The Advisory Council
on Security held its first meeting in Washington on December
4-5. The Council, consisting of 17 members representing employers,
employees, and the public, was created by the Senate Finance
Committee to assist the Committee in a comprehensive study of
the present social security system and of various proposals
for its expansion. The following statement, presented to the
Council by the Commissioner for Social Security, deals specifically
with the Federal program of old-age and survivors Insurance. |
SOCIAL SECURITY in the most inclusive sense of the term includes
all the things necessary to enable the individual citizens of a
country to lead a personally satisfying and socially useful life.
In this large sense, social security would certainly include decent
housing, education, and health, as well as the elimination of destitution.
There is considerable danger that this broad use of the term social
security will destroy its usefulness as a term to describe a specific
program of action. Therefore, I shall use the term in a more restricted
sense as applicable to a specific program designed to eliminate
want by preventing loss of income and affording protection against
large and unpredictable economic hazards, such as the cost of medical
care.
I should like to point out that, even though we achieve the goal
of full employment and full production, it is still necessary in
a system of private enterprise such as ours to have a program designed
to eliminate want, because the working people of this country will
still be confronted with the great economic hazards of sickness,
physical disability, want, old age, and death, as well as intermittent
unemployment. All these great hazards mean interruption of income
to the individual family and still spell want in a land of plenty.
I mention intermittent unemployment as a continuing major cause
of loss of income because, under a system of free enterprise, we
must encourage invention, improvement, variety, and continual adaptation
to changing ideas and circumstances.
This must mean that, as the processes of production and distribution
change, individuals will be forced out of one employment and be
obliged to seek another. This is the price, if it can be called
a price, that we pay for maximum production, free enterprise, and
free labor.
Of course, to the extent that we fail to achieve full employment
and full production, a system of social security designed to eliminate
want is all the more necessary. Nor should we overlook the fact
that a system designed to eliminate want also does actually make
a great contribution to the maintenance of full production and full
employment by helping maintain mass purchasing power, upon which
mass production must depend.
In presenting to you a specific social security program, it will
not be necessary to propose strange and new methods. We have a world
history and world experience upon which to base our planning and
our action. Indeed we already have in our own Social Security Act
the fundamental elements of a program of social security designed
to eliminate want. Therefore, in my judgment it is only necessary
for us to extend, expand, and improve our present Social Security
Act in the light of the experience and thinking that have been developed
since that act was passed in 1935.
Since the security of the large majority of people is dependent
upon their earnings, the focal point of our efforts should be to
provide reasonable protection against interruption of income due
to sickness, accidents, old age, death, and unemployment.
In other words, we should strive to devise a system which will
spread income over periods of non-earning as well as over periods
of earning. This can be accomplished to a large extent by a system
of social insurance under which benefits are paid to compensate
for a reasonable proportion of the wage loss sustained. The cost
of such benefits should be financed out of contributions made by
the workers of this country and by their employers, supplemented
ultimately with some contribution from the Government, representing
the entire community.
The Relationship of Social Insurance
and Public Assistance
Even a comprehensive contributory social insurance system, however,
cannot provide complete protection under all conceivable circumstances.
Certainly an insurance system cannot insure against hazards that
have occurred before the system was established. Therefore, there
is also need for a basic and comprehensive system of public assistance
to meet the needs of individuals and their families which cannot
be met out of their own resources.
The late Oswald Stein, the world's greatest authority on social
security at the time of his tragic death, best characterized the
true nature of these two systems. He said, in a report of the International
Labor Office: "Social assistance is a progression from poor
relief in the direction of social insurance, while social insurance
is a progression from private insurance in the direction of social
assistance." This statement suggests that there are areas of
similarity and areas of distinction in the two programs.
Assistance and insurance are alike in that they seek to provide
a minimum degree of economic security. In so doing, both strive
to remove uncertain and subjective tests of eligibility and to create
certainty and objectivity. Both have endeavored to obtain improved
methods of financing and thus to create confidence that benefits
will be available when they are needed.
The methods that each program employs complement one another, and
both programs are essential in order that protection may be well-rounded
and able to meet all foreseeable contingencies that are common to
mankind. In this country, public assistance is playing the dominant
role at the moment since it must care for those cases in which the
wage earner was old or died before our social insurance program
got under way. As social insurance develops and spreads its protection
more widely, it is hoped that eventually--perhaps before another
generation has passed--it will become the predominant program and
will take care of the bulk of the problem, providing benefits for
the great mass of the population. Such a development would not mean,
however, that a system of social security can ever dispense with
public assistance. Assistance would always be needed as a residual
program for those who are not protected by social insurance because
it is not feasible to cover them or because they do not qualify
for social insurance benefits. Assistance would also be required
to supplement social insurance benefits when they prove inadequate
to meet special needs of individuals.
The two programs, similar in purpose but differing in the provisions
that enable them to meet their respective obligations, show certain
rather significant contrasts as they are constituted today. To illustrate,
an applicant for social insurance benefits may qualify without regard
to his other resources, whereas the applicant for public assistance
will have his other resources taken into account. Associated with
this difference is another: insurance benefits are provided on the
presumption that most people, when they meet certain defined risks,
will be in need of cash income, although it may happen that an individual
beneficiary may not be. The applicant for public assistance, on
the other hand, must show actual need if he is to qualify for a
grant.
This Advisory Council will be confronted with the necessity of
determining how far these twin programs have advanced us toward
the goal of a minimum level of well-being for everybody. Without
undertaking to prejudge your conclusions, I think you will find
that we are still a considerable distance from our goal.
Improvements in the Old-Age and Survivors
Insurance System
Since I understand, however, that this Advisory Council wishes
first to consider the ways and means of improving the present Federal
old-age and survivors insurance system, I shall therefore concentrate
on this particular phase of social insurance, which deals with what
might be called the long-term economic risks to which the workers
and their families of this country are exposed, namely, death, old
age, and permanent and total disability.
In considering any type of social insurance, it is necessary to
keep in mind two fundamental principles. The first is that only
a minimum degree of protection can be afforded; second, that this
minimum degree of protection is a general minimum which does not
always cover the individual needs of each worker and his family.
In other words, I believe that social insurance should be looked
upon as providing a minimum degree of protection on which the worker
himself through his individual efforts may build more surely and
effectively a higher standard of living for himself and his family.
We should assume that, in a country such as this, workers by and
large will have an opportunity to accumulate some savings, take
out some private insurance, and own their own homes. The success
of a system of social insurance should be measured by whether such
a system, together with private savings, private insurance, and
home ownership, enables most of the people of this country to maintain
themselves in decency and comfort. This test might be called the
test of social adequacy. But in addition, I believe, any social
insurance program functioning within a system of free enterprise
must also take into account individual equities and incentives.
Therefore, while I believe that the low-wage earner and the worker
who is already advanced in age should be compensated for a larger
proportion of the wage loss sustained, I also believe that the benefits
paid to younger wage earners receiving higher wages should take
into account the length of time that they have contributed and the
larger wage loss they sustain when their employment ceases.
As the Advisory Council knows, the Federal old-age and survivors
insurance program is the only part of the Social Security Act that
is administered wholly by the Federal Government. Employers and
employees have each been making contributions of 1 percent of taxable
wages since January 1,1937. Under the original provisions of the
Social Security Act, monthly benefits would not have been payable
until January 1, 1942; the 1939 amendments, however, advanced that
date to January 1, 1940. The 1939 changes also resulted in the payment
of more adequate benefits during the early years of the system's
operation. Above all, the amendments added both dependents' and
survivors' benefits, so that now, in addition to the payment of
old-age benefits to the retired worker, monthly benefits are also
payable to the aged wife and young children of a living beneficiary
and to the widow, children, and, in some cases, the dependent parents
of an insured worker who dies. Just as contributions are paid on
the basis of wages received, so these benefits
are paid on the basis of the past wages of the insured worker and
thus compensate for a portion of the wage loss caused by his retirement
or death.
Improvement
of Old-Age and Survivors
Insurance Benefits
More adequate benefits.--The
benefit established in 1939 provided a relatively small replacement
of wages for most beneficiaries, even in terms of the wage
and price levels of that period. Since then the benefits have
become increasingly inadequate as prices have risen some 60
percent or more. The following changes in the benefit provisions
are suggested to adapt the benefits to changed conditions:
(a) Benefit formula.
The benefit formula should be revised to provide a replacement
of wages, in terms of present levels, at least as large
as was provided in 1939 by the present formula. One formula
which would accomplish the result for most workers would
be one that replaced 40 percent of the first $100 (instead
of $50) of the average monthly wage and 10 percent of the
next $300 (instead of $200).
Illustrative
primary benefits under present law and proposed revision
|
Average monthly wage |
Present
law |
Proposed
revision |
Basic benefit |
10 years' coverage |
20 years' coverage |
Basic benefit |
10 years' coverage |
20 years' coverage |
$50
100
150
200
250
300
400 |
20
25
30
35
40
40
40 |
$22
27.50
33
38.50
44
44
44 |
$24
30
36
42
48
48
48 |
$20
40
45
50
55
60
70 |
$22
44
49.50
55
60.50
66
77 |
$24
48
54
60
66
72
84 |
(b) Minimum benefit.
If the change suggested above is made in the benefit formula
and the average monthly wage is redefined as proposed below,
the amounts payable to most individuals would not be less
than $20. If the minimum primary benefit were set by law
at $20 (instead of the present $10) this would assure a
man and his wife a minimum combined benefit of $30.
(c) Wage base.
At present, only the first $3,000 of wages in a year is
counted for benefit purposes. If this amount were raised
to $4,800 it would permit about 96 percent of the workers
now covered to have all their wages counted for benefits,
as compared with the 97 percent who had all their wages
counted in 1939 under the $3,000 wage base.
(d) Maximum benefit.
The present law limits benefits to $85 per month, twice
the primary benefit amount, or 80 percent of the average
monthly wage of the employee, whichever is least. A higher
maximum dollar amount, such as $120, would reflect the increase
to $4,800 in the maximum annual earnings credited and would
recognize the desirability of providing a relatively wide
range of benefits under a program of contributory insurance.
Omission of the requirement that the family total must not
exceed twice the primary benefit amount would provide more
adequate benefits when a worker is survived by a large family.
(e) Average monthly wage.
Under present law, benefits are based on total covered wages
averaged over all months since 1936 (including months of
little or even no earnings). Lack of wages in insured employment
in any period reduces the average to an excessive degree
when, as in the early years of the program, the period of
coverage is short. To avoid this, the average wage could
be determined by relating it only to periods when the worker's
earnings exceeded a certain amount, that is, by excluding
periods of little or no earnings. In order to afford some
variation in the amount of the benefit in relation to the
length of time a person made contributions, the benefits
might continue to be increased by 1 percent for each year
of coverage, as is now the case, and reduced by 2 percent
for each year the worker was out of covered employment.
(f) Age of eligibility.
The age for women might be reduced to 60. Since, among the
aged, wives are, on the average, about 5 years younger than
their husbands, this change would in most cases permit payment
of supplementary benefits to the wife at the time the wage
earner retires. Women wage earners and aged widows should
be eligible at the same age as wives.
Eligibility.--To
be fully insured a worker must have been paid wages of at
least $50 in (a) half the calendar quarters elapsed since
1936 or since age 21, or (b) 40 calendar quarters. This
requirement would be difficult for newly covered workers
to meet. Thus it would take a farmer who had never worked
in insured employment previously, 10 years before he could
qualify for an old-age retirement benefit. To make it easier
for these workers, a person might also be deemed to be insured
if he had covered wages of $200 in at least 5 of the 10
years before retirement or death.
Retirement test.--Benefits
under the existing law are not paid for any month in which
a person earns at least $15. In view of increased wage levels,
a person aged 65-69 whose earnings did not exceed $40 could
be considered as not engaged in regular employment and therefore
in need of his benefit payments. Beginning at age 70, benefits
could be paid irrespective of whether the individual was
employed or not. |
Federal old-age and survivors insurance constitutes the largest
permanent insurance system in the world. Therefore, unprecedented
problems were encountered in putting it into effect. All these administrative
problems have been solved, however. The total cost of administration
at the present time is less than 3 percent of the contributions
collected and less than 10 percent of the benefit payments. We confidently
expect that, as benefit rolls increase, the cost of administration
will decline to less than 5 percent of the benefit payments.
At the present time there are 1,950,000 aged persons, widows, and
orphans receiving monthly benefits. More than 89 million individual
worker accounts have been established. The cost of maintaining these
wage records is less than 12 cents per account per year.
There can no longer be any question as to the effectiveness and
practicability of this Federal old-age and survivors insurance system.
However, the years that have passed have indicated various ways
and means by which it could be improved and also demonstrated that
its benefits could be extended to cover all gainfully employed persons,
including the self-employed.
Liberalization of Benefits
The level of benefits now provided was enacted in 1939. Since 1939
the cost of living has increased by at least 60 to 65 percent. Average
wages of individuals credited under the insurance system have increased
by 55 percent (from $881 in 1939 to $1,370 in 1946). Various studies
have shown that the present benefits were inadequate even before
these increases in cost of living and wage levels.
Among the changes which I recommend for consideration is a modification
of the benefit formula so as to represent a larger proportion of
the wage loss sustained by claimants, particularly those with low
earnings.
I believe that the wage base for both contributions and benefit
computations should be the first $4,800 in taxable earnings in a
year, rather than the first $3,000. Such a change would recognize
the general increase in wage levels and would result in benefits
representing a somewhat larger proportion of the wage loss actually
sustained by families in the middle and upper income brackets.
Certain items of income, such as tips and dismissal wages, that
are not now considered "wages" under the definition in
the act should be included as wages, so that the base for benefits
would represent the worker's actual earnings from employment.
I also believe that certain changes should be made in the provisions
governing minimum and maximum benefit amounts. A reasonable standard
of adequacy would seem to require a minimum benefit of $20 for an
eligible worker rather than the present $10 a month, even though
most workers would have earnings that would qualify them or their
survivors for more than the minimum amount.
At present, the maximum total amount payable to the worker and
his dependents, or to a widow and her young children, is $85 a month,
twice the primary benefit amount, or 80 percent of the average monthly
wage of the insured worker, whichever is least. I believe that the
$85 maximum limit should be raised to $120 and that the second limitation
of twice the primary benefit should be removed. The chief effect
of these changes would be to provide more adequate benefits in the
case of a widow with several children.
It is well established that women retire from gainful employment
at an earlier age than men. Also, wives are ordinarily younger than
their husbands. Of the married men who reach age 65 each year, less
than 20 percent have wives who also have reached age 65. The age
requirement is lower for women than for men in many of the social
insurance programs of foreign countries and also in many of the
retirement systems established in this country by various State
and local governments and private concerns. I therefore recommend
that consideration be given to reducing from 65 years to 60 years
the age at which women may qualify for a retirement benefit or for
any other type of benefit.
The law now provides a small lump sum payment if there are no surviving
dependents entitled to monthly benefits at the time of the worker's
death. I recommend that this small lump sum be paid whether or not
there are surviving dependents entitled to monthly benefits, since
the need for it is as great in either case.
Under the existing law, benefits are suspended for any month in
which the beneficiary earns more than $14.99 in covered employment.
The amount of permissible earnings could well be increased without
fear that beneficiaries will encroach on the job opportunities of
regular, full-time workers. I believe that earnings of $40 a month
should be permitted without suspension of benefits and that when
the retired beneficiary reaches age 70, he should receive his benefits
whether or not he is employed and irrespective of his earnings.
Permanent
Disability Benefits Under Old-Age and Survivors Insurance
Need for disability protection.
The loss of income suffered by a family when the breadwinner
is stricken with a serious and long-lasting disability is
fully as great as in cases of old age or death. Prolonged
incapacity to work, whether due to accident, extended illness,
or chronic disease, is a risk against which most workers and
their families find it difficult to budget on an individual
basis, or to secure protection through existing insurance
or other benefit systems. On any one day, about 1.6 million
persons are kept out of the labor force because of major disabilities
that have lasted 6 months or longer.
Extended disability is a major cause of
destitution because the incidence of total disability is
individually unpredictable, the wage loss suffered is frequently
complete, and added medical expenses may make the burden
of disablement heavier upon the family than that caused
by old age or death. The fact that the incidence of permanent
disability is reasonably predictable in the aggregate--although
not individually--makes it an insurable risk and one which,
like old age and death, can be effectively met through contributory
social insurance.
Administrative feasibility.--The
administrative feasibility of providing cash insurance benefits
in such cases is reflected by the disability benefit provisions
incorporated in the old-age insurance system of every foreign
country. In this country many retirement plans, both public
and private, contain disability provisions. Furthermore,
there has been extensive administrative experience in the
adjudication of disability under the Federal and State workmen's
compensation programs, the veterans' programs, Federal and
State civil-service retirement and disability programs,
and the railroad retirement program. The existing facilities
of the Bureau of Old-Age and Survivors Insurance, including
the wage records and the field organization, would be available
for the administration of disability benefits. Administrative
control of the program would be aided by the regular wage
reports received from employers, if the disabled persons
were still employed.
Scope of "permanent" disability
benefits.--Monthly cash benefits
would be payable to insured workers who are afflicted with
serious disablements that have lasted 6 months or more.
Concept of disability.--Disability
benefits should be payable only if there is a substantial
loss of earning capacity for work in general. They should
be payable only if the worker is found incapable of earning
more than a small amount at any work which he might reasonably
be expected to do.
Eligibility conditions.--To
receive benefits, a disabled worker would have to be insured.
The insurance requirement should be a test of both substantial
and fairly recent covered employment. As in the case of
old-age benefits, disability benefits would not be paid
for any month in which the beneficiary earned more than
the amount permitted under the retirement test. Also, benefits
would be terminated if recovery occurred.
Extent, types, and amounts of benefits.--More
than half of the cases of protracted disability occur at
ages under 55, when the worker has heavy family responsibilities
and has not had an opportunity to build up adequate protection
through savings or insurance. In order for a disability
insurance program to meet the test of social adequacy, benefits
should be paid to persons with dependents and be related
to the number of dependents. The disabled worker should
receive a monthly benefit computed in the same way as the
benefit of an aged retired worker; the wife (if she has
a child entitled to benefits in her care or if she is aged
60 or over) and children of a disabled worker should also
receive benefits. Their benefits should be computed in the
same way as benefits for wives and children of retired workers.
Integration with old-age and survivors
insurance.-- Under the existing
program a period of non-employment due to disability reduces
the benefits for which the worker or his family may subsequently
qualify, and may cause the complete loss of insurance protection.
If disability benefits are added, the worker's insurance
protection would be maintained during a period of disability.
Vocational rehabilitation.--Expenditures
for rehabilitation should be authorized from the trust fund
to rehabilitate the disabled workers vocationally if there
is a promise of success. If the rehabilitation is successful,
the payment of benefits can be discontinued.
Adjustment of duplicating benefits.--Because
benefits should not be in excess of the individual's previous
wages, consideration should be given to provisions for adjusting
duplicate benefits among different disability systems.
|
Benefits for Permanent Total Disability
Disability is among the important causes of insecurity. On an average
day of the year, about 3.5 million persons are suffering from disabilities
which have already lasted 6 months or more. About 1.6 million of
these persons are in the ages between 14 and 65 and, but for their
disability, they would be engaged in productive work. Disability
is one of the major causes of dependency. The extent to which dependency
is due to invalidity is evidenced also by State reports to the Social
Security Administration, which show that one-fourth of the children
granted aid under the assistance program are the children of disabled
fathers. Various State and local studies have found that even larger
proportions of recipients were receiving general relief primarily
because of dependency resulting from the disability of the breadwinner.
The cost of dependency falls largely on the public purse.
These and other studies leave no doubt that a comprehensive program
of social security must protect families and individuals against
loss of earning capacity by reason of disability. It is significant
that every other country in the world which has an old-age retirement
program provides for retirement necessitated by chronic or permanent
disability.
On the basis of extended study and of the actual experience in
the payment of monthly benefits since January 1,1940, I strongly
recommend the inclusion of permanent total disability insurance
in the Federal system.
Extension of Coverage
If the old-age and survivors insurance system is improved in accordance
with the foregoing suggestions, it becomes increasingly desirable
and necessary that the coverage of the system be extended as widely
as possible, since the whole population of this country is subject
to the common hazards in varying degrees.
The present program covers, with certain important exceptions,
employers of one or more employees. Despite these exceptions, social
security account cards have already been issued under this program
to more than 89 million persons, of whom 82 million already have
had some wage credits posted to their accounts because of work in
insured employment. It is apparent from these figures that a large
proportion of the gainfully occupied population already has some
measure of protection against old age and death. However, it is
also apparent that many persons pass back and forth between insured
employment and uninsured employment. In 1946, while only 33 million
individuals were engaged in insured employment at any one time,
more than 49.5 million individuals worked in insured employment
during the course of the year.
Since the amount of the benefit depends to a considerable extent
on the length of time an individual actually worked in insured employment
and the amount of his earnings in such employment, persons who pass
in and out of insured employment get lower benefits than they would
have, on the basis of the same amount of total earnings, if all
their work had been in insured employment. Some of them may never
acquire insured status or may lose it before benefits become payable,
and so may receive no returns at all on their contributions. Persons
who always work in uninsured employment are unable, of course. to
develop any benefit rights whatsoever under the system.
The main groups now excluded from old-age and survivors insurance
and unemployment insurance are agricultural workers, domestic employees,
employees of nonprofit organizations, railroad employees, government
employees (Federal, State, and local), and self-employed persons,
including small businessmen and farmers.
Extension
of Old-Age and Survivors
Insurance to All Gainful Employment
Desirability.--Many
wage earners not now covered under old-age and survivors
insurance do not have any protection against the risks of
old age, death, and disability. Many of those who shift
between employment covered by the program and non-covered
employment do not acquire insured status under the insurance
program, and derive no protection from the contributions
they have made. An extension of coverage to all gainful
employment (including self-employment) would assure the
basic protection of the program to all members of the labor
force, regardless of type of work or changes in jobs.
Agricultural and domestic employees.--Workable
solutions have been developed for the administrative problems
of covering agricultural and domestic employees. Reporting
of wages and the payment of contributions could be accomplished
either by a stamp method or through employer reports. The
problem of evaluating noncash wages, such as meals and lodging,
could largely be met by use of a schedule of presumed values.
It would be advisable to exclude exchange labor and unpaid
family labor.
Employees of nonprofit institutions.--No
administrative problems would be involved in covering nonprofit
employees. If religious organizations desired, clergymen
and members of religious orders might continue to be excluded
from coverage. The legislation might also declare that coverage
of nonprofit employment is not intended to violate the traditional
tax-exempt status of nonprofit organizations.
Federal civilian employees.--An
extension of coverage to civilian employees of the Federal
Government, coupled with appropriate adjustment in the civil-service
retirement system, would be of substantial value to most
workers. Workers who shift between Federal employment and
employment covered under old-age and survivors insurance
would have continuity of coverage, while career employees
of the Federal Government would gain the valuable survivorship
protection provided under old-age and survivors insurance.
The rights of annuitants and employees under the civil service
retirement system would, of course, be preserved, and the
separate administration and financing of that system would
be retained.
Employees of State and local governments.--Constitutional
difficulties in the levy of a tax against State governments
could be avoided by authorizing the Federal Security Administrator
to enter into voluntary agreements with States for the coverage
of their employees. Local governmental units could participate
in the State agreements. Compulsory coverage might be provided
for some groups of proprietary employees.
Railroad workers.--While
the survivor benefits of the railroad retirement program
are coordinated with those of old-age and survivors insurance,
the retirement benefits of the two programs are separate.
If old-age and survivors insurance were extended to railroad
employment, workers who shift between employment covered
by old-age and survivors insurance and railroad employment
would have continuity of retirement coverage. As in the
case of governmental employees, no loss of present rights
need be involved.
Members of the armed forces.--An
extension of coverage to future service in the armed forces
would assure continuity of coverage for individuals who
spend only part of their working lifetime in military service.
The survivorship protection provided career servicemen would
be especially valuable to them after they leave military
service. The special survivorship protection under old-age
and survivors insurance now provided World War II veterans
would seem adequate if coverage were generally extended
in the fairly near future and if the provisions for the
average monthly wage and insured status were modified to
remove handicaps because of prior periods of non-coverage.
Self-employed persons.--A
separate statement describes a method for providing old-age
and survivors insurance protection for the self-employed.
|
Agricultural Labor and Domestic Workers
About 3.5 million agricultural workers and more than 2.5 million
domestic workers are excluded from old-age and survivors insurance
during the course of a year. These two are the largest and most
necessitous groups of workers now unprotected. A principal reason
for their exclusion was the administrative difficulty involved,
because of the large number of small employers concerned and the
fact that most of these employers do not keep books and would find
it difficult to make reports. On the basis of studies made during
the past 10 years, I believe that it is administratively feasible
to extend coverage to these groups through the use of a stamp-book
system. Under such a system each employee would receive a stamp
book in which stamps would be placed by his employer to evidence
contributions made by the employer and the worker. In rural areas
the employer could purchase these stamps from the mail carrier,
and in urban areas they could be purchased at post offices. A stamp
plan could be used also by smaller industrial and commercial establishments
that found it more convenient.
Employment by Nonprofit Organizations
I also recommend the inclusion of services performed for religious,
educational, and similar nonprofit organizations. No administrative
difficulties would be involved in extending coverage to these groups.
Coverage of
the Self-Employed Under Old-Age, Survivors, and Permanent
Disability Insurance
Present status.--The
majority of self-employed persons are just as much in need
of old-age and survivors insurance protection as are wage
earners. A number of social insurance programs in foreign
countries now cover the self-employed. Under our present
program, many self-employed persons now pay contributions
on behalf of their employees who are covered and so are
very conscious of their own exclusion. The owner of a business
large enough to be incorporated acquires protection as an
officer of the corporation, but the owner of a small unincorporated
concern has no similar advantage. Moreover, many self-employed
persons work at times as wage earners but fail to build
up and maintain an insured status because their income from
self-employment is not credited toward such status. Experience
gained in the administration of the present law and in the
income-tax law has made it possible to develop adequate
methods of meeting the problems involved in coverage of
the self-employed.
Reporting.--Contributions
and benefits would be based on income from self-employed
activity. For both the self-employed person and the Government,
the simplest way of reporting such income is as part of
the income-tax return. The integrated returns would be for
a calendar year and would be due on March 15 of the following
year, as at present. Social security reporting would be
required only from persons with annual gross income of $500
or more (exclusive of income in kind for home use), and
contributions would be required only from those whose "net
income from self-employment," as defined below, is
$200 or more. Consistent with the provisions for employees,
the maximum annual net income from self-employment on which
contributions would be payable would be $4.800, less the
amount of any wages received during that year from other
covered employment.
Contribution rate.--To
avoid undue burdens on those with low incomes, the contribution
rate on income from self-employment should be only the employee
rate on the first $500 of annual net income from self-employment
and the combined employer-employee rate on all such income
in excess of $500 up to the maximum.
Definition of net income from self-employment.--Net
income from self-employment could be determined on the basis
of two figures already included in the income-tax return,
namely, income from business or profession (schedule C),
and income from partnerships (schedule E).
Retirement test.--It
would be presumed that, if the individual is between the
ages of 65 and 70 and his annual income from self-employment
is less than $480, the individual is retired. If his income
exceeds this amount, his benefits would be withheld only
if there has been substantial activity directed toward the
production of such income. In such case, 1 month's benefit
would be withheld for each $40 of income in excess of $480,
with a maximum of 12 months' benefits withheld on the basis
OI any 1 year's income from self-employment. If the individual's
income is not the result of substantial activity on his
part, he would continue to receive his benefits without
regard to the amount of his income from self-employment.
Beginning at age 70, irrespective of whether the individual
was employed or the amount of his income or earnings, benefits
could be paid. |
Public Employment
I believe that it would be highly desirable to extend the basic
protection of the social insurance system to all
public employees--Federal, State, and local.
Special retirement systems now cover approximately three-fifths
of all public employees. It would be possible to revise these special
retirement systems so that their benefits would be superimposed
on those payable under the basic social insurance system. Such a
revision would of course have to be made in such a way as to increase,
not reduce, the total protection afforded government employees.
In the case of Federal employees, if agreement cannot be reached
as to the necessary adjustments in the existing Federal retirement
systems, I recommend that at least the Federal employees who are
not protected by an existing retirement system be covered under
the basic old-age insurance system.
In the case of State and local employees, I see no major administrative
difficulties in permitting the governmental units to be covered
voluntarily, provided there are proper safeguards to protect the
social insurance system against adverse selection.
Railroad Employment
At present, employment within the railroad industry and that outside
the industry are covered by two different social insurance systems.
These are coordinated on only a limited basis. Under the 1946 amendments
to the Railroad Retirement Act, eligibility for and the amount of
the benefits payable to survivors are based on combined earnings
under both systems. No coordination is provided for retirement benefits,
however. As a result, workers who move between railroad employment
and employment covered by old-age and survivors insurance may lose
all retirement protection under old-age and survivors insurance
and, because of the time spent in employments covered by the latter
program, may also suffer a reduction in the benefits payable under
the railroad system. On the other hand, depending on when the shift
in employment took place, dual benefits may be paid upon retirement.
The only completely adequate remedy is the extension of old-age
and survivors insurance to railroad employment. As in the case of
the coordination of old-age and survivors insurance and systems
covering government workers, those covered by the railroad act need
not suffer any loss or diminution of benefit rights under such coordination.
The Self-Employed
I recommend that the protection of the system be extended to self-employed
persons, such as small businessmen and farm operators, whose need
for such protection is as great as that of persons in the employ
of others. The self-employed could report their earnings from self-employment
as a part of their income-tax return. There is, of course, the special
problem of determining how much income is due to self-employment
as distinguished from return on investment. Since, however, a reasonable
approximation of this can be derived from items already in the income-tax
return, there are no insuperable administrative problems to prevent
extension of coverage to the self -employed.
Disadvantages Suffered by Newly Insured
Groups
If these recommendations relating to broad extension of coverage
of old-age and survivors insurance are enacted into law, it will
be necessary to adjust the eligibility requirements and the method
for determining the average monthly wage upon which benefits are
based so that the newly insured groups will not be unduly disadvantaged
because of their late entrance into the system. As the law now stands,
a person who has not been working in insured employment for roughly
one-half the time since the law went into effect on January 1, 1937
(or one-half the time since the date he became 21 years of age,
if that date is later), is not fully insured and, therefore, not
entitled to retirement benefit. It would, therefore, take a farmer
who had never worked in insured employment previously, 10 years
before he could qualify for an old-age benefit. Even at the end
of 10 years, the average monthly wage would be one-half of the average
wage he had earned during that time because his wages, for benefit
computation, would have to be averaged over the whole period since
January 1,1937, namely, 20 years. I am prepared to submit various
alternative proposals which would help correct both these types
of inequities.
Protection of Veterans
If old-age and survivors insurance were extended to include all
Federal employment, both civilian and that in military establishments.
soldiers and civilian employees would have the basic protection
of this system at all times. It would also be possible to provide
additional special protection on a consistent and certain basis.
Any other approach to the problem of providing protection to soldiers
and civilian employees of the Federal Government inevitably results
in some gaps, overlaps, anomalies, and administrative difficulties.
With respect to veterans of World War II, the lapse of time since
they entered military service and the fact that many millions have
already left military service create problems which make it impossible
to arrive at an ideal solution.
In 1946, Congress provided what was in effect free term-insurance
protection to veterans who die during the 3 years immediately following
their separation from active military or naval service. This period
of time enables veterans to acquire at least currently insured status
if they work in insured employment for as much as one-half of that
period. For those veterans who do not have insured employment, however,
this insurance protection ceases upon the expiration of the 3-year
period. Even veterans who do have insured employment suffer some
reduction in their benefits because military or naval service is
not insured employment. Thus their average wage, on which benefits
are based, is less, and they do not receive the 1-percent increment
in the benefit amount that is provided for each year a person earns
$200 or more in covered employment.
Financing
Old-Age, Survivors, and Permanent Disability Insurance
Strengthening the actuarial basis of the
program.-- The recommendations
for changes in coverage should strengthen the actuarial basis
of the program, both in the immediate future and in the long
run. Income from contributions would be increased while at
the same time the relative cost of insurance benefits paid
to the group of individuals who move between uninsured and
insured employments would be reduced. Benefit disbursements
would be greater, particularly in the early years, so that
the relative cost of all benefits in the early years would
represent a higher proportion of ultimate disbursements under
the expanded plan than at present. Consequently, since the
slope of the benefit curve would be less steep, the expanded
program would be a safer and sounder plan actuarially and
financially and would also substantially increase social insurance
protection.
Long-run financial plans essential.--A
long-range plan should be developed to assure ample funds
to finance benefit disbursements not only in the years Just
ahead but in the more distant future, without necessitating
abrupt changes in premium rates. The contribution rates
in the present law are as follows: 1 percent each for employers
and employees during 1947, 1948, and 1949; 12/2 percent
in 1950 and 1951; and 2 percent each for 1952 and thereafter.
These contribution rates will probably provide enough revenue
to cover disbursements under the expanded program for 10
years or more.
Division of costs.--With
practically complete coverage of the gainfully employed
and their dependents, a Government contribution toward financing
the program becomes equitable and appropriate. Such a contribution
would be offset by the reduced public costs for public aid
if coverage is extended and permanent disability benefits
are included. Distribution of the ultimate cost of these
benefits among employers, employees, and the Government
should be governed by the degree to which coverage is extended
and the method of financing other insurance benefits.
Cost of the present program.--The
actuarial estimate of the original 1935 law indicated that
the "level premium cost" of the benefits (the
average contribution rate required to finance the system
into perpetuity discounted at interest) would be slightly
in excess of 5 percent of pay roll. Subsequent studies based
on "probable maximum cost" assumptions showed
a level premium cost of 7 percent of pay roll.
When the program was revised in 1939, bringing
in survivors insurance and providing higher benefit payments
in the early years, increased costs were counterbalanced
by a reduction in average benefit payments in later years
and a reduction in lump-sum death payments. The level premium
cost of the 1939 law, therefore, was about the same as for
the 1935 law. Actuarial estimates made at the time of the
1939 law indicatedthat the level premium cost of the plan
varied from 4 to 7 percent of pay roll.
The level premium cost of the present law,
based on actuarial estimates published in 1947, is estimated
to range between 3 and 7 percent of pay roll, or lower than
previous estimates. The war and its aftermath, as well as
the recovery from the depression of the early thirties,
have been accompanied by important changes in many of the
factors which determine the relationship between benefits
and contributions. Among the more important factors leading
to reduction in costs, measured as a percent of pay roll,
are the increase in level of earnings and expanded employment
in covered occupations.
These revised figures are predicated on
the maintenance of existing wage levels over the next 40
or 50 years. However, our history indicates that the level
of income and earnings in the future is likely to be above
that now prevailing. Increases in the past have been uneven
but on the whole persistent over the decades. If the cost
estimates of the present benefit provisions were amended
to take account of a long-term tendency for wages to increase,
the range of the level premium cost might be lowered from
3-7 percent to 2 1/2-6 percent.
Cost of an expanded program.--Using
as illustration the 1947 actuarial estimates based on present
employment and wage levels, the level premium cost of a
revised and expanded program would total 5 1/2 to 8 1/2
percent of pay roll, or not much more than the present system
was estimated to cost in 1939. The ultimate annual cost
of the expanded program based upon the above assumptions
is estimated to range from 7 percent of pay roll to 12 percent.
This is lower than the range for the 1935 law (9.4-13.4
percent) and not much different from the range for the existing
law as estimated in 1939 (7-10 1/2 percent). However, it
is of course higher than the estimates of the cost of the
1939 benefits measured as a percentage of present-day pay
rolls (4-8 percent). The explanation of the paradox of being
able to grant more liberal benefits, both as to amount and
type, at apparently the same cost in terms of pay roll is
as follows. First, the change in the benefit formula, in
general, parallels the changes in wages over the past 8
years, so that benefits under the new formula, on the average,
will bear the same relation to wages as benefits under the
present formula bore to the lower average wages prevailing
before the war; thus, the change in the benefit formula
can be said to be not a real liberalization but only a maintenance
of the same level of relative adequacy as when the program
was enacted. Second, the cost of the additional types of
benefits and benefit liberalizations will be borne largely
by the savings due to extending coverage. |
Costs
It was estimated in 1939, when the law was amended, that the most
probable range in the average long-run cost of the benefits to be
provided would be 4 to 7 percent of covered pay rolls. Of course,
actuarial estimates must be presented within a wide range, since
nobody can predict accurately future economic conditions, mortality
rates, population growth, retirement rates, and many other such
factors on which actuarial estimates must be based.
One fact is clear, however. The present old-age and survivors insurance
system provides for a basic primary benefit of 40 percent of the
first $50 in average monthly wages and 10 percent of the next $200.
As an individual's wages increase, he always receives a larger benefit,
but this benefit also represents a smaller proportion of his wages.
For instance, the worker who has average wages
of $100 a month receives a basic benefit of $25 a month or 25 percent
of his average wages; the $250-a-month individual receives $40 a
month, which represents 16 percent. Thus, as the average wage of
insured persons increases, the relative costs of the present benefits
measured as a percentage of pay roll will decrease. At the present
time the average wage of persons contributing to the insurance system
is substantially higher than the average wages assumed in making
the actuarial cost estimates in 1939. This single factor has resulted
in a great reduction in the relative costs of the insurance plan.
In calculating the costs of the proposals I have presented, it must
be borne in mind that extension of coverage would result in including
all the wages of many individuals who are already under the insurance
system part of the time. This would increase their taxable wages
and reduce the relative cost of the insurance plan, as already explained.
Therefore, while it might be necessary eventually to increase somewhat
the income of the system to meet the cost of the various additional
benefits recommended, the schedule of rates payable by employers
and employees, as reduced by Congress this year, would be sufficient
to cover current costs of an expanded program for the next 10 years
or more. I believe that, when the present schedule of rates fails
to cover current disbursements, the Government should begin to contribute.
|