Reading FDR’s Mind: “Full Funding” and the Original Intent of Social Security

What kind of a program did Franklin Delano Roosevelt want Social Security to be? A narrowly designed, fully self-funded system, or a more expansive institution whose funding sources might change over time? Today’s three-way struggle between progressives, conservatives, and the center-right over Social Security’s future makes the question of FDR’s “original intent” more timely than ever.

When I was writing The People’s Pension, my history of the past 30 years of the Social Security debate, I sidestepped – for the most part – the question of what Franklin Delano Roosevelt’s precise intentions were for the program he signed into law in 1935. The early history of Social Security is extremely tangled. The political context was unique. FDR himself was a complex and contradictory figure, and Social Security was much changed by the time my story began, in 1980. But activists on all sides continue to evoke the debates that took place within and around the Roosevelt administration in the 1930s to defend their particular visions of what Social Security should be. In spite of myself, I got interested – and started forming opinions.

So have a lot of other people, at a time when the question of how to make the program’s books balance far into the future is again a major issue in Washington. A Forbes columnist recently suggested that because he pushed to extend a partial payroll tax as a recession-relief measure, President Obama may be the “damn politician” Roosevelt once warned would one day attempt to “scrap” Social Security – and quoted conservative economists to prove it.

Two new books address the question of FDR’s intentions from opposite ends of the political spectrum. The New Deal: A Modern History is by Michael Hiltzik, a Los Angeles Times columnist and a staunch friend of the program. The Predictable Surprise is by Sylvester J Schieber, a private-sector pension consultant who has argued for years for cutting back, phasing out, and partially privatizing Social Security.

Both books are fascinating and informative. Schieber argues that Roosevelt was a fiscal conservative who consistently supported full funding of Social Security through payroll taxes and wanted the program to operate as nearly like a private-sector insurance policy as possible. Hiltzik doesn’t pick apart FDR’s precise intentions, but implies he had less of a fixed position, and in any event his ambitions for Social Security weren’t confined by the question of how it was funded.

I’ll make my own view clear as we proceed, but first, let’s lay out the political landscape. The issue of funding Social Security has never been firmly segmented between left and right. Some conservatives prefer Social Security to be funded strictly by payroll tax revenues, because they fear it becoming a more open-ended commitment, with benefits than can be expanded infinitely. Others on the right would rather it was funded by general revenues rather than payroll taxes, because that would redefine it as another form of “welfare,” or “the dole, as it was known in the pre-New Deal days: no longer unique, eminently cuttable.

On the left, some argue for funding through payroll taxes only, so that it stays insulated – at least to some extent – from Washington budget politics. Others favor adding in general revenues – because early Social Security legislation made this acceptable, and to keep the program from being straitjacketed by an endless, circular debate about its future “solvency.”

What sort of preferences did FDR bring to the funding issue? Fundamentally, he always identified himself as a fiscal conservative; his 1932 electoral platform called for balancing the budget even in the midst of the Great Depression. This was probably a deeply engrained preference. Roosevelt was a scion of the American aristocracy, living on inherited wealth much of which probably took the form of fixed-income securities including U.S. Treasuries. People in his position had – and continue to have – a horror of inflation, high levels of government debt and deficits, which tend to erode the value of their assets. They tend to assume that everyone should feel the same way.

As Governor of New York, Roosevelt signed a retirement benefit system into law during the early years of the Depression, just as dozens of other states did then. The program he enacted was means-tested, such that benefits were lower for upper-income recipients. This suggests he was concerned to keep the costs of the program low. But this doesn’t necessarily prove he would automatically want the same thing on the federal level, since state government typically operate under tighter fiscal constraints than does Washington.

FDR talked up old-age pensions during his 1932 presidential campaign, but they were far from being a major Democratic issue. Developing some form of “social security” system only became urgent when the Townsend Clubs, a multi-million-strong movement, focused attention on the dire condition of the elderly and gathered nearly overwhelming grassroots support for generous guaranteed old-age income payments. Bankers, conservative lawmakers, and mainstream economists were alarmed when the Townsend plan came close to passing Congress. The president had to offer a counter-proposal – yet he had to structure it so as to reassure fiscal conservatives that it wouldn’t break the bank. This political reality, as much as any deeper inclination, may have underpinned FDR’s desire to make Social Security strictly self-funding in 1935.

Roosevelt was also notorious for assembling an ideologically disparate group of advisors, mixing up progressive reformers with old-school pols and fiscal penny-pinchers. The Committee on Economic Security that he assembled to create (among other things) the blueprint for Social security was dominated by progressives like Perkins and Agriculture Secretary Henry Wallace. The one exception was Henry Morgenthau, Jr., Treasury Secretary and a stern fiscal conservative.

The story goes that when Morgenthau discovered a draft press release noting that “contributions from general revenues” would be needed to supplement payroll taxes to keep the program afloat after 1965, he rebelled at a committee meeting and took his objections straight to the Oval Office. Shortly thereafter, the White House decided to double the recommended payroll tax to eliminate the shortfall. The president stated his opinion explicitly to Perkins. If the program wasn’t fully funded,

This is the same old dole [i.e., welfare] under another name. It is almost dishonest to build up an accumulated deficit for the Congress of the United States to meet in 1980. We can’t do that.

But he added, according to Perkins, “We have to do it.”

Roosevelt hated confrontations, it’s often said, and the fact that the president would say one thing to Morgenthau – and act on it – while saying another thing to Perkins didn’t surprise her. But six years later, and even more famously, Roosevelt had a different explanation for why payroll taxes were such an important part of Social Security. He told an aide,

We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions…. With those taxes in there, no damn politician can ever scrap my social security program.

Had Roosevelt’s views changed? In 1935, he appears to have regarded Social Security primarily as an economic proposition, and payroll taxes strictly as a way to pay for it. Later, in 1941, his conception appears to have loosened: payroll taxes were a political tool, a means to inculcate a strong sense of entitlement in the workers who contributed to Social Security and received benefits from it and a bogeyman to politicians who would attempt to cut benefits.

A lot had happened between 1935 and 1941. A severe economic downturn took hold of the country in 1937-38, eliminating a lot of the progress the economy had made during Roosevelt’s first term. Some placed a portion of blame on the payroll tax, with its regressive structure, which may have discouraged consumption by working people. At the same time, conservatives led by Sen. Arthur Vandenberg objected to the build-up of a large Social Security trust fund, which they regarded as “socialistic.” And progressives had never been happy with the 1935 law’s ungenerous benefits formula, lack of benefits for dependents, and the fact that payments weren’t even to begin until 1942 – seven years after workers started making contributions.

Roosevelt appointed an advisory council in 1938 to address these issues. In the resulting 1939 Amendments to the Social Security Act, everyone got some of what they wanted. The benefit formula was liberalized. Initial payments moved up to 1940. Spouses and other dependents received coverage. Payroll taxes were reduced and a scheduled increase was rolled back from 1940 to 1942.

This was right in tune with the new direction of the Roosevelt White House, which a year earlier had passed a massive recovery measure aimed at ending the slump – the first real “pump-priming” measure of an administration that his often caricatured as having done nothing but. The size of the package was such that it “not only frightens me but will frighten the country,” Morgenthau said. Yet the president pushed it through.

When the 1939 Amendments were unveiled, actuaries predicted that, once again, “the proceeds of general taxation” would be needed to make up the difference in later decades. Yet, according to Thomas H. Eliot, who helped draft the 1935 Act, the Amendments “had the full support of the president.” They went against everything Morgenthau had fought for four years earlier, but this time the Treasury Secretary appears not to have made a peep, and actually testified in their support before Congress.

Had FDR’s views definitively changed? Was he no longer wedded to sound “insurance principles,” as Schieber and other conservative writers insist he was? It’s still unclear. In 1942, with a war raging, payroll taxes were scheduled to rise. Congress took up a bill to again postpone the rate hike, until 1944. The president objected strongly that failure to let the tax increase proceed would

cause a real and justifiable fear that adequate funds will not be accumulated to meet the heavy obligations of the future and that the claims for benefits accruing under the present law may be jeopardized.

Congress passed the Revenue Act of 1942. The president vetoed it. Congress override him.

But that’s not the end of the story, either. Already in 1940, Roosevelt’s plans for Social Security – his conception of the program’s future role in society – was starting to expand sharply. That year, with a war or something like it clearly looming, he appointed a National Resources Planning Board to develop proposals “for the avoidance of a depression after the defense period.” When the committee’s report was released in early 1943, it recommended greatly expanding Social Security’s old-age and survivors’ benefits and making the benefits themselves much more generous. It also noted,

The general principle of a governmental contribution to the costs of the program should be specifically embodied in legislation.

Suspicious congressional Republicans scuttled the Planning Board project later that year. But FDR took the idea a considerable step farther in his 1944 State of the Union message, in which he proposed a “second bill of rights” for Americans that would include “adequate protection from the economic fears of old age, sickness, accident, and unemployment.” The rationale behind this proposal had everything to do with the 12 years of depression and war the country had just gone through. “True economic freedom cannot exist without economic security and independence,” Roosevelt said. “People who are hungry … are the stuff of which dictatorships are made.”

Taken together, the Planning Board report and the president’s 1944 SOTU suggest strongly that as he neared the end of his presidency and his life, Roosevelt was making a major transition from the cautious, fiscally conservative politician he had been in the 1930s. He was ready to vastly expand Social Security and embrace a broader range of funding sources for the program. More important, he was no longer thinking about it in reactive terms – as a response to the Townsend movement, the 1938 recession, or other particular events, but as an essential building block of the postwar industrial society.

And he was thinking about it as a matter of human right. Perhaps he was influenced by his wife Eleanor, who a few years later would chair a UN commission drafting a Universal Declaration of Human Rights. Ratified by the UN General Assembly in 1948 (but still not ratified by the U.S. Senate) , the Declaration stated that “everyone, as a member of society, has the right to social security and is entitled to [its] realization.” Article 25 fleshed out the concept and extended it to explicitly include the elderly, disabled, and survivors:

Everyone has the right to a standard of living adequate for the health and well-being of himself [sic] and his family, including food, clothing, housing, medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age, or lack of livelihood in circumstances beyond his control.

It’s difficult to reconcile the kind of sweeping, morally charged language the Roosevelts adopted with the narrow program that was Social Security in its early years, or one a program rigidly tied to a single source of funding. Clearly, I think, FDR’s positions evolved with the political pressures and constraints he felt as president, his frequent tendency to temporize, and his own intellectual views and ambitions. Hiltzik “gets” Roosevelt much better than Schieber, because he doesn’t ascribe to the president a consistency of motive and action that weren’t there. FDR was a politician, in other words, but one capable of growth.

None of this, however, makes Roosevelt very useful to contemporary political players who want to use him to bolster their views on what Social Security was “meant to be.” Both conservatives and progressives looking for an FDR who consistently stood by 100% payroll tax funding of Social Security are out of luck. So are those looking for the opposite, since Roosevelt never explicitly rejected it either.

This is just as well, because even an institution based on intergenerational promises and solidarity must be free to evolve along with the changing needs and desires of its constituents. Otherwise, it atrophies and dies. The healthiest current developments relating to Social Security are undoubtedly the efforts to expand its scope: recent legislation that would extend Social Security benefits to same-sex couples, and a slew of proposals from labor and women’s groups. Among other things, these would award benefits to caregivers based on years they spend outside the workforce, improve benefits for elderly surviving spouses and divorcees, increase the minimum benefit for lifetime low-wage workers, and restore survivors’ benefits for college attendees.

It’s worth noting, too, that there’s no reason why the issue of how Social Security is funded has to automatically constrain efforts to expand and improve it. In his book, Schieber casts Arthur Altmeyer, the first commissioner of Social Security and one of the authors of the program, as one of the stalwarts of the view that Social Security should operate as much like straight insurance as possible:

I say it is inequitable to compel [workers] to pay more under this system than they would have to pay to a private insurance company.

Yet Altmeyer also talked of investing the Social Security trust fund assets in “social undertakings such as … low-cost housing, schools, hospitals,” and even in manufacturing “that could be justified from the point of view of social welfare” – until Vandenberg and others recoiled in horror and decided that Social Security shouldn’t be allowed to accumulate large reserves. As FDR knew, payroll taxes give working people a clear sense of ownership of the program. Privatizing Social Security through payroll tax-funded personal investment accounts is one way to transform the program’s social and economic role. Altmeyer’s comment suggests there are other, more progressive routes.

Nothing about Social Security is settled, except the fundamental principles of mutual aid and collective intergenerational obligation. Which is why attempting to base any further argument on its founders’ intentions is bound to end in failure. As Franklin Roosevelt himself said in statement issued at the signing of the 1935 Social Security Act

This law, too, represents a cornerstone in a structure which is being built by is by no means complete.

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5 thoughts on “Reading FDR’s Mind: “Full Funding” and the Original Intent of Social Security”

  1. I’m not arguing against maintaining Social Security’s current status as a program with its own dedicated revenue stream. Current political realities argue that if this wasn’t the case, Social Security would quickly be branded as “just another welfare program” and on its way to phase-out, just as Dale says above. However, some improvements could be made – benefit accruals for caregivers, benefits for same-sex households, a higher minimum benefit for long-term low-wage workers, etc – under the current funding scheme, because they wouldn’t actually cost much extra. Second, if another tax was added into the mix – say, a revived estate tax – that would be OK by me too, as long as it was understood that that tax would now be exclusively dedicated to Social Security (same with flex benefit earnings, capital gains, and dividends, since relatively more income arguably comes from such sources today rather than from wages). And I don’t see anything wrong with raising the cap, either, because it merely asks the “risk-takers” and “job creators” to pay their fair share for a benefit they already receive.

    But to underscore: The reason I share Dale’s concern about altering the dedicated-revenue-stream approach is that it would undermine the basic profile of Social Security as something we pay for, therefore are “entitled” to the resulting benefits. The point I tried to make in this piece is that I base this position on my reading of current political realities, not on some problematic interpretation of what the “original intentions” were of FDR, or anyone else involved in Social Security 70-something years ago. The political reality today is that for 40-plus years, US economic policy has been weighed down by a basic assumption that this is a zero-sum society, that everything is a trade-off with everything else. As long as this wrong-headed but powerful idea is in place, Social Security needs to be firmly walled off from the rest of the federal budget debate, or its enemies will succeed in turning it into just another bargaining chip. If that changes, perhaps the funding issue can be revisited. But I don’t see that day coming soon.

  2. From above: The reason I share Dale’s concern about altering the dedicated-revenue-stream approach is that it would undermine the basic profile of Social Security as something we pay for…

    Here’s the problem. Social Security is not something I pay for for me. Because it is not, the system is financially unsustainable.

    Every single payment I make is paid to an unknown individual that is retired. When I retire, my children will do the same.

    The biggest problem with SS/Medicare is the demographics are based on unrealistic estimates of life exptectancy. Currently, SSA estimates expectancy to rise 11.8 years this century. This rate is up from a little over 9 years in 2003. It is a moving target.

    Sadly, during the nineteenth century life expectancy increased 12 year, and during the twentieth, 29 years. Over the course of the next two centuries there is not much doubt life expectancy will increase. Short of war and pestilence, life expectancy will move over 100 years and likely exceed 140 years. There is no tax based solution that will support these metrics that would not also condemn the economy to serdom.

    T

  3. The rising life expectancy is not the problem. Believe it or not, this was largely anticipated as far back as the 1930s. Every social insurance system eventually becomes “mature,” meaning there are no free rides left. The real reason Social Security’s “insolvency” date has been getting closer is that real wages have stagnated for most of the past 40 years. That pits a damper on payroll tax receipts. The solution to stagnating wages is not to cut Social Security benefits – which are more badly needed than ever now – but to restore a more equitable economy for working people in this country/
    Thanks for the comment!

  4. Hey Eric,

    The line near the end of your comment not only pissed me off (thats ok in America your allowed to piss people off, its part of our liberties as free people.) but worse it made me wonder if I had lost my ability to reason logically!

    You said: “And I don’t see anything wrong with raising the cap, either, because it merely asks the “risk-takers” and “job creators” to pay their fair share for a benefit they already receive.”

    I pondered for a while and just couldn’t come up with how what I paid into the Social Security system as an employer on behalf of the employees benefited me?????

    I owned and ran a small business for 16 years in South Florida. I put at risk my own money to start and run that business. If it failed it was me and no one else that would lose that money and time.

    That makes me a risk taker, period.

    I also had 5 employees and did the payroll myself. That makes me a job creator, period.

    When I did an employees payroll, I deducted 6.2% for Social Security and 1.45% for Medicare from the employees income earned for doing their job (that I created) so that was their money they earned it. I sent that withholding to the US government. That money was the employees money and of NO BENEFIT to me at all.

    But it didn’t stop there. I also was required by law, under threats of fine and or imprisonment, to match to the penny, the amount withheld from my employees pay and I also sent that into the US Government.
    That is money that would have been profit had I not been required to pay it. Now that would have been a benefit to me!

    So my first question to you is what exactly is my “FAIR SHARE” and who gets to decide that? YOU!!!!

    Second, what benefit am I “ALREADY RECIEVING” from the employees tax I withheld and sent to the government on their behalf?

    Third, what benefit am I “ALREADY RECEIVING” from the profits extorted from me in the form of “matching funds”?

    So please if you will enlighten me on the unfair share I am paying and what the benefits I am “already receiving” from that unfair share.

    If you are just going to give me some touchy feelly answer like I’m benefiting from a better society and the wonderful feeling I’m able to get from giving back, save it.

    Why don’t you instead fill me in on all the jobs you have created, the business you have run, all the money you have put at risk, and explain how that is enough to constitute “YOUR FAIR SHARE”! After all you seem to know.

    Ted

  5. No touchy-feely answers from me. I was referring to the cap on income subject to payroll tax, which has been dwindling down for three decades now, weakening the long-term funding of the Social Security trust fund. Raising the cap (not scrapping, as some have proposed) would boost this back to the level it was at 30 years ago. If you believe the entire Social Security system is a crime because it doesn’t benefit you in any way, then we have no basis for discussion. If, on the other hand, you think the system’s basically OK but you just don’t want to be gouged, then you have nothing to worry about. I’m just proposing how to restore the program’s fiscal health, not rip anyone off. As for “risk-takers,” I wasn’t referring to small business owners, but to extremely affluent people (hedge fund operators, corporate execs who never actually started a business or created a job in their lives, right-wing think-tank denizens, to name a few) who howl in protest every time someone proposes to strengthen Social Security in any way that wouldn’t cripple it or phase it out. That doesn’t include you. As far as I can see, you’ve just been doing your job.

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