THE SOCIAL SECURITY ACT of 1935 established two social insurance
programs: one provides protection against permanent loss of income
as a result of old age; the other, protection against temporary
income loss resulting from unemployment. Amendments in 1939 added
protection for survivors against cessation of income resulting from
the death of the wage earner and provided allowances for dependents
of recipients of old-age benefits. Most employees in industry and
commerce are covered by these systems.
While greatly furthering individual and family security, the present
system still fails to provide protection against several major economic
hazards confronting every individual, notably income loss resulting
from temporary and permanent disablement and heavy costs incurred
for hospitalization and medical care. It also omits from the scope
of even its present protections a substantial proportion of the
Nation's workers. Moreover, benefits payable under existing programs
are admittedly inadequate at various points.
Timeliness of Expanding Social Insurance
Because of the economic dislocations which may characterize the
aftermath of the war, it is important to provide greater security
against economic risks to workers and their families by remedying
these deficiencies and strengthening our social insurance system
before that time. Unless action is taken now, there is grave danger
that the postwar period will arrive before a well-rounded system
has been put in operation. It may then be impossible to install
the necessary measures sufficiently rapidly to care for the urgencies
of the moment, and we might have to face emergency problems with
hastily improvised devices.
The obvious question which will occur to many-- who may agree with
the inherent desirability of having a comprehensive social insurance
system available at the end of the war--is whether the present is
a practical and appropriate time for such action. The enormous outlays
and the vast administrative undertakings now necessary for the prosecution
of the war may appear to suggest that action be deferred, regardless
of other consequences.
The answer to this question--entirely apart from the social gains
involved--is that expansion of the social insurances would be more
appropriate now from the standpoint of the Nation's economic and
fiscal circumstances than at any time since 1935 or for some time
to come.
Two of the major economic problems of the war effort are to control
inflation and to obtain revenues through taxation or borrowing or
both. Because of the accumulation of reserves which characterizes
the early stages of social insurance systems, new or expanded, and
the operation of such systems in a period of high employment such
as now prevails, immediate expansion of our social insurance system
would contribute substantially toward meeting these economic problems.
The enlarged excess of contributions over disbursements which would
accompany the early phase of social insurance expansion would reduce
current purchasing power and serve as a potent force in the fight
against inflation. Investment of the excess in Government obligations
would make corresponding sums available to the Treasury. These investments
would aid in financing the war just as do the war savings bonds
purchased by individuals.
Thus, a measure can be taken now which will provide the basis for
a better society after the war and at the same time will serve the
general economic and fiscal needs of the moment.
Contents of an Expanded Program
Before examining the possible contribution of social insurance
expansion to these problems, it is desirable to outline briefly
the general nature of the changes which should be made in the present
system. In the first place, new types of protection should be added:
(1) benefits for permanently disabled workers and for their dependents,
irrespective of the worker's age and generally similar in amount
to old-age benefits; (2) benefits for workers temporarily disabled
through illness or injury and for their dependents, payable for
a limited number of months and more or less similar in amount to
unemployment benefits; and (3) payments with respect to hospitalization
costs incurred by insured workers or their dependents.
A second part of the expansion should be the extension of social
insurance coverage to occupations now excluded from even the present
programs. Among the major occupations not now covered at all or
only partially covered under the existing system are agricultural
labor, domestic service, employment in certain nonprofit organizations,
governmental service, maritime employment, employment in small firms,
and self- employment--that is, the work of an individual who is
in business or trade for himself. It would be desirable, so far
as it is administratively and otherwise feasible, to extend both
the present and the proposed new protections to these groups.
Expansion should provide, in addition, for more nearly adequate
benefits under existing programs. This end could be achieved by
increasing the maximum duration of unemployment benefits, shortening
the waiting period, introducing dependents' allowances, and increasing
benefit amounts. An adjustment in the formula for computing old-age
benefits and a lower retirement age for women under old-age and
survivors insurance might also appropriately be included.
Post-War Considerations
Because of the manner in which benefit and eligibility rights are
accumulated in advance of the receipt of benefits under social insurance,
the contributory nature of its financing, and the automatic processes
inherent in its operation, it is inevitably destined for an important
role in the postwar period. The only basic question is whether a
comprehensive system should be set up now, so that benefits will
be immediately available at the end of the war to assist in alleviating
the hardships of that period, or whether changes should be delayed
until these hardships are actually occurring for millions of families.
Provided expansion is undertaken now, social insurance can play
a dual role in the economic readjustment and reconstruction that
will be necessary when the war ends. On the one hand, it can provide
protection to individuals and families against the loss of income
which they may suffer for one reason or another after the war, when
a decline from the high levels of wartime production would increase
greatly the incidence of risks leading to such losses. On the other
hand, from the standpoint of the economic system as a whole, social
insurance can aid in maintaining consumer purchasing power if national
income exhibits a tendency to shrink and thus can assist in maintaining
employment at higher levels.
Under an expanded program, more nearly adequate benefits would
be available to support the unemployed and their dependents until
they can get new employment in peacetime production. More nearly
adequate annuities would be paid to aged workers who, though they
normally might have retired, remained at work until the end of the
war. Permanently disabled persons, too young to be eligible for
old-age benefits, would for the first time be able to obtain similar
benefits. Workers who are temporarily disabled would be eligible
for weekly benefits until they are able to return to work. When
sickness entails hospitalization, payments would be available to
ease the heavy burden of the cost. Finally, the widows, orphans,
and other survivors of workers who die would continue to receive
benefits which would, in large measure, replace their loss of support.
The general sense of security which would result from the continuity
of income provided by these various types of protection would provide
a better life for the great mass of people. Knowledge that these
programs are in operation would give a sense of security to all
who are protected, a sense of security which is the most potent
antidote to fears and worry over the uncertainty of the times. Viewed
from the present, therefore, the post-war period would not be anticipated
with fear and apprehension because of the readjustments that will
be inevitable but as a period when the economic sacrifices made
during the war seem to have been worth while.
The economic effect of an expanded program upon the economy as
a whole during the post-War period will depend largely upon the
relation of disbursements to contributions. Social insurance benefits
represent active purchasing power used immediately for consumption
goods. Social insurance contributions in the main come out of income
otherwise used for consumption. Thus, the extent to which the social
insurance programs as a whole will give a stimulus to the economy
after the war will depend on the extent, if any, to which disbursements
exceed receipts in that period. The net balance between receipts
and disbursements will vary widely according to the levels of post-war
production and employment. If employment declines sharply after
the war, the need for a strong social insurance system will be critically
urgent. Even if our economy stays geared for the long run to high
levels of employment, many millions of workers and soldiers may
be temporarily unemployed while we are changing over from a war
to a peacetime economy. It is precisely in such circumstances that
disbursements under an expanded program will be most likely to exceed
receipts and will be most useful in sustaining general purchasing
power.
Contribution Rates
The question now arises as to the over-all rate of contribution
which, from the standpoint of sound principles of social insurance
financing, should be imposed at the outset of an expanded program.
The permanent level of dollar disbursements under insurance against
unemployment, temporary disability, and hospitalization would be
approached within a relatively few years because these programs
deal with "current" risks. In contrast, disbursements under old-age
and permanent disability programs (except survivor benefits) would
rise steadily but relatively slowly over a number of decades, since
they cover "deferred" risks which generally materialize late in
the lives of' the contributors.
It would be unwise to fix the portion of the over-all contribution
rate for the deferred-risk programs on the basis of a simple projection
of recent benefit disbursements under the present old-age and survivors
insurance program. Many eligible claimants are now postponing retirement
because of wartime employment. It is estimated that by the middle
of 1946 nearly 2 million workers and their wives will be receiving
or will be eligible to receive benefits. The materialization of
this tremendous potential benefit cost at the end of the war, coupled
with the inevitable long-term rise in costs--as all the first generation
of contributors gradually reach old age--suggests that a sound compromise
must be sought between excessive financial conservatism and undue
disregard of the large additional liability now accruing daily.
On the basis of these considerations, a total basic contribution
rate of 10 percent of pay roll for employments covered under all
protections is indicated for the first years of the program outlined
above. For employments omitted from the coverage of some of the
protections, an appropriate downward adjustment in the basic rate
would be necessary. A 10-percent rate would be double the total
basic rate levied in 1942 for old-age and survivors insurance and
unemployment compensation combined.
Receipts and Expenditures
The suggested contribution rates would produce receipts substantially
in excess of disbursements in the first years of the expanded program.
This excess would result from the operation of various factors:
temporary deferment of benefit payments under the new programs to
permit accumulation of benefit rights and organization of administrative
machinery; delay in filing claims and accumulating the normal load
of benefits typically experienced under new social insurance programs;
continuance of wartime pay rolls at levels above the average pay
rolls to be expected through the cycle on which the percent-of-payroll
computations underlying the 10-percent rate are based; and, finally,
the small volume of unemployment and the postponement of retirement
accompanying wartime employment.
An excess of receipts over outgo is both necessary and inherent
in the introduction of a soundly financed new or expanded system
of social insurance. If the excess comes at a time when employment
and purchasing power are at a low level, such an excess may be injurious
to the national welfare. At a time like the present, when one of
the great dangers is that inflationary forces may get out of hand,
an excess of receipts over outgo can be of considerable aid in combating
such forces--even though, in the last analysis, this fiscal effect
of the program is an incidental byproduct of its primary objective--to
enhance the economic security of individuals and families.
In accordance with past practice which has met with general approval,
the increased assets of social security trust funds under an expanded
program should be invested in obligations of the United States Government.
Thus, another byproduct of an expanded social insurance program
would be the provision of additional sources from which the Treasury
can borrow without contributing to actual or potential inflationary
forces. It is unnecessary to dwell on the contribution to the war
effort which can be made at this time by expansion of Treasury facilities
for borrowing.
While adhering firmly to accepted principles of social insurance
financing, immediate expansion of the social insurance program along
lines strongly dictated by social needs would thus lead to a substantial
increase in reserves. Investment of these additional reserves in
Federal obligations would make funds in corresponding amount available
to the Treasury. These obligations would be credits available to
the social insurance program, to be drawn upon later as required
to meet benefit disbursements.
War-Revenue Requirements
A revised estimate of $85 billion for expenditures by the Federal
Government in the fiscal year 1942-43 was issued on October 7 by
the Bureau of the Budget. After taking into account net budget and
trust-account receipts and borrowing from Government trust accounts
under existing legislation, it is estimated that during the fiscal
year 1942-43 the Treasury will have to obtain approximately $60
billion over and above expected income to finance expenditures.
The deficit amount will have to be obtained either through additional
taxation or by borrowing from individuals and banks. It is generally
recognized that financing the war through potentially inflationary
measures, such as borrowing from commercial banks, should be kept
to the lowest possible level. If excessive reliance on bank borrowing
is to be avoided, additional funds beyond those now provided must
be transferred from the hands of the public into the Treasury.
The first question in considering methods of attaining the Treasury's
necessary goal is whether or not the imposition of further levies
should be accompanied by some type of post-war return. To the extent
that additional funds are obtained through outright taxation, no
such return is provided. Expansion of the social insurance system
or the introduction of a compulsory lending plan would, however,
involve additional levies which would provide a return to the lender
after the war. Because of the heavy tax burdens added by the Revenue
Act of 1942, the further sacrifices which will result from longer
hours and curtailment of consumption, and the stimulating effect
of spending in the post-war period which would be made possible
by credits built up during the war, there is much to be said for
the argument that some type of post-war return should be included
in further levies on the public. This is particularly the case since
any additional levies which are made during the war may be expected
to fall heavily on low-income groups.
The increased revenue accompanying an expansion of the social insurance
program differs from other types of taxation in that a post-war
credit is provided to contributors. It resembles compulsory lending
plans to that extent, but it differs from such lending plans in
that the post-war return is in the form of insurance protection
rather than lump-sum amounts.
Use of the insurance principle means that payments are guaranteed
to those who suffer the insured risks rather than to everyone including
those whose normal income is not interrupted after the war. Moreover,
under social insurance, the size of individual payments is geared
to presumptive need, so that they can be much more nearly in accord
with the needs of those who suffer misfortune than is possible under
a system of compulsory lending, under which repayments are determined
by the individual amount lent. In other words, the fact that risks
do not eventuate for all persons makes it possible to pay out considerably
more to those for whom they do occur than would be possible under
a compulsory savings plan. In both cases, the group of participants
as a whole may ultimately receive back the same aggregate amount,
but the manner in which this total amount is distributed among the
recipients differs.
To advance as an argument in support of an expansion of social
insurance--a desirable and timely step on its own merits--that the
increase in net receipts in the early years would aid the Treasury
in financing the war should not be under stood as advocating diversion
of social security taxes to general revenue purposes. The increased
collections, as in the past, would still flow into trust funds,
rather than into the general fund of the Treasury; their investment
in interest-bearing Government obligations would still be manifested
by a corresponding rise in the public debt; and-- most important
of all--contributors would receive benefit rights, and such benefit
rights would be a full "money's worth" per dollar contributed.
In view of these considerations, immediate expansion of the social
insurance program would seem to be well adapted as a part of a well-rounded
program for financing the war. It would not, of course, be a substitute
for all other measures but would serve to complement them.
Anti-Inflationary Effects
Immediate expansion of the social insurance program would, as has
been indicated, contribute to the solution of current problems of
war finance not only through the raising of funds but also by the
assistance rendered to the anti-inflation program.
The dangers of inflation resulting from the increase of national
income to unprecedented heights and the concurrent decrease in goods
available for civilian purchase as a result of diversion of raw
materials, labor, plant capacity, and transportation facilities
to war production are a matter of common knowledge. It is estimated
that, in 1943, income payments may be in the neighborhood of $125
billion. After the probable amounts which will be saved or paid
in direct personal taxes are taken into account, it seems likely
that there will exist a substantial gap between the value of the
goods and services available for civilian consumption and the funds
available for the purchase of these goods. Administrative controls
such as price ceilings cannot alone be relied upon to prevent inflation
unless the huge excess of consumer purchasing power is reduced through
other measures, and particularly fiscal measures.
The contribution which expansion of the social insurances at this
time might make to the control of inflation results from the fact
that new or expanded social insurance programs are usually deflationary
in the first phase of their operations. During this phase, in which
benefit rights and reserves are being accumulated, contributions
exceed expenditures to a substantial degree. If, in addition, the
period in which the new or expanded program is introduced is one
of high employment, as is the case at present, its anti-inflationary
influence is greatly increased.
If immediate action were taken to expand the social insurance program,
the prospective inflationary gap would be appreciably narrowed by
siphoning off a substantial portion of consumer income. Such action
would assist in making effective a fiscal policy designed to secure
a stronger framework for direct administrative price controls. Persons
contributing to social insurance, by foregoing, for the present,
use of increased incomes resulting from greater productivity and
full-time employment, would not sacrifice these gains permanently
through taxation or dissipate them in higher prices. Rather, a part
of their current income would be diverted to the purchase of protection
against present and future risks of economic insecurity for themselves
and their families.
In summary, expansion of social insurance is urgently required
now to provide security against the uncertainties arising out of
the war. Changes in our economic life caused by the war increase
the potential economic risks facing individuals and their families,
and emphasize the need for an adequate system of insurance to allay
fear of the future and provide the security essential for an all-out
effort. Taking this socially desirable action now would not interfere
with the war effort but would assist in alleviating the pressing
economic problems of raising more funds for the war and of checking
inflation.
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