Social Security: Broke at the Beginning

Social Security: Broke at the Beginning
John Ransom
7-23-11

It is an axiom in the insurance business that insurance is not bought but sold. In 1935 Franklin Roosevelt sold Congress and Congress sold the U. S. the Social Security Act, the biggest, most comprehensive, most expensive mass insurance policy ever written. Since then its purchasers, the nation's taxpayers, have had occasion to read their policy carefully and, if they have detected no outright jokers, their reaction has been such that practically every politician in the U. S. from Franklin Roosevelt down has put revision of Social Security at the top of his must list.- "Pie from the Sky" Time Magazine, Feb. 13, 1939

“It takes a great deal of history to produce a little literature,” said American-born writer Henry James. While generally James has been proved correct, in the case of Social Security, the literature, at least by volume, has swamped the history.

One of the earliest pieces of literature that contributes to the history of Social Security is Time Magazine’s Pie from The Sky, an account of a House Committee hearing called to deal with “reforming” Social Security. The hearing was held four years after passage of the Act and before even a single check was written to old age beneficiaries. The Time article is stunning not because it gives us a quaint, sun-dappled and leaded window into the Norman Rockwell past, but because it provided a pinpoint, spotlight prediction of the acrimonious future of a failed federal program.

It predicted, amongst other things, that by 1980 the “the bond interest” on Social Security “will in turn have to be met by the Treasury, through other taxes.” That is, that the insurance “scheme” was really just a Ponzi scheme that would collapse in time if other taxes to fund it weren’t raised in the future. In fact, the prediction was off by just three years. The solvency of the program was addressed in landmark legislation pushed through by President Ronald Reagan and Speaker Tip O’Neil in 1983. That legislation though only amounted to a twenty-year truce in the Social Security war. The truce ended at the turn of this century.

"Some of the proposals were less than ideal," writes US News, "one that was ultimately enacted into law raised the regressive payroll tax, which hit working- and middle-class Americans harder than wealthier citizens. Nonetheless, the 1983 agreement did succeed in extending the trust fund's solvency for a couple of generations by raising the retirement age to 67 from 65 (to be phased in by 2027); imposing a six-month delay in the cost-of-living adjustment; and requiring government employees to pay into Social Security for the first time."

The Time article also said that the federal government would borrow the money accumulated from the Social Security “reserve” to finance deficit spending and ultimately the public would have to pay the bill:

[L]ast week came a fresh round of ammunition from Liberal Economist John T. Flynn. Writing in Harper's on "The Social Security 'Reserve' Swindle," plain-talking Mr. Flynn declared:

"Obviously the government cannot pay adequate pensions if it insists on 'borrowing' most of the old age taxes and spending them to support the government. The whole thing is a disguised tax levied upon the lowest income groups under the pretense of old age pension premiums. No government would dare support itself out of a payroll tax if it honestly proclaimed its purpose.”

Time wrote that already, in 1939, the president and Congress were considering a fifty-percent increase in Social Security taxes to finance expanded benefits, even as qualified beneficiaries doubted that they’d live to see any benefit from the program. “But for old folks,” wrote Time, “Social Security, which will not begin paying monthly old-age insurance benefits for those over 65 until 1942, is still pie in the sky.”

So how is it that such flawed legislation-legislation that was bound to fail eventually- became the hallmark legislation of the New Deal? Well, this is where history outruns literature, while supplying literature with some of its most enduring, odious and naïve characters of the American political archetype.

And it started with politico-economic theories that are museum pieces.

As curious as it may sound today, both Communism and Fascism were considered “progressive” movements in the 1930s. While the rest of Europe and America were still suffering from the effects of the Great Depression, Adolf Hitler in Germany was apparently driving unemployment down with massive deficit spending. Included in his economic program was expanded old-age pensions, which had been first introduced in Germany in 1889 by Bismarck. In the Soviet Union, Stalin was providing cradle-to-grave economic programs. Western intellectuals, such as Harold Laski, talked up Stalinist Communism as a legitimate social order of the future while decrying the failures of the democracies’ ability to provide social and economic security under capitalism.

Into the intellectual and economic miasma of the Great Depression in the US stepped three important figures: writer Upton Sinclair; politician Huey Long; and activist Francis Townsend.

Townsend was a well-intentioned physician from South Dakota, an Army medical corps veteran of the First World War. He championed old-age pensions during the Great Depression as a way of allowing older people to retire so younger people could have jobs. The pension money that the retired would spend would increase consumer spending to energize the economy. Townsend proposed a scheme, supported by a national sales tax, whereby people “over the age sixty would receive two-hundred dollars a month on the condition that they spend the entire amount each month and retire if still employed,” writes Richard Polenberg in The era of Franklin D. Roosevelt.

Contemporary pictures of Dr. Townsend show a bespectacled, rectangle face lined with Midwestern character, a man wholly comfortable in the spotlight, as if he was just chatting with plain folks.

In a social outpouring embedded in revivalist American tradition, Townsend’s “revolving pension” idea became a grassroots movement with local chapters of Townsend clubs springing up all over the country. “Millions of elderly Americans,” says Polenburg, “joined Townsend clubs and helped crystallize popular sentiment in favor of old-age pensions.”

By the end of 1934 there were over 5000 Townsend clubs nationwide with 2 million members, says T.H. Watkins in The hungry years: a narrative history of the Great Depression in America. Like all American revivals, it was more than a cause or a movement: It was a religion. Townsend was largely ignored by the Roosevelt White House and that rankled the revivalists.

A figure of a different sort, Senator Huey Long, former Governor from Louisiana, painted a different picture across Roosevelt’s vision. It was a picture that Roosevelt couldn’t afford to ignore. Long, known as the Kingfisher in Louisiana politics, wanted to replace Roosevelt in the White House. He planned on doing it by out-New Dealing Roosevelt.

Long attacked Roosevelt’s New Deal policies as too weak. Instead, Long proposed a radical system of wealth redistribution called Share Our Wealth that would impose Draconian taxes on millionaires and corporations and redistribute the wealth to the poor and working classes. But as Stephen W. Baskerville explained in Nothing else to fear: new perspectives on America in the thirties, there were major flaws in Long’s proposals. “There were simply not enough millionaires and too many poor families for the benefits” that Long promised, says Baskerville. Also, Long promised that such a straightforward plan wouldn’t require a huge federal agency to administer. But as Baskerville notes: “Long himself admitted on other occasions that a giant federal ‘Share Our Wealth’ corporation would have to supervise and administer wealth redistribution.”

The appeal of Long’s scheme to the poor at the height of the Depression, along with the Kingfisher’s unalloyed use of the powers of corruption, deceit and political bribery scared Roosevelt enough that he called Long “one of the two most dangerous men in America. (The other was Gen. Douglas McArthur.),” says the Long Legacy Project.

Then in 1934, radical socialist writer, Upton Sinclair, who penned The Jungle, an expose of the meat-packing business, ran unsuccessfully for Governor in California. Sinclair had made previous runs for public office as a socialist. As Sinclair wrote in his autobiographical work I, candidate for governor: and how I got licked: “Twice I ran for Governor, and once for United States Senator, always on the Socialist ticket, and the highest vote I ever polled was sixty thousand out of an electorate of a couple million.”

But running for Governor as a Democrat in 1934 Sinclair garnered almost 900,000 votes running under a socialist scheme called End Poverty In California (EPIC). EPIC proposed “an ad valorem tax on property assessed above $100,000, which means about $250,000 of actual value. This tax will fall almost entirely upon our great corporations and utilities,” wrote Sinclair, echoing political themes still in vogue today. The money raised would be put into idle factories and land as a kind of “cooperative”- better word might be soviet. The produce could then be used by workers to barter for goods and services. In theory, it would put the unemployed back to work in California and jumpstart the economy.

For Sinclair, the lesson of his defeat was obvious. As R. Baird Shuman wrote in Great American Writers: Twentieth Century “Sinclair’s 1934 campaign for Governor was his best showing in a political race. He believed that running as a Democrat instead of a socialist increased public support for him.” In 1951 Sinclair wrote: “The American People will take Socialism, but they won’t take the label.”

The combination of Sinclair’s gubernatorial showing, Long’s political ambitions and the outpouring of support for the Townsend plan convinced Roosevelt that he needed to introduce a series of social programs aimed at capturing the country’s lurch to the left. Roosevelt understood that, just as Long found out, there weren’t enough millionaires or thousand-aires to make a social security program financially viable. But to ignore the demand for a social security program would have made a Roosevelt reelection unviable. So Roosevelt took the plunge.

The program, as Time has noted, was subject to both flawed demographics and the temptation by politicians to use the program to payoff the electorate. Consequently, the social security program was always broke from the very beginning. It was broke by the utopian, socialist ideas that Time Magazine called Pie from the Sky.

The country has never yet been able to quite wipe that pie off its face either.

As The Nation wrote wistfully in October, 2010 “Sinclair lost in November, but the inspiring success of his mass movement—among other things, it basically created the liberal wing of [California] Democratic Party, which also endures to this day—and its powerful influence on a wavering new president deserves close study.”

It does indeed.

The country has studied it and come to a conclusion at odds with the political objectives of Townsend, Sinclair and Long, while forming a revivalist movement for a new generation, which in most happy circumstances will begin to right America’s Socialist lurch to the left.

Because today the heirs to America’s mass movement history aren’t the Jerry Browns, the Howard Deans, the Bill Clintons or the Barack Obamas. They are the Tea Party voters who can do three things that socialists never could quite manage in this country:

They can add, subtract and win elections.
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To read another article by John Ransom, click here.