University of Florida Levin College of Law UF Law Scholarship Repository UF Law Faculty Publications Faculty Scholarship 4-1997 The volutE ion of Entitlement: Retirement Income and the Problem of Integrating Private Pensions and Social Security Patricia E. Dilley University of Florida Levin College of Law, [email protected] Follow this and additional works at: http://scholarship.law.ufl.edu/facultypub Part of the Retirement Security Commons Recommended Citation Patricia E. Dilley, The Evolution of Entitlement: Retirement Income and the Problem of Integrating Private Pensions and Social Security, 30 Loy. L.A. L. Rev. 1063 (1997), available at http://scholarship.law.ufl.edu/facultypub/656 This Article is brought to you for free and open access by the Faculty Scholarship at UF Law Scholarship Repository. It has been accepted for inclusion in UF Law Faculty Publications by an authorized administrator of UF Law Scholarship Repository. For more information, please contact [email protected]. THE EVOLUTION OF ENTITLEMENT: RETIREMENT INCOME AND THE PROBLEM OF INTEGRATING PRIVATE PENSIONS AND SOCIAL SECURITY PatriciaE. Dilley* TABLE OF CONTENTS I. Introduction ............................................................................ 1066 A. Conflict of Integration and Entitlement Principles... 1068 B. Integration as a Microcosm .......................................... 1070 II. Retirement Entitlements: From Practice to Theory ......... 1074 A. Entitlement as the Precondition of Retirement ........ 1076 B. Entitlement for the Worthy ......................................... 1078 C. Mass Retirement and Earned Entitlement ................ 1080 D. Metaphor and Reality of Contributory Entitlem ents ................................................................... 1081 E. Retirement Entitlements and Redistribution ............ 1082 III. The Roots of Entitlement: Evolution of Entitlement and Retirement in America .................................................. 1085 A. Old Age and Poverty Before the Retirement Era .... 1086 1. Old Age and Poverty in the Old World ............. 1087 2. Colonial American Approaches to Poverty and A ging .............................................................. 1090 3. Retirement for the Propertied ............................ 1092 * Assistant Professor, Seattle University School of Law; Visiting Assistant Pro- fessor, University of Florida College of Law Graduate Tax Program, Spring 1997; B.A., Swarthmore College; M.A., History, University of Pennsylvania; J.D., George- town University Law Center; LL.M., Tax, Boston University School of Law. The author was a member of the professional staff of the Committee on Ways and Means, U.S. House of Representatives, from 1981 through 1987, serving as staff di- rector and chief counsel of the Subcommittee on Social Security from 1985 through 1987. I am grateful for the comments and advice on this Article from my colleagues at Seattle University School of Law, Eric Chiappinelli, Annette Clark, and Julie Shapiro. Thanks also to my research assistants, David Kitchell and Daniel Quick of Seattle University School of Law and Ellen Sueda of the University of Florida Col- lege of Law Graduate Tax Program, for their help. 1063 1064 LOYOLA OFLOS ANGELES LAW REVIEW [Vol. 30:1063 B. The Federal Pension Model: Veterans' Entitlem ents ................................................................... 1094 1. Revolutionary War Pensions: Welfare for the D eserving ............................................................... 1095 2. The Civil War Pension System: Precursor to Social Insurance .................................................... 1096 C. Industrialization and the Beginning of "Voluntary" R etirem ent ..................................................................... 1102 IV. Expansion of Entitlement: The Modem Retirement System ..................................................................................... 1106 A. The "Social Problem" of Aging ................................... 1110 B. Private Pensions: Labor Management, Industrial Social W elfare ................................................................ 1112 1. Extent of Pension Plan Coverage Prior to the 1930s .......................................................................1113 2. Nature of the Private Pension "Right" .............. 1114 3. Growth and Retrenchment of the Private Retirement Solution ............................................. 1115 C. The Federal Response: Social Insurance- Redistribution for the Worthy ..................................... 1119 1. The Great Depression and the Threat of Old-Age Insecurity ............................................... 1120 2. The Social Security Acts of 1935 and 1939 ........ 1123 A. Social Insurance and Labor Force Management ................................................. 1126 B. Contributory Financing and Redistributive Benefits in the 1935 Act .............................. 1129 C. The 1939 Act's Expansions ......................... 1135 D. Universal Coverage and Private Pensions ........................................................ 1137 V. Tax Policy and Entitlement: Integration and Nondiscrimination ................................................................. 1139 A. Tax Treatment of Private Pensions Prior to the 1942 Revenue Act .........................................................1142 B. Fundamentals of Nondiscrimination: "Taxpayer Abuse" vs. "Worker Security"? .................................. 1144 C. 1942 Revenue Act: The Role of Integration in the Nondiscrimination Framework .......................... :........ 1152 D. The First IRS Regulation of Integration: 1943-1979 ............................................................. 1159 VI. Reforming Integration .......................................................... 1164 April 1997] EVOLUTION OFENTITLEMENT 1065 A. Extent of the Integration "Problem".......................... 1165 B. Attempts to "Reform" Integration ............................. 1167 C. 1986 Tax Reform Act: "Permitted Disparity" .......... 1171 1. Framing the Problem: 1986 Senate Hearings... 1172 2. 1986 Tax Reform Act: House, Senate, and Conference Solutions ........................................... 1174 D. 1986 Act Analysis: Was the Game Worth the Candle? ........................................... ................................ 1176 VII. Critique of Integraton: Entitlement Principles, Poor Relief Result ................................................................. 1179 A. The Problem of Integration and Social Security Redistribution ................................................................ 1181 B. Integration and Adequacy of Retirement Income .... 1185 C. Integration and the "Employer Share" of Social Security ........................................................................... 1186 D. Integration and "Overpensioning" ...................1188 V III. Conclusion ............................................................................. 1192 1066 LOYOLA OF LOS ANGELES LAW REVIEW [Vol. 30:1063 Pension benefits given to low-paid employees as an ab- straction are taken away in the fine print of the income tax code. -Senator Gaylord Nelson' I'm old, I'm helpless and feeble .... and the days of my youth have gone by... and it's over the hill to the poor- house .... I must wander alone there to die .... 2 I. INTRODUCTION Entitlement is the public policy hot button of the mid-1990s. The drive to "restrain the growth of entitlements" has taken a cen- tral role in the budget battles facing Congress each year.3 In the context of public debate over federal spending, even the word "entitlement" has taken on unsavory connotations of getting some- thing for nothing, of rewards based on status rather than merit.4 Nowhere does the issue of public spending on "entitlements" loom larger than in the area of programs providing retirement in- come security. Such programs include Social Security, Old Age Survivors' and Disability Insurance (OASI),5 government 6 and veterans' pensions,7 and Supplemental Security Income (SSI) aid to the poor elderly.8 These programs are perhaps the largest pub- 1. SENATE COMM. ON LABOR AND PUBLIC WELFARE, EMPLOYEES RETIREMENT INCOME SECURITY ACT OF 1974, H.R. REP. No. 93-406, at 829 (1974), reprinted in 2 LEGISLATIVE HISTORY OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, at 1716 (1976) (statement of Senator Nelson during debate on proposed amendments to Employee Retirement Income Security Act of 1974 (ERISA)). 2. L. FLATT & W. LILLY, Over the Hill to the Poorhouse, on HARD TRAVELIN' (Columbia Records 1963). This song version of a poem was recorded in the 1930s and later by Southern bluegrass artists, including Flatt and Scruggs. The song tells the story of an old man whose three children threw him off the farm and forced him to wander the roads in poverty. See id. 3. A thorough discussion of the public perceptions concerning Social Security and the federal budget debates can be found in THEODORE R. MARMOR ET AL., AMERICA'S MISUNDERSTOOD WELFARE STATE: PERSISTENT MYTHS, ENDURING REALITIES 128-74 (1990). 4. See id. at 13940. Senator Frank Murkowski stated in the CongressionalRec- ord, "As Robert Samuelson... recently stated, the 'something for nothing' decep- tion regarding new health care entitlements is an 'exercise in national make- believe."' 140 CONG. REC. S11,885 (daily ed. Aug. 16, 1994) (referring to Robert J. Samuelson, Unspeakable Runaway Spending, WASH. POST, Aug. 1, 1994, at A17). 5. See 42 U.S.C. §§ 401-433 (1994). 6. See 5