Would Franklin Roosevelt approve of Social Security? The question seems absurd. After all, Social Security is considered the New Deal's signature achievement. It distributes nearly $800 billion a year to 56 million retirees, survivors and disabled beneficiaries. On average, retired workers and spouses receive $1,839 a month -- money vital to the well-being of millions. Roosevelt would surely be proud of this, and yet he might also have reservations. Social Security has evolved into something he never intended and actively opposed.
It has become what was then called "the dole" and is now known as "welfare." This forgotten history clarifies why America's budget problems are so intractable.
When Roosevelt proposed Social Security in 1935, he envisioned a contributory pension plan. Workers' payroll taxes ("contributions") would be saved and used to pay their retirement benefits. Roosevelt rejected Social Security as a "pay-as-you-go" system that channeled the taxes of today's workers to pay today's retirees. That, he believed, would saddle future generations with huge debts -- or higher taxes.
Discovering that the original draft wasn't a contributory pension, Roosevelt ordered it rewritten and complained to Frances Perkins, his labor secretary: "This is the same old dole under another name."
But Roosevelt's vision didn't prevail. In the 1940s and early 1950s, Congress gradually switched Social Security to a pay-as-you-go system. Interestingly, a coalition of liberals and conservatives pushed the change. Liberals wanted higher benefits, which -- with few retirees then -- existing taxes could support. Conservatives disliked the huge surpluses the government would accumulate under a contributory plan.
Millions of Americans believe (falsely) that their payroll taxes have been segregated to pay for their benefits and that, therefore, they "earned" these benefits. To reduce them would be to take something that is rightfully theirs. Indeed, Roosevelt -- defending a contributory program -- said exactly that:
"We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions. No damn politician can ever scrap my Social Security program."
What we have is a vast welfare program grafted onto the rhetoric and psychology of a contributory pension. The result is entitlement. The $2.6 trillion in the Social Security trust fund at year-end 2010 sounds like a lot but equals slightly more than three years of benefits.
With favorable demographics, contradictions were bearable. But now, demographics are unfriendly. In 1960, there were five workers per recipient; today, there are three, and by 2025 the ratio will approach two. Roosevelt's fear has materialized. Paying all benefits requires higher taxes, cuts in other programs or large deficits. Indeed, the burden has increased, because it now includes Medicare, which is also viewed as an entitlement.
Although new recipients have paid payroll taxes higher and longer than their predecessors, their benefits still exceed taxes paid even assuming (again, fictitiously) that they had been invested. A two-earner couple with average wages retiring in 2010 would receive lifetime Social Security and Medicare benefits worth $906,000 compared with taxes of $704,000, estimate Eugene Steuerle and Stephanie Rennane of the Urban Institute.
By all rights, we should ask: Who among the elderly need benefits? How much? At what age? If Social Security and Medicare were considered "welfare" -- something the nation does for its collective good -- these questions would be easier. We would tailor programs to meet national needs. But entitlements are viewed as a higher-order moral claim. So a huge part of government spending moves off-limits to intelligent discussion.
We can only imagine how Roosevelt would view this. He consistently advocated a fully funded Social Security and used his second veto on a 1942 tax bill that delayed higher payroll taxes. But Congress overrode the veto, and Roosevelt was preoccupied by World War II.