Finding Middle Ground for Social Security and Public Pensions

Over the years, I’ve come to understand that government pensions are not a fun topic of conversation.  Everyone knows someone else who is collecting a public pension, and I know many.  The conversation tends to get very personal, and very fast.  My observation of the fundamental problems inherent in the very concept of public pensions is often received as a personal attack against the person to whom I’m speaking.

But here’s what still fascinates me.  When I bring up any fundamental issues with public pensions or cite shortfalls at the state or federal level (particularly, in regard to the latter, around Social Security), the immediate response is that those are benefits the government and taxpayers are contractually obligated to make.  If higher taxes are required among the taxpayers providing the benefits to make good on those obligations, they argue, then so be it.  They’re “entitled” to those benefits.

Interestingly, this is not true in any practical estimation.  In reality, a government pension is not even a little bit like a contractual obligation between individuals.    

But there’s a reason that most Americans think otherwise.  Let’s take Social Security, for example.  Ever since its inception, it’s been pitched to the American people that way.  FDR argued, for example, that “[y]our Social Security card shows you have an insurance account with the government – federal old age and survivors insurance.  This is a national insurance plan for all workers in commerce and industry… [T]axes are like the premium on any other kind of insurance.”

You need look no further than the fine print in the Social Security Act itself to see why it’s nothing like “any other kind of insurance.”  The Act states that the federal government has “the right to alter, amend, or repeal any provision” if the need calls for it.  Any insurance company contracting with a customer would face some serious legal challenges due to such language in a “contract.” 

An insurance company, you see, is contractually bound to pay for the benefits that you’ve been promised for your premium payments.  But once you’ve peered behind the curtain, you notice that you hold no such right to expected benefits with Social Security.  This was later litigated and affirmed in Flemming v. Nestor in 1960.

Just a couple of excerpts, though I’d recommend reading the whole thing:

The Social Security system may be accurately described as a form of social insurance, enacted pursuant to Congress’ power to “spend money in the aid of the ‘general welfare” …  But each worker’s benefits, though flowing from the contributions he made to the nation economy while actively employed, are not dependent on the degree to which he was called upon to support the system by taxation. It is apparent that the noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to premium is bottomed on his contractual premium payments.

Note the language used here.  Your contributions were “taxes” paid to bolster “the nation’s economy,” not an insurance policy designed to ensure that you have a stated payment in the future.  It’s a “noncontractual” arrangement. 

Here’s another important observation in the text:

Integrated treatment of the manifold specific problems presented by the Social Security program demands more than a generalization.  That program was designed to function into the indefinite future, and its specific provisions rest on predictions as to expected economic conditions which must inevitably prove less than wholly accurate, and on judgments and preferences as to the proper allocation of the nation’s resources which evolving and social conditions will of necessity in some degree modify.

In other words, your Social Security benefit is a function of what the government “needs” in terms of its citizens’ “resources” and the “evolving social conditions” of the nation.  You know… “taxes.”  Nothing more.

Our government has outwardly promised Americans a “contract” with Social Security.  But our government cannot issue contracts.  It can only create laws.

That is the fundamental flaw with Social Security.  The government cannot enter into “contracts” which must be upheld for future generations, because in doing so, they would bind future legislatures and the future taxpayers they will represent.

Pension funds (similarly in crisis mode from California to Maine) face these same headwinds in arguing that state or municipal pension benefits amount to some sort of contract that the government is obligated to pay.

There is a case that has recently been undertaken and ruled upon by the First Circuit Court of Appeals which provides a bit of insight into this.  Municipal firefighters’ and police officers’ unions in the City of Cranston filed suit against the State of Rhode Island for recent changes to their pension infrastructure, both in terms of contributions and benefits, for public employees as a response to recent state laws, with the plaintiffs arguing that the state’s curtailing of benefits for current employees (but not current pensioners) and demand for higher contributions among those employees amounts to a breach of contract.  The First Court responded in a fairly harsh rebuke:

A claim that a state statute creates a contract that binds future legislatures confronts a tropical-force headwind in the form of the “unmistakability doctrine.” Parker, 123 F.3d at 5.  This doctrine precludes finding that a statute creates a binding contract absent a clear and unequivocal expression of intent by the legislature to so bind itself.  Nat'l R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. 451, 465–66 (1985). The doctrine recognizes that "the principal function of a legislature is not to make contracts, but to make laws that establish the policy of the state."

Perhaps it’s important to note again that the Social Security Act goes out of its way to not “bind itself” to a contractually obligated benefit for contributors.  This principle applies all the way down to state and municipal levels, for the simple fact that it’s obvious that government is not nimble enough to readily adapt to increasing longevities among beneficiaries, different contributions among the populace over time, and changing market dynamics.  An insurance company can typically do these things, but only because it creates binding contracts with individuals which can be appraised ongoing in terms of premiums, liabilities, and market environments, and it can adjust its offerings to new policyholders on a daily basis, if need be.

What is the purpose of observing this distinction?

It’s important to understand the nature of the relationship between the American government and its citizens.  Public pensions, at the federal, state, or municipal level, are not “insurance,” as FDR described Americans’ right to the benefits of the program, but “social insurance,” as the above Court opinion relates. 

Insurance has a distinct definition.  “Social insurance” is a made-up concept which, in no meaningful way, differs from the “social safety net” phrase that we often use to describe welfare programs, or “social justice” which is used to describe anything certain people may not like about our society.  These programs are promised as entitlements, but function only to address the needs of the collective at the expense of individual producers.

This is not meant to be an outright attack on Social Security or public pensions, though I would argue that they have been nefariously presented to the public and that they corrupt the very nature of limited government which should never have been predicated upon a government seizing wealth from one individual to pay another individual to provide anything other than a service from which a given body of taxpayers might benefit. 

That said, this relationship exists, and I have no aim to destroy the edifices previously erected, however shaky the foundations might be.

But I suppose that’s why it sticks in my craw so much.  I’m willing to meet in the middle, as the parties engaging in creation of a contract might do.  I see no such willingness from the other side on this matter.

If we expect these established edifices to continue in their existence, it should be understood that my ever-increasing contributions to the public coffers cannot be the only solution to the problems which I did not create.  At the very least, calls to increase working taxpayers’ contributions should be readily met with the consideration of modest concessions by those who seek to collect from these programs.

William Sullivan blogs at Political Palaver and can be followed on Twitter.

Over the years, I’ve come to understand that government pensions are not a fun topic of conversation.  Everyone knows someone else who is collecting a public pension, and I know many.  The conversation tends to get very personal, and very fast.  My observation of the fundamental problems inherent in the very concept of public pensions is often received as a personal attack against the person to whom I’m speaking.

But here’s what still fascinates me.  When I bring up any fundamental issues with public pensions or cite shortfalls at the state or federal level (particularly, in regard to the latter, around Social Security), the immediate response is that those are benefits the government and taxpayers are contractually obligated to make.  If higher taxes are required among the taxpayers providing the benefits to make good on those obligations, they argue, then so be it.  They’re “entitled” to those benefits.

Interestingly, this is not true in any practical estimation.  In reality, a government pension is not even a little bit like a contractual obligation between individuals.    

But there’s a reason that most Americans think otherwise.  Let’s take Social Security, for example.  Ever since its inception, it’s been pitched to the American people that way.  FDR argued, for example, that “[y]our Social Security card shows you have an insurance account with the government – federal old age and survivors insurance.  This is a national insurance plan for all workers in commerce and industry… [T]axes are like the premium on any other kind of insurance.”

You need look no further than the fine print in the Social Security Act itself to see why it’s nothing like “any other kind of insurance.”  The Act states that the federal government has “the right to alter, amend, or repeal any provision” if the need calls for it.  Any insurance company contracting with a customer would face some serious legal challenges due to such language in a “contract.” 

An insurance company, you see, is contractually bound to pay for the benefits that you’ve been promised for your premium payments.  But once you’ve peered behind the curtain, you notice that you hold no such right to expected benefits with Social Security.  This was later litigated and affirmed in Flemming v. Nestor in 1960.

Just a couple of excerpts, though I’d recommend reading the whole thing:

The Social Security system may be accurately described as a form of social insurance, enacted pursuant to Congress’ power to “spend money in the aid of the ‘general welfare” …  But each worker’s benefits, though flowing from the contributions he made to the nation economy while actively employed, are not dependent on the degree to which he was called upon to support the system by taxation. It is apparent that the noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to premium is bottomed on his contractual premium payments.

Note the language used here.  Your contributions were “taxes” paid to bolster “the nation’s economy,” not an insurance policy designed to ensure that you have a stated payment in the future.  It’s a “noncontractual” arrangement. 

Here’s another important observation in the text:

Integrated treatment of the manifold specific problems presented by the Social Security program demands more than a generalization.  That program was designed to function into the indefinite future, and its specific provisions rest on predictions as to expected economic conditions which must inevitably prove less than wholly accurate, and on judgments and preferences as to the proper allocation of the nation’s resources which evolving and social conditions will of necessity in some degree modify.

In other words, your Social Security benefit is a function of what the government “needs” in terms of its citizens’ “resources” and the “evolving social conditions” of the nation.  You know… “taxes.”  Nothing more.

Our government has outwardly promised Americans a “contract” with Social Security.  But our government cannot issue contracts.  It can only create laws.

That is the fundamental flaw with Social Security.  The government cannot enter into “contracts” which must be upheld for future generations, because in doing so, they would bind future legislatures and the future taxpayers they will represent.

Pension funds (similarly in crisis mode from California to Maine) face these same headwinds in arguing that state or municipal pension benefits amount to some sort of contract that the government is obligated to pay.

There is a case that has recently been undertaken and ruled upon by the First Circuit Court of Appeals which provides a bit of insight into this.  Municipal firefighters’ and police officers’ unions in the City of Cranston filed suit against the State of Rhode Island for recent changes to their pension infrastructure, both in terms of contributions and benefits, for public employees as a response to recent state laws, with the plaintiffs arguing that the state’s curtailing of benefits for current employees (but not current pensioners) and demand for higher contributions among those employees amounts to a breach of contract.  The First Court responded in a fairly harsh rebuke:

A claim that a state statute creates a contract that binds future legislatures confronts a tropical-force headwind in the form of the “unmistakability doctrine.” Parker, 123 F.3d at 5.  This doctrine precludes finding that a statute creates a binding contract absent a clear and unequivocal expression of intent by the legislature to so bind itself.  Nat'l R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. 451, 465–66 (1985). The doctrine recognizes that "the principal function of a legislature is not to make contracts, but to make laws that establish the policy of the state."

Perhaps it’s important to note again that the Social Security Act goes out of its way to not “bind itself” to a contractually obligated benefit for contributors.  This principle applies all the way down to state and municipal levels, for the simple fact that it’s obvious that government is not nimble enough to readily adapt to increasing longevities among beneficiaries, different contributions among the populace over time, and changing market dynamics.  An insurance company can typically do these things, but only because it creates binding contracts with individuals which can be appraised ongoing in terms of premiums, liabilities, and market environments, and it can adjust its offerings to new policyholders on a daily basis, if need be.

What is the purpose of observing this distinction?

It’s important to understand the nature of the relationship between the American government and its citizens.  Public pensions, at the federal, state, or municipal level, are not “insurance,” as FDR described Americans’ right to the benefits of the program, but “social insurance,” as the above Court opinion relates. 

Insurance has a distinct definition.  “Social insurance” is a made-up concept which, in no meaningful way, differs from the “social safety net” phrase that we often use to describe welfare programs, or “social justice” which is used to describe anything certain people may not like about our society.  These programs are promised as entitlements, but function only to address the needs of the collective at the expense of individual producers.

This is not meant to be an outright attack on Social Security or public pensions, though I would argue that they have been nefariously presented to the public and that they corrupt the very nature of limited government which should never have been predicated upon a government seizing wealth from one individual to pay another individual to provide anything other than a service from which a given body of taxpayers might benefit. 

That said, this relationship exists, and I have no aim to destroy the edifices previously erected, however shaky the foundations might be.

But I suppose that’s why it sticks in my craw so much.  I’m willing to meet in the middle, as the parties engaging in creation of a contract might do.  I see no such willingness from the other side on this matter.

If we expect these established edifices to continue in their existence, it should be understood that my ever-increasing contributions to the public coffers cannot be the only solution to the problems which I did not create.  At the very least, calls to increase working taxpayers’ contributions should be readily met with the consideration of modest concessions by those who seek to collect from these programs.

William Sullivan blogs at Political Palaver and can be followed on Twitter.