Legislative History

1939 Amendments

In January 1940 the Director of the Bureau of Old-Age and Survivors Insurance circulated a memorandum to all Bureau personnel throughout the country. This memorandum from the Director sought to explain in plain terms the reasons for enactment of the 1939 Amendments. John Corson, as Director of the Bureau, was technically the number four official at the Social Security Board at this time. However, since he was in charge of virtually all of the operations related to the Social Security program, he was arguably the most important single person in the organization. In the months following passage of the 1939 Amendments, Corson had been travelling the country explaining the 1939 law to employees of the Agency. This Director's Bulletin put in written form Corson's remarks. His views are a significant expression of the viewpoint of the Social Security Board on the '39 law and his remarks should be understood as reflecting the views of the top administrative officials of his day.

REASONS FOR THE 1939 AMENDMENTS
TO THE SOCIAL SECURITY ACT

Ours is and, I hope, will remain a somewhat unique organization. It is unique in that it is a democratic organization in which each member--(not each "employee")--is expected to play his part, not as a cog in the machinery, but as a thinking individual. His part is not just to take orders, but to give suggestions and make constructive criticisms as well as to carry out the necessary instructions. There are many new problems. Their solution requires real thought and intelligence rather than just obedient conformity with an increasing volume of rules and regulations. In that spirit I hope each may play his part in this organization.

When Congress adjourned last August, it left the Bureau of Old-Age Insurance (as it was then named) with four big tasks ahead.

(1) The first of those was the preparation of interpretative regulations, forms and procedures, and so forth, to govern the administration of the amendments to title II.

(2) The second task was to develop among our present staff a real understanding of these amendments to title II. By a real understanding I mean something more than a memorization of the words that make up the statute. I mean an understanding of the reasons for these amendments. I believe them even more important than the memorization.

(3) A third task was to build a larger organization to do a larger job. This meant the opening of field offices and the adding of personnel, to insure that we do the job, and do it well.

(4) The fourth task was to "clear the decks" so as to be current by January first. This was essential in order that we could concentrate on the new job.

We have been engaged for four months in the second of these tasks; the development of a thorough understanding of these amendments. To develop a real understanding of these amendments and the reasons for them, we must think through some of the basic terms we use; terms that we have used very naively in the past three years without thought as to what they really meant. We must consider the meaning of such terms as "social security" and "social insurance." What do they mean? What do they imply?

"Security" in itself is not difficult to define. It has a relatively commonplace meaning. Security, for you, for me, and for the average covered worker implies the assurance of a continuing income. It means the assurance that we can look forward to a salary check coming in at the end of next week as it did last week. Give us that assurance and we will make our own security. But when you tack onto the word "security" the word "social" we have a term that means very little to any individual, and implies as many different things as there are individuals. The word "social" is confusing. It has the same derivation as has the word "society." Society, to us, means the aggregate of the 130,000,000 American people between Canada and Mexico. When we talk about social security, we mean the security of this society.

Against what are we trying to make our society secure? We are trying to make it secure against at least two tangible, concrete things; namely,

1. A large proportion of the members of that society becoming dependent on society for its support--without resources of its own;

2. Loss of the purchasing power of this same large proportion of the American people.

We are trying to make society secure against the effects of both of those two contingencies. Social insurance is one of the ways in which we endeavor to make society secure.

"Insurance" is a term we all claim to understand, but "social insurance is a new term with no clearly understood meaning. Insurance is an orderly and logical provision in advance for some future contingency. Social insurance then is an orderly and logical provision in advance for contingencies that this society will meet. Through one form of social insurance--unemployment compensation--we endeavor to make orderly and logical provision to tide the workers over periods of temporary unemployment. Through another form of social insurance--that in which you and I are engaged--we are endeavoring to protect society against the contingency that it will be called upon to support a large proportion of the people over sixty-five who can no longer support themselves. Basically, each form of social insurance serves to replace a part of that wage income that made for the individual's own security and makes simutaneously for the protection of society against the necesisty of his support. Through unemployment compensation we replace a part of that wage income when it is lost by unemployment. Through workmen's compensation we replace part of that wage income when it is lost through industrial accident. Through old-age insurance we replace part of the wage income when it is lost because the individual can no longer work in old age. Through survivors insurance we replace part of the income which is lost as a result of the death of the wage earner. The basic purpose of all forms of social insurance is to replace a sufficient part of that wage income when it is lost as a result of any of these hazards--unemployment, accident, old age, or death of the wage earner--to insure not only that the individual may look forward to protection, but that society as well may be protected against the hazards which it faces.

Observed from this point of view, the 1939 amendments to title II assume a more understandable shape. They may be grouped under five principal headings. To do so will make their character and their purpose still clearer.

1. Several of these amendments which can be usefully classified in this first category are designed to provide protection for a greater proportion of the aged people. Protection for a greater number of the aged is essential not alone that more of the aged can look forward to the future with assurance that they will not be in want, but as well that this society, represented by the government, can look forward to the future with some assurance against the twin hazards of dependency and depression that it has faced in the last decade. To attain these objectives the amendments include two particular provisions: first, Section 209-b provides for the crediting of wages earned after age 65 toward benefits in the future. That means that about 300,000 individuals who have attained age 65 since 1936 can now look forward to the same protective monthly income when they can no longer work as any other younger insured individual; second, Sections 905 and 907 provide for the application of the pay-roll taxes on wages earned after 65 back to January 1, 1939. There is greater significance to this than we might at first realize. That means that approximately 450,000 people who were over 65 on January 1, 1937, can now look forward to the protection of a monthly income upon retirement. By means of the two amendments two large groups may look forward to retirement with a monthly old-age insurance payment for the first time--those who attained age 65 between January 1, 1937, and January 1, 1940, and those who were 65 before January 1, 1937. This means that 750,000 people who are for the first time given protection will be the claimants, not in the distant future, but primarily in the first years of this program, during 1940 and 1941.

To effect the inclusion of those groups it was necessary to make several other changes which are especially significant in our administration of this job. To qualify these elderly individuals who have but a brief time before they can no longer work, the eligibility requirements must be relaxed. The relaxation of these eligibility requirements brings into our work the terms "fully insured status," "quarter of coverage," and "average monthly wage," (Section 209(g) and (f)). The memorization of the exact meaning of these terms is essential; an understanding of the reasons for these provisions is equally important.

Under an insurance program, to be eligible for benefits a worker should have made some minimum contribution. In determining what this minimum should be, three difficult problems must be considered. First, this minimum must not be so great as to exclude older workers who retire soon, or younger workers who die. Second, this minimum must not be so great as to exclude the worker in covered employment because of temporary unemployment. Third, this minimum must be large enough to exclude the worker in non-covered employment who seeks to qualify by just a minimum of employment in covered industry. Should, for example, a person who was a farmer from 1937 to 1945, when he becomes about 66 years of age and realizes he isn't going to work much longer, be able to turn to work in covered employment for 1-1/2 years and qualify for benefits? Or should he be expected to meet the same requirements for benefits as the individual who has been in the system and contributed during the entire period from 1937 to 1945? These problems are answered in terms of "fully insured status." At the same time "currently insured status" offers protection for the wage earner who, by virtue of his youth or brief employment, dies before he has built up "fully insured status." Old age is a future risk against which individuals can be expected to make provision. Death is a current risk, in that it may be an event of the next week.

Consider the chronological development of these eligiblity requireinents. Under the 1935 Act it was necessary to have worked in at least five years, and have earned at least $2,000 in wages, to qualify for monthly benefits. The draft of the bill reported out by the House Ways and Means Committee would have required that a worker should have worked at least two years, and earned $600 in wage. As finally enacted, the eligibility requirements are neither 5 years and $2000, nor 2 years and $600, but 6 quarters (or 1-1/2 years), and a minimum of $300 in wages. In short, these eligibility requirements were considerably relaxed for persons already old.

There will be individuals who still won't be either "fully insured" or "currently insured." Yet in any insurance program it is essential that an individual shall have been a part of the system and contributed for at least some part of the time. That minimum has been considerably reduced; it has been reduced to a point where it will not exclude the worker customarily employed in covered industry. If it excludes the agricultural worker, or the self-employed person who is occasionally employed in covered industry, that is, of course, to be expected.

The inclusion of these older workers within the system necessitates not only the relaxation of their eligibility requirements, but as well the calculation of their benefits on the basis of an average wage rather than an accumulation of wages. This older worker will not have had an opportunity to accumulate, in the brief time during which he will be employed after 1936 or after January 1, 1939, a sufficiently large accumulation of wages to permit the calculation of an adequate benefit. Hence, it is essential that his benefits be related to his rate of earnings rather than to an accumulated total.



2. The second_group_into which these amendments can be classified includes those designed to provide more adequate protection for those whose need is greatest; more adequate benefits for those who would not be able under the 1935 law, to build up benefits adequate for subsistence. Under the previous law an individual earning $75 a month would have required 10 years in which to build up rights to a benefit of $20 a month. Under the amended.law this worker can build up the right to a benefit of that size in a year and a half. In short, the monthly insurance benefits have been made more adequate and more generous for two groups: first, those workers who were already old in 1937; and second, those workers who because their earnings are always low, were unable to build up adequate benefits even though employed a relatively long period of time. For those two groups the benefits are now much more nearly adequate.

Why is it essential that a social insurance system pay adequate benefits? These older workers have contributed very little. Why should they receive more generous, more adequate benefits? Because unless they do receive benefits at least adequate for subsistence, a social insurance program does not insure society against the necessity of supporting these individuals through emergency relief. If society is to be protected against (a) the necessity of supporting a large number of dependent old people, and (b) the loss of their purchasing power, when they are no longer able to earn a wage, they must receive benefits at least adequate for subsistence.

To accomplish this objective the amended law provides in Section 202(b) for supplementary benefits to the aged wives of retired workers, and in Section 209(e) and (f) for the calculation of benefits by a formula applied to the worker's "average monthly wage." Together these provisions serve to increase the size of the average benefits that will be paid and adapt them better to the actual needs of the average elderly worker. Only four or five States will pay to old-age assistance clients amounts as great as the average old-age benefit that will be paid in that State. In other States, old-age insurance benefits will be substantially greater than old-age assistance payments.

While increasing the average benefit to make it adequate to enable these workers or their dependents to support themselves, the amended law simultaneously provided for larger benefits for those who participate in this insurance system for longer periods. Section 209(e)(2) provides that the worker's benefit shall be increased 1 percent for each year in which he was paid $200 or more of wages under the system. Not only is it necessary to provide that every worker, even though his earnings are low or the time he has had to contribute is short, (if he has been in the system for a reasonable minimum period) shall be eligible for adequate benefits, but in an insurance program it is essential that the worker who has been in the system a longer time and contributed more shall receive a larger benefit.



3. The third_category into which the_changes to title II_may_conveniently_be grouped include those that provide for the extension of the scope of protection to a hazard faced by every worker that was not covered by the Act enacted in 1935. Interestingly enough, I think we should find that this is the one hazard that you and I have protected ourselves against through the use of private insurance. We have not bought private insurance against unemployment. We could not have bought such protection. Nor have many bought accident insurance. I venture, too, that not many of us have bought private insurance to protect ourselves against our own dependency in old age. Most of us have bought life insurance to protect our wives and children in the event of our death. That hazard, the hazard that the covered worker would die and leave his wife and children dependent upon society, was not provided for in 1935.

Those paragraphs under Section 202 which provide for widow's benefits, widow's current insurance benefits, children's benefits, and parent's benefits, protect the average wage earner against this hazard. These provisions represent a far-reaching change in the character of this insurance program. In the past, of all of the claims paid, 56 percent have been payments made upon the death of the wage earner. Similarly, the claims for survivors' benefits--widows' benefits, children's benefits, and parents' benefits--will represent a major part of our job in the future. In the past, when an individual became 65 he came to your office to file his claim. In the future there is no reason for him to come to your office upon his 65th birthday. There is no reason for him to come in at 75 unless he is ready to retire. In the meantime, many workers will have gone on working, and died before they ever came to file a claim for benefits. The person who does come to your office to for benefits is more often the survivor.

In paying benefits to survivors an accumulated wage base is not feasible. The prospect of death is a current risk. The young wage earner who comes into the system at 23 may die, not 10 years hence but he may die in three years or even a year and a half. Before he has had an opportunity to accumulate a sufficient base for benefits. Hence, an "average wage" base must be substituted for an accumulated. Yet, the "average monthly wage" when used in calculating benefits for some retiring workers will be difficult. There will be individuals, particularly at first, who will have earned during the period they worked in covered employment, let's say, $150 per month, whose "average monthly wage" will be only $50 or $75. This result arises from the use of an average wage determined by dividing the total wages earned when employed by the number of months in the entire period when the individual might have been employed in covered employment. Why?

This system, established in 1935, was designed to cover a certain limited group. Originally, agricultural, domestic, government and self-employed workers were specifically excluded. For the limited group in covered employment it must be recognized that the individual will be unemployed a portion of the time. Unemployment of any normal duration will not materially affect the calculated average monthly wage and the benefits based upon it, The individual whose benefit will be substantially reduced by the use of the "average monthly wage" will be the one who works most of the time in excluded employment--self-employment, agriculture, etc.--and only a part of the time in covered employment. In relation to his earnings in covered employment his "average monthly wage" and consequent benefits will be much less than his rate of remuneration when employed. In individual cases this may be difficult to explain. The way to meet his problem is not to revise all of our formulas, but to extend coverage to agricultural workers.

A similar problem arises from unemployment which is the result of disability. Suppose at age 55 or 58 a man becomes totally and permanently disabled. For 7 or 8 years he is unable to work. He sees his average monthly wage steadily decreasing and his "insured status" expire. That will be very difficult to explain. Yet the reasonable and practical method of meeting this problem is to provide disability insurance, to provide benefits during his disability. The problem now does not represent a weakness of the present system, but illustrates the necessity for another type of social insurance.

4. The fourth-categgory into which these amendments may be classified includes those provisions which advance the date upon which the payment of monthly benefits commences and those which change the manner in which benefits are financed.

When the 1935 Act was written, there were two reasons why it was thought necessary to defer beginning monthly benefits for five years. The first reason was to provide time in which to build up the administrative organization and machinery necessary to administer a huge job. The second reason was that it was thought necessary, under the original Act, to build up a reserve accumulated from tax payments over these early five years and subsequent years, which would provide a part of the resources to pay benefits the future.

The experience of the last three years has indicated that this administrative machinery has been built adequately in but three years. An accurate and efficient recordkeeping organization has been built which is adequate by enabling us even now to answer expeditiously any of 30,000,000 employees' inquiries as to the status of their personal insurance accounts.

Simultaneously an extensive and well trained field organization has been established which required a relatively small expansion to undertake the big job in the future. And, as well, a small but highly efficient corps of adjudicators has been recruited and carefully schooled. It is not necessary to postpone the payment of benefits longer on this account.

During these last three years you have heard much criticism, based upon a dearth of understanding, of the reserve. One criticism was that the accumulation of this reserve had a harmful effect upon the national economy by reducing the purchasing power of workers. The purchasing power was reduced by a large sum taken out in payroll taxes while a small sum was replaced in benefits. The effect of these amendments is to much more nearly balance the effect upon purchasing power within the next several years. In 1940, after the reduction of the payroll tax rate, the tax income will approximate $525,000,000 while the amount paid to beneficiaries in benefits will be about $114,000,000. In 1941 benefit payments will approximate $298,000,000, and 1942, $431,000,000. In a program of social insurance, the maintenance of such a balance may be important. One of the basic objectives of social insurance, you will recall, is to protect society against a loss of purchasing power. Social insurance will never, by itself, equalize the national purchasing power. It should not be so designed, however, as to contribute to the instability of purchasing power.

There appears to be some incongruity in the reduction of taxes (Section 1400, Int. Rev. Code) on the one hand, and the increase of benefit payments on the other. Yet this incongruity is not real when it is learned that the annual outlay for benefits under this new program in the future will be less than the annual disbursements under the old program. Despite the fact that larger benefits will be paid in the earlier years and new benefits are provided for the wives, widows, children, and parents of retired workers, the ultimate annual outlay will be less.

There are several reasons for this: first, the elimination of the lump-sum death payments, which would have in the future become very costly; second, the addition of survivors benefits, and wives benefits, do not represent as large an addition to the cost as might at first be supposed; many of the wives, widows, and parents will have built up right to "primary insurance benefits" themselves; they will not receive both benefits but the larger; the added cost is only the difference between the two benefits; third, the revision of the manner in which benefits are calculated through the use of an average wage and a new formula means that, while larger benefits will be paid to lower wage-earners, smaller benefits will be paid to higher wage-earners.

We have ahead of us a job as big as any job the Federal government has undertaken for a long time. Our success will depend on how well we have made preparation--how well we have done the four jobs Congress left for us last August.