Reports & Studies

1938 Advisory Council

1938 Advisory Council Report--
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.)