Speech to National Conference on the Churches & Social Welfare
Address at the Second National Conference on the Churches and Social Welfare, Cleveland, Ohio, October 24, 1961.
THE ROLE OF SOCIAL INSURANCE
IN PREVENTING ECONOMIC DEPENDENCY
by
Robert M. Ball, Deputy Director
Bureau of Old-Age and Survivors Insurance
Social Security Administration
As I understand it, my role on this panel is to give some factual information, and perhaps some philosophical orientation, in the area of social insurance, and to point up issues and questions for the future.
For convenience I have divided my presentation into four parts: First, a statement on the function of social insurance; second, a statement of the present status of social insurance in the United States; third, a summary of the basic values of social insurance; and fourth, a presentation of the major issues and problems we must face up to in the immediate future.
What is the Function of Social Insurance?
Social insurance is based on the recognition that economic insecurity in a money economy arises in considerable part from interruptions to income from work caused by unemployment, retirement in old age, death of the family breadwinner, or disability, either short-term or long-term. The contribution of social insurance to economic security is principally to provide a partial replacement of work income during the time when a person is out of work for any of these specified causes. It is thus "income insurance"-replacing a part of one's work income when it is interruptedjust as other forms of insurance replace, when it is lost, part or all of the value of the thing insured. In many countries, it is also common for social insurance to be applied to the risk of having to face certain extraordinary expenses such as those connected with the birth of a child or with illness.
It is, of course, recognized that social insurance does not deal with all the situations in which economic insecurity may occur. For example, income insurance is of little help where insecurity is the result of low wages, with large numbers of children to be supported by such wages. Income insurance can hardly deal with the problems of poverty for children and their mothers that grow out of illegitimacy, desertion, and divorce.
Moreover, and most important, it is of course obvious that, except in relatively minor and indirect ways, an insurance program does not create wealth. An insurance program redistributes income from all contributors to those who at any one time have suffered a loss. Also, for the individual, an income insurance program serves to redistribute income over time, from when he is earning to when he is not earning. Thus social insurance is concerned with the distribution of purchasing power, and its success in the prevention of economic insecurity is basically dependent on the ability of the economy to produce an adequate volume of goods and services. Within this framework and with these limitations, let us examine the main outlines of the American system of social insurance.
Where Do We Stand Today?
There are four major programs of social insurance in the United States. By far the largest is the Federal OldAge, Survivors, and Disability Insurance System, usually referred to as social security, which provides retirement benefits, survivors' benefits, and benefits to the permanently and totally disabled. The next largest is the Federal-State program of unemployment insurance, followed by the State programs of workmen's compensation, which provide cash benefits and medical care in cases of occupational injury or disease. Finally, in four States there are programs that pay cash benefits during short-term illness. In addition there is a special program of social insurance for railroad workers, and some of the veterans' programs have characteristics in common with social insurance. All of these programs are, of course, supplemented by private voluntary insurance and industrial health, welfare and pension programs.
The Federal social security program now provides protection for practically all working people and their families. More than nine out of ten people who work are covered under the program and already eighty-five percent of the people becoming 65 are eligible for retirement benefits; this percentage will rise in the future to 95 percent or more. Nine out of ten mothers and children can count on monthly survivors' benefits in the event of the death of the family breadwinner. People forced into premature retirement by total disabilities can get benefits before 65 and any insured person may choose to draw reduced retirement benefits at 62. Well over a billion dollars a month is being paid by social security to 16 million older people, people with long-term disabilities, widows, and orphans. In the course of a year some 73 million earners contribute to the program; 86 million have contributed long enough to be fully insured. The rates of contribution are now 3 percent for the employer and 3 percent for the employee on wages up to $4800 a year; the self-employed pay 4j percent. The rates, under present law, rise in steps until, seven years from now, they reach the ultimate rate of 4 5/8 percent for employers and employees and 6.9 percent for the self-employed.
These benefits are the main reliance of the retired aged, of the permanently and totally disabled, of widows and orphans. For more than half of the aged social security beneficiaries, the benefit is the only significant source of regular income; and for the great majority of the others the benefit is the major source of regular income. Although there is much room for improvement in this program (particularly as regards benefit levels) it is, even as now constituted, the base on which practically everyone builds his plans for economic security.
Each of the fifty-one States and territories has a system of unemployment insurance. Unemployment insurance pays weekly benefits to unemployed workers for a specified number of weeks during which they are willing to work and available for work but are unable to find the kind of work that is suitable for them. There is a great variety in the amount of protection afforded by the various State systems since the Federal law does not prescribe the benefit provisions. Typically, the maximum number of weeks for which benefits are payable is about 26, although in some States the maximum number is as low as 20 weeks. In the majority of States, maximum benefit amounts range from $30 to $40 and in only five does the maximum limit on the individual's benefit go as high as $45. (In 9 of the 11 States that provide extra benefits for dependents the maximum family amount is as high as $45.) In 1960 about 80 percent of employed people (including those in the armed forces) had some protection under employment insurance and 6.8 million workers receiVed $2.9 billion in benefits.
Every State also has a system for workmen's compensation providing cash benefits and medical care for workconnected disabilities. About 4/5 of the employed workers in the country are protected by workmen's compensation programs, and in 1960 a total of $800 million in cash payments was paid out to workers under these systems, excluding the value of medical care provided under the programs.
Relatively little has been done through government in the United States about wage losses due to short-term illness that is not work-connected. There is no Federal program except the one for railroad workers and only four States--California, New Jersey, New York, and Rhode Island-have established programs. Many employers have cash sickness and sick leave plans of their own, however, and this type of private protection for at least a few weeks of sickness is now wide-spread.
In 1960, 10.4 million people were covered by the four State programs. In an average week in 1960, 121,000 people (not including beneficiaries of private plans in New Jersey, where contracting out to such plans is an alternative to coverage under the State plan) received cash sickness benefits. Benefits paid out under the plans, including payments made under private plans in New Jersey, amounted to $314 million for the year 1960.
This in broad outline is where we stand today. Before proceeding to a presentation of the developing major issues in social insurance, I would like to say a little more about the basic principles of social insurance and why I believe that social insurance has proven to be a uniquely effective way of preventing economic dependency.
The Basic Values of Social Insurance
Social insurance is based on the concept that security for the individual should, to the extent possible, grow out of his own work; under social insurance the worker earns his future security as he earns his living. Whether a worker is entitled to benefits, and the amount of his benefit and that of his family, is related to a record of his earnings. Basing eligibility on a demonstration of work and providing variable benefits related to the level of a worker's earnings reinforces the general system of economic incentives. Furthermore, since benefits are paid regardless of nonwork income from savings, pensions, investments, and the like, the worker is encouraged to supplement the basic protection afforded by his social insurance benefit with whatever additional protection he can afford. Social insurance as a way of providing economic security is an important social invention, largely eliminating the old fear that meeting need will injure incentives to work and save.
Another important principle of social insurance is that a person's rights under the program--the conditions of his eligibility and the way in which the amount of his benefits will be determined--are spelled out in detail in the statute itself, with as little discretion as possible left to the administering agency. Furthermore, all decisions are subject to administrative appeal and finally to the courts.
The principle of nondiscretionary payments made as a matter of enforceable legal right and based on the demonstration of productive work is the very essence of social insurance. It is this principle of "earned rights" which guarantees the freedom of the individual to manage his own income and prevents the conditioning of payment on any concept of acceptable behavior. In other approaches to the provision of economic security people have often had to choose security at the price of freedom, gaining their bread by accepting restrictions imposed on them by others. The method of social insurance provides the freedom that comes from an assured income that is accepted as an earned right.
The Major Issues to be Faced
Now to turn to the major issues to be faced in the next few years in the further development of our systems of social insurance. First and foremost in importance and also in controversy is the issue of health insurance for the aged.
Although there is disagreement on what to do about it, there is now widespread agreement that the greatest threat to the economic security of retired persons arises from the unpredictable cost of illness. The cash benefits of social security, even when supplemented by private pensions as increasingly they are, cannot meet the costs of major illness.
There is also rather wide-spread agreement that if large numbers of people are to be protected from having to turn to the means-test assistance programs for help, insurance, not individual savings, is the only sound answer. Insurance is the ideal answer for a risk to which all are subject but which falls unevenly on those exposed to the risk. If everyone pays something, the relatively few who have large expenses have their bills paid and everyone has the satisfaction of knowing he is protected if disaster strikes.
If an insurance approach is to be followed in meeting the medical care costs of older people, the main problem is to find a satisfactory way of financing that can be made applicable to practically everyone. A major obstacle to financing health insurance for the aged arises from the high cost of care for the aged combined with the generally low incomes of retired people. Because retired older people use much more medical care than younger employed people, an insurance premium related to the risk for older people has to be high; if the high premium has to be paid after retirement, when incomes are low, it becomes an almost impossible burden for the average person. "Communityrated" Blue Cross plans have attempted to help the older person to meet this burden by spreading the high cost attributable to the aged over all subscribers. Socially desirable as this may be, one result is to put such plans at a competitive disadvantage in attracting young subscribers as compared with a private insurance plan which has a different premium rate for the young employed workers than for the retired older workers. Thus the effort to meet a social need, in this instance, leads to a loss of the very subscribers needed to make the plan work. This is one reason why some Blue Cross plans are having difficulty.
For most people the only feasible approach to reasonably adequate medical-care protection in old age would seem to be to finance health insurance in the same way as cash benefits for retirement are financed--by contributions paid while at work, when the payments are least burdensome, with the protection furnished in retirement without further payment.
It is probable that only social insurance could apply this method on a large enough scale to really solve the problem. Under social insurance practically all of the people could provide for their health insurance protection in retirement by paying toward it during their working lives, just as they pay now toward cash benefits. When they are older they would have the health insurance protection without having to pay additional amounts out of reduced incomes. This is the basic reasoning behind the President's proposal.
Another major issue in the Federal system of old-age, survivors, and disability insurance is the adequacy of the benefits. The average benefit of about $75 a month for a retired beneficiary is just not enough to provide an American standard of living today even when combined with the relatively small amounts of savings and other income and resources available to the average retired person.
A major factor in benefit adequacy is keeping benefits in line with changes in prices and wages. In spite of the many improvements that have been made in the benefits provided under social security in the last 10 years, the program has not really kept up with the increased productivity of the American economy and the consequent rise in the level of living. Benefits have been increased more than prices, so that there has been no loss in purchasing power; but for the worker who earns average wages or more, the system is less adequate as a replacement of lost earnings than was originally contemplated under the 1939 Act. Under the 1939 Act, and assuming a continuation of 1939 wage levels, a regularly employed male worker earning average wages until retirement this year would have had a retirement benefit replacing 31 percent of his previous wage. Today such a worker would have only a 29 percent replacement. {1} A worker earning the maximum wage of $3,000 under the 1939 system and looking forward to retirement in 1961 could have expected a replacement of 20 percent. Today that $3,000 worker would be earning $10,000 but would get a replacement of only 14 percent of his present earnings. Basically what has happened is that as wages have risen the maximum wage base for benefits and contributions has not been increased sufficiently. Today it is only $4,800 as against the original $3,000 although wage levels have considerably more than tripled in the meantime.
{1} In 1939 median earnings of regularly employed men were about $1,300 a year. In 1960, the median annual earnings of regularly employed men were $5,345, of which only $4,800 could be credited toward benefits. The retirement benefit based on an average wage of $4,800 would replace only about 29 percent of actual earnings of $5,345.
It is true that for those earning the lowest wages the program has been made more and more adequate, but it has become less and less adequate for those earning average wages and above. We have not really raised our sights for large groups of social security beneficiaries beyond what was contemplated at the time benefits were first paid--in fact, when measured as a percent of wages, the protection has deteriorated for more than half the people covered. The question of benefit increases is one that is sure to come up repeatedly in the future. In making recommendations it will be important to consider not only lower-paid workers but also those earning average or above average wages.
A related question is how any future benefit increases should be financed. We will want to give serious consideration to whether increases should not be financed, in part, by rather substantial increases in the maximum wage and contribution base. Over the years we have allowed an increasingly substantial part of the payrolls in covered employment to escape taxation, with the obvious result of a higher than necessary contribution rate. In 1937, when the program first went into effect, 90 percent of the total payroll in covered employment was taxed. Today only 77 percent is taxed. This amounts to a loss to the system in terms of current tax rates of over $2.3 billion a year.
Before leaving the discussion of the Federal old-age, survivors, and disability insurance program, I think it is important to emphasize two more points. The first is that over the years the Congress has consistently provided for sound financing on the basis of conservative assumptions as to the cost of the program. As stated in 1959 by the Advisory Council on Social Security Financing, made up of distinguished economists, private insurance actuaries, bankers, and social insurance and financial experts as well as representatives of management and labor: "The method of financing the old-age, survivors, and disability insurance program is sound, and based on the best estimates available, the contribution schedule now in the law makes adequate provision for meeting both short-range and long-range costs." And again, "...the contribution schedule enacted into law in the last session of Congress makes adequate provision for financing the program on a sound actuarial basis." We can, I-am sure, expect that in the future development of the Federal program Congress will continue to accompany any program changes by full provision for financing the costs.
Second, I should like to stress that social insurance is based on the idea that the first line of security is a job. In the words of Lord Beveridge, the great English student of social security, "Social security is a job when you can work and an income while you can't." It is because a job is the first line of security that vocational rehabilitation services for disabled workers are of great importance to the social security program. It is obviously much better for the disabled person to be helped back to work than to continue to draw benefits. And, of course, returning the disabled worker to gainful employment saves money for the social security program.
Similarly, improving employment opportunities for older persons keeps down the cost of retirement benefits because social security benefits are either reduced or withheld when people who are eligible for benefits earn substantial amounts. Older persons who can and want to work should have the opportunity to do so. The object of old-age and survivors insurance is not to pay an annuity at 65 but to partially replace the lost income of those who retire in old age. This principle of conserving the funds of the program for those who have suffered a loss of income through retirement, although frequently under attack, is an important principle to maintain if we intend to do the Job of providing reasonable security for people without excessive cost. After all, the older person with a regular job paying good money does n,_gt need the bonus of a social security payment.
Unemployment insurance, as well as old-age, survivors, and disability insurance, is based on the idea that the first line of security is a job. The first objective in dealing with the unemployed worker is to find him a suitable job. All the State systems of unemployment insurance are administered hand in hand with the Employment Service and the whole concept is one of temporary payments between jobs.
Although a job is better than a benefit, it is not the objective of the Employment Service to place a worker in just any job. It is an important function of the unemployment insurance system to strengthen the waiting power of the worker for a period of time so that a placement can be made which preserves for the economy the skills and abilities possessed by the experienced worker.
There are two points about unemployment insurance that seem to me most worthy of immediate attention. First, how can the percentage of wage loss replacement be increased-a result greatly needed on both humanitarian and economic grounds--and second, what should be done for the unemployed who in time of recession exhaust their rights to benefits under the State systems?
At the present time, probably not more than 20 percent of all wage loss from unemployment, and 30 percent of all wage loss from unemployment in covered work, is replaced by unemployment insurance. This is very largely the result of unrealistically low maximum limits on benefits in relation to average earnings. Although State benefit formulas generally provide for replacement of about 50 percent of average weekly earnings for lower-paid workers, the maximums result in a far lower percentage for those earning above average wages.
While the major justification for any social insurance system is the welfare of the individual, social insurance also has important broad economic functions. This is particularly true of unemployment insurance, which serves to retard the contraction of consumption in periods of declining employment. It would be most effective for this purpose if it were to provide benefits equal to the wages lost. If benefits were equal or nearly equal to full-time wages, however, workers would have little or no economic incentive to prefer work to benefits. The goal for benefit levels might well be the one stated by the 1948 Senate Advisory Council on Social Security: "Unemployment insurance payments should be as high a proportion of wage loss caused by unemployment as is practicable without inducing people to prefer idleness to work." Generally there is a long way to go before benefits for higher-paid workers and for those with dependents meet this test.
A major increase in the proportion of wage loss compensated for by unemployment insurance will in all likelihood require Federal legislation prescribing benefit standards as well as further extensions of coverage to work for small employers, agricultural work, employment for nonprofit organizations and other excluded occupations.
Another problem, and a very difficult one, is that of the unemployed who exhaust their rights to unemployment insurance in time of recession. The Federal Government has twice established temporary programs administered through the States to extend the duration of unemployment benefits. Under legislation enacted this year, Federal funds are available to the States in order to extend unemployment benefits (by a maximum of 13 weeks) for jobless workers who exhaust their benefits under State laws between June 30, 1960, and April 1, 1962. These temporary measures raise the question of whether we should have a permanent provision in Federal law to go into effect when unemployment reaches a certain.level or when the number who have exhausted their benefit rights reaches a certain percentage. Among the difficult questions that will have to be faced are: For how long is it reasonable to pay unemployment insurance as such? When, if at all, should a work program come into play as a substitute for long-term benefits? What is the proper relation of extended unemployment insurance to general assistance? It is my belief that there will be increasing interest in this area of social insurance in the near future.
In the State workmen's compensation programs, as in Federal-State unemployment insurance and in the Federal social insurance program, revisions in the benefit structure have not kept pace with rising wages and as a result the protection provided has significantly deteriorated in terms of replacement of earnings. In many respects workmen's compensation is the most neglected and out of date of any of the social insurance systems. It is the oldest of the programs and its major period of development took place well before the great depression. Progress since the very early days has been slow indeed. Some slight progress has been made with respect to coverage; probably about 4/5 of civilian wage and salary workers are covered. Because of limitations on maximum benefits, instead of replacing 2/3 of the wage loss, as is typically specified in the law, benefits replace 1/2 to 1/3 of wages or even less in temporary disability cases, with still smaller percentage replacement for permanent disability and death. In the words of Herman M. Somers, the outstanding American student of these programs, "With regard to permanent disability and death benefits, which are limited not only by a weekly maximum but also by duration and aggregate maxima, the ratios have sunk so low as to end any rational claim to being either wage-related or related to any other explainable criterion, even the relief standard." {2}
| {2} Herman M. Somers and Anne R. Somers, "Trends and Current Issues in Social Insurance," reprinted from Proceedings of the Ninth Annual Meeting Industrial Relations Associ9~Ti`on, Institute of Industrial Relations, University of 'C=afornia, (Berkely: University of California, 1957) reprint NO. 97, p. 13. |
Also, there has been little progress in social insurance in recent years in providing protection against loss of income due to short-term illness. As mentioned earlier, only 4 States and the railroad retirement system provide this protection. The last major action was taken in July 1950 when New York adopted its program. Increasingly the question is being raised whether at least partial protection against this risk might not logically be furnished through the Federal social insurance system. This could be accomplished, of course, by reducing the present 6-month waiting period for disability benefits.
Conclusion
These are some of the issues and problems that we face in developing a more adequate social insurance system. There are still many gaps in protection and in general the amounts paid are too low to do the job.
Of course social insurance alone cannot fully solve the problems of economic dependency and income maintenance. Private insurance and private pension plans, as well as individual savings, will continue to play an important role in supplementing the basic protection afforded by social insurance. It is to be hoped and expected that this additional protection will be available to a growing number of people in the future. And there will continue to be need for public assistance--for people with special needs, for example, and to take care of the needs of children arising from such causes as desertion and illegitimacy.
It is increasingly clear, too, that there will need to be an even closer relationship in the future between the provision of cash benefits under social insurance and the complex of noncash services developing outside the social insurance programs. Although most people are able, with the provision of adequate income, to manage their lives reasonably well without the help of specialized community services, successful living for others is dependent not only on a money income but also on the availability of a variety of health, welfare, rehabilitation, employment and recreation services. I do not believe that such services should be provided by the social insurance systems; but I do believe that we in social insurance have an increasing responsibility to help in planning for the development of such services and an increasing responsibility to provide a good referral service for those insurance beneficiaries who seek additional help. In somewhat the same way, I believe that social welfare agencies, the churches, and individual ministers in their counselling work have a major responsibility to know enough about social insurance to help people to properly exercise their rights. We still have far too many people losing benefits because they do not know enough to apply. And above all else we look to you and other leaders of thought in the field of welfare to plan with us the future direction of these important social insurance programs.