May 9, 2005

Roosevelt's Social Security plan included private accounts

By Noel Sheppard

Franklin Delano Roosevelt's original Social Security plan included provisions that would have allowed people to make personal investments — not altogether different from the private accounts that President Bush is currently proposing.  In fact, this was one of three 'necessary principles' in FDR's legislative package presented to Congress on January 17, 1935:

"In the important field of security for our old people, it seems necessary to adopt three principles: First, non—contributory old—age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps thirty years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities which 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.'

Here's how it would have worked as outlined by Edwin Witte, Executive Director of FDR's Committee on Economic Security:

"The voluntary system of old—age annuities we suggest as a supplement to the compulsory plan contemplates that the Government shall sell to individuals, on a cost basis, deferred life annuities similar to those issued by commercial insurance companies; that is, in consideration of premiums paid at specified ages, the Government would guarantee the purchasers a definite amount of income, starting at 65, for example, and continuing throughout the lifetime of the annuitant.'

For those who are unfamiliar with the term 'annuity,' these are basically certificates of deposit offered by insurance companies rather than banks.  You give your money to an insurance company for a predetermined period of time in exchange for a minimum guaranteed interest rate that will be paid back to you —— 'the annuitant' —— as monthly installments in the future.

In this case, what FDR proposed was that along with the funds each employee was required to contribute from his/her paycheck, workers could make periodic investments that would give them certificates redeemable for monthly payments upon their retirement.  These certificates were referred to as 'annuity bonds,' and, much like Bush's private accounts, could be redeemed by the annuitant's spouse or beneficiaries upon his/her demise.

Unfortunately, this provision  —— initially referred to as 'Title V' —— was deleted from the final bill that came out of Congress due to pressures exerted by the insurance industry. 

For somewhat obvious reasons, insurance lobbyists felt that this plan might cut into their industry's ability to sell such policies, as the government would suddenly become a direct competitor. Given the poor health of financial companies after The Crash, it is understandable that Congress didn't want to add to this sector's difficulties, and therefore yielded to such pressures.

That said, the salient point here is that this concept of individuals being able to invest their own funds exclusively for their benefit (or for that of their estate) outside of the pay—as—you—go facet of the program was part of the original Social Security plan. 

Furthermore, as the initial monthly cap of the proposed annuity distribution was fixed at $100, this was intended to represent a very significant percentage of one's future benefits.  For instance, the first monthly check distributed by Social Security was  $22.54, or less than a quarter of what one could have received from an annuity bond.

Given this, one has to wonder why the Bush administration has not used this piece of history to engender support for private accounts. After all, if the American people were aware that FDR wanted the government to make such investment alternatives a part of Social Security, maybe a greater percentage of the nation would favor implementing it now.

Beyond this, wouldn't such a revelation be extremely embarrassing for reform opponents?  If the most highly regarded Democrat of the 20th century wanted to offer citizens the option of investing funds for their own future benefit under the umbrella of Social Security, why is today's iteration of this party not only eschewing such a concept, but spending all of its political capital to defeat it?

Now in fairness, annuity bonds are not completely analogous to some of the risk—carrying options proposed for private accounts such as equities.  However, what most folks don't understand in this debate is that the overwhelming majority of Americans would likely choose the guaranteed interest option in their private accounts regardless of what other alternatives were available. 

As a result, if private accounts ever became a reality, most people would, in effect, end up investing in an annuity that is quite similar to what FDR originally proposed.

With this in mind, the president should consider offering annuity bonds as a private account option.  Then, he could state that he was just reviving a part of the plan proposed by the Father of Social Security 70 years ago that had been deleted due to the political and economic pressures of the day.

Noel Sheppard is an economist and writer residing in Northern California.  He welcomes your comments at slep@danvillebusinesscenter.com.