1965 Advisory Council



1965 Advisory Council on Social Security
Part 1: Financing the Present Program


Financing the Present Program

In this part of the report the Council presents the results of its study of the financial status of the existing social security program and of the principles underlying the legislative provisions for social security financing. The financial implications of the Council's recommendations for program improvements as set forth in parts II and III of the report are presented in conjunction with those recommendations.

The financing provisions of present law are as follows: Employees pay contributions on their annual earnings up to a maximum of $4,800. Each employer pays at the same rate as the employee on the first $4,800 paid to each of his employees in the year. The self-employed pay at a rate approximately equal to 1.5 times the rate paid by employees. Contribution rates are scheduled to increase from an employer and employee rate of 3 5/8 percent each in 1965 to 4 1/8 percent each in 1966 and to an ultimate rate of 4 5/8 percent each in 1968. The contribution rates now scheduled are intended to provide enough income to meet all of the costs of the system, including administration, into the indefinite future.

Funds not needed for immediate benefit payments are invested in obligations of the United States Government and the interest earnings on these obligations are available to help pay the cost of the system. The scheduled contribution rates include an allocation to the separate disability insurance trust fund of one-half of one percent from the combined employer and employee contribution (three-eighths of one percent for the self-employed).

1. The Status of the Program and Allocation of Contribution Income

The social security program as a whole is soundly financed, its funds are properly invested, and on the basis of actuarial estimates that the Council has reviewed and found sound and appropriate, provision has been made to meet all of the costs of the program both in the short run and over the long-range future. The contribution income should be reallocated between the two trust funds, however, so that the disability insurance part of the program, like the old-age and survivors insurance part of the program and the program as a whole, will be in close actuarial balance.

As indicated in the latest Trustees' Report, the social security program as a whole is in actuarial balance both over the short run and for the long-range future. The review of the actuarial estimates conducted by the Council supported this conclusion of the Trustees. In the Council's opinion, based on actuarial estimates that the Council has reviewed and found sound and appropriate, the contribution rates in present law will supply income which, together with interest earnings on the funds, will be sufficient to meet all benefit costs and administrative expenses as they fall due.

While the old-age and survivors insurance part of the program and the program as a whole are in close actuarial balance, the disability insurance part of the program(which involves only a small proportion of the total cost of the system) when looked at separately, is underfinanced. It was recognized at the time of the last major disability amendments in 1960 that the income to the disability fund was likely to be about 0.06 percent of covered payroll short of what was needed for the long- run. Experience since that timehas indicated that disability benefit termination rates due to death and recovery of the beneficiary are lower than had been assumed in the earlier estimates, so that the expected deficit is now about 0.14 percent of covered payroll. To correct this situation, the Council endorses the recommendation of the Board of Trustees that there be a small reallocation of contribution income--the Council would favor 0.15 percent of covered payroll for present law--from the old-age and survivors insurance trust fund to the disability insurance trust fund. {1} This could be done without any increase in the over-all contribution rates now scheduled for the program and would put the disability insurance part of the program in close actuarial balance, while also leaving the old-age and survivors insurance part and the program as a whole in close balance.

In arriving at the conclusion that the system as a whole is in actuarial balance, the Council examined not only the results of the estimates but also the techniques used and the assumptions on which the estimates are based. It found that the techniques used in preparing the estimates of the cost of the program are in accordance with sound actuarial practice and that the assumptions on which these estimates are based are appropriate. The estimates take full and proper account of the various economic and demographic factors affecting the future cost of the program.{2} The Council favors the continuance of present practice under which estimating techniques and the assumptions underlying the estimates and the contribution schedule are re-examined and adjusted in the light of developing experience.

The Council believes that it is proper for a national system of compulsory social insurance to use what is known as an "open-group" technique in preparing actuarial cost estimates--that is, to take into account not only present assets, future benefits for present beneficiaries, and future contributions and benefits with respect to workers now covered, but also the contributions and benefits to be paid with respect to workers to be covered in the future as well. The Council is in agreement with the previous groups that have studied the financing of the program that it is unnecessary and would be unwise to keep on hand a huge accumulation of funds sufficient without regard to income from new entrants, to pay all future benefits to past and present contributors. A compulsory social insurance program is correctly considered soundly financed if, on the basis of actuarial estimates, current assets plus future income are expected to be sufficient to cover all the obligations of the program; the present system meets this test. The claim sometimes made that the system is financially unsound, with an unfunded liability of some $300 billion, grows out of a false analogy with private insurance, which because of its voluntary character cannot count on income from new entrants to meet a part of the future obligations for the present covered group.

It is important to note that the long-range cost estimates prepared for the program are based on the assumption that earnings will remain at a given level (at the 1963 level under the estimates shown in this report). If average earnings continue to rise in the future, as there is reason to expect they will, then, assuming no change in other cost factors, the income of the program relative to outgo will be considerably higher than the estimates show. {3} The Council believes that making the estimates on a level-wage assumption allows for a desirable margin of safety and recommends that the practice be continued in making the long-range estimates. If the assumptions which underlie the intermediate or low-cost estimates are borne out by experience, then the use of level wages allows for benefit increases if wages rise without any increase in the contribution rates. If experience comes close to the high-cost assumptions, then the use of the level-wage assumption will result, if wages rise, in an offset to the cost consequences of the unfavorable experience and still allow for some upward adjustment in benefits without any increase in the contribution rates.

The Council suggests only one significant change in the assump-tions underlying the long-range estimates. In the past an attempt has been made to present cost estimates into perpetuity. Specifically, it has been assumed for purposes of the estimates that trends for the factors affecting the cost of the program will level off at some point in the distant future (about 85 to 90 years) and continue at that level indefinitely. The Council believes that it serves no useful purpose to present estimates as if they had validity in perpetuity. A period of 75 years would span the lifetime of virtually all covered persons living on the valuation date and is as long a period as can be expected to have a realistic basis for estimating purposes. When costs are reassessed at frequent intervals, as has always been the practice, 75-year projections allow sufficient time to adjust to new and changing experience as it emerges. The long-range cost estimates shown in this report, therefore, are developed for a period of 75 years and it is our recommendation that long-range estimates in the future also be made on this assumption. The effect of this changed procedure is to make the estimated level-cost of the present program about 3 percent lower (about 0.25 percent of payroll) than when using the earlier procedure. At the same time the Council believes that the financing should be such that the actuarial status of the program will be reasonably close to an exact balance according to the intermediate-cost estimates.{4}

The Council has also examined the practices followed with respect to investment of the funds of the program. From the inception of the program in 1937, the investment of trust fund assets has been restricted by law to interest-bearing obligations of the United States or obligations guaranteed as to principal and interest by the United States. The investments can be either in special obligations issued exclusively for purchase by the trust funds or in publicly available obligations of the Federal Government. Under the present provisions of the Social Security Act relating to the investments of the trust funds, the special obligations issued exclusively to the trust funds bear interest rates equal to the average market yield at the end of the preceding month on all interest-bearing marketable obligations of the United States not due or callable for 4 or more years after that date. This market-yield formula, based on the recommendations of the Advisory Council on Social Security Financing appointed in 1957, has served as a model for determining interest rates on special obligations issued to certain other Federal trust funds. This Councilbelieves that the present procedures for investing the trust funds and for setting the interest rates on the special obligations are satisfactory.

2. Adjustment in the Contribution Rate Schedule in the Short Range

The contribution rates now scheduled in the law should be adjusted to avoid the rapid increase in trust fund assets that will otherwise begin with the rate increases scheduled for 1966 and 1968.

The 1956 legislation establishing the social security advisorycouncils scheduled them so that each would make its report 1 year before the date when an increase in the social security contribution rates was due to go into effect, and one of the primary duties of the councils, as specified in the law, is to make recommendations with respect to the social security contribution schedule. Thus the Council recognizes a special obligation, without regard to other change it is recommending, to report its findings and make recommendations regarding the social security contribution rates designed to support the existing program.

The benefit outgo of the program will increase for many years, mainly because of the increasing number of people eligible for benefits at age 62 or over. This increased cost is to be met under the present law by raising the rates to 4 1/8 percent each for employees and employers and to 6.2 percent for the self-employed in 1966, and finally to 4 5/8 percent each for employees and employers and 6.9 percent for the self-employed in 1968. The question to which the Council is here addressing itself is whether changes should be made in these scheduled rate increases.

On the basis of the actuarial cost estimates the Council has examined, it is clear that some increase in income to the program over what the 3 5/8 percent tax rate now in effect would produce will be needed in 1966. The Council finds, however, that the increase to 4 1/8percent each for employers and employees now scheduled for 1966 and 1967 is higher than it believes is desirable forseveral years.

The Council is recommending an increase in the contribution and benefit base in order to maintain the wage-related character of the benefits, to restore a broader financial base for the program, and to apportion the cost of the program appropriately between high-paid and low-paid workers. If the increase in the base is adopted in accordance with the Council's recommendation, the increase needed in 1966 in the income of the program will be provided thereby. If the base is not increased, and if all other provisions remain unchanged, the Council would propose the contribution rate be increased in 1966 to 3.9 percent. This rate would produce a slight excess of income over outgo for about 2 years. In the Council's opinion it is highly desirable that the income to the funds exceed outgo year by year. As has been evidenced in several recent years, if this is not the situation, there is danger of public misunderstanding of the financial condition of the program. On the other hand, as nearly as can now be determined, it would seem to be desirable from the standpoint of the general economy to avoid the deflationary effect of large trust fund accumulations. In the absence of any other changes in the law the Council would also propose revisions in the rates scheduled for 1968 and later years. The imposition of the 4 5/8 percent rate as scheduled in 1968 would build very large trust fund accumulations--as much as $4 billion a year--and would also involve the possibility of imposing rates higher than will ever be needed to pay for the benefits provided under present law. The rate of 4 5/8 percent in 1968 is designed to meet long-range costs falling about halfway between the high- and the low-cost estimates. If the actual experience is close to the low-cost estimates, for example, a contribution rate of 4 1/8 percent in 1968, rather than 4 5/8 percent, would cover the cost of the present program for 75 years.

This Council agrees with the last Advisory Council in the view that once the social security contribution rates actually in effect are high enough to cover the long-range cost of the program as shownby a reasonable minimum estimate, then decisions on whether scheduled rate increases are allowed to go into effect should be guided largely by conditions expected in the 15- or 20-year period immediately ahead. The Council recommends that if the present program continues unchanged in other respects the proposed 3.9 percent rate for 1966 be continued through 1968 and the rate scheduled for 1969-1971 be 4.1 percent of payroll. This figure is close to the 75-year level cost of the program under the low-cost estimates. The recommendations for rates to be included in the law for years after 1971--but to be allowed to go into effect only if developing conditionsindicate that they will be necessary--are given on page 21.

The Council believes that reducing the scheduled rates as suggested for the 6 years after 1965 would not threaten the financial soundness of the program. Since continuing income from social -security contributions is assured, the only fund balances required are those needed to meet temporary excesses of outgo over income due to relatively high benefit costs or low social security tax revenue in a particular period. In the opinion of the Council, fund balances high enough to maintain the solvency of the program in the face of recession conditions as severe as, say, those referred to in the annual report of the Board of Trustees--that is, conditions that would prevail if there were a drop of 5 million in the number of people with covered earnings in a year--would be adequate to provide protection against any contingency that might reasonably be expected, and the trust fund balances resulting from the Council's recommended rate schedule would be sufficient to do this. {5}

Holding the trust funds to reasonable continency levels, instead of allowing them to increase as they would under the present tax schedule, will of course mean a loss of interest income to the program. However, despite the very substantial funds that would be built up under the present schedule, the interest earned on these funds is expected to supply only about 10 to 15 percent of the income of the program over the long-range future. Thus the role of thetrust funds as interest-earning reserves is not very great even underthe present schedule; the funds are even now to be thought of largely as a reserve to meet unexpected contingencies rather than as fundsfor the purpose of earning interest. Moreover, if the system is improved as earnings levels rise in the future, as seems likely to be the case, interest earnings on a fund of any given size will meeta decreasing proportion of benefit costs. It may therefore prove to be unwise to count on interest earnings meeting even as large a partof benefit costs in the distant future as is now contemplated.

The Council does not consider the use of interest in the financing of the program to be a major issue. A reasonable contingencyfund will result in interest earnings which will supply 4 to 5 percentof benefit costs. Even under the present contribution schedule interest earnings may not exceed 10 percent of costs. The Councilbelieves that, on balance, any advantage of imposing rates that willbuild up large interest-earning trust funds is outweighed by thedisadvantages.

3. The Contribution Rates in the Long- Range

There should continue to be included in the law a schedule of contribution rates which, according to the intermediate -cost estimates, will be sufficient to support the Program over the long-range future. However, decisions about putting future rate increases into effect, once the rates actually being charged are high enough to cover the long-range cost of the program as shown by a reasonable minimum estimate, should be guided largely by estimates of program costs over a 15- or 20- year period.

Like the last Advisory Council, the present Council endorses the practice of including in the law a contribution schedule that, according to the intermediate-cost estimates, places the system in actuarial balance over the long-range future. As that Council pointed out, this procedure is needed to make people conscious of the long-range costs of the program and the costs of proposals to change the program. Accordingly, this Council is recommending that for the present program, if the contribution rates it recommends for 1966 and 1969 are put into effect (bringing the rates about to the level needed for the next 75 years under the low-cost estimates), further contribution rate increases nevertheless should be scheduled in the law for 1972 and 1975. The 1972 rate should reflect the estimated cost for the next 3 years on the basis of the long-range intermediate-cost estimate, while the 1975 rate should represent the level cost for the succeeding 65 years. The employee (and employer) rate for 1972-74 should be 4.3 percent. A rate of 4.7 percent effective in 1975 would be sufficient to finance the present program under the intermediate-cost estimate throughout the period covered by the estimate.

While the Council believes that the rates for 1972 and 1975 should be scheduled in the law in order to assure public appreciation of the approximate long-range cost of the program, decisions on whether theserates should be put into effect as scheduled, since they are higher than would be needed if the low-cost estimates are borne out by experience, should be made in the light of circumstances prevailing just before the proposed effective dates. These decisions should be made largely in the light of conditions that are expected to exist over the 15 or 20 years following the proposed effective dates.

If there are no other changes in the program, and if the contribution and benefit base is not increased, the Council would recommend that the 4.125 percent rate scheduled for employees and employers in 1966 be reduced to 3.9 percent, that the rate be held at this level through 1968, and that the rate for 1969 be set at 4.1 per cent. Rates of 4.3 percent in 1972 and 4.7 percent in 1975 should be scheduled in the law, subject to future review. If the Council's recommendations for improvements in the program are adopted, the rates would of course need to be higher than those shown here, the cost of the changes and the recommended rates for the cash-benefit program as it would be improved are shown on pages 84 and 85. The financing of hospital insurance is discussed on pages 45-52.

4. The Contribution and Benefit Base

The maximum amount of annual earnings that is taxable and creditable toward benefits needs to be substantially increased in order to maintain the wage-related character of the benefits, to restore a broader financial base for the program and to apportion the cost of the system among low-paid and higher-paid workers in the most desirable way.

The Council recommends that the maximum amount of annual earnings that is taxable and creditable toward benefits--the contribution and benefit base--be increased to at least $6,000 effective in 1966 and $7,200 effective in 1968. These increases are needed in order to maintain the wage-related character of the benefits, to restore a broader financial base for the program, thus keeping the contribution rates lower than they would otherwise have to be, and to apportion the cost of the system appropriately.

As is discussed in Part III, failure to keep the contribution and benefit base up to date has serious effects on the benefit protection provided as more and more workers have earnings above the base and their benefits are related to a smaller and smaller part of their earnings. In addition, unless the contribution and benefit base is increased as earnings rise, the foundation of the financing of the: program--the proportion of the Nation's payrolls which is subject to social security contributions--is weakened.

Moreover, if benefits were raised without increasing the contribution and benefit base, the increases in the contribution rates would have to be higher than they would have to be if the base were raised. and lower-paid workers as well as those earning at or above the maximum would have to pay these higher rates. It is much more desirable to meet the cost of increased protection for workers at average or higher earnings levels by increasing the amount of earnings on which those workers contribute than by increasing the contribution rates that all workers pay.{6}

The contribution and benefit base is now substantially out of date because of large advances in the general wage level. When the program was enacted in 1935, the $3,000 base providedwould have covered 95 percent of total earnings in covered workin that year, and would have covered the full earnings of 98 percent of all workers and of 97 percent of regularly employed men.{7} When the base was raised to $3,600 in 1950, the $3,600 base would have covered 86 percent of earnings in covered work andall of the earnings of 81 percent of all workers and of 62 percentof regularly employed men. In 1965, with the $4,800 base, only about 72 percent of earnings in covered employment will be taxedto support the program and only 66 percent of all workers and 36percent of regularly employed men will have all their earnings covered.

The concept embodied in the original $3,000 base was thatpractically all of the Nation's covered payrolls should be subject to contributions for the support of the program and that all but the mosthighly paid workers should have all their earnings counted toward benefits. The Council does not think it would be practicable to attempt at this time to restore all of the ground that has been lost over the years. A base of $14,500 would be needed now to cover 95 percent of total earnings in covered work, as was contemplated in 1935. Nor does the Council believe it necessary that the original situation with respect to the proportion of total earnings covered under the program be fully restored in order to carry out the general principles of the original Act.

The Council believes that a return to the relationship that existed in 19550, the first year the Congress increased the contribution and benefit base, is a practical goal. The Council recognizes, however, that it may not be practical to move to this level in one step, and is recommending, therefore, that the base be increased at least to $6,000 for 1966 and 1967 and to $7,200 in 1968. A contribution and benefit base of $7,200, if effective in 1968, would, it is estimated, tax about 80 percent 6f total earnings in covered work and would result in 82 percent of all workers, and 63 percent of regularly employed men, having all their earnings counted toward benefits. {8} The result would be comparable to the 1950 situation in respect to the last two measures and somewhat short in respect to the first measure.

The members of the Council are agreed on the changes here recommended as the minimum desirable. Some members, however, think that the proposed amounts for the contribution and benefit base are not high enough and would recommend that they be substantially greater, rising in the second step to nine or ten thousanddollars. This group believes that it is important to go beyond restoring the 1950 situation and move toward the situation contemplated under the original Social Security Act.

5. The Contribution Rate for the Self-Employed

Increases in the social security contribution rate for the self- employed beyond the present rate should be put into effect gradually, and only to the extent that the ultimate rate will be no more than 1 percent of earnings greater than the rate paid by employees.

Since 1951, when self-employed people were first brought into the social security program, they have paid social security contributions at a rate 1.5 times the rate paid by employees. The policy of imposing the contribution at this 1.5 times rate balances two opposite considerations. On the one hand, to the extent that the self-employed person does not contribute at rates as high as the combined employee-employer rate, there is a financial disadvantage to the program in covering him, as compared to covering an employee. On the other hand, looked at from the standpoint of an individual contributing toward his own protection, some self-employed people willbe "overcharged" when paying over a lifetime at the ultimate rate now scheduled.

Although the policy of setting the self-employed rate at 1.5 times the employee rate seemed a reasonable compromise at the time it was adopted, the Council believes that, as the rates have gone up, the substantial difference between the employee rate and the self-employed rate has become difficult to justify. The contributions paid by self-employed people above the rates paid by employees are, like employers' contributions to the program, used in large partto help provide protection for low-paid workers, workers with large families and workers who were already on in years when their jobs were first covered.{9} The Council believes that it is reasonable to use the contributions of an employer for general purposes, rather than for the benefit of the particular employees on whose earningsthe contributions are based, as long as the employee can in general be said to get his own money's worth. On the other hand, the Council does not believe that self-employed workers should as a rule be charged rates for their own coverage beyond the rates needed to pay for the protection they are provided by the program in order to helpmeet the cost of the protection provided to others.

The Council recommends, therefore, that, except for the financing of new types of benefits such as hospital insurance, increases in the social security tax rate for the self-employed beyond the rate now being charged be put into effect only to the extent that the self-employed will pay no more than 1 percent of covered earnings above the rate paid by employees at the time the ultimate rate goes into effect.{10} With self-employed contributors paying, ultimately, 1 percent of earnings more than employees, their contribution ratewould reflect the fact that to a degree they are in the same position asan employer, that is, that they are their own employers. At the same time, they would not be overcharged when paying for a full workinglifetime at the ultimate contribution rate. {11}

6. Maintaining the Integrity of the Trust Funds

To maintain the integrity of the trustfunds, the reirnbursement of the trust funds for the cost of paying social security benefits basedon military service for which no contributions were paid should begin without further delay and the Board of Trustees should begiven specific responsibility for reviewing those administrative charges against the trust f unds which are based on estimates ratherthan on actual costs.

The last Advisory Council called the management of the social security trust funds "the greatest financial trusteeship in history." This Council agrees, and it has reviewed the management of the funds to be sure that their integrity is maintained. As a result of its study, the Council has concluded that, in general, the trust funds are managed with due regard for their nature as funds held in trust for the contributors and beneficiaries of the program. The Council does, however, want to call attention to two respects in which improvement should be made.

Military service after 1956 is covered in the same way as is all other work in covered employment, and social security employee and employer contributions with respect to military service are paid into the trust fund by the Federal Government just as are the contributions of private employers and employees. For service prior to 1957 (and after September 16, 1940), however, non-contributory wage credits were provided, and, in addition, benefits were provided for the Survivors of certain World War II veterans who died within 3 years after discharge. Social security contributions were not paid with respect to those special wage credits and benefits.

The social security system has been reimbursed from the general fund of the Treasury for the cost resulting from the special benefits paid through August 1950. The authorization for such reimbursement was repealed by the 1950 amendments. In 1956 the law authorized reimbursement of the system for the cost resulting fromthe payment of the special benefits from September 1950 on and for the cost resulting from the non-contributory wage credits for military service. Although the 1956 legislation authorized such reimbursement beginning in fiscal year 1960, no reimbursement has yet been made.

The Council views the reimbursement owed the trust funds by the United States Government for benefits arising from non-contributory military service credits in the same light as social security contributions payable by employers generally, and therefore urges that the Government as the employer of the servicemen discharge its obligations to the trust funds just as it requires employers generally to meet their obligations. The Council also believes that this reimbursement should begin without delay.

The Council notes also that, although the Board of Trustees is directed to review the general policies followed in managing the trust funds, there is no specific requirement in the law that it review the way in which administrative costs incurred outside of the Social Security Administration--for example, by the Internal Revenue Service in the collection of social security taxes and by the Treasury Disbursing Office in issuing benefit checks--are arrived at and charged to the funds, nor has any other agency of Government beenassigned this responsibility. Many of these costs, unlike those of the Social Security Administration, are charged to the trust funds on the basis of estimates rather than of actual cost. The Council believes that there should be a review of such charges and that the Board of Trustees should do it.

The Council does not believe that the Board of Trustees should be required by law to meet every 6 months, as it now is. The Council has been informed that important financial policy issues suitable for consideration by the Trustees do not come up every 6 months. The Council recommends that the law be changed so that the Trustees would not be required to meet more than once every year.

{1}Under the Council's recommendations discussed in Part III, the reallocation should be 0.25 percent of covered payroll rather than 0.15 percent.

{2} Since over the long-range future the cost of the program will be affected by many factors that do not lend themselves to precise measurement, assumptions regarding them may differ widely and yet be reasonable. For this reason,high and low-cost assumptions are made for the various factors affecting the long-range cost of the program. Intermediate-cost estimates are then derived by averaging the high-cost estimates and the low-cost estimates. The Council believes that these intermediate-cost estimates provide a reasonable basis for gauging the long-range cost implications of present benefit provisions and proposals for changes.

{3} The reason for this effect of rising earnings is that benefits based on low earnings are a higher percentage of the worker's average monthly wage than are benefits based on higher earnings, and therefore, as earnings go up, benefits as a percentage of earnings go down. Contributions, on the other hand, are the same percentage of covered earnings at all levels. As earnings go up, then, the benefit outgo as a percentage of covered earnings decreases while the contribution income as a percentage of covered earnings stays the same.

{4} Traditionally the social security program has been considered in actuarial balance when, on the basis of the long-range intermediate-cost estimatesprojected into perpetuity, the actuarial insufficiency was not greater than 0.30 percent of payroll for the program as a whole. The Council believes that a closer balance would be desirable when the long-range cost estimates are projected over a 75-year period.

{5} The Trustees follow a practice of including in their annual report an illustration of the effect that a sharp reduction in the level of econoinic activity and an increase in the rate of unemployment would have on the operations of the program. In the opinion of the Council this is a desirable practice and should be continued.

{6} If the base were restored to a figure comparable to the $3,000 figure provided in the 1935 legislation, the ultimate contribution rate for employee and employer under the present program could be reduced for each by about 0.5 percent. If it were raised to a figure comparable to $3,600 at the time that figure was written into the law in 1950, the ultimate rate for the present program could be reduced by about 0.3 percent each.

{7} Measures of the effectiveness of the contribution and benefit base that have been used from time to time include the proportion of earnings taxedfor the support of the program, the proportion of all workers who have allof their earnings credited toward benefits, and the proportion of regularlyemployed men (generally the primary earners) who have all of their earnings credited toward benefits. The first is probably most important for financing and the third for an evaluation of the adequacy of the benefit structure.

{8} If earnings levels continue to increase at about the same rate as they increased over the last 5 years, average earnings in covered work will increase about 4 percent per year during the period January 1964-January 1968.

{9} Actually, a part of the employers' contributions (about 15 to 20 percent)--and of that part of the self-employed person's contribution that exceeds the employee contribution--is used to meet the cost of benefits for the long-term better-paid worker, since the contributions of this group donot quite cover the cost of their own benefits.

{10} In Part II the Council also recommends that the contribution rate for the self-employed under the hospital insurance proposal be only a little above that for employees--0.5 percent of earnings for the self-employed and 0.4 percent for employees.

{11} The contribution rate paid by the self-employed person in excess of that paid by the employee would roughly cover the difference between the value of the contributions paid over a lifetime at the ultimate rate by employees earning at the maximum covered amount and the value of the old-age, survivors, and disability insurance protection received by a person covered by the system over a whole working lifetime and earning at the maximum covered amount.