Mises Wire

The Cronyist Origins of Social Security

In a story that could only happen in 2018, septuagenarian Bernie Sanders took to twitter to agree with someone called Cardi B – who my teenage daughter tells me is a popular singer – about the importance of strengthening Social Security.

Sanders claimed that Social Security enables seniors to “retire with the dignity they deserve,” while Ms. B praised FDR for its creation.

Of course, Social Security needs “strengthening” because, by some estimates, it has long-term unfunded liabilities of $34 trillion, and will “officially” be insolvent by 2034.

The commonly held belief is that Social Security was created by FDR as a compassionate, “progressive” program to help older people feel more secure in their retirement.

Like so many progressive programs, however, Social Security was likely the creation of big businesses turning to big government technocrats to protect themselves against competition. That’s just one of countless insights unearthed by Murray Rothbard’s book The Progressive Era.

Social Security passed in 1935, but its genesis began in 1934 when FDR “commissioned three of his top officials to select the membership of a Committee on Economic Security (CES),” according to Rothbard.

The CES was the body that would craft Social Security legislation, but more specifically, the Technical Board of the CES would be tasked with the details of the plan.

Spearheading the Technical Board was J. Douglas Brown, head of the Industrial Relations Department at Princeton — a department created and largely funded by an organization called the Industrial Relations Councilors (IRC).

The IRC “had been set up in the early 1920s by the Rockefellers, specifically John D., Jr., in charge of ideology and philanthropy for the Rockefeller empire,” reports Rothbard.

The IRC was billed as a scholarly and activist group whose mission, Rothbard describes, was to “promote a new form of corporatist labor-management cooperation, as well as promoting pro-union and pro-welfare-state policies in industry and government.”

Part of the IRC’s activities included setting up Industrial Relations departments in Ivy League schools, including Brown’s at Princeton. Not coincidentally, the other two members of the CES’s Technical Board were IRC affiliates.

Which brings us back to J. Douglas Brown.

Brown was not only backed by a powerful Rockefeller outfit, he was also influenced by hand-picked advisors to the CES, many of which were heads of big businesses. Within this context, as Rothbard notes, Brown “was particularly adamant that no employers escape the taxes of the old-age pension scheme.”

Big businesses were upset that their smaller competitors were not providing retiree pensions, and wanted to use the federal government “to force their small-business competitors into paying for similar, costly, programs.”

At the time Social Security was being developed, about 15 percent of workers were covered by a company pension plan, with a little more than 300 – mostly large – businesses offering such plans.

In his testimony before the Senate Finance Committee in 1935, Brown declared that government compulsion of universal employer “contributions” to old-age pensions would make “uniform throughout industry a minimum cost of providing old-age security and protect(s) the more liberal employer now providing pensions from the competition of the employer who otherwise fires the old person without a pension.”

Put more simply, in Rothbard’s words, “the legislation deliberately penalizes the lower cost, ‘unprogressive’ employer and cripples him by artificially raising his costs compared by the larger employer.”

It should come as no surprise, as Rothbard wrote, “the bigger businesses almost all backed the Social Security Scheme to the hilt, while it was attacked by such associations of small businesses as the National Metal Trades Association, the Illinois Manufacturing Association, and the National Association of Manufacturers.”

Indeed, big businesses “collaborated enthusiastically” with the implementation of Social Security once passed. When confronted with establishing 26 million accounts for individuals, the Social Security Board consulted the Commerce Department’s Business Advisory Committee (BAC). Big business’ handprints were all over the Committee. BAC was dominated by W. Averell Harriman, wealthy heir to his father’s railroad fortune turned banker (and future New York Governor), head of Standard Oil Walter Teagle, and John Raskob of DuPont and General Motors.

Meanwhile, BAC member Marian Folsom of Eastman Kodak was instrumental in planning the creation of regional Social Security Board centers.

Rothbard’s work lays waste to the romanticized tale of Social Security as humanitarian program to provide grandpa’s nest egg. Instead, it’s just another case of big business leveraging government to protect themselves from smaller competitors, all at taxpayer expense.

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