- Historic Sites
The Birth Of Social Security
Had Franklin D. Roosevelt not been so conservative, we might have had national health insurance forty years ago
April/May 1979 | Volume 30, Issue 3
Judged by its direct and profound I influence upon individual and collective lives, no social legislation in all American history is more important than the Social Security Act of August, 1935. And of no other New Deal measure is the legislative history more instructive for one who would understand the essential nature and central purpose of the Roosevelt administration, and the ways in which the mind, character, and temperament of Franklin D. Roosevelt had major shaping impact upon today’s America.
In the spring and summer of 1935 there was, of course, much impassioned public commentary on the allegedly “revolutionary” nature of the New Deal. Widespread among both opponents and supporters of Roosevelt was the belief that profound structural changes were being made in the American system, effecting a major and permanent shift of ruling power from property to people. As government became more representative of, and responsive to, the great mass of citizenry, it used its spending and taxing powers drastically to alter the incomedistribution pattern of the United States, reducing the percentage going to the affluent, increasing the percentage going to the poor—and direct government intervention in the economy (Agricultural Adjustment Administration, National Recovery Administration, Tennessee Valley Authority, et al.) rectified the glaring deficiencies of the old “capitalist” order with a species of socialism. Such was the popular view.
But it was sharply challenged by an informed minority. Many close observers of the current scene, including most of the political Left, could discern in the overall thrust of the New Deal no intention to achieve any great increase in egalitarianism, any important modification in the basic power structure of America. Insofar as changes were made in these directions they were incidental to a central purpose that, far from being “radical,” was profoundly conservative. This purpose was to prevent social revolution. Roosevelt gathered together and focused energies which, released by the debacle of American capitalism following the crash of ’29, had been driving toward fundamental change; but he did so to divert these forces from their logical ends and then dissipate them in relative ineffectually. If Roosevelt “carried out” the Socialist program, commented Socialist Norman Thomas, wryly, he did so “on a stretcher.”
In other respects, the New Deal was a salvage operation: it aimed to restore the wrecked profit system to some kind of working order with a bare minimum of the most obviously needed reforms. Why, then, was Roosevelt so bitterly hated by conservative businessmen? Because they generally were ignorant of the historic forces he mastered on their behalf. They reacted blindly to his public rhetoric, which, being usually of the political Left, insulted them. They failed to note the discrepancy between his words and his deeds.
An example of that discrepancy was his handling of the great banking crisis of March, 1933. The nation’s credit structure had collapsed, and bankers, utterly discredited and demoralized, were objects of vast popular wrath. Roosevelt castigated them in his inaugural address as “unscrupulous money changers,” leading many to believe he intended to nationalize the banks. (This “could have been accomplished without a word of protest,” and should have been, wrote New Mexico senator Bronson Cutting a year later—the same Cutting to whom Roosevelt had offered the post of Secretary of the Interior.) Instead he summoned leading “money changers” to Washington, asking them for their ideas on banking reform (they had none, as the chief of the Brains Trust, Raymond,Moley, discovered to his disgust); and it seemed to some observers both typical and significant that the single important structural change resulting from the crisis, the Federal Deposit Insurance Corporation, was one Roosevelt opposed from first to last, yielding finally to irresistible pressures.
The same held true with regard to the crisis in labor-management relations resulting from the business community’s adamant hostility to collective bargaining. When Senator Robert Wagner’s historic labor-relations bill was introduced in 1934 and again, in revised form, in February, 1935, Roosevelt pointedly refrained from endorsing it. Indeed, Wagner had to work hard to keep Roosevelt from supporting efforts of conservative senators to block a floor vote on the measure. Not until it had passed the Senate without his approval in May and appeared certain of easy passage through the House did the President stamp the bill “must” legislation. It overwhelmingly passed the House in June, by voice vote, whereupon Roosevelt hailed it as “a tremendous step forward” and signed it with a flourish.
Less clear cut, but of the same kind, were Roosevelt’s dealings with the social insurance movement as it approached culmination in the Social Security Act of 1935.
Social insurance was first effectively conceived in Bismarck’s Germany, largely by the Iron Chancellor himself, to halt the growth of German socialism. It was “to bribe the working classes … to regard the State as a social institution … interested in their welfare,” as he once said, that Bismarck sponsored a health insurance law in 1883, accident insurance laws in 1884 and 1885, and an old-age insurance law in 1889, all of them compulsory contributory insurance schemes involving the build-up of reserves. From Germany, compulsory social insurance spread to Austria (1888), Hungary (1891), Luxembourg (1901). England’s Old Age Pension Act was passed in 1908 and was followed, in 1911, by a comprehensive National Insurance Act, which instituted national health insurance and unemployment insurance. The British insurance schemes, it should be pointed out, differed from the German in that the British government participated financially in the enterprise: payments were made out of the general tax revenues into insurance funds.
Meanwhile, in the United States, though the Western frontier had ceased to exist by 1900 and the nation had become an industrial power, agrarian frontier attitudes continued to prevail in the popular mind. Self-reliance and private, voluntary charity were deemed morally good; social welfare was deemed morally bad (it “destroyed initiative,” it “weakened character”); and since the frontier placed a premium on youthful hardihood, there was a tendency to neglect the indigent elderly. Not until the second decade of the present century, largely through the activities of the American Association for Labor Legislation (AALL), established in 1906 to lobby for laws beneficial to industrial workers, did America even begin to consider seriously the need for social insurance that an advanced industrialism brings with it.
AALL’s founders, inspired by the German and British examples of social legislation, were mostly academics, of whom two of the most prominent, both from the University of Wisconsin, were political scientist Richard Ely and economist John R. Commons. The latter secured the appointment of a former student of his, John B. Andrews, as the organization’s executive secretary, a post Andrews retained until his death in 1943.
From the outset, therefore, AALL’s operations were greatly influenced by what came to be called the Wisconsin Idea. This involved close collaboration between government and university in the business of the state - an idea born of the physical proximity of capitol and university in Madison, and of the fact that Wisconsin politics were dominated by a great Progressive, the elder Bob La Follette, at a time when the university had an exceptionally able faculty. AALL’s principal founders were practical-minded men of good will, inclined to deal with immediate problems in their own immediate terms, with no great concern for “underlying” principles or “overall” ideas.
But there was also among AALL’s charter members a man, then chief actuary and statistician of a large insurance firm, who greatly differed from the Wisconsin contingent in almost every respect. Isaac M. Rubinow was a socialist by political conviction and an idealist in both the common and philosophical meanings of the term. Born a Russian Jew, he immigrated to New York in 1893, when he was eighteen, graduated from Columbia two years later, took an M.D. from New York University in 1898, and then practiced medicine for several years among New York’s poor. In 1903, having become convinced that the health horrors he daily encountered were at base a socioeconomic problem, not a medical one, he abandoned his medical practice in order to devote himself to what he called the “continuous and obstinate agitation for social insurance.” By the mid-teens he had written two classic books in his special field— Social Insurance (1913) and Health Insurance (1916)—in which he was eloquent in arguments for social approaches to social problems, caustic in his denial that “voluntarism” or “individualism” had validity as other than subsidiary ways of dealing with the welfare needs of an advanced industrial society.
It was inevitable that such a mind often would disagree profoundly with the policy line of Commons and Andrews. Rubinow did so with regard to the first two of AALL’s major campaigns, that for workmen’s compensation, launched in 1911, and that against unemployment, launched in 1914. In both cases, in model legislation pressed upon the states, the Commons Andrews leadership placed its major emphasis on prevention of the evil (industrial accident, sickness, unemploymen t) rather than on compensation of the injured: the compensation provisions were designed to “stimulate both workman and employer to reduce the risk,” as AALL’s official publication put it. This was a mistake, said Rubinow: prevention and insurance were “two distinct social efforts” that, tied into the same package, confused and corrupted one another. Both workmen’s compensation and unemployment insurance ought to be conceived frankly and wholly as insurance schemes, he said, designed to protect the individual worker against risks that are “inevitable” in “economic activity.”
With the third of AALL’s major campaigns, that for compulsory health insurance, launched in 1915, Rubinow found himself more in agreement. Here again AALL’s leadership stressed the “prevention of sickness” as a goal, and health insurance as a means of achieving it. But in the health field the inadequacy of voluntarism and private initiative was so patent, while binding social action was so clearly the only sensible solution, that AALL’s main emphasis accorded with Rubinow’s basic philosophy. The standard health insurance law proposed by AALL to the states stressed the compulsory requirement: by means of it, coverage was rendered universal instead of partial, and the need for expensive reserves was reduced. The model legislation was also redistributive of income insofar as most of the cost was borne by employer and state, each of whom (argued AALL) had a responsibility for the general health situation far greater than the workers had.
None of these three campaigns came close to achieving its objective. Most states passed workmen’s compensation laws, but these had no clearly demonstrable effect upon accident rates (other factors worked to reduce accidents) and they inadequately compensated the victims of accident and occupational illness: the injured worker continued to bear the bulk of the financial burden imposed by his injury. A mere handful of employers in the whole of the nation even attempted the employment “regularization” schemes proposed by A ALL, whereas the need for unemployment insurance increased even during the 1920’s, when New Era prosperity reigned. The campaign for compulsory health insurance failed most dismally of all. It aroused intense national controversy for half a decade, and in two states, New York and California, the model legislation seemed at one point close to passage. But in the end the proposal was everywhere decisively defeated.
Its chief opponent was the medical profession itself, whose concern to spread the blessings of medical science to the economically disadvantaged in any efficiently organized way proved to be minimal, or, at any rate, to lag far behind the concern for entrepreneurial freedom and private profit. Medical associations—state, local, nationalwaged ruthless war on the measure, learning and employing every trick of pressure lobbying and misleading propaganda, including appeals to the mind-befogging patriotic passions aroused by World War I. Health insurance was damned as a German conspiracy or (after the autumn of 1917) a Bolshevik plot. Consequently, from AALL’s point of view, the entire effort was ultimately counterproductive. The American Medical Association had not theretofore been much involved in politics, but it emerged from this struggle a remarkably potent political lobby and could be counted upon, ever after, powerfully to oppose any legislative proposal that might reduce in the slightest the private-entrepreneurial nature of American health-care delivery.
Small wonder that, as postwar reaction swept America into the 1920’s, AALL’s leadership was discouraged from further efforts along the same line. The new decade’s principal effort in the field of AALL’s interest was initiated not by AALL but by one of America’s zoological garden of fraternal associations, the Fraternal Order of Eagles. Every state had a number of so-called Eagle Aeries, whence came delegates each summer to a national policy-making convention called the “Grand Aerie”; and it was the Grand Aerie of 1921 that, at the behest of a “Past Grand Worthy President” named Frank E. Hering, committed the Eagles to a campaign for state old-age pensions. The time had come, said Hering, to stop consigning “our unfortunate aged to pauper institutions, humiliated, humbled, and, not infrequently, mistreated.”
The subsequent campaign was highly effective in calling popular attention to old-age dependency as a great and growing social problem in America; it was far less effective in providing solutions to the problem. True, the Eagles were largely responsible for the fact that eleven states had old-age pension laws on their books by 1930, whereas no state had such a law in 1921 (Alaska Territory had one, passed in 1915). Moreover, this was accomplished despite strong opposition from business organizations in a time when businessmen dominated the American scene as never before. But this triumph, alas, was more apparent than real. What opponents could not wholly defeat they still might vitiate, and they were aided in doing so by the Eagles’ lack of professional expertise and their willingness to compromise in order to achieve paper victories. Most of the resultant legislation was fatally flawed: it was optional rather than compelling of local compliance, it required local funding, and it confusedly mingled “moral” concerns with economic need in deciding pension rolls. (Hering’s own published belief was that, to become a pensioner, one should have a “history of habitual industriousness, habitual loyalty to family obligations, and freedom from all crimes involving more than four months imprisonment.”) Only six of the state laws were even nominally in effect in 1929, and these produced few actual pensions—a mere twelve hundred or so concentrated in Alaska, Montana, and a few Wisconsin counties, totaling $222,000.
Clearly, if the old-age problem were to come even close to a solution, a new, better-organized approach was needed. And by 1929 such an approach was being made through the American Association for Old Age Security (AAOAS), which had been launched two years before by Abraham Epstein. Like Rubinow, Epstein was a Russian Jew who immigrated to New York City when he was eighteen (in 1910). Like Rubinow he was intellectually brilliant, identified himself with the economically disadvantaged, and became passionately committed to social insurance. He differed from Rubinow in the greater emphasis he placed upon income redistribution as an aim of social insurance, insisting more strenuously that government must contribute to insurance funds. He differed, too, from Rubinow in temperament, being more impatient, abrasive, touchy; his career was marred by bitter quarrels with professional colleagues, including Andrews, whose policy lines he of course deplored, and with Hering, whose assistant he briefly was when the Eagles’ campaign was launched. Yet more than any other one man, Epstein was responsible for the fact that, by decade’s end, social insurance was again a live idea in America, with its central focus on old-age security—even after the deepening Depression made mass unemployment the nation’s crucial immediate concern.
In 1932, while Herbert Hoover was yet in the White House, Senator Clarence C. Dill of Washington and Representative William P. Connery, Jr., of Massachusetts introduced in Congress an old-age bill, prepared and sponsored by Epstein and AAOAS, calling for federal grants-in-aid, totaling onethird of the costs of old-age pensions, to states adopting acceptable old-age laws. Inherited by the New Deal Congress, the Dill-Connery bill was reported favorably out of the Labor Committee of the House and the Pensions Committee of the Senate in early 1934. It would then certainly have passed Congress with a large majority if the President had specifically endorsed it or even indicated he had no objection to it. Roosevelt declined to do so—and that was the beginning of the way, the decisive way, in which FDR’s mentality, long-term purposes, and political techniques influenced the final development of American social security.
Roosevelt himself was influenced in some degree by Rubinow and Epstein, or by their ideas, largely through Frances Perkins, whom he appointed state industrial commissioner when he became governor of New York in 1929. She it was who, at his request, wrote the words he addressed to the conference of governors at Salt Lake City in July, 1930, which made him the first major national political figure to come out for mandatory unemployment insurance, and stamped his image upon the public mind as that of a bold, forceful, enlightened liberal. The address also called (this went less noticed) for old-age benefits to be paid out of joint contributions by employers, employees, and government. The influence of Rubinow and Epstein is clear. Six months later, Frances Perkins encouraged Roosevelt to summon a governors’ conference of his own—the chief executives of the Middle Atlantic and New England states—to discuss the possibility of concerted action against a then swiftly rising tide of unemployment. To help prepare for this conference, she called to Albany young Paul H. Douglas, a brilliant University of Chicago economist, whom FDR at once “liked … and trusted,” as Madam Perkins later wrote. Douglas was a friend and disciple of both Rubinow and Epstein.
But this Rubinow-Epstein-Douglas influence was not the only one brought to bear upon Roosevelt’s thinking about social welfare. There was also the influence of the Wisconsin Idea, manifested by the Commons-Andrews leadership of AALL—an influence greatly strengthened in January, 1932, when Wisconsin governor Phil La Follette (son of “Bob”) signed into law an unemployment compensation bill that the state legislature had passed in December.
Drafted by Wisconsin University economics professor Harold R. Groves, who was a legislator, and Paul Raushenbush, whose wife Elizabeth (she collaborated in the drafting ) was a daughter of U.S. Supreme Court Justice Brandeis, the Wisconsin law had unemployment prevention as its central theme. It required each firm employing ten or more persons to establish a reserve fund out of which any employee earning less than fifteen hundred dollars annually would, if thrown out of work, be paid half his weekly wage (up to ten dollars a week) for ten weeks. Farm workers, loggers, and employees making more than fifteen hundred dollars were not covered. The rate of required contribution and the size of the individual firm’s reserve varied with the firm’s employment record: if it had a stable record, its reserve could be relatively small; if its record showed wide fluctuations in the number employed, its reserves must be larger. This was called “merit rating.” The law was not to go into effect until July 1,1933, to give employers opportunity to institute “voluntary plans” along the indicated lines.
This so-called Wisconsin Plan was greatly and glowingly publicized by its proponents, including AALL’s leadership, who stressed its conservative “Americanism.” The measure, said Commons, should appeal to the “individualism of American capitalists who do not want to be burdened with the inefficiencies or misfortunes of other capitalists, and it fits the public welfare policy of a capitalistic nation which uses the profit motive to prevent unemployment.” But the “capitalists” whom Commons was so concerned to propitiate showed no grateful enthusiasm for this effort on their behalf: Wisconsin’s industrialists resisted the law’s application to them as long as they could, ultimately forcing a year’s postponement of the date the law went into effect. Equally negative, for opposite reasons, was the response of intellectual leaders of the social insurance movement. Epstein and Douglas, among others, pointed out that the Wisconsin Plan, with its combine of individual reserves and merit rating, assumed that American “capitalists” operating individually did or could control economic forces which in that very year had produced massive and growing unemployment. The assumption obviously was false: the individual business, even when large, now showed itself (even proclaimed itself) as much a victim of general conditions, and almost as helpless in the face of them, as the individual worker who lost his job.
Nor was the Wisconsin Plan long vithout a rival. It soon was chalenged by a clearly defined alternative—a so-called Ohio Plan, announced in November, 1932, in the form of proposed legislation, by an Ohio commission on unemployment having Rubinow as its key “idea” member.
Reflecting Rubinow’s views, the Ohio Plan differed from the Wisconsin Plan in that it would establish a single pooled fund under full public control instead of individually segregated reserves under employer control; it required contributions to the fund from employee as well as employer, the former contributing one per cent and the latter two per cent of the recorded employee wage; and it would pay the unemployed worker half his weekly wage (but up to fifteen dollars instead of Wisconsin’s ten) for sixteen weeks (instead of Wisconsin’s ten). The proposal soon gained more adherents among serious students of social welfare than had the Wisconsin Plan. But, conversely, it was more strongly opposed by the business community. The Ohio Chamber of Commerce promptly published (December, 1932) a “critical analysis” in which the proposed legislation was denounced as “the most menacing and revolutionary” in Ohio’s history—an “attempt to foist upon the United States foreign ideals and foreign practices” that threatened “complete disruption of our American system of individual responsibility.”
There were criticisms, too, from the liberal side. Epstein and Douglas, for instance, though immensely preferring the Ohio to the Wisconsin plan, were sure that the failure to require governmental participation was a serious defect.
Some of Epstein’s sharp criticisms of individual firm reserves and merit rating evidently had some effect upon Raushenbush and, through him, upon initial New Deal planning for social insurance. In the fall of 1933, seven months after Roosevelt moved into the White House and Frances Perkins became Secretary of Labor, Raushenbush came from Madison to Washington for the express purpose of persuading the administration to promote adoption by the states of mandatory unemployment compensation laws. But he was far less insistent that these laws slavishly follow the Wisconsin model than might have been expected. Instead, he proposed to give the states ample leeway for innovation and free choice between salient features of the Wisconsin and Ohio plans. He placed his greatest emphasis upon an ingenious device developed by his fatherin-law, Mr. Justice Brandeis, for federal inducement of the desired state action. It called for a federal payroll tax upon employers equivalent to 5 per cent of the total wages paid employees, but with the proviso that, in states adopting mandatory unemployment-compensation laws meeting the minimum standards, employers could deduct from the federal tax whatever contributory payments they made under the state acts. This not only would stimulate state adoption of mandatory unemployment insurance, it also would protect employers in states having such laws against unfair competition from employers in states not having them.
The idea was first presented by Raushenbush to a group of young New Dealers (Thomas G. Corcoran was one of them) and pro-New Deal businessmen (including Edward A. Filene) at a meeting in Brandeis’ apartment. Mr. Justice Brandeis was not there: perhaps he absented himself out of deference to
the constitutional separation of powers. But his idea moved quickly and persuasively into the minds of Raushenbush’s auditors and received, a day or so later, the tentative blessing of Secretary of Labor Perkins. Raushenbush and a Labor Department lawyer then drafted along the indicated lines a bill which was introduced in the U.S. Senate by Wagner, and in the House by Maryland’s David J. Lewis, in February, 1934; it was endorsed by Roosevelt a month later.
The presidential approval, however, soon proved to be halfhearted and tentative. No more than the Dill-Connery old-age bill did the Wagner-Lewis unemployment bill receive effective White House backing. Like Dill-Connery, it languished in congressional halls, never coming to a floor vote.
Why did Roosevelt thus delay congressional action on what, by 1934, was just beginning to be called “social security”? (Use of the term was partly due to Epstein, who in 1933 had broadened his AAOAS program to include unemployment insurance and had renamed his organization the American Association for Social Security.) All we can be sure of is that the delay continued and that, during it, popular pressures for farreaching welfare legislation grew rapidly toward a point beyond which the White House would be unable to exercise decisive control over them.
In January, 1934, an impecunious, sixty-six-year-old medical doctor named Francis E. Townsend, of Long Beach, California, organized a nonprofit corporation called Old-Age Revolving Pensions, Ltd., to promote what soon became known nationwide as the Townsend Plan. Simultaneously, Louisiana senator Huey P. Long launched what he called a Share Our Wealth Society, its slogan “Every Man a King,” which soon spawned local chapters across the land. Townsend proposed to give two hundred dollars a month to every person over sixty who retired from active employment and spent the full amount within a month after its receipt, the scheme to be financed by a two per cent tax on all “transactions”- a general sales tax, in other words. Long proposed that the federal government provide every family with a five-thousand-dollar “homestead,” guarantee a family income of two to three thousand dollars annually, give “adequate” pensions to the old and generous bonuses to veterans, and provide a college education for all youths of “proven ability.”
Neither of these grandiose schemes had yet sparked a mass movement but they were clearly on the way to doing so when Roosevelt, on June 8, 1934, sent Congress a special message saying that, among New Deal objectives, “I place the security of the men, women and children of the nation first,” and advocating “some safeguards against misfortune which cannot be wholly eliminated in this man-made world.” He still failed to plump for either Dill-Connery or Wagner-Lewis, however. Instead he suggested that legislative implementation of the administration commitment be deferred until early next year, to give time for further study by a special Committee on Economic Security which he soon would appoint, and the preparation by it of definite legislative proposals to be presented to Congress in January, 1935. He established the committee by executive order three weeks later: it consisted of Secretary of the Treasury Henry Morgenthau, Jr., Secretary of Agriculture Henry A. Wallace, Attorney General Homer Cummings, Relief Administrator Harry Hopkins, and Secretary of Labor Perkins, who was named chairman.
But the real work was to be done by a full-time professional staff whose appointment was awaited with mingled eagerness and anxiety by those most dedicated to social insurance. And at least some anxiety proved justified. Not one of the major ideological leaders of America’s social insurance movement was appointed—not Rubinow, not Epstein, not Douglas. Instead, economist Edwin E. Witte of the University of Wisconsin, a former student and protégé of Commons, was named executive secretary; second assistant Secretary of Labor, A. J. Altmeyer, also from Wisconsin, was named chairman of the committee’s Technical Board on Economic Security; and these two, who themselves had been involved in the Wisconsin Plan, naturally were inclined to choose staff members generally sympathetic to that plan and their views.
The staff finally assembled, however, was too large to be of the same mind on any subject and was surrounded by what Paul Douglas called a “bewildering cluster of advisory committees,” the chief being a general advisory council of distinguished citizens chaired by the president of the University of North Carolina, Frank P. Graham. The staff itself was organized into three sections, the two largest having to do respectively with unemployment insurance, on which popular attention was focused, and health insurance, on which the baleful eyes of the AMA were focused. Much smaller was the section dealing with old-age security, in which Witte and the Wisconsin group had relatively little personal interest.
Almost from the moment it began its work, the large and cumbrous unemployment insurance section was embroiled in fundamental controversy not wholly free of acrimony. Should unemployment insurance be administered by the federal government, or in separate pieces by the forty-eight states? National administration would ensure uniform standards among states, with equal treatment of workers who moved, as workers now increasingly did, from one state to another. It also would be more efficient. It was favored strongly by Rubinow, Douglas, and Epstein, none of whom, however, was called in for direct, formal consultation on the matter. It was also strongly favored by at least one member of the top cabinet committee, Henry Wallace. But to Witte and the Brandeisians of the Wisconsin group, with their vested intellectual interest in the Wisconsin Plan, the national scheme was anathema. They pressed hard for a statefederal scheme in which the ingenious “offset” device of Brandeis’ invention, incorporated in the 1934 Wagner-Lewis Bill, would be used to stimulate state adoptions of implementing legislation. They argued that Congress, because of “state jealousies and aspirations” (Perkins’ words), was more likely to buy it than a purely national scheme; and that the conservatives of the U.S. Supreme Court were less likely to declare it unconstitutional.
The controversy raged unresolved all through the autumn of 1934. “Finally, one day during Christmas week … I issued an ultimatum that the Committee would meet at eight o’clock at my house for the evening … and that we would sit all night, if necessary, until we decided the thorny question once and for all,” wrote Frances Perkins in The Roosevelt I Knew . “We sat until two in the morning, and at the end agreed, reluctantly and with mental reservations, that for the present the wisest thing we could do was to recommend a federal-state system.”
There remained the issue of individual reserves joined with merit rating (as per the Wisconsin Plan), versus a pooled reserve with no merit rating—an issue that the cabinet committee finally resolved by adopting a compromise proposed by Altmeyer. Altmeyer was by this time doubtful of the plan to which he had been initially committed (years later he told a congressional committee that merit rating was a bad idea, that unemployment insurance ought to have been established on a national basis); and his proposal was one that constricted merit rating almost to the point of extinction. The employer, by this proposal, could divide his total contribution between his individual reserve and the pooled reserve, but to the pooled reserve he must contribute a minimum of one per cent of his payroll—and in no state with an unemployment compensation law had the average overall employer contribution been more than one and a half per cent. In the end, however, this arrangement foundered on the conservatism of Congress and President. At a critical point in the subsequent legislative proceedings, Roosevelt backed those members of Congress who wished to restore merit rating, and so it was restored (with segregated reserves) in the final Social Security Bill. The consequences, easily predictable by those best informed on the subject, were in every respect deplorable. “As a result of merit rating,” writes Arthur Schlesinger, Jr., “states with low standards and low tax rates tended to enjoy a competitive advantage over states with higher standards. Moreover … the burden of unemployment compensation [was increasingly placed] on the industries least able to bear it….”
As for the large staff devoted to health insurance, a few of its members professed to believe, with Harry Hopkins, that “with one bold stroke we could carry the American people with us … for sickness and health insurance”; but even these few had to concede the extreme unlikelihood that any such “stroke” now would be attempted. In the end, relatively innocuous recommendations were made by the committee for federal grants-in-aid to state public health services. None were made for national health insurance, this being foredoomed by the implacable hostility of the AMA and Roosevelt’s obvious unwillingness to challenge it. In his one public statement on the matter during the period of committee operation, he spoke of “the problem of economic loss due to sickness” as “a very serious matter for many families … and therefore an unfair burden upon the medical profession [emphasis added],” and said that any proposal ultimately made for health insurance must be such as would “enhance and not hinder the remarkable progress … being made” by the medical profession.
Far happier in process and outcome were the deliberations of the smallest of the three staff sections, that dealing with old-age security—and for this its very smallness was in part responsible. It “proved a great boon,” wrote J. Douglas Brown, a Princeton expert who was one of the four key members of this section, the other three being Barbara Armstrong, a University of California law professor who was section head; Murray W. Latimer, first chairman of the Railroad Retirement Board; and Otto C. Richter, actuarial expert of American Telephone and Telegraph.
From the first, these four were agreed that any workable old-age plan must be national in scope and administration. Their response to the constitutional problem was pragmatically hopeful: “Since law is a living science,” they wrote in a crucial memorandum, “it is reasonable to assume that… our system of constitutional law will evolve in time to support… [a sound old-age] program.” They were drawn together in a close working community by their sense of being faced by inimical forces. They were aware from the first that the executive director, Edwin Witte, had relatively little interest in their work, being himself primarily concerned with unemployment insurance—and in midNovember, when their insistence upon a national rather than state insurance scheme had been stressed repeatedly, they were brought suddenly to realize that the very survival of their project was threatened, not only by the priorities of the executive director but also by those of the President.
This jolting realization came during a national conference on economic security (some two hundred interested professionals) assembled on November 14 in Washington’s Mayflower Hotel. The White House sponsored it for two main purposes. One was to offset growing Townsend-Long pressures with public evidence of the administration’s concern; the other was to give inspiration to all laboring under the aegis of the Cabinet committee. And the latter purpose was served by Relief Administrator Hopkins with a luncheon address that seemed to commit the administration, once and for all, to the single “bold stroke” in which “all phases of social security” would be comprehended. The audience response was enthusiastic. Even the feeble hopes for health insurance were revived momentarily.
But barely three hours later, when the President himself addressed the conferees, reading a speech for which the initial draft had come from Witte, the sole immediate commitment he made was to unemployment insurance, which, he stressed, must not be allowed to become “a dole” through “a mingling of insurance and relief” but “must be financed by contributions” exclusively. Bowing to the AMA, he dismissed health insurance as a present possibility, using words already quoted. His similar dismissal of old-age security, however, astonished and dismayed a substantial portion of his audience. “I do not know if this is the time for any federal legislation on oldage security,” said he, going on to deplore “organizations promoting fantastic schemes” whereby hopes impossible of fulfillment were aroused. These had “increased the difficulties of getting sound legislation: but I hope that in time we may be able to provide security for the aged….”
Initially stunned (“It’s the kiss of death!” cried Barbara Armstrong), members of the old-age section quickly rallied and fought back with the only weapon they had at hand, that of publicity. Next day the national chain of Scripps-Howard newspapers carried an editorial sharply critical of Roosevelt’s abandonment of old-age security, written by Max Stern, a personal friend of Barbara Armstrong’s; and the New York Times carried a lengthy story under a three-column front-page headline, by Louis Stark, telling how great expectations had been aroused by Hopkins only to be dashed by Roosevelt when he “chopped the entire social security program down to one subject for early enactment—unemployment insurance.”
Within hours Secretary Perkins, informed of the President’s displeasure over the “press” his speech was getting, conferred with Witte, and Witte, greatly agitated, came to the office shared by Brown and Armstrong to ask why, in their view, the speech was reported as it was. No doubt because the President had said what he said, the two blandly replied: obviously old-age security had wide popular support. That afternoon Secretary Perkins expressed to newsmen her surprise and annoyance at the “interpretation” reporters were placing on the speech. Roosevelt, she said emphatically, was not opposed to oldage legislation by the upcoming session of Congress; a “broad comprehensive program of economic security” remained the administration goal. And in fact, as Perkins revealed later, FDR had conceded to her, “We have to have it. The Congress can’t stand the pressure of the Townsend Plan unless we have a real old-age insurance system, nor can I face the country….”
And at that very moment, key old-age section members were meeting with Epstein and Rubinow to review a draft “Outline of Old Age Security Program” completed just a few days before. In it, to a degree that seemed to these expert consultants dangerously mistaken, the private insurance model was being followed—in good part because the President was known to think in this way. (“If I have anything to say about it,” Roosevelt would tell a press conference in 1937, “it [the total financing of Social Security] will always be contributed, and I prefer it to be contributed … on a sound actuarial basis. It means no money out of the Treasury.”)
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.
But if the President gagged at the compromise old-age funding scheme when it was first presented to him, he was evidently in process of swallowing it anyway, as a political necessity, by mid-January: it was part of the Social Security Bill introduced in Congress on January 17 by Senator Wagner and Representative Lewis, then assigned, as a tax measure, to the conservative Finance Committee of the Senate, and the equally conservative Ways and Means Committee of the House. Many proponents of Social Security thought it should have been classed a welfare measure and assigned to the liberal labor and pension committees of the two houses; and that it would have been but for White House fears that its provisions might then have been liberalized before it was reported out. The opposite happened to it in Ways and Means. It was in fact rendered as conservative a measure as it could possibly become in a season of multiplying Townsend and Share Our Wealth clubs. Moreover, the changes were inflicted for the most part by the administration itself, though this was an administration bill.
In late January, after hearings on the bill had opened, the Secretary of the Treasury came to the President to confess a change of mind: he now disapproved major parts of the committee report he had signed, and wished to propose two key revisions when he appeared as a witness before Ways and Means a few days hence. One of them repudiated the principle of “universal coverage” adopted by the committee after full discussion. Morgenthau now proposed to exclude from Social Security farm workers, transient labor, domestics, and those working for anyone with fewer than ten employees—in other words, those who, of all workers, had least security and were most ruthlessly exploited. It would be too hard to collect payments from and for people in these categories, he said. The other revision scrapped the compromise funding arrangement which the old-age group had devised and maintained against Epstein’s strictures. Morgenthau proposed a reserve fund to be built up to a maximum, not of $11 billion as originally proposed, but of $50 billion by 1980, with not a dollar of it coming from the U.S. Treasury. This of course involved heavy increases in contributory rates. The initial rate would be double that first proposed—a full one per cent each for employer and employee instead of the original onehalf of one per cent; and the rate would rise by one-half of one per cent for two successive three-year periods, following which it would jump to three per cent and remain there. Also, the initial annuities paid would be reduced considerably.
Roosevelt himself had proposed an extreme universality of coverage in private talk (“I see no reason why every child, from the day he is born, shouldn’t be a member of the social security system”). Yet he seems to have accepted without much argument Morgenthau’s restricted coverage. If somewhat more concerned over the financing revision, he promptly was soothed by assurance from Treasury economists that it would have no deleterious effect upon the general economy. The original funding proposal was “the same old dole under a new name,” he now said to the Labor Secretary, and to build up a deficit to be met by the 1980 Congress was “almost dishonest.” So the Morgenthau revisions received presidential approval.
They caused a furor when Morgen thau presented them to Ways and Means on February 5. His colleagues of the Economic Security Committee were angered by what they deemed a breach of faith. Those doubtful from the first that the administration really was committed to genuine social insurance had their doubts reinforced—a skepticism that increased as the bill languished in committee for many weeks after hearings ended on February 12, with administration forces exerting no evident effort on its behalf. When finally reported out favorably on April 5, it was in a revised form that incorporated the substance of Morgenthau’s testimony on funding and coverage while also curtailing federal authority to impose minimum pension standards—this last a concession to Southerners who feared the forced payment of pensions to aged blacks higher than local Southern whites deemed “desirable.”
Public controversy now swirled around the measure. It was attacked from the Left for not going anywhere near far enough. It was attacked from the Right as radically subversive of the American Way, bound to discourage thrift, encourage shiftlessness, destroy private initiative, and produce general economic disaster. But as the weeks passed and it became clear that Congress must enact social insurance of some kind in the current session (it would be Wagner-Lewis or something “worse”), conservative opposition became perfunctory and, at last, simply collapsed. The bill passed the House 372 to 33 on April 19, in substantially the form in which it emerged from Ways and Means. Reviewed and somewhat revised in the Senate Finance Committee, it was reported out favorably on May 7 and, after some revisionary floor debate, passed by the Senate 76 to 6. The final bill, emerging from joint conference committee, swept through both houses in early August and was ceremoniously signed by the President on August 14.
The Social Security Act of 1935 was, as Arthur Schlesinger, Jr., has written, “far from a perfect piece of legislation.” It was even, in several major respects, “an astonishingly inept and conservative piece of legislation,” as William E. Leuchtenberg has said. It excluded from coverage those who needed it most. Even by Depression standards its initial benefit payments to the aged covered were minimal (they ranged from ten dollars to a maximum of eighty-five dollars a month). It required a person over sixty-five to retire from all gainful employment in order to receive the annuity that properly would be his by right of purchase (he would have paid for it by his direct contribution to the system plus the indirect ones he would have made via his employer’s contributions) once the system was thoroughly established—a palpable injustice, dictated by a desire to remove the elderly from the labor market in order to provide jobs for younger workers. Its hodgepodge of state and federal jurisdictions made it an administrative nightmare, especially with regard to unemployment insurance. Its financial “self-sufficiency,” insisted upon by Roosevelt, involved complete dependence upon a regressive tax, which did grave damage to the economy only two years later. (In June, 1937, the coincidence of a drastic slash in government spending and the collection of $2 billion in Social Security payroll taxes triggered what became justly known as the “Roosevelt Recession”—sharp declines in industrial production and security values, equally sharp rises in unemployment.)
Nevertheless, the ceremonial signing of the act marked one of the major turning points of American history. No longer could “rugged individualism” convincingly insist that government, though obliged to provide a climate favorable for the growth of business profits, had no responsibility whatever for the welfare of the human beings who did the work from which profit was reaped. The flood thus loosed was of irresistible weight and irreversible direction.
Moreover, much that was deplorable in the act was offset by the quality of its initial administration. The act established, as an independent administering agency, a three-member Social Security Board, appointed by the President. Roosevelt chose for chairman a former Progressive Republican governor of New Hampshire, John G. Winant, whose marked leadership qualities included an ability to inspire in associates a disinterested commitment to the general good. The other two appointees were an Arkansas lawyer named Vincent Myles and, most importantly, Arthur Altmeyer, who promptly demonstrated a genius for organization and administration. It was largely due to Altmeyer that, despite enormous complexities, sound procedural patterns soon were established and have been followed ever since. Within two years all forty-eight states had adopted the needed implementing legislation and Social Security had become what it since has remained, a governmental agency remarkable for the smooth efficiency of its operations: no private insurance company functions with so small a proportionate overhead cost.
By that time, too, Social Security had survived two crucial tests. The first was the presidential campaign of 1936, in which the Republican party made Social Security a major campaign issue and lost. The second was the Supreme Court ruling in late May, 1937, seven to two, that Social Security was constitutional.
Through the years since then, Congress has amended the act in ways that have improved Social Security’s operating efficiency, expanded its coverage, and greatly increased both contributions and benefit payments. In 1940, survivor benefits were added to retirement benefits. A few years later, coverage was extended to the self-employed. In 1954, disability benefits were added. In 1965, against strong AMA opposition, Medicare was established, providing hospital and medical insurance for the aged. Also enacted in 1965 was Title 19, establishing Medicaid, a new departure of great significance in that it was financed not by contributory payments but out of general revenues. Through matching grants it distributed benefits to (in effect) all medically needy persons under twenty-one and over sixty-five, and to the blind, the disabled, and ADC (Aid to Dependent Children) cases. It was generally ignored until April, 1966, when New York’s state legislature saw its possibilities (the law permitted each state to make its own definition of “medically indigent”) and adopted the required enabling legislation.
“When it was suddenly realized that New York’s plan alone would cost over a billion dollars a year in combined Federal, state, and local payments,” wrote Ben B. Seligman two years later, “the legislature in Washington was stunned. They hurriedly tried to amend the law, but it seemed too late—the welfare state had barged through the cautious legislative barriers with a resounding crash.” And indeed it had. Soon all states had legislated themselves into Medicaid; medical associations and drug companies were making sure the program would be as profitable for them as it was costly to taxpayers; and it was clear that, from this new departure, there was no turning back. Nor is there today much possibility that any part of Social Security can be even slightly contracted in scope of operation, much less wholly eliminated: each and every part has been woven into the essential fabric of our collective and individual lives.
This renders all the more serious, even dangerous, the negative legacies that remain from New Deal years. Though greatly expanded, Social Security does not yet provide that “universal coverage” proposed in the original Wagner-Lewis Bill and removed from it by the Morgenthau-Roosevelt revisions. National health insurance—which almost certainly could have been achieved in 1935 or early 1936 if Roosevelt had fully exercised on its behalf his political potency—is still only a proposal, as medical and health costs soar high above the realm of justice and common sense. There remain restrictions upon the amount of income that can be earned by an elderly person without a reduction in annuity payments that in simple justice are his or her property, having already been paid for by deductions from that person’s wages. It is still true that Social Security “is structured in such a manner that the income transfers flow from lower-middle-income groups to lower-income groups, with upper-income groups contributing very little,” as Seligman has said —and the socially and personally harmful effects of this increase with every boost of the payroll tax, as Congress and Executive still resist the demand for generalrevenue financing.
This last flaw in Social Security is, of course, the most fundamental. It is the source of the great crisis facing the system as this is written. And it was bequeathed to us largely by the mind, the temper, the sense of priorities of Franklin Roosevelt as these operated upon opportunities and possibilities that were far more numerous and wide in the 1930’s, when all was fluid and malleable, than they are today.