SSR 72-5c: SECTION 203(f)(3). -- WORK DEDUCTIONS -- BENEFIT REDUCTION BECAUSE OF EXCESS EARNINGS -- CONSTITUTIONALITY OF RETIREMENT PROVISO

20 CFR 404.415 and 404.416

SSR 72-5c

Gainville et al v. Richardson, 319 F.Supp. 16 (D.Mass., 1970)

WYZANSKI , Chief Judge: This case is before the court on

defendant's motion to dismiss the complaint on grounds of lack of

jurisdiction and failure to state a cause of action.

This is a class action brought by seven plaintiffs claiming that, as

applied to them and others in their class, § 203(f)(3) of the Social

Security Act, 42 U.S.C. § 403(f)(3) -- a provision for deducting earned

income from old age benefits otherwise payable -- denies each plaintiff

the due process of law guaranteed by the Fifth Amendment.

The Social Security Act, so far as here material, provides for payments

of federal old-age benefits based upon a person's record of earnings in

employment covered by the Act. Eligibility depends on satisfying statutory

conditions as to (1) employment in covered employment [see § 210(a), 42

U.S.C. § 410(a)]; (2) the requisite number of "quarters of coverage" [see

§§ 213-215, 42 U.S.C. §§ 413-415]; and (3) attainment of the retirement

age of 65 in the case of men and 62 in the case of women. [See Pub.L.

87-64, Title 1 § 102(c), Act of June 30, 1961, 75 Stat. 131, 134.]

Entitlement to benefits once gained is partially or totally lost if the

beneficiary has earnings in excess of $1200 annually from employment. In

essence, the Social Security Act provides for monthly benefits [see §§ 202

and 203, 42 U.S.C. §§ 402, 403] from which thee are to be deducted

so-called excess earnings, that is wages and self-employment income above

a certain amount. [See §§ 203(b) and (f)(1), 42 U.S.C. §§ 403(b) and

rtially or totally lost if the

beneficiary has earnings in excess of $1200 annually from employment. In

essence, the Social Security Act provides for monthly benefits [see §§ 202

and 203, 42 U.S.C. §§ 402, 403] from which thee are to be deducted

so-called excess earnings, that is wages and self-employment income above

a certain amount. [See §§ 203(b) and (f)(1), 42 U.S.C. §§ 403(b) and

(f)(1).] For purposes of the aforesaid provisions it is further provided

in § 203(f)(3) of the Act, 42 U.S.C. § 403(f)(3), -- that is, in the

section now challenged -- as follows:

These are the practical effects of the quoted formula. For each month

that an old age beneficiary under the age of 72 earns in excess of $140,

his benefits are reduced by one dollar for every two earned up to an

additional $100 in any month, and by one dollar for every one dollar

earned thereafter. Thus any old age beneficiary under the age of 72 who

works at a steady pace throughout the year is effectively limited to

earning $1,680 in any year or else he faces the loss of some social

security benefits. For every two dollars earned between $1,680 and $2,880

per year, the beneficiary forfeits one dollar of benefits. For every

dollar over $2,880 earned per year, the beneficiary forfeits one dollar of

benefits.

Three of the seven plaintiffs make parallel allegations. Plaintiffs Ralph

Aims, Frank McGillvray and William Manzel, each allege that (1) he has

made involuntary contributions to the Social Security Trust Fund, through

the payment of Social Security taxes; (2) he is a fully insured individual

within the meaning of 42 U.S.C. § 414(a); (3) he has been deprived and

will be deprived hereafter of old age benefits to which he would otherwise

be entitled in a sum in excess of $10,000 and has been deterred and will

be deterred hereafter from earning income in excess of $10,000 by the

application or threatened application of 42 U.S.C. § 403(f)(3)

; (2) he is a fully insured individual

within the meaning of 42 U.S.C. § 414(a); (3) he has been deprived and

will be deprived hereafter of old age benefits to which he would otherwise

be entitled in a sum in excess of $10,000 and has been deterred and will

be deterred hereafter from earning income in excess of $10,000 by the

application or threatened application of 42 U.S.C. § 403(f)(3). The other

plaintiffs' allegations add nothing, and in each instance fall somewhat

short of the allegations of Aims, McGillvray and

Manzel. [1] Hence plaintiffs will

be at no disadvantage if in considering the present motion we concentrate

on Aims' case as being the strongest.

Aim's claim that the threatened application to him of § 403(f)(3) has

deprived and will deprive him of $10,000 in benefits to which he would

otherwise be entitled, and has deterred him and will deter him from

earning $10,000, arises under the Constitution and laws of the United

States and involves the requisite jurisdictional amount. 28 U.S.C. §

1331.

Plaintiff Aims is not debarred from seeking judicial relief by the

general doctrine that he must first exhaust his administrative remedies,

nor by the more specific provisions of § 205(h) of the Social Security

Act, 42 U.S.C. § 405(h). The general doctrine is inapplicable because here

plaintiff claims that the statutory provision permitting deduction is

unconstitutional. Where a plaintiff attacks the constitutionality of the

statute under which an administrative agency acts, and the attack does not

turn upon a factual determination requiring administrative expertise, the

doctrine of exhaustion of administrative remedies does not apply. Public

Utilities Commission v. United States, U.S. 534, 539; Oesteich v.

Selective Service Board, 393 U.S. 233, 242.

Nor are the specific provisions of § 205(h) of the Social Security Act 42

U.S.C. § 405(h) a bar. That section merely provides that:

turn upon a factual determination requiring administrative expertise, the

doctrine of exhaustion of administrative remedies does not apply. Public

Utilities Commission v. United States, U.S. 534, 539; Oesteich v.

Selective Service Board, 393 U.S. 233, 242.

Nor are the specific provisions of § 205(h) of the Social Security Act 42

U.S.C. § 405(h) a bar. That section merely provides that:

In the present action, while plaintiff does, perhaps improperly, seek

damages, his complaint also has prayers for a declaratory judgment that §

203(f)(3) of the Social Security Act, 42 U.S.C. § 403(f)(3) is

unconstitutional, and for an injunction restraining defendant from

applying that section. If he were to be successful with respect to those

prayers, plaintiff would not, in the language of the statute, "recover on

any claim" for benefits. For recovery of benefits he would still need to

resort to the administrative process. The only effect of a declaratory

judgment or injunction by this court would be to preclude the Secretary

from making the challenged deduction.

There is another reason why the general doctrine of exhaustion of

administrative remedies and the specific provisions of 42 U.S.C. § 405(h)

do not apply. Plaintiff Aims seeks a declaratory judgment with respect to

the application of 42 U.S.C. § 403(f)(3) to amounts he may earn hereafter.

There is no way that that issue may be submitted for administrative

determination. The only remedy is by an action for a declaratory judgment

or an injunction.

We now turn to the substantive issues raised by the complaint.

Plaintiff's principal contention is that they are denied the equal

protection of the laws because from old age benefits otherwise payable

earned income is deductible, although unearned income is not

deductible.

ed for administrative

determination. The only remedy is by an action for a declaratory judgment

or an injunction.

We now turn to the substantive issues raised by the complaint.

Plaintiff's principal contention is that they are denied the equal

protection of the laws because from old age benefits otherwise payable

earned income is deductible, although unearned income is not

deductible.

Plaintiffs' cardinal error is in disregarding the nature of the social

insurance provided by the old age benefit system established by the Social

Security Act. That system is for retirement benefits to replace lost

earnings. As Secretary of H.E.W., Wilbur J. Cohen, in his letter of

January 7, 1969, to Speaker John W. McCormack stated, "what people have

been paying for is a retirement benefit . . . the whole purpose of a

retirement system . . . is to pay benefits to partially replace lost

earnings" See The Retirement Test Under Social Security, Letter from The

Secretary of Health, Education and Welfare, transmitting a report

resulting from a study of the retirement test pursuant to Public Law

90-248. The Social Security Amendments of 1967. H.Doc. No. 91-40, 91st

Cong., 1st Session, p. III.

From its inception in 1935 the Social Security old-age benefit system was

designed to provide insurance against the failure to receive a particular

kind of earned income. This is shown by the provision in § 202(d) of the

original Act, 49 Stat. 620, 623, that then old age benefits were not

payable for any month for which a person received wages in covered

employment. It is a misunderstanding to treat this insurance system as

though it were addressed to the risks of the aged poor as such. It is a

system that covers both rich and poor insofar as they receive earned

income in covered employment and have retired from employment. While not

irrelevant, the statement of Mr. Justice Cardozo in Helvering v. Davis,

301 U.S

ceived wages in covered

employment. It is a misunderstanding to treat this insurance system as

though it were addressed to the risks of the aged poor as such. It is a

system that covers both rich and poor insofar as they receive earned

income in covered employment and have retired from employment. While not

irrelevant, the statement of Mr. Justice Cardozo in Helvering v. Davis,

301 U.S. 619, 641 that "The hope behind this statute is to save men and

women from the rigors of the poor house as well as from the haunting fear

that such a lot awaits them when journey's end is near" tends to be

misleading. The test of a right to a benefit is not poverty nor even old

age -- but, in general, former employment in taxable occupations, plus

attainment of a prescribed age, plus present retirement from work.

It is obviously rational to make benefits depend not upon need but upon

the failure to receive a specific kind of income. This is especially true

when, as here, contributions have been exacted in the light of the

particular risk of that possible failure.

Moreover, Congress has a rational basis for not providing for deductions

for unearned income. First, unearned income has little relevance to the

central purpose of a retirement benefit system intended to compensate for

loss of earned income. Second, unearned income plays no part in the

taxation or other aspects of the old age benefit system. Third, to make a

deduction would create disincentives to saving. As Secretary Cohen, in the

letter previously quoted, noted "If benefits were withheld because the

person had income from savings, investments, a private pension plan or the

like, the program would discourage people from saving in their productive

years to have a more comfortable life in retirement than social security

benefits alone can make possible." Fourth, if deductions were to be made

for unearned income a new set of problems of administration, valuation,

computation and reporting would be presented.

savings, investments, a private pension plan or the

like, the program would discourage people from saving in their productive

years to have a more comfortable life in retirement than social security

benefits alone can make possible." Fourth, if deductions were to be made

for unearned income a new set of problems of administration, valuation,

computation and reporting would be presented.

But plaintiffs seem to contend that even if Congress has a rational basis

for not making deductions from benefits on account of unearned income it

has no rational basis for making deducting of earned income when it does

not simultaneously make deductions for unearned income. The short and

adequate answer is the one already given: that it is rational to have a

retirement benefit system in which benefits are related to failure to

receive a particular type of earned income.

In effect, plaintiffs are claiming that they are as deserving of getting

a full benefit as are persons who have retired and have unearned income.

The due process clause of the Fifth Amendment (even if construed to

include a guarantee of equal protection of the laws) does not usually

require Congress if it provides benefits for A to provide benefits for B

merely because B is in the same economic plight as A. It can hardly be

supposed that if Congress appropriates money for victims of a disaster in

Texas it must appropriate money for victims of a disaster in

Massachusetts. Nor does the due process clause require Congress when it is

directing the distribution of a particular welfare fund to make

distribution to all persons on the basis of equality of need. It may

establish classifications reasonably related to the purposes of the fund.

In the area of economics and social welfare, all that is required is that

the classifications have some reasonable basis. Dandridge v. Williams, 397

U.S. 471, 485

ongress when it is

directing the distribution of a particular welfare fund to make

distribution to all persons on the basis of equality of need. It may

establish classifications reasonably related to the purposes of the fund.

In the area of economics and social welfare, all that is required is that

the classifications have some reasonable basis. Dandridge v. Williams, 397

U.S. 471, 485. Surely it is reasonable to make a classification making

payments depend upon the attainment of a prescribed age, even though some

persons under that age are in greater need than others who have attained

it. It has been held reasonable to make payments to women at an earlier

age than men, although some elderly women are more affluent than men of

the same age. Gruenwald v. Gardner, 390 F.2d 591 (2nd Cir.). And in view

of the differences between a deduction of earned income and of unearned

income, such as the four already recited, the classification here has a

reasonable basis. "Whether wisdom or unwisdom resides in the scheme of

benefits . . . it is not for us to say." Helvering v. Davis, 301 U.S. 619,

644. "Particularly, when we deal with a withholding of a noncontractual

benefit under a social welfare program such as this, we must recognized

that the Due Process Clause can be thought to interpose a bar only if the

statute manifests a patently arbitrary classification, utterly lacking in

rational justification." Flemming v. Nestor, 363 U.S. 603, 611

[ SSR 60-1 , C.B. 1960, p.87].

9,

644. "Particularly, when we deal with a withholding of a noncontractual

benefit under a social welfare program such as this, we must recognized

that the Due Process Clause can be thought to interpose a bar only if the

statute manifests a patently arbitrary classification, utterly lacking in

rational justification." Flemming v. Nestor, 363 U.S. 603, 611

[ SSR 60-1 , C.B. 1960, p.87].

What has been said also applies to the claim that plaintiffs have been

denied due process of law because full old age monthly benefits, without a

deduction for earned income, are available worker who has reached the age

of 72. [See § 203(f)(1) of the Act, 42 U.S.C. § 403(f)(1)]. If a

classification based upon attainment of a prescribed age is permissible as

a test of eligibility for benefits it is also permissible as a test of

non-deductibility of earned income. While it is not always true, it is

generally true that persons over 72 have been contributing for a longer

time than persons under 72, and are likely to have fewer years of

retirement ahead of them. See Sen. Rept. No. 1987, 83rd Cong., 2nd Sess.,

p. 18. "'The problems of government are practical ones and may justify, if

they do not require, rough accommodations -- illogical, it may be, and

unscientific.' Metropolis Theatre Co. v. City of Chicago, 228 U.S. 61,

69-70." Dandridge v. Williams, 397 U.S. 471, 485.

Finally, plaintiffs allege that they are denied due process because the

deduction of earned income is on a monthly not an annual accounting basis.

This point is nearly frivolous. Any accounting period is ex necessitate to

some extent arbitrary. But a Congressional choice keyed to a monthly

calendar does not deny due process merely because it makes it possible for

some persons to schedule their work to minimize their deductions.

Complaint dismissed for failure to state a cause of action.

s on a monthly not an annual accounting basis.

This point is nearly frivolous. Any accounting period is ex necessitate to

some extent arbitrary. But a Congressional choice keyed to a monthly

calendar does not deny due process merely because it makes it possible for

some persons to schedule their work to minimize their deductions.

Complaint dismissed for failure to state a cause of action.

[1] Thus neither Gainville nor

Saponaro alleges that he is a fully insured individual. Neither Kramer nor

Camer alleges that he will be deterred from earning income. Gainville does

not allege that he has been deprived of benefits.