FDR Vetoes Social Security legislation; Republican Congress overrides

Posted by Marc Hodak on June 4, 2008 under History | Comments are off for this article

That headline contradicts most people’s view of the history of Social Security, the most visible, surviving legacy of the New Deal. But it’s true.

Roosevelt, of course, promoted and signed into law the original Social Security Act of 1935. But that law set up a forced savings/redistribution program for limited portion of the population (* details below the fold). It used the contributions from the participants to set up reserves, and it paid beneficiaries from those reserves. The plan was more or less self-contained. In 1943, President Roosevelt vetoed legislation that would turn Social Security from the forced savings/redistribution program it was set up to be into the pay-as-you-go program that, once his veto was overriden, we know today.

The 1943 debate on this law centered on governance. For Roosevelt, good governance meant continuing the Social Security program as it was originally envisioned–actuarially self-financing. To Arthur Vandenberg and other Republicans, it was clear that Congress was simply using the “reserve fund” as a cover to squander money on pet projects. In their minds, shutting down the “reserve” was just a way of restoring fiscal discipline.

So, in 1939 Vandenberg got Congress to begin payouts in 1940 instead of 1942, and to delay scheduled tax increases until 1942 instead of 1940. The net effect of these changes was to wipe out the notional reserves that had been building up since 1937. (Accelerating benefits and delaying a tax increase was also a pretty good way to get votes.) In 1943, Vandenberg pushed a law that indefinitely canceled further tax increases. Even without any increases, the war had already pushed up Social Security reserves.

This is the legislation that Roosevelt vetoed, arguing that it turned a social insurance program into an intergenerational transfer scheme that undermined accountability to current taxpayers/future recipients. The Republicans overrode the veto, saying that when you stripped away the social insurance terminology, and accounted for Congress’s lack of discipline with regards to current taxes to be used for future purposes, this was already a pay-as-you go system.

This debate continues today. Meanwhile, the present value of Social Security liabilities is $41 trillion.

If you buy that Social Security taxes are dedicated to future payments to the elderly, then the value of all those taxes into the future fall short of this liability by only about $13 trillion. By some way of reference, total taxes collected by the Federal government from all sources last year was under $3 trillion.

Liberal commentators insist that any problem with meeting that liability can be characterized as not a Social Security problem, but a general budget problem. Fair enough, but that general budget problem was created, in part, by the availability of “Social Security” taxes that were raised on a pretext that they would be saved, but were spent and will therefore need to be repaid. The taxpayers who will need to pay it, our children and grandkids, are stuck with the whole bill one way or another without any extra funds to pay for it besides their earnings.

All of this, by the way, is dwarfed by the projected shortfalls of the Medicare pay-as-you-go scheme.

HT: Jim Glass

* Participants would pay a small percentage of their income into a “reserve fund,” starting at 2 percent in 1937, then scheduled to rise to 6 percent over the decade of 1940 to 1950. Starting in 1942, everyone would get roughly even amounts from the fund when they retired, meaning that relatively lower earners would benefit at the expense of the relatively higher earners. The total payout was not expected to be that significant–just enough to keep someone out of poverty.