The Birth of America's Largest Spending Program

On this day in economic and business history...

Today a hope of many years' standing is in large part fulfilled. The civilization of the past hundred years, with its startling industrial changes, has tended more and more to make life insecure. Young people have come to wonder what would be their lot when they came to old age. The man with a job has wondered how long the job would last.

This social security measure gives at least some protection to thirty millions of our citizens who will reap direct benefits through unemployment compensation, through old-age pensions and through increased services for the protection of children and the prevention of ill health. ...

This law, too, represents a cornerstone in a structure which is being built but is by no means complete. It is a structure intended to lessen the force of possible future depressions. It will act as a protection to future Administrations against the necessity of going deeply into debt to furnish relief to the needy. The law will flatten out the peaks and valleys of deflation and of inflation. It is, in short, a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness. ...

If the Senate and the House of Representatives in this long and arduous session had done nothing more than pass this Bill, the session would be regarded as historic for all time.

--President Franklin D. Roosevelt, on signing the Social Security Act, Aug. 14, 1935.

The Social Security Act was in many ways the crowning achievement of the Roosevelt administration, which oversaw a more rapid and radical shift in the relationship between the government and its people than any other in living memory. For centuries, Americans had relied on a patchwork "safety net" of local support, charitable relief, and the occasional small pension awarded to veterans and their families or loyal company men lucky enough to obtain long-term employment at certain progressive corporations. This net, as might be expected, had more than its fair share of holes -- and these holes were stretched to the point of breaking several times in America's industrialized history, with major protests like "Coxey's Army" erupting during depressions.

The frailty of America's safety net was thrown into stark public relief in the summer before Roosevelt's election, when thousands of World War I veterans marched on Washington, D.C., to demand early payment of their military bonuses. The brutal treatment of this "Bonus Army" (spiritual successors to Coxey's Army), dispersed at President Herbert Hoover's direction with tanks and cavalry, only served to further turn the nation against Hoover and his disastrous handling of the Depression. Roosevelt also dealt with a (smaller) Bonus Army protest, but he managed to avoid a fiasco by offering the picketers jobs in the Civilian Conservation Corps. However, this solution wouldn't provide an income for everyone in the nation suffering through hard times.

Several proposals emerged during the Great Depression to ameliorate the widespread and crippling levels of unemployment and its associated poverty. The Social Security Administration recounts many of these on its own historical site:

  • Louisiana Governor and Senator Huey Long proposed a "Share Our Wealth" program, which would guarantee a minimum annual income of $5,000 and provide everyone over the age of 60 with an old-age pension. The program had several more radical anti-wealth elements, but it proved immensely popular and eventually claimed nearly 8 million members in local Share Our Wealth clubs across the country.
  • Francis Townsend, a California doctor, proposed a $200 monthly pension, paid for by a 2% national sales tax, for everyone over the age of 60. The plan came with two caveats: The person had to have avoided "habitual criminality" in their lives and would have to spend the money in the United States within one month of receipt. Townsend's movement eventually claimed more than 2 million members.
  • Several plans, proposed in California, also concerned old-age payments. Upton Sinclair proposed payments of $50 per month to all California residents over the age of 60, provided they'd been residents for at least three years. Another plan, called "Ham and Eggs," rallied around the idea of "$30 every Thursday."

There were worthwhile elements in many old-age social insurance plans put forward by concerned citizens as the Great Depression dragged on. However, the early days of Roosevelt's administration were devoted primarily to putting out the many fires that raged across the American economy. It was not until June of 1934, more than a year after his inauguration, that Roosevelt first proposed a plan for Social Security to be overseen by the federal government in a speech to Congreess:

Among our objectives I place the security of the men, women and children of the Nation first.

This security for the individual and for the family concerns itself primarily with three factors. People want decent homes to live in; they want to locate them where they can engage in productive work; and they want some safeguard against misfortunes which cannot be wholly eliminated in this man-made world of ours.

In a simple and primitive civilization homes were to be had for the building. The bounties of nature in a new land provided crude but adequate food and shelter. When land failed, our ancestors moved on to better land. It was always possible to push back the frontier, but the frontier has now disappeared. Our task involves the making of a better living out of the lands that we have.

So, also, security was attained in the earlier days through the interdependence of members of families upon each other and of the families within a small community upon each other. The complexities of great communities and of organized industry make less real these simple means of security. Therefore, we are compelled to employ the active interest of the Nation as a whole through government in order to encourage a greater security for each individual who composes it. ...

Fear and worry based on unknown danger contribute to social unrest and economic demoralization. If, as our Constitution tells us, our Federal Government was established among other things, "to promote the general welfare," it is our plain duty to provide for that security upon which welfare depends.

Next winter we may well undertake the great task of furthering the security of the citizen and his family through social insurance. ...

This seeking for a greater measure of welfare and happiness does not indicate a change in values. It is rather a return to values lost in the course of our economic development and expansion.

Following this speech, Roosevelt established the Committee on Economic Security, which undertook the first truly comprehensive analysis on the concept of a national social-insurance program in American history. After six months, this report was ready, and it was presented to the president and then to the houses of Congress in January of 1935. After months of contentious negotiation, Social Security became the law of the land on Aug. 14, 1935.

It was not as complete as Roosevelt had hoped -- disability and medical payments (Medicare and Medicaid) would wait for decades before entering into law as the Social Security Amendments of 1965. Other provisions had to be added to enhance Social Security's coverage and to ensure that it was paying out enough for beneficiaries to support themselves. The Act even seemed destined for a serious legal challenge and the very real possibility of defeat before the infamous "switch in time that saved nine," which saw Supreme Court Justice Owen Roberts change his legal opinions on many New Deal programs. This sudden shift was widely seen as a capitulation to Roosevelt's unpopular court-packing threats, which would have expanded the Supreme Court roster to 15 justices. The Social Security Act held up, and in 1937 it swung into action.

Social Security's implementation was not without its difficulties. The country entered a second steep recession in 1937 as the Roosevelt administration tightened its budget belt, even as millions of workers suddenly had chunks of their paychecks withheld for Social Security's first year in operation. The crash of 1937 was steeper and faster than the Great Depression: In 12 months, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) lost nearly half of its value, compared to a 38% drop for the first year of the Crash of 1929. The unemployment rate doubled after nearly dropping back into single-digit territory. However, monthly payments wouldn't begin until 1940. For the first three years of the program, 441,765 elderly Americans accepted lump-sum payments totaling $25,652,000 -- equal to a rather pitiful $58 per person, which would be worth a bit less than $1,000 today.

The first monthly retirement check went to Ida May Fuller of Vermont in January of 1940. Fuller, 65, had contributed $24.75 in Social Security taxes, but because she lived to be 100, she wound up collecting $22,888.92 in benefits. By the time Fuller died in 1975, Social Security had been augmented with Medicare and Medicaid, and a Supplemental Security Income program had been instituted to care for disabled Americans. In 1975, 4.3 million Americans received $5.7 billion in federally administered payments. When Social Security, Medicare, and Medicaid are lumped together, the three programs will account for $1.7 trillion in federal outlays for the 2014 fiscal year -- roughly 47% of the total federal budget. Social Security and Medicare payroll taxes will fund about $1 trillion of this amount, leaving a $700 billion shortfall.

Social Security plays a key role in your financial security. In our brand-new free report "Make Social Security Work Harder For You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family, regardless of what happens to this largest of American federal programs. Click here to get your copy today.


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