Obama vs. FDR on Social Security

Obama vs. FDR on Social Security

Date: 14 Dec 2010 | posted in: equity, From the Desk of David Morris, The Public Good | 0 Facebooktwitterredditmail

Today, 75 years and 4 months since Franklin Delano Roosevelt signed the Social Security Act, a Democratic president is ignoring his wisdom and abandoning his strategy for protecting the program from shifting political winds. If congressional Democrats go along with Obama on this, it could mark the beginning of the end of Social Security as we have known it.

Franklin Delano Roosevelt regarded the Social Security Act as the cornerstone of the New Deal. “I think he took greater satisfaction from it than from anything else he achieved on the domestic front”, observed his Secretary of Labor Frances Perkins.

And well he might.  Seventy-five years later, Social Security keeps more than 20 million Americans out of poverty.  Almost 90 percent of the elderly receive benefits: 69 percent receive more than half their income from Social Security and more than 40 percent received 90 percent.

“No other New Deal measure proved more lastingly consequential or more emblematic of the very meaning of the New Deal,” notes Stanford historian David M. Kennedy.

One reason Social Security has proven so enduring and substantial is because of the financing strategy chosen, a payroll tax.  Many of FDR’s advisors wanted financing to come out of general appropriations.   They counseled, using an argument eerily similar to that offered today, that in 1935 the economy was still emerging from a deep depression and a payroll tax would have a detrimental impact.

FDR understood the argument.  But he believed it far more important to adopt a funding mechanism that would protect Social Security from the depredations of future politicians.  He had seen 85 percent of House Republicans and 76 percent of Senate Republicans vote against the Social Security Act and he knew the political wheel of fortune would change in the future.

As FDR recalled in 1941,  “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.”

Social security was to be an insurance fund.  People paid in during their working years and received payouts when they stopped working.  The money was theirs, by contractual right.  They didn’t have to beg Congress for it.

The tax deal will cut the payroll tax by 2%, reducing payments into the Social Security trust fund by $120 billion a year.  Not to worry, says the White House.  The $120 billion will come from the general fund.  Social security revenues would remain intact.  And the payroll tax reduction, they insist, will disappear in two years.

Well, if anyone believes that in two years the Republicans will agree to raise payroll taxes or that the Democrats will insist on it, I have a bridge to sell you.

The payroll tax cut will be permanent.  The elderly and disabled will have to compete for $120 billion a year against all other claimants on the federal budget—the pentagon, Medicaid, education, environment. Or the payroll tax will become a bargaining chip for a Republican demand that Social Security benefits be reduced.

I suspect that first step would be for politicians to undermine the “social” in social security by insisting that the rich shouldn’t receive benefits because they don’t need them. That may sound equitable, but means tested programs do not fare well.  Look at welfare and Medicaid.

As Nancy Altman of Social Security Works, who has been leading the campaign to educate the nation about the implications of the payroll tax holiday observes, New Dealers “understood the adage that programs exclusively for the poor made poor programs.”

The irony is that Social Security’s finances do need bolstering. As many have pointed out, the modest shortfall could be fully made up by applying the existing 6 percent payroll tax to incomes above the current cap of $106,800, an income level exceeded by only 6 percent of the population.

Instead the Democratic Party has decided to decrease the payroll tax and double the trust fund’s prospective deficit.

The only obstacle to this ominous proposal is a revolt by House Democrats against the whole tax deal.  One hopes they will hold firm and as the implications of the deal on the future of Social Security become more widely known, the voters will rise up to put a stop to this mischief.

David Morris
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David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.