The Clark Amendment

The "Clark Amendment" to the 1935 Social Security Act was a proposal introduced in the Senate Finance Committee by Senator Bennett Champ Clark (D-Missouri). The amendment exempted from participation in the new social insurance system any company which had an existing company pension system, or which devised one subsequent to the passage of the Act, provided that the system met certain conditions spelled-out in the law. Companies which chose to deploy their own company pension systems could then opt-out of Social Security as long as the kept their system in operation. If at any time they decided to abandon their private system, they could opt back in. Strictly speaking, Senator Clark's amendment was not a private-sector alternative to adopting Social Security; it was by way of providing a private-sector option alongside the Social Security system.

The legal effect of the proposal was that it would allow employers and their employees to avoid paying Social Security payroll taxes, at the cost of forgoing any potential Social Security benefits. Since it was the employer who chose whether or not to have a pension system, this meant that, in practical terms, it would have made the Social Security program optional for employers, but not for employees.

Senator Clark's amendment contained language stating that the private pension system would have to be at least as generous to the worker as the government system, and that the employer would have to pay at least the same amount into the system as he would have paid to the federal system. This seemed like an attractive and reasonable idea to many members of Congress, and the idea had some substantial support.

The Problems with the Clark Amendment

Certainly the Clark Amendment had an initial appeal. It seemed only reasonable that if a business had an existing pension program that its employees might not need the new Social Security program. And it seemed only natural for employers to resist the idea of paying additional new taxes as a cost of doing business, if some way existed to honorably avoid them. But from the point-of-view of Social Security advocates, there were at least four major problems with the Clark Amendment.

First, was the traditional insurance problem of "adverse selection." The Social Security program is a form of social insurance, operating, in part, on insurance principles. Under insurance systems, a pooled fund is created out of which benefits are paid to individuals who suffer the insured conditions. A wide contribution base is generally necessary to make the fund viable. In adverse selection situations the "best risks" leave the system. What was likely to happen under the Clark Amendment was that the better-financed, more prosperous, companies would opt-out of the Social Security system, leaving behind the poorer companies that could not afford to create their own pension systems. In effect, the "best risks" would opt-out, leaving behind the "worst risks" and narrowing the contribution base so much that the system would not be viable. Indeed, for this reason, the Roosevelt Administration viewed the Clark Amendment as a "killer amendment" threatening the viability of the entire Social Security proposal.

The second problem concerns the question of portability. One major virtue of the Social Security system is that its coverage is portable from job to job. You can spend part of your working career with Company A, part with Company B, part with Company C, and so on, and the Social Security credits you earn in each job are part of the same nationwide system. A company pension, by contrast, is tied to the company issuing it. So if a worker's basic retirement security is tied to a company pension then the worker is tied to that company and cannot easily change jobs without risking the loss of their retirement pension. This was a major problem in America prior to the advent of Social Security. Indeed, this was an example of an economic security issue in which companies and their employees were often at odds. Many companies used the threat of loss of a retirement pension as a deliberate strategy to bind workers to their companies and prevent labor mobility. Under the Clark Amendment, for companies who opted-out of Social Security, this traditional problem would continue to afflict their employees.

The third concern with the Clark Amendment again involved the issue of universality. Another virtue of the national Social Security system is that the eligibility rules are the same for everyone, in every industry, in every part of the country. This is certainly not the case for company pensions. Companies can design pension systems with all sorts of idiosyncratic eligibility rules. Indeed, there was a history in America of abuse of this freedom by companies who deliberately crafted their eligibility rules in such a way as to make it virtually impossible for their workers to ever actually qualify for a pension. There were also many reports of companies who, on some pretext or other, would dismiss older workers who were on the verge of qualifying for their pensions. This sort of problem would continue to be present for workers in companies which opted-out of Social Security under the provisions of the Clark Amendment.

And finally, there was the traditional insurance problem of "moral hazard." In insurance programs the insurer has to worry about claimants for benefits who present phony claims. The Roosevelt Administration was concerned that the same thing would happen with the Clark Amendment--that companies would design phony pension schemes for the sole purpose of evading Social Security taxes through the use of the Clark Amendment. Indeed, this issue was the focus of the debates over the Clark Amendment in the Conference Committee.

Congressional Consideration

The Clark Amendment was developed by a group of insurance lobbyists under the leadership of Walter Forster, of the insurance brokerage firm of Towers, Perrin, Forster and Crosby, and introduced by Senator Clark as an amendment to the Administration's bill while it was under consideration in the Senate Finance Committee. The Clark proposal failed to be adopted in the Finance Committee on a tie vote, with some members of the Committee absent at the time of vote. According to Edwin Witte, Executive Director of the President's Committee on Economic Security (CES), the Clark Amendment would likely have passed in the Finance Committee had all members been present and voting.

Senator Clark then introduced the amendment on the Senate floor on June 17th. The matter was debated at length in the Senate on two legislative days (June 18 and June 19). The amendment was adopted on the Senate floor by a vote of 51-35. Of the 21 members of the Senate Finance Committee, 12 voted in favor of the Amendment, 8 against, and one was absent. This suggests that Professor Witte was right in his supposition about the action in the Committee itself.

House/Senate Conference

Since there was no such provision in the House-passed version of the bill, the matter went to Conference, along with the other disagreeing provisions between the two houses.

The conferees were named on June 20th and work on reconciling the two bills began shortly thereafter. On July 16th the conferees reported to their respective houses that they had reached agreement on all provisions in disagreement save the Clark Amendment, and they requested further instructions regarding this amendment. On July 17th both houses accepted the Conference Reports and instructed their conferees to adhere to their respective positions on the Clark Amendment. The conferees returned to work but again were unable to reach an agreement.

The Administration's representatives on the bill actually helped in attempts to draft legislative language capturing the idea behind the Clark Amendment in a form the Administration and the bill's supporter found unobjectionable. At the staff level, three legislative draftsmen were put to work trying to craft compromise language that the members and the Administration could support. One of these three was a young lawyer on the CES named Thomas Eliot. Eliot has given a first-person account of the course of these efforts:

"There were a good many differences, and these were battled over for a month. Eventually all differences were settled except whether or not the Clark Amendment should be included in the bill. Here the President did bring pressure on the House leadership which was much more amenable to his leadership and influence than was the Senate. The House was solidly against the Clark Amendment and indicated that it would never vote for the bill if the Clark Amendment was in it. The Senate was equally obdurate in insisting that the Clark Amendment stay in the bill. Eventually Harrison's assistant, Leonard Calhoun, a counsel from St. Louis brought in by Senator Clark, a very able fellow named Bill Woodward, and I were designated by the conference committee to see if we could redraft the Clark Amendment to close all the conceivable loopholes so that only the really reputable private pension plan could be exempted from the national scheme. We spent 2 weeks of very hard work. We could not close the loopholes. This was going to be an exceedingly difficult job. We had to learn absolutely everything about the possibilities in this old-age pension retirement plan system kind of thing, and we just couldn't do it in the short time that had been given us. We finally signed a report to that effect and agreed to continue to meet if the Senate wanted us to and to have a new version of the Clark Amendment ready sometime the following winter or spring. With that understanding, the Senate dropped its insistence on the Clark Amendment."

Therefore, the two houses reported their final Conference Reports to their bodies and the Conference Reports, without the Clark Amendment, were adopted without a recorded vote in both chambers. The Social Security Act was signed into law less than a week later. And the Congress adjourned shortly thereafter.

The Clark Amendment Fizzles Out

In the following session of Congress in January 1936 the Senate Finance Committee did in fact appoint a subcommittee to draft legislative language. And the Senate Finance Committee and the House Ways and Means Committee did have a couple of meetings on the matter. But interest in the Clark Amendment had dissipated following passage of the Social Security Act. The constituencies that had lobbied for the amendment the previous summer no longer rallied to the issue and the matter basically faded away due to lack of interest.

Some commentators have incorrectly interpreted this lack of follow-on action as somehow indicative of "bad faith" on the part of Social Security's supporters. What actually happened has been recounted by Thomas Eliot, who became the General Counsel of the Social Security Board after passage of the law, and hence was responsible for the Administration's role in the promised follow-up legislation. According to Eliot,

"Now an interesting little-addition to that issue is what happened the next winter. I was by then General Counsel and Leonard Calhoun was one of my assistants. He talked to me about this. I called up Senator King, who was Acting Chairman of the Finance Committee, and said, 'Look, you were one of the people who was most active for the Clark Amendment, and you remember that Leonard and I and Bill Woodward pledged ourselves to do our best to write a new Clark Amendment. When do you want it? It's getting on into March now, and Congress isn't going to sit forever. When do you want the amendment? We haven't heard from you.' He laughed and he said, 'Oh! Mr. Forster was in the other day. You can forget the amendment. Mr. Forster said he'd made a terrible mistake. He thought that the passage of the old-age insurance bill would ruin his business of selling private pension plans. Instead the passage of the Social Security Act has got everybody thinking about pension plans. He doesn't want any Clark Amendment. You can forget it forever.' So that's why there isn't an exemption for private pension plans in the present social security law." 

Larry DeWitt
SSA Historian's Office
August 2000