July 25, 2014

What Happens To Benefits When Social Security Goes Bankrupt?

Volume VI, Number 5
April 19, 2000


There are two things everybody knows about Social Security-and they are directly contradictory. The first is that its benefits are written into law. This "guarantee" is why financial planners take Social Security benefits for granted, why private employers structure their pension plans around them, and why government can estimate them for you to the dollar in your personal Social Security Statement. The second thing everybody knows is that Social Security is projected to go "bankrupt" in thirty or forty years, after which it will only be able to pay a portion of promised benefits. To the extent that people try to resolve this contradiction, they are apt to conclude that it is the benefit guarantee which takes precedence. And indeed, all of the long-term spending projections for Social Security-by the CBO, the GAO, and the Social Security Administration itself-assume that current-law benefits will be paid in full, even after the trust funds are empty. This cannot happen. If Social Security is simply left on autopilot, the law leaves no doubt that the contradiction will be resolved the other way around-with massive benefit cuts. Making this fact more widely known would have two salutary consequences. In general, it would cause the public to take a more active interest in reform. And in particular, it would allow a fairer comparison of reform proposals with current law. As things stand, reformers face the hopeless task of trying to out-promise a system that is unsustainable.

Some Basics

Let's start with some basics. Social Security's authorizing legislation, the Social Security Act, establishes benefit rules which remain in force indefinitely unless amended by Congress. The Act also gives Social Security budget authority in the form of a permanent appropriation, meaning that the payment of legislated benefits does not require yearly action by Congress. However-and this is where the contradiction arises-the Act limits Social Security's budget authority to its current earmarked revenue plus its trust-fund reserve. So what happens if Social Security's budget authority is insufficient to pay legislated benefits? The Act doesn't say. But among those knowledgeable about appropriations law, there's little question. If the Social Security Administration were forced to resolve the contradiction, it would have to do so by cutting benefits. The power of the purse, after all, is the exclusive prerogative of Congress. The Constitution prohibits the withdrawal of money from the Treasury except "in consequence of appropriations made by law." No matter what benefit rules are in force, benefits can be paid if and only if Congress appropriates the money. Some experts point out that things are more complicated than this-and indeed they are. The courts have recognized two exceptions to the rule that appropriation trumps authorization. In cases where these exceptions apply, individuals may be able to sue and collect the benefits to which they are entitled by statute. The first exception involves violations of the takings clause of the Fifth Amendment-in other words, cases where there is a contractual claim to payment. The courts have determined, for instance, that Congress cannot deprive federal employees of pay owed for services already performed. The second exception involves cases where the failure to appropriate is inadvertent. According to the judicial rule against "repeal by implication," Congress must make clear that its intent is to appropriate less than it authorized. Mere inadvertence cannot be construed as amending or repealing prior legislation. Neither of these exceptions apply to Social Security. In its landmark decision in Flemming v. Nestor, 363 U.S. 603 (1960), the Supreme Court established that workers accrue no property rights by participating in Social Security. The program rests solely on the sovereign (and distinct) powers of government to tax and to spend. Social Security is a legislated entitlement, not a contract. Congress can-and on many occasions has-altered the rules by changing taxes and benefits. As for inadvertence, it's enough to recall that Congress explicitly designed Social Security to be self-financing. Ever since 1935, Social Security benefits have depended on the solvency of the trust funds. Congress can hardly claim that it is unaware of how the program operates-or of its projected bankruptcy.

How Would Benefits Be Cut?

So it is clear: Social Security cannot pay full benefits once its trust funds are empty. But that raises the next question: How precisely would benefits be cut? The most equitable solution would be to reduce monthly benefit checks pro rata to match available tax revenue. There is, moreover, some precedent for this approach. In City of Los Angeles v. Adams, 556 F.2d 40 (D.C. Cir. 1977), the courts considered a case in which Congress appropriated less for a variety of airport projects than had been authorized. They ruled that total spending was limited by the appropriations act, but that available funds could be distributed proportionally to the amounts specified by the authorizing legislation. In the view of some experts, however, the Social Security Administration would not have the authority to make such ad hoc adjustments. Absent a directive from Congress, they say, monthly checks would have to be delayed until sufficient funds accumulated to pay them in full. Sending out later checks would cause more hardship than sending out smaller checks. But over time, of course, it would result in the same benefit cut. How large would the cut be? Large indeed: The typical worker born in 1960 would lose 8 percent of lifetime benefits, the worker born in 1980 would lose 29 percent, and the worker born this year would lose 33 percent. Again, all of these numbers assume that Social Security benefits will be paid in full until the projected date of trust-fund bankruptcy-that is, until 2037. Defenders of the status quo often claim that none of this matters because Congress can always grant the trust funds new budget authority. While Congress can indeed credit the trust funds with any amount of money, it is unlikely to embrace large-scale general revenue financing. Social Security is a contributory program, and as such its benefits enjoy a special political (if not legal) status. If the link between contributions and benefits is severed, there will be little to distinguish it from a welfare program. General revenue financing is not a new issue. It has been raised and rejected many times in the past, mainly because on reflection advocates realized that it would ultimately change the system in ways they did not intend. There's another problem with general revenue financing. While Concord has often criticized the trust funds for failing to effect genuine savings, they do serve a useful function-namely, as a final backstop against runaway spending. It was the projected insolvency of Social Security that led to the reform acts of 1977 and 1983. And it is the threat of insolvency that keeps leaders focused on Social Security today. Dismantling the backstop won't make Social Security more affordable. It will merely mask the gravity of the problem.

A Helpful Step

The misconception that promised benefits are guaranteed is a big obstacle to reform. It gives voters the feeling they have nothing personally to worry about. And it sets up an impossible standard (unreduced benefits with unraised taxes) against which reform proposals must be compared. Recently, the Social Security Administration took a helpful step by adding an explicit reference to bankruptcy to the benefit statements it mails to all workers aged 25 and over. However, it did not reduce its benefit estimates accordingly. The reference merely comes in the form of a caveat that actual benefits may differ, and the language used ("We're working to resolve these issues") makes it sound like the system's impending insolvency is some sort of minor technical glitch. If government is going to send workers a benefit estimate, shouldn't it be the benefit that Social Security can legally pay? The caveat could then be put the other way around. The statements could read: This is the benefit that we project you will receive under current law. Your actual benefit may be higher if the President and Congress procure new resources for the system, either in the form of new taxes or saved contributions. Any genuine reform has a cost, and so it's tempting to pretend that the status quo can continue indefinitely. It can't. Not acting is itself a choice, and one that will have grim consequences-large benefit cuts for today's midlife adults and even bigger ones for their children.

 

FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE  DIRECTOR: Robert Bixby