Birth of an Entitlement

Learning from the origins of Social Security

When a Social Security advisory council appointed by Health and Human Services Secretary Donna Shalala decides to issue a final report with three reform options, one of which would privatize half the retirement program, and when a Republican presidential candidate not only discusses Social Security privatization but also makes it a key element of his campaign, you know that business is definitely not as usual. In a remarkable turn of events, proposals that once were ignored or denounced as efforts to "smash and destroy" Social Security are being explored as possibly the only real means of saving Social Security. The ongoing support of middle-aged and younger people is clearly threatened by the woefully poor rates of return the program now offers. Numerous proposals circulating on Capitol Hill would move toward a system of true saving, where a portion of a worker's taxes would go directly into a personal retirement account that the worker owns, invests, and earns interest on.

As the idea of privatizing a portion of Social Security gains currency, a debate with the old guard is intensifying over what constitutes "radical" reform. This debate has a certain back-to-the-future quality to it. Far from being universally embraced when first considered, Social Security was bitterly contested in the 1930s and was, at the time, the radical alternative. With real reform now in the wind, it is worth remembering just how close this nation came to maintaining a basically private system of retirement pensions.

FDR's compulsory old-age pension program was nearly stricken from his grander "economic security bill" in the House Ways and Means Committee and again on the House floor, where an amendment to strike the program mustered a third of the votes cast. After this rocky start, the legislation moved to the Senate where an amendment was offered to permit companies to contract out of the public program if they could provide comparable pensions to their employees. Leading to more controversy in the Finance Committee and on the Senate floor than did any other, this amendment was killed in committee by a tie vote, then went on to be approved in the Senate by a wide margin and to stalemate House and Senate conferees.

No doubt the idea that Social Security lacked broad bipartisan support is at odds with many people's understanding of the birth of this mighty program. It is true that the Social Security Act moved through Congress quickly. Introduced on January 17 and signed into law on August 14, 1935, this landmark expansion of the role of the federal government wended its way through Congress and was adopted largely intact in just seven months.

However, what we know as Social Security--the old-age pension program--was just a piece of the Social Security Act that ushered in the modern welfare state. Many now-familiar programs got their start, or at least a federal boost, then too. Federal grants for aid to dependent children (now the AFDC program), aid to the elderly and to the blind (later merged with aid to the disabled into a single program of Supplemental Security Income), and maternal and child health services, to name a few, plus a tax-offset arrangement for unemployment compensation, were all contained in the original Social Security Act.

To appreciate the widespread and bipartisan resistance to Social Security, it is important to recognize the distinction that was made at the time between the problem of preventing poverty in old age and the problem of alleviating poverty among the elderly poor--a distinction that some find difficult to grasp today. Prevention was seen as a problem of retirement-income planning, of personal saving and continued employment, that could and should be addressed through voluntary arrangements--by individuals and families working together with employers, trade unions, fraternal organizations, and financial institutions. Alleviation ultimately came to be seen as a problem demanding at least some government intervention at the state or local level.

In the first three decades of this century, many states debated means-tested public assistance for the elderly poor and several states passed laws enabling counties to collect and dispense funds for this purpose. No one, however, introduced legislation to get the federal government involved in poverty relief for the elderly poor--let alone involved in the direct provision of retirement pensions for working Americans. Advocates of social insurance worked hard to blur the distinction between prevention and alleviation, and between insurance and welfare, in the redistributive programs they promoted. They met with a decided lack of success. In historian Arthur Schlesinger' s words, "While the friends of social security were arguing out the details of the program, other Americans were regarding the whole idea with consternation, if not with horror." Samuel Gompers, leader of the American Federation of Labor for nearly half a century, put his feelings succinctly in 1917. "Compulsory social insurance," he said, "is in its essence undemocratic."

The public was not naive about the political difficulties of controlling public income-transfer programs. The federal government had long provided pensions and other special programs for veterans, and the generosity and cost of these programs had been a subject of continuous controversy. In 1920, the federal government set up a retirement program for its own employees, spending on which quickly outstripped original projections. And, of course, two or thr ee decades' worth of experience with state and local pension funds for teachers, firemen, and other public employee groups revealed the inevitable pressures to increase benefits, defer tax costs, and shift burdens to future generations. Overexpansion, seve re underfunding, and even cutbacks in benefits were not unheard of. In some ways, the political risks attached to long-term benefit promises by government were better understood in the 1920s than they have been since--or at least until very recently.

With the onset of the Great Depression in 1929 and the election of Franklin Roosevelt in 1932, the political landscape began to shift. Old-age assistance programs cropped up in many states, but were strained severely by burgeoning numbers of poor people and shrinking local tax bases. Pressures mounted--especially in the larger, more industrialized states--for federal assistance and a redistribution of tax costs. In 1934, a bill to provide federal matching funds to states operating old-age assistance programs received unanimous approval in both the House Labor Committee and the Senate Finance Committee, revealing broad, bipartisan support for public assistance for the elderly poor.

In a masterful political ploy, however, FDR refused to support the bill and it died at the end of the session. FDR's strategy, clear to all observers at the time, was to take the substantial momentum behind federal assistance for the poor--especially the elderly poor--and leverage it into support for his Social Security Act, a comprehensive legislative program whose heart was the compulsory, government-administered pension program.

Across party lines, members of Congress recognized and complained that they were being put in the position of voting for everything or being labeled as opposed to "social security." As Abraham Epstein, an early proponent of social insurance, described the dilemma for members of Congress, "Their choice was 'all-or-none,' [so] they voted for all and left it to the Supreme Court to separate the good from the bad. " (Interestingly, the terms pension, annuity, and insurance appeared nowhere in the original Social Security Act because of the concern that a compulsory pension program would be found unconstitutional.)

FDR was well aware of the battle to be waged over compulsory old-age pensions. When his Committee on Economic Security submitted its comprehensive legislative package to Congress in 1935, the Great Depression had been raging for six years. The Depression wreaked havoc on everyone--nearly 20 million Americans were on direct relief from the government--but it hit the aged especially hard. Yet not a single bill had been introduced into either chamber of Congress to establish a compulsory old-age pension program. FDR's social-insurance proposal was the first of its kind, even though social insurance had emerged in Europe nearly a half-century earlier, had spread widely among industrial nations, and had been a topic of debate in the United States for more than two decades.

The battle for Social Security began in earnest in the Senate when Sen. Bennett Clark (D-Mo.) offered an amendment to allow companies with private pensions to opt out of the public program. Under the amendment, any company could contract out of the public program if it had a pension plan that off ered benefits at least as generous as the federal program, provided that the plan was available to all employees, that premiums were deposited with an insurance company or approved trustee, that employee contributions plus interest were refunded to the gov ernment in the event an employee's job was terminated, and that the company was willing to subject its books to federal scrutiny. Employees of companies that contracted out would have their choice of the public or private plan. (Those familiar with modern social security systems will recognize the concept of company-wide contracting out from systems in the United Kingdom and in Japan.)

While the Clark amendment conceded a great deal to Social Security proponents--it accepted, for instance, the premise of compulsory participation and left companies exposed to substantial federal regulation--it nevertheless would have given workers some degree of choice and given employers the right to compete with the government in providing retirement pensions. Individual choice and competition in supply would help ensure maximum value for workers' tax "contributions," protect workers' non-contractual rights to future benefits, and provide a much-needed check on the use of Social Security for the purposes of income redistribution

According to University of Chicago economist Paul Douglas, a leading figure in the social-insurance movement and later a U.S. senator, the fight over the Clark amendment was "the most vigorous" of the debates surrounding the economic security bill. And little wonder: In less than 10 sentences, the amendment cut through the "insurance" rhetoric and exposed the redistributive underpinnings of Social Security.

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