This is a selection from the book by John K. DiMugno, Stephen Plitt, and Dennis J. Wall, titled "Catastrophe Claims: Insurance Coverage for Natural and Man-Made Disasters," Chapter 18A by Dennis J. Wall (©May 2017, Thomson Reuters). This selection is reprinted with permission of Thomson Reuters. Any further reproduction without the consent of the publisher is expressly prohibited.
Social Security reserves, i.e., the monies received from worker and employer contributions placed in the "social security fund," were intentionally made low enough that Congress could pass a bill. To say again, the question of reserves is answered differently in the old-age insurance Social Security framework, than it is in the area of private insurance:
In private individual insurance, a full reserve would be considered essential. Even in group annuity programs set up by private firms, accrued liability [had] to be funded over time. In social insurance, however, we were convinced, such a full reserve was not only unnecessary, but an impossible incubus on the national economy.[1]
The Social Security bill would have been politically unpalatable if Social Security old-age insurance reserves were set too high. The level of contributions required from employees and employers would be so high that no-one, employee or employer, could afford to advance the funds Social Security would require. Further, the participation of the general treasury was doubtful at best looking at the question realistically.[2] Even today, there are grave doubts whether there is in reality an impending crisis over the future funding of benefits under the Social Security Act including not only old-age insurance benefits, but also Medicaid, Medicare, and Disability.[3]
If reserves were set too low on the other hand, participation would again be in doubt since returns on the investments, as it were, would not be worth the sacrifice. Social Security reserves were intentionally left open to calculation from formulas that provided a result somewhere in the middle. The formulas were based on the individual's level of contribution to the U.S. economy, accumulated over time:
Our approach is that, within limits, the individual worker establishes the level to his protection by his individual contribution to our economy. I want to emphasize the distinction, "to our economy," not "to the system." Not to the Treasury of the United States but to our economy.
The limits to this principle are important, but the concept is simple; benefits by and large in the American system are firmly related to the wage system. Differentials in wages resulting from the efforts of the worker are reflected to a degree in differentials in benefits. The relative continuity of earnings under the wage system is also reflected to some degree in the level of protection.
The simple device of averaging wages over a period in the determination of benefits has important significance in adding a factor related to contribution through time to that of the economic worth of such contribution in a single period of time.[4]
If the individual receiving Social Security payments under the old-age insurance program has received "more than the correct amount of payment," moreover, then "proper adjustment or recovery shall be made" unless that person is "without fault."[5] Even when a person is without fault for overpayment of Federal Old-Age, Survivors, and Disability Insurance Benefits, still she or he must return the overpayment either through adjustment of her or his future such insurance benefits, or as the result of a recovery action brought by the United States against her or him, with two exceptions.[6]
The first exception is if the "adjustment or recovery would defeat the purpose" of the Federal Old-Age, Survivors, and Disability Insurance Benefits program. The second exception is a voice from the courts of equity of centuries ago, heard in the 21st Century: If it "would be against equity and good conscience,"[7] then no such adjustment or recovery of an overpayment is allowable as against "any person who is without fault."[8]
In sum, the social history of Social Security[9] provides the background of the Social Security Method, which is the subject of the next section.
Next: Section 18A:2: The Social Security Act's Method.
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[1] J. Douglas Brown, "The Genesis of Social Security in America" (1969), available online at https://www.ssa.gov/history/jdb5.html (last accessed on Sunday, January 8, 2017).
[2] While recognizing that government contributions to the Social Security system have not happened, the authors of Social Security old-age insurance "were convinced," Dean Brown once observed, that the place of a large reserve would be taken by "an eventual government contribution to the system[.]" J. Douglas Brown, "The Genesis of Social Security in America" (1969), available online at https://www.ssa.gov/history/jdb5.html (last accessed on Sunday, January 8, 2017).
Upon further reflection, or at any rate at a later date, Dean Brown added to this statement:
The question of eventual governmental contributions to the system to compensate for these low rates during the early years of the system has been shelved for our children and grandchildren to answer.
- Douglas Brown, Sidney Hillman memorial lecture at the University of Wisconsin delivered on November 18, 1955, combined in part with a lecture delivered at Social Security Headquarters in Baltimore, Maryland on November 7, 1957, "published in 1972," titled, "The American Philosophy of Social Insurance," accessible online at https://www.ssa.gov/history/brown2.html, last accessed on Monday, January 9, 2017. (Emphasis added.)
[3] Matthew M. Hawes, "So No Damn Politician Can Ever Scrap It: The Constitutional Protection of Social Security Benefits," 65 U. Pitt. L. Rev. 865, 908 n.270 (2004) ("Of course whether or not avoiding the impeding [sic] Social Security crisis constitutes a public purpose, let alone whether there is an imminent crisis, is a matter of debate."). The "So No Damn Politician Can Ever Scrap It" article which has just been cited, offers one source to support the claim that Social Security is 'incontestably' running out of money. The one source is a "see" cite to one newspaper column, Richard W. Stevenson, "U.S. / The 2004 Campaign: Social Security; The Hot Potato of Issues is Dropped Anew," N.Y. Times, February 27, 2004, at A21. I downloaded the newspaper article from the New York Times archives, but although I found that it repeated many opinions expressed by politicians in Washington, I could not find any research in it to actually evidence that any Social Security program, including the old-age insurance Social Security program, is running out of money.
In any case, it does not appear at all clear, especially to insurance practitioners, that the only option to maintain insurance is to cut insurance benefits.
[4] J. Douglas Brown, "The Idea of Social Security," speech at the Meeting of the Bureau of Old-Age and Survivors Insurance in Baltimore, Maryland on November 7, 1957, accessible online as the "original version" of this 1957 speech, at https://www.ssa.gov/history/brown3.html, last accessed on Sunday, January 8, 2017.
[5] 42 U.S.C.A. § 404(a)(1), current through P.L. 114-254, and also P.L. 114-256 (emphasis added). The title of Section 404 is "Overpayments and underpayments."
[6] 42 U.S.C.A. § 404(b)(1), current through P.L. 114-254, and also P.L. 114-256.
[7] This is a modern application of the main principle which has guided Equity Courts for many centuries, which is "ex aequo et bono," or "out of what is equal and good."
[8] 42 U.S.C.A. § 404(b)(1), current through P.L. 114-254, and also P.L. 114-256. To say again, the title of Section 404 is "Overpayments and underpayments."
[9] What I am referring to here as the social history of Social Security consists of all the writings, speeches, and lectures given on the history of Social Security, and of Social Security old-age insurance in particular, by those who participated in designing it. The "core" documents, or what the Social Security Administration Historian has termed "the primary source documentation of the intentions of the program's designers on the CES [Committee on Economic Security]," are "the unpublished 10-volumes of studies, the 74-page report, the draft administration bill, the President's cover message to Congress and the 1937 book," all of which resulted from the work of the CES. Larry DeWitt, SSA Historian, in "Special Study #7: The History and Development of the Social Security Retirement Earnings Test" (August 1999), available online at https://www.ssa.gov/history/ret2.html, last accessed on Tuesday, January 10, 2017.
Given that perspective, I can provide in this limited space only that amount of social history of Social Security which, it is hoped, is sufficient to understand the true purposes of those who wrote the program.
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