is the political power and sheer number of future retirees fully intending to receive a check. This group of people has the voting power to assure they will receive their benefits. Groups like AARP, The American Association of Retired Persons, and The National Council of Senior Citizens are voices no politician can ignore.

While his testimony primarily focused on how the government accounts for liabilities, he made a good case for why our government will pay promised benefits with little ability to even slow down, let alone stop. Another point: Congress never simply changes any law, particularly the Congress we have today.
 
Stay tuned to the blog, as I will continue to cover issues impacting the Social Security system and insight that is important to your retirement planning.

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Topics: Social Security, Retirement, Tia M. Lee, Wealth Management