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Franklin Roosevelt on Social Security

Below are two messages from Franklin Roosevelt, proposing the Social Security program and signing it into law. The main points to note in the text deal with the purpose and funding of Social Security and unemployment insurance i.e. the why and the how.

Expenditure by a sovereign government is independent from taxing or borrowing because a sovereign government spends in a currency it creates. A sovereign government like the US doesn’t have to ‘get’ dollars. It creates them by spending. The Japanese government does not have to ‘get’ yen. It creates them by spending. Any limitation to this is self-imposed to prevent runaway spending by the sovereign (in the past, traditionally for wars). You and I do have to ‘get’ dollars or yen. See Randall Wray’s post on IOUs Denominated in National Currency.

Nevertheless, to talk about Social Security or unemployment insurance as general expenditures as if they are divorced from the payroll tax makes no sense whatsoever. From the very beginning, they were seen as a “self-supporting” federal government scheme to provide economic security, covered via payments appropriated specifically to fund them.

Social security, like every other government retirement scheme, is not a general government program, it is a government provided pension program. To claim otherwise is to ignore 70 years of history.

Note, Roosevelt designated four areas where the government could provide greater economic security that would alleviate and prevent depression, the purpose of these programs: Unemployment compensation, Old-age benefits, Federal aid to dependent children, and the provision of health care. In the first three cases, the programs were made explicit. In the fourth case, Roosevelt declined to provide government-funded “health insurance”.

Below I have highlighted the passages from the Roosevelt statements which make these points clear.

Message to Congress on Social Security, Franklin D. Roosevelt, 17 Jan 1935

To the Congress:

In addressing you on June 8, 1934, I summarized the main objectives of our American program. Among these was, and is, the security of the men, women, and children of the Nation against certain hazards and vicissitudes of life. This purpose is an essential part of our task. In my annual message to you I promised to submit a definite program of action. This I do in the form of a report to me by a Committee on Economic Security, appointed by me for the purpose of surveying the field and of recommending the basis of legislation.

I am gratified with the work of this Committee and of those who have helped it: The Technical Board on Economic Security drawn from various departments of the Government, the Advisory Council on Economic Security, consisting of informed and public-spirited private citizens and a number of other advisory groups, including a committee on actuarial consultants, a medical advisory board, a dental advisory committee, a hospital advisory committee, a public-health advisory committee, a child welfare committee and an advisory committee on employment relief. All of those who participated in this notable task of planning this major legislative proposal are ready and willing, at any time, to consult with and assist in any way the appropriate Congressional committees and members, with respect to detailed aspects.

It is my best judgment that this legislation should be brought forward with a minimum of delay. Federal action is necessary to, and conditioned upon, the action of States. Forty-four legislatures are meeting or will meet soon. In order that the necessary State action may be taken promptly it is important that the Federal Government proceed speedily.

The detailed report of the Committee sets forth a series of proposals that will appeal to the sound sense of the American people. It has not attempted the impossible, nor has it failed to exercise sound caution and consideration of all of the factors concerned: the national credit, the rights and responsibilities of States, the capacity of industry to assume financial responsibilities and the fundamental necessity of proceeding in a manner that will merit the enthusiastic support of citizens of all sorts.

It is overwhelmingly important to avoid any danger of permanently discrediting the sound and necessary policy of Federal legislation for economic security by attempting to apply it on too ambitious a scale before actual experience has provided guidance for the permanently safe direction of such efforts. The place of such a fundamental in our future civilization is too precious to be jeopardized now by extravagant action. It is a sound idea—a sound ideal. Most of the other advanced countries of the world have already adopted it and their experience affords the knowledge that social insurance can be made a sound and workable project.

Three principles should be observed in legislation on this subject. First, the system adopted, except for the money necessary to initiate it, should be self-sustaining in the sense that funds for the payment of insurance benefits should not come from the proceeds of general taxation. Second, excepting in old-age insurance, actual management should be left to the States subject to standards established by the Federal Government. Third, sound financial management of the funds and the reserves, and protection of the credit structure of the Nation should be assured by retaining Federal control over all funds through trustees in the Treasury of the United States.

At this time, I recommend the following types of legislation looking to economic security:

1. Unemployment compensation.

2. Old-age benefits, including compulsory and voluntary annuities.

3. Federal aid to dependent children through grants to States for the support of existing mothers’ pension systems and for services for the protection and care of homeless, neglected, dependent, and crippled children.

4. Additional Federal aid to State and local public-health agencies and the strengthening of the Federal Public Health Service. I am not at this time recommending the adoption of so-called "health insurance," although groups representing the medical profession are cooperating with the Federal Government in the further study of the subject and definite progress is being made.

With respect to unemployment compensation, I have concluded that the most practical proposal is the levy of a uniform Federal payroll tax, 90 percent of which should be allowed as an offset to employers contributing under a compulsory State unemployment compensation act. The purpose of this is to afford a requirement of a reasonably uniform character for all States cooperating with the Federal Government and to promote and encourage the passage of unemployment compensation laws in the States. The 10 percent not thus offset should be used to cover the costs of Federal and State administration of this broad system. Thus, States will largely administer unemployment compensation, assisted and guided by the Federal Government. An unemployment compensation system should be constructed in such a way as to afford every practicable aid and incentive toward the larger purpose of employment stabilization. This can be helped by the intelligent planning of both public and private employment. It also can be helped by correlating the system with public employment so that a person who has exhausted his benefits may be eligible for some form of public work as is recommended in this report. Moreover, in order to encourage the stabilization of private employment, Federal legislation should not foreclose the States from establishing means for inducing industries to afford an even greater stabilization of employment.

In the important field of security for our old people, it seems necessary to adopt three principles: First, noncontributory oldage pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps 30 years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities which in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans.

The amount necessary at this time for the initiation of unemployment compensation, old-age security, children’s aid, and the promotion of public health, as outlined in the report of the Committee on Economic Security, is approximately $100,000,000.

The establishment of sound means toward a greater future economic security of the American people is dictated by a prudent consideration of the hazards involved in our national life. No one can guarantee this country against the dangers of future depressions but we can reduce these dangers. We can eliminate many of the factors that cause economic depressions, and we can provide the means of mitigating their results. This plan for economic security is at once a measure of prevention and a method of alleviation.

We pay now for the dreadful consequence of economic insecurity-and dearly. This plan presents a more equitable and infinitely less expensive means of meeting these costs. We cannot afford to neglect the plain duty before us. I strongly recommend action to attain the objectives sought in this report.

Statement on Signing the Social Security Act.

Today a hope of many years’ standing is in large part fulfilled. The civilization of the past hundred years, with its startling industrial changes, has tended more and more to make life insecure. Young people have come to wonder what would be their lot when they came to old age. The man with a job has wondered how long the job would last.

This social security measure gives at least some protection to thirty millions of our citizens who will reap direct benefits through unemployment compensation, through old-age pensions and through increased services for the protection of children and the prevention of ill health.

We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.

This law, too, represents a cornerstone in a structure which is being built but is by no means complete. It is a structure intended to lessen the force of possible future depressions. It will act as a protection to future Administrations against the necessity of going deeply into debt to furnish relief to the needy. The law will flatten out the peaks and valleys of deflation and of inflation. It is, in short, a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness.

I congratulate all of you ladies and gentlemen, all of you in the Congress, in the executive departments and all of you who come from private life, and I thank you for your splendid efforts in behalf of this sound, needed and patriotic legislation.

If the Senate and the House of Representatives in this long and arduous session had done nothing more than pass this Bill, the session would be regarded as historic for all time.

Sources:

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

4 Comments

  1. nikhil says:

    Thanks for the great post. It is refreshing to see how a real president acts. One question you mention that taxation is not a requirement for government spending and then in the next paragraph state that SS is an exception because it is “self-supporting”. Could you expand on this distinction?

    Are you saying this is a legal or political requirement put in place upon the creation of SS or that SS is some how different than other government spending?

    • I am referring to currency sovereignty and government money. When a government issues money it is issuing an IOU which is in essence a promise to repay in kind with another government IOU of equivalent value. . If you hand the government your paper IOU with $100 printed on it to demand your money, the government will simply hand you another IOU with the same number printed on it. Obviously governments can produce these IOUs in infinite quantities if they so choose.

      So any government program is not ‘funded’ by tax dollars per se since tax payment merely returns the IOU to its original issuer. It is this fact that can cause governments to manufacture such large quantities of these IOUs that it causes inflation and debases their worth. People know this and have always sought to restrict governments in some way, limit them, so they do not abuse the power of money creation.

      In the case of social security, as you can see from Roosevelt’s wording, it is different from other general government expenditures. He says it was intended to be “self sufficient”, meaning that it would be ‘funded’ as if expenditures from the social security program could not be made without the payment of the taxes allocated specifically for it. The reason for this is that social security was such a large expenditure that there was a lot of political pressure against it unless it was ‘funded.’ Social Security never would have happened if it weren’t funded as a separate non-general expenditure program Those same political pressures remain today.

  2. Don Levit says:

    nikhil:
    You offer an interesting paradox in that taxation is not needed for the benefits, yet Social Security is to be self-supporting.
    The self-supporting statement was made in reference to not using general revenues.
    The last 2 years, the cash income has been less than the cash outgo.
    In that situation a typical reserve fund would simply liquidate interest to cover the shortfall.
    The trust fund has $2.6 trillion, so $40 billion of interest should be no big deal.
    However, the interest in the trust fund is a special type of interest (credited at 4%, when 10 year Treasuries are paying 2%).
    It is credited via (unfunded) debt.
    So, general revenues were required to “liquidate” the “interest.”
    The same process will ensue when the principal needs to be redeemed.
    The reason for the need for new monies, general revenues from the Treasury, is that the old monies, principal and “interest,” were loaned to the Treasury to pay for current expenses.
    The laws of economics state that the dollars cannot be in the Treasury (and spent) and in the trust fund, at the same time.
    Regarding taxation, it is true that taxes are not needed to pay benefits.
    This is because benefits are not based on taxes paid, but on one’s earnings history.
    I can provide reputable government links to support specific statements for anyone who is interested.
    Don Levit