The Day FDR Tore Up The Constitution

With the Supreme Court nomination hearings for Elena Kagan last week, it’s time once again to open up our “Pocket Constitutions.”

Kagan has already faced questions on the constitutionality of “Don’t Ask, Don’t Tell” and the classic “Right to Bear Arms.” But the major question that nominees always face during these events is whether the Constitution should be open to interpretation or if it is a literal document. And that got us thinking…

What if some of our current policies weren’t so constitutional after all? After just a little research, we found that one of our most entrenched national institutions barely passed constitutional muster.

In part of FDR’s New Deal, Social Security was dreamed up to protect people against financial devastation in their most dependent times. The concept of Social Security was straightforward; the constitutionality of it was not. In concept, the Social Security system would collect a special tax to fund a special account that provides financial support to the nation’s elderly, disadvantaged and dispossessed.

But in constitutional terms, the Social Security program would collect taxes from the many to distribute funds to the few. Thus, the Social Security Act of 1935 was a truly groundbreaking piece of legislation…and maybe even unconstitutional.

Prior to the New Deal, legal precedent on the Supreme Court had established that any practice the Constitution did not explicitly permit was, by definition, unconstitutional.

Under the 10th Amendment, federal powers are restricted to what the Constitution says. Nevertheless, politicians and jurists throughout history have debated whether the letter or the spirit of the Constitution ought to be the deciding factor in any Supreme Court decision. Alexander Hamilton and James Madison debated this very idea in the early years of the republic. Hamilton argued the federal government could levy new taxes for the general welfare of the country in a broad sense. But Madison countered that the federal government could only levy new taxes specifically granted by the Constitution.

Central to the New Deal decision was whether or not the Social Security tax “provided for the general welfare” of the country. Creating a brand-new agency to collect and distribute a special tax was unheard of and there were no real precedents to fall back on.

Ultimately, the court settled this debate by declaring, “The powers of Congress to authorize expenditure of public moneys for public purposes is not limited by the direct grants of legislative power found in the Constitution.”

This may have been the most expensive sentence ever issued by the Supreme Court. This one little phrase not only blessed the Social Security concept of taxation and redistribution, but it also created the first legal precedent for levying new taxes to fund specific programs.

The rest is history…and it’s not a very pretty one. The Social Security system is functionally bankrupt…and growing more insolvent by the day. Far from spending “public moneys for public purposes,” the Social Security system borrows foreign money for unsustainable entitlement benefits.

Today, roughly 18 million new or reissued Social Security cards are sent out each year. And more than $600 billion in payments are given to some 50.9 million beneficiaries of the Old-Age and Survivors Insurance and the Disabilities Trust Funds.

For years, we’ve heard that someday the Trust would begin to run deficits – handing out more payments than it receives through taxes. This date has always been in the distant future. But because of the economic meltdown of 2008-09, that day has unexpectedly arrived this year.

For the first time since Social Security was just a twinkle in FDR’s eye, the Trust will lose money. The Congressional Budget Office predicts Social Security outlays to reach $708 billion in FY2010, up from $665 billion last year. Meanwhile, revenues are expected to fall flat near $670 billion.

Without significant changes to the system right now, this arguably unconstitutional program could disappear.

Jim Nelson
for The Daily Reckoning

The Daily Reckoning