F.R. Duplantier reporting Behind The Headlines
Week of:
June 11, 2000
The Riskiest Retirement Plan of All



F.R. Duplantier

by: F.R. Duplantier

The government's power to change the terms of participation at any time makes Social Security a truly risky retirement plan.



"One of the most enduring myths of Social Security is that there is a right to Social Security benefits," declares Suffolk University law professor Charles Rounds. "Many workers assume that, if they pay Social Security taxes 'into the system,' they have some sort of legal right to benefits 'out of the system,'" Rounds observes. "That is not surprising," he concedes. "Much of the language surrounding the Social Security program is designed to convey that impression."

In a policy paper published by the Cato Institute, Professor Rounds argues that terms like "insurance contributions" and "trust fund," when applied to Social Security, are "misleading to the point of dishonesty. The U.S. Supreme Court has ruled that payroll taxes are not 'contributions' but are taxes like any others," he notes. "Social Security has nothing to do with 'insurance' contracts or any other type of contract, and nothing to do with segregated 'accounts.' Paying Social Security taxes does not give rise to any contractual right to Social Security benefits," says Rounds. "In the Social Security Trust Fund, no property is held in trust for any worker or collection of workers."

Professor Rounds cites the 1960 case of Flemming v. Nestor in which "the Supreme Court ruled that Social Security is an umbrella term for two schemes that are legally unrelated. One is a taxation scheme, the other a welfare scheme. Workers and their families have no legal claim on the tax payments that they make into the U.S. Treasury or that are made on their behalf," Rounds affirms. "Those funds are gone, commingled with the general assets of the U.S. government."

Rounds concludes that "a worker's retirement security is entirely dependent on political decisions made by the President and Congress. Benefits may be reduced or even eliminated at any time," he stresses. "Indeed, Congress has already arbitrarily reduced the benefits of some groups of workers." Rounds argues that "a privatized Social Security system, based on individual accounts, would provide workers with the protections and the safeguards that go with true ownership." He also notes that, "under a privatized system, workers would be able to pass their benefits on to their heirs as they would any other property."

Rounds rejects "the faulty premise that the current Social Security system is less risky than private capital markets." He emphasizes that, "over the long term, prudent, diversified private capital investments have proven remarkably safe and lucrative. That cannot be said for Social Security, which continues to place workers and their families at considerable economic risk." Social Security is risky because "the scheme does not involve private property and the protections and the safeguards that go with it. Social Security is facing a severe financial crisis," Rounds continues. "By 2014, the system will be running a deficit. Overall, Social Security is more than $10.4 million in debt. One likely response to this shortfall," he predicts, "will be a reduction in benefits. And, because workers have no property right to their benefits, Congress is free to cut them."


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