With all of the recent talk about social security reform and private investment accounts, I thought we would briefly review how our current system actually came into being. After President Franklin Roosevelt assumed office in 1933, he embarked on the first of his New Deal programs, which dealt largely with public works projects, as well as banking and labor reform.  New Deal II, which Roosevelt commenced during the second congressional term in 1935, saw more of the same, but also, on August 14, 1935, Roosevelt signed into law the Social Security Act (SSA), a piece of legislation which brought the federal government into the field of social insurance for the first time.

The Progressives back in the early 1900s had made similar proposals, and more than one foreign nation had enacted such a program, but the feeling among most in government up until 1935 was that America should stick to its self-reliant roots.  It was the Great Depression that changed all that.

The SSA resulted in the most far-reaching of all the New Deal initiatives and it not only was the “cornerstone” and “supreme achievement” of FDR’s administration, you would probably receive few arguments when calling social security the best government program ever, period.

The SSA provided for unemployment and old-age insurance, as well as various public-welfare programs, with the latter including benefit payments to the blind, dependent mothers and children, and crippled children.  But, of course, the portion of the Act which it is most identified with is its system of old-age pension plans which were to be financed through a payroll tax on employers and employees. 

Though the initial benefits were very modest, with retirees over age 65 receiving monthly payments of between $15 and $22, FDR stressed that social security was not intended to provide a comfortable retirement, but rather it was intended to supplement other forms of income and to protect the elderly from the “hazards and vicissitudes of life.”  It was only later that Americans viewed social security as their primary form of retirement income.

Social security was conservative in nature in that it was funded through taxes on the earnings of current workers.  Most countries with similar programs finance it out of general tax revenues. FDR opted for the payroll tax angle.  As he stated, “We put those payroll contributions there so as to give the contributors a moral, legal, and political right to collect their pensions and their unemployment benefits.  With those taxes in there, no damn politician can ever scrap my social security program.”

The plan certainly had its critics, chiefly because it took away from the aforementioned American individualism.  One New Jersey senator decried that the new law would “take all the romance out of life.  We might as well take the child from the nursery, give him a nurse, and protect him from every experience that life affords.”  In addition, social security is the most regressive program in existence since it is funded by the uniform tax on the current earnings of workers.

The SSA represented a milestone on the way to a welfare state. While workers received a little protection from the scourge of unemployment, as well as the guarantee of a minimum level of comfort for workers in their old age, as historian David Kennedy wrote, “It also created the potential for enormous demands on the public purse, diminished incentives for individuals to save, and reduced the sense of responsibility of families to care for their own elderly members.”

And what few probably realize today, the Supreme Court deemed many of FDR’s New Deal programs unconstitutional, including social security.  Starting with its decision to strike down the National Industrial Recovery Act on the grounds that Congress had allowed government intervention into intrastate affairs, as FDR saw it, the Court began to act like a super-legislature which was determined to thwart the will of the American people.  Thus began Roosevelt’s war against the “nine old men.”

By February 1937, FDR was working in secret on a plan to “pack the Court.”  Eventually, legislation was working its way through Congress which would allow the president to appoint one new justice (up to a total of 15) for each justice who refused to retire within six months of his 70^th birthday.  As historian Michael Beschloss put it, Roosevelt “disingenuously tried to justify his proposal with the argument that an overburdened court needed an expanded membership to handle its caseload.”

Roosevelt lost out in Congress, but, as it turns out, the proposal became moot when the Supreme Court reversed itself on its earlier decisions thanks to the change in position of Justice Roberts, who went to the liberal side and joined Chief Justice Hughes, Brandeis, Cardozo, and Stone in a series of 5-4 decisions which ratified the guts of the New Deal.  It was a sweeping endorsement of the power of government to act for the national welfare.  And, yes, in switching his vote, Roberts’s move was dubbed “the switch in time that saved nine.”

So through these decisions in 1937, the Court brought the Federal Government into the field of social insurance, and gave the broadest possible scope to the congressional power to tax and spend for the general welfare.  It was also another way of granting the government the authority “to regulate the entire economy under its commerce power and to use its power to tax and spend to set up comprehensive schemes of social insurance.”

[Bernard Schwartz]

Ironically, despite all of the above, in June 1937 social security taxes began to take a bite out of everyone’s paycheck.  It not only weakened Roosevelt’s efforts to revive the economy, it helped to precipitate another deflationary downturn that was as bad as that of 1929.  Public consumption was blunted and more than 2 million workers lost their jobs within months.  Nice going, FDR!  Of course, as we have stated often in other stories, it was World War II that ended the depression, not any of the well-intentioned, and still worthy programs of New Deal I and II.

Sources:

“America: A Narrative History,” Tindall and Shi
“A History of the American People,” Paul Johnson
“American Heritage: The Presidents,” Michael Beschloss
“The Presidents,” edited by Henry Graff (article by David Kennedy)
“The Growth of the American Republic,” Morison, Commager, Leuchtenburg
“A History of the Supreme Court,” Bernard Schwartz

Brian Trumbore