What Would FDR Have Done?

President Trump marked the 90th anniversary of the enactment of Social Security in an Oval Office ceremony last week.

Source: https://www.ssa.gov/news/en/press/releases/2025-08-14.html

Franklin Delano Roosevelt signed the Social Security Act into law on August 14, 1935.

Lost in history is this quote from Franklin Delano Roosevelt in his message to Congress on January 17, 1935 asking Congress to enact the Social Security program.  It is clear that Roosevelt understood that the program he was asking for was unsustainable in the long term and had to be replaced by a "self supporting system" in 30 years or so.  Unfortunately, that was 60 years ago.

In the important field of security for our old people, it seems necessary to adopt three principles: First, non-contributory old-age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps thirty years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities which in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans.

FDR openly admitted when the legislation was proposed that Social Security would need to be transitioned to a self-supporting annuity plan system in about 30 years in which the contributions of workers and employers would fund their future Social Security annuity payments. 

FDR also envisioned a system by which individuals could add voluntary contributions to increase the annual amounts received in old age recognizing individual initiative.

Apparently, everyone forgot about FDR's roadmap of how Social Security should work in the future in order to be sustainable.

We are going to come face to face with this reality over the next decade.

Social Security has been running a deficit between payroll tax revenues and payments to beneficiaries since 2010. It has been able to pay benefits and stay solvent by using "reserves" from payroll tax surpluses from prior years and interest income on the treasury bonds that the reserves are invested in.

However, we are now on a path that the deficits will get significantly larger each year.

Source: https://www.federalbudgetinpictures.com/social-securitys-deficits-2/

Reserves at January 1, 2025 were $2.7 trillion.

However, the most recent Social Security Trustees' Report estimates that the reserves will be completely exhausted during 2034---just nine years away.

Credit: https://newpittsburghcourier.com/2025/04/16/social-securitys-trust-fund-could-run-out-of-money-sooner-than-expected-due-to-changes-in-taxes-and-benefits/

At that point, current payroll tax revenues will only be able to pay 77% of projected Social Security benefit payments.

Why are these numbers important?  Despite the fact that you always hear about the Social Security Trust Fund there is nothing to trust.  It is a fiction.  Social Security can only pay benefits if it has revenues coming in.  

It is a 'pay-as-you-go' system that some would argue is one step removed from being considered a Ponzi scheme. The one step is the fact that it is government sanctioned.  It needs a continual flow of payroll taxes from new workers to pay the promised benefits of the older workers.  It worked well in the early years when there were a lot of workers paying in and few beneficiaries.  This is no longer the case.

In 1950 there were 16.5 workers for every person on Social Security. In 1970, there were 3.7. By 2000 it was down to  3.4. There are now only 2.7 workers paying in for every one beneficiary.

The projections are that it will be 2 workers or less for every beneficiary within the next 25 years.

When the trust fund is empty in 2034 it will mean that everyone on Social Security will need to have their benefit reduced by about 25% unless major reforms to the system are enacted.

Social Security was a good deal for my parents and grandparents. This was primarily due to the fact that the taxes they paid were very low.  For example, the tax rate was only 1% and the maximum wage base was only $3,000 for the first decade and a half of Social Security.  That is $30 per year.  

Benefits received for the average wage earner were approximately what could be earned if the employee and contributions were invested in a safe bond portfolio earning 3%.

When I graduated from college in the early 1970's the maximum tax was $414 per year.  The maximum tax today is $10,918 per employee (matched by an equal amount by the employer). A self-employed person has to pay both the employee and employer shares.

Baby boomers will just marginally get a small return on the money contributed in the employer and employee shares over the years. 

The average earner will pay $4,131 in Social Security taxes in 2025.  Of course, this amount must be matched by the employer.  The tipping point has long since been reached on receiving a fair return on the amounts paid into Social Security. It is not even a break even deal for most people retiring today.  If you are under age 50, you are going to be taken to the cleaners as the law now exists.

Workers under age 50 today will only receive less than one-half of what their contributions would have earned even if the money had been invested received a modest annual investment return of 5% over their lifetimes.

This is a chart that Grok prepared for me comparing SS contributions and benefits for an average income worker at various birth years compared to what the contributions would have been worth if invested at 3%, 5% and 7% rates of returns 

 

One of the biggest failures of the Clinton Administration was not fixing Social Security.  The economy was growing, the stock market was booming, the federal government was running an overall surplus. You also had Republicans in Congress that would have seen that it got done if the President would have shown leadership on the issue. In addition, Social Security was running annual budget surpluses each year.  In 1998 it was $100 billion. This money could have been used to reform the system. 

For example, in the period between 1997 and 2009, Social Security took in almost $2 trillion in revenues in excess of benefits. By law, this could only be invested in treasury securities. 

However, the effect of this is that the federal government used this money to fund a lot of deficit spending as got into the 2000's. It was able to use the Social Security surplus revenues to pay for welfare, defense and a thousand other things and did not have to go to the debt markets and borrow the money. 

All the federal government had to do was give the "Trust Fund" an IOU for the money to paper over the deficit spending. 

Of course, that IOU is now due and the federal government has to go to the markets today and borrow even more money to replace the treasury bonds that Social Security is cashing in to pay benefits.

President George W. Bush made an effort to reform Social Security in 2005---20 years ago. It made a lot of sense since the reserves in the trust fund had grown to substantial amounts and were still growing as the Baby Boom generation reached their peak earnings years.

Bush's plan would have allowed younger Americans to establish voluntary personal accounts in which workers could invest part of their payroll taxes much as FDR envisioned 70 years before.

His plan would have also curbed the benefit formula for higher income workers but left in place the formula for average and lower incomes.

This would have taken a great deal of pressure off of Social Security's future funding issues as well as providing younger workers the opportunity to get a fair return on their lifetime of Social Security contributions.

The proposed legislation went nowhere in the face of sustained demagoguery by Democrats and the AARP  that the Bush plan would involve "gambling" on the stock market.

20 years later we can assess how that would have worked out.

Those voluntary accounts would have performed spectacularly for the benefit of the Social Security recipients under almost any investment scenario.

The S&P 500 increased 428% since Bush proposed reforming Social Security. That is a compound annual growth rate of 8.7%.

S&P 500- August, 2005-August, 2025
Source: https://www.macrotrends.net/2324/sp-500-historical-chart-data

The NASDAQ did even better---up 909%. That is an annual growth rate of 12.2%.

NASDAQ Composite-August, 2005-August, 2025
Source: https://www.macrotrends.net/1320/nasdaq-historical-chart

An investment totally in US Treasuries would have still produced a 4.13% annual compound return over the last 20 years despite the rise in interest rates over the last few years.

All of these would have produced much higher retirement benefits than Social Security is providing.

A grave error was made in not reforming Social Security 20-30 years ago when there was a surplus to work with and there was time to implement the reforms.

No such luxury exists today.

Social Security will have to be reformed in the next decade and it will be painful.

Current beneficiaries will likely not see their benefits cut but that is not assured depending on the nation's overall debt situation.

Retirement ages for younger Americans will undoubtedly increase.

The FICA tax will increase for everyone. but it will not mean higher benefits in the future, The returns on Social Security contributions will just get worse.

The payroll tax cap for high earners will be increased significantly if not completely eliminated.

Social Security will become more like a redistributive welfare program than the insurance program that it was originally designed to be. 

FDR laid out what had to be done 90 years ago.

Roosevelt is the liberal icon that all progressives lionize.

However, when it really counted no one paid attention to what he said was necessary when he proposed the program in 1935.

As a result, there will be an enormous price to pay to maintain Social Security's solvency and sustainability that we will find out within the next 10 years.