Committee on Economic Security (CES)

Volume II. Old Age Security

Townsend Old Age Pension Plan


Why The Townsend Old Age Revolving Pension Plan Is Impossible (1935)

by
Edwin E. Witte:

Costs
The Townsend plan proposes that pensions of $200 per month shall be granted to all citizens of the United States who are 60 years of age or over, other than habitual criminals, and who will forego all gainful occupation and agree to spend the pensions during the month in which they are received. No income or property limitations whatsoever are prescribed; even millionaires would be entitled to the Townsend pensions.

There were 10,385,000 persons over 60 years of age in the United States in 1930, as shown by the Census of that year. At this time the number is considerably greater, being estimated at 11,582,000. The number of habitual criminals among the aged is very small and the number who are not citizens only about 600,000. While 4,155,495 persons over 60 years of age were in 1930 still "gainfully occupied," the great majority of these persons would gladly forego gainful occupation and agree to spend their pensions each month as received, if they were assured a pension of $200 per month. Even if one fourth of all now gainfully occupied would refuse the pensions, the total number of the pensioners under the Townsend plan would still approximate 10,000,000. This is the figure for the number of pensioners most commonly given in the Townsend literature, although sometimes 8,000,000 is stated as the number to be pensioned.

If there are 10,000,000 pensioners, the cost is 2 billion dollars per month or 24 billions per year; if there will be only 8,000,000 pensioners, these figures would be reduced to $1,600,000,000 per month or $19,200,000,000 per year. Either figure is considerably more than double the present combined federal, state, and local taxes, which in 1932 totaled only $8,212,000,000. (Source: Annual Report of the Secretary of the Treasury, 1933, p. 306, and the report of the United States Census Bureau, Financial Statistics of State and Local Governments: 1932, p. 8).

These figures would represent the costs only in the first year. Persons who reach age 60 still have more than 15 years of life ahead of them on the average. Under the Townsend plan the average pensioner would be entitled to $200 per month for more than 15 years. Actuaries employed by the Committee on Economic Security have computed that merely to pay pensions to these now 60 or over, represents a cost to the Government of a present value of 245 billion dollars--which is to be compared with a total estimated public and private debt of 126 billion dollars at the peak of the boom period in 1929. (Source: The Internal Debts of the United States, by Evans Clark, p. 10). This total almost equals the entire estimated taxable wealth of the United States, which the report on Double Taxation in 1932 of a sub-committee of the Committee on Ways and Means of the House of Representatives in the 72nd Congress, 2nd Session (page 204) places at less than 240 billion dollars, and is 50% greater than the actual assessed value of all property, found by this sub-committee to be 163 billion dollars.

As the plan contemplates that not only shall pensions of $200 per month be paid to those now 60 and over but also to all persons as they become 60, the actual liability assured by the Government is much greater than this staggering total of 245 billion dollars. For many years to come, the number of pensioners will increase each year, and the annual cost and total liability will mount rapidly.

Taxes
To finance the Townsend pensions, the McGroarty bill (H.R. 3977), which is the official Townsend plan bill, provides that a 2% tax (which may be reduced by the President to 1% or increased to 3%)shall be levied "on the gross value of each business, commercial, and/or financial transaction," to be paid by the seller.

In the Townsend literature the claim is made that the total money value of all transactions in 1933 was 1200 billion dollars and the 55th Statistical Abstract of the United States indicates that no figure for the total money value of all transactions appears anywhere in the volume. The nearest approach to such a figure is the total of all bank debits (representing the total of all business transactions in which bank checks, drafts, etc., are used) in the 141 principal cities of the country, which in 1933 was 442 billion dollars, while, roughly representing the total of all "business, commercial, and/or financial transactions" not all of this amount will be taxable under the Townsend Plan, as it specifically exempts "salaries for personal services." Allowing for this exemption, approximately 400 billion dollars of transactions would have been taxable in 1933. At the 2% rate in the McGroarty bill, this tax would have yielded 8 billion dollars, or about one-third the amount needed for the Townsend pensions. A rate not of 2% or 3%, as provided in the McGroarty bill, but of 6% is indicated as necessary for payment of the Townsend pensions on the basis of 1933 money value of all transactions.

Even a 2% rate on the money value of all business, commercial and financial transactions (to say nothing of a 6% rate) is so heavy that it would stop all business and could not possibly be collected. It would mean a tax of 2% of the face value of every check written in the course of ordinary business transactions. It would apply to manufacturer's sales, wholesalers' sales, and retail sales, and for nearly all commodities would represent a duplication of taxes, which inevitably, would have to be added to the price paid by the consumers. In glassware for instance, 11 transactions are customary between the producer of the raw materials and the consumer. On all of these transactions there would be a 2% (or 3%) tax and at each stage something more than the tax (to allow for investment and handling charges) would be added to the price.

Such increases in prices would have a pronounced tendency to restrict purchases. Many other types of transactions would be rendered entirely impossible, while in the Townsend literature the claim is repeated time and again that a very large part of the entire cost of pensions would come from the sale of stocks and bonds, the probable effect of a tax of 2% (or 3%) on the money value of all sales of securities would be to close all stock exchanges, since the margin at which business is done on these exchanges is much less than 2%. A tax of 2% on the money value of all transactions would dry up the sources of revenue and would probably produce much less than the $2,000,000,000 per year indicated as the probable yield on the basis of the 1933 business of the country. In fact, it is doubtful whether such a heavy tax could be collected at all.

Administrative Problems
Aside from the difficulties of collecting three times the amount of the federal, state, and local taxes combined (which, as noted, would require a tax rate, not of 2%, but of 6% on the money value of all business, commercial an financial transactions), the Townsend plan involves other great administrative difficulties. It provides that all sellers shall be licensed by the Secretary of the Treasury. The Bureau of the Census in 1933 had a record of 2,359,497 establishments engaged in manufacturing, wholesale and retail trade, hotel, service industries, and places of amusement, and this is by no means the entire number of sellers who would have to be licensed and from whom taxes would have to be collected monthly. Provisions would also have to be made for up to the minute lists of pensioners and their identification, to prevent frauds. Under the McGroarty bill, further local pension boards would have to be set up in each of the 3,071 counties and, approximately 3,500 wards in cities of the country.

Most difficult of all would be the necessary checking to see that the 10,000,000 pensioners all spent their $200 within the month in which received. This would require going into the private affairs of the pensioners to an extent never before attempted and would necessitate a vast army of additional Government employees.

Final Appraisal of Plan
The Townsend advocates base practically their entire argument on the "revolving" feature of their plan. If there does not result from the plan a very great increase in incomes and in the money value of transactions, the promised pensions cannot possible be paid for any length of time without wholesale inflation. The total income of all of the people of the United States in 1933 was only 46 billion dollars. The people who are over 60 years of age are less than 9% of the entire population of the country. The Townsend proposal, consequently, might be described as a plan under which more than half the national income is to be given to the less than 9% of the people who are over 60 years of age. Unless there is a very great increase in the national income, this could be done only through reducing the incomes of the people under 60 years of age by approximately one-half.

The Townsend advocates claim that such a result will not be produced because business will be enormously stimulated through placing such a large amount of money in the hands of the old people to spend within the month in which received. They say nothing about the fact that the people under 60 will have approximately the same amount less to spend, and they will have to pay in taxes the amount which the people over 60 will get in pensions.

The Townsend literature states that the United States Government would have to pay only the 2 billion dollars required for the first month's pensions and that the plan would thereafter be self-sustaining because it would create enough new business to return to the Government the entire pension costs, without burdening the taxpayers. As the rate of tax proposed is only 2%, it is manifest that the 2 billion dollars paid out in the first month would have to increase to 100 billion during that month, to justify the expectations of the Townsend advocates. The Townsend plan contemplates that pensioners shall spend their money within the month--but in order to produce sufficient revenue to pay the pensions of the second month, without burdening the people under 60, there must be fifty turnovers of the pension within the first month.

Even the Townsend advocates acknowledge that this is impossible, but they are reduced to the dilemma, either of burdening the people under 60 with heavy taxes which will greatly reduce their incomes or of having the Government pay the pension costs for a much longer period than the first month. Since it is inconceivable that the people under 60 would submit to have their incomes reduced by one-half, the latter course is the only possibility. This will mean a rapid increase in the national debt and in effect pronounced inflation.

Through inflation it may be possible to keep up the pension payments for some time. The final result, however, cannot be in doubt. The inflation and duplicate taxation involved in the Townsend plan will cause prices to soar and soon, even with $200 per month, the pensioners will not be better off than they were before, while those below 60 will be immeasurably worse off. The Townsend plan is one which involves not only revolving pensions but revolving taxes. It is a plan which arouses great hopes but actually will give the old people little, or nothing.

Back to Volume Two Table of Contents