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Historical Perspectives on the Federal Income Tax

Social Welfare
Its Cost

            See Also:
Social Welfare
Social Security
Enforced Savings
Victory Tax

 During the discussion of the Social Security Act, Congressman Ditter made this comment, warning of the potential dangers of social welfare:
Congressional Record of the House, April 19, 1935, on page 6092

“Let us be mindful of the fact that security for the individual, whether worker or aged, will be a mockery and a sham if in the attainment thereof we barter away our constitutional rights or evade our constitutional duties and allot to our people the role of puppets of a socialistic state”.

Congressional Record-House, July 17, 1935, page 11335, Congressman Samuel B. Hill of Washington:
 “Those young men are not drawing money out of the Treasury during those 20 or 30 or 40 years.  So we borrow the money from the money that they pay in, in order to pay these benefits to the older men who are retired after a few years’ of work.  Only in that way can we finance the fund.  If we do not have that financial support for the fund, then we would have to go out and levy general taxes to put into the Treasury to pay this money.  In the course of a few years it will amount to more than a billion dollars a year paid out in benefits.  So that the bill, as it left the House financed itself by the young men carrying, for the first few years, the fund out of which the benefits are paid to the older men, thereby saving the Federal Treasury the necessity of going out and levying general taxes to supplement the Treasury funds for the purpose of financing these benefits.”

Social Security Act Title VIII Section 801:
“In addition to other taxes, there shall be levied, collected, and paid upon the income of every individual a tax equal to the following percentages of the wages (as defined in section 811) received by him after December 31, 1936, with respect to employment (as defined in section 811) after such date:

The following statement appears in the Congressional Record of the House April 18, 1935 and is attributed to Mr. Reed of New York, page 5991:

“The best legal talent the administration has been able to engage from the departments and elsewhere has endeavored to so frame title II, change its title, distort it, and put the tax features in title VIII, to mislead and deceive, if possible, the Supreme Court of the United States.  I stated yesterday, and I state again today, that the members of the committee in their conscience know that title II and title VIII are unconstitutional.   They know they are trying to set up as a Federal activity a police power that is reserved to the States.”

And, Senator King expresses this same contention when he said on June 18, 1935 page 9535:

“Congress, in titles II and VIII, knowing that it cannot directly collect premiums to pay compulsory old-age annuities, is attempting to reach this result indirectly through the taxing power.   It is obviously disclosed on the face of the act what is trying to be done.  The premiums are collected as taxes under title VIII and the annuities paid as Federal old-age benefit under title II.   I do not believe anyone ought seriously to contend that Congress by changing the form of the bill can overcome the constitutional limitations”.

These are powerful statements and ones which have come back to haunt us, for this is the very condition we find ourselves in today.   We have lost that which our forefathers fought so hard to protect, the freedom we enjoy as individuals, exchanging it for slavery to a welfare program of National debt.

 The “security” program was simple, that is, by creating a large reserve through contributions from both the employer and the employee, a “fund” would be established from which pensions could be paid.  These funds would be held by “Trust Accounts” and paid 3% interest, thereby creating a growing investment.   However, as all good intentions go, so goes the money.   These “contributions” were to be placed into the Federal Treasury and then appropriated out of the Treasury to pay current benefits.   Any balance would then be used to purchase “bonds” (loaned money) issued by the Federal Treasury, which in turn would be held by the “fund” and guaranteed by the Federal Government as to both principle and interest.  In its original form the Trust Fund was to maintain 100 percent of these reserves in ready cash and redeemable investments.  Changes made under the revisions to the Social Security Act in 1939, however, reduced this “reserve” requirement to equal 3 years of actual payments in any 5year period.  This, in effect, changed the entire basis of the welfare program from a contribution fund to a pay-as-you-go tax system.  Today this “fund” contains less than two years of “reserves” comprised of Treasury Bonds, redeemable only through increased tax revenues; those same tax revenues paying current benefits as well.

The dangerous outcome of this arrangement was predicted by several Congressmen.   First, I refer to Representative Wadsworth’s comments made April 19, 1935 pages 6060-61 of the Congressional Record:

“First, as to the financing of the major portion of this program.   As I understand it-and I have listened attentively to the debate-these funds are to be established in the Treasury Department, through the collection of pay-roll taxes…. The bill provides in general that those moneys shall be invested solely in the bonds of the Government of the United States or bonds guaranteed as to principle and interest by the Government.  As I read the report and have listened to the discussion on the floor, it is apparent that the proponents of this bill expect that this fund will grow from time to time, year after year, until about 1970, if I an not mistaken, the fund will approximate $32,000,000,000, every penny of which must be invested in Government bonds.
It is apparent that unless the national debt of the United States goes far, far beyond $32,000,000,000 in the time over which this calculation is extended, by the time this fund has been built up to any considerable degree it will become a fund large enough to absorb at least a major portion of the national debt, and finally absorb it all.
The bill provides, in effect, that the funds shall be invested in these bonds, but the bonds and special securities authorized by the bill shall net not less than 3-percent interest to the fund. …
Now, that may seem an effective and adequate way to finance the Government’s financial activities in all the years to come.   I am trying to look to the future.  Heretofore the Government has financed its undertakings primarily and fundamentally as the result of the confidence of the individual citizen in the soundness of the Government’s undertaking, but from this point on we are apparently going to abandon that philosophy of public confidence and resort to a very different practice.   The Government is to impose a pay-roll tax through one of its agencies, collect the money into the Treasury Department, then the Treasury Department with its left hand on the proceeds of those taxes is to turn around and buy bonds of the United States Government issued by the right hand of the Treasury Department.   Thus the Government of the United States, after this thing gets going, is no longer to be financed directly by its citizens, confident in the soundness of the Government, but it is to be financed instead by arrangements made within the bureaucracy-an undemocratic and dangerous proceeding”.

Senator Hastings takes this concept one step closer to reality when he says on June 17,1935 page 9422 of the Congressional Record:

“It must be borne in mind that in order to create this fund there must be annual appropriations by Congress.   It is contemplated that those annual appropriations shall be the amount of money collected from the employer and the employee; but does anyone doubt that when the Congress comes to these appropriations there would be manipulations so that the fund would not accumulate but would be used for current expenses of the Government?
Mr. President, we have a fine example of that-very slight, indeed, because of the amount involved-in the case of the civil-service retirement fund.   I wonder if Senators realize that, while there is suppose to be something like a billion dollars accumulated in that fund and that the actuaries say there ought to be about a billion dollars accumulated in it, there has been practically nothing accumulated in that fund.   I blame no particular person for it; I know when the Government needs money for some purpose the question may readily be asked why should not the Government, when it needs money for other purposes, take out of its till and put in some other place a certain sum of money that is necessary for some retirement fund?  There is nothing in the civil-service retirement fund except an I O U.  Of course, the I O U is perfectly good; nobody questions that; but I call attention to the seriousness of the situation when it reaches the sum of $47,000,000,000.

This is exactly what the problem is today, instead of Social Security and all of the other Trust Funds containing money, in the form of redeemable bonds, they contain only I O U’s.  The I O U’s may be good, but they now total $6,000,000,000,000.  Instead of bonds owed to the Federal Government (us?) paying 3% interest we now have National Debt owed by the Federal Government (us!) payable at a much higher interest and still no reserves from which to pay benefits.  I fail to see how the National Debt could be construed as an “investment” or how such an investment could be “guaranteed” as to principle and interest by the Federal Government, unless the intent was actually to effect the enslavement of the American people.   Congressman Bolton recorded his views of this possibility when he made this entry in the Congressional Record, April 19, 1935.   On page 6085 he says:

“…Such a requirement has a definite harmful effect on the credit of our Nation.
This proposal would bring about a new method of financing future Government obligations-not through the citizens of the Country as heretofore but through a constantly increasing fund, which the Government holds as trustee for a certain group of its citizens.  To have the Government, in its capacity as trustee of funds belonging to a specified group of its citizens, invest those funds in its own obligations is a practice contrary to sound fiduciaryship, a practice detrimental to the credit of the country, and manifestly improper from the standpoint of those citizens who contribute to the fund”.

The Social Security Act should be taken as a warning to us of the consequences born by partisan politics and the concentration of power in a single political party.  Despite the constant objections voiced by the minority Republicans over the apparent unconstitutionality of sections II and VIII, the Democratic majority passed this legislation.   Today we are saddled with the consequences of that decision.  It is not that their original intention was wrong, nor that the fairness of the method in implementing it was wrong.   The “wrong” was that it violated the Constitution and opened the door to future abuse.   This Act not only destroyed personal liberty but, in so doing, it ultimately destroyed the sovereignty of the State Governments.  Senator George of Georgia, on June 18, page 9518 of the Congressional Record provides us with this insight:

“…but the real objection is the overweening desire of those who seek to concentrate in Washington all power and reduce the States to a system of vassalage, and to convert a free people, able and willing to manage and conduct their own affairs, into humble supplicants for the crumbs and for the benefits which may fall from the national table”.

Senator Smith of South Carolina continued with this statement on June 18, 1935 page 9531:

“The Senator is losing sight of the cardinal principle behind most of this type of legislation, namely, that all the beneficiaries must look to the Federal Government and not to local or private agencies.  The theory is we must centralize here in the Federal Government.   Of course, we cannot argue against that because we want to wipe out all the States and all their rights and have everything all centered here in Washington!”

It cannot be argued that this has been the end result, for today we find that the States are wholly dependent upon the Federal Government and must comply with their demands in order to obtain the necessary funds from which to operate.   This is likewise true of the individual for we must pay a tribute to the Federal Government in order that we may earn our own livelihood.  This is the paradox of “Social Security”, for in order to provide for the first generation they were required to mortgage the lives of every succeeding generation.

            See Also:
Social Welfare
Social Security
Enforced Savings
Victory Tax

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