The first significant New Deal Act to come before the Supreme Court was the Railroad Retirement Act of 1934. Footnote1 The Act, strictly speaking, was not a New Deal measure as it had not been originally proposed by the Roosevelt administration. However, after the bill had passed the Congress, the President signed it with enthusiasm because it was in line with the social policy of the Administration. The Railroad Retirement Act was passed by the Congress, to promote economy and improve employee morale and promote the efficiency and safety of interstate transportation. The Congress believed that legislation was necessary because morale was low in the railroad industry as a consequence of financial insecurity. The voluntary pension programs of the railroad companies did not alleviate the anxiety as they were inadequate. The company scheme did not provide, according to Congress, their employees with a sense of security. Therefore, the Congress passed the Railroad Retirement Act which imposed a compulsory pension scheme on the entire industry. The Act established a compulsory retirement and pension system for all carriers subject to the Interstate Commerce Act. The Act provided for the creation of a fund into which contributions from employers and employees were paid. These funds were raised by compulsory contributions, in specific amounts, of both employers and employees, each carrier to pay double the total payable by its employees. The contributions were based on percentages of current compensation, the amount of the percentage to be fixed by the Board. This fund was administered by a Retirement Board who were required to award pensions to, (1) employees of any carrier on the date of passage of the Act; (2) those who subsequently become employees of any carrier; and (3) those who within one year prior to the date of enactment were in the service of any carrier. Every such person became entitled to an annuity, (a) when he reached the age of 65 years, whether then in carrier service or not; if in such service, he and his employer may agree that he shall remain in service until he is 70, at which age he must retire; (b) at the option of the employee, at any time between the ages of 51 and 65, if he has served a total of 30 years in the employ of one or more carriers, whether continuously or not. The compulsory retirement provision was not applicable to those in official positions until 5 years after the effective date of the Act.

The pension was payable monthly. Its amount was determined by multiplying the number of years, not exceeding 30, before as well as subsequent to the date the Act was adopted, whether for a single carrier or a number of carriers, and whether continuous or not, by graduated percentages of the average monthly compensation (excluding all over $300 per month). If any one who had completed 30 years of service elected to retire before he was 65 years of age, the annuity was reduced by 1/15th for each year he lacks of that age, unless retirement was due to physical or mental disability.

On the death of an employee, before or after retirement, his estate was repaid all that he contributed to the fund, with 3% compounded annually, less any annuity payments received by him.

The Retirement Act's constitutionality was challenged by 137 railroad companies on the grounds that it violated the due process clause of the Fifth Amendment and that it breached the restrictions imposed by the Commerce Clause. The companies sought an injunction against the Act's enforcement which was awarded. The Retirement Board appealed against the injunction and also applied for a writ of certiorari from the Supreme Court which was awarded.

On May 6, 1935, the Supreme Court of the United States handed down its judgment in Railroad Retirement Board et al. V. Alton Railroad Company et al. Footnote2 The Court by a majority of one, held the Act unconstitutional, on two grounds; first, that certain of its provisions violate the due process clause of the Fifth Amendment, and being inseparable, condemn the whole Act; and, second, that the Act was not in purpose or effect a regulation of interstate commerce, under the Constitution. Mr. Justice Roberts delivered the majority opinion for the Court, while Chief Justice Hughes presented the views of the minority.

The majority opinion discusses various aspects of the case in the following order; the contention that the Act is arbitrary in that it makes certain persons eligible for pensions on the basis of prior service, and includes prior service in determining the amount of pensions of persons previously in carrier service in the event that they later return to such service; certain special features alleged to be violative of due process; certain general features, such as that the Act violates due process because it sets up a unitary pension system, and that it imposes an unconscionable burden; and, finally, that the Act is not a regulation of commerce.

The first feature of the Act which was considered by Mr. Justice Roberts was the provision affecting former employees. The Act made eligible for pensions all employees who were in carrier service within one year prior to its passage, irrespective of future employment. About 146,000 persons fell within this class, including those discharged for cause, those retired, those who resigned for other employment, those whose positions were abolished, those temporarily employed, and those who left the service for other reasons. It was agreed in both the majority and dissenting opinions that this provision was arbitrary. As to it, Mr. Justice Roberts said:

"It is arbitrary in the last degree to place upon the carriers the burden of gratuities to thousands who have been unfaithful and for that cause have been separated from the service, or who have elected to pursue some other calling or who have retired from the business, or have been for other reasons lawfully dismissed. And the claim that such largess will promote efficiency or safety in the future operation of the railroads is without support in reason or common sense." Footnote3

In addition to this class, there were over 1,000,000 persons who had previously been in carrier service. The railroads challenged the statute as arbitrary to the extent that it made their prior service the basis for computing their pensions in the event that they ever return to carrier service. This objection was likewise sustained by the Court. With respect to it Mr. Justice Roberts states:

"Plainly this requirement alters contractual rights; plainly it imposes for the future a burden never contemplated by either party when the earlier relation existed or when it was terminated. The statute would take from the railroads' future earnings amounts to be paid for services fully compensated when rendered in accordance with contract, with no thought on the part of either employer or employee that further sums must be provided by the carrier. The provision is not only retroactive in that it resurrects for new burdens transactions long since past and closed; but as to some of the railroad companies it constitutes a naked appropriation of private property upon the basis of transactions with which the owners of the property were never connected. Thus the Act denies due process of law by taking property of one and bestowing it upon the another." Footnote4

The railroads further challenged the provision allowing pensions to those 65 years old, who were in carrier service but a limited time. They contended that such a provision was not an aid to economy, efficiency or safety. Sustaining this contention, and rejecting the Retirement Board's answer thereto that the provision improves the morale of employees while they are in the service, Mr. Justice Roberts said:

"Assurance of security it truly gives, but, quite as truly, if 'morale' is intended to connote efficiency, loyalty and continuity of service, the surest way to destroy it in any privately owned business is to substitute legislative largess for private bounty and thus transfer the drive for pensions to the Halls of Congress and transmute loyalty to employer into gratitude to the Legislature." Footnote5

General features, in relation to the Fifth Amendment, were also considered by the Court. First among these, was the unitary nature of the system, which treated all railroad as a single carrier. This provision of the Act if found valid, would result in the solvent carriers furnishing the money necessary to meet the demands of the system upon insolvent carriers. In other words, all the future employees of any railroad which discontinues operation must be paid their pensions by the surviving railroads. This underlying basis of the system, through its imposition of unequal burdens on various carriers, was also thought to be unconstitutional. As to this the opinion declared:

"This court has repeatedly had occasion to say that the railroads, though their property be dedicated to the public use, remain the private property of their owners, and that their assets may not be taken without just compensation. The carriers have not ceased to be privately operated and privately owned, however much subject to regulation in the interest of interstate commerce. There is no warrant for taking the property or money of one and transferring it to another without compensation, whether the object of the transfer be to build up the equipment of the transferee or to pension its employees." Footnote6

Further developing this line of thought, Mr. Justice Roberts went on to distinguish cases relied on by the Board for their support of this pooling principle, and stated:

"We conclude that the provisions of the Act which disregard the private and separate ownership of the several respondents, treat them all as a single employer, and pool all their assets regardless of their individual obligations and the varying conditions found in their respective enterprises, cannot be justified as consistent with due process." Footnote7

Finally, as to the whole case considered in the light of the due process clause, the majority concluded that the invalid provisions were so inseparable from its other terms as to render the Act invalid in its entirety.

The case was then considered from the standpoint of the power of Congress to regulate interstate commerce. Mr. Justice Roberts said:

"It results from what has now been said that the Act is invalid because several of its inseparable provisions contravene the due-process-of-law clause of the Fifth Amendment. We are of opinion that it is also bad for another reason which goes to the heart of the law, even if it could survive the loss of the unconstitutional features which we have discussed. The Act is not in purpose or effect a regulation of interstate commerce within the meaning of the Constitution." Footnote8

The Court finally concluded that the Act in its fundamental purpose and effect was a measure designed to promote the social security of retired employees, which is not included within the powers delegated to Congress to regulate interstate commerce.

"In final analysis, the petitioners' sole reliance is the thesis that efficiency depends upon morale, and morale in turn upon assurance of security for the worker's old age. Thus pensions are sought to be related to efficiency of transportation, and brought within the commerce power. In supporting the Act the petitioners constantly recur to such phrases as 'old age security,' 'assurance of old age security,' 'improvement of employee morale and efficiency through providing definite assurance of old age security,' 'assurance of old age support,' 'mind at ease,' and 'fear of old age dependency.' These expressions are frequently connected with assertions that the removal of the fear of old age dependency will tend to create a better morale throughout the ranks of employees. The theory is that one who has an assurance against future dependency will do his work more cheerfully, and therefore more efficiently. The question at once presents itself whether the fostering of a contented mind on the part of an employee by legislation of this type is in any just sense a regulation of interstate transportation. If that question be answered in the affirmative, obviously there is no limit to the field of so-called regulation. The catalogue of means and actions which might be imposed upon an employer in any business, tending to the satisfaction and comfort of his employees, seems endless. Provision for free medical attendance and nursing, for clothing, for food, for housing, for the education of children, and a hundred other matters, might with equal propriety be proposed as tending to relieve the employee of mental strain and worry. Can it fairly be said that the power of Congress to regulate interstate commerce extends to the prescription of any or all of these things? Is it not apparent that they are really and essentially related solely to the social welfare of the worker and therefore remote from any regulation of commerce as such? We think the answer is plain. These matters obviously lie outside the orbit of Congressional power. The answer of the petitioners is that not all such means of promoting contentment have such a close relation to interstate commerce as pensions. This is in truth no answer, for we must deal with the principle involved and not the means adopted. If contentment of the employee were an object for the attainment of which the regulatory power could be exerted, the courts could not question the wisdom of methods adopted for its advancement." Footnote9

Mr. Justice Roberts finally concludes:

"We think it cannot be denied, and, indeed, is in effect admitted, that the sole reliance of the petitioners is upon the theory that contentment and assurance of security are the major purposes of the Act. We cannot agree that these ends if dictated by statute, and not voluntarily extended by the employer, encourage loyalty and continuity of service. We feel bound to hold that a pension plan thus imposed is in no proper sense a regulation of the activity of interstate transportation. It is an attempt for social ends to impose by sheer fiat non-contractual incidents upon the relation of employer and employee, not as a rule or regulation of commerce and transportation between the States, but as a means of assuring a particular class of employees against old age dependency. This is neither a necessary nor an appropriate rule or regulation affecting the due fulfillment of the railroads' duty to serve the public in interstate transportation." Footnote10

Chief Justice Hughes in his dissenting opinion, emphasized the far-reaching effect of the decision, especially as it erects a barrier to all legislative action bearing on the subject matter.

The Chief Justice made reference to the wide scope of the power of Congress to regulate interstate commerce, as determined by previous decisions of the Court, and to various acts of Congress which had been upheld governing the conditions of employment and the relations between employers and employees in interstate commerce. The Chief Justice said:

"The power committed to Congress to govern interstate commerce does not require that its government should be wise, much less that it should be perfect. The power implies a broad discretion and thus permits a wide range even of mistakes. Expert discussion of pension plans reveals different views of the manner in which they should be set up, and a close study of advisable methods is in progress. It is not our province to enter that field, and I am not persuaded that Congress in entering it for the purpose of regulating interstate carriers has transcended the limits of the authority which the Constitution confers." Footnote11

After the Supreme Court declared the Railroad Retirement Act unconstitutional, it raised serious doubts in the Roosevelt administration and Congress as to the validity of the Social Security Bill Footnote12 pending in Congress at the time.

The anxiety of administration leaders in the Senate over the implications in the decision was reflected in a request by Senator Robinson, for a thorough re-examination of the Social Security Bill by the Finance Committee.

In other quarters, particularly the House, there was more confidence that the decision in no way endangered Roosevelt's Social Security Bill. The bill, it was contended, relied more upon the taxing power of Congress and the general welfare clause of the Constitution than upon the power to regulate interstate commerce. Footnote13

In the light of the Supreme Court's decision on the Railroad Retirement Act, President Roosevelt on May 8, 1935, ordered a thorough re-examination of the social security legislation.

Legal advisers of the Finance Committee, reported to Roosevelt, that they interpreted the Railroad Retirement Act decision by the Supreme Court as a "danger signal" involving not only social security but also the National Industrial Recovery Act, the Agricultural Adjustment Act, and other New Deal legislation.

Senator Wagner, the author of the social security legislation, declared in the Senate that social welfare legislation could be enacted that would meet the test of the federal courts. Senator Wagner remarked:

"Of course, the word of the Court is the law, and as such is entitled to respect and obedience, but the United States Senate has never regarded it improper to inspect and comment upon the intrinsic validity of the decisions of the Supreme Court - whether they are consonant with a living law responsive to social needs and whether they are forced upon the court by the weight of existing precedent.

"I am sure there are some members of the Senate, familiar with the divisions of the Court in other cases of great social significance, who will at the outset be inclined to agree with the reasoning of Chief Justice Hughes and Justices Brandies, Stone and Cardozo, the dissenters in this pension case.

"As I read the majority opinion, it holds merely that under the interstate commerce clause, Congress has not the power to provide pensions for railway employees, the theory being that the retirement of superannuated workers has no effect upon the efficiency and flow of interstate commerce.

"The Court has never indicated that a tax for old-age pensions does not fall within the category of a public purpose; in fact, cases involving State systems have held that contrary. And no substantial limitations have ever been placed upon the spending power of Congress. Thus is seems clear that the old age pension plan contemplated by the Economic Security Bill is constitutional.

"Certainly no showing can be made that it is affected in any way by the recent decision of the Court. And the unemployment insurance features of the Economic Security Bill, which are based upon Federal subsidies, are clearly in line with past acts of Congress that have not been subjected to challenge."

On May 8, 1935, the American Federation of Labor's executive council issued a statement, calling on Congress to propose a constitutional amendment, if necessary, to get through the railroad pension retirement plan and the pending social security legislation. William Green president of the American Federation of Labor, in delivering the statement said:

"The council was bitterly disappointed over the Supreme Court's decision that the railroad pension plan was unconstitutional.

"The minority opinion presents the situation in a constructive way.

"If the majority opinion is to control and we are faced with a situation where Congress is impotent to enact this type of legislation, then we'll have to get behind a constitutional amendment."

George Harrision, chairman of the Railway Labor executives Association and president of the Brotherhood of Railway and Steamship Clerks, Freight Handlers, Expressman and Station Employees, said:

"The decision represents one of the most reactionary decisions handed down by the Court and shows a total disregard of the social obligations of industry to its workers. It will be most difficult for Congress to enact any social legislation that requires employers contributions and, therefore, it is a serious obstacle to the consummation of the whole New Deal program.

"Organized railway labor has long sought recognition for those workers who have contributed their lives in furnishing essential transportation service, and now, since it appears that this question is beyond the power of Congress, they will therefore of necessity be compelled to rely upon their economic strength to compel a fair and decent system of retirement benefits.

"In other words, if they won't give us what we want, we'll have to take it away from them."

Phil Ziegler, editor of The Journal of the Brotherhood of Railway Mail Clerks, declared:

"The Supreme Court's decision throws the railroad pension plan out of the window and with it probably goes the entire social security program of President Roosevelt. It is a tragedy that five aged gentleman can block the will of the people."

Footnote1

48 Stat. 1283.

Footnote2

295 U.S. 330 (1935)

Footnote3

Id. at 349.

Footnote4

Id. at 349-50.

Footnote5

Id. at 351.

Footnote6

Id. at 357.

Footnote7

Id. at 360.

Footnote8

Id. at 362.

Footnote9

Id. at 367-68.

Footnote10

Id. at 374.

Footnote11

Id. at 391-2.

Footnote12

The Social Security Bill was introduced in Congress by Senator Wagner on January 18, 1935. The bill was titled "The Economic Security Bill of 1935." The bill went through many revisions before it was finally enacted into law on August 14, 1935. Several sections of the bill needed to be changed in order for it to comply with the restrictions laid down by the Supreme Court in their interpretation of the commerce clause and the general welfare clause in the Constitution. One substantial change is found in Title IX of the Act. The original bill submitted by Senator Wagner on January 18th states "... there shall be levied and assessed upon every employe ... an earnings tax, to be collected ..." In the Act adopted and passed by the Congress the word "earnings tax" was changed to "income tax." This change was essential in order for the tax in Title IX to conform to the privilege (excise) tax levied upon those engaged in interstate commerce. An in depth discussion of the two bills and the changes needed to conform the Social Security Act to the interstate commerce clause is given in Volume II of this work.

Footnote13

When the Supreme Court declared unconstitutional the Agricultural Adjustment Act in the Butler case, and adopted the Hamiltonian view of the general welfare clause of the Constitution, it was reported to Roosevelt that because of this interpretation of the general welfare clause by the Supreme Court, the Social Security Act which had been enacted into law five months before the Butler case, would be in danger of being invalidated if the act was properly challenged. In an effort to prevent the invalidation of the Act, Title 28 of the United States Code, was amended to allow the government to intervene in any action which sought to challenge the constitutionality of any statute, which obviously included the Social Security Act.