1938 Advisory Council

The 1938 Advisory Council was jointly chartered by the Social Security Board and the Senate Finance Committee. Some members of the Senate Finance Committee (principally, Senator Arthur Vandenberg (R-MI)) wanted an opportunity to revisit key features of the 1935 Act (particularly the issue of reserve funding, which Vandenberg opposed) and hoped to use the Advisory Council to achieve this aim.

In its Report, the Advisory Council recommended a fundamental shift in the Social Security program, away from a defined benefit retirement plan for individual workers, to a family benefit plan, with dependents and survivors benefits. The Council's Report went to the Social Security Board (SSB) and to a special Select Committee of the Senate Finance Committee. This was the starting event of a legislative process which ultimately yielded the 1939 Amendments.

The Council's Report went to the Social Security Board (SSB), which reviewed it and issued its own report. The Board's Report differed in some respects from the Council's report. The Board's report concentrated on a host of administrative issues which the Council did not consider. For example, the SSB requested Congress to give it authority to issue subpeonas and conduct investigations, and to make all Board decisions final, i.e., to eliminate any appeals process in Social Security cases. These two ideas, which were not accepted by Congress, certainly would have altered the administrative history of the Social Security program.

On the two main policy changes, both Reports were in agreement. Both proposed adding dependents and survivors benefits to the basic Social Security retirement program; and both proposed advancing the date for monthly benefits to begin from 1942 to 1940. And the Congress accepted both ideas. Both the Council and the Board also recognized the desirability of a disability benefits program, but neither was prepared to recommend it in 1938.

Since the Board's responsibilities extended to the whole range of programs under the 1935 Act, their Report covered in detail issues related to unemployment, health care and public assistance, as well as the old-age insurance program.

The 1938 Council was especially concerned about issues of financing, and much of its report is taken up with an extended discussion of the financial underpinnings of Social Security. Especially noteworthy in the Council's Report is the special Appendix added to address Senator Vandenberg's concerns about reserve funding. The issue is the same one that appears in debates of the present day. People have always had trouble reconciling the idea of investing the Social Security surplus in government securities. This was the core of Vandenberg's opposition to reserve funding. The Council did not, as Vandenberg hoped, advocate any departure from the reserve funding, indeed it strengthened this approach by creating formal Trust Funds to hold the Social Security reserves and, in the Appendix, basically rejected Vandenberg's criticisms of the investment of Social Security surpluses in government securities.

The Advisory Council of 1938 was important for two key reasons. First, it firmly established the precedent of periodic outside advisory councils to provide guidance to Social Security's policymakers. Secondly, it recommended a fundamental shift in the Social Security program, away from a retirement plan for individual workers, to a family benefit plan. Much of the agenda of the 1938 Advisory Council and the Social Security Board's Report was enacted into law in the 1939 Social Security Amendments.

Report of the 1938 Advisory Council on Social Security

The Advisory Council of 1938 was important for several reasons. First, it firmly established the precedent of periodic outside advisory councils to provide guidance to Social Security's policymakers. Secondly, it recommended a fundamental shift in the Social Security program, away from a defined benefit retirement plan for individual workers, to a family benefit plan, with dependents and survivors benefits. And the recommendations of the Council were largely enacted into law in the 1939 Amendments.

The following is the text of the Report issued by the Council. This report went to the Social Security Board and to the Senate Finance Committee. The Social Security Board then issued its own Report, based on the Council's work, and this report became the Administration's legislative proposal to the Congress.

FOREWORD

The Advisory Council on Social Security was appointed by the Senate Special Committee on Social Security and the Social Security Board in May, 1937. The following announcement, which was issued at that time, explains the purposes for which the Council was appointed and lists its members:

"At a hearing before the Committee on Finance of the United States Senate on February 22, 1937, it was agreed that the Chairman of the Committee on Finance would appoint a special committee to cooperate with the Social Security Board to study the advisability of amending Titles II and VIII of the Social Security Act. The Chairman of the Committee on Finance has appointed such a special committee consisting of Senator Pat Harrison, Senator Harry Flood Byrd, and Senator Arthur H. Vandenberg. It was agreed that this special committee in cooperation with the Social Security Board would appoint an Advisory Council on Social Security to assist in studying the advisability of amending Titles II and VIII of the Social Security Act.

"It is desired that the Advisory Council on Social Security cooperate with the Special Committee of the Committee on Finance of the United States Senate and with the Social Security Board in considering the following matters

"(1) The advisability of commencing payment of monthly benefits under Title II sooner than January I, 1942;

"(2) The advisability of increasing the monthly benefits payable under Title II for those retiring in the early years;

"(3) The advisability of extending the benefits in Title II to persons who become incapacitated prior to age 65;

"(4) The advisability of extending the benefits of Title II to survivors of individuals entitled to such benefits;

"(5) The advisability of increasing the taxes less rapidly under Title VIII;

"(6) The advisability of extending the benefits under Title II to include groups now excluded;

"(7) The size, character and disposition of reserves;

"(8) Any other questions concerning the Social Security Act about which either the Special Senate Committee or the Social Security Board may desire the advice of the Advisory Council.

"It is understood that the Social Security Board will make all necessary studies and furnish all necessary technical assistance in connection with the consideration of the foregoing subjects. It is further understood that these subjects will be considered jointly by the Advisory Council, the Special Senate Committee, and the Social Security Board.

"The Special Committee on Social Security of the Committee on Finance of the United States Senate and the Social Security Board join in appointing the following persons to serve as members of an Advisory Council on Social Security:{1}

Representing Employees

G. M. BUGNIAZET, Secretary, International Brotherhood of Electrical Workers of America, and President, Union Cooperative Insurance Association, Washington, D.C. HARVEY FREMMING, President, Oil Field, Gas Well and Refinery Workers International Union, Fort Worth, Texas.
JOHN P. FREY, President, Metal Trades Department of the American Federation of Labor, Washington, D.C.
SIDNEY HILLMAN,{2} President, Amalgamated Clothing Workers of America, New York, N.Y.
PHILIP MURRAY, Vice President, United Mine Workers of America, Washington, D.C.
MATTHEW WOLL, Vice President, International Photo Engravers' Union of North America, and President Union Labor Life Insurance Company, New York, N.Y.


Representing Employers

MARION B. FOLSOM, Treasurer, Eastman Kodak Company, Rochester, New York.
WALTER D. FULLER, President, Curtis Publishing Company, Philadelphia, Pennsylvania.
JAY IGLAUER, Vice President and Treasurer, Halle Brothers Company, Cleveland, Ohio.
M. ALBERT LINTON, President, Provident Mutual Life Insurance Company, Philadelphia, Pennsylvania
E. R. STETTINIUS, JR., Chairman of the Board, United States Steel Corporation, New York, N.Y.
GERARD SWOPE, President, General Electric Company.



Representing the Public

J. DOUGLAS BROWN, Princeton University, Princeton, New Jersey.
HENRY BRUERE, President, The Bowery Savings Bank, New York, N.Y.
PAUL H. DOUGLAS, University of Chicago, Chicago, III.
WILLIAM HABER, University of Michigan, Ann Arbor, Michigan.
ALVIN H. HANSEN, Harvard University, Cambridge, Massachusetts
LUCY R. MASON {3} General Secretary, National Consumers' League, New York , N.Y.
THERESA McMAHON, University of Washington, Seattle, Washington.
GERALD MORGAN, Hyde Park, New York.
A. H. MOWBRAY, University of California, Berkeley, California.
T. L. NORTON, University of Buffalo, Buffalo, New York.
GEORGE W. STOCKING, University of Texas, Austin, Texas.
ELIZABETH WISNER, Past-President of the Association of Schools of Social Work, New Orleans, Louisiana.
EDWIN E. WITTE, University of Wisconsin, Madison, Wisconsin."
{1} Where the connections or positions of the members of the Council have changed since their appointment, the present position is indicated.

{2} Lee Pressman, General Counsel, Congress of Industrial Organizations, Washington, D.C., served as alternate for Mr. Hillman.

{3} Resigned. Miss Josephine Roche, The Rocky Mountain Fuel Company, Denver, Colorado, was appointed to fill the vacancy.

The Council held its first meeting in Washington on November 5th and 6th, 1937. Other meetings have been held in December, 193,7; and February, April, October and December, 1938. To provide for the continuous study of the problems before the Council and to plan the agenda of the full sessions of the Council, an Interim Committee of the Council was appointed. This Committee, including two representatives of industry, two representatives of labor, and three representatives of the public, has held frequent meetings during the past year and has been of great assistance to the Council in its work. At the same time, the individual members of the Council have continued their study of the questions before the Council through the use of a large number of documents and reports prepared by the Social Security Board and the Interim Committee. Discussions at meetings have been supplemented by a large volume of correspondence among the members of the Council and between them and the Social Security Board.

The Social Security Board has been most generous in assigning a large number of its research and administrative technicians for protracted periods to the preparation of material requested from time to time by the Council. At the meetings both of the Council and of the Interim Committee, the principal officials of the Board have afforded their help in the study of the technical aspects of the problems before the Council. At the invitation of the Council, experts from the Treasury Department and the Post Office Department have been present when subjects affecting these Departments have been considered.

In addition to the assistance afforded by the Social Security Board, the Council has received valuable suggestions from the members of the Senate Special Committee. It has also studied the proposals concerning old-age security advanced by a large number of bodies representing industry, labor, professional, social welfare and general citizen groups. The recommendations developed by committees of experts and by individual students of social insurance have been carefully analyzed and examined. To the extent time has permitted, the Council has invited a number of outstanding experts on various aspects of the problem of old age security to present their views orally.

In accordance with the terms of its appointment, the Council has concentrated its attention on problems connected with the old-age insurance program established by Titles II and VIII of the Social Security Act and the means by which the program there established might be improved or extended. While keenly interested in the other phases of social security affected by the Social Security Act as a whole, the Council considered its specific task to be concerned with these two titles of the law, including their relation to the old-age assistance program provided in Title I.

From time to time in the course of its deliberations, the Council has submitted to the Senate Special Committee and the Social Security Board interim recommendations or statements on subjects upon which immediate comment seemed desirable. In December, 1937, the Council unanimously approved proposals developed by the Social Security Board for the amendment of Titles II and VIII in regard to coverage. The amendments then approved are outlined in the body of this report. On April 29, 1938, the Council made further recommendations as to coverage, which are likewise repeated herein, and also approved a statement concerning the financing of the old-age insurance system which will be found in the appendix of this report.

The recommendations which follow, while stated in principle, have been developed through intensive study of the practical problems involved in their application. In the course of the deliberations, the Council has had before it a series of carefully developed proposals, accompanying financial and actuarial studies, and administrative provisions in outline form. Each proposal, applying the principles under discussion, has been examined in order to test the principle involved and its practicability. The Council in presenting its recommendations has confined itself to statements of principle supplemented by brief summaries of the reasons for each conclusion.

SUMMARY OF RECOMMENDATIONS

A. Recommendations on benefits

I. The average old-age benefits payable in the early years under Title II should be increased.

II. The eventual annual cost of the insurance benefits now recommended, in relation to covered payroll and from whatever source financed, should not be increased beyond the eventual annual disbursements under the 1935 Act.

III. The enhancement of the early old-age benefits under the system should be partly attained by the method of paying in the care of a married annuitant a supplementary allowance on behalf of an aged wife equivalent to fifty per cent of the husband's own benefit; provided, that should a wife after attaining age 65 be otherwise eligible to a benefit in her own right which is larger in amount than the wife's allowance payable to her husband on her behalf, the benefit payable to her in her own right will be substituted for the wife's allowance.

IV. The minimum age of a wife for eligibility under the provision for wives' supplementary allowances should be 65 years; provided, that marital status had existed prior to the husband's attainment of age 60.

V. The widow of an insured worker, following her attainment of age 55, should receive an annuity bearing a reasonable relationship to the worker's annuity; provided, that marital status had existed prior to the husband's attainment of age 60 and one year preceding the death of the husband.

VI. A dependent child of a currently insured individual upon the latter's death prior to age 65 should receive an orphan's benefit, and a widow of a currently insured individual, provided she has in her care one or more dependent children of the deceased husband, should receive a widow's benefit.

VII. The provision of benefits to an insured person who becomes permanently and totally disabled and to his dependents is socially desirable. On this point the Council is in unanimous agreement. There is difference of opinion, however, as to the timing of the introduction of these benefits. Some members of the Council favor the immediate inauguration of such benefits. Other members believe that on account of additional costs and administrative difficulties, the problem should receive further study.

VIII. In order to compensate in part for the additional cost of the additional benefits herein recommended, the benefits payable to individuals as single annuitants after the plan has been in operation a number of years should be reduced below those now incorporated in Title II. If the national income should increase in future years, these reductions may not be necessary.

IX. The death benefit payable on account of coverage under the system should be strictly limited in amount and payable on the death of any eligible individual.

X. The payment of old-age benefits should be begun on January 1, 1940.

B. Recommendations on coverage

I. The employees of private non-profit religious, charitable, and educational institutions now excluded from coverage under Titles II and VIII should immediately be brought into coverage under the same provisions of these Titles as affect other covered groups.

II. The coverage of farm employees and domestic employees under Titles II and VIII is socially desirable and should take effect, if administratively, possible, by January 1, 1940.

III. The old-age insurance program should be extended as soon as feasible to include additional groups not included in the previous recommendations of the Council and studies should be made of the administrative, legal, and financial problems involved in the coverage of self-employed persons and governmental employees.

C. Recommendations on finance

I. Since the nation as a whole, independent of the beneficiaries of the system, will derive a benefit from tho old-age security program, it is appropriate that there be Federal financial participation in the old age insurance system by means of revenues derived from sources other than payroll taxes.

II. The principle of distributing the eventual cost of the old-age insurance system by means of approximately equal contributions by employers, employees, and the government is sound and should be definitely set forth in the law when tax provisions are amended.

III. The introduction of a definite program of Federal financial participation in the system will affect the consideration of the future rates of taxes on employers and employees and their relation to future benefit payments.

IV. The financial program of the system should embody provision for a reasonable contingency fund to insure the ready payment of benefits at all times and to avoid abrupt changes in tax and contribution rates.

V. The planning of the old-age insurance program must take full account of the fact that, while disbursements for benefits are relatively small in the early years of the program, far larger total disbursements are inevitable in the future. No benefits should be promised or implied which cannot be safely financed not only in the early years of the program but when workers now young will be old.

VI. Sound presentation of the government's financial position requires full recognition of the obligations implied in the entire old age security program and treasury reports should annually estimate the load of future benefits and the probable product of the associated tax program.

VII. The receipt of the taxes levied in Title VIII of the law, less the cost of collection, should through permanent appropriation be credited automatically to an old-age insurance fund and not to the general fund for later appropriation to the account, in whole or in part, ac Congress may see fit. It is believed that such an arrangement will be constitutional.

VIII. The old-age insurance fund should specifically be made a trust fund, with designated trustees acting on the behalf of the prospective beneficiaries of the program. The trust fund should be dedicated exclusively to the payment of the benefits provided under the program and, in limited part, to the costs necessary to the administration of the program.

IX. The consideration of change in the tax schedule under Title VIII of the law should be postponed until after the rates of 1.5 per cent each on employer and employee are in effect since information will not be available for some time concerning (a) tax collections under varying conditions, (b) effective coverage under taxes and benefits, © average covered earnings, period of coverage, time of retirement, and average amount of benefits, (d) the possibilities of covering farm labor, domestic employees or self-employed persons, and (e) the possibilities of introducing new types of benefits.

X. The problem of the timing of the contributions by the government, taking into account the changing balance between payroll tax income and benefit disbursements, is of such importance as to require thorough study as information is available.

XII. Following the accumulation of such information, this problem should be restudied for report not later than January 1, 1942, as to the proper planning of the program of payroll taxes and governmental contributions to the old-age insurance system thereafter, since by that time experience on the basis of five years of tax collections and two years of benefit payments (provided the present Act is amended to that effect) will be available. Similar studies should be made at regular intervals following 1942.

REPORT

Introduction

The Social Security Act became law on August 14, 1935. A major purpose of the statute was to provide a constructive program for meeting the growing national problem of old-age dependency. Under Title I of the Act provision was made for Federal subsidies to approved state programs for old-age assistance. By the use of the method of assistance, encouraged and aided under this Title, needy persons already old or becoming old in the future without the opportunity of accumulating sufficient rights to benefits under an insurance program were afforded basic protection against want. Under Titles II and VIII, through separate provisions for old-age benefits and payroll taxes on employers and employees, there was established, in effect, a national system of old-age insurance. The method of insurance was approved by Congress as a means of preventing old-age dependency and of assuring protection to qualified individuals as a matter of right, without the use of the means test. These two measures provide a coordinated approach to a well rounded program of old age security.

The old-age benefits provided in Title II of the Social Security Act are payable to qualified persons 65 years of age and over commencing January 1, I942. The amount of benefit is determined by the application of graduated percentages to the total covered earnings of the beneficiary under the system prior to age 65. A minimum monthly benefit of $10 is established as well as a maximum monthly benefit of $85. It is estimated that the average monthly benefit payable by 1945 under existing provisions would be approximately $19. Persons not qualified to receive the monthly benefit at the time of attainment of age 65, or the estates of persons dying before that age, receive a settlement equivalent in amount to 3.5 per cent of wages covered under the program. Under the present legislation no provision is made for the supplementary protection of male annuitants with a dependent aged wife, for the protection of the aged widow, or the younger widow and dependent, surviving children of a deceased wage earner except upon a means test under Titles I or IV.

Under Title VIII of the Act, payroll taxes are levied upon covered employers and employees commencing at the rate of one per cent on each in the years 1937-39, one and one-half per cent in the years 1940-42, and rising one half of one per cent on each in three-year intervals until a permanent rate of 3 per cent on each is reached in 1949. The proceeds of such taxes are covered into the general funds of the Treasury. Congress is authorized under Title II of the Act to appropriate to an old-age reserve account each year an amount sufficient as an annual premium to provide for the payment of the benefits afforded, such amount to be determined on a reserve basis in accordance with accepted actuarial principles. Investment of amounts credited to the account is limited to the securities issued or guaranteed by the Federal government and yielding not less than a 3 per cent return. The amount of payroll taxes collected through November, 1938,was $963,800,000. The amount in the old-age reserve account at that time was nearly $1,132,700,000, of which $830,300,000 was invested in special Treasury notes bearing 3 per cent interest, approximately $300,000,000 was held to the credit of the appropriation made by Congress, and nearly $2,400,000 was held by the Treasury disbursing officer for the payment of benefits. Payments from the account for lump-sum settlements had amounted to $10,000,000.

Since the enactment of the Social Security Act, the problem of old-age dependency in this country has been studied more thoroughly than in any other period in our history. Not only have the normal operations of the Social Security Board made available a large amount of additional material, but the research and actuarial staffs of the Board have, during the past three years, had an opportunity for the analysis and interpretation of rapidly accumulating data. While such studies are by no means definitive and must ever be subject to revision in the light of new information, the estimates of the present and future problem now available are of significance in planning any revision of our old-age security program.

It is estimated that approximately 65 per cent of all persons aged 65 and over are wholly or partially dependent, of whom nearly one-third are dependent on public or private social agencies and two-thirds on friends and relatives. The number of aged persons in our population, moreover, is steadily growing. In 1900 there were only 3,080,000 persons 65 and over, representing 4.1 per cent of the population. These figures reached 6,634,000 or 5.4 per cent in 1930 and will be about 8,180,000 or 6.3 per cent on January 1, 1939. Recent estimates by the National Resources Committee indicate that by 1980 we may have over 22,000,000 persons aged 65 and over, representing 14 to 16 per cent of the total population. Recognizing these facts, it is possible to foresee that we shall have a growing number of aged persons for whom some provision must be made. This has been the experience of all industrial countries as their population became older and industrialization advanced.

The experience thus far developed in the application of Title I of the Social Security Act is likewise of significance in planning any revision of the old-age insurance provisions of the Act. The old age assistance plan therein provided is already in operation in the 48 states, the District of Columbia, and the Territories of Alaska and Hawaii. Over $800,000,000 has been expended by the Federal, state, and local governments for this purpose since February 11, 1936, when Federal funds first became available. Of this amount, it is estimated that about $380,000,000 will be expended for this purpose during the calendar year 1938. During September, 1938, about 1,738,000 persons were in receipt of old-age assistance in the states. This number has grown from the 206,000 who were in receipt of old-age assistance in 27 states at the end of 1934 just prior to consideration of the Social Security Act in Congress. The average grant for old-age assistance was $19.21 for the month of September, 1938, but this varied from $6.37 in Mississippi to $32.39 in California. A recent study by the Social Security Board of recipients accepted by the states for assistance shows that about 35 per cent received less than $15 per month, over 50 per cent amounts between $15 and $30, and nearly 15 per cent $30 and over. Of all married persons accepted for old age assistance during 1937-38, over 40 per cent had a spouse receiving a separate grant. The total to an aged couple may therefore be substantially higher than the general average.

In the month of September, 1938, about 21.6 per cent of all persons aged 65 and over were in receipt of assistance. This proportion varied from 54.5 per cent in Oklahoma to 7.2 per cent in New Hampshire.

After a thorough consideration of the growing problem of old-age dependency facing our country and of the experience thus far under the program of old-age assistance, the Council is convinced of the wisdom of Congress in establishing a contributory program of old-age insurance. The Council believes that such a method of encouragement of self-help and self-reliance in securing protection in old age is essentially in harmony with individual incentive within a democratic society. It is highly desirable in preserving American institutions to remove from as many individuals as possible, in the years to come, the necessity for dependency relief and to substitute instead protection afforded as a matter of right, related to past participation in the productive processes of the country. It is only through the encouragement of individual incentive, through the principle of paying benefits in relation to past wages and employment, that a sound and lasting basis for security can be afforded.

The Council believes that the contributory insurance method safeguards not only the wage earner but the public as well. By this method benefits have a reasonable relation to wages previously earned, and costs may be kept in control relative to tax collections. Through careful planning, the continued payment of benefits can be assured without undue diversion of funds needed for other governmental services. At the same time, the routine nature of contributory old-age insurance permits the perfection of effective administrative machinery. The Council is impressed by the effectiveness already attained in the administration of old-age insurance by the Social Security Board and believes that available skill in handling large-scale accounting operations is sufficient to meet new problems successfully.

Since contributory old-age insurance possesses these advantages over dependency relief or old-age assistance, it is in the public interest that the insurance program be improved and extended to cover additional groups. The Council is convinced of the necessity of gradual evolution in the development of a broad social program such as this. At the same time, the speed of evolution in a democratic society must be related to the economic and social conditions present. The Council is cognizant of the fact that a large amount of experience under similar insurance programs has developed abroad and that only in recent years has our country realized the necessity of social insurance systems under modern industrial conditions.

The Council is also aware of the great financial costs, particularly in the future, involved in an insurance program. The pattern cannot be larger than the cloth; the degree of security afforded must be limited by the national income and the proportion of that income properly available for any specific purpose. Old-age insurance is only one element in the whole structure of governmental social services. The protection of the aged must not be at the expense of adequate protection of dependent children, the sick, the disabled, or the unemployed; or at the cost of impairing such essential services as education and public health or of lowering of the standard of living of the working population. However, the cost of old-age insurance is by no means a net addition to the costs of government. An old-age insurance program is not only an improvement upon the method of relief, but is also aimed to control and reduce the inevitable pressure to divert a larger and larger proportion of public funds in the form of free pensions to aged persons. The value to society of preventing dependency in old age, as far as possible, must be weighed against the cost of the insurance method.

In the course of its study of the problem, the Council has become increasingly impressed by the need to revise the existing old-age insurance program in the direction of fitting the structure of benefits more closely to the basic needs of our people, now and in the future. With limited funds available for this type of insurance protection, the program will never be sufficient to afford the ideal standard of life for our aged citizens except in so far as insurance benefits are supplemented by individual savings. As a means of affording basic protection, however, the existing system can be much improved. With the advantage of more than three years of further study and experience since the passage of the Act and with a greatly enhanced public understanding of the method of social insurance, the time seems ripe for the revision of the program to afford more adequate protection to more of our people. At the same time, the Council has studied the financial problems involved and the best means by which the costs may be met. With a view to assuring basic protection for the largest possible number of our people, the Council has thoroughly reexamined the principles upon which the financial aspects of the existing program were planned.

In the following outline of its recommendations, the Council has departed somewhat from the precise order of the questions submitted to it by the Senate Special Committee and the Social Security Board. In the deliberations of the Council, it was found that the logical development of its conclusions could best be presented under the following headings:

1.The improvement in the structure and scope of benefits.

2. The expansion of the system to cover a larger proportion of the population.

3. The best method of financing the program and of handling the necessary funds.

The Council has sought in this way to answer to the best of its ability the questions submitted for its consideration.

RECOMMENDATIONS AND CONCLUSIONS

A. Recommendations on benefits

I. The average old age benefits payable in the early years under Title II should be increased.

Since it is the purpose of old-age insurance to prevent dependency in old age, the benefits payable under the program should, as soon as possible, be sufficient in amount to afford the aged recipient at least a minimum subsistence income. This does not mean that minimum old age benefits must always exceed maximum old-age assistance grants since the two types of payment are based on different considerations in the individual case. Further, old-age benefits and old-age assistance grants cannot be properly compared in terms of national averages but should be examined relative to state or community conditions as to wage levels, living costs, and assistance grants. After study of such comparisons, however, the Council believes that in a considerable proportion of cases, the schedule of old-age benefits established in Title II will not provide reasonable benefits in the early years of the program. While, in some cases, it will be necessary to supplement insurance benefits by assistance grants despite any reasonable enhancement of early benefit payments, it is sound public policy to reduce this overlap considerably. Only by relieving a large proportion of the beneficiaries under the insurance system from the necessity of resorting to old age assistance to supplement their benefits, will the social advantages of old age insurance be realized.

The policy of paying higher benefits to persons retiring in the earlier years of the system than are the equivalent of the individual contributions is already established in the present Act. Such a policy is not only sound social insurance practice but has long been recognized as necessary in private pension programs. Only through the payment of reasonable benefits can older workers be retired. It is believed that the reasoning which led to the application of the principle in the law in 1935 inevitably leads to a further application of the principle in the light of experience now available. The methods by which it is proposed to accomplish this are outlined in this report.

Since old-age insurance benefits are related to past wages, the upward adjustment of early minimum benefits in line with this recommendation can be attained only in terms of minimum needs as related to such wages, and not, as in old-age assistance, through investigation in the individual case. The Council is convinced that the structure of the benefit schedule can be adjusted to meet more effectively the needs of insured persons retiring in the early years of the system. At the same time, it believes that the payment of higher benefits to persons retiring in the earlier years of the system than are the equivalent of their individual contributions should not be at the expense of reasonable differentials in benefit payments as related to taxable wages earned. As the system matures it may be advisable to limit more strictly the "unearned" portion of the benefit payments where persons have spent but short periods of their working lives in covered employment.

II. The eventual annual cost of the insurance benefits now recommended, in relation to covered payroll and from whatever source financed, should not be increased beyond the eventual annual disbursements under the 1935 Act. {1}

 

{1} Several members of the Council believe, in view of the other types of benefits which later may be added to the plan, that in adopting revised old-age and survivors' benefits their eventual cost should be kept within 10 per cent of payrolls, the original estimate of the probable eventual cost of the present old age benefits when the Act was adopted.

In considering specific improvements in the benefit structure under Title II, the Council believes it to be essential to avoid proposals which would increase the eventual annual disbursements under the old-age insurance system above those involved in the present Act. While future years may bring changes in these eventual disbursements, it is unwise at this time to assign any larger share of our national income to old-age and survivors' protection some decades hence while other pressing social needs exist. The Council is agreed, however, that the annual benefit disbursements in the earlier years of the program should be considerably increased in order that the insurance system fulfill its proper function more adequately. So far as possible, therefore, the Council has sought to level out the progressive increases in the annual costs of the system to avoid a great upward acceleration of future disbursements, at the expense of inadequate protection in the early years, and at the risk of exceeding proper eventual limits. While old-age insurance disbursements will increase in years to come, a closer approximation of disbursements to available tax proceeds is in itself desirable in financing a continuing social insurance program.

It is possible to make only approximate estimates of the eventual disbursements under any insurance program. Information now available indicates that the benefit structure under Title II of the present Act will involve financing from all sources of an annual disbursement equivalent to ten to twelve per cent of covered payroll by 1980 when persons now in their twenties will be at retirement age. {2}

{2} Two members of the Council who are actuaries fear that the upper limit of the eventual cost of the benefits provided by Title II of the present Act will be higher than here estimated

The Council believes that any revised benefit structure recommended at this time should not involve eventual annual disbursements in excess of this approximate level.

It is recognized that further periodic studies of the disbursements under the program will permit a refinement of present actuarial estimates just as existing estimates are in turn a refinement of those made before the initiation of the program. It is reasonable to expect that surveys in the years to come may lead to a revision of best judgments concerning the probable eventual cost of any program. The Council is agreed that the recommendations for revisions in the existing benefit structure here submitted can be reasonably implemented within the eventual cost limit now suggested.

It is understood by all members of the Council that this recommendation relates only to the benefits recommended unanimously and does not apply to the disability benefits referred to in Recommendation VII.

III. The enhancement of the early old-age benefits under the system should be partly attained by the method of paying in the case of a married annuitant a supplementary allowance on behalf of an aged wife equivalent to fifty per cent of the husband's own benefit; provided, that should a wife after attaining age 65 be otherwise eligible to a benefit in her own right which is larger in amount than the wife's allowance payable to her husband on her behalf, the benefit payable to her in her own right will be substituted for the wife's allowance.

The inadequacy of the benefits payable during the early years of the old-age insurance program is more marked where the benefits must support not only the annuitant himself but also his wife. In 1930, 63.8 per cent of men aged 65 and over were married. Payment of supplementary allowances to annuitants who have wives over 65 will increase the average benefit in such a manner as to meet the greatest social need with the minimum increase in cost. The Council believes that an additional 50 per cent of the basic annuity would constitute a reasonable provision for the support of the annuitant's wife. To increase the annuity in all cases, regardless of marital status, by this amount would, it is believed, involve unwarranted costs. It is true that in some instances a single annuitant will need to support an aged dependent relative. To make such relatives eligible for allowances would create many administrative problems. After careful consideration of many alternatives, the Council believes the supplementary wives' allowance here proposed is an effective method of enhancing early benefits in accordance with Recommendation I.

Among the possible alternative methods of raising the average level of early benefits is that of a substantial readjustment of the present benefit formula to raise materially the amount paid all persons on the basis of the lowest segment of accumulated wages under the system. While such a readjustment would enhance the level of early benefits, it would likewise add a large and permanent burden of cost which would not be warranted in the later years of the program after a large proportion of aged wage earners had been under coverage for many years. The Council believes that any adjustment in the benefit formula which raises the level of early benefits should be so designed as to avoid adding to this eventual burden. The method of the supplementary wives' allowance, while providing more adequate protection where needed, meets this limitation, since the allowance would be payable only where the wife is not eligible for a larger annuity on her own account.

In addition, the Council believes that careful study should be given to the substitution of an average wage formula for the accumulated wage formula incorporated in the present Act. An average wage formula would more readily permit an increase in the early benefit payments and enable eventual costs to be kept within the limits prescribed under Recommendation II. Furthermore, in Recommendation VI the Council is on record as approving the average wage formula for computing survivorship benefits. By basing all benefits under Title II upon average wages, simplicity of understanding and administration is achieved as well as a consistent and related pattern of benefit payments.

As indicated in Recommendation VIII hereafter, the Council recommends that the cost of the program of wives' allowances here proposed be financed in part through some reduction in the eventual rates of benefits payable to individuals as single annuitants. Not only does such a readjustment of the benefit structure seem socially desirable but such an adjustment can and should be made without doing violence to the principle of individual equity in the case of widowers, bachelors, and women workers, since such persons should receive in all cases insurance protection at least equal in value to their individual direct contributions invested at interest.

IV. The minimum age of a wife for eligibility under the provision for wives' supplementary allowances should be 65 years; provided, that marital status had existed prior to the husband's attainment of age 60.

This minimum age requirement with respect to eligibility for wives' allowances appears to the Council to be necessary on the grounds of cost, internal consistency of the program, and administrative feasibility. It is recognized that the wives of a considerable proportion of aged men are several years younger than the men themselves and that where this discrepancy in ages occurs, the payment of the wives' allowance will be delayed some time after possible retirement of the husband. After thorough consideration of all possible alternatives, the Council is convinced that the minimum age requirement here proposed is necessary and justifiable at this time.

A reduction of the age for eligibility for wives' allowances to 60 would involve anomalies and inequities between the wives of annuitants and women with wage credits in their own account against which benefits would not be payable until age 65. A reduction in the minimum age requirement to age 60 for both wives' allowances and annuities to all women, while eliminating such anomalies, would add greatly to the cost of the program. Women annuitants are already heavily favored by the plan since no account is taken in either contributions or benefits of their relatively longer life. The Council believes such a large additional cost for this purpose to be unwarranted so long as far more pressing needs exist.

The requirement that the wives' allowance be payable only where marital status existed prior to the husband's attainment of age 60 is intended to serve as protection against abuse of the plan through the contracting of marriages solely for the purpose of acquiring enhanced benefits. If the marriage takes place at least five years before any old-age benefits can be paid, a reasonable assumption exists that it was contracted in good faith.

V. The widow of an insured worker, following her attainment of age 65, should receive an annuity bearing a reasonable relationship to the worker's annuity; provided, that marital status had existed prior to the husband's attainment of age 60 and one year preceding the death of the husband.

A haunting fear in the minds of many older men is the possibility, and frequently, the probability, that their widow will be in need after their death. The day of large families and of the farm economy, when aged parents were thereby assured comfort in their declining years, has passed for a large proportion of our population. This change has had particularly devastating effect on the sense of security of the aged women of our country.

Women as a rule live longer than men. Wives are often younger than their husbands. Consequently, the probabilities are that a woman will outlive her husband. Old age insurance benefits for the husband, supplemented during his life by an allowance payable on behalf of his wife, fall considerably short, therefore, of providing adequate old-age security.

Lump-sum death benefits, such as payable under the present Act, are a very unsatisfactory and ineffective form of protection. The amount in the individual case is quite unlikely to bear any reasonable relationship to the needs of the surviving widow. Payable immediately in one sum, such settlements are likely to be used for many other purposes long before her old age.

The Council believes, therefore, that the old-age insurance program should include provision for old-age annuities for the widows of all covered workers. Where the worker had been an annuitant at time of death, it appears reasonable that his widow, if 65 or over, should receive an annuity equal to approximately three-fourths of the husband's annuity which would be equal to one-half of their combined annuity. Similar protection should be afforded if death occurred before the husband had reached old age. In the latter event,, especially, there is some likelihood that the widow may reenter covered employment. If so, a systematic procedure should be available whereby she may build upon a deferred old-age annuity accruing to her as a result of her deceased husband's earnings. By such a supplement, the needs in old age of women becoming widows either early or late in life can be more adequately met.

As in the case of wives' allowances, it is believed desirable to protect the provisions for widows' benefits against abuse by the requirement of a minimum period of marital status. It would also be necessary to provide that such widows' benefits terminate on remarriage.

The cost of financing the program of widows' protection here recommended can be met, in the judgment of the Council, from the savings to the system in the revision of the present provisions for death benefits (as proposed in Recommendation IX), and in the reduction of the eventual rates of old-age benefits payable to single annuitants (as proposed in Recommendation VIII). It is believed that such a readjustment in the benefit structure is both in the public interest and equitable in its effect upon the various classes of beneficiaries under the system and may be expected to reduce the costs of old-age assistance.

VI. A dependent child of a currently insured individual upon the latter's death prior to age 65 should receive an orphan's benefit, and a widow of a currently insured individual, provided she has in her care one or more dependent children of the deceased husband, should receive a widow's benefit.

The Council believes that a program of survivors' insurance, intended primarily for the protection of the dependent orphans of deceased wage earners, is of as much importance to the community as an old-age insurance program. While public assistance is now being provided to a large number of dependent children in this country on a needs-test basis, the arguments for substituting benefits as a matter of right in the case of children are even more convincing than in the case of aged persons. A democratic society has an immeasurable stake in avoiding the growth of a habit of dependency among its youth. The method of survivors' insurance not only sustains the concept that a child is supported through the efforts of the parent, but affords a vital sense of security to the family unit.

The need for providing cash allowances for the care of dependent children has long been recognized in this country. "Mothers' aid" legislation was first adopted over 25 years ago and was greatly expanded through the program for aid to dependent children incorporated in the Social Security Act in 1935. Over 626,000 children in 254,000 families were receiving aid during the month of September,1938. The total expenditures for this aid in that month were over $8,000,000, of which less than one-third was from Federal funds available through the Social Security Act. The average amount of aid per family for the month of September was $31.72 or approximately $13 per dependent child.

A recent study made by the Social Security Board of families accepted for aid to dependent children in 1937-38 showed that in about 43 per cent such aid the father was dead.

While the expansion of aid to dependent children under the Social Security Act has been gratifying, there is great need for further protection of dependent children. In many instances, the aid is insufficient to maintain normal family life or to permit the children to develop into healthy citizens. Many deserving cases are not able to obtain any aid. Above all, the relief method is not the most desirable way of meeting childhood dependency. Social insurance offers an improved method of dealing with the problem.

A program of survivors' insurance providing for dependent children can be most effectively administered in conjunction with an old-age insurance program. Moreover, survivors' protection in the event of the early death of a wage earner with young children is the counterpart of the protection of the wage earner and his aged wife or widow should he live to retirement after his children are grown. These two types of protection can, therefore, be most effectively financed under a single insurance program. In addition to the fact that lump sum settlements are undesirable, the death benefits under the existing provisions of Title II, which are so payable, do not provide adequate survivors' protection. The Council therefore recommends that the savings to the system accruing through the elimination of larger death benefits (proposed in Recommendation IX) be used in part for the financing of a program of benefits to surviving dependent children.

The Council recommends that, in addition to benefits for such children, benefits be payable to widows who have in their care one or more of their children of the deceased wage earner. Such payments are intended as supplements to the orphans' benefits with the purpose of enabling the widow to remain at home and care for the children. It is recommended that as soon as the last child attains the upper limit of age for eligibility for benefits, the payments to the widow shall cease. This is not intended, however, to affect her eligibility to an old age annuity on her attainment of age 65.

As contrasted with the payments to widows with dependent children, here recommended, benefits to all younger widows would not only greatly increase the cost of the total program but would, it is believed, divert funds from more pressing social needs. It is normal for a large majority of younger widows without dependent children to reenter employment. To provide continuing benefits to such widows would create not only many anomalies and inequities, but serious administrative difficulties as well.

In order to provide orphans' benefits of reasonable amount and related to the normal income of the deceased wage earner, it is recommended that such benefits be computed on a basis of average wages rather than of accumulated earnings as now provided in the case of old age benefits under Title II. Since death may occur at any age, average wages, on the one hand, and the number of dependents, on the other, are the significant factors. Survivors'' insurance must be looked upon as current protection, closely related to the current earning status of the insured worker. At the same time, reasonable provision should be made for the continuance of insured status for a limited time where a period of sickness or unemployment precedes the death of the wage earner.

VII. The provision of benefits to an insured person who becomes permanently and totally disabled and to his dependents is socially desirable. On this point the Council is in unanimous agreement. There is difference of opinion, however, as to the timing of the introduction of these benefits. Some members of the Council favor the immediate inauguration of such benefits. Other members believe that on account of additional costs and administrative difficulties, the problem should receive further study.

With the growth of industry and urban life, the problem of providing for wage earners who become permanently and totally disabled before the age of retirement has become increasingly serious. While the number of persons who reach old age is much larger than the number who become disabled at younger ages, the latter state when it does materialize, is likely to be of more serious concern to the individual, his family, and the community. Moreover, protection against this hazard, except to the extent that workmen's compensation coverage applies, is even further out of the question for most wage earners than is protection against dependency in old age.

The members who favor the immediate inauguration of benefits for insured persons who become permanently and totally disabled prior to their attainment of age 65 and for their dependents call attention to the fact that this class of persons (except for the blind) is the only category of permanent social casualties who receive no insurance or assistance under the Social Security Act. No provisions whatever are made for them except general relief as administered by local communities, which is often entirely insufficient. No other group in our population is more completely dependent or in a more desperate economic situation. People who become permanently and totally disabled before reaching retirement age are economically in the same position, or a worse one, as those who are unable to work by reason of old age. By making early provisions for people who are permanently and totally disabled before age 65, it is hoped that much of the pressure for lowering the retirement age will be relieved.

The members who believe that immediate provisions should be made to provide protection for these unfortunates and their dependents recognize that the determination of permanent and total disability gives rise to difficult administrative problems and that a system of benefits such as they recommend may increase the total eventual benefit costs beyond the estimated ultimate costs of the benefits provided in the present law. They believe, however, that the administrative difficulties and those of calculating the exact costs are not so great as to warrant long continued delay. Nearly all other countries which have old age insurance systems include protection for the permanently and totally disabled and have not found the administrative problems insurmountable. It is the opinion of these members, moreover, that the administrative problems involved will never be solved until benefit payments are actually begun. If the Social Security Act had not been launched until all administrative difficulties had been solved, this Act would never have been put into operation.

Regarding costs, the members who favor immediate action direct attention to the fact that while estimates as to the eventual costs differ widely, it is agreed that, at least for some years, the additional costs of providing protection for this now unprotected group are but small. They also stress that society now bears a large cost for the support and care of the permanently disabled and their dependents in the form of relief and institutional care. In large part, the benefits under Title II for the permanency and totally disabled will not be additional costs but a shifting of costs now borne in another form. For the unfortunates thus afflicted, however, the plan of including permanent and total disability along with old age insurance means the substitution of the certainties of insurance for the uncertainties of relief.

While recognizing the desirability of providing protection against total and permanent disability and the advantages of contributory insurance as a method of attacking this problem, other members believe it is undesirable to recommend the initiation of a program of disability insurance at this time. The probable costs of such a program are extremely difficult to determine. Costs will vary with a large number of factors. The range between minimum and maximum estimates is wide. Until the probable costs of the old-age and survivors' insurance, recommended in this report, can be more accurately projected, it is unwise to recommend the assuming of the burden of a distinctly new type of protection, the cost of which is indeterminate and heavy.

Further, these members believe that disability insurance would introduce many administrative problems of great difficulty, and of a character apart from those involved in the program here recommended. The determination whether total and permanent disability exists in each individual case would not only require a highly skilled professional staff but would necessitate intensive and sustained local investigation to prevent abuse. The experience of the private insurance companies with total and permanent disability insurance has been so unfavorable that it has caused heavy and unexpected losses and has practically been abandoned.

These members believe that until coverage under the social security program has been widened to include other large groups in the population which are now excluded there would be added administrative and financial problems resulting from shifts from uncovered to covered employment. Until the whole question of health insurance is given further consideration, definitive action on disability Insurance should be delayed. With added experience in the administration of the benefit programs now recommended, administrative problems under disability insurance should be more readily met.

VIII. In order to compensate in part for the additional cost of the additional benefits herein recommended, the benefits payable to individuals as single annuitants after the plan has been in operation a number of years should be reduced below those now incorporated in Title II. If the national income should increase in future years, these reductions may not be necessary.

In order to provide more adequate basic protection to the wage earners of the country and at the same time fit the pattern of benefits to the financial cloth, it is believed that the formula used in the computation of old-age benefits should be revised in such a manner as to reduce the eventual rates of benefit payable to individuals as single annuitants. The Council is convinced of the necessity of broadening the scope of insurance protection to include allowances for aged wives and benefits for aged widows and surviving dependent children. It is of the conclusion that the use of a part of the funds otherwise allocated to the payment of relatively high benefits to single individuals in future years to permit the immediate broadening of the protection afforded by the system is both socially justifiable and financially necessary. The single individual will not be deprived of adequate basic protection. Differentials in terms of past wages and employment will remain. It would not be necessary for the single individual to receive less in protection than the value of his direct contributions with interest. Meanwhile through life, the single person will have received directly or potentially the advantages of the protection of the family unit.

Certainty is more valuable than promises. Only by such readjustment of benefit schedules does the expansion of the scope of the insurance program seem financially feasible.

IX. The death benefit payable on account of coverage under the system should be strictly limited in amount and payable on the death of any eligible individual.

With the introduction of a systematic and adequate plan of survivors' protection under the old-age insurance program, all justification of the large lump-sum death benefits now possible under the existing provisions of Title II disappears. The present lump-sum payments have been considered in the nature of rebates of contributions on a "savings-bank" basis and are in no way related in amount to the needs of a surviving family. At the same time the repayment of 3.5 per cent of covered wages to the estates of all deceased persons, regardless of the family situation, would consume a large amount of funds in the years to come. The Council, therefore, recommends the substitution of a strictly limited death benefit such as three months' average wages but not in excess of $200 and payable in all cases where the insured individual is eligible. On account of the diminishing number of cases affected as the program matures, it is recommended that no payment be made upon the death of an individual who is not eligible.

X. The payment of old-age benefits should be begun on January 1,1940.

Since it is convinced of the importance of enhancing the effectiveness and adequacy of the contributory system of old age protection in this country, the Council recommends that benefits under the broadened program be begun on January 1, 1940. It is believed that such an advancement of the date of beginning benefits is not only financially and administratively feasible but of marked social advantage in enhancing public understanding of the method of contributory social insurance. Where existing needs can be met on an insurance basis, there seems little justification for unnecessary delay. Rather it is highly important that experience in the payment of benefits be obtained as soon as feasible in order to provide more definite experience for planning the financial program of the system. Many of the details of administering benefits can only be tested in operation. With marked progress already made in the administration of the program, the expansion of the existing benefit payment facilities of the Board could be readily accomplished in the course of the year 1939.

B. Recommendations on coverage

The Council wishes to repeat the recommendations affecting coverage under the system adopted at its meeting in December, 1937, and submitted to the Special Senate Committee and the Social Security Board at that time. These recommendations approved proposals developed by the Social Security Board for the amendment of Titles II and VIII in the following particulars:

1. An amendment which would permit an individual to qualify for monthly benefits and to secure a larger monthly benefit because of employment after age 65.

2. An amendment which would exclude from the definition of wages certain types of payments made by an employer to or on behalf of an employee under plans for providing for retirement or disability benefits.

3. The coverage of seaman under the program.

4. The coverage of employees of national banks, and of state banks which are members of the Federal Reserve System and of certain other Federal and state instrumentalities.

5. An amendment defining coverage of services under the Act depending on whether the excepted or included services predominate.

In addition, the Council makes the following recommendations at this time:

I. The employees of private non-profit religious, charitable, and educational institutions now excluded from coverage under Titles II and VIII should immediately be brought into coverage under the same provisions of these Titles as affect other covered groups.

The Council believes that there is no justification in social policy for the exclusion of the employees of such organizations from the protection afforded by the insurance program here recommended. Further, no special administrative difficulties exist in the coverage of the employees of such organizations under the system.

II. The coverage of farm employees and domestic employees under Titles II and VIII is socially desirable and should take effect, if administratively possible, by January 1,1940.

Farm and domestic employees are, in general, among those wage earners most in need of protection against dependent old age and premature death. Low wages and intermittent employment frequently combine to make individual savings difficult. Their exclusion from the existing legislation was based to a considerable extent on grounds of administrative difficulties foreseen with respect to wage reporting and tax collections. Recent studies indicate that the additional cost of extending the coverage of the system to these classes of workers will be considerably less than originally estimated since a large number of such workers are already coming under the system through employment in covered occupations on a seasonal or part time basis. Intermittent coverage of this character is not only unsatisfactory in the benefits afforded but is a factor of uncertainty in financing the program. These groups could probably be covered by means of some form of stamp-book system applied to a limited number of broad wage classifications.

III. The old-age insurance program should be extended as soon as feasible to include additional groups not included in the previous recommendations of the Council and studies should be made of the administrative, legal, and financial problems involved in the coverage of self-employed persons and governmental employees.

Consistent with its acceptance of the contributory insurance method as socially necessary and desirable, the Council recommends the extension of the coverage of this method to the largest possible proportion of our gainfully employed population. An important group outside the existing program are those persons working on their own account such as business and professional men, farmers, and mechanics. Not only would the inclusion of this group be socially desirable, but it would also be a marked advantage in planning the financial program of the system. At present, the shift in and out of insurance coverage among this group of individuals is an added factor of uncertainty.

Despite the reasons in its favor, extension of coverage to the self-employed cannot be recommended at this time. The Council finds that the administrative problems of obtaining reports of earnings and of collecting contributions from persons without an employer, together with the problems of financing the benefits to be paid such persons are extremely difficult. The Council believes that attempts to find a solution should be made, and urges that studies directed toward this end be continued.


C. Recommendations on finance

The Council is convinced that the problem of financing the amended program of old-age and survivors' insurance here proposed must be approached as a part of the general fiscal problem of the government in providing for a continuing social service mechanism. In planning financial policy, conservatism is a necessity but at the same time flexibility is vital. In a continuing social insurance program, the cost of future benefits can only be estimated. The sources of future income can likewise only be estimated. Frequent revaluations of future costs and future income are essential to the safe planning of the system.

In its recommendations, the Council has sought to attack the present problem of continuing old-age and survivors' protection, doing the most possible to solve what can be solved now, avoiding, however, impossible or unreasonable commitments for future generations. As has been stated, the Council has had before it, at its request, a series of carefully developed proposals, accompanying financial and actuarial studies, and administrative provisions in outline form. On the basis of such studies the Council believes that the ultimate annual cost of the revised program here proposed would not exceed that involved in Title II of the existing Act although the volume of benefit payments would be increased in the earlier years.

Much of the present controversy in regard to the financing of the old-age insurance program has been concerned with long-run future policy. Experience developing since the initiation of the program and further studies of probable future trends have already shed much new light on the problem. The revision of the structure of benefits along the lines here recommended will aid materially in resolving the problem. After thorough canvassing of this aspect of the insurance program, the Council makes the following recommendations.

I. Since the nation as a whole, independent of the beneficiaries of the system, will derive a benefit from the old-age security program, it is appropriate that there be Federal financial participation in the old-age insurance system by mean of revenues derives from sources other than payroll taxes.

Dependent old age has become a national problem. A steadily rising proportion of aged, technological change, mobility, and urban life have combined to create a condition which cannot be met effectively by state governments alone. The Council has indicated its conviction of the importance of an adequate contributory insurance program in the prevention of the growth of dependency in a democratic society. Since the nation as a whole will materially and socially benefit by such a program, it is highly appropriate that the Federal government should participate in the financing of the system. With the broadening of the scope of the protection afforded, governmental participation in meeting the costs of the program is all the more justified since the existing costs of relief and old-age assistance will be materially affected.

Governmental participation in financing of a social insurance program has long been accepted as sound public policy in other countries. Definite limits exist in the proper use of payroll taxes. An analysis of the incidence of such taxes leads to the conviction that they should be supplemented by the general tax program. The prevention of dependency is a community gain in more than social terms.

II. The principle of distributing the eventual cost of the old-age insurance system by means of approximately equal contributions by employers, employees, and the government is sound and should be definitely set forth in the law when tax provisions are amended.

The Council believes that this recommendation is a logical implementation of the principle of governmental financial participation.

III. The introduction of a definite program of Federal financial participation in the system will affect the consideration of the future rates of taxes on employers and employees and their relation to future benefit payments.

Future taxes under the program must be determined in relation to the future volume of benefits as knowledge becomes more definite. The introduction of Federal financial participation will permit redetermination of tax rates and intervals between adjustments of tax rates in relation to benefit costs, as then estimated, if such redetermination is deemed appropriate. Such adjustments may, under these conditions, be so determined as to affect the amount remaining on balance in the old-age insurance fund without the creation of serious financial problems as the system matures. The Council believes that with Federal financial participation, problems of financial policy can be far more readily resolved.

IV. The financial program of the system should embody provision for a reasonable contingency fund to insure the ready payment of benefits at all times and to avoid abrupt changes in tax and contribution rates.

The Council is of the conclusion that, in the financing of the insurance program, it is desirable to make provision for a contingency fund to insure ready payment of benefits at all stages of the business cycle and under varying conditions resulting from fluctuations in such factors as the average age of retirement, the total coverage under the program, and average wage rates. It is desirable that the payment of benefits should not be dependent upon quick Congressional action in levying emergency taxes to meet deficits or in sudden raising of contribution rates when disbursements exceed current tax collections or normal appropriations to the system.

With the changes in the benefit structure here recommended and with the introduction of a definite program of governmental contributions to the system, the Council believes that the size of the old-age insurance fund will be kept within much lower limits than are involved in the present Act. Under social insurance programs it is not necessary to maintain a full invested reserve such as is required in private insurance, provided definite provision is made for governmental support of the system. The only invested fund then necessary would be a reasonable contingency fund as outlined above. The financial program inherent in the present Act offers one means of meeting the future costs of an old-age insurance program. If the method of accumulating a relatively large reserve is eliminated, there must be, instead, the definite assurance that the program will be financed not by payroll taxes alone but, in addition, by governmental contributions from other sources. Without interest returns on a relatively large fund, payroll taxes alone would prove insufficient to meet the current disbursements necessary as the system matures. For this reason, the Council insists that the principle of adequate governmental contributions should be definitely established in the law when tax provisions are revised, if the reserve policy under the old-age insurance program is changed.

V. The planning of the old-age insurance program must take full account of the fact that, while disbursements for benefits are relatively small in the early years of the program, far larger total disbursements are inevitable in the future. No benefits should be promised or implied which cannot be safely financed not only in the early years of the program but when workers now young will be old.

VI. Sound presentation of the government's financial position require full recognition of the obligations implied in the entire old age security program and treasury reports should annually estimate the load of future benefits and the probable product of the associated tax program.

The Council wishes to reiterate the necessity of taking full account of the greatly increasing costs of the old age insurance program in future years. The Council has kept this fact constantly in mind in its study of recommended revisions. It is of the belief that we should not commit future generations to a burden larger than we would want to bear ourselves. It is therefore important that Congress be kept fully informed of the obligations implied in the entire old age security program in the years to come under both the assistance and the contributory insurance provisions of the Social Security Act.

VII. The receipts of the taxes levied in Title VIII of the law, less the costs of collection, should through permanent appropriation be credited automatically to an old-age insurance fund and not to the general fund for later appropriation to the account, in whole or in part, as Congress may see fit. It si believed that such an arrangement will be constitutional.

VIII. The old-age insurance fund should specifically be made a trust fund, with designated trustees acting on the behalf of the prospective beneficiaries of the program. The trust fund should be dedicated exclusively to the payment of the benefits provided under the program and, in limited part, to the costs necessary to the administration of the program.

At the time the Social Security Act was drafted it was deemed necessary for constitutional reasons to separate legally the taxation and benefit features of the program. It is believed that in the light of subsequent court decisions such legal separation is no longer necessary. Since the taxes levied are essentially contributions intended to finance the benefit program, it is not only logical but expedient to provide for automatic crediting of tax proceeds to the old age insurance fund. It is believed by the Council that such a procedure would enhance public understanding of the contributory insurance system. Since the tax proceeds thus credited are intended for payment of benefits, it is recommended that they be deposited in a trust fund under the control of designated trustees in accordance with appropriate legal provisions. The trust fund should be dedicated to the payment of benefits and, to a restricted amount, to the costs necessary to the administration of the program. It is recommended that these funds should continue to be invested in securities of the Federal government as at present.

In recommending these technical changes in the method of handling the contributions under the program, the Council wishes to record again its unanimous conclusion that the provisions of the existing law have been strictly respected by Congress and the Treasury Department. It is believed, however, that the technical improvements here recommended will simplify and strengthen the financial provisions of the program.

IX. The consideration of change in the tax schedule under Title VIII of the law should be postponed until after the rates of 1.5 per cent each on employer and employee are in effect since information will not be available for some time concerning (a) tax collections under varying conditions, (b) effective coverage under taxes and benefits, © average covered earnings, period of coverage, time of retirement, and average amount of benefits, (d) the possibilities of covering farm labor, domestic employees or self-employed persons, and (e) the possibilities of introducing new types of benefits.

With these and many other variable elements now present in any estimate of the future costs of a revised program under Title II, the majority of the Council is not ready to recommend any change in the tax schedule under Title VIII of the Act at this time. It does not feel that it could determine intelligently or with proper caution any precise adjustment of rates. Nor is immediate change considered necessary since in any case the amount accumulated in the old-age insurance fund for some years will not exceed that deemed appropriate for the contingency fund previously recommended. In view of the probable increase in the immediate cash outlay to begin in 1940 which the Council's recommendations of benefits will entail, it is conservative policy to continue the taxes now provided in the present Act. It seems the part of wisdom to make changes, as warranted, on the basis of more certain knowledge. {1}

{1} Several members of the Council feel that the increase of 50 per cent in the tax rate from 2 per cent to 3 per cent now provided by the law to be made in 1940 should be reconsidered. Unless the cost of the benefits payable in 1940 and 1941 shall exceed current income from the present 2 per cent payroll tax, and in view of the probable size of the contingency fund on January 1,1940, they feel that the increase in the tax rate should not take place before the study herein recommended to be made in 1941 shall have been completed. They believe that under the present conditions it would be better policy to allow the sum involved in the increase in the tax rate to remain in the hands of employees and employers than to use it to increase the contingency fund.

X. The problem of the timing of the contributions by the government, taking into account the changing balance between payroll tax income and benefit disbursements, is of such importance as to require thorough study as information is available.

The timing of the governmental contributions here proposed is particularly a question requiring further study on the basis of better knowledge.

XI. Following the accumulation of such information, this problem should be restudied for report not later than January 1, 1942, as to the proper planning of the program of payroll taxes and governmental contributions to the old-age insurance system thereafter, since by that time experience on the basis of five years of tax collections and two years of benefit payments (provided the present Act is amended to that effect) will be available. Similar studies should be made at regular intervals following 1942.

After thorough canvassing of the problem, the Council is of the conclusion that by the close of 1941, sufficiently comprehensive knowledge will be available for definitive recommendations on changes in the tax program, if then deemed appropriate, and for definitive recommendations as to the timing of governmental contributions toward the financing of the insurance system. By that time approximately five years of experience in tax collection under varying conditions will be available. Even more important, approximately two years of benefit experience under a revised program will have developed, if suggested revisions are made. Further change in the tax rates under the existing schedules will not take place until January 1, 1943.

At that time, the determination of the long-run philosophy as to the financing of the program will come to have significance in terms of tax rates. Discussion of such philosophy, while of great concern to all far-sighted students of fiscal policy, does not warrant departure from the recommendations on financial policy here presented.

The Council has deemed it a privilege to cooperate in the study of the old age security program carried on by the Senate Special Committee and the Social Security Board and hopes that its findings will be of service to the bodies which appointed it. While anxious to be of service as individuals, we assume that with the presentation of this report the task for which the Council was appointed has been fulfilled.

Respectfully submitted,

(Signed) J. DOUGLAS BROWN, Chairman

HENRY BRUERE
GERALD MORGAN
G. M. BUGNIAZET
A. H. MOWBRAY
PAUL H. DOUGLAS
PHILIP MURRAY
M. B. FOLSOM
THOMAS L. NORTON
HARVEY FREMMING
LEE PRESSMAN
JOHN P. FREY
JOSEPHINE ROCHE
W. D. FULLER
E. R. STETTINIUS, JR.
WILLIAM HABER
GEORGE W. STOCKING
ALVIN H. HANSEN
GERARD SWOPE
JAY IGLAUER
ELIZABETH WISNER
M. ALBERT LINTON
EDWIN E. WITTE
THERESA S. McMAHON
MATTHEW WOLL

December 10, 1938.


APPENDIX

On April 29, 1938, the Council unanimously approved the following statement concermng the financing of the old-age insurance system:

"The Advisory Council on Social Security has been giving much attention to the problem of financing the old age insurance system. The Council recognizes that there are other ways of financing the old-age insurance system which upon further study may prove to have greater advantages than the present system. The entire subject, however, is so complex that the Council is not yet prepared to express a final judgment as to the method of financing which would be most desirable from a social and economic standpoint.

"Upon one aspect of the general problem the Advisory Council deems it advisable to make a public statement at this time to allay unwarranted fears. This relates to the method of handling the funds collected for old-age insurance purposes.

"In accordance with the statutes, the taxes collected from employers and employees under Title VIII of the Social Security Act are paid into the general fund of the Treasury. While not expressly provided by law, it was understood at the time of the enactment of the Social Security Act that amounts equivalent to the entire proceeds of these taxes, less costs of administration, shall be appropriated annually by Congress to the old age reserve account. Congress has not only done so, but to date has appropriated somewhat more to the old-age reserve account than has been collected from the taxes levied in Title VIII of the Social Security Act. Thus, up to the end of March, 1938, $636,100,000 had been invested to the credit of the old-age reserve account, and $57,447,532 had been collected from the taxes for old-age insurance purposes.

"A proportionate part of the moneys appropriated by Congress to the old-age reserve account has been turned over periodically to this account and has been immediately invested in special securities of the United States Government bearing 3 per cent interest.

"The special securities issued to the old-age reserve account are general obligations of the United States Government, which differ from other securities of the Government only in the higher rate of interest they bear and in the fact that they are not sold in the open market. The issuance of such special securities is not only expressly authorized by law, but is required by the provision of the Social Security Act that the old-age reserve funds are to be invested so as to yield an interest return of 3 per cent.

"The United States Treasury uses the moneys realized from the issuance of these special securities by the old-age reserve account in the same manner as it does moneys realized from the sale of other Government securities. As long as the budget is not balanced, the net result is to reduce the amounts which the Government has to borrow from banks, insurance companies and other private parties. When the budget is balanced, these moneys will be available for the reduction of the national debt held by the public. The members of the Advisory Council are in agreement that the fulfillment of the promises made to the wage earners included in the old age insurance system depends upon, more than anything else, the financial integrity of the Government. The members of the Council, regardless of differing views on other aspects of the financing of old-age insurance, are of the opinion that the present provisions regarding the investment of the moneys in the old-age reserve account do not involve any misuse of these moneys or endanger the safety of these funds."

Report of the Social Security Board

The Social Security Board's Comments & Recommendations

The Advisory Council of 1938 recommended a fundamental shift in the Social Security program, away from a defined benefit retirement plan for individual workers, to a family benefit plan, with dependents and survivors benefits. The Council's Report went to the Social Security Board and to the Senate Finance Committee. The Social Security Board, in turn, wrote its own report on the Council's report, differing in a few important points, and this second report was transmitted to the President along with the Council's Report.

The following is the text of the Social Security Board's Report to the President, transmitting the Board's recommendations for legislative action. These recommendations differ in many respects from the Council's Report, although the key recommendation--to transform Social Security by adding dependents and survivors benefits--is the same in both reports.

PROPOSED CHANGES IN THE SOCIAL SECURITY ACT

A Report of the Social Security Board to
the President and to the Congress of the United States

LETTER OF TRANSMITTAL

WASHINGTON, D. C.,
December 30, 1938.


The PRESIDENT
The White House.

DEAR MR. PRESIDENT: The Social Security Board has regarded as one of its most important responsibilities under the Social Security Act that imposed by the section of the law which charges the Board with "the duty of studying and making recommendations as to the most effective methods of providing economic security through social insurance, and as to legislation and matters of administrative policy concerning old-age pensions, unemployment compensation, accident compensation, and related subjects."

In accordance with this congressional mandate and specific instructions received from you, the Board, since its creation in August 1935, has continuously appraised the operation of those provisions of the act for which it has administrative responsibility. In addition, the Board has carried on extensive studies as to effective methods of providing greater social security for the American people.

The Social Security Board's report, based on these studies and on practical experience in social security administration during the past 3 years, is submitted herewith for your consideration and that of the Congress.

The Board has not undertaken to include in this report the extensive data on which its recommendations are based. However, the Board is prepared to furnish such data and technical assistance as may be desired in connection with any of these recommendations which the Congress may wish to consider.

Respectfully submitted.

ARTHUR J. ALTMEYER, Chairman.

 

REPORT

Through the Social Security Act the people of the United States have established their first Nation-wide and organized system of protection against prevailing economic hazards. To accomplish this purpose, both the Federal Government and the States have cooperated in these provisions for social security. It has been possible, therefore, to attack Nation-wide problems on a Nation-wide front, and, at the same time, to keep the program practical, flexible, and close to the people.

Possible ways and means of improving and extending the present provisions of the Social Security Act naturally become more apparent as administrative experience increases, as more data become available, and as a better understanding of actual needs develops. Though the Board recognizes that such growth is a continuing essential, it believes that the general approach to social security embodied in the existing act is fundamentally sound.

Through the Social Security Act the people of this country have attacked the problem of insecurity upon two fronts: The act undertakes to provide some measure of protection against present needs arising out of past neglect, and it establishes at the present time basic protection against economic hazards which would otherwise cause future insecurity. To accomplish these purposes the act sets up, in the main, a system of Federal-State cooperation whereby financial resources of the Federal Government are made available to the States to enable them to safeguard their citizens. The only part of the act wholly administered by the Federal Government is the old-age insurance system. Since such a system necessarily operates on a long-term basis, movement of population among the States precludes setting it up on State-by-State basis.

The changes in the Social Security Act recommended by the Board are designed to promote the objectives of the present law, as regards all the programs under the Board's direction--old-age insurance, unemployment compensation, and public assistance. In addition, the Board makes certain recommendations with regard to general administration and suggests certain considerations relating to health protection. It is the judgment of the Board that these recommended changes represent practicable next steps toward the goal of adequate security for the American people by liberalizing the benefits payable under the act, by extending its protection to a much larger proportion of our people, and by greatly facilitating administration.

Federal Old-Age Insurance

Although the Federal old-age insurance system is the largest ever put into operation, it has proved to be sound from both the administrative and financial standpoint. In considering the development of this plan, it should be borne in mind that it is separate and distinct from the Federal-State program of old-age assistance. Under Federal old-age insurance, benefits are payable as a matter of right irrespective of individual need, and in relation to past earnings. Under Federal-State old-age assistance, payments are made only on the basis of individual need as determined by the State.

Our present system of old-age security thus embodies two principles: the insurance program related to the individual's past earnings and the assistance program related to his present need. The Social Security Board is convinced that a system of old-age security which attempted to operate on any other principles would be bound to lead to disaster both for the beneficiaries and for the general taxpayer.

The basic problem of old-age insurance is to make the system more immediately and fully operative without destroying the reasonable relationship which must exist in such a program between benefits payable and past earnings. Such a relationship must exist under any system of retirement insurance, whether social insurance or an industrial pension plan, unless the term "insurance" is to lose all its meaning. For the protection of future beneficiaries and future taxpayers it is essential that this reasonable relationship be maintained; just as in the case of old-age assistance it is necessary to maintain a reasonable relationship between assistance granted and the needs of the individual.

The present old-age insurance system, while maintaining a reasonable relationship between past earnings and future benefits, provides proportionately greater protection for the low-wage earner and the short-time wage earner than for those more favorably situated. In other words, it recognizes presumptive need as an essential consideration in any socially adequate old-age insurance system. But the presumptive need toward which social insurance is directed must be distinguished from the specific need, as established by investigation, which public assistance is designed to meet. To allow for presumptive need, the old-age insurance system gives much greater weight to the first $3,000 of accumulated earnings than to subsequent earnings. It is thus possible for a person retiring in the early years of the system, or for a low-wage earner retiring at any time, to receive very liberal benefits in proportion to his past earnings.

But every worker, regardless of his level of earnings or of the length of time during which he has contributed, will receive more by way of protection than he could have purchased elsewhere at a cost equal to his own contributions. In other words, the system recognizes the principle of individual equity, as well as the principle of social adequacy. It has been possible to incorporate in the system both these aspects of security by utilizing a larger proportion of employers' contributions to pay benefits to those retiring in the early years, and to low-wage earners. A similar procedure is also followed in private pension plans. Such plans recognize that the employer must contribute more liberally in behalf of older workers if they are to have sufficient income to retire.

Benefits

Starting Monthly Benefits in 1940--
The Board believes that the payment of monthly benefits should commence in 1940 instead of on January l, 1942, as scheduled in the present law. This will be practicable, in the opinion of the Board, since by 1940 a considerable body of administrative experience will have been accumulated, and wage records will have been built up for a period of 3 years.

Because of its nature as an insurance program, the Social Security Board does not believe that it is possible to bring under this system all persons who have already retired from gainful employment. Even though it were considered reasonable to pay benefits regardless of the fact that no past contributions had been made either by these individuals or by their employers, it would be impossible to obtain adequate wage records upon which to compute benefits.

Increasing Benefits Payable in Early Years--
The Board also believes that the monthly benefits payable to those retiring in the early years can be increased without increasing the eventual cost of the program.

The cost of any system of benefits will mount rapidly with the passage of time as a larger proportion of the population reaches retirement age. Consequently, a scale of benefits, the cost of which would be altogether reasonable now, might be unduly burdensome at the end of a generation. Therefore, in making increases in benefits, particularly in the early years of a system, it is essential to keep the ultimate financial cost in mind. It is impossible under any social insurance system to provide ideal security for every individual. The practical objective is to pay benefits that provide a minimum degree of social security--as a basis upon which the worker, through his own efforts, will have a better chance to provide adequately for his individual security.

In order to increase benefits for those retiring in the early years, the Board recommends two measures: first, supplementary benefits for aged wives, and second, the use of "average wages" instead of total accumulated wages for the computation of benefits.


Supplementary Benefits for Aged Wives--
The Board suggests that a supplementary benefit be paid for the aged dependent wife of the retired worker which would be related to his old-age benefit. Such a plan would take account of greater presumptive need of the married couple without requiring investigation of individual need. An aged wife would of course be entitled to benefits based upon her own past earnings in lieu of the supplement, if her own benefits were greater. Since in the course of time many women will have developed substantial benefit rights based upon their own past earnings, the cost of providing the supplement for dependent wives would gradually decline, and eventually the additional cost would be reduced to a relatively small amount. In order that greater social adequacy may not be achieved at the expense of individual equity, the Board recommends that the benefits payable to unmarried persons continue to be at least as much as they could purchase from a commercial insurance company with their own contributions.

Utilizing "Average Wages" as Benefit Base--
The Board recommends that benefits be calculated upon the basis of average wages, rather than, as at present, upon total accumulated wages.

This change would make it possible to increase early benefits and to relate benefits more closely to the previous normal wage income of the individual. It would also eliminate, as the years go by, the large bonus which present provisions would afford those who have had only a brief period of participation prior to the date of retirement. Under the existing law the large credit for the first $3,000 of accumulated earnings remains in effect regardless of whether a worker retires in the early years of the system or later. This large credit is justified in the early years, since workers and their employers have had an opportunity to make contributions for only a short period of coverage under the system. But it is advisable to safeguard the system against disproportionately large withdrawals in the future in behalf of those who have paid taxes only a short time.

While the Board believes that benefits should be related to the average wage, it recognizes that benefits should also be related to the number of years the individual has been in covered employment and has made contributions. The Board therefore recommends that an insured individual, upon retirement, receive a basic benefit related to his average wages; and that, for every year he has earned more than some small specified amount of wages in covered employment, his basic monthly benefit be increased by a specified percentage. Conversely it recommends that for every year a person does not earn this specified amount of wages, the basic monthly benefit be reduced by the same percentage.

The Board is of the opinion that a percentage decrease for each year not covered is a more equitable approach than that found in most foreign old-age insurance systems which usually require that a person be in covered employment during a specified number of years immediately preceding the date of retirement. As a result, an individual who had been in covered employment a considerable proportion of his working life but not during the last few years before retirement would be ineligible for monthly benefits. Such a provision would, in the Board's opinion, work undue hardship on those who had left covered employment during their later years and would offer undue advantages to those who entered covered employment only during their last few working years. The system which the Board recommends represents a more flexible and equitable arrangement. It not only protects individuals who have been in covered employment during a considerable portion of their working life, but also safeguards the system as it matures against disproportionate payments to those in covered employment for only a short time.

Benefits for Widows and Orphans--
The Board is of the opinion that old-age insurance should be expanded to include survivors' insurance. The law now provides for single lump-sum cash death payments equal to 3.5 percent of the worker's total recorded wages provided he has not during his lifetime drawn benefits equal to this amount. Under a social insurance system the primary purpose should be to pay benefits in accordance with the presumptive needs of the beneficiaries, rather than to make payments to the estate of a deceased employee regardless of whether or not he leaves dependents. The payment of monthly benefits to widows and orphans, who are the two chief classes of dependent survivors, would furnish much more significant protection than does the payment of lump-sum benefits. Such monthly benefits could be provided and still kept within the eventual costs of the present system. There is ample precedent for such provision, since 15 out of 22 foreign old-age insurance systems make provision for survivors' benefits.

The Board is of the opinion that aged widows and younger widows with dependent children should receive benefits, and that benefits should be paid on behalf of children at least until they reach 16 years of age, and until 18 while they are regularly attending school.

Some measure of the need for this protection as it affects children is indicated by experience under the present Federal-State program of aid to dependent children. In 43 percent of these cases the children have become dependent because of the father's death and in an additional 25 percent of the cases, because of the father's disability.

The Board has given much consideration to the feasibility and desirability of providing benefits for widows under 65 years of age who have no young children in their care. The Board believes that only a temporary monthly benefit, covering the period immediately following the husband's death, should be paid in such cases. However, the Board does recommend that all widows of persons who would have been qualified for old-age benefits, if they had lived to age 65, be entitled to a deferred monthly benefit payable at age 65. Such benefits should bear some reasonable relationship to that which the deceased husband would have received.

Normally, young widows without children can be expected to enter gainful employment, but middle-aged widows frequently find it more difficult to become self-supporting. On the other hand, they are likely to have more savings than younger widows and many of them have children who are grown and able to help them until they reach 65 years of age, when they would be entitled to a widow's benefit under the plan proposed. Though their problems are fully recognized, provision for commencing benefits to widows under 65 with no children would present certain serious anomalies. Any age selected for benefits to begin would appear arbitrary, excluding some widows just below that age. Moreover, the question would arise as to discrimination against unmarried women, who would not receive benefits until they reached 65. Yet if the retirement age for women generally were lowered, the effect would be to discriminate against men and at the same time substantially to increase the cost.

Disability Insurance--
The Board has given much thought to the question of whether the present old-age insurance system should be expanded to include provision for benefits to workers who become permanently totally disabled, before reaching age 65, and to their dependents.

With the single exception of Spain, every other country which has a system of old-age insurance has made provision for permanent disability. One of these countries, Great Britain, includes this provision in its health-insurance system; others relate it directly to old-age insurance.

The Board recognizes that the administrative problems involved are difficult, although it does not believe them insuperable. It also recognizes that provision for permanent total disability would increase the cost of the system both now and in the future. For these reasons it is not making any positive recommendation on this matter at this time. It should, however, be pointed out that the extent to which costs would increase would depend upon the definition of disability which could be made effective. If a fairly strict definition were adopted and maintained, the Board believes that the additional costs could be kept within reasonable limits. Later, as experience developed, the definition could be made more liberal if this appeared socially desirable. In connection with any permanent total disability program, adequate provision should be made for hospitalization and other institutional care, and for vocational rehabilitation.

Coverage

Extending the Coverage of the System--
The Social Security Board is of the opinion that it is sound social policy to extend old-age insurance to as many of the Nation's workers as possible. It believes that it is administratively feasible to provide this protection for large numbers of people who are not yet covered.

Even with its present limited coverage--estimated to include at any one time only 50 percent of the Nation's gainfully occupied population-- at least some small measure of protection is already being furnished by the old-age insurance program to two-thirds of those gainfully occupied. This is due to the fact that a great many persons, usually in excluded occupations, work in covered employment from time to time. It is estimated that, even without any change in the present coverage, 75 or 80 percent of the gainfully occupied persons in this country would eventually have some protection. However, since the adequacy of this protection depends to a considerable extent upon the length of time the individual actually works in covered employment, it is highly desirable that coverage be extended as rapidly as administratively feasible. Extension of coverage would also be necessary in order to protect the financial soundness of the system if the present benefit provisions in the law granting such proportionately large benefits to persons who have been in covered employment only a short period prior to retirement are retained.


Agricultural labor--
The Board believes that the "agricultural labor" limitation on coverage should be modified. It is, of course, apparent that the problem of covering the independent farmer cannot be finally solved, except as part of a general program to cover the self-employed. It is also recognized that the complete inclusion of employees engaged in agricultural labor is fraught with great administrative difficulties. However, the Board believes that the inclusion of large-scale farming operations, often of a semi-industrial character, probably would reduce rather than in crease administrative difficulties.

At present it is almost impossible to delimit the field of "agricultural labor" with anything like the certainty required for administration and for general understanding by employers and employees affected. The extent of the exception is shadowy indeed where the producer also engages in processing and marketing.

The Board recommends that the language of the present exception relating to ''agricultural labor" be modified to make it certain that this exception applies only to the services of a farmhand employed by a small farmer to do the ordinary work connected with his farm. The Board further recommends that, with a reasonable time allowed before the effective date, the "agricultural labor" exception be eliminated entirely.

Domestic Service--
The Board recommends that the exception of domestic service be eliminated, with a reasonable time allowed before the effective date. It is believed that the principal administrative difficulties with respect to domestic service will be overcome, just as they will be in the case of agricultural labor, when the individuals affected become generally informed as to the benefits and obligations incident to coverage.

Maritime Employment--
There is at present an exclusion of "service performed as an officer or member of the crew of a vessel documented under the laws of the United States or of any foreign country." The legislative history indicates that this exclusion was made because of the administrative difficulties of covering foreign crews of American vessels engaged in foreign trade. The Board recommends that the present exception be redrawn so that exclusion of employment on American vessels be limited to this type of situation.

Nonprofit Organizations--
The Board recommends the inclusion of service performed for religious, educational, charitable, and similar nonprofit organizations. The Board foresees no serious administrative difficulties in such inclusion.

Services Performed for the Federal Government or Its Instrumentalities--
The Board recommends the inclusion of service performed in the employ of the United States or its instrumentalities. The Board anticipates no administrative difficulties in such inclusion. However, in extending old-age insurance to all employees of the Federal Government, it would be necessary to give consideration to the effect on other retirement systems for Federal employees, with a view either to excluding employees already covered by these systems or to adapting these systems so that they would take account of the basic protection afforded by the old-age insurance system. In any event, the Board recommends an amendment to bring under coverage employees of instrumentalities of the United States, except those which either are wholly owned by the United States or are exempt from the taxes levied under the Social Security Act by virtue of some other act of Congress. The principal "Federal instrumentalities" which would thus be brought into old-age insurance are national banks and State banks which are members of the Federal Reserve System, and building and loan associations which are members of the Federal Home Loan Bank System.

Services Performed for States and Their Instrumentalities--
A
number of State and municipal officials have indicated a desire for coverage of State and municipal employees. However, no method has yet been devised which would overcome constitutional difficulties and also protect the old-age insurance system against adverse selection. It is hoped that further study will develop a method which will be constitutional and which will prove mutually advantageous to the States, their employees, and the old-age insurance system. The Board confines its recommendation at this time to the suggestion that the present exclusion of the act be modified so that it applies only to services performed in the employ of a State or a political subdivision or instrumentalities wholly owned by the State or whose functions are such as to raise constitutional barriers to Federal taxation.

Allowing Benefit Credits for Wages Earned After 65--
The Social Security Act as it now stands does not permit workers to gain benefit credit for wages earned after age 65. The taxes paid by employer and employee also stop when the wage earner reaches this age. Lump-sum cash benefits are provided for workers who reach 65 years of age without having worked enough to qualify for a monthly benefit. Such workers, even though they continue in employment, cannot under the present law qualify for annuities. The lump-sum payment is all that is available to them. The Social Security Board recommends that such workers receive credit for any time that they work after age 65 so that they may qualify for monthly benefits upon retirement at a somewhat later date. This would automatically eliminate the occasion for lump-sum payments at age 65, and at the same time would provide a much greater degree of protection for older workers.

Employer-Employee Relationship--
Old-age insurance coverage is at present limited by the undefined terms "employer" and "employee." The Board recommends that this provision be expanded to the extent feasible to cover more of the persons who furnish primarily personal service. The intention of such an amendment would be to cover persons who are for all practical purposes employees, but whose present legal status may not be that of an employee. At present, for example, insurance, real estate, and traveling salesmen are sometimes covered and sometimes not; the Board believes that all such individuals should be covered.

Casual Labor--
The Board believes it is necessary to retain the existing exclusion of casual labor not in the course of the employer's trade or business, because of the administrative difficulties which otherwise would be involved, with no considerable compensating social advantages. It should be noted that this exclusion is numerically small since labor so excluded must be not only casual but also unrelated to the employer's business.

Self-Employment--
The Board has given considerable study to the possibility of including self-employed persons under the old-age insurance system. However, the Board is not prepared at this time to recommend what it considers a practicable method for extending coverage to such persons.

Contracting Coverage to Prevent Collusion--
Until a practicable means is found for including self-employed persons, the Board recommends that the family employment exclusion, appearing in title IX of the Social Security Act relating to unemployment compensation, be incorporated in the old-age insurance provisions. The Board further recommends that the act be amended so that old-age insurance benefits will not be paid where there has been a contract of employment for the purpose of securing benefits without the performance of bona fide service.

Financing

The Social Security Board is not making detailed recommendations relative to the financing of the old-age insurance system since the Treasury Department is charged with primary responsibility in this regard. However, the Board believes it is essential that any method of financing that is proposed should take into account all probable future disbursements so that the interests of both the prospective beneficiaries and the general taxpayers may be properly safeguarded.

When the system is fully matured, its eventual cost with the changes here recommended--which the Board believes will furnish far greater protection--would be somewhat less than the cost of the present system. The cost of paying benefits in the early years would, however, be greatly increased if the proposed changes were put into effect. If permanent total disability insurance should also be included, the eventual cost, when the system is fully matured, would be somewhat more than the present system.

The existing law contemplates a fully financed system for all time to come. That is to say, it requires that probable future liabilities be taken into account from the very beginning and that a sufficient reserve be set up so that the earnings on the reserve, plus current pay-roll tax receipts, will be sufficient always to cover annual benefit disbursements.

As already stated, if the recommendations of the Board relating to benefits are adopted, early payments under the system will increase substantially. The tax provisions embodied in the present law would probably cover the increased annual cost for the first 15 years. They would also probably provide a small reserve, which would be invested and earn some interest. But when future annual benefit disbursements exceeded annual tax collections plus interest earnings, some other provision would have to be made for the funds which, under the existing plan, would be secured from interest on accumulated reserves. It would then be necessary to do one of two things: increase the pay-roll tax, or provide for the deficiency out of other general taxes.

The Board is of the opinion that it would be sound public policy to pay part of the eventual cost of the benefits proposed out of taxes other than pay-roll taxes, preferably taxes such as income and inheritance taxes levied according to ability to pay.

The portion of the total costs to be met by taxes other than pay-roll taxes should depend upon the proportion of the general population covered by the insurance system. The wider the coverage, the more extensive this contribution from other tax sources might properly be.

Although the Board believes that contributions to the old-age insurance program should eventually be made out of Federal taxes other than those on pay rolls, it does not believe that such taxes should be substituted for any part of the pay-roll taxes, provided in the present act, or that such other taxes should be used until annual benefit disbursements begin to exceed annual pay-roll tax collections, plus the interest earned on the small reserve which would be accumulated. The Federal Government is already making an annual contribution out of general taxes of almost a quarter of a billion dollars for old-age security, in the form of grants to the States to help finance their old-age assistance programs. Substitution of other taxes for any portion of the pay-roll taxes now provided would increase the disparity between taxes paid and benefits payable in the early years of the system. Those retiring in the early years in any event will receive much greater benefits in proportion to taxes paid on their behalf than those retiring in the later years. Furthermore, while the exact future costs of benefits under the insurance system cannot be determined with any degree of accuracy until more data are available (especially those which will come with the actual payment of benefits to large numbers of people), it is certain that the costs will be great and it is important that Government finances should not suffer through reduction in revenues from pay-roll taxes.

Administrative Changes

The Board recommends a number of changes to improve administration of the present law:

1. Inclusion of a provision requiring employers at the time of wage payment to furnish employees a statement, which they may retain, showing the amount of taxes deducted from their wages under the old-age insurance system.

2. Exclusion of any nominal wages paid employees of all nonprofit organizations exempted from the Federal income tax. Many nonprofit organizations, particularly fraternal organizations with employees and officers drawing a nominal wage, are now required to make reports and pay taxes for these employees, although the amount of the taxes and prospective benefits involved is negligible.

3. Exclusion from the definition of wages of all payments made by an employer to or on behalf of an employee under a plan or system providing for retirement benefits, dismissal wages, disability benefits and medical and hospital expenses. The purpose of this proposal is to avoid discouraging plans of the nature described.

4. Simplification of the present provisions with respect to lump-sum payments on death (in case the substantive changes recommended by the Board are not made).

5. Provision that applications for death benefits must be filed within 2 years after date of death.

6. Simplification of the procedure for payment to infants or other legally incompetent persons.

7. Provision making more equitable the recovery by the Federal Government of incorrect payment to individuals.

8. Provision respecting the practice of attorneys and agents before the Board.

9. Provision that findings of fact and decisions of the Board in the allowance of claims shall be final and conclusive. Such a provision would follow the precedent of the World War Veterans Act and of other legislation with respect to agencies similar to the Board which handle a large number of small claims.

10. Clarification of the law regarding services of an employee performing both excluded and included employment.

Unemployment Compensation

The unemployment compensation and public assistance provisions of the Social Security Act constitute the most comprehensive attempt yet made to utilize a system of Federal-State cooperation for the solution of national problems. To promote State action in unemployment compensation the Federal law establishes a uniform tax payable by employers regardless of whether the State in which they operate has an unemployment compensation law; it then permits employers to offset their contributions under a State unemployment compensation law up to 90 percent of the total Federal tax. The act also provides that the Federal Government shall make grants to the States to cover the entire necessary cost of proper administration of their unemployment compensation laws.

The recommendations of the Social Security Board relative to unemployment compensation deal with extension of coverage, improvement of Federal-State relationships, and certain technical changes, rather than any fundamental change in the present Federal-State pattern now set forth in the Federal law. Though the adjustment of Federal-State relations is at best a difficult and delicate task, particularly in the field of social legislation, experience so far indicates a large measure of success. The present provisions of the Federal law have proved completely effective in facilitating the enactment of State unemployment compensation laws. These laws and the character of their administration have on the whole been reasonably satisfactory. The inevitable administrative difficulties involved in the inauguration of any large-scale undertaking were accentuated by the fact that in 22 States benefits became payable in January 1938, at a time of unexpectedly heavy unemployment. In spite of these difficulties, the 31 jurisdictions that had begun paying benefits by the end of 1938 have paid out about $400,000,000 in benefits to approximately 3.5 million unemployed workers. The most pressing problem in unemployment compensation at the present time is improvement and simplification of the State laws themselves and of their administration, on the basis of increasing experience.

Employers' Tax and Reporting Procedures
The Board is aware of the suggestion made at the time the Social Security Act was under consideration, that the Federal Government should collect the entire Federal tax and make grants-in-aid to the States, instead of allowing an offset on the Federal tax. It was argued that such a method would relieve employers of the necessity of making tax reports to both the State and the Federal Government. It is true that this would be of some advantage, particularly to employers operating in more than one State. However, at present, the State unemployment compensation agencies need detailed information concerning the past working history of persons claiming benefits in order to determine the amount due them. If employers did not report directly to the State agencies, it would either be necessary for the Federal Government to furnish the State agencies the required information, or it would be necessary for the States to develop benefit procedures which would eliminate detailed reporting. Neither the Federal Government nor the States have had sufficient experience to warrant an opinion as to the feasibility of such a drastic change.

The Board, however, does recommend that the Federal unemployment compensation tax provisions be combined with those for old-age insurance which relate to employers. Such a combination would have the advantage of relieving employers from making two separate Federal tax returns. This arrangement would, of course, not affect the present offset provision or the present use of the proceeds of the two separate taxes.

Extension of Coverage
Regardless of whether the two taxes are combined, the Board recommends that the coverage of unemployment compensation be made similar to the coverage already recommended for old-age insurance, with certain exceptions to be discussed later. Even though the tax provisions were not combined, there would be great advantages in making the provisions of the two programs identical with respect to employers affected by both. Such a change would make it possible to simplify employers' recordkeeping and reporting to the Federal Government, as well as to the States, since the latter would undoubtedly adjust their State laws accordingly.

The suggested combination of the unemployment compensation tax provisions with the old-age insurance tax provisions or any broadening of Federal unemployment compensation provisions (with the exception of maritime employment) should not become effective before January 1, 1941, since it would be necessary to give the States ample opportunity to amend their laws accordingly. This would also give the State unemployment compensation agencies sufficient time to perfect their administrative organization and procedures.

In unemployment compensation as in old-age insurance, the Board believes that it is administratively feasible and in accordance with sound social policy to include the employments not covered by present Federal provisions, with the exceptions hereafter discussed.

Problems Relating to Agricultural Employment--
The situation of agricultural employees is frequently different from that in most other occupations. Farm employees often either own small farms of their own, or live in homes provided by the employer with the use of land and equipment to produce a part of their subsistence. While it seems feasible to cover such persons in old-age insurance, in unemployment compensation there are unusual problems. For example, in many cases it would be extremely difficult to determine whether the individual should be considered "unemployed," or whether he is normally working for himself. While some foreign systems have been extended to cover agricultural employees, it must be recognized that the agricultural wage-earning group in this country is much less clearly defined. It therefore appears inadvisable to recommend at this time the extension of unemployment insurance to cover all agricultural employees. However, just as in the case of old-age insurance, the Board recommends that the language of the present exception relating to "agricultural labor" in any event should be modified to make certain that this exception applies only to the services of a farm hand employed by a small farmer to do the ordinary work connected with his farm. The Board will continue to study the problems involved and will make every effort to develop practical ways and means of bringing about extension to agricultural employees.

Problems Relating to Domestic Service--
In case of domestic service in a private home, the difficulties of extending unemployment compensation are far less serious than in agriculture. The fact of unemployment is much easier to determine. The chief problem here relates to the determination and collection of contributions. The Board believes domestic employees can and should be covered by the unemployment insurance provisions of the act, provided sufficient time is allowed for the States to perfect their administrative procedures.

Problems Relating to State and Federal Employment--
Employment by a State government or its instrumentalities must continue to be excluded from Federal unemployment compensation provisions for the reasons cited in connection with old-age insurance. The Board does not believe there would be any great advantage in including Federal employees under the unemployment compensation provisions. Civil-service employees are, for the most part, already protected against the hazard of unemployment, and it would probably be more practical to provide for non-civil-service employees through some form of dismissal wage rather than through establishing a special Nation-wide unemployment compensation system.

However, the Board does believe that so-called instrumentalities of the Federal Government which are not wholly owned by it--such as national banks--should be brought into State unemployment compensation as well as under old-age insurance.

Nonprofit Organizations--
The Board recommends the inclusion of service performed in the employ of nonprofit organizations. The Board anticipates no serious administrative difficulties in such inclusion.

Family Employment--
In order to avoid serious administrative difficulties in the payment of unemployment compensation benefits, the Board believes that the exclusion of family employment should be retained.

Including Employers of One or More Employees--
The Board recommends that the present Federal restriction to employers who have had 8 or more employees in 20 or more weeks during the year be eliminated so that the unemployment compensation provisions would cover all those having one or more employees, just as in the case of old-age insurance. Twenty-four State unemployment compensation laws already cover smaller employers than those included in the Federal act as it now stands; of these, 10 cover employers of one or more.

Employer Employee Relationship--
The Board recommends that the changes to broaden and clarify these terms, already described in connection with old-age insurance, be also incorporated in the Federal provisions for unemployment compensation.

General--
The Board recommends that the Federal pay-roll tax in connection with unemployment compensation be limited to the first $3,000 of annual wages, if that maximum is retained in the old-age insurance tax provisions. Though the Board recognizes that such a limitation would reduce revenue somewhat, it believes that this disadvantage would be counterbalanced by the advantages to be derived from making the Federal tax provisions identical for both programs.

If unemployment compensation coverage is extended to employers of one or more, the Board believes it will be necessary to exclude--for the same reason as in old-age insurance--casual labor not in the course of the employer's trade or business.

Unemployment Compensation for Seamen--
Under the Constitution it is impossible to confer upon the States jurisdiction over maritime employment to the extent necessary to meet the needs of unemployment compensation. Therefore, in order to afford such protection to seamen it would be necessary to pass a Federal act. The Board recommends that such an act be passed covering all maritime employment which it is not possible or practicable to bring under State laws, with the exceptions noted under old-age insurance.

State Personnel--
Under the present Federal law, before a grant to a State for unemployment compensation administration may be certified, the Social Security Board must find that the State law includes provisions for "such methods of administration (other than those relating to selection, tenure of office, and compensation of personnel) as are found by the Board to be reasonably calculated to insure full payment of unemployment compensation when due." In another section, the Board is required, in making such grants, to determine the amount "necessary for proper administration" of the State law.

The Board believes that proper administration must necessarily include adequate provision for the selection, tenure of office, and compensation of personnel. Therefore it may be argued that a conflict exists in the present Federal provisions. The Board believes this should be resolved by repealing the parenthetical language quoted above.

In the opinion of the Board it is sound policy for the State unemployment compensation agencies to have entire authority and responsibility for the selection, tenure of office, and compensation of individual employees. But this authority and responsibility should be exercised in accordance with a systematic merit system for the establishment and maintenance of desirable personnel standards. The Board therefore recommends that for the parenthetical language already quoted, there be substituted language requiring that methods of State administration shall include procedures for the establishment and maintenance of personnel standards on a merit basis.

Such merit systems should include, as does the Federal civil-service law, prohibition against political solicitation and political activity, since the salaries of State unemployment compensation personnel are paid entirely out of Federal funds.

Thirty-nine State unemployment compensation agencies already operate under a general State civil-service law or in accordance with a merit system established for or by the agency itself. The effect of this suggested amendment would simply be to make personnel practices already put into operation by a large majority of States more general.

The Board believes that requiring the State agencies to establish a merit system would place Federal-State relations on a more stable and automatic basis. In actual experience the result of establishing an adequate State personnel system has been to eliminate the necessity for detailed Federal scrutiny of operation, and the possibility of misunderstanding and conflict in Federal-State relations. The suggested requirement thus constitutes not an encroachment of Federal authority in State operations, but rather a protection to the States against undue interference with their administrative functioning.

The establishment of a merit system also protects taxpayers and beneficiaries within the State, inasmuch as it materially reduces the hazard that administration will become so unsatisfactory that the State law can no longer be certified by the Board as meeting the administrative standards of the Federal act. Such inability to certify means that employers in a State would be required to pay to the Federal Government 100 percent instead of 10 percent of the Federal tax, in addition to paying their full tax under the State unemployment compensation law. Up to the present the Board has not found it necessary to withhold certification in the case of unemployment compensation, although it has been necessary to take such action regarding public assistance grants. Effective safeguards should be set up, in order to eliminate the possibility that the derelictions of their public servants may bring such a penalty upon innocent citizens of a State.

Unification of Unemployment Compensation and Employment Service--
In order to promote effective administration, the Board recommends that the administration of unemployment compensation and of the United States Employment Service be unified in a single Federal bureau, in such a way that the specialized functions of each are not only protected but strengthened. In all other countries having unemployment compensation systems, a single governmental agency administers both the placement function and the insurance function. This has been found necessary because of the close relationship essential to the proper carrying out of these two functions. In this country each is under a separate Federal agency, although in all the States but one a single State agency administers the unemployment compensation law and operates the State employment service.

The Social Security Act provides that unemployment compensation may be paid through public employment offices or such other agencies as the Social Security Board may approve. The Board has fully recognized the desirability of paying claims through public employment offices, in order to aid the unemployed worker in finding new employment, and to reduce the amount of unemployment compensation claims to a minimum. It has, therefore, not approved of payment of unemployment compensation claims through any agencies other than employment offices.

Recognizing the necessity for an efficient employment service as a part of the proper administration of a State unemployment compensation law, the Board has made grants to the States for the administration of their employment services. The Board has realized that it would be uneconomical, undesirable, and impracticable to have two employment services, one for workers covered under the unemployment compensation laws and one for workers not so covered. Therefore, it has encouraged the States to affiliate with the United State Employment Service and to match the Federal funds available in connection with that service. All the States have taken this action. The Federal funds available to them from this source have been substantially augmented by grants from the Social Security Board. Of the total funds now being expended for the operation of the expanded Federal-State employment service, approximately 80 percent is provided by grants from the Board, 10 percent by grants from the United States Employment Service, and 10 percent by the States themselves.

From the outset the Board has recognized the necessity for coordinating and integrating its unemployment compensation functions with those of the United States Employment Service, in order to avoid the dilemma in which the State agencies would be placed if obliged to deal with two Federal agencies having conflicting standards and policies. The Board, therefore, negotiated an agreement with the Secretary of Labor whereby the United States Employment Service and the Board's Bureau of Unemployment Compensation would act as if they were a single agency. This joint agreement has promoted a considerable degree of coordination and integration. But complete integration is necessary in the interests of economy, efficiency, and good will. The day-to-day activities of the local employment offices, through which unemployment compensation claims are paid, are closely interrelated and vary in such a way between unemployment compensation and placement work that it is necessary for a considerable portion of the employees to be available for transfer from one function to another as occasion requires. Only unified supervision and direction can properly protect and integrate the various functions that must be performed if unemployed workers and employers are to be served adequately.

Other Administrative Changes
The Board recommends a number of other changes designed to improve the administration of the present program:

1. Increasing the authorization for the annual appropriation of Federal funds to assist the States in the administration of their unemployment compensation laws. The present maximum of $49,000,000 is clearly insufficient to cover the necessary cost of proper administration. The Board recommends that the maximum be raised to $80,000,000. The history of this legislation indicates that Congress intended that the 10 percent net proceeds of the Federal tax should cover the entire cost of administration. An authorization of this increased amount would still be covered by the probable proceeds of this tax.

2. Supplementary provisions authorizing the Social Security Board to enforce requirements that expenditure by State officials of Federal funds be in accordance with the purposes authorized by the act.

3. Changing the base of the pay-roll tax from "wages payable" to "wages paid," thus making it the same as that for old-age insurance taxes.

4. Permitting the employers to offset against their Federal tax, up to the 90 percent maximum, all contributions made under State unemployment compensation laws, regardless of whether or not the latter are made with respect to employment as defined under the Federal law.

5. Exclusion of nominal wages paid to employees of nonprofit organizations, as already recommended under old-age insurance.

6. Exclusion from the definition of wages of all payments made by an employer to or in behalf of an employee under any benefit plan or system, as described in the identical recommendation made with regard to old-age insurance.

7. Extending the time within which credit may be claimed under the Federal taxing provisions in cases where the employer has paid his State tax on time, but has paid it to the wrong State.

8. Authorizing the States to make their unemployment compensation laws applicable to persons employed upon land held by the Federal Government, such as employees of hotels in national parks. Congress has already enacted a statute giving the States authority to apply their workmen's compensation laws to such employees.

9. Clarification of the language excluding State instrumentalities to indicate that the exemption applies to any instrumentality wholly owned by the State or political subdivision, as well as to those which would be exempt under the Constitution.

10. Clarification of the law as regards services of an employee performing both excluded and included employment. The same recommendation is made in connection with old-age insurance.

11. Clarification of the provisions relating to so-called "merit rating" or "experience rating" under State unemployment compensation laws.

Public Assistance

The Social Security Act offers the States Federal aid in providing public assistance for three groups of the needy--the aged, the blind, and dependent children. The Nation-wide development of these programs since the passage of the act leaves no question as to the effectiveness of this Federal legislation in promoting more systematic, equitable, and humane assistance to these needy men, women, and children.

As a result of the Federal grants-in-aid which the act makes available, all the States and Territories and the District of Columbia have joined in the Federal-State old-age assistance program. Forty States, the District of Columbia, and Hawaii are taking part in the program for aid to dependent children, and the same number in aid to the needy blind. By the close of 1938 some 1,771,000 old people, 636,000 children, and 42,000 blind were thus being aided from combined Federal and State funds. The total amount of Federal and State aid given during the current fiscal year will approximate half a billion dollars.

The Board recommends no fundamental change in Federal-State relations as regards public assistance. It believes, however, that certain substantive and procedural changes can be made which will greatly strengthen and improve the protection now afforded.

Old-Age Assistance and Aid to the Blind--
At the present time, in addition to reimbursing the States for 50 percent of their assistance payments to the needy aged and needy blind (subject to a maximum of $30 a month for each person aided), the Federal Government makes an additional grant of 5 percent which the State may apply to administration. This flat 5 percent does not represent an adequate Federal contribution for proper administration; and the Board, therefore, recommends that the law be amended so that Federal grants may reimburse the States for 50 percent of the necessary cost of proper administration.

Aid to Dependent Children--
The Board strongly recommends that grants-in-aid to the States for aid to dependent children be placed on the 50-percent matching basis already in effect for the other two programs. At the present time the Federal Government contributes only one-third of the payments made by the States to dependent children. As a result, fewer States are participating in this program, and in many of the States that are participating, the level of assistance for dependent children is lower than that for the aged and the blind. The number of old people now being aided through Federal grants is three times as large as the number of dependent children. But the actual number of dependent children in need of assistance and eligible under Federal and State standards is probably fully as large as the number of needy aged now receiving assistance.

At present the maximum amounts which may be taken into consideration in making Federal grants are $18 a month for the first child and $12 for each additional child in the family. The Board recommends that these maximum limitations be raised to the same maximum as that provided in the case of needy aged and needy blind.

In addition to these changes in the basis of Federal matching, the Board recommends that the age limit for dependent children should be raised in the Federal law from 16 to 18 when the child is regularly attending school. This would recognize the present desirable tendency for children to finish high school before seeking permanent employment.

For aid to dependent children the Federal law already provides that the cost of administration shall be reimbursed by the Federal Government in the same proportion as the cost of assistance. This should be retained in placing Federal grants for this program on an equal matching basis.

Public Assistance for Indians--
A number of States have a considerable Indian population, some of whom are still wards of the Federal Government. The Board believes that with regard to certain Indians for whom the Federal Government is assuming responsibilities in other respects, and who are in need of old-assistance, aid to the blind, or aid to dependent children, the Federal Government should pay the entire cost. If this provision is made, the Board should be authorized to negotiate cooperative agreements with the proper State agencies so that aid to these Indians may be given in the same manner as to other persons in the State, the only difference being in the amount of the Federal contribution. The Board believes that it should also be given authority to grant funds to the Office of Indian Affairs for this purpose, if that appears more desirable in certain circumstances.

Variable Grants--
Federal grants-in-aid under the three public assistance provisions of the Social Security Act will total approximately a quarter of a billion dollars during the current fiscal year. These grants are made to all States on the same percentage basis, regardless of the varying capacity among the States to bear their portion of this cost. The result has been wide differences between the States, both in number of persons aided and average payments to individuals. Thus, in the case of old-age assistance the number of persons being aided varies from 54 percent of the population over 65 years of age in the State with the highest proportion to 7 percent in that with the lowest proportion. Similarly State averages for payments to needy old people range from about $32 per month to $6. While these variations may be explained in part on other grounds, there is no question that they are due in very large measure to the varying economic capacities of the States.

The Board believes that it is essential to change the present system of uniform percentage grants to a system whereby the percentage of the total cost in each State met through a Federal grant would vary in accordance with the relative economic capacity of the State. There should, however, be a minimum and maximum limitation to the percentage of the total cost in a State which will be met through Federal grants. The present system of uniform percentage grants results at best in an unnecessarily large amount of money flowing in and out of the Federal Treasury, and at worst in increasing the inequalities which now exist in the relative economic capacities of the States.

The Board believes that, with such large sums involved, it would be desirable to establish an interdepartmental agency representing the various governmental departments which collect and analyze economic data having a bearing on the relative economic capacity of the various States. Such an agency could be given the responsibility of determining the relative economic capacity of the various States, upon the basis of which the varying percentages of Federal grants would be computed.

State Personnel--
With regard to requiring States to establish merit systems for the selection and maintenance of personnel, the Board makes the same recommendations for public assistance as for unemployment compensation. These--and the reasons therefore--have already been set forth. It should be noted that in 19 States public-assistance agencies already operate under a systematic merit system and that in varying degrees all the States have set up objective standards of some sort for the selection of public-assistance personnel. In public assistance, as in unemployment compensation, this provision would strengthen State administration, safeguard taxpayers and beneficiaries, and place Federal-State relations on a more stable and automatic basis.

Disclosure of Confidential Information--
The Board recommends that State public-assistance plans be required, as one of the conditions for the receipt of Federal grants, to include reasonable regulations governing the custody and use of its records, designed to protect their confidential character. The Board believes that such a provision is necessary for efficient administration, and that it is also essential in order to protect beneficiaries against humiliation and exploitation such as resulted in some States where the public has had unrestricted access to official records. Efficient administration depends to a great extent upon enlisting the full cooperation of both applicants and other persons who are interviewed in relation to the establishment of eligibility; this cooperation can only be assured where there is complete confidence that the information obtained will not be used in any way to embarrass the individual or jeopardize his interests. Similar considerations are involved in safeguarding the names and addresses of recipients and the amount of assistance they receive. Experience has proved that publication of this information does not serve the avowed purpose of deterring ineligible persons from applying for assistance. The public interest is amply safeguarded if this information is available to official bodies.

Administrative Changes--
The Board recommends a number of minor technical changes to clarify and simplify existing Federal public-assistance provisions: Of these the most important is provision for a different method of settlement with the States for amounts recovered from the estates of deceased recipients of old-age assistance. At present the States are not required to make collections against the estates of deceased recipients; nor does the Board propose that any such requirement be set up. However, a number of States do make such collections in accordance with their own plans. The present method of settlement between the States and the Federal Government in such cases creates needless administrative difficulties which can readily be eliminated by permitting the Federal Government to offset its pro rata share of the amounts recovered against the next payment made by it to the State.

Health

The Chairman of the Social Security Board is a member of the Interdepartmental Committee to Coordinate Health and Welfare Activities which has presented to the President a long-range National Health Program. The Board is of the opinion that the enactment of the National Health Program would not only result in meeting more adequately the needs of those now receiving aid under the Social Security Act, but would also have a material effect in reducing the future cost of public assistance under the act.

Recommendation V of the National Health Program calls for insurance against loss of wages during disability not arising out of employment. The Board believes that adoption of this recommendation would go far toward completing the protection now afforded workers against loss of wages. The present State workmen's compensation laws offer protection against loss of wages resulting from injury arising out of employment. The State unemployment compensation laws furnish some protection against wage loss due to unemployment. The Federal old-age insurance system will provide protection against permanent loss of wages due to old age. But, though some workers have some protection through voluntary insurance, no comprehensive protection yet exists against unemployment due to disability not connected with employment.

As already indicated in the discussion of old-age insurance, the Board believes that if protection against wage loss due to permanent total disability is provided, it should be linked with that program since permanent disability is most likely to occur among older workers, and the permanently disabled worker leaves the labor market in much the same sense as does the aged person. Another reason for linking permanent total disability with old-age insurance is that the latter is on a Federal basis. The load would thus be more evenly distributed among the States than would be possible if permanent total disability were administered on a State-by-State basis, since some States have higher proportions of the older persons among whom disability more frequently occurs.

As regards temporary disability compensation the Board believes that this can be placed on a State basis following the precedent of unemployment compensation. The Board recommends that if such a program is inaugurated, it incorporate taxing and grants-in-aid provisions like those in operation for unemployment compensation--that is, provision for a uniform, Federal pay-roll tax against which employers would be permitted to offset a substantial percentage of their contributions under State laws for this purpose. If Congress should not wish to levy an additional pay-roll tax at this time, this offset might be allowed against the present tax levied upon the employer under the old-age insurance system. But it should be realized that this would materially reduce the proceeds available for future old-age insurance benefits. The Board estimates that a system of temporary disability compensation would involve a cost of approximately 1 percent of wages. If a State levied a tax of 1 percent payable equally by employers and employees, allowance to employers of an offset up to 90 percent of a Federal tax of one-half of 1 percent would be sufficient to enable States to provide temporary disability compensation, without the risk of unfair competition on the part of employers in other States that fail pass such legislation. In order to afford States ample opportunity to enact the necessary legislation, the Board recommends that Federal action in this field should not be made effective prior to January 1, 1941.

General

The Board recommends the following amendments of a general character. These are to a large extent self-explanatory

1. An amendment to prohibit the disclosure of information obtained by the Board or its employees except under certain restricted conditions related to proper administration. The provisions which the Board recommends are similar to those already applicable to the Veterans' Administration.

2. An amendment to confer upon the Social Security Board the power to issue subpoenas, administer oaths, and examine witnesses and the like in connection with its administration of the Social Security Act. This recommendation is in line with the authority conferred on numerous other administrative agencies, such as the Veterans' Administration, the Federal Trade Commission, and the Securities and Exchange Commission.

 

President's Transmittal to the Congress

President's Letter of Transmittal to the Congress

To the Congress:

Four years ago I sent to the newly convened Congress a message transmitting a report of the Committee on Economic Security. In that message I urged that Congress consider the enactment into law of the program of protection for our people outlined in that report. The Congress acted upon that recommendation and today we have the Social Security Act in effect throughout the length and breadth of our country.

This Act has amply proved its essential soundness. More than two and one half million needy old people, needy blind persons, and dependent children are now receiving systematic and humane assistance to the extent of a half billion dollars a year.

Three and a half million unemployed persons have received out-of-work benefits amounting to $400,000,000 during the last year.

A Federal old-age insurance system, the largest undertaking of its kind ever attempted, has been organized and under it there have been set up individual accounts covering 42,500,000 persons who may be likened to the policy holders of a private insurance company.

In addition there are the splendid accomplishments in the field of public health, vocational rehabilitation, maternal and child welfare and related services, made possible by the Social Security Act.

We have a right to be proud of the progress we have made in the short time the Social Security Act has been in operation. However, we would be derelict in our responsibility if we did not take advantage of the experience we have accumulated to strengthen and extend its provisions.

I submit for your consideration a report of the Social Security Board, which, at my direction and in accordance with the congressional mandate contained in the Social Security Act itself, has been assembling data, and developing ways and means of improving the operation of the Social Security Act.

I particularly call attention to the desirability of affording greater old age security. The report suggests a two-fold approach which I believe to be sound. One way is to begin the payment of monthly old-age insurance benefits sooner, and to liberalize the benefits to be paid in the early years. The other way is to make proportionately larger Federal grants-in-aid to those states with limited fiscal capacities, so that they may provide more adequate assistance to those in need. This result can and should be accomplished in such a way as to involve little, if any, additional cost to the Federal Government. Such a method embodies a principle that may well be applied to other Federal grants-in-aid.

I also call attention to the desirability of affording greater protection to dependent children. Here again the report suggests a two-fold approach which I believe to be sound. One way is to extend our Federal old-age insurance system so as to provide regular monthly benefits not only to the aged but also to the dependent children of workers dying before reaching retirement age. The other way is to liberalize the Federal grants-in-aid to the states to help finance assistance to dependent children.

As regards both the Federal old-age insurance system and the Federal-State unemployment compensation system, equity and sound social policy require that the benefits be extended to all of our people as rapidly as administrative experience and public understanding permit. Such an extension is particularly important in the case of the Federal old-age insurance system. Even without amendment the old-age insurance benefits payable in the early years are very liberal in comparison with the taxes paid. This is necessarily so in order that these benefits may accomplish their purpose of forestalling dependency. But this very fact creates the necessity of extending this protection to as large a proportion as possible of our employed population in order to avoid unfair discrimination.

Much of the success of the Social Security Act is due to the fact that all of the programs contained in this act (with one necessary exception) are administered by the states themselves, but coordinated and partially financed by the Federal Government. This method has given us flexible administration, and has enabled us to put these programs into operation quickly. However, in some states incompetent and politically dominated personnel has been distinctly harmful. Therefore, I recommend that the states be required, as a condition for the receipt of Federal funds, to establish and maintain a merit system for the selection of personnel. Such a requirement would represent a protection to the states and citizens thereof rather than an encroachment by the Federal Government, since it would automatically promote efficiency and eliminate the necessity for minute Federal scrutiny of state operations.

I cannot too strongly urge the wisdom of building upon the principles contained in the present Social Security Act in affording greater protection to our people, rather than turning to untried and demonstrably unsound panaceas. As I stated in my message four years ago: "It is overwhelmingly important to avoid any danger of permanently discrediting the sound and necessary policy of Federal legislation for economic security by attempting to apply it on too ambitious a scale before actual experience has provided guidance for the permanently safe direction of such efforts. The place of such a fundamental in our future civilization is too precious to be jeopardized now by the extravagant action."

We shall make the most orderly progress if we look upon social security as a development toward a goal rather than a finished product. We shall make the most lasting progress if we recognize that social security can furnish only a base upon which each one of our citizens may build his individual security through his own individual efforts.

NOTE: Back in 1934, I created an Advisory Council on Economic Security to assist the Committee on Economic Security in its investigations which eventually led to the formulation and adoption of the Social Security Act in 1935 (see Items 117 and 179, 1934 volume). The Act was based upon the careful research and the thorough studies and surveys made by both the Advisory Council and the Committee.

Since the passage of the basic statute, we have had considerable experience in the administration of the social security program. We had an opportunity to test the operation of its various features, in order to determine the directions in which it might be plausible to expand the Act.

In May 1937, another Advisory Council on Social Security was appointed by the Social Security Board and by a subcommittee of the Senate Committee on Finance. This body was similar in some respects to the old Advisory Council which I had created in 1934. It was composed of twenty-five members, representing employers, employees, and the public; and it concentrated its attention upon the problems arising out of the operation of the old-age insurance program.

Throughout 1937 and 1938, the Advisory Council investigated the ways in which the old-age insurance provisions of the Act could be improved. At the same time, the Social Security Board itself was carrying on surveys, and on December 14, 1937, Chairman Altmeyer submitted to me a list of suggested improvements (see Item 163, and note, 1937 volume). On April 28, 1938, I wrote to Chairman Altmeyer requesting that the Board study some additional changes in the old-age insurance provisions (see Item 56, and note, 1938 volume).

The "Final Report of the Advisory Council on Social Security," dated December 10, 1938, was before the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives when they started their deliberations on the Act. The report of the Social Security Board on the proposed changes in the Act was also referred to the congressional committees concerned, along with the foregoing message which I sent to the Congress.

From February 1 until April 7, 1939, the House Ways and Means Committee held hearings on possible amendments to the Act, and over ninety social security bills were referred to the Committee. H.R. 6635 finally passed the House of Representatives on June 10, 1939, by a vote of 361 to 2, and the bill as amended passed the

Senate on July 13, 1939, by a vote of 57-8. After the adoption of the conference report, I signed H.R. 6635 on August 10, 1939 as 53.Stat. 1360 (see Item 109, this volume).

Most of the reforms recommended by the Social Security Board were embodied in the amendments which were passed by the Congress. The following account outlines changes which the Board advocated, and the extent to which their suggestions were followed by the Congress:

1. Federal Old-Age Insurance

a. Benefits
The Board recommended that monthly benefit payments start in 1940 instead of on January 1, 1942, as scheduled. The amendments advanced the date for beginning payments to January 1, 1940.

Because those retiring in the early years of the operation of the system would receive very small amounts, the Board suggested that supplementary benefits be provided for aged wives, and that average wages instead of total wages be used as a basis for computing benefits. Both these reforms were carried into effect when the amendments were passed, with aged wives being granted supplementary benefits totaling one-half of the old-age insurance benefit of their husbands.

Under the Social Security Act of 1935, single lump-sum cash payments amounting to 3 ½ percent of the worker's total wages were made at the time of his death. The Board felt that monthly benefits to widows and orphans would be preferable. These recommendations were carried out by the 1939 amendments, which granted monthly benefits to widows who had reached 65, unmarried dependent orphans under 18, younger widows with children, and aged dependent parents.

b. Coverage
The Social Security Board recommended that the old-age insurance system be extended to cover employees in large-scale farming operations, and that eventually agricultural labor be covered completely. Likewise, it was advocated that the following groups be covered into the operation of the Act: domestic service, maritime employment (with the exception of foreign crews on American vessels engaged in foreign trade), services performed for religious, educational, charitable and non-profit organizations, services performed for the federal and state governments or their instrumentalities, those workers employed after they passed the age of 65, and those workers performing personal service who did not fall within the term "employee" as used in this Act.

Under the 1939 amendments, three of the above groups were placed within the system: maritime workers, those earning wages after they reached 65, and employees of federal instrumentalities, such as member banks in the Federal Reserve System.

Several other clarifying amendments were passed, such as the exemption of foreign governments and their instrumentalities, the exclusion of any instrumentality wholly state-owned or constitutionally tax-exempt, and the coverage of an employee performing both excluded and included types of employment where the latter predominates during a particular pay period.

c. Financing
The Board made no definite recommendations regarding the financing of the system, beyond stating that if additional funds were needed, they should be raised by taxes other than those on payrolls.

The 1939 amendments postponed until 1943 the increased taxes to be paid by employers and employees. Under the original terms of the Act, the 1 percent old-age insurance tax was to be stepped up to 1 ½ percent during the years 1940, 1941, and 1942. However, the amendments froze the rate of 1 percent until 1942, thus saving employers and workers about $275,000,000 in 1940 and $825,000,000 for the three years.

d. Administrative changes
The following recommendations of the Board were enacted in the 1939 amendments:

(1) Employers are now required to make a statement to employees showing the amount of taxes deducted from their wages under the old-age insurance system.

(2) The recovery by the Federal Government of incorrect payments to individuals has been rendered easier.

(3) Provisions have been made respecting the practice of attorneys and agents before the Board.

(4) Employers are not required to pay taxes on payments they make under any employer welfare plan providing for retirement benefits, disability benefits, medical and hospital expenses, etc.

2. Unemployment Compensation

a. Coverage
In general, the Board advocated that coverage be extended to the same groups which it suggested should be included under the old-age insurance provisions of the Act. With the passage of the amendments, about 200,000 additional persons, chiefly bank employees, were brought into the unemployment compensation branch of the system.

b. Financing
The Board felt that certain features of both the old-age insurance and unemployment compensation sections of the Act should be standardized. Since, under old-age insurance, only the first $3,000 paid to an employee is taxed, a similar recommendation was made for unemployment compensation, and it was embodied in the 1939 amendments. A suggestion that the tax provisions of the two systems be combined or made identical, in order to facilitate record-keeping, was not adopted. However, the Board asked that the taxes for unemployment compensation be imposed on "wages paid," instead of "wages payable," and when the Congress adopted this amendment it established the same basis as used in old-age insurance.

The Board proposed certain liberalizations in the time limit within which an employer could qualify for the 90 percent credit against the federal tax by contributing to state unemployment insurance funds. As asked by the Board, the time limit was extended where the employer has paid his tax on time, but to the wrong state. Also, the amendments of 1939 saved employers approximately $15,000,000 by providing that they would receive full credit for delinquent 1936, 1937 and 1938 taxes paid within sixty days after the passage of the amendments. Other minor changes eased the stringent provisions governing delinquent taxpayers.

c. Administrative changes
The following recommendations of the Board were subsequently enacted:

(1) As in the case of the old-age insurance provisions of the law, payments under employer welfare plans are made exempt from taxation.

(2) States are required to establish and maintain a merit system for the personnel in unemployment compensation agencies, in order to be eligible for federal grants.

(3) The Board recommended that the administration of unemployment compensation and of the United States Employment Service should be placed within a single federal bureau. Under Reorganization Plan No. 1, the United States Employment Service was transferred from the Department of Labor to the Federal Security Agency, and its functions were consolidated with the unemployment compensation functions of the Social Security Board (see Item 66, this volume).

(4) As in old-age insurance, the language excluding state instrumentalities is clarified to apply to any instrumentality wholly owned by the states or political subdivisions thereof, as well as those exempt from tax under the constitution.

(5) Exemption of foreign governments and their instrumentalities from the unemployment compensation tax.

(6) States are now required to enact laws providing that expenditures be in accordance with the provisions of the federal act.

(7) The provisions relating to "merit rating" or "individual employer experience rating" have been clarified in accordance with the recommendations of the Social Security Board.

3. Public Assistance

The Board recommended that the present uniform percentage grants be changed to a system which would take into account the varying economic capacities of the States. However, no action was taken by the Congress.

a. Old-age assistance, and aid to the blind.
The Board proposed that federal contributions for the administration of grants-in-aid to the states should be increased. In the 1939 amendments it was provided that the federal government contribute 50 percent of state assistance payments to needy aged and blind up to a maximum limit of $40 a month. Inasmuch as the previous limit was $30 a month, the maximum federal grant per aged or blind persons was thus increased from $15 to $20 per month.

b. Aid to dependent children. The following recommendations of the Board were subsequently embodied in the 1939 amendments to the Social Security Act:

(1) The contribution of the federal government toward state aid to dependent children was increased from one-third to one-half of the amount granted to each individual.

(2) Where a child is regularly attending school, the age limit is raised from 16 to 18 to enable most children to finish high school.

(3) Before the passage of the amendments, the federal government was limited to contributing $18 per month for the first child and $12 per month for each child thereafter. The Board suggested a liberalization of this amount, and now the federal government will pay one-half the amounts up to an average of $18 per child per month throughout the state.

c. Public assistance for Indians
The Board advocated that the Federal Government reimburse the states for the entire cost of public assistance to certain Indians. No action was taken by the Congress upon this recommendation.

d. Maternal and child health services, and services for crippled children.
Although the Social Security Board made no recommendations on these aspects of public assistance, which are administered by the Children's Bureau of the Department of Labor, testimony presented to the Senate Committee holding hearings upon the Wagner national health bill (see Item 17 and note, this volume) showed the immediate need for expanding assistance along these lines. Greater amounts of federal money, under the 1939 amendments, are authorized to be appropriated to assist the states in extending these services. The total amount authorized to be appropriated for maternal and child health grants was increased from $3,800,000 to $5,820,000, while that for crippled children was increased from $2,850,000 to $3,870,000.

The 1939 amendments to those titles of the Act covering aid to the needy aged, blind, dependent children, maternal and child health services and services for crippled children provided that approval of state plans was contingent upon the establishment of personnel standards on a merit basis.

c. Public health work
The Social Security Board urged the enactment of the National Health Program presented by the Interdepartmental Committee to Coordinate Health and Welfare Activities (see Item 17, and note, this volume). The amendments of 1939 stipulated that the amount authorized to be appropriated for federal aid to state public health programs should be increased from $8,000,000 to $11,000,000. Following this increase, particular emphasis has been placed upon developing control of tuberculosis, malaria, cancer, pneumonia, and industrial hygiene.

4. Vocational Rehabilitation

The Board made no additional recommendations regarding this phase of the Social Security Act, but the 1939 amendments increased the annual allotment from $1,938,000 to $4,000,000, to be divided among the states, Hawaii and Puerto Rico.

(For a discussion of the accomplishments of the Social Security Act, see Item 107 and note, 1935 volume; and Item 103 and note, 1938 volume.)