Will Government Repay Its Debt to Social Security?
In 1983, in response to the recommendations of the 1982 Presidential Commission on Social Security, Congress enacted a hefty hike in payroll taxes. The tax hike was designed to gradually prepay, over a period of more than 25 years, much of the cost of Social Security benefits for the baby-boomer generation. That tax increase has generated approximately $2.5 trillion in surplus revenue, which would have been enough to pay full benefits until at least 2037, if the annual surpluses had been saved and invested, as they were supposed to be. Unfortunately, none of the surplus revenue was saved and invested. Dishonest politicians from both political parties used the surplus as a giant slush fund and spent every dollar of it on other government programs.
Unless the debt to Social Security is repaid, Social Security will be unable to pay full benefits, beginning in about 2017, when payroll tax revenue will fall below the cost of benefits. Where will the government get the money with which to repay the looted Social Security money? Since the national debt has soared from $1 trillion in 1981 to more than $12 trillion today, and continues to rise at an alarming rate, the government will probably not be able to borrow money from the public to repay Social Security. This means that the only way the government can repay the Social Security money is by raising taxes. Will it be politically feasible to do so?
Taxes have never been popular in this country, but they are probably more hated today than ever before. Therefore, it is hard to believe that either the Congress or the American people would support a large tax increase for the explicit purpose of replacing tax revenue that has been misspent by the government. If the government cannot borrow the money, or raise it through higher taxes, it will be unable to repay the looted Social Security money. If that happens, Social Security benefits will have to be cut.
The notion that the government might arbitrarily choose to cut Social Security benefits at some point in the future is unacceptable to most Americans who believe that, once they have paid into Social Security, they are guaranteed retirement benefits. Some say “BY LAW, the government has to pay me full benefits because of the FICA taxes that I have paid.” But they are wrong.
One of the least known facts about Social Security is that, although the government does have a moral obligation to pay Social Security benefits to those who have earned them, the government does not have a legal obligation to do so. In a 1960 ruling by the United States Supreme Court, the court ruled that nobody has a “contractual earned right“ to Social Security benefits. Section 1104 of the 1935 Social Security Act specifically states, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” According to the above strong language, Congress could do whatever it wanted to do with regard to changing or even eliminating Social Security. Some did not take the language seriously because they thought it was probably unconstitutional. However, in 1960, in the case of Fleming v. Nestor, the Supreme Court upheld the denial of benefits to Nestor, even though he had contributed to the program for 19 years and was already receiving benefits In its ruling, the Supreme Court established the principle that entitlement to Social Security benefits “is not a contractual right.”
As a result of the 1960 Supreme Court ruling, the future of Social Security is totally in the hands of Congress and the President. They have the legal authority to amend any and all parts of the Social Security Act, as well as the authority to either increase or decrease Social Security benefits.
Allen W. Smith, is Professor of Economics, Emeritus, Eastern Illinois University. The author of seven books, Smith has been researching and writing about Social Security financing for the past ten years. Visit his website at www.thebiglie.net.