Why FDR's Fed Chair Opposed His Plan to Expand Social Security

Today’s note is a follow-on to the one I published yesterday. In yesterday’s post, I wrote about the near-universal obsession with program “solvency” and the idea that we need to deal with looming shortfalls in order to protect Social Security (and Medicare Part A) for future generations. In one sense, that is true.

Under current law, OASI, DI, and HI are authorized to pay statutory benefits—i.e. what beneficiaries are entitled to under the law—only if there are adequate financial resources to cover those obligations. Right now, Social Security (OASDI) provides benefit payments to about 65 million people.¹ Without legislative action to address the near-term shortfalls facing OASI (2034) and HI (2028), the operating constraints implied by the specific text of the enabling legislation will essentially force the government to (at least partially) default on these promises.

So you can see why someone like Senator Bernie Sanders (I-VT) has recently introduced legislation that aims to “make Social Security solvent for the next 75 years.” But he’s not just trying to eliminate the “long-term financing shortfall” that is projected in the latest Trustee’s report. He also wants to expand benefits to current and future retirees. Here’s how he describes the goal of his Social Security Expansion Act:

[It] would make Social Security solvent for the next 75 years, expand benefits for seniors and people with disabilities by $2,400 a year, and increase COLAs, which would lift millions of seniors out of poverty.

As you might expect, he proposes to “pay for” these changes by raising taxes on high-earning individuals:

Today, absurdly and unfairly, there is a cap on income subject to Social Security taxes which is just $147,000 a year. That means that if you’re a multi-billionaire you pay the same amount into Social Security as someone making $147,000 a year. 

It means if you make $147,000 a year or less you pay 6.2% of your income in Social Security taxes. But if you make 10 times more – $1,470,000 – you pay just 0.62% of your income in Social Security taxes. That may make sense to someone. It doesn’t make sense to me.

Our legislation applies the Social Security payroll tax to all income – including capital gains and dividends – for those who make over $250,000 a year, the wealthiest 6.4% of Americans. Under this bill, 93.6% of households would not see their taxes go up by one penny. 

The bill isn’t going to pass, and one wonders whether President Biden would sign it if it did, given his repeated promise not to raise taxes on anyone making less than $400,000. But the clock is ticking (even louder with the Hospital Insurance (HI) Trust Fund), so something will eventually need to be done—legislatively—if cuts are to be avoided.

It’s easy to understand why Senator Sanders—along with seven co-sponsors in the Senate and 22 in the House—feel an urgent need to expand benefits.

At a time when half of older Americans have no retirement savings and are worried about their ability to retire with dignity and millions of seniors are living in poverty, I believe that our job is not to cut Social Security. Our job must be to expand Social Security so that every senior citizen in America can retire with the respect they deserve and every person with a disability can live with the security they need.

According to the most recent data, 12% of seniors are trying to live on an income of less than $10,000 a year while 55% are trying to survive on less than $25,000 a year. 

Think about that. How do you pay the rent, put food on the table and pay for the basic necessities of life on just $10,000 or $25,000 a year? The answer is many cannot. In the richest country in the world that is a national disgrace.

Times are tough for millions of Americans right now. We’re paying substantially more for basic necessities like food and gas. We’re drawing down savings and reaching for credit cards to help pay the bills. Nearly half of families with kids say they can’t afford enough food now that the child tax credit (CTC) has ended. And millions of seniors are facing one of the largest-ever Medicare premium hikes for the remainder of 2022. It makes perfect sense that Senator Sanders and many of his colleagues are looking for ways to offer some some relief.

It’s actually reminiscent of something FDR proposed in 1943, when inflation was running hot (6.1 percent) during WWII. Like Senator Sanders, FDR wanted to provide some relief. So his administration proposed an expansion of Social Security benefits with additional revenue coming from the payroll tax. Specifically, Roosevelt sought a payroll tax of 12 percent, shared equally between workers and their employers. It would have raised the employer contribution from 4 percent to 6 percent, and it would have increased the rate paid by workers from 1 percent to 6 percent.

Marriner Eccles, the Chairman of the Fed at the time and the man for whom the Federal Reserve Building is named, was strongly opposed.

I learned of this history just yesterday, when I stumbled on the following letter that Eccles sent to an official at the Treasury Department on September 7, 1943. He was clearly distressed by the administration’s proposal, and he articulated a number of reasons why he considered it “a serious tactical error to link the Social Security programs with the current revenue proposal.”

One of his big concerns was inflation. Congress had been working on legislation aimed at generating additional revenue as part of a “stabilization program.” You see, back then, lawmakers actually understood that the purpose of their proposed tax hikes was to help manage inflationary pressures, not to generate revenue per se. And the public understood it too. By pushing for an expansion of Social Security alongside proposed increases in the payroll tax, Eccles worried that the administration would be sending mixed signals to the population. He wrote:

The major task before Congress is to provide promptly for a substantial amount of additional revenue needed to assure the success of the stabilization program. If the Social Security proposal were introduced as a part of the revenue program, this basic issue would be lost sight of. The public, which has come to understand the need for increased taxes as a means of inflation control, would find it more difficult to see how an expansion of the Social Security program at this time would serve the same purpose.

He further worried that it would delay passage of the bill, thereby jeopardizing efforts at managing inflationary pressures, as various factions spent months debating the more controversial provisions. He was also looking ahead, to the post-war period, and he advised the administration to “think carefully” about preserving the link between Social Security and the payroll tax. He ended the letter with these words:

It appears very doubtful whether the financing of the enlarged program should, even at the outset, rely exclusively upon payroll taxes and not be given some support from the general budget. Payroll taxes as high as 12 percent might prove a severely depressing factor in the post-war economy, whether the burden were shifted to the employees in the form of lower wages or to the consumers in the form of higher prices. This point should be weighed carefully before adopting a 12 percent payroll tax which would promise to become a rigid element in the post-war Federal tax structure.

Eccles wasn’t opposed to the expansion of Social Security. Indeed, he lauded the program, calling it “of vital importance to the nation.” But he thought there were better ways to get there.² And he wanted to see Congress preserve its inflation fighting credibility with the public!

I’ll have a little bit more to say on this topic tomorrow. Thanks for reading!

1. Of those, 50 million are retired workers and dependents of retired workers, 6 million are survivors of deceased workers, and 9 million are disabled workers and dependents of disabled workers.

2. He wanted to be sure that Congress’ [inflation] stabilization program remained the priority. He also wanted to avoid confusing the public about the purpose of raising taxes. He suggested that an (inflation-dampening) increase in income taxes, combined with a provision for tax refunds after the war, would offering an “equally effective means” means of delivering relief. He also believed that, if economic conditions warranted tax cuts, it would be easier to reduce income taxes as opposed to payroll taxes after the war.