Arthur J. Altmeyer

A Statement on the Automatic Increase in the Tax Rate Under
the Federal Old-Age and Survivors Insurance System

A. J. Altmeyer, Chairman, Social Security Board
Before the House Ways and Means Committee
November 27, 1944

The question which I understand the Committee wishes to discuss today is whether Congress should act to prevent the automatic increase in the present 1-percent-contribution rate payable by employers and employees respectively under the Federal old-age and survivors insurance system. As you know, if Congress does not act this rate will increase automatically to 2 percent each on January 1, 1945, in accordance with the schedule provided in the Social Security Act of 1935 and retained in the 1939 amendments to that Act. If Congress acts to retain the rate at 1 percent it will be the fourth time Congress has delayed the automatic increase provided in the law.

As you know from my previous appearances before this Committee, the Social Security Board believed that it was necessary from the standpoint of sound financing of a contributory social insurance system that the automatic increases be permitted to go into effect. The Social Security Board believes that the longer these necessary increases in the contribution rate are deferred the greater is the impairment of the financial soundness of this contributory social insurance system and the greater the impairment of the whole idea of contributory social insurance.

I believe that I am safe in saying that the people of this country, that the Congress of the United States, and that the members of this Committee favor a system of contributory social insurance for providing protection against the inevitable economic hazards that beset the workers of this country, rather than a Government dole. A sound contributory social insurance system has four main characteristics. First, it provides for benefits on a specific and predetermined basis. Second, it provides these benefits as a matter of right without a means or a needs test. Third, it finances these benefits largely out of contributions made by or on behalf of the beneficiaries. Fourth, it provides a long-range systematic method of financing rather than a year-to-year unsystematic method.

There is no question that the benefits promised under the present Federal old-age and survivors insurance system will cost far more than the 2 percent of payrolls now being collected. As I pointed out in my testimony of last year, none of the actuarial estimates which have been made on the basis of present economic conditions and other factors now clearly discernible result in a level annual cost of this insurance system of less than 4 percent of payroll. Indeed, under certain assumptions the level annual cost has been estimated to be as much as 7 percent of payrolls. On the basis of a 4-percent-level annual cost it may be said that the reserve fund of this system already has a deficit of $6,600 million. On the basis of 7-percent-level annual cost it may be said that the reserve fund already has a deficit of about $16,500 million.

Another indication of the magnitude of the liability which the Federal Government has assumed can be obtained from the fact that the present value of the benefits payable to those now eligible amounts to approximately four and one-half billion dollars. Let me emphasize that this figure represents only the liabilities which the Federal Government has assumed for those persons already eligible for benefits. Since the reserve fund as of January 1, 1945, will be only six billion dollars, this leaves only a billion and a half dollars in the reserve fund to meet the liabilities which the Federal Government has assumed for the payment of benefits to the 69 million persons who have accumulated wage credits but have not yet died or reached the retirement age of 65.

I hope that the foregoing figures will help to clear up the misunderstanding that some people have that because we are collecting as much in contributions at the present rate of 1 percent each on employers and employees as it was estimated in 1939 we would collect at 2 percent each it is not necessary to permit the automatic increase in the rate to go into effect. I wish to emphasize that for every dollar of contributions which is collected the Federal Government assumes a liability for the payment of benefits. It is true that we are collecting at the present rate of 1 percent as much as we estimated in 1939 we would collect at 2 percent. However, this is because more people have become insured and larger wage credits, upon which benefits are based, have been accumulated by the workers insured under this system. Therefore, it is quite fallacious to assume that because we are collecting as much at the present 1-percent rate as we estimated in 1939 we would collect at the 2-percent rate it is not necessary to permit the increased rate to go into effect. A private insurance company that wrote twice as much business and, therefore, had twice as much premium income as it had previously estimated does not cut its premium rates in half, because it realizes that it has also assumed an increased liability. In my judgment, it is likewise unsound for the Federal Government to do so.

I do not wish to take the time of this Committee by repeating all of the facts and arguments I have presented on previous occasions. However, it may be helpful to the Committee if I list the following points upon which I believe all experts are in agreement:

(1) In the early years of the operation of the old-age and survivors insurance system, the actuarial value of the benefits paid are many times the actuarial value of the individual worker's contributions. (See pages 15-16 of the Report of the Committee on Finance covering the Social Security Act amendments of 1939.)

(2) Even a contribution rate of 2 percent each by employers and employees is probably inadequate to finance the cost of benefits promised.

(3) It is a mathematical certainty that the longer the present pay-roll tax rate remains in effect, the higher the future pay-roll tax must be if the insurance system continues to be financed wholly by payroll taxes. Therefore, the indefinite continuation of the present contribution rate (assuming the system is self-sustaining, and the costs are shared equally by the employees and employers) will eventually necessitate raising the employees' contribution rate later to a point where future beneficiaries will be obliged to pay more for their benefits than if they obtained this insurance from a private insurance company.

(4) Retaining the present rate creates a moral obligation on

the part of Congress to provide a Government subsidy later on to the extent necessary to avoid levying inequitably high pay-roll tax rates in the future. This obligation is recognized in the recent Murray amendment incorporated in section 201 (a) of the Social Security Act reading as follows: "There is also authorized to be appropriated to the trust fund such additional sums as may be required to finance the benefits and payments provided under this title."

(5) The Government obligations held by the Old-Age and Survivors Insurance Trust Fund would otherwise be in the hands of banks, insurance companies, and other private investors--assuming that the receipt of pay-roll contributions so invested have not caused the Congress to make larger appropriations than it would otherwise have done.

I think it is concerning the implications of this last point that there has not been a complete meeting of minds. Thus, the following statement is contained in a report of the Senate Finance Committee concerning the tax freeze last year: "It makes no difference to the taxpayer whether this $1,500,000,000 is appropriated to pay the interest on $50,000,000,000 of Government bonds in a reserve fund or whether it is a direct appropriation to the support of the old-age and survivors system."

However, I feel that that statement fails to recognize that with no reserve funds the taxpayers would be required to pay a $1.5 billion subsidy to the insurance system and also be required to pay $1.5 billion interest to private investors on securities held by them instead of by the insurance trust fund. With a $50 billion reserve fund, the taxpayers would pay only $1.5 billion into the insurance trust fund in the form of interest on the securities held by it. Therefore, without a reserve fund the taxpayers' burden would be exactly double.

If my analysis is correct, I believe that this Committee is confronted with a question of public policy rather than a technical question upon which experts might differ. This question of policy may be summarized as follows:

(1) The Social Security Board believes that there is greater assurance that the benefits promised will be paid if the future annual excess of benefit payments over pay-roll tax receipts is met by a Congressional appropriation to pay the interest on the insurance trust fund rather than in the form of an outright subsidy out of general revenues.

(2) Those who disagree believe that the larger the accumulated trust fund, the greater is the temptation to extravagance on the part of Congress, if not for general Government purposes, at least for the payment of higher benefits than they would consider warranted. The Board believes that this argument is unsound for two reasons: First, because while this fund represents an asset of the insurance system it represents a liability of the Government just as truly as any other outstanding Government obligations. Second, because the Board believes that the present contribution rate, so far below the value of the protection provided, creates a temptation to increase the benefits without giving proper consideration to the true costs involved. Parenthetically, I should also like to point out that the continuation of the present 1-percent rate not only tends to depreciate the true costs involved, but also depreciates in the minds of employees, employers and the public generally the great value of the protection afforded.

In my testimony before this Committee last January, I made the following statement: "In the history of social insurance throughout the world the major difficulty of social insurance systems has been the lack of adequate financing of old-age retirement benefits. It is always easiest to delay levying the necessary insurance contributions, thus perpetuating and strengthening the belief that the insurance benefits are meager and the costs of the insurance system are low. Inevitably, when the time comes to increase the taxes, many reasons can always be advanced as to why the imposition of the additional taxes is unwise or impossible. In this country we are still in a position to avoid these mistakes by getting clearly established now that if our people want social insurance they must be willing to pay for it. The time to obtain the necessary contributions is when people are able to pay for the insurance and are willing to pay for it because they can be shown that they are getting their money's worth. If we should let a situation develop whereby it eventually becomes necessary to charge future beneficiaries rates in excess of the actuarial cost of the protection afforded them, we would be guilty of gross inequity and gross financial mismanagement, bound to imperil our social insurance system."

In closing I should like to emphasize that all of the reasons that the Board has advanced for permitting the schedule of rates in the law to become effective deal with the proper financing of a contributory social insurance system. The Board has not undertaken to make any argument from the standpoint of general Government financing or from the standpoint of combating inflationary threats. However, the Board wishes to point out that most of those who opposed the automatic increase in the contribution rate in January 1940 did so largely for reasons not connected with the financing of a contributory social insurance system and emphasized the deflationary effect of the increase. Those arguments advanced in 1940 not only are inapplicable under present conditions but logically would support an increase in the contribution rate now. At all events, it appears probable that the workers of this country and business generally can absorb the 1-percent increase as readily or more readily at this time than they could a year hence or at any other time in the near future.