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Obama vs. FDR

Monday, February 2, 2009

How Obama’s proposed changes to Social Security take aim at Franklin D. Roosevelt’s vision for retirement security.

When the Social Security Act was passed in 1935, the program embodied new ideas on the role of government and engendered significant opposition. Yet one point remained clear: Social Security was not “relief,” what is today termed “welfare.” This new program, explained President Franklin D. Roosevelt, was to be an earned right by American workers, not a handout. This aspect of the program, the Social Security Administration (SSA) says, is “one of the basic principles of the Social Security program and is largely responsible for its widespread public acceptance and support.” But some in Congress and the new Obama administration wish to make fundamental changes to how Social Security works, shifting it closer to a welfare program.

Social Security has changed a great deal over time—retirement benefits have increased, and taxes along with them, while benefits for spouses and the disabled have been added to the program. Yet one constant has been that benefits are paid out based on taxes paid in.

Obama has proposed changes to Social Security that would shift it from a social insurance program based on earned benefits toward a welfare program that transfers from the rich to the poor.

Social Security is financed through a dedicated tax of 12.4 percent of wages, with 6.2 percent each paid by workers and their employers. Roosevelt saw the benefit of separate taxes for Social Security, calling it “politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions….”

Moreover, Social Security taxes have always been levied on wages up to a ceiling, on the assumption that individuals earning above a given level could save on their own. Currently, around 84 percent of total wages are subject to Social Security taxes, consistent with the average since 1935. As Social Security Administration analyst Michael Resnick described it, “The upper limit on the tax was designed to assure that no one contributed directly more than the value of the protection he received.”

Finally, Social Security benefits have always balanced adequacy with equity. To provide adequate retirement income to low earners, Social Security benefits are progressive. But benefits have also always increased along with contributions. This balancing of equity with adequacy is designed, in SSA’s words, to ensure “that a person receives a reasonable return on his/her investment in Social Security.”

Arthur Altmeyer, President Roosevelt’s first chairman of the Social Security Board, explained that the program should “Rely to the maximum extent on contributory social insurance for protection against destitution. . . . By contributory social insurance, the president meant a system under which contributions and benefits were related to past earnings.”

Together, the capped payroll tax and link between taxes and benefits have prevented Social Security from resembling a traditional welfare program. As the SSA itself says, Social Security “is not and was never intended to be a program to provide benefits based on need. Rather, it is a system of social insurance under which workers (and their employers) contribute a part of their earnings in order to provide protection for themselves and their families if certain events occur.” As a result of this “earned benefit” status, collection of Social Security benefits has never carried the stigma associated with food stamps, Supplemental Security Income, or other welfare programs.

Unfortunately, President Obama has proposed changes to Social Security that would shift it from a social insurance program based on earned benefits to a welfare program that redistributes from the rich to the poor.

Obama proposes two changes related to the taxes collected to fund Social Security. The first alters the maximum wage on which taxes are paid. Currently, the Social Security payroll tax of 12.4 percent is levied on earnings up a limit of $106,800. (This “tax max” increases each year along with wage growth.) Obama has called for placing a surtax on earnings over $250,000. For the first time, Social Security would levy taxes above the maximum wage ceiling. And in another first, additional benefits would not be paid based on these additional taxes.

Obama’s second proposal would effectively reduce or eliminate payroll taxes for low earners. Called “Making Work Pay,” the plan provides a refundable income tax credit equal to 6.2 percent of wages up to a maximum credit of $500 per person. In effect, Obama’s plan eliminates the 6.2 percent employee share of the Social Security tax for anyone earning less than $8,000 and reduces the payroll tax for people earnings between $8,000 and $85,000.

Obama’s proposal would effectively reduce or eliminate payroll taxes for low earners.

Since the tax cut for low earners significantly outweighs the new taxes collected from high earners, it is only with injections of revenues from the general budget—which is itself deeply in deficit—that Social Security’s already precarious finances are not made even worse.

Consider what these tax proposals would mean for the nature of Social Security: high earning workers will pay Social Security taxes for which they will receive no benefits. Likewise, low earning workers will receive Social Security benefits for which they did not pay taxes. If anything characterizes a welfare program, this is it.

While casting himself as a defender of the traditional Social Security program against reformers who would reduce benefits, raise the retirement age, or introduce personal savings accounts, the Obama legacy could be a Social Security significantly different from that which Franklin D. Roosevelt intended.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. He was principal deputy commissioner at the Social Security Administration. Research assistant Adam Paul assisted in the drafting of this article. 

Image by Darren Wamboldt/Bergman Group.

 

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