From the February 2007 issue of Wealth Manager Web • Subscribe!

Birth Pangs

After taking a few days off in February of 1935, Franklin Delano Roosevelt returned to Washington only to find chaos brewing in the House of Representatives, which was in turmoil over his Social Security legislation. Now--71 years later, amidst all the recent back and forth between the Bush administration and its adversaries across the aisle over privatization--the tendency is to view the original passing of that social safety-net legislative program as a rubber stamp process. In fact, this bedrock of the New Deal has become so revered that, according to Jared Bernstein of the Economic Policy Institute in Washington, D.C. "It has become politically insulated. It really is the third rail of politics: You touch it, you die." But perhaps the curse has been lifted. "Bush touched it," says Bernstein, "and he obviously didn't die."

A brief scan of legislative lore suggests the Social Security Act of 1935 came to be only after much discussion, dispute, and compromise. "It really was not as simple as many would believe," explains David John of the Heritage Foundation. "In politics, it is never that much of a broad stroke."

"The plan that came to pass in 1935 bears little resemblance to that seen today," John adds. "The tax burden was much lower, spouses were not covered and almost entire segments of society were not covered. [The president] had to bend." Roosevelt had the task not only of battling those who viewed any sort of large scale handout as unacceptable, but of coping with those who wanted more radical provisions.

While engaging in sweeping philosophical battles with those championing small government, FDR faced a formidable front from the populist Sen. Huey P. Long (D-La.), who proposed a "Share Our Wealth" plan that would redistribute all private fortunes to Americans in need. Another populist, Francis Townsend, a Long Beach, California physician, wanted to tax all business transactions to give $200 a month to elderly Americans if they agreed not to work and to spend the entire sum each month.

The flamboyant Long was riding a wave of popularity due in large part to his bringing Keynesian economic theory to his home state. Long's primary focus was against the concentration of wealth and power, and his weapon of choice was his SOW plans, which imposed heavily confiscatory taxes on large fortunes and large family allowances that amounted to a guaranteed income.

Meanwhile, Roosevelt, who ran on a "work and security" platform in 1932, and presided over a country not that long removed from a "Red Scare," wanted to avoid anything that looked like the handouts for those on the dole in Europe. This split opinion within the highest levels of FDR's staff. WPA Director Harry Hopkins and a slew of powerful liberal Democratic senate leaders, such as Robert F. Wagner, favored generous relief payments. In the summer of 1934, Roosevelt formed a Committee on Economic Security to devise legislation for a self-sustaining, insurance-style program for the unemployed and the aged that would reduce the need for handouts.

"A program developed by a committee of the cabinet would be under his control," wrote Frances Perkins, who, as labor secretary, chaired the committee. "It would not be likely to get off into the kind of political discussion and publicity that might breed doubt and delay." Their instructions were to develop a largely self-financing program that would help the elderly, the unemployed, the disabled, and dependent mothers and children--but avoid the extravagance of the Long and Townsend plans which Roosevelt feared. "One hardly realizes nowadays how strong was the sentiment in favor of the Townsend plan," Perkins wrote in her 1946 memoir.

Progress through congress was a battle that lasted seven months. From the right, the out-gunned Republicans argued that Roosevelt's plan went too far, violating the Constitution, hurting industry and instituting socialism. "You are placing a financial lash upon the backs of the people whose backs are breaking under a load of debts and taxes," said Rep. Thomas A. Jenkins of Ohio. Daniel Alden Reed (R-N.Y.) compared Roosevelt to a 14th-century English king.

At first, Roosevelt excluded domestics and agricultural workers--that is, African-Americans--although he did bring them into the tent just a few years later. And even he took a nod at states' rights: Referring to Senator Long, whom FDR viewed as a potential rival, he said in 1934, "All the power shouldn't be in the hands of the federal government. Look, just think what would happen if all the power was concentrated here, and Huey Long became president!"

Eventually, congress overwhelmingly passed Roosevelt's plan, but it was only after months of hard work and compromise. Let this be a lesson to those who want to change Social Security today.

Robert Margolis is a New York-based writer and history teacher.

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