Property Rights: The Hidden Issue of
Social Security Reform
Charles E. Rounds Jr.
One of the most enduring myths of Social Security is that there is a right to Social Security benefits. 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.” That is not surprising. Much of the language surrounding the Social Security program is designed to convey that impression. For example, payroll taxes are called “insurance contributions” under the Federal Insurance Contribution Act. Social Security monies are placed in a “trust fund” to pay “Old-Age and Survivors Insurance” benefits.
In reality, however, all those terms 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. 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. In the Social Security Trust Fund, no property is held in trust for any worker or collection of workers.
In Flemming v. Nestor, decided in 1960, the Supreme Court ruled that Social Security is an umbrella term for two schemes that are legally unrelated. 1 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. Those funds are gone, commingled with the general assets of the U.S. government. This decision rested on a previous case, Helvering v. Davis, in which the Court ruled that Social Security was not an insurance program. 2
Originally published as Cato Institute Social Security Paper no. 19, April 19, 2000, and updated to reflect current information.