The Birth Of Social Security

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The old-age group would have been happy to adopt a “pay-as-you-go” scheme wherein current income from contributory payments covered current outgo through benefit payments. But circumstances made this impossible. The day on which pensions began going out to all in the system who achieved age sixty-five could not be postponed for long; and the very first payments had to be large enough to actually mean something to their recipients. And included in the system would be people now in late middle age, who, with their employers, would make contributory payments for only a few years before retiring—people who therefore would have credited to their Social Security accounts far less than they would extract from the system in benefit payments, even though these last were cut to the smallest practicable amount.

In other words, the system must assume at the outset a heavy accrued liability. Must this be fully covered by a reserve fund, as in a private insurance enterprise? If so—if the system, though using government power to compel individual participation in it, were denied the power to underwrite any part of it with the credit of the United States—this reserve must be built up either immediately, through shockingly high initial contributory rates, or later through a sudden, equally painful increase of rates. Moreover, the reserve fund must then soon assume truly awesome proportions. It could approximate the size of the total national debt: not enough federal securities would be available to absorb it.

The outline proposed a compromise solution to the problem, one that fused “pay-as-you-go” with deferred federal financing. There would be no immediate draft on the federal treasury; neither would the initial contributory rates be set shockingly high. Instead, the rates were to begin at one-half of one per cent each for employer and employee, gradually increasing to (in 1956) two and a half per cent each. At that point, the federal government would be called upon to supply whatever additional money was needed to maintain a reserve of $11 billion. This, the outline argued, was the only possible way of paying reasonably high benefits in the early years while also avoiding the build-up of impossibly huge reserves. According to Otto Richter’s projections, if the proposal were accepted, the federal Treasury contribution would approximate $1.4 billion annually by 1980.

Neither Rubinow nor Epstein could approve this compromise on grounds of logic or justice—and Epstein even found it impossible to accept, as Rubinow was inclined to do, on grounds of expediency. To Epstein, the exclusion of the federal government from equal financial partnership in this enterprise was the opposite of progressive. Under the present proposal, he pointed out, for the next several decades at least, the wealthy deriving their incomes from investments actually would have a smaller proportionate obligation for poor relief than they had had under the ancient Poor Laws of England and the Continent. Without revenue derived from the graduated income tax, Social Security was to be financed by a highly regressive special tax which the employee, in effect, paid twice, first as employee and second as consumer: for the so-called employer contribution would at once be passed on to consumers in higher prices, and the employee, perforce, spent virtually all his income on consumer goods. Thus the system would perpetuate, or even increase, that maldistribution of total national income which was a root cause of the current Depression.

 
 
 
 
 

The argument was powerful—was, indeed, unanswerable in its own terms.

But there were other terms in which Barbara Armstrong and her colleagues felt forced to think. Even after the administration had been obliged publicly to recommit itself to old-age insurance, the old-age section leaders worried that their plan for a national old-age system would be rejected by the cabinet committee, acting on advice from Executive Director Witte. So the section leaders dared not increase their risks by incorporating in their proposal a financing scheme that was bound to provoke conservative opposition, and which Roosevelt himself was known to oppose. They rejected Epstein’s advice. They stuck to their uneasy joining of pay-as-you-go with a partial reserve and a future partial funding annually from general revenues, recommending this in the final report to the executive director made in late December, 1934.

It then became part of the final staff report and legislative recommendation to the cabinet committee—covering both unemployment insurance and oldage security, along with a few token gestures in the field of public health - which, after minor changes, was signed by every member of the committee and submitted to the President on January 15,1935.