FDR's Deal, In Bush's Terms

Author: Steven Mufson

Published: February 20, 2005

When President Bush went on the road this month to make his sales pitch for his plan to alter Social Security, he sounded at times more like a personal investment adviser than the nation's policymaker-in-chief. He preached the virtues of putting away money when you're young, the magic of compound interest and the ability of individuals to beat Social Security's rate of return (as though the Social Security trust fund were simply a lumbering, below-par mutual fund).

"Now, I've got some ideas myself," the president said during a stop at Montgomery County Community College in Blue Bell, Pa. "And one of the ideas is to allow younger workers to take some of their own money and set up a personal retirement account. The idea is to allow a younger worker to be able to earn a better rate of return on his or her money than that which is being earned as a result of the Social Security money going through the federal government."

How we talk about policy says a lot about how we think about it. Is Social Security a planning vehicle that an individual uses for his or her own retirement, or is it a pooling of resources so that all of society can meet the needs of its older members? Is it about each person saving for himself, or is it a matter of young helping old and rich helping poor?

In couching the Social Security debate largely as a matter of personal rather than collective interest, Bush is redefining the program's very essence. The president's drive to divert a portion of payroll taxes from traditional Social Security benefits to personal accounts for every worker is a departure from the origins of the program and the way people talked about it then.

Listen to the way President Franklin D. Roosevelt talked about Social Security when he signed it into law in 1935, during the Great Depression: "We have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age," he said. Roosevelt's target was the rate of poverty, not a rate of return.

Measured by that standard, it's been a smashing success. Poverty among the elderly started dropping as soon as the first monthly Social Security benefits began, and declined even faster after benefits improved in the 1960s. Between 1960 and 1995, the official poverty rate of those 65 and older fell from 35 percent to 10 percent, according to a study published in May 2004 by the National Bureau of Economic Research, a steeper decline than for any other age group. "While poverty was once far more prevalent among the elderly than among other age groups, today's elderly have a poverty rate similar to that of working-age adults and much lower than that of children," the NBER study said.

The study's authors, economics professors Gary Engelhardt and Jonathan Gruber, said the decline could be attributed entirely to increases in Social Security payments.

In taking on poverty, Roosevelt's rhetoric also changed our notion of the government's role and individual responsibility. The Social Security Act of 1935 "reversed historic assumptions about the nature of social responsibility," historian William E. Leuchtenburg wrote in his book, "Franklin D. Roosevelt and the New Deal."

As the counsel for the National Association of Manufacturers put it at that time, perhaps not approvingly, "The concept that the function of government was to prevent exploitation by virtue of superior power has been replaced by the concept that it is the duty of government to provide security against all the major hazards of life -- against unemployment, accident, illness, old age, and death."

But Social Security was never generous enough to protect people from every hazard or hardship. And Roosevelt never intended it that way. "The Act does not offer anyone, either individually or collectively, an easy life -- nor was it ever intended so to do," he said on the third anniversary of signing the legislation. "None of the sums of money paid out to individuals in assistance or in insurance will spell anything approaching abundance. But they will furnish that minimum necessity to keep a foothold; and that is the kind of protection Americans want."

To a surprising degree, that's still the protection that Social Security provides. By some estimates, without Social Security benefits an additional 11 million senior citizens would fall below the poverty line.

"If you think of it as the floor, you think of it very differently than if you think of it as a second tier or frosting to your retirement savings," says Robert Reischauer, president of the Urban Institute and former director of the Congressional Budget Office. Reischauer argues that if Social Security benefits were more generous, then diverting some of the money into more risky stock market investments might be a good idea. But if people are relying on it as their sole or principle means of support, then it might be more prudent to keep all their savings in the Social Security trust fund, which invests only in rock-solid government bonds and notes.

Bush, of course, is not proposing to tear up Social Security. He would trim, not eliminate, the traditional program while carving out revenues for individual accounts. Bush justifies the multi-trillion-dollar cost of using Social Security funds to create personal accounts by saying that over the long-run, the government would save trillions more because it would shed some of the obligations it pays under Social Security now.

But would the government really be relieved of its basic obligation?

In Chile and other nations that have turned to personal accounts, citizens have ended up demanding that government protect them from venal investment professionals or simply from their own miscalculations over investments. Rather than let poor seniors suffer, almost every one of those countries has adopted a guarantee of minimum benefits as a safety net. If market conditions undermine Bush's proposed personal accounts, some future administration could face the cost of alleviating the same kind of poverty that Social Security was designed to address in the first place.

To be sure, the administration plans to reduce the chances of people losing or wasting their retirement money. Bush would attach a lot of restrictions to the accounts people would "own." Membership may have its privileges, as the credit card advertisement says, but ownership, in the president's vision, has its limits.

In taking this approach, Bush has replaced his much-vaunted compassionate conservatism with conservative paternalism. He would transfer a huge chunk of tax revenues from the control of government to individual accounts, but government would still force people to save, control the investment choices they make and regulate the rate of withdrawals. "I think every citizen -- every citizen -- has got the capacity to manage his or her own money," Bush said earlier this month. "And if they don't, we'll help them understand how to, and the rules will be such that they can." On the one hand, he would empower individuals to make choices about their investments, while on the other hand he promises that the protective hand of government will still be there. Individualism may be an essential part of the American spirit, but individuals cannot always be trusted.

"You can't take all your money when you retire and take a trip," Bush said at a stop in Portsmouth, N.H. "In other words, this is your account, but there's got to be guidelines because the account is set up to help supplement your Social Security check. And so you can't withdraw it. There will be withdraw[al] requirements, for example."

It's not surprising that we might not use the same rhetoric about Social Security today that Roosevelt did 70 years ago. FDR spoke of the trouble the working class had putting aside money for retirement; Bush says, "I believe the so-called investor class ought to be every American, regardless of his or her background." For Roosevelt, Social Security was a matter of obligation; Bush describes his initiative as a question of "ownership." Roosevelt saw payroll taxes as a device to make people feel invested in the program. Now, many younger workers have doubts about whether they will see any return from their payroll taxes.

Bush has fueled that perception in order to pry apart the sense of common obligation that once underlay Social Security -- and in doing so, has changed the terms of the Social Security debate.