REASONS WHY THE
FEDERAL OLD-AGE AND SURVIVORS INSURANCE CONTRIBUTIONS SHOULD NOT
BE FROZEN AT THE PRESENT RATE OF 1 PERCENT EACH ON EMPLOYERS AND
EMPLOYEES BUT SHOULD BE ALLOWED TO INCREASE TO 2 PERCENT EACH AS
NOW PROVIDED IN THE SOCIAL SECURITY ACT
A Statement by
A. J. Altmeyer,
Chairman of the Social Security Board
Before the Senate Committee on Finance on October 14, 1943
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The question which I understand the Committee wishes
to discuss today is whether the increase from 1 percent on employers
and employees, respectively, to 2 percent each, scheduled for next
year in the contribution rates of the Federal Old-Age and Survivors
Insurance program is justified. A comprehensive review of the existing
social security legislation and the factors which have led up to
the present situation will show, I hope, that such an increase is
desirable from the standpoint of the insurance program. I shall
limit my discussion solely to the desirability of the scheduled
increase in relation to the social insurance system, although I
believe there are additional good reasons which arise out of the
present financial status of the insured contributors and the Government
during this wartime period.
I should also like to make it clear at the outset that in presenting
my reason today for the scheduled increase I do not propose to discuss
the question as to whether the insurance program should be operated
on a "full" reserve basis or on a pay-as-you-go basis, or on some
modified basis with a contingency reserve involved. While the Congress
did not make a final and explicit determination in the 1939 law
with respect to the question of long-run financing, this is a matter
for the Congress to decide in relation to the coverage and benefit
structure of the insurance program.
Should the Congress finally decide that a limited coverage insurance
system, such as the present system is, should be self-sustaining
without any contribution from the Government out of general taxes,
it will be necessary eventually to obtain additional contributions
from employees and employers in order to make up the difference
between the 1 percent which is now being collected and the contribution
rate which must be levied under a self-sustaining system. On the
other hand, if the Congress should eventually decide that Government
contributions out of general taxes should be made to the insurance
system, the more contributions which the Government now collects
from employees and their employers the smaller need be the ultimate
subsidy. The Social Security Board has recommended that the insurance
system should be eventually financed, in part, from sources other
than payroll taxes. However, the Board believes this contribution
from other sources can be and should be deferred until the mounting
annual cost reaches a high level expressed as a percentage of payroll,
and that in the meantime the scheduled increases in payroll contributions
should be permitted to become effective.
I should also like to say that while certain arguments by analogy
with private insurance can be made in support of the scheduled tax
increase, I do not intend to discuss these today since such discussion
opens up the debatable question of the similarity and contrast between
private and social insurance. In passing it may be noted, however,
that already the total liability which has accrued for the payment
of insurance benefits is several times in excess of the amount in
the existing trust fund.
Under certain assumptions the level annual cost has been estimated
to be 7 percent of payroll. On this basis there would now exist
a deficit of nearly $13.5 billion. Other assumptions would yield
a lower level annual cost estimate. However, none of the actuarial
estimates which have been made on the basis of present economic
conditions and other factors now clearly discernible result in a
level annual cost of the insurance system of less than 4 percent
of payroll. On the basis of 4 percent level annual cost it may be
said that the fund already has a deficit of about $5.4 billion.
My own personal opinion at the present time after considerable study
of the many unknown factors which must now be used in any long-run
actuarial estimates, is that the level premium cost of the present
insurance system is likely to be in the neighborhood of 5 to 6 percent
of payroll. Thus, instead of the present reserve fund being too
large, the fund is small when tested on the basis which any private
insurance company would be compelled to use. While social insurance
cannot be judged by a too rigorous application of private insurance
concepts, nevertheless, this comparison indicates that the existing
trust fund is not unduly large in view of its liabilities.
Finally, I do not intend to discuss the broad economic aspects
of financing the OASI insurance system. While we must frankly recognize
that the goods and services purchased by insurance benefits at any
given time are paid out of the national income produced by the generation
then engaged in productive work, we should not conclude that the
methods followed in financing social insurance benefits are of no
significance in enabling the Government to meet its future social
insurance obligations. Just as we recognize that although the costs
of the war are being met now by all of us through inability to purchase
goods and services, we nevertheless realize that it is important
how we allocate the money cost to particular individuals and to
the Nation as a whole over a period of time through taxation and
the redemption of war bonds later on. In other words, we recognize
that the question of financing any governmental disbursement also
involves the question of the Government's financial ability to meet
all its costs at any particular time and the impact of such costs
on individuals. In the last analysis, the ability of the Government
to meet its costs rests upon the financial integrity of the Government,
its over-all financial burden, and the over-all tax system used
to meet its burden. Whatever may be the differing views on these
matters, I believe it is fair to say that the scheduled increase
in the OASI taxes would result in helping both the Government and
the social insurance contributors to be in a better position to
meet their long-run obligations.
The 1935 Law
As you know, the Social Security Act became law on August 14, 1935,
after many months of careful deliberation by the Congress. It incorporates
a two-fold approach to the problem of old-age security: non-contributory
old-age assistance, payable on the basis of a determination of need,
and contributory old-age retirement insurance based on wages earned
in insured employment.
The Federal old-age insurance law first came into operation on
January 1, 1937, when contributions became payable from employers
and employees at a rate of 1 percent on each. This same rate of
contribution is still in effect today. The law at that time, however,
provided that monthly old-age retirement insurance benefits would
not become payable until January 1, 1942--that is, after an individual
had contributed at least 5 years to the insurance system.
Amendments of 1939
In 1939, Congress made a number of significant changes in the old-age
retirement insurance program, most of them along the lines recommended
by an Advisory Council on Social Security and the Social Security
Board. The Advisory Council was created in May 1937 by the Senate
Committee on Finance and the Social Security Board. The most important
changes were as follows:
1. The old-age insurance system was expanded to furnish protection
for widows, orphans, and the dependent parents of insured workers
who die prematurely. This is a logical and necessary part of any
contributory insurance system, since many contributors die before
reaching retirement.
2. Monthly benefits became payable in 1940 instead of 1942, as
provided in the original law.
3. The entire system was shifted from individual protection to
family protection. In addition to the monthly survivorship benefits,
provision was made that an insured wage earner who retires would
receive an additional benefit of 50 percent when his wife also reaches
the age of 65.
4. The step-up from 1 percent to 1.5 percent in the contribution
rate, which in the 1935 act was scheduled for January 1, 1940, was
eliminated contrary to the recommendation of the Social Security
Board and the Advisory Council.
The Present Federal Old-Age and Survivors
Insurance Law
The old-age and survivors insurance program is the only one of
the social security programs administered entirely by the Federal
Government. Contributions are collected from the worker and his
employer through the Bureau of Internal Revenue of the Treasury
Department. The Social Security Board administers the benefits through
the Bureau of Old-Age and Survivors Insurance.
The various monthly benefits payable under the law range between
a minimum of $10 per month to a maximum of $85 per month. The amount
paid to each individual depends upon the amount of wages the insured
worker received in covered employment since the insurance plan first
became effective and the length of time such person was in the insurance
system. The lump-sum benefits which are paid may range from a minimum
of $60 to $300 or more.
At the present time about 750,000 individuals are drawing monthly
insurance benefits. In addition, lump-sum death payments are being
made with respect to 10,000 deceased workers each month. The rate
of disbursements for these various insurance benefits now averages
$14 million per month.
At the present time the contributions are 1 percent on the wages
of the employees and 1 percent on the employer's payroll--making
2 percent in all. These rates are scheduled to increase to 2 percent
each in 1944 and '45, or a total of 4 percent; and to 2.5 percent
each, or a total of 5 percent, during 1946, '47, and '48; and to
3 percent each, or total of 6 percent, in 1949 and thereafter. These
increases are already provided in existing law.
The revenue received comes into the Federal Treasury, and an amount
equivalent to the contributions received is deposited automatically
in the Federal Old-Age and Survivors Insurance Trust Fund. A board
of trustees supervises the Trust Fund. The three members of the
board of trustees are the Secretary of the Treasury, the Secretary
of Labor, and the Chairman of the Social Security Board.
Employers send their contributions and the contributions which
they have collected from their workers to the collector of internal
revenue every 3 months, on quarterly reports, listing the name,
social security account number, and wages of each individual employed
by the employer during the particular quarterly period. These records
are sent by the Treasury Department to the Social Security Board
offices in Baltimore, Maryland, where the records are kept for each
individual under the supervision of the Bureau of Old-Age and Survivors
Insurance through a method of mechanical bookkeeping.
Contributions are collected and benefits are payable on the basis
of employment covered by the insurance system. During 1942 over
45 million individuals had wages covered under the insurance system
and during 1943 it is estimated that the number will reach 48 million
for the year even though self-employed businessmen and farmers,
agricultural labor, domestic servants, employees of non-profit institutions,
Federal, State, and local governmental employees, and certain other
groups are excluded from the system at the present time.
Financial Operation of the Present
Law
Contributions collected for old-age and survivors insurance during
the fiscal year 1943 totaled $1.1 billion. Expenditures for benefit
payments and administration during this period were $176.8 million.
Total administrative expenses are equal to 2.5 percent of the premiums
collected. The total assets of the old-age and survivors insurance
trust fund, as of June 30, 1943, represented $4.3 billion, which
was invested in Government obligations at an average interest rate
of approximately 2.3 percent. A complete statement of the financial
aspects of the old-age and survivors insurance system was included
in the Third Annual Report of the Board of Trustees of the Federal
Old-Age and Survivors Insurance Trust Fund, which was sent to the
Congress in accordance with the requirement in the Social Security
Act. Table 3 of this report shows the distribution of the
assets of the Trust Fund at the end of the fiscal year 1942.
Assets of the fund as of the end of the last fiscal year represented
an average of about $75 per worker with wage credits under the old-age
and survivors insurance system. Total tax collections for the calendar
year are estimated at approximately $1.3 billion and total disbursements
for benefits and administrative expenses are estimated at about
$200 million. The additional 1 percent step-up scheduled for next
year is estimated to yield $1.4 billion for the calendar year 1944
of which half would come from employees and the other half from
employers.
Wartime Influence on the Trust Fund
The contributions now being collected are higher than was originally
anticipated at the time the 1939 amendments were enacted. Similarly,
the benefit payments are a great deal less than was originally estimated.
The marked rise in contributions reflects, of course, the high levels
of wartime payrolls. It may be worth while to mention those factors
in greater detail.
Increased employment, steadier work, and higher wages. The
general availability of work of a steady character and at higher
wages has increased earnings in covered employment. As a consequence,
the contributions to the Trust Fund are at a high level. During
1937 the average taxable wage of workers contributing to the insurance
system was $900. By 1940 it had risen slightly to $930. In 1941
it was $1,028. In 1942 it was $1,181. Our estimate for 1943 is about
$1,400. In 1937 the total of taxable wages was about $30 billion.
In 1942 it was $53 billion and in 1943 it will be well over $65
billion, or more than twice the amount in the first year.
These increases also result in higher wage credits accumulating
which will increase future monthly benefits payable at death or
retirement. Therefore, while this situation results in an abnormal
upturn in contributions during this period, there is a more or less
off-setting liability created for settlement over many years in
the future when more and larger benefits will become due.
Deferred retirements and suspensions of benefits. With the
need for maximum use of available manpower many individuals above
the age of 65 who are already eligible for retirement benefits have
remained on the job or returned to work, and thereby deferred or
interrupted their retirement. Since monthly benefits are not payable
for months in which an individual is working in covered employment
and to the extent that these deferments and suspensions exceed those
which, except for the war, would have taken place, there is an obvious
increase in the assets of the fund. At the present time there are
between 500,000 and 600,000 wage earners 65 year of age and over
who are eligible to old-age insurance benefits but who are still
working and who are, therefore, not drawing their old-age insurance
benefits. However, the benefits to be paid to those who have deferred
retirement to a later age than otherwise, will be greater in amount
by reason of being determined, partly at least, on the currently
high wage levels. Nevertheless, the net result of the factors mentioned
will be an increase to the fund.
Conclusion
The major reason why it would be unwise in the opinion of the Social
Security Board to defer the increase in the contribution rates now
scheduled to take effect on January 1, 1944, may be stated as follows:
(1) The chief reason why a graduated schedule of contribution rates
was incorporated in the 1935 Social Security Act was to permit the
ultimate contribution rates of the program to become effective gradually
and thereby give employees, employers, and the economy generally
an opportunity to become adjusted to the changes. In 1939 the law
was amended to postpone a step-up in the contribution rate from
January 1, 1940, to January 1, 1943. Last year, the law was again
amended to postpone a step-up in the contribution rate to January
1, 1944. These several changes do have the affect of substituting
uncertainty for certainty which should be an essential characteristic
of a system of social insurance. Today employment, wages, and the
national income are at record levels--at levels far in excess of
anything experienced in the past. If we depart once again from the
original schedule of contributions at a time when ability to make
these contributions is at a maximum, we increase the uncertainty
as to when the next step-up in contribution rates will occur.
(2) As I indicated earlier the average annual cost of the present
insurance system based upon existing economic conditions and other
factors now clearly discernible results in a rate of not less than
4 percent of payroll; and some of our actuarial estimates yield
a level premium cost in the neighborhood of 7 percent of payroll.
We are now engaged in making the revisions in our actuarial estimates
based upon information which has become available from the first
few years of operation of the law, the 1940 census, and changes
due to the war.
There are numerous factors which must be given consideration in
the actuarial cost analyses of the old-age and survivors insurance
system. Among the more important are: (1) Mortality. (2) Population
progress dependent upon births, deaths, emigration, and immigration.
(3) Family composition. (4) Employment. (5) Income level. (6) Length
of the productive period. (7) Length of the period of dependent
childhood. (8) Length of the period of retirement. (9) Invalidity.
(10) Interest rates. (11) Migration between covered and uncovered
employment. (12) The war.
The cost factors cited can pyramid rather strikingly. Persons could
go to work early, stay at work late in life, might avoid any serious
periods of unemployment, might have small families, and might live
under mortality conditions no better than the present. On the other
hand, the period of preparation for employment could be lengthened,
the period of retirement could be lengthened, the interruptions
of work might be frequent and serious, mortality might improve so
as to lengthen the life of the pensioners, families might be larger
so as to increase family benefits in case of the death of the worker,
etc. Also the proportion of workers by sex can shift and, viewing
the past, considerable change is likely in wage income. Administrative
determinations as to benefit qualification can add a certain amount
of ultimate costs--so can legal decisions as to specific definitions
and rights.
While it is impossible, because of the reasons cited, to reach
absolutely final conclusions as to future costs, all actuarial calculations
indicate a steeply increasing annual cost, because of the growing
proportion of the aged in our population, the growing number of
aged persons who will become entitled to benefits, and the increasing
amount of benefits per person due to the fact that benefits are
related to the length of time a person has been insured. This steep
increase in the future benefit costs will result in eventual annual
disbursements 15 to 20 times the present annual disbursements.
(3) As I have pointed out, the contribution rates scheduled for
1944 in the existing law, together with interest receipts to the
trust fund, are probably inadequate to meet the benefit payments
provided in the existing law and the administrative expenses of
the program, depending upon developments which cannot be foreseen
with confidence. Any reduction in the scheduled contribution rates
would lessen what would otherwise be the size of the fund, and hence,
would reduce the future interest income of the fund. This would
increase the likelihood of an eventual deficit, or would hasten
and increase the size of such a deficit. No doubt the existing law
would be amended before an actual deficit developed. At such time
an increase in contribution rates or a reduction in the scope or
level of benefits, or a Federal subsidy, or some combination of
the three, would become necessary. A reduction in the tax rates
scheduled to apply in 1944 would be a step toward such an eventual
situation. While no immediate difficulties are apparent in the financing
of the insurance system the fact that the Congress did not explicitly
provide in the law what should be done in case present contributions
are inadequate in the long run makes it impossible to determine
the financial policy under which we are operating. Until the Congress
is able to make a more definite commitment on the financial policy
of the insurance system it seems unwise to continue to levy contributions
which meet only a small part of the long-run cost.
(4) A consideration of the legislative history of the provisions
of the existing law concerning the reports which the Board of Trustees
of the Trust Fund is required to make to Congress supports the view
that the scheduled tax rates for the year 1944 should not be reduced.
It is true that the existing law requires the Board of Trustees
to report to Congress whenever the Board is of the opinion "that
during the ensuing five fiscal years the trust fund will exceed
three times the highest annual expenditures anticipated during that
five-fiscal-year period." However, the law does not require Congress
to take any action upon the receipt of such a report, nor does it
suggest that the three-time rule is the sole indicator of the proper
size of the reserve. Indeed, this provision was written into the
law with the thought that it would be meaningful only with respect
to the reserve when the benefit load has reached a considerable
degree of stability and not for the early years.
(5) The great increase in contribution income, due to the war,
is readily apparent, but the extent of the drain on the Trust Fund,
which will occur when economic activity slackens is frequently overlooked.
Since no one can tell when the war will end, prudent management
of the insurance system should allow for the possibility that economic
activity may decrease sharply within the year following the war.
If a sharp decrease in employment does occur a large proportion
of the recipients will elect to receive their benefits. A decline
in economic activity would, therefore, increase benefit disbursements
and at the same time reduce payrolls and tax income. If we recognize
that it is possible that during the post-war period there may be
a long continued period of high disbursements and low income, the
Trust Fund at the end of that time may be less than what would be
desirable in view of the long-run increase in costs.
(6) The unusually high level of tax receipts under the old-age
and survivors insurance program during the past year or so should
not be thought of an constituting a clear "gain" to the Trust Fund.
The wages which give rise to the increased current receipts will
also, in the future, serve to qualify many individuals for benefits
who would not otherwise receive them and will increase the potential
benefit amounts payable to other individuals. In other words, the
increased present income to the fund means increased future disbursements
from the fund. A reduction in the scheduled tax rates of the program
because of wartime fluctuations in the amount of taxable wages under
the program would seem to be unsound in the light of the increasing
liabilities.
(7) In the early years of the operation of the old-age and survivors
insurance system the actuarial value of the benefits provided is
very many times the value of the individual worker's contribution.
For example, a single individual who contributes for 10 years to
the system and at the maximum salary taxable under the law ($250
per month) might have obtained from a commercial insurance company
an annuity of $2 per month with his own contributions; whereas,
this law entitles him to benefit of $44 per month--or 22 times the
amount purchasable from an insurance company by his own contributions
(Senate Report No. 734, 76th Congress, p. 16). A married man might
be entitled to $66 per month or 33 times the value of his own contributions.
Hundreds of thousands of aged persons are now working in war industries
at good wages. At the present rate the insurance contributions which
they will pay during the entire war will be returned to them completely
in the first month or two that they draw benefits when they retire
after the war. Moreover, the actuarial value of the survivorship
benefits alone is equivalent to a 1 percent contribution. The present
value of these survivors' benefits at the date of death (corresponding
to the face amount of life insurance) is between $3,000 to $10,000
for most families (and as high as $15,000 for some families). Therefore
equity to the contributors who do not receive benefits until after
many years indicates that the contribution rates be increased.
(8) In addition to the equity of levying contributions at the 2
percent rate, it is desirable to increase the rate to 2 percent
in order to convey to the contributors a better appreciation of
the value and the cost of their insurance protection. The continuation
of the present 1 percent rate tends to depreciate the cost and the
protection afforded in the minds of employees, employers and the
public generally. As I have just pointed out, the real value and
cost of the insurance benefits provided are substantially in excess
of the rate of contributions now being collected. Yet I believe
it is fair to say that at the present time there are not a sufficient
recognition on the part of the contributors of the real value and
cost of the protection that is being afforded. I wonder how many
people realize, for example, that the 1939 amendments resulted in
the Government's underwriting life insurance having a face value
of $50 billion. I know of no better way to bring home both the value
of the benefits and the fact that these benefits will cost very
substantial sums than to put something like the true price on the
product.
In the history of social insurance throughout the world the major
difficulty of social insurance systems has been the lack of adequate
financing of old-age retirement benefits. It is always easiest to
delay levying the necessary insurance contributions, thus perpetuating
and strengthening the belief that the insurance benefits are meager
and the costs of the insurance system are low. Inevitably when the
time comes to increase the taxes many reasons can always be advanced
as to why the imposition of the additional taxes is unwise or impossible.
In this country we are still in a position to avoid these mistakes
by getting clearly established now that if our people want social
insurance they must be willing to pay for it. The time to obtain
the necessary contributions is when people are able to pay for the
insurance and are willing to pay for it because they can be shown
that they are getting their money's worth. If we should let a situation
develop whereby it eventually becomes necessary to charge future
beneficiaries rates in excess of the actuarial cost of the protection
afforded them, we would be guilty of gross inequity and gross financial
mismanagement, bound to imperil our social insurance system. Social
insurance financing is admittedly a difficult and complex problem.
However, we are all of one mind in wanting to make social security
secure, and I am confident we can and will provide the necessary
ways and means of doing so.
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