UNEMPLOYMENT INSURANCE
The Social Security Act of 1935, commonly associated with the nation's old-age pension system, also created a national system of unemployment compensation—a guarantee of income for temporarily unemployed workers. At the time of the act's passage, this provision seemed more of a historic milestone than did the old-age insurance provision, which is now synonymous with the term Social Security.
To most Americans on the eve of the Depression, the idea of unemployment insurance was an unwelcome European import—a "dole" that undermined the work ethic and the fiscal stability of the nation. This view reflected the fact that policies to assist unemployed workers were a European invention. In the early decades of the twentieth century a number of countries in continental Europe began to augment union-sponsored out-of-work plans with tax funds. But when the Depression struck, it was England's pioneering program that was the most closely associated with the term unemployment insurance.
The British unemployment system, passed in 1911, created a large central fund financed initially by "contributions" from employees and employers, although the government also subsidized the program with general tax revenues. Thus the policy looked more like "insurance" than traditional relief, a fact that was constantly emphasized by its proponents. Between 1911 and 1930, ten other countries in Europe adopted compulsory unemployment insurance programs.
The British precedent generated much enthusiasm among American reformers. A key center of support for unemployment insurance was the University of Wisconsin in Madison, where economics professor John R. Commons developed a uniquely "American" version of unemployment insurance. Commons's "Wisconsin plan" focused more on preventing unemployment than on creating funds to assist the jobless. Commons proposed an unemployment tax on employers, with the rates adjusted for "experience" and the funds channeled into individual "reserves." Employers with healthy employment records would pay less than those who tended
constantly to lay off and then rehire workers at various points in the business cycle. The goal was to encourage stable employment and avoid what were perceived as European-style doles from large central funds.
Commons's plan was, in part, a response to the strong opposition in the United States to European-style social insurance in the 1920s. The British system, which experienced a constant financing crisis throughout the 1920s, seemed to prove that government-mandated insurance proposals would quickly evolve into doles. Although numerous commissions were organized to study the problem,
no state had established unemployment insurance prior to the 1930s.
The Great Depression turned the tide in favor of unemployment insurance. Insurance plans organized by private enterprises collapsed, and local private charity and public relief were inadequate substitutes for a national unemployment policy. The federal government was soon forced to take up the unemployment relief burden. By the time Franklin D. Roosevelt was inaugurated, Washington was financing the bulk of aid to the unemployed through local welfare agencies. There now seemed to exist a national "dole" more insidious than any European import.
Roosevelt voiced his support for state-level unemployment insurance in 1931, and the policy was endorsed by the Democratic platform for the 1932 presidential elections. In the early months of the New Deal several proposals for unemployment insurance surfaced, but none received sustained congressional attention. Then, in early 1934, Senator Robert F. Wagner and Representative David J. Lewis of Maryland introduced a bill that would profoundly shape the Social Security Act of 1935.
The Wagner-Lewis bill proposed a policy that became known as a tax-offset plan. A federal tax of 5 percent on employers' payrolls would be levied to finance benefits for the unemployed. If states passed their own unemployment insurance laws, employers would receive a credit against the federal tax. In short, the federal tax was a mechanism to encourage state-operated unemployment insurance systems. This formula was introduced, in part, out of fear that the Supreme Court would find a strictly federal program unconstitutional.
Roosevelt, however, disliked certain aspects of the Wagner-Lewis plan. He believed that employees, as well as employers, should pay into this "insurance" system. Furthermore, the New Deal was considering other related social reforms, such as an old-age pension plan and a public employment policy to replace relief. Thus, in June 1934 Roosevelt proposed a broad Committee on Economic Security to study the "great task of furthering the security of the citizen and his family though social insurance."
Although the Committee on Economic Security was designed, in part, to resolve conflicts over unemployment insurance, it temporarily intensified them. The Depression had increased support for reform but also generated sharp divisions among reformers themselves. While many supported the Wisconsin plan, which focused on individual employer reserves, others believed that this approach would provide inadequate benefits. They supported what became known as the "Ohio plan," which advocated state-wide "pooled funds." Still other members of the Committee on Economic Security advocated a national system operated by the federal government.
The debates over the unemployment provisions of the social security legislation dominated the committee's work in late 1934. In the end, these conflicts were resolved by adopting a version of the Wagner-Lewis tax-offset approach. The Committee on Economic Security proposed a federal tax (3 percent of payroll by 1938) to be reduced by up to 90 percent if a state system was established. The proposal mandated that one-third of the tax would finance a state "pooled" fund (Ohio plan), but also that federal credits would be given to state plans that created employer reserves based on experience (Wisconsin plan).
National unemployment insurance became federal law with the passage of the Social Security Act in 1935. In the final legislation, Congress stuck to the basic tax-offset formula, but modified the Committee on Economic Security proposal on significant points. For example, the requirement that one percent of payroll be earmarked for "pooled funds" was eliminated, a defeat for the proponents of the Ohio plan. Congress also weakened the ability of federal officials to influence procedures for the selection of personnel. Finally, the federal law excluded employers of agricultural workers from the tax.
Over the years, the system has been expanded to include workers not originally covered. The "American plan" of individual reserves, championed by the Wisconsin reformers, proved impractical. All states adopted the approach of creating pooled funds along with an "experience rating" of employer contributions, in which employers with good employment records were rewarded with lower payments into the system.
Numerous policy experts have criticized the state-level unemployment compensation system as inefficient, but such critiques have not generated significant political debate. Ironically, unemployment insurance, one of the most controversial policy issues in the years that preceded the Social Security Act, has generally avoided the public controversies that have marked other provisions of the 1935 law.
BIBLIOGRAPHY
Altmeyer, Arthur J. The Formative Years of Social Security. 1966.
Berkowitz, Edward D. America's Welfare State: From Roosevelt to Reagan. 1991.
Haber, William, and Murray, Merrill G. Unemployment Insurance in the American Economy. 1966.
Lubove, Roy. The Struggle For Social Security, 1900–1935. 1968.
Nelson, Daniel. Unemployment Insurance: The American Experience, 1915–1935. 1969.
