Committee on Economic Security (CES)
Volume II. Old Age Security
Final Staff Report
COMMENTS ON THE RECOMMENDATIONS FOR OLD
AGE SECURITY
by
Actuarial Committee
(Page numbers indicate pages in Staff Report on Old Age Security on
which Actuarial Committee is commenting).
Page 1. The figures for the proportion of aged in the population in future years do not take into account the possibility of an improvement in mortality which might increase the figure substantially. Unfortunately there are no methods of forecasting such improvement.
General. Where figures are given in the report, there should be reference in an appendix to the source material.
Page 2. It would probably be helpful if the sentence at the end of the second paragraph would relate to the present time, reading somewhat as follows:
"It is conservative to estimate that at least half of the 7,500,000 now over 65 years are not self-supporting."
Page 3. The figures for the expectation of life and the amount necessary provide the specified annuity should be carefully checked and the mortality table specified.
Page 4. The comments with reference to institutional care of the aged give the impression that non-industrial assistance will predominate. This is true, we believe that there should be a statement to the effect that there is likely to be at all times a significant proportion of dependent aged who, because of illness, invalidity, or the absence of near relatives, should be provided for in institutions meeting certain prescribed standards.
General. We believe that it would assist in clearness if a definite terminology were adhered to throughout the report; that is to say, where the contributory old age assistance plan is referred to, the word pension should be used, and where the contributory old age plan is referred to, the word annuity should be used. We do not believe that the word insurance should be used in connection with either plan.
Page 6. In connection with, the conditions necessary for eligibility to a pension, we believe that account should be taken of change of residence from state to state as it is bound to be met in practice. Therefore, we would suggest the following provision:
Where an aged person, otherwise eligible to old age assistance, has failed to qualify by five years of residence in the state, he should, nevertheless, be entitled to receive aid from that state, reimbursement to be made by the federal administrative authority for the amount paid.
Page 7. At this point, we would omit reference to the financing of the plan until consideration has been given to the compulsory old age annuity system.
Pages 8 and 9. In estimating the amount of federal subsidy to the old age assistance plan, it is our judgment that one table only should be presented. We suggest as a basis for this table (1) an average grant of $25 per month from the state and federal government combined, and (2) a dependency ratio of 33 per cent in the year 1940, increasing thereafter by 1 per cent a year to a maximum of 50 per cent in 1957 and subsequent years. On account of delay in putting this plan into effect in the various states, we suggest that the yearly estimates up to 1940 be as specified in the following table:
1936 - 15 per cent
1937 - 20 per cent
1938 - 25 per cent
1939 - 30 per cent
Page 12. We believe that the federal agency created to administer the new plan, should be built up under Civil Service regulations.
At the bottom of the page, we believe that it would clarify the presentation of the two alternative proposals if they were described as follows:
(1)An annuity plan which would provide for annuities for older workers as though the system had been functioning all their working lives.
(2)An annuity plan which limited the annuities to the older workers to the amounts resulting from the contributions on a uniform basis made by them and on their behalf.
Pages 14 and 19. Our most far-reaching comment has to do with the financial aspects of the combined plans of pensions and annuities. First, we would recommend the inclusion of a table showing the yearly income and outgo of the contributory old age annuity plan. Then there should be a table combining the figures of the two plans. This would indicate the use of the current income from the net contributions under the compulsory old age annuity plan to meet not only the payments under the annuity plan, but also the payments on account of the gratuitous pensions. When the total payments indicated in the table exceed the receipts from contributions, the difference would have to be met by the federal government. In the years when the contributions exceed the payments, the balance would be conserved to assist in meeting the payments in the years when the income is sufficient to meet the outgo. (Table I)
In considering pension and annuity plans, a system of reserves is usually
contemplated. It is not recommended in the present instance for the following
reasons: The function of a reserve in a national plan of the kind proposed
would be to build up a fund, the interest upon which would furnish an
income that would go a long way toward meeting the payments that future
generations would have to make. For example, if a reserve of fifty billion
dollars could be built up to produce 3 per cent interest, the resulting
one and one-half millions in interest income would be available to assist
in meeting the payments titled to old age annuities. A fund of fifty billion
dollars sounds
| TABLE I COMPARISON OF INCOME AND OUTGO UNDER COMBINED OLD AGE PENSION PLAN AND CONTRIBUTION OF OLD AGE ANNUITY PLAN (all figures in millions of dollars) |
||||||
| Year |
(1) |
(2) |
(3) |
(4) |
(5) |
(6)
|
| 1936 1937 1938 1939 1940 1945 1950 1955 1960 1965 1970 1975 1980 |
227.2 229.5 231.7 234.0 236.2 504.2 805.0 1140.0 1484.4 1543.7 1603.1 1662.5 1662.5 |
0.5 1.5 2.5 3.6 4.7 201.0 512.7 989.2 1575.3 2011.5 2421.2 2781.7 3115.0 |
130.1 189.5 255.9 331.6 398.2 480.1 552.9 619.9 657.3 640.0 640.3 654.0 667.9 |
130.6 191.0 258.4 335.2 402.9 681.1 1065.6 1609.1 2232.6 2651.5 3061.5 3435.7 3782.9 |
-96.6 -38.5 26.7 101.2 166.7 176.9 260.6 469.1 748.2 1107.8 1458.4 1773.2 2120.4 |
0.0 0.0 0.0 0.0 159.5 176.9 260.6 469.1 748.2 1107.8 1458.4 1773.2 2120.4 |
| * Including refund of contributions upon
death of insured workers, as provided by proposed plan. ** Excess of contributions over payments in early years conserved to reduce balance of payments which must be met by federal government in later years. |
||||||
fantastically large in connection with the annuity plan outlined, and yet actuarial calculations indicate that a regular reserve plan would necessitate the accumulation of a sum of at least that magnitude.
The mere mention of a fund of this size clearly shows how impracticable a regular reserve plan would be. The fund would present insuperable problems of management and investment entirely apart from the practical problem of protecting a reserve of such huge dimensions from diversion into other channels under the pressure of emergency.
On the general subject of reserve funds built up by the federal government, it is essential to keep in mind that the payment of the interest upon such funds rests in the final analysis upon the taxing power of government. Therefore, the financial stability of the annuity plan and the security of the promises made to the participants, rests upon the guarantee of the federal government to undertake to carry as much of the load as is not carried by the contributions of the prospective annuitants and their employers. In the development of the plan, the obligation of the government to protect the rights of the contributors should be regarded as a contractual, irrevocable obligation.
From what has been said, it is apparent that no matter how the plan is handled, there is no practicable way of avoiding eventually placing a heavy burden upon future generations in meeting the obligations to those who will make up the aged population of the future. This does not mean that these obligations should not be incurred. It does mean, however, that we should clearly understand the nature of our undertaking.
It should be pointed out that the elaborate calculations upon which a report of this kind rests assumes a relatively stable level of prices over the years, thus emphasizing the importance of general economic conditions in the satisfactory functioning of long range plans of the kind proposed. This does not imply that changes in price level will not occur, but that they cannot be forecast.
Pages 19 and 20.In connection with the voluntary old age annuities, we believe that in emphasizing the self-supporting features of the system, there should be a recommendation that periodically actuarial examinations should be made of the fund, and the rates for new entrants revised in accordance with experience.
Also that provision should be made for the charging to the voluntary annuity of all expenses that might be incurred by any branch of the government service in connection with the operation of the plan.
Page 20. We would suggest the following revision of paragraph 4:
The plan should be aimed primarily at the provision for old age income, and this objective should be recognized by issuing only annuity contracts without cash and loan values. Provision could also be made, if desired, for a return of premiums in the event of death prior to retirement.
ADDENDUM TO COMMENTS OF THE ACTUARIAL COMMITTEE ON THE RECOMMENDATIONS FOR OLD AGE SECURITY
Following the vote of the Executive Committee of the Technical Board to keep separate the financing of the Contributory Old Age Annuity Plan from the Old Age Pension Plan, it is recommended that the progress of the reserve funds of the annuity plan, (page 14 of the report) be shown without a federal subsidy until the reserve becomes exhausted.
It is recommended further that paragraph 4 of page 7 of the report, in regard to the borrowing of annuity reserve funds for subsidies to old age pension plans, be amplified by the inclusion of a schedule showing the extent to which government would increase its indebtedness if it proceeded to borrow, up to the full amount available in the reserve at any time, the amounts required for subsidies to old age pension plans.
It is desired to revise the comments with reference to page 6 of the report as follows:
In connection with the conditions necessary for eligibility to a pension, we believe that account should be taken of change of residence from state to state as it is bound to be met in practice. When this occurs, the plan should provide that the individual will neither gain nor lose by the transfer.
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