[Congressional Record Volume 144, Number 86 (Friday, June 26, 1998)]
[Senate]
[Pages S7243-S7247]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




     WHAT CAN WE LEARN FROM THE PAST? A HISTORY OF SOCIAL SECURITY

  Mr. GRAMS. Mr. President, on July 1st, concerned Americans will 
gather in Cranston, Rhode Island, for the second in what will be a 
series of public meetings called the ``Great Social Security Debate.''
  I want to thank the Concord Coalition, the American Association of 
Retired Persons, and Americans Discuss Social Security for sponsoring 
this event.
  The first forum, which took place last April 7th in Kansas City, 
Missouri, was a great success. The discussions in Rhode Island will no 
doubt be equally compelling, especially given the focus of the debate: 
``Retirement in the 21st Century.''
  It is with one eye to the 21st Century that I rise today to speak 
about Social Security's past--to offer some perspective on its history 
and what we can learn from our attempts at social policy making.
  In recent years, as more and more Americans become aware of its 
looming financial and demographic crisis, Social Security is no longer 
the ``third rail'' of American politics.
  Both Democrats and Republicans have offered reform plans, including 
ones that would set up individual retirement accounts--a suddenly 
mainstream idea that would have been considered heresy just a couple of 
years ago.
  Long before President Clinton's ``Save Social Security'' State of the

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Union address, a national dialogue was already underway.
  Summits, conferences, forums, and town hall meetings were organized 
to allow all Americans, old and young, to discuss Social Security and 
how to reform it to benefit our nation and make retirement more secure 
for current and future generations.
  This democratic process will help us build a national consensus and 
eventually find workable solutions to preserve and strengthen Social 
Security while providing freedom of choice for all Americans.
  As we move forward, it is important to remember that history is a 
mirror--by looking through it we gain perspective and the wisdom it 
provides, giving us the opportunity to avoid repeating mistakes. Nobel 
Laureate Friedrich Hayek says:

       Political opinion and views about historical events ever 
     have been and always must be closely connected. Past 
     experience is the foundation on which our beliefs about the 
     desirability of different policies and institutions are 
     mainly based. . .
       Yet we can hardly profit from past experience unless the 
     facts from which we draw our conclusions are correct.

  A review of its history will provide a better understanding of the 
origin and evolution of our Social Security system. It will facilitate 
the national debate on its reform and point us in the right direction.
  For a time I would like to travel back in time. For hundreds, perhaps 
thousands of years, human society relied on families, relatives, or 
friends to care for their elders.
  For the unfortunate individuals who could not support themselves, or 
did not have families to support them, the community provided 
assistance, in many cases through what were called the ``poor laws.''
  The first compulsory social insurance programs on a national scale, 
including the programs that we call ``Social Security" today, were 
established in Germany under Bismarck during the 1880s. Soon after, 
Austria and Hungary followed Germany by passing similar legislation.
  England adopted national compulsory social insurance in 1911 and 
greatly expanded it in 1948. After 1920, social insurance on a 
compulsory basis was rapidly adopted throughout Europe and into the 
American hemisphere.
  The United States did not have a national social insurance program 
until 1935.
  Today, more than 140 countries in the world have one form or another 
of a social security program.
  Unfortunately, a recent World Bank study shows that most of these 
programs are not sustainable in their present form. I will discuss this 
issue on another occasion.
  It has been said that the industrial and agricultural revolution that 
began in the late 18th Century triggered social reform that shifted 
elderly-care from individuals and families to the state.
  But empirical evidence is insufficient to support this statement, 
particularly in the case of the United States.
  Prior to 1929, the economic condition of the elderly in America was 
fairly secure: most owned their own homes and lived off labor income, 
which was supplemented by emerging private pension plans as well as 
life insurance, savings, and family support.
  The intellectual origin of social insurance, or as we call it, Social 
Security, comes in effect from an obscure group of scholars known as 
the German historical school of economics.
  Driven by their dislike of laissez-faire capitalism and fear for a 
Marxist-led revolution, a group of German-government employed 
professors desperately sought a middle ground to make peace with 
Marxists.
  They pushed for large-scale welfare legislation that could, in their 
view, ease the social tension, keep social order and justice, and avoid 
proletariat revolutions.
  One of the leading figures was Gustav Schmoller. Schmoller was 
sympathetic to the industrial proletariat, and hated what he called the 
``unethical'' striving for wealth by the property-owning classes.
  He believed that the lower classes had a right to derive benefits 
from increased production through welfare legislation. He argued that 
unequal distribution of income was evil, and that government, not the 
individual or the community, had the moral duty to help the proletariat 
maintain equity and social harmony.
  In the early 1870s, Schmoller set up the Congress for Social Reform. 
The purpose was to draft, propose, and promote social legislation. 
Later, he and others created the Association of Socialpolitics as a 
forum to advocate social reform.
  As a result of his effort, the Bismarck government passed the first 
welfare laws in 1883 and old age insurance laws in 1889 in Germany.
  Very few in this country have ever heard about the German Historical 
School of Economics, but it was this small group of intellectual elite 
had a tremendous impact on American economic thought as well as public 
policy making.
  As thousands of young Americans went to Germany to study in the late 
19th century and early this century, many became disciples of the 
German Historical School of Economics and were indoctrinated by German 
welfare capitalism.
  The American students were urged by their German teachers to 
influence the course of politics in the U.S. and change American 
attitudes towards social legislation.
  Now, these German-trained and educated economists--Adams, Clark, 
Patten, Seligman, and Ely--founded the American Economic Association in 
1885. That is the American counterpart of the German Association of 
Socialpolitics.
  Edwin Gay, one of Schmoller's students, was a founder of the National 
Bureau of Economic Research and created the journal, Foreign Affairs.
  Recford Tugwell, a well-known American disciple of the German 
Historical School of Economics, favored social legislation along the 
lines of the German welfare economists. Tugwell become influential 
under President Roosevelt in the 1930s and exerted considerable 
legislative influence under the New Deal.
  Richard Ely, another important disciple of the German Historical 
School, established the American Association for Labor Legislation, 
later named the American Association for Old-age Security. That 
launched the first American social insurance movement. He was even put 
on trial by Wisconsin's superintendent of public instruction for 
propagating socialism in Wisconsin schools in 1894. Ely and John 
Commons succeeded in passing the old-age insurance legislation in 
Wisconsin in 1925. That was among the first in this country.
  Later, the Wisconsin model was used in drafting the federal Social 
Security legislation.
  Now, despite their enthusiasm for social legislation, these German-
trained intellectuals were initially not successful in achieving their 
goals in America.
  Before 1929, there were no significant, broad-based demands for 
compulsory, federal old-age insurance. In most states, elderly 
assistance was locally provided and administered through poor laws.
  Private charity and town/county-controlled almshouses were the 
primary sources for elderly assistance. In 1929, the New York 
Commission on Old-Age Security found that 90 percent of the elderly 
population were either self-supporting or were being supported by their 
families and relatives.
  Less than four percent depended on private charity or public 
assistance. Private pensions existed although they were not widespread 
in America before the era of the Great Depression.
  During the Great Depression, when the stock market plunged 80 
percent, 15 percent of the population began receiving some form of 
public relief. This event gave tremendous momentum to social 
legislation.
  On June 8, 1934, President Franklin D. Roosevelt announced his 
intention to provide a program for Social Security.
  Subsequently, FDR created the Committee on Economic Security, which 
was chaired by Frances Perkins, Secretary of Labor, with four other 
members of the cabinet.
  The committee was instructed to study the entire problem of economic 
insecurity and to make recommendations that would serve as the basis 
for legislation consideration by the Congress.
  A number of university professors were called to staff the CES. 
According to the recollections of Professor Douglas Brown, a staff 
member in the small,

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old-age security section of the CES, the major attention of the CES and 
its staff was focused on unemployment insurance, not old age insurance.
  FDR, Perkins, and the CES director clearly had doubts about a 
national old-age system. On a number of occasions it appeared unlikely 
that the Committee would approve the old-age insurance system.
  Because it was on the back burner, the old-age security section had a 
very small staff and was left alone to work out a plan at its will.
  Basically, two individuals, Barbara Armstrong of the University of 
California and Douglas Brown of Princeton, who pushed old-age insurance 
in the CES. The two actually drafted the U.S. Social Security plan in 
only a month.
  Their compulsory old-age insurance plan raised serious concerns about 
its constitutionality within the CES.
  Even President Roosevelt, Labor Secretary Perkins, who was also the 
chairman of the CES, and Edwin Witte, the Executive Director of the 
CES, did not think this was the right time for a Social Security 
system.
  But the intellectual elite within the CES pushed on. In November, 
1934, Armstrong asked her friend, Max Stern, who was in the Scripps-
Howard newspaper chain to launch a sharply written editorial 
criticizing Roosevelt's failure to give his wholehearted support to 
old-age insurance.
  Roosevelt finally caved. From then on, old-age insurance moved to the 
front burner at the CES.
  The original proposals for the old-age insurance program drafted by 
the CES staff allowed the states or private insurance companies to 
administer the program.
  But this was removed in later drafts. Douglas Brown later admitted 
that the CES staff deliberately exaggerated the difficulties of 
establishing separate state old-age insurance systems as an alternative 
to a federal system.
  It is generally believed that the Great Depression made Social 
Security necessary for the American people.
  The CES argued that the Great Depression had greatly exacerbated the 
plight of the elderly, that the elderly were among the first to lose 
their jobs, and that the effects of the Depression would be felt for a 
long time to come since many families had seen their lifetime savings 
wiped out.
  However, the Social Security proposal submitted to Congress fell far 
short of dealing with this. The Social Security system started to 
collect payroll taxes in 1937 but no benefits were distributed until 
1942. It took more than seven years for this elderly relief measure to 
be effective--long after the Great Depression ended.
  More recent studies have suggested the Depressions may not have 
dictated the establishment of a Social Security system.
  For example, economists now believe that by examining the welfare of 
the elderly outside the family context, reformers such as those 
staffing the CES drew an exaggerated picture of the elderly's plight.
  The 1935-36 data shows that per-capita household income peaked at 
$627 for persons aged 60 to 64, while for people aged 65 and over, 
average per-capita income was only slightly lower, at $601.
  In any event, the CES made its report to the President in early 
January 1935, and on January 17, the President introduced the report in 
both Houses of Congress for simultaneous consideration.
  In less than seven months following its introduction, Congress passed 
and the President signed the Social Security Act into law.
  The history of Congress' debates and consideration of this 
legislation is of particular interest.
  When drafting the compulsory old-age legislation, the CES felt that 
the House Ways and Means Committee and the Senate Finance Committee, 
which had jurisdiction over the issue, might not be sympathetic toward 
FDR's plan, so they created a special committee that would be headed by 
the labor committees' chairmen.
  Without showing much interest in the substance of social security, 
the tax committees were concerned nonetheless with who should have 
jurisdiction over it.
  When it appeared he might be bypassed, Ways and Means Chairman Robert 
Doughton of North Carolina went to see FDR, whereupon the President 
told Frances Perkins that bypassing the Ways and Means Committee would 
never do.
  He did not want to alienate Doughton and his Senate counterpart, Pat 
Harrison. Without especially liking the old-age insurance program, both 
committee chairmen stood loyally by it, perhaps in return for having 
been left in charge.
  Instead of being put into a new committee, the chairmen of these 
committees, the Senate Finance and House Ways and Means, did not want 
to feel that they were being bypassed, so they pledged their loyalty in 
order to keep jurisdiction in their committees over these plans.
  Once the Economic Security bill was introduced, both chambers began 
hearings immediately, and it took less than a month for the committees 
to complete its work on the bill. Nearly 100 people testified--but most 
of them were either government officials or friends of the CES. The 
general public and opponents of the bill, particularly employer groups, 
were not well represented. Again, according to CES Director Edwin 
Witte, the employer groups ``simply knew too little to take any active 
role.'' So did the public.
  In other words, the employers and the public knew too little, so they 
only invited certain people to testify before their committees in 
support of the new Social Security program.
  The Economic Security Legislation contained many titles. In an ``all-
or-none'' strategy, FDR smartly tied old-age insurance with the old-age 
assistance program.
  If not for the needed program to aid the elderly poor, the old-age 
insurance would have never gone through the Congress, according Edwin 
Witte.
  Nevertheless, there was no shortage of opposition to the bill in the 
House.
  In fact, the old-age insurance title was nearly stricken from the 
bill in the House Ways and Means Committee and again on the House 
floor, where an amendment to strike the program mustered a third of the 
votes cast.
  Congressman Allen Treadway, the ranking Republican member of the 
House Ways and Means Committee, called old-age insurance the ``worst 
title in the bill. . . a burdensome tax on industry.''
  Congressman Daniel Reed pointed out that neither old-age insurance 
nor unemployment compensation were ``relief provisions and they are not 
going to bring any relief to the destitute or needy now nor for many 
years to come.''
  When the Senate began debate on the legislation, the old-age 
insurance program became even more controversial. Many senators from 
both sides of the aisle seriously questioned how un-Americaness this 
compulsory old-age insurance plan was. So there were a lot of questions 
and concerns at that time in Congress over these proposals.
  Some worried about the extremely high cost of the program and the 
heavy tax burden it would impose on the American people.
  Some doubted the finance mechanism, and predicted the funding could 
not be sustained. Some pointed out how unwise it was to have the 
federal government, instead of states and private companies, run the 
plan.

  Some were concerned that, as an emergency measure to respond to the 
difficult days of the Great Depression, the plan would turn into a 
permanent program over which the Congress had no control.
  Some criticized the discriminative nature of the legislation against 
the young and higher-wage earners. Some questioned the morality of the 
current generation passing the burden to future generations.
  Unfortunately, many of their prophecies have become reality today.
  The major battle on the Economic Security Legislation was fought over 
the Clark amendment.
  Senator Bennett Clark, a Democrat from Missouri, recognized the 
income-redistribution and non-competitive nature of the old-age 
insurance program and decided to amend it by allowing companies with 
private pensions to opt out of the public program.
  Any employer could stay out of the Social Security program if they 
had a pension plan that offered benefits comparable to the federal 
program. Workers would be given the freedom to choose either the 
federal Social Security program or a private pension plan offered by 
their companies.

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  Clark argued that if the purpose of the old-age insurance program was 
to provide pensions based on earnings and contributions, not to 
redistribute income, the private sector was perfectly capable of 
performing this function. Unearned benefits, not competition, were the 
source of the problem.
  The proponents of the Economic Security Bill feared that if the Clark 
amendment passed, it would encourage private competition and put the 
federal-run program at a disadvantage.
  That is the market at work. Again, those who were proponents of the 
Social Security plan did not like the Clark amendment because they 
thought it would encourage private competition and it would put the 
Federal run program at a disadvantage.
  Competition would eventually undermine and destroy the Social 
Security program, they argued.
  The Clark amendment was narrowly defeated in the Senate Finance 
Committee by a tied vote, but was adopted on the Senate floor by a wide 
margin of 51 to 35. Considering FDR's veto threat and the two-to-one 
ratio of Democrats/Republicans in the Senate, this was indeed a very 
significant vote.
  Subsequently, the Senate passed the Economic Security bill, including 
the Clark amendment, by a vote of 77-6. However, the amendment became a 
sticking point once the bill reached conference.
  House conferees strongly opposed the amendment on the grounds that it 
would ruin the federal program, but Senate conferees refused to concede 
on this matter.
  The conference dragged on for weeks. At the end, FDR ordered the 
Senate Democrat conferees to agree to the House position, and because 
many conferees feared that the much-needed old-age assistance might be 
delayed by the Clark amendment, they agreed to drop the amendment.
  The concession was that the Administration promised to further study 
the idea of contracting out of Social Security.
  There would be a special joint legislative committee to work on 
legislation based on the Clark amendment and submit it to Congress for 
consideration during the next session. With that understanding, the 
Congress approved the conference report. FDR signed it into law on 
August 14, 1935. The promised special committee and the Clark 
legislation, of course, never happened.

  In her book, ``The Roosevelt I Knew'', Frances Perkins recorded an 
interesting conversation she had with Senator Al Gore, Sr., of 
Tennessee:
  ``I remember that when I appeared before the Senate Committee old 
Senator Gore raised a sarcastic objection. `Isn't this Socialism?'

       ``My reply was, `Oh, no.'
       Then, smiling, leaning forward and talking to me as though 
     I were a child, he said, `Isn't this a teeny-weeny bit of 
     Socialism?' ''

  Despite her denial, Senator Gore may have made a point. Professor 
Theresa McMahon, a member of the Social Security Council, put it more 
bluntly by saying at that time: `` I don't mind taxing the bachelors. . 
.I think they ought to take on the responsibility of sharing their 
income with somebody else.''
  On January 31, 1940, the Social Security system started to distribute 
the payroll taxes the government had collected in the past three years 
to those who never paid any tax into the system. The first monthly 
retirement check was issued to Ida May Fuller of Ludlow, Vermont, in 
the amount of $22.54. Miss Fuller died in January of 1975 at the age of 
100. During her 35 years as a beneficiary, she received over $20,000 in 
benefits and paid in nothing.
  In the 60 years following its creation, and despite continued 
criticism, the Social Security program has grown dramatically in size 
and scope. As more beneficiaries and programs are added, the payroll 
tax has been raised 51 times.
  Congress 51 different times has gone back either to raise the tax on 
Social Security, or to expand the income on which that was to be taxed.
  As an example, in 1940, an American worker earning the maximum 
taxable wage paid $70 in payroll tax. That is $675 in inflation-
adjusted dollars. Today, that same worker would pay a Social Security 
payroll tax of $8,481.
  So the maximum in 1940 in today's dollars would have been $675. The 
maximum today is nearly $8,500. Meanwhile, the number of workers per 
retiree has dropped from 100 in 1942 to two today, and the unfunded 
liabilities of the program have become unbearable for future 
generations.

  Since the enactment of the 1935 Social Security Act, many changes 
have taken place to expand the program.
  Major changes include the 1939 amendment, which was initiated by 
Social Security officials and greatly expanded the program. It required 
the payment of benefits to the spouse and minor children of a retired 
worker, and survivor benefits to the family in the event of the 
premature death of a covered worker.
  It also increased benefit amounts and accelerated the start of 
monthly benefit payments from 1942 to 1940. The 1939 amendment 
officially set up the pay-as-you-go scheme which uses today's tax to 
pay today's benefits, leaving unfunded liabilities to future 
generations.
  A 1950 amendment accelerated the benefits schedules and extended 
Social Security coverage to the self-employed. In 1952, all Social 
Security beneficiaries received a general ``cost-of-living'' increase.
  The Social Security Amendments of 1954 expanded the old-age insurance 
to a disability insurance program.
  Another major change was made in 1956.
  The 1956 amendment expanded Social Security coverage to more classes 
of workers, increased the wage base substantially, and increased 
benefits by 77 percent.
  In 1965, Medicare, a new social insurance program that extended 
health coverage to retirees, was added to the Social Security system. 
In the 1970s, another new program, Supplemental Security Income, was 
added.
  The 1950s and 1960s were the golden age for Social Security because 
the fund revenue was greatly increased by growing employment and rising 
wage rates. Social Security officials repeatedly assured the Congress 
that Social Security would maintain long-term actuarial balances.
  Ronald Reagan saw the defects of the system and was the first to 
suggest investing Social Security funds in the market. As early as 
1964, Reagan asked: ``Can we introduce voluntary features that would 
permit a citizen to do better on his own, to be excused upon 
presentation of evidence that he had made provisions for the non-
earning years?''
  Reagan's advice was cast aside. But in 1975, Social Security first 
began running larger long-term deficits. Its expenditures exceeded 
income by $1.5 billion. The pay-as-you-go finance mechanism started 
cracking and was unable to produce large windfall gains to retirees.
  In 1977 and 1983, Congress had no choice but to pass Social Security 
rescue packages by significantly increasing taxes. Again Washington 
claimed the fix would make Social Security solvent for at least 75 
years. Again, that was a lie.
  Today, Social Security faces the severest crisis yet. When 74 million 
baby boomers begin retiring in 2008, Social Security will run a cash 
shortage in 2013 and go broke in 2031, according to official 
projections. Knowing the ``reliability'' of these official forecasts, 
the shortage could arrive much earlier.
  Without a policy change, the Congressional Budget Office estimates 
the debt held by the public will balloon to nearly $80 trillion, from 
today about $5.6 trillion in debt. But without a policy change, 
beginning with Social Security, the Congressional Budget Office 
estimates that the debt held by the public could balloon to as much as 
$80 trillion. And General Accounting Office estimates that it could be 
even worse. The General Accounting Office says it could be a $158 
trillion debt. This is very, very serious.

  Mr. President, that covers the history of Social Security. Now, what 
can we learn from our past policy making experiences?
  First, the Social Security system was put together in just a few 
weeks without thorough debate and time to consider such a major policy 
change.
  It was imposed on the American people following a time of economic 
crisis and despair by a few individuals who had a personal agenda of 
redistributing private income.
  At the time it passed, few people understood the long-term impact of 
the program on the citizens. It was hardly a democratic process.

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  Second, a retirement program that mixes insurance with welfare does 
not work, because these two functions are fundamentally incompatible.
  As a result, we have a bad welfare plan and a bad old-age insurance 
plan which make the system much more inefficient for those who need 
welfare assistance as well as those who need retirement security.
  It does not work because it is based on the false assumption that 
people no longer have to work to achieve the American dream--the 
government will take care of them.
  Third, when we consider Social Security, policy--not politics--should 
be our guide. Changes made for short term gain will come back to haunt 
us.
  Fourth, the federal government does not have a good record of running 
social insurance programs. We should look for ways to improve and 
streamline the program.
  Fifth, we should begin to look to the ingenuity and competitive 
spirit of the private sector to improve and rejuvenate the program.
  The American people should have some freedom of choice. Each 
individual has different abilities and different needs at different 
times; they should be free to choose either the current compulsory 
insurance plan or their own individual retirement accounts.
  The individual retirement account is not a new idea. A majority in 
Congress supported this idea 60 years ago. Sixty years ago the Clark 
amendment, the individual retirement account, was supported by the vast 
majority in Congress--60 years ago. Had we adopted the Clark amendment 
then, our Social Security system would be in much better shape today.
  And it is not too late, because Congress should take Senator Clark's 
advice by allowing people to opt out of the Social Security system and 
giving individual workers the right to fund and control the investment 
of their own retirement accounts.
  With today's mature and well-regulated financial markets, every 
American, rich or poor, can greatly improve their retirement security. 
We must provide the options to ensure that Americans can provide for 
their retirement, not just pass an increasing liability on to their 
children and grandchildren. If we don't make this change, we are going 
to pass to our children a national debt somewhere between $80- and $160 
trillion. We need to pass on the ability for our children and 
grandchildren to make those decisions for themselves.
  Finally, we need to educate and inform the public about Social 
Security. We should encourage more people to participate in the 
policymaking process. We need to encourage them to understand how 
options can actually help them enjoy their retirement. A well-informed 
general public will not be deceived by political rhetoric and will be 
able to decide what is the best option for them. They can make that 
decision best for themselves.
  So, Mr. President, with the perspective offered by the past, I urge 
my colleagues to join me in the months to come in my efforts to improve 
retirement security for all Americans.
  I thank the Chair. I yield the floor and suggest the absence of a 
quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. BYRD. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered. The 
Senator from West Virginia.
  Mr. BYRD. Mr. President, I ask unanimous consent that I may consume 
as much time as I require.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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