Why Is Social Security Regressive?
In 1971, two short, balding, middle-aged Americans (one the son of a dry-goods merchant, the other a son of a grocer) met in a hotel to discuss Social Security. But because this was Washington, D.C., and the two men were Milton Friedman and Wilbur Cohen, the ballroom was packed with men and women eager to hear them speak.
Friedman, who would receive the Nobel Prize a few years later, observed that "social security combines a highly regressive tax with largely indiscriminate benefits and, in overall effect, probably redistributes income from lower to higher income persons." "[A]s a way to distribute government assistance to the needy," he added, "the structure of benefits is not defensible and is not defended even by the proponents of social security."
"As I have gone through the literature," Friedman continued, "I have been shocked at the level of the arguments that have been used to sell social security....Men who would not lie to their children, their friends, or their colleagues, whom you and I would trust implicitly in personal dealings, have propagated a false view of social security — and their intelligence and exposure to contrary views make it hard to believe that they have done so unintentionally and innocently."
Cohen, who had been Lyndon Johnson's Health, Education, and Welfare secretary and had done as much as anyone over the preceding four decades to shape the Social Security program, was not afraid to engage: "Mr. Friedman attacks the idea that American social security is primarily a system of redistribution of income to middle income people. Actually I think he is probably right about that." But, Cohen jousted, "that is part of the system's political sagacity. Since most of the people in the United States are in the middle income, middle class range, social security is a program which appeals to them." Without spending disproportionately on the middle class, Cohen suggested, "programs don't get appropriations."
The belief that disproportionately generous Social Security spending on the affluent is necessary to maintain public support for spending on the needy remains a widely held and highly influential one across social policy. Yet a close examination of the history of Social Security makes it clear that, at every stage in its development, there was enthusiastic support for providing generous aid to the elderly poor. It was the expansion of benefits to the middle class, the regressive structure of the payroll tax to fund these benefits, and proposals for a benefit structure that paid more to the rich that faced the fiercest political opposition, and repeatedly so.
Why did America end up with a public-pension system that flouted popular opinion while violating both the egalitarian values of the left and the small-government objectives of the right? To find the answer, we must dig deeper into the political maneuverings and influences behind Social Security's development, beginning in the 1930s.
A FATEFUL INTERVENTION
The 1932 Democratic Party platform was clear about its aims for Social Security: "We advocate unemployment and old-age insurance under state laws" it declared, with "the extension of federal credit to the states to provide unemployment relief wherever the diminishing resources of the states makes it impossible for them to provide for the needy."
The following year, two Democrats — Senator Clarence Dill of Washington and Representative William Connery of Massachusetts — introduced a bill providing federal grants for states to cover a third of the cost of means-tested old-age pensions. It received the support of committees in both chambers and swiftly passed the House of Representatives.
With the economic situation failing to improve and many households rapidly depleting their savings, the Chamber of Commerce, labor unions, and other major interest groups joined the push for federally supported relief for the elderly. In June 1934, the Republican National Committee issued a new declaration of policy, insisting that the problems of "relieving the hardships of unemployment and old age" be "approached in a broad, liberal and progressive spirit, unhampered by dead formulas or too obstinately clinging to the past." A week later, on June 13, the Dill-Connery bill passed the Senate without objection.
But as the bill was being read a final time, Democratic Senator Thomas Gore of Oklahoma, who had been attending to committee business, hurried to the chamber to intervene. Gore moved to reconsider the bill on the grounds that it was "not consistent with the special message submitted to the House last week by the President, who suggested that measures of this kind, together with others, ought to be very carefully considered by a commission."
This last-ditch intervention came at the behest of Franklin Roosevelt. The president disliked the idea of permanent, non-contributory pensions as a "dole" and sought to prohibit the involvement of general revenues. He held up the means-tested relief as leverage to secure the enactment of an arrangement with funds "raised by contribution rather than by an increase in general taxation."
According to economist Paul Douglas, an architect of Social Security and future Democratic senator from Illinois, this "failure to act helped...to create the Townsend movement, which arose in the summer of 1934." That year, former physician Francis Townsend gained rapid fame with a proposal that the federal government pay $200 per month to every American over the age of 60 who agreed not to work, so long as the money was spent within 30 days. Townsend clubs sprang up around the nation; by 1936, the movement had 1.5 million listed supporters. Townsend claimed the benefits could be financed by a 2% sales tax.
The benefit levels Townsend proposed were clearly unrealistic — Douglas estimated they would cost $24 billion, equivalent to 75% of the nation's total retail sales in 1934. Nonetheless, more modest schemes (such as "End Poverty in California," which offered $50 per month for needy individuals over 60, and the "Ham and Eggs" plan, offering $30 every Thursday to those over 50) vied for public support and attention.
When FDR's commission issued its report in January 1935, it proposed a more complex approach. The commission adopted the structure of the Dill-Connery bill to finance expansions of state old-age pensions ( "Old-Age Assistance") and recommended similar matching funds to finance the expansion of mothers' pensions ("Aid to Dependent Children"). It also suggested using payroll taxes to finance a nationally administered "old age fund" (later relabeled "Old-Age Benefits") along with a state-administered trust fund for the unemployed ("Unemployment Insurance"). Grant-in-aid programs would also be established for maternal, child, and public health.
Taking pity on "the poor blind man with his little tin cup extended," the committee added "Grants to States for Aid for the Blind" to the proposal. The addition encountered little controversy, as only 15% of the blind had previously been employed. "Grants to States for Aid to Dependent Children" (ADC) were similarly uncontroversial, as nearly half the states had already established mothers' pension programs.
The bill as a whole, however, encountered lukewarm reception from the committee. "Few of the members of the Ways and Means Committee were sympathetic [to the draft]" observed Edwin Witte, the head of Roosevelt's commission. Nonetheless, all Democrats on the committee who were present dutifully voted to approve the legislation. Witte doubted whether many would have done so without the president's endorsement.
THE STRUGGLE FOR MIDDLE-CLASS BENEFITS
Title I of the bill — "Grants to States for Old-Age Assistance" (OAA) to support means-tested old-age pensions — authorized states to claim a dollar from the federal government for every dollar they spent on OAA per beneficiary, up to $15 per month. With the most generous state pension at the time providing $30 per month, this would shift half the cost to federal taxpayers. Federal funds would make it possible for poorer states to establish old-age pensions, while state lawmakers would retain the freedom to set needs-based eligibility criteria in terms of income, savings, and assets. This title was widely acknowledged as the bill's main selling point.
Title II — "Federal Old-Age Benefits" (OAB) — was far less popular. The provision promised benefits from $10 to $85 per month in return for a payroll tax on the first $3,000 of income, which was scheduled to gradually rise from 2% upon introduction in 1937 to 6% in 1949. Individuals who had enjoyed higher incomes would be entitled to larger benefits. Recipients were required to give up employment in order to claim benefits, with the goal being to clear the labor market of older employees.
OAB initially excluded the self-employed, farm workers, and domestic servants, as they typically didn't have formal payroll arrangements with a single employer. Individuals who had retired prior to 1937 were also ineligible, while those paying in would initially receive low returns — and no benefits at all until 1942.
Whereas every other element of the Social Security Act operated as a grant-in-aid program, lawmakers deemed it impractical to operate OAB — a contributory program — at the state level, given the complexity of maintaining actuarial alignment as citizens moved from state to state over the course of their working lives. This broadened the political appeal of OAB somewhat, since it would have the indirect effect of shifting costs from states to the federal government. And yet, OAB remained highly unpopular. It was almost eliminated from the final bill by committees in both the House and the Senate.
The minority-party report by Republicans on the House Ways and Means Committee opposed OAB's contributory scheme, even as it endorsed OAA, ADC, and the titles providing grants to the states for maternal, child, and public health. It deemed the provision unconstitutional and predicted it would "destroy old age retirement systems set up by private industries." Harold Knutson, a Republican representative from Minnesota, pointed out that payroll taxes would add to the burdens of already-struggling businesses. He added that those living in states "that are bankrupt, or nearly so, will receive absolutely no benefits from this legislation."
When the bill was brought to the House floor, Democratic leaders made it known to their party's rank and file that they wanted all amendments defeated, regardless of content. Nonetheless, 45 Democrats defected to support Republican Representative Allen Treadway's motion to recommit, which would have struck the middle-class OAB and Unemployment Insurance programs from the bill while leaving in place the means-tested OAA, ADC, and Aid to the Blind. In any other Congress, such opposition would have proved decisive. But in 1935, Democrats held a 322-103 seat majority in the House. Treadway's motion was disposed of by a vote of 253-149.
On April 19, 1935, the House passed the Social Security Act with a sweeping bipartisan majority of 372 to 33. Democrats voted in favor 284 to 15, while Republicans supported it 81 to 15. Two months later, the Senate was similarly enthusiastic, voting 77 to 6 for enactment, with Democrats favoring the act 60 to 1 and Republicans favoring it 16 to 5. Finally, on August 14, President Roosevelt signed the bill into law.
By all accounts, the costly OAB entitlement for the middle class only made it through Congress because it was bundled with the popular OAA means-tested benefit for the poor, which members were desperate to pass. In a November 1939 Gallup poll, 90% of Americans surveyed expressed support for government-funded old-age pensions. Those who did so were then asked: "Do you think pensions should be given to old people who are in need, or to all old people?" Seventy-seven percent replied that they supported pensions for the "needy only," while fewer than a quarter supported universal pensions. Polls in 1935 and 1938 yielded similar results. As commission leader Witte later observed:
I doubt whether any part of the social security program other than the old age assistance title would have been enacted into law but for the fact that the President throughout insisted that the entire program must be kept together. Had the measure been presented in separate bills, it is quite possible that the old age assistance title might have become law much earlier. I doubt whether anything else would have gone through at all.
Thomas Eliot, who had led the drafting of the bill, went further, arguing that if OAB had been Title I and OAA had been Title II, "no one would have kept on reading." Wilbur Cohen agreed, noting that OAA "was viewed favorably because it would have alleviated immediately the states' financial difficulties and assisted the large number of needy aged in dire straits." "Putting this popular program at the beginning," he concluded, was "a helpful factor in pushing the entire bill through Congress."
THE PUSH FOR PROGRESSIVITY
After the Supreme Court voted 7-2 to uphold the constitutionality of OAB in 1937, the Social Security Board's leadership changed the name of the program from "Old-Age Benefits" to "Old-Age Insurance" (OAI) to strengthen the impression of a link between spending under Title II and revenues under Title VIII. It did so over the objections of the board's own actuaries and legal staff, who noted the absence of vesting rights — the touchstone of insurance integrity.
With the act safely on the books and OAA aid no longer held hostage, bipartisan dissent over OAI burst into the open. The New Republic, which had led the cheering section for the New Deal and celebrated Social Security as "an important milestone," deemed the law's details "almost a model of what legislation ought not to be," noting that under the payroll tax, "the wealthy will avoid even the burden they now bear through local taxation on property for local aid." The Nation denounced the payroll tax as well, calling it "the most regressive levy on our statute books, surpassing, in that regard, even the sales tax." Abraham Epstein, who had coined the term "social security," lamented that "the extensive use of [payroll] taxes for old age and unemployment insurance not only defeats the very purpose of this legislation, but tends actually to aggravate existing insecurity," as it "can result only in reduced consumption, increased unemployment and greater insecurity."
Republicans embraced these lines of critique. Kansas governor Alf Landon, the party's 1936 presidential nominee, noted that a "tax on payrolls is beyond question a tax on employment," which "slows down the advance of wages and holds back re-employment." He called for Social Security to be reformed, arguing "we must provide real old-age pensions" but "pay the cost of these pensions as we go along by a direct tax, widely distributed."
In 1936, a study by the Social Security Board's statistics division documented the genuinely regressive incidence of the payroll tax, thereby buttressing these critiques. But Arthur Altmeyer, the official in charge of Social Security from its creation until 1953, suppressed the study's publication. The political sensitivity of such findings meant that no major studies of OAI's distributional impacts would be permitted within the agency for decades.
OAI's exclusive reliance on payroll taxes thus contravened not only public opinion, but the opinion of economists and political leaders from across the political spectrum. Such taxes had not been part of the initial design for Social Security. Even New Deal chief Harry Hopkins had opposed them.
But Treasury secretary Henry Morgenthau, Jr., who was wary of the impact of long-run deficits on the gold market, had insisted on them. At a time when half of workers were excluded from eligibility for OAI benefits due to the lack of covered employment arrangements, a payroll tax also held appeal as a method of limiting payment for the program to those who might eventually draw some advantage from it.
Over subsequent years, a kind of mythology surrounding the payroll tax emerged. Much was made of a remark by FDR, first published in Arthur Schlesinger's 1958 history of the New Deal, suggesting that a reliance on payroll taxes was motivated by a desire to "give the contributors a legal, moral, and political right to collect their pensions." Yet the direct link between benefits and prior contributions was discarded within four years of the act's passage — before the first benefits were even paid out — while the benefit levels to which contributors were legally entitled would remain in constant flux for the following four decades.
During the 1938 elections, Republicans picked up 81 seats in the House of Representatives, ending the dominance of the New Deal coalition that had initially shaped the Social Security program. By that time, Social Security payroll taxes had been collected from 1937, but no benefits were scheduled to be paid until 1942.
As the economy recovered from the depression, revenues began to exceed projections. Republicans — led by Senator Arthur Vandenberg of Michigan, who had voted for the initial legislation with reservations — were wary that a large surplus would become a politicized slush fund, as Civil War pensions had. They were joined by many Democrats, who were eager to expand benefits and for beneficiaries to begin receiving money. The year after the midterms, Congress amended the Social Security Act to replace the program's fully funded structure with a pay-as-you-go approach, which Republicans had initially called for.
Though the 1939 legislation formalized the renaming of OAB in the statute to "Old-Age and Survivors Insurance" (OASI), each of its major provisions shifted the basis of benefits from contributions to needs. From 1940 onward, generous benefits would go to individuals who had paid very little into the program. The increase in the payroll tax that was scheduled to take effect in 1940 was repealed, and the contribution-based lump-sum payout to widows and dependent children was replaced with continued assistance for survivors regardless of whether they had paid into the program. By flattening the relationship between benefits and contributions, the 1939 reform increased the size of benefits for the poor while reducing the amount that went to higher earners.
That same year, Roosevelt nominated former Indiana governor Paul McNutt to head the newly established Federal Security Agency, under which the Social Security Board was to be located. McNutt sought to make Social Security more effective by turning OASI into a uniform benefit for all elderly Americans, financed by progressive income taxes. In a speech he planned to deliver to the National Industrial Conference Board in 1940, he argued that the payroll tax infringed on the right of Americans to decent support in old age, while the regressive benefit structure of the existing scheme added administrative complexity for no good reason. But upon learning of what McNutt intended to say, Altmeyer had the speech replaced with a substitute that was more favorable toward the existing law.
Around the same time, the Senate Finance Committee appointed a special subcommittee to look into the Social Security scheme. The subcommittee's report, issued in August 1941, criticized the inequity of the act's distribution of benefits. Noting the fictitious nature of the supposed tie between benefits and contributions, it recommended replacing both OAA and OASI with a flat $30-per-month pension for retired Americans over the age of 60. The proposal won supporters from across the ideological spectrum, including senators Claude Pepper, Robert La Follette, and John Thomas, but wartime fiscal constraints kept it from making further progress through the legislative process.
In 1944 Senator Vandenberg — who had served on the subcommittee — and his colleague James Murray led the passage of an amendment that authorized the use of general revenues to pay OASI benefits if payroll-tax revenues proved inadequate. This would have phased OASI onto a more progressive track. But as the country mobilized during World War II, the economy boomed and unemployment fell, causing payroll-tax revenues to swell. This forestalled the need to dip into general revenues.
Throughout the 1940s, political support for the means-tested OAA remained much stronger than it was for the contributory OASI. In fact, economic growth made it possible for states to increase the assistance provided under the former: OAA-benefit levels rose by an average of 31% in real terms between 1940 and 1953. Eligibility for the program was also expanded, and total OAA spending grew by 70% in real terms over roughly the same period. Though deficit financing of wartime spending led to rapid inflation, Congress repeatedly enacted legislation (in 1939, 1946, and 1948) to increase the cap on the federal match for OAA.
On the other hand, lawmakers did nothing to stop inflation from rapidly eroding OASI benefits. The program was supposed to be self-financing, and there was little appetite for increasing the payroll-tax cap, which remained at $60 but declined by 40% in real terms between 1937 and 1949. By 1949, means-tested OAA benefits were 70% higher than OASI payments on average. The exclusion of large categories of workers from OASI meant that by the late 1940s, twice as many Americans received OAA as OASI. In 1948, Congress overrode a presidential veto to further expand OAA benefits. The same law shrank eligibility for OASI.
REVIVING REGRESSIVITY
In 1948, Harry Truman won re-election, and his coattails restored the Democratic House majority to its pre-war level. The president used his January 1949 State of the Union address to call attention to the inadequacy of OASI benefits, observing that OASI beneficiaries received an average of only $25 per month.
Much of the push for revitalizing OASI came from trade unions, whose members had already contributed disproportionately to the program through payroll taxes. Additional support came from the South. As Alabama's public-welfare commissioner explained in testimony to Congress, Southern states had "larger and larger numbers of needy old people and correspondingly smaller numbers within the population who can earn and pay taxes" to support them under OAA. And since those states were largely agricultural, few of their elderly residents were covered by OASI. Expanding OASI to cover farm workers would allow Southern lawmakers to shift more costs borne by their states onto the federal government.
In 1950, the Social Security Act was amended once again. The amendments extended OASI eligibility to domestic workers, public-sector employees, regularly employed farm workers, and the self-employed, expanding the share of the workforce covered by OASI from 55% to 70%. They also raised average benefits to $46 per month regardless of prior contributions, with a proportionately higher benefit hike for those who had spent their careers in higher income categories.
In addition to expanding OASI at the expense of OAA, which had been targeted at the poor, the amendments made OASI more regressive. They increased the $3,000 maximum income subject to the payroll tax by much less than 15 years of inflation (to $3,600, rather than $5,184), but then raised the payroll-tax rate, which had been frozen at 2%, to 6.5% on that lower income segment. They also repealed the Vandenberg-Murray amendment, which would have allowed revenues from the highly progressive income tax to be used for OASI.
The 1950 amendments entrenched OASI as the primary form of Social Security in the United States. In February 1951, there were suddenly more OASI recipients than OAA recipients. The amendments were followed by similar legislation in 1954, which expanded OASI taxes and benefit eligibility to 94% of all workers. Though bipartisan opposition to OASI's contributory structure was present from the outset and repeatedly bubbled to the surface throughout the 1940s, it was no match for the administration's political maneuverings.
Curiously, as leading Social Security historian Martha Derthick observed of the program's origins, the Roosevelt administration's "resistance to universal flat pensions was so rigid, and the reasons for it were so little articulated in public, that the logical content is hard to summarize." The program's first chief actuary, W. R. Williamson, noted too that officials' praising of the contributory principle was "pure lip service" that was "honored in the breach rather than the observance." "[T]o pretend that the special favoritism for the higher paid persons" had "anything to do with ‘reducing dependency'" was, in Williamson's eyes, "perfect nonsense."
In fact, the commitment to OASI's complex contributory principle was peculiar to many officials associated with the Democratic Party. The Beveridge Report, which set forward principles of Britain's post-war welfare state, had declared: "The first fundamental principle of the social insurance scheme is provision of a flat rate of insurance benefit, irrespective of the amount of the earnings which have been interrupted by unemployment or disability or ended by retirement." David Lloyd George, who had established Britain's state pension, had earlier noted, "[s]o long as you have taxes upon commodities which are consumed practically by every family in the country, there is no such thing as a non-contributory scheme." Britain's Labour Party had opposed mandatory sickness-insurance contributions in 1911, preferring an arrangement funded by general revenues to one that taxed the working class.
Republicans in the United States exhibited similar instincts. When two leading Republicans — Senator Robert Taft of Ohio and Representative Carl Curtis of Nebraska — proposed a flat $25-per-month benefit as a floor, the Truman administration opposed it, noting that the "obvious inadequacy of $25 a month as a standard of life for the aged would bring about immediate pressure for raising the minimum benefit." One official worried that a flat benefit "would create an aristocracy of old age pensioners in the poorer sections, especially in the rural areas."
What was the political basis of Roosevelt's — and later, Truman's — strident objection to flat pensions? To find answers, we must revisit the political roots of the Social Security Act of 1935.
RACE AND REGRESSIVITY
Race was the dark matter of mid-20th-century Democratic Party politics: It exercised a pervasive influence on legislators' behavior, though it was invisible in official accounts of proceedings.
In his 1998 book Shifting the Color Line, Robert Lieberman of Johns Hopkins University concludes as much, observing that national policies of the era "were possible only when they could be restricted to a narrowly designated target population that was predominantly white." Though no overtly racist provisions were included in the legislation, Lieberman notes that the "Old-Age Insurance provisions of the Social Security Act were founded on racial exclusion," while anti-discrimination provisions requested by the NAACP were rejected. "In order to make a national program of old-age benefits palatable to powerful southern congressional barons," Lieberman writes, "the Roosevelt administration acceded to a southern amendment excluding agricultural and domestic employees from OAI coverage."
In 2010, the Social Security Administration published a response by its historian, Larry DeWitt, to Lieberman and other scholars advancing similar arguments about the farm- and domestic-worker exclusions. DeWitt conceded the disparate impact of the exclusions — 65% of black workers had originally been excluded, compared with 27% of whites — but argued that this was motivated by the administrative difficulty of imposing payroll taxes on workers who were often paid in-kind with crops and lodging. Similar exclusions for agricultural and servant workers, he noted, had typically been created when European nations first established their contributory systems.
The exemption from OASI benefits also meant exemption from its payroll taxes, which likely would have weighed heavier on blacks — especially relative to their old-age benefits in a decade where life expectancy for non-whites in Mississippi was 56. Furthermore, Southern legislators generally supported eliminating the exclusions in 1950 and 1954. And by 1960, although non-white workers were covered at a higher rate (96%) than whites (93%), annual benefits received by blacks were 13% to 40% lower across beneficiary categories.
While Jim Crow is overblown as an explanation of the farm- and domestic-worker exclusions, the need for Southern support in Congress likely explains why Democratic leaders insisted so doggedly but inconsistently on contributory principles in the nationally administered OAB/OAI/OASI program. This is apparent in Edwin Witte's account of the Development of Social Security, where he notes that "[f]rom the first it was realized that the Senate Finance Committee would probably constitute the most serious obstacle to the enactment of the social security bill. A very large percentage of the members of this committee were from south of the Mason and Dixon Line." And in fact, the Senate Finance Committee was chaired by Pat Harrison of Mississippi, and eight out of the 15 Democrats on the committee were from Southern and Border states.
Harrison, the son of a Confederate veteran, had been bitterly opposed to the flat benefits proposed by Townsend and others. He brought a reluctant Henry Morgenthau to Congress to testify against Townsend's proposal and persuaded the Treasury Department to throw its weight against it. Back home, the Jackson Daily News — Harrison's great champion in the state — fulminated against non-contributory flat benefits that would place blacks and whites on equal terms, noting that "[t]he average Mississippian can't imagine himself chipping in to pay pensions for able-bodied Negroes to sit around in idleness on front galleries, supporting all their kinfolks on pensions, while cotton and corn crops are crying for workers to get them out of the grass."
Charles Hamilton Houston, the NAACP's first full-time special counsel, testified in front of the Senate Finance Committee against a contributory scheme:
Mr. Chairman, the National Association for the Advancement of Colored People regrets that it cannot support the Wagner economic security bill. It approached the bill with every inclination...but the more it studied the bill the more holes appeared, until from a Negro's point of view it looks like a sieve with the holes just big enough for the majority of Negroes to fall through.
Noting provisions excluding farm and domestic workers, Houston added that "the present scheme is unfair to unorganized labor." Though he conceded that "the overhead of administering and really enforcing a pay-roll tax on casual, domestic, and agricultural workers would practically consume the tax itself," he pointed out that payroll-tax financing was inherently problematic, as it hit those already "below really a distinct subsistence level" during an economic depression that had "thrown more Negroes out of work proportionately than any other element of the population."
Houston also noted that OAA was unlikely to be helpful. While he acknowledged there were "lots of decent, fair-minded people in the South," he observed that "in many States it would be political suicide for [elected officials] to advocate a State old-age assistance law giving Negroes substantial benefits in large numbers." Instead, he called for a single, flat benefit to be administered at the national level. When Chairman Harrison asked whether a $15-per-month federal contribution without state match would be a fair amount, Houston suggested it would. No such provision was ever included in the bill.
Harrison, Witte noted, "displayed remarkable ability in getting what he wanted." The chairman "held back the vote on the most controversial subjects until he felt sure of the vote." He gathered proxies from members who were ill, swayed members whose support was doubtful, and scheduled the final vote on Social Security for when hostile senators were absent. Witte continued: "The question whether a compulsory old age insurance provision should remain in the bill was one on which the outcome was most doubtful. Had Chairman Harrison allowed this question to come to a vote earlier than it did I feel quite sure that Title II would have gone out of the bill."
To secure approval, Witte — who had designed the blueprint for the bill as FDR's committee director — met the Senate Finance Committee in an "executive session" (meaning off the record). Witte notes that he spoke "with an emphasis upon the fact that the probable alternative was a modified Townsend plan" of flat, non-contributory benefits. "Chairman Harrison then, immediately after my speech, put the question to a vote and every member of the committee who was considered doubtful voted for old age insurance."
"With a less adroit chairman," Witte concluded, "the social security bill would probably have emerged from the Senate committee in a very unsatisfactory form, if indeed a favorable report could have been secured."
That the regressive old-age insurance title was passed due to a combination of Southern support and Democratic Party loyalty was also clear from the consideration of the initial bill in the House of Representatives. Witte notes that Democratic leaders "passed the word around that they wanted all amendments killed" regardless of their content. When Representative Treadway's motion to eliminate the contributory old-age insurance from Title II was considered on April 19, 1935, Republicans voted for striking it 100-1. Progressive Party members did so too, by a vote of 7-0, as did all Minnesota Democratic-Farmer-Labor Party representatives, by a vote of 3-0. Democrats from Northern states saw 36 defectors voting to strike the contributory program, with 139 voting to keep it. Together, legislators from all parties in Northern states voted 143-140 to eliminate it. It was only lopsided votes in the Border states (5-33) and the South (4-90) that supplied the votes to reject Treadway's motion and retain the regressive title as part of the act.
After the civil-rights revolution, the main political impediment to flat benefits appears to have fallen away. In 1969, President Richard Nixon proposed federalizing OAA as a flat non-contributory benefit. That year, OAA had paid beneficiaries $139 per month in Wisconsin but only $40 per month in Mississippi. In 1972, Congress replaced OAA, Aid to the Blind, and Aid to the Disabled with Supplemental Security Income (SSI) — a flat benefit of $130 per month, funded entirely out of general federal revenues, and indexed to increase automatically with the cost of living. The House of Representatives passed the reform by a vote of 305 to 1, and the Senate by 61 to 0, before Nixon signed it into law.
SOCIAL SECURITY IN ITS OLD AGE
Over the two decades following the 1950 amendments, wage growth and the influx of young baby boomers into the workforce caused payroll-tax revenues to rise faster than spending on benefits. This gave congressional incumbents an opportunity to claim credit for increasing benefits every election cycle.
To check this regressive bidding war for middle-class votes, the 1968 Republican Party platform proposed making cost-of-living increases to OASI automatic. After compounding benefit increases of 15% in 1969, 10% in 1971, and 20% in 1972, Congress and the Nixon administration agreed to a formula that would automatically increase all benefits in line with the growth of average wages.
Yet as inflation surged in the 1970s, policymakers realized they had inadvertently double-indexed the system: The increase in benefits due to wage-indexing came on top of an increase in benefits that enrollees would have enjoyed from being credited with a higher earnings history. As the ratio of retirees to workers began to climb, the economic slowdown squeezed payroll-tax revenues, generating pressure for reform by starving the beast.
Legislation in 1977 slightly increased the progressivity of the OASI benefit formula and raised the payroll tax, but it proved inadequate to make up the structural shortfall. Three years later, voters swept Ronald Reagan into the White House and put Republicans in control of the Senate for the first time in a quarter-century. And in 1983, Congress agreed to a broader reform that would gradually raise the retirement age and take a further step in the direction of flat benefits by reducing payments made to high earners.
In the early years of OAB, when the number of workers greatly exceeded the number of eligible retirees, all beneficiaries received far more in benefits than they paid in payroll taxes, regardless of their income history. But in its maturity, these benefits — now administered under the Old-Age, Survivors, and Disability Insurance (OASDI) program — are less generous relative to OASDI taxes, and the net regressive effects of the program's history and structure are beginning to emerge.
These effects are significant. Benefits increase from $7,600 at the 25th percentile to $15,600 at the 75th percentile, in line with higher earnings histories. The payroll tax is also regressive, taking 8.8% of income from individuals earning between $30,000 and $40,000 per year but only 5% from those earning between $500,000 and $1 million due to the $142,800 cap on income that is subject to the OASDI tax. This is exacerbated by the fact that non-college-educated workers are subject to payroll taxes for at least an additional four years without receiving additional benefits.
On top of this, differences in life expectancy mean that college-educated men collect Social Security for an average of eight years longer than those who didn't attend college. As non-college life expectancy is only six years more than the retirement age, not only do non-college-educated workers pay in for more years and get much less each month, they receive fewer than half as many payouts. Net of payroll-tax contributions, low-income workers receiving OASDI are now little better off than non-working retirees who rely on SSI alone.
Given the links between income, education level, and race in America, one would expect to find racial disparities associated with OASDI. And in fact, Eugene Steuerle, Karen Smith, and Caleb Quakenbush of the Urban Institute calculated that white Americans in 2020 would, on average, receive $1.25 in benefits for every dollar they contributed in taxes under OASDI over the course of their lives, whereas blacks would receive 94 cents.
The political circumstances of OASDI's development and subsequent changes in society have made the program regressive in effect. And if the very structure of a program is regressive, the poor of all races are only made worse by increases in its scale.
THE TRICKLE-DOWN MYTH
The notion that making Social Security benefits for the wealthy disproportionately generous was necessary to win political support for aiding lower-income seniors is simply not true. It is partly a cliché repeated out of sheer habit and partly an ex-post rationalization of the OASDI program, whose regressive structure owes much to the politics of Jim Crow.
Far from being required to win popular support for aid to the elderly poor, policymakers held aid to these individuals hostage to enact and expand OASDI. Today, the structure of the program is defended primarily out of inertia, as well as a misguided sense that a costlier program necessarily achieves more.
But voters generally want aid to go to those who most need it, and taxing Americans to benefit people who can provide for themselves is generally unpopular. When the time comes to consider meaningful Social Security reforms, we should keep in mind both the historical roots and the substantive weakness of the case for providing more aid to those who need it least.
