Fundamental Fallacy

Since 1935 the U. S. people have acted like a man who saves for his old age, borrows from his savings to meet current expenses, and fills his hope chest with notes payable by himself to himself. Up to the first of this year, they had laid by $1,131,000,000 in Social Security's old age reserve fund which invested it in the people's own promises to pay (U. S. bonds and Treasury notes).

Last week Franklin Roosevelt and his fiscal servant, Secretary of the Treasury Henry Morgenthau Jr., at last recognized this fundamental fallacy of the Social Security Act and asked Congress to correct it.

Social Security having paid out only $11,000,000 on old-age benefits (to Dec. 31 last) is rapidly piling up a huge reserve. By 1980, as the act now reads, the reserve would amount to $47,000,000,000 (about seven times the amount of money now circulating in the U. S.).

Among numerous blasts at this astronomic dream was the report of Economist James Douglas Brown's Advisory Council (TIME, Dec. 26). That council, representing Government, Labor and the Public, recommended that in order to hold down the reserve, Social Security call a temporary halt to rate increases, begin payments of full benefits in 1940 instead of 1942, and extend them to more people. Last week, in a report to the House Ways & Means Committee, Henry Morgenthau said nothing about speeding up payments. But he did approve another suggestion: to give up the idea of "full reserve" and substitute a much smaller "contingency fund."*

The President in press conference suggested that $2,500,000,000 to $3,000,000,000 should be enough for the new contingency fund. Henry Morgenthau, foreseeing that the total will vary, guessed it ought to reach $4,500,000,000 by 1955.

This would amount to putting Social Security largely on a collect-as-you-pay basis. Henry Morgenthau warned that the change may well mean higher payroll taxes than those now planned to peak at 3% each on employes and employers in 1949. To even matters up he took another suggestion of the Advisory Council, advised that at some future date the U. S. Government should share the burden with employers and employes; that is, meet part of the expense by indirect rather than direct taxes on prospective beneficiaries.

Since he did not propose increasing at once the amounts paid out for old age benefits, Mr. Morgenthau had to take the one other method of keeping the reserve fund down. Granting that payroll taxes might be slowing Recovery, he proposed either to reduce the rate of increase in old-age levies (scheduled to rise next January from 1% to 1 1/2% on employers and employes), or to postpone any increase at all until 1943. That seemed just as pleasing to Congress, just as appeasing to business, as correcting a bad boner in the Social Security Act.

* He also suggested that control of the fund be shifted from the Treasury to a "trusteeship" composed of the chairman of the Social Security Board and the Secretaries of Labor and the Treasury.

This file is automatically generated by a robot program, so reader's discretion is required.