May 16, 2005
The Social Security bait-and-switch schemeBy Noel Sheppard
As amazing as it might seem in the midst of the current Social Security debate, the first reforms to our national retirement program were actually initiated by its founder, Franklin Delano Roosevelt, less than three years after he signed it into law, and, oddly, before it paid out any benefits.
In fact, an April 28, 1938 letter from FDR to then Social Security Board Chairman Arthur Altmeyer suggests that Roosevelt's original proposal in 1935 was largely what marketing and sales organizations today would refer to as a 'bait and switch':
'I am very anxious that in the press of administrative duties the Social Security Board not lose sight of the necessity of studying ways and means of improving and extending the provisions of the Social Security Act. I am particularly anxious that the Board give attention to the development of a sound plan for liberalizing the old—age insurance system. In the development of such a plan I should like to have the Board give consideration to the feasibility of extending its coverage, commencing the payment of old—age insurance annuities at an earlier date than January 1, 1942, paying larger benefits than now provided in the Act for those retiring in the earlier years of the system, providing benefits for aged wives and widows, and providing benefits for young children of insured persons dying before reaching retirement age.'
Imagine that. Roughly 32 months after enactment, and four years before the first American is supposed to receive benefits, the creator of Social Security proposed 'liberalizing' it by extending coverage to those not originally included, starting payments earlier than agreed upon, and making distributions larger than prescribed in the 1935 bill.
Sound like a bait and switch to you?
For the marketing—impaired, bait and switch is an illegal advertising scheme wherein a store places an ad in the newspaper or on television for a highly—desired product at an absurdly low price. Unfortunately —— or, in this case, conveniently —— they don't have the product in stock.
As a result, when the prospective customer enters the store to buy this product finding it not available, the salesperson offers a substitute that typically costs much, much more. And, as the prospective customer arrives in a 'buying mood,' he/she becomes an easy target for a salesperson of even Al Bundy's caliber.
With that in mind, doesn't it sound like this is exactly what FDR did in 1935 as he baited Congress into supporting a Social Security plan with features and benefits at a cost they found acceptable, only to switch it for a significantly more expensive program once they had already bought into the concept?
Let's examine some of the facts. The first significant change to this program under the 1939 amendments was the elimination of what we would refer to today as 'vesting.'
When originally enacted, a recipient of monthly Social Security checks was required to contribute to the program for a minimum of five years. This was why the first monthly checks were scheduled to go out in January 1942, five years after contributions officially started in January 1937.
However, FDR tossed this vesting caveat aside once he was re—elected, allowing folks instead to receive benefits regardless of how long they had contributed —— even if they had been 'taxed' for as little as one day.
Then, FDR 'liberalized' the benefit formula so that the first retirees would get significantly more than originally agreed upon. At the same time, he moved up the start date for these first distributions from January 1942 to January 1940, meaning that these maiden recipients actually paid into the system an even shorter period of time. And, benefits for lower—paid workers were also increased.
Maybe most important, these 1939 amendments created a whole new set of benefits for the survivors of deceased contributors. These included: children 16 and younger; widows 65 and older; widows of any age who were still caring for a child of the deceased, and; aged dependent parents of the deceased if there were no other eligible survivors.
When you add it all up, by 1939, Social Security had a vague resemblance to what Congress approved in 1935. And, given all these benefit increases —— along with the fact that much of the early distributions were going to come out of income tax receipts —— it was going to be FAR more expensive than originally presented to Congress.
Unquestionably, much like a well—constructed Ponzi scheme, these alterations were specifically designed to engender support for this program after it had come under tremendous scrutiny during the 1936 presidential campaign.
Or didn't you know that one of the key issues debated during FDR's first re—election cycle was the viability of Social Security, and that Republican presidential candidate Alf Landon ran on an anti—Social Security platform wherein he called the program a 'cruel hoax' and 'a fraud on the working man?'
As such, it is extremely doubtful that Social Security would have passed had all the provisions included in the 1939 amendments been in the original bill. In fact, history suggests that FDR and his aides were fully aware of this, and that they played a marvelous Washington two—step on Congress and the American people to generate support for something that ended up being quite different than originally depicted.
Noel Sheppard is an economist and writer residing in Northern California. He welcomes your comments at email@example.com.