TCS Daily

Bush, FDR and Social Security

By Nick Schulz - February 17, 2005 12:00 AM

Shortly after President Bush's State of the Union address New York Times columnist Paul Krugman accused President Bush of trying to "destroy" the America created by FDR by introducing private accounts into the Social Security system. I wrote a column at the time claiming Krugman was wrong and that, based on some principles FDR outlined in a message to Congress when Social Security was being constructed, one could reasonably conclude that Bush's effort was in keeping with the principles outlined by FDR.

The invocation of that message to Congress by advocates of Social Security reform has left-wing critics of the Bush administration in a lather. In early February, some prominent journalists and talking heads such as Brit Hume of Fox News discussed the principles FDR articulated in that message to Congress. What Hume et. al. claimed FDR meant in his message got the political left in high dudgeon. David Brock's group Media Matters accused them of bad-faith and misrepresenting what FDR actually said. Radio host Al Franken picked up on the Media Matters attacks and pilloried Hume and others. And now TV anchor Keith Olberman is in on the act, attacking Hume et. al. You can read their arguments and decide for yourself who is correct.

Then on Tuesday night Al Franken's blog linked to my piece and my email box started filling up with people calling me an idiot, saying I was clueless, didn't understand FDR, and worse. With Franken et. al. beating this drum, let's see if we can't revisit the FDR quote to make some sense of the debate over it.

So what did FDR say? Let's look again at the quote:

        "In the important field of security for our old people, it seems necessary 
        to adopt three principles: First, noncontributory old-age 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 that 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."

It seems plain that FDR was calling for a system that was predicated on two essential components. The first was that it be "self-supporting". That sounds reasonable enough -- who wants to create a system that can't support itself? The second is that part of it be "compulsory". Given the context -- a Great Depression that left many older Americans in dire straits -- that made sense, too. The government would encourage you to save by creating mechanisms that force you to save, taking your money away from you so that you can't spend it on something else. That way there would be no excuses for being old and being without. FDR also called for a voluntary component to the system as well.

Now, let's look at those components in the context of the current Social Security system and then in the context of Bush's proposed private accounts.

Is the current system "compulsory"? Of course. Is the current system "self-supporting"? In one sense, yes but in a more important sense, no.

The current system is pay-as-you go, meaning today's contributions from workers go to today's retirees. The government taxes over 12% of income and retirees get their benefits from that tax base. The system supports itself ... today.

But the system as currently constructed is not self-supporting in any meaningful sense in the long term. As William Sterling has pointed out, the wage indexing changes initiated to the program in the 1970s mean benefits rise much faster than they used to. Couple that with demographic shifts in which the worker-to-retiree ratio drops dramatically, and the system literally can't support itself without changes -- without massive tax increases, benefit cuts, means testing, the inflationary printing of more money, or any of a series of other possible changes.

Now let's look at FDR's principles in the context of Bush's proposed private accounts.

Is what Bush proposes compulsory? Yes, in the sense that people would still be forced to contribute to their retirement. They would have more choice over what form that contribution should take. They could decide to take smaller checks from the government in the future in return for being able to use some of their contributory funds to invest in stocks and bonds. But they would not be able to spend that money on groceries or housing or clothes or vacations or anything else. Bush's plan involves just as much compulsory saving for retirement as the system we have inherited from FDR.

Is what Bush proposes self-supporting? In an important sense it moves Social Security in a direction that's by definition more self-supporting than the current system. Money that's put into a private account with your name on it will be there for you when you retire. Your money, your retirement. And the cuts in future benefits that Bush appears to favor would make the program solvent.

No, FDR never wanted a completely voluntary or purely private system to replace Social Security -- and some commentators may have spoken carelessly in suggesting that he wanted it replaced. Either way, that's not what Bush is proposing. By making the system more transparently self-supporting while keeping it compulsory, Bush's effort is in keeping with the broad principles outlined by FDR. The benefits from private accounts will supplement government checks, not replace them.

What's more, it's important to remember that Social Security taxes and benefits have grown enormously since FDR's day. So cutting benefits two generations from now as a way of making some room for the financing of private accounts within the Social Security system today can't possibly be viewed as a violation of FDR's original vision -- and probably brings us closer to it.

Lastly, rather than being an attack on the New Deal -- "destroy"ing FDR's America, as Krugman alleged -- the kinds of changes initiated by the Bush administration can just as easily be considered an expansion of the welfare state. Up until now, the welfare state has given Americans only income support. Bush's proposal would have it give Americans the opportunity to accumulate wealth, as well. But it is an expansion of the welfare state that reduces the public's dependence on the state -- which may be why some of FDR's self-styled heirs hate it so.


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