Social Security: Pension Plan or Entitlement?

Dec 20th, 2010 | By | Category: Social Security & Medicare

A lot is being said in national media today about Social Security being a Pension Plan.  And an equal amount of verbage is spewed about Social Security being an Entitlement program (i.e., senior citizens are ‘entitled’ to retirement benefits provided in a program administered by the Federal Government).  Let’s take a look at the issues.

A pension plan is “A type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee’s future benefit. The pool of funds is then invested on the employee’s behalf, allowing the employee to receive benefits upon retirement.” 

If we accept this commonly held definition of a pension plan, Social Security doesn’t qualify.  Both the employer and the employee make contributions to an employee’s social security account, not just the employer.  It’s clearly not tax exempt.  Both employer and employee pay the “payroll tax” known as FICA.

So what about the entitlement label?  Wikipedia says, “An entitlement is a guarantee of access to benefits based on established rights or by legislation.”  This makes more sense when we look at the Social Security program as it exists now.  Retirees are entitled to benefits if they have paid in to an account, and if other requirements of the program are met (citizenship, arrived at designated retirement age and paid in to the account the mandatory number of quarters are the primary requirements.)

So it appears Social Security is more an ‘entitlement’ benefit than it is a pension plan.  So why the discussion?  What’s the argument? 

Floyd Norris had an interesting post on his New York Times blog November 4, 2010.  He tossed the issue back and forth about entitlement versus pension plan.  He noted the original intent of the Social Security program, which was “…a plan to tax working Americans to pay for benefits given to retired and disabled workers, and to their families.”  Interestingly, Norris makes the point that it was never intended to be an entitlement program to provide monies to wealthy Americans who need help the least.  Yet, this is precisely the issue in front of Congress at this time.  That is, should the cap on Social Security taxes be changed or eliminated?  Currently the cap is at $106,800, meaning any wages earned over that amount are not subject to payroll tax.

He says in the final paragraph, “…in a time of fiscal austerity, Congress should at least consider whether it makes sense that an increase in taxes to finance the system automatically increases the benefits paid to those who need help the least.”

This seems to SCJ to be another issue in the ‘No Brainer’  category.

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