In personal injury and wrongful death matters, economic losses associated with a loss of earnings capacity and fringe benefits are claimable. Fringe benefits are typically a category of offerings by an employer to an employee for items other than regular salary and wages. The Bureau of Labor Statistics tracks various fringe benefit costs by employers that include (1) legally required costs associated with payroll taxes, (2) costs related to supplemental pay for vacation, sick time, bonuses and overtime, (3) insurance benefits, which may include health care coverage or premium payment assistance, group life insurance, disability insurance and unemployment insurance, and (4) retirement and pension benefits.

Within the employer costs are payroll taxes paid to the U.S. Department of the Treasury to support various social welfare programs such as Medicare, Medicaid and Social Security.

The question often arises as to whether Social Security retirement benefits are a claimable loss item. Such potential losses are not consistently claimed. And in practice, the potential loss is often wrongfully quantified as being equal to a projection of the employer’s portion of Social Security taxes that would have been payable based on a projection of lost earnings. In other cases where Social Security retirement benefits are already being paid, the payments themselves are claimed.

The challenge to the courts, attorneys and economic experts relates to whether Social Security payments are considered earned and, if so, whether the payments represent earnings that were previously put aside for the future. There is no consistent answer in this regard, leaving the claimability of such benefits up for continued debate. Herein is a discussion of some of the relevant information that exists from which the claimability of such benefits can be either supported or denied depending on one’s interpretation.

The Social Security program was put in place as a form of social insurance in the mid-1930s when poverty rates among senior citizens exceeded 50 percent. Among other things, the Social Security Act provided federal payments to retirees. To qualify for such payments, an individual had to earn a number of qualifying work period credits when Social Security taxes were paid. The ultimate payment of Social Security retirement benefits is based on a formula that takes into account an individual’s earnings history over his or her lifetime. A calculation is made of the individuals’ average earnings for a 35-year period, and based on a formula that can be changed by U.S. Congress as deemed necessary, a monthly benefit amount is calculated.

The Social Security system is not designed to pay a dollar-for-dollar benefit to individuals. Said differently, what you pay in Social Security taxes and what your employers pay in Social Security taxes on your earnings has no direct relationship to the ultimate benefit you may receive sometime in the future. The benefit formula changes over time, as do the tax rates and qualifying retirement ages for the collection of such benefits. Congress maintains the ability to change or dissolve the system at will, based on the social and economic needs of the nation.

The payment of Social Security benefits to current retirees is financed by the payroll tax that is charged to current workers and their employers. The tax payment is based on a percentage of the workers’ qualifying earnings. Currently, the Social Security tax is equal to 6.2 percent of one’s earnings up to $113,700, and that amount is paid by both the individual and the employer. Of this amount, 5.3 percent is for the OASI (Old-Age and Survivors Insurance) Trust Fund, and 0.9 percent is for the DI (Disability Insurance) Trust Fund. An additional 1.45 percent is paid for by employees and employers for the Medicare tax without any income limit. In this regard, the tax paid by employees and employers is a recognized income tax. It is not an amount of earnings set aside for retirement for an individual, although arguably a reasonable expectation of some future benefit is achieved by the payment of these taxes during one’s working years.

It is unlikely that Congress will eliminate Social Security retirement benefits, although as history has shown, adjustments can and will likely be made to both the tax rate, the benefit formula and the qualification of such benefits based on the financial well-being of the Social Security system.

The Pennsylvania Suggested Standard Civil Jury Instructions indicate retirement benefits that represent past earnings put aside for the future are recoverable. The same instructions also indicate that in claiming these past "put-aside" earnings, it would be improper to allow a "double" deduction by again deducting costs of maintenance during the retirement period.

Some attorneys and expert witnesses interpret these instructions to include Social Security retirement benefits since the wording in the instructions do not differentiate Social Security retirement benefits from other retirement benefits. Others believe that Social Security retirement benefits are different than earned retirement benefits because they do not represent set-aside earnings for the future.

This latter position is consistent with findings of the U.S. Supreme Court, which has specifically ruled that the Social Security benefits do not represent past earnings put aside for the future. In Helvering v. Davis, 301 U.S. 619 (1937), the Supreme Court found that, "The proceeds of both [employee and employer] taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way." In fact, when the constitutionality of Social Security taxes was challenged soon after they were enacted, the payments were found to be constitutional because they represented an exercise of Congress’ general taxation powers. Thus, payments made to the Department of the Treasury for taxes imposed under the Social Security Act of 1935 do not represent past earnings put aside for the future, but instead represent taxes paid to the government to be used for the general welfare of the country as deemed appropriate by Congress.

Notwithstanding the findings of the U.S. Supreme Court, the Pennsylvania Suggested Standard Civil Jury Instructions indicate that Social Security should be considered in the same manner as actual earnings for the purpose of providing some measure of a loss under either wrongful death or survival. It is not clear, however, if the premise of this instruction is that Social Security retirement benefits represent past earnings. If so, then this instruction should arguably be revised. Regardless, what appears to be clear is that if Social Security retirement benefits are claimable in Pennsylvania and are to be treated in the same manner as actual earnings, then a deduction of personal maintenance expenses would be appropriate. However, if the intent of the Pennsylvania Suggested Standard Civil Jury Instructions is to classify Social Security benefits as past earnings put aside for retirement in a manner similar to contractually-obligated pension or annuity-type benefits, then perhaps this area of the instructions should be clarified.

In Thompson v. City of Philadelphia, 294 A.2s 826 (Pa. Super. 1972), the Pennsylvania Supreme Court ruled that retirement and Social Security income is admissible to establish loss in a wrongful death or survival action. This case is specifically referenced in the civil jury instructions. However, in the same case, the Pennsylvania Supreme Court also ruled that such income could be used "solely for the purpose of providing some measure of earning capacity, and not for the purpose of establishing lost income." This is an important distinction in that the court was careful not to rule that Social Security benefits were claimable.

Federal case law on the claimability of Social Security benefits is clearer. In Flemming v. Nestor, 363 US 603 (1960), the U.S. Supreme Court stated that "it is apparent that the noncontractual interest of an employee covered under the [Social Security] Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments." The same court also recognized that the provision of payments under the act "rest on judgments and preferences as to the proper allocation of the nation’s resources which evolving economic and social conditions will of necessity in some degree modify." Said differently, unlike contractual annuity payment rights, Social Security benefit payments are subject to change at the will of Congress.

In Richardson v. Belcher, 404 US 78, 30 (1971), the U.S. Supreme Court indicated, "The fact that Social Security benefits are financed in part by taxes on an employee’s wages does not in itself limit the power of Congress to fix the levels of benefits under the act or the condition upon which they may be paid. Nor does an expectation of public benefits confer a contractual right to receive the expected monies." I note that President Obama recognized this in 2011 when he stated he could not guarantee that retirees would see their Social Security checks if a budget agreement was not reached "because there may simply not be the money in the coffers to do it." The 2012 OASDI Trustees Report to Congress projects that the Social Security Disability Trust Fund will be exhausted by 2016 and the Social Security OASI Trust Fund will be exhausted by 2035. Thus, changes to the Social Security program are foreseeable and necessary. Whether that means current workers will have to pay more for current retiree benefits, or whether current retirees will be subject to benefit cuts is yet to be determined. Regardless, a projection of potentially claimable Social Security retirement benefits as a potential economic loss item is not appropriately done simply by adding payroll taxes paid by employers to a loss calculation. This method is sometimes used by damage experts but provides no reasonable basis of potential Social Security benefit losses if they are claimable. •

William E. Harris is a shareholder in ForensicDamages LLC. Harris has 22 years of experience in damage-related disputes in the Philadelphia and surrounding area. He has taught economic damage-related issues locally, nationally and internationally. He can be reached by phone at 215-720-1570 and by email at  weharris@forensicdamages.com.