Committee on Economic Security (CES)

"Social Security In America"

Part II

OLD-AGE SECURITY

Chapter X

FORMULATION OF RECOMMENDATIONS FOR AN OLD-AGE SECURITY PROGRAM FOR THE UNITED STATES

THE PRECEDING chapters have indicated the need for old-age security in the United States, have summarized the existing provisions for old-age protection in this country and their inadequacy in providing either relief or prevention of dependency, and have reviewed foreign methods of meeting this problem. The present chapter sets forth the steps taken in formulating a definite series of proposals for consideration of the Congress in the framing of a legislative program. The recommendations which follow, while based upon the preliminary proposals of the staff assigned to study the problem, evolved into their present form through an extended process of criticism and revision. Repeated conferences with the subcommittee on old-age security and with the executive committee of the technical board resulted in successive adjustments and amendments. The revised recommendations were presented to the advisory council and to experts outside the committee's staff for criticism and suggestion. The conclusions here summarized include, therefore, the contributions of many persons who with varied training and experience made a detailed analysis of the findings of the staff.

In entering upon an exposition of proposals for old-age security, it should be asserted that the "poorhouse" or "almshouse" method of providing for all aged dependents has been rejected by thinking opinion as both wasteful and inhumane. Non-institutional assistance for those who are not in need of institutional care has become an accepted standard of decent provision for the dependent aged.

In popular discussion of proper plans for the aged in an economic security program, the issue of choosing between non-contributory oldage assistance and a system of contributory old-age insurance has been raised. It seems apparent, however, that an effective old-age security program for this country involves not a choice between assistance and insurance but a combination of the two. It seems equally apparent that only assistance programs can serve to meet the problem of the millions of persons who are, or soon will become, superannuated and dependent. An insurance program coming into operation some years hence obviously offers no solution for the problems of the near

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future. It can, on the other hand, afford younger workers the opportunity to build up a certain protection against dependency in their old age. Regular benefits are unquestionably to be preferred to assistance grants. They come to the workers as a right, whereas assistance is conditioned upon a "means" test. Assistance, moreover, in fairness to the legitimate demands of other needy groups, must limit all grants to a minimum standard. Insurance benefits, on the other hand, can be ample for a comfortable existence, bearing some relation to customary wage standards.

An old-age insurance program could be expected in time to carry the major, but never the entire, load. Administrative problems stand in the way of covering in an insurance program all employed persons who need old-age protection. Moreover, it may always be expected that some persons whose income has been derived from other sources than wages will come to financial grief and dependency in old age. Assistance programs have a definite place, even in the longtime planning for old-age security. In consideration of the advantages of old-age insurance, the limitations imposed upon the Federal Government by our Constitution which would affect the adoption of such a program were fully recognized.

The recommendations for a system of old-age insurance outlined in the succeeding pages must, therefore, be considered in the light of the specific recommendations later advanced for a fundamentally altered program of old-age benefits believed to be legally feasible at this time. The reasoning which has led to these specific recommendations can be reported, however, only by outlining the more general conclusions from which they have evolved.

The old-age security program proposed comprised three separate plans:

(1) A,Federal program of grants-in-aid to the State old-age assistance laws.

(2) A Federal system of old-age annuities covering those classes 'of employed persons which can be effectively brought within such a system.

(3) A system of voluntary old-age annuities for persons of low and moderate incomes not covered by the old-age insurance system.

No provision for any type of institutional maintenance was proposed. Yet there are many aged persons not needing hospitalization who require constant custodial care. The almshouses of most of the States are most unsuitable to provide for the needs of these persons. The lack of factual data bearing on these county institutions and their inmates prevented intelligent planning for this problem. It was, therefore, recommended that the proper Federal agency undertake at once a special survey of such institutions. with a view to recom-

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mending a constructive program for the improvement of institutional maintenance of the aged.

OLD-AGE ASSISTANCE

As has been stated previously in this report, there were, prior to the introduction of the Social Security Act, 28 States and 2 Territories with old-age assistance laws which professedly offered to aged persons varying standards of aid. Six of these laws were practically nonfunctioning. Four were just getting under way. Many of the others, because of financial stringencies, had cut assistance grants below a proper minimum and had long waiting lists of needy persons. It would seem quite clear that, as. a result of the financial problems of many of the States and the indifference of others, Stats action alone could not. be relied upon to provide either adequate or universal old-age assistance.

Basic Considerations.-The specific reasons influencing the recommendations for a program of old-age assistance were as follows

(1) To help in the expansion of the use of the old-age assistance technique, both to additional States and to all subdivisions of States with nonmandatory laws. The provision of matching grants had proved to be an effective means of aiding States to enact welfare legislation.

(2) To permit and aid more adequate financing of State plans. By the provision of Federal aid on a matching basis, not only would a Nation-wide tax base be utilized as a source of a part of the funds, but the use of a broader tax base within the State would be encouraged. The inadequacy of the grants paid in most States with assistance plans indicated the pressing need for additional funds.

(3) To permit and aid improvement in standards of administration, minimum grants, and coverage of State plans. The particular standards which were deemed worthy of aid were

(co) State-wide coverage either under State administered plans or plans mandatory on State subdivisions.

(b) The establishment or designation of a State welfare authority responsible for the administration of the plan. It was believed that centralized responsibility for administration not only would avoid a diversity of operating standards in the subdivisions within the State, but would permit closer contacts between the several States and between the Federal Government and the particular State in cooperating to raise the level of effectiveness of assistance programs throughout the country. .

(o) The assurance to any claimant for assistance of the right of appeal to the State authority. This would provide a further assurance of the uniformity of administrative effectiveness within the State.

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(d) Adequate reporting through the requirement that complete reports be made to the Federal administrative agency in accordance with regulations established by that agency.

(e) The assurance that the minimum assistance grant made by the State would provide a reasonable subsistence ~ compatible with decency and health when combined with any income the claimant might possess. While the monetary cost of such reasonable subsistence would vary throughout the country, it was believed that a. lower limit to grants, related to local costs of living, should be established. The provision of matching grants by the Federal Government might well make it possible to raise the level of the assistance afforded by State programs under normal conditions. An established minimum would, however, avoid the spreading of funds too thinly or the progressive lowering of grants in time of financial stringency.

( f ) A widened coverage through the elimination of a required period of citizenship; the reduction of the period of required residence in the State; the raising of the property limit; and the lowering of the age limit, at least after a few years. The diverse standards of eligibility in State old-age assistance laws greatly reduced the effectiveness of assistance programs in meeting the growing need for old-age relief. Since needy old persons must be aided in some manner, arbitrary requirements of years of citizenship and many years of residence for eligibility for assistance merely shift individual claimants from a more adequate system of relief to a less adequate. With the extension of assistance legislation to more States, the fear of an incursion of older dependent persons into a particular State would be lessened. The provision of Federal funds would lessen the justification of a restriction of assistance grants to American citizens of long residence in a particular State. Statistics of dependency and of relief experience during the recent depression indicate that the limitation of assistance to persons.aged 70 or over excludes far too great a proportion of dependent aged persons. Not only had the depression itself left many older persons permanently dependent, but persistent changes in our economic life have lowered the age at which superannuation is likely to occur.

The raising of the property limit was intended to permit greater flexibility in handling those situations where the claimant might possess such useful assets as a home, a small piece of land, tools, or furnishings. To the extent that income accrues from these assets, this income might reduce the amount of the grant necessary. It was proposed that a lien be placed against the estate of the recipient at least for the amount of the assistance granted by the Federal Government. This requirement indicated a practical method whereby the States might control expenditures or assistance to persons with considerable assets.

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(g) The use of the inadequacy of the claimant's income as the test of need in providing a reasonable subsistence compatible with decency and health, and not the inadequacy of the income of other persons who might, on account of family or similar ties, be expected to support the claimant. It was not the intention, in recommending this narrower application of the means test, to discourage in any way the support of needy aged persons by their relatives. Rather, it was to avoid the distress which might occur when relatives obligated to provide support failed to do so or failed to afford sufficient aid. It did not seem proper that the aged person should be excluded from assistance in such situations. Rather, assistance should be given, with the possibility of legal suit for the recovery of the amount of such assistance brought by the State assistance authority against any legally responsible relatives. It was considered more advantageous, both socially and administratively, to encourage an arrangement whereby legal action against indifferent relatives, where necessary, would be brought by a public authority rather than by the needy aged person. The possibility of such suits might go far to render them unnecessary.

It was believed that the offer of a subsidy by the Federal Government to an amount equal to the assistance afforded by the States (but limited to $15 per month on account of any individual) under approved plans would not only cause the extension of State assistance legislation but would make possible the adoption of these more adequate standards throughout the country. While earlier proposals for Federal subsidization called for a ratio of Federal to State appropriations of but one to two, on account of the growing urgency of the need for assistance programs, the financial stringencies faced by many States, and the higher standards of legislation now called for, it was deemed advisable to recommend the more favorable ratio of dollar for dollar. To encourage effective administration, it was suggested that State expenditures for administration be matched at the same ratio up to a maximum of not more than 10 percent of the total expenditures for assistance in the State. With an adequate proportion of funds assigned to administration, the Federal and State authorities could cooperate more effectively in the development and extension of improved administrative techniques.

Estimates of future subsidy costs, like all forecasts, must of course be offered as probabilities rather than certainties. In table 44 are presented two different estimates of the number of persons who will be eligible for old-age assistance and the costs of Federal subsidy over a period of years. The two sets of estimates were based on different assumptions as indicated in the subhead. The data that were studied as a basis for the estimates included material collected and analyzed by the several State commissions on old-age dependency,

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statistics of the functioning of State old-age assistance laws, and the history of the functioning of gratuitous pension laws elsewhere in operation, particularly those of Denmark, Australia, and Canada. The first estimate presented in table 44 was predicated on an assumption which seemed liable to error on the side of understatement of upward trends. The average pension used in the computation, $20, was undoubtedly too low for the period covered. This was felt to be counterbalanced by the fact that the increase in the ratio of dependency might well be less rapid than that which was counted upon in this estimate.

TABLE 44. Estimates of the number of old-age assistance recipients and the amount of Federal subsidy to State old-age assistance programs {1}
Year	Assumption I {2}		Assumption II {3}		Year	Assumption I {2}		Assumption II {3}
Year	Number receiving old-age assistance (in thousands)	Amount of Federal subsidy (in millions of dollars)	Number receiving old-age assistance (in thousands)	Amount of Federal subsidy (in millions of dollars)	Year	Number receiving old-age assistance (in thousands)	Amount of Federal subsidy (in millions of dollars)	Number receiving old-age assistance (in thousands)	Amount of Federal subsidy (in millions of dollars)
1936	897	{4}$72.2	897	$136.6	1955	4,140	$521.8	5,844	$889.7
1937	1,048	131.8	1,307	199.0	1960	5,304	688.3	6,801	1,035.5
1938	1,200	151.2	1,785	268.7	1965	5,735	722.7	7,169	1,091.5
1939	1,372	172.8	2,287	348.2	1970	8,028	759.3	7,533	1,148.9
1940	1,580	199.1	2,746	418.1	1975	8,405	807.0	8,007	1,219.1
1945	2,293	289.0	3,631	552.8	1980	8,800	858.8	8,501	1,294.3
1950	3,153	397.3	4,675	711.8
{1} These estimates assume that no Nation-wide system of contributory old-age insurance or a substitute therefor is in effect. {2} Assuming: (1) dependency ratio of 15 percent in 1936, increasing thereafter by yearly increments of 1 percent to maximum of 40 percent in 1961 and subsequent years; (2) average grant of $20 per month; (3) Federal subsidy of one-half total costs, excluding that portion of individual grants in excess of $30 per month and that portion of administrative expenses in excess of 10 percent of total payments to individuals. {3} Assuming: (1) dependency ratio of 15 percent in 1938, increasing to 20 percent in 1937, 25 percent in 1938, 30 percent in 1939, 33 percent in 1940, and thereafter, by 1 percent yearly increments, to maximum of 50 percent in 1957 and subsequent years; (2) average total grant of $25 per month from State and Federal Government combined (3) Federal subsidy of ono-half of total costs, excluding that portion. of individual grants in excess of $30 per month and that portion of administrative expenses in excess of 10 percent of fatal payments to individuals. {4} Full-year cost reduced for administrative lag.

In spite of the fact that the actual figures might vary from those presented in any one year, it was felt that the trend indicated in the two estimates presented in table 44 would be inescapable. There were several reasons for this conviction. The assurance of an oldage assistance grant in case of need tends to produce the reaction in the minds of many persons that the assistance grant is available in old age as a matter of right. This impression would tend to become still more widespread should the Federal Government participate in the financing of such assistance. It becomes reflected in the attitude of children toward supporting their parents and causes a mounting number of claims for assistance. Moreover, the very principle of gratuitous assistance, namely, that the less income'the applicant has the more pension he receives, has an effect which is the inverse of inducement to thrift. The number of aged persons who arrive at old age without any income is actually increased.

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The justification of a Federal subsidy to State old-age programs is readily apparent from a study of current conditions as to old-age dependency, the shortcomings of existing State old-age assistance programs, and the limitations of State and local public finance. These matters are discussed elsewhere in this report.-

Proposals to the Congress.-It was recommended to Congress

(1) That the Federal Government offer grants-in-aid to those States and Territories which provide old-age assistance for their needy aged under plans that are approved by a Federal authority, such plans to include proposed administrative arrangements, estimated administrative costs, and the method of selecting personnel.

(2) That the grants-in-aid constitute one-half of the expenditures, including administrative expenses, for noninstitutional old-age assistance made by any State or Territory under a plan approved by this Federal authority, provided that in computing the amount of said grants-in-aid not more than $15 per month shall be paid in Federal subsidy on account of assistance provided for any aged persons in such State or Territory nor more than 5 percent of the total expenditures for assistance on account of administration.

(3) That a State or Territory, on account of administration, shall be free to impose qualifications upon the granting of assistance to needy aged persons, but that it be stipulated in the congressional statute providing for the grants-in-aid that no plan shall be approved by the Federal administrative agency unless it-

(a) Is State-wide or Territory-wide and, if administered by subdivisions of the State or Territory, is mandatory upon such subdivisions; and

(b) Establishes or designates a State welfare authority which shall be responsible to the Federal Government for the administration of the plan in the State, and which shall administer the plan locally through local welfare authorities; and

(d) Provides that such State authority shall make full and complete reports to the Federal administrative agency in accordance with rules and regulations to be prescribed by the Federal administrative agency; and

(e) Provides a minimum assistance grant which will afford a reasonable subsistence compatible with decency and health, provided that, if the claimant possesses income this minimum grant may be reduced by the amount of such income; and

{1} See chapters VII, VIII, and XIX

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(f) Provides that whether or not assistance shall be denied to certain needy aged persons it shall be granted at least to any person who

(1) Is a united states citizen; and

(2) Has resided in the State or Territory for 5 years or more within the 10 years immediately preceding application for assistance; and

(3) Is not an inmate of an institution; and

(4) Has an income inadequate to provide a reasonable subsistence compatible with decency and health; and

(5) Possesses no real or personal property, or possesses real or personal property of a market value of not more than $5,000; and

(6) Is 70 years of age or older; provided that after January 1, 1940, assistance shall not be denied to an otherwise qualified person after he is 65 years of age or older; and

(g) Provides that at least so much of the sum paid as assistance to any aged recipient as represents the share of the United States Government in such assistance shall be a lien on the estate of the aged recipient which upon his death shall be enforced by the State or Territory and the amount collected reported to the Federal administrative agency.

Legislative Modifications of the Proposals.-

These proposals were embodied in the original economic security bill introduced in Congress on January 17, 1935. This bill was introduced in the Senate by Senator Wagner (S. 1130) and in the House of Representatives by Congressmen Doughton (H. R. 4120) and Lewis (H. R. 4142). After hearings before the House Ways and Means Committee this bill was not recommended. In its stead the social security bill (H. R. '1260) was introduced and recommended for passage; this bill became law on August 14, 1935. In the act as passed Congress adopted the basic principle of Federal grants-in-aid to States with old-age assistance programs meeting certain requirements. However, several important changes were made in Congress in the proposed standards for State old-age assistance programs required as a condition for Federal subsidy. The principal , legislative modifications were the following

(1) the required condition that State old-age assistance plans should furnish assistance sufficient, when added to the income of the recipient, for "reasonable subsistence compatible with decency and health" was rejected by Congress.

(2) The proposal that the test of need, to be used in approved State old-age assistance plans in the determination of eligibility for grants, be limited to the adequacy of the income of the aged person, together with that of his or her spouse, was rejected.

(3) Congress rejected the proposal that a State plan for old-age assistance should not be approved if it denied assistance to any United States citizen who met the requirements of minimum age

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and residence, whose property and income were not in excess of a specified maximum, and who was not an inmate of an institution. Under the act as passed, a State which wishes to receive Federal aid is left free to impose any requirements upon applicants for assistance, except that it cannot impose a residence requirement: in excess of 5 years within the last 9 years immediately preceding application for aid, or an age requirement of more than 65 years ( i 0 years until January 1, 1940), or a citizenship requirement which excludes any citizen of the United States.

(4) .The proposal that the Federal Government should share with the States the cost of administration by payment of an amount not to exceed 5 percent of the State's total expenditures was modified to a provision that 5 percent of the Federal grant pap:tble to the State for giving assistance to individuals should be paid to the State. The State might use this amount either for paying the costs of administration or. for assistance to individuals, or both, but for no other purpose.

A SYSTEM OF OLD-AGE ANNUITIES

With the recognition of the conditions which necessitate Federal financial participation in buttressing existing techniques in meeting old-age dependency in this country, there follows inevitably the conclusion that existing techniques will soon prove inadequate to cope with this mounting problem. The trends in the proportion of aged persons in our population have been discussed.a The estimates of the number of aged persons probably becoming dependent have been presented.a The improvement of assistance techniques and the financial participation of the Federal Government in their operation would not only meet more adequately the existing problem of dependency but, through encouraging reliance on assistance in old age, might well accelerate rather than retard the growth of Federal and State assistance expenditures. The experience of other countries lends weight to this conclusion. It was, therefore, concluded that a system of contributory old-age insurance should be established at the earliest possible time to control the upward trend in expenditures for old-age assistance. Only through the method of preventing dependency through some form of cooperative thrift can the cost of relief be kept down. Old-age insurance financed in large measure from the contributions of workers and their employers would serve to protect an increasing proportion of our citizens from the hazard of old-age dependency and at the same time retard the mounting trend of assistance expenditures.

{2}See pp. 139-141.

{3} See pp. 149-184.,

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A corollary reason for the early establishment of a system of oldage insurance was the urgent necessity of preventing the untoward social consequences of increasing dependence upon old-age assistance on the part of our citizens. Since assistance is granted on the basis of need, it tends to discourage thrift, which would render assistance unnecessary. Under a system of old-age insurance, individual need would not be a determinant. Since insurance benefits would be received as a matter of right, based on contributions related to wages, workers would be encouraged to maintain the best possible record of employment and wages in order to earn the right to a high rate of benefits. Savings or other assets would in no way reduce the amount of benefits received but would provide a means of augmenting income in the later years of life.

The Advantages of the Insurance Method.-The certainty and regularity of insurance benefit payments would greatly enhance the sense of security of the superannuated person. The prospect of recurrent investigations and possible changes in status and grants based upon varying regulations, interpretations, and conditions in State finances limit the degree of assurance which the recipient of assistance can feel. Benefits paid under a system of old-age insurance would be determined at the time of retirement and continued without change during the period of retirement. The social advantages of an insurance program seemed marked.

The conditions surrounding the payment of benefits under an old-age insurance system would enhance the economic effects of an old-age security program. Under the method of old-age assistance superannuated persons are encouraged to compete in the labor market as long as possible to eke out a more satisfactory existence. Assistance grants may prove a subsidy to superannuated workers which will permit them to accept lower wages than younger workers in competition for jobs. Administrative authorities seeking to hold down assistance expenditures may stimulate, such competition as a means of reducing grants in individual cases. The effect on thb employment opportunities of younger men and upon wage rates might prove most unfortunate. Under a system of old-age insurance, the opposite effect would ensue. Since retirement from regular employment could be made a condition for receipt of benefits, the displacement of superannuated workers from the labor market would be accelerated.

The certainty and regularity of benefit payments under an oldage insurance program would serve to stabilize in some degree the flow of consumption expenditures on the part of our superannuated population. With a definite retirement income assured, superannuated persons would be mare likely to maintain a normal rate of

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expenditure in good times and bad. As benefit payments rose and more persons became eligible to receive them, it might safely be prophesied that this added element of stability in our economic system would have considerable influence. The less tangible effects should not be disregarded. The confidence and sense of security of a mature group of citizens could not but affect the attitudes of younger groups.

American experience with industrial pension programs, while strictly limited in extent, and by no means universally successful, serves as a basis for demonstrating the social and economic advantages of an old-age insurance program. The more adequate pension programs have served to protect those eligible for benefits from distress in old age and thus have afforded some sense of security both before and after retirement. Related to employment and wages, such programs have tended to encourage rather than discourage continued initiative on the part of the prospective recipient. They have also enhanced thrift through increasing the appreciation of the satisfactions of planned security. At the same time, pension payments, where adequate, have served to prevent the necessity for superannuated persons to compete for'jobs against younger and more active workers. In these cases, they have increased employment opportunities, accelerated promotions, and prevented the depressing effect on wage rates which the competition of superannuated persons might cause. For a limited number of individuals industrial pension programs have served to make retirement from active life a cause of satisfaction rather than a misfortune. The every limited coverage and frequent shortcomings of most existing industrial pension programs prevent, however, any reliance upon such programs in meeting the problem of old-age dependency facing the country.{4} In the fees instances where private pension plans afford more generous protection than the public system here considered, the industrial plans could be readily adjusted to supplement such a system. Only through a uniform basic program can industrial employees generally be effectively protected in old age.{5}

{4} See p. 176 for a discussion of the limitations of industrial pension programs.

{5} It was considered neither feasible nor desirable to exempt employers and workers party to private pension plans from coverage under a compulsory old-age insurance program. A social insurance program serves a broad public purpose and is designed to meet basic needs. Private pension plans are adjusted to the interests of a relatively small group of persona-those attaining retirement age with a record of faithful service for a particular employer. To warrant exemption, existing private pension plane would need to undergo thorough reconstruction in coverage, financing, standards, and administration. At the same time, the Government would, under such an arrangement, face serious problems of finance and administration in attempting to safeguard both the general insurance system and the employees affected. On the other hand, employers desiring to provide more liberal benefits will be able to work out supplementary programs which will be entirely apart from governmental supervision.

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The experience of other countries with various types of old-age security measures serves to justify further the conclusion that oldage assistance cannot be permanently relied upon as the sole means of meeting the problem of old-age dependency in an industrial country. Contributory old-age insurance programs developed in other important industrial nations include the features of definite payments to eligible beneficiaries, paid as a matter of right and computed on the basis of previous earnings in gainful employment. The inadequacies and social and economic effects of means-test assistance have weighed heavily in the decision to establish the more constructive programs. While the source of funds in most of these foreign plans is in part the contributions of workers and employers, appropriations from the general governmental funds are quite usual. The shift from gratuitous pensions granted on a needs basis to annuities earned as a right through contributions to an insurance system is a significant feature in development of old-age security abroad.

The Necessity of a Single Federal System.-In considering a program of old-age insurance, the question soon arose whether a more or less related aggregation of State plans or a single Federal system was preferable. The answer to this question was not merely one of preference but of absolute necessity. After thorough canvass of the technical, economic, and administrative problems involved, the conclusion was reached that only through a single national administration could effective operation be assured. The reasons leading to this decision may be summarized

(1) The mobility of population across State lines would make the use of the actuarial procedures necessary in any workable plan impossible on any but a country-wide base. While such estimates as those of population growth, age distribution, and mortality could be developed with sufficient accuracy for the total population, future migrations of young or old persons from one State to another, whether for climatic considerations or as a result of shifts in industry, would make such estimates untenable if constructed on the basis of a single State. The operation of 48 separate systems of old-age insurance would involve virtually insuperable administrative difficulties, excessive costs, and almost certain failure in many States.

(2) Aside from the actuarial problems involved in State administration of old-age insurance, many other disadvantages of separate State systems were apparent after even casual examination. With varying standards of benefits and the probability that many States would fail to act, large numbers of workers moving from one State to another in the course of adult life would reach old age without

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adequate protection. The mobility of labor would be affected if there were any considerable variation in rates of contributions and benefits. Federal administration, on the other hand, would afford uniform standards over the entire area.

(3) The accumulation of reserves under old-age insurance programs by 48 States would involve both investment and administrative problems of serious proportions. Not only might the degree of safety and the adequacy of funds vary, but the effects of diverse investment policies upon the credit structure of the country might prove unfortunate. Furthermore, the transfer of individual credits from the reserve account of one State to that of another would require a great amount of administrative labor. Where the reserve policies of States varied in the degree to which accrued liabilities were funded, the transfer of individual credits would lead to difficult adjustments in equities.

(4) Varying rates of contributions under State insurance programs might affect seriously the competitive costs of doing business in the several States. For interstate corporations, the adjustment of industrial pension plans to various State old-age insurance programs would become a most discouraging task.

(5) The argument for State experimentation with social security techniques has much less validity in the case of old-age insurance than in the case of unemployment or sickness compensation, since 50 to 75 years are required to test an old-age insurance system through one complete life cycle. The confusion of various systems in all stages of maturity would, without doubt, soon kill any urge toward continued experimentation.

(6) Finally, the routine character of the administration of oldage insurance would make it more adapted to large-scale operation. Since rates of benefits would be based on past contributions alone, with little if any discretionary. determination, the machinery far administering an old-age insurance system would be much simpler than that far administering unemployment compensation. With broad policies determined by a central Federal authority, operating procedures could be reduced to standardized routines. The advantages in economy and convenience resulting from such a uniformity of procedure alone would seem to warrant the paralleling of old-ago insurance with such services as the Federal postal system rather than incurring the vagaries of State workmen's compensation administrations.

It became clear, therefore, that State action could not prevent oldage dependency by establishing independent old-age insurance systems. A study of foreign insurance systems confirmed this conviction. In the field of unemployment insurance a number of na-

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tional governments in foreign countries limit their function to stimulating voluntary efforts by offering subsidies to regional, local, or industrial funds. However, no foreign government which has adopted the principle of old-age insurance leaves the responsibility of building an old-age fund for the protection of its working people to political subdivisions or to voluntary action on the part of employers or labor unions.

Basic Principles of an Old-Age Annuity System.-Before formulating a program for presentation to Congress, decision had to be reached on the basic provisions to be incorporated in a Federal oldage annuity system, such as the amount of the old-age annuity, the method of financing the benefits, the accumulation of a reserve, the groups to be covered, and the administrative machinery for putting the program into effect.

The Character cued Amount of Insurance Barriers.-Although payments to beneficiaries under a system of old-age insurance should bear a definite relationship to the previous earnings of the beneficiary, many factors must be considered in determining the precise relationship which is proper and feasible. After balancing these factors the following conclusions were reached

(1) The immediate payment of benefits at a rate justified in a system long in operation seems financially impossible. While a rate approximating 50 percent of previous average earnings is socially desirable, the cost of such benefits would be far too great to be met from worker and employer contributions or to be absorbed by the Government in the early years of the system. Only after contributions had been levied over a period of years could the flow of funds necessary for a full scale of benefits be attained. The charges necessary for such benefits for persons now old should not be suddenly assessed upon the present younger generation of contributors. Instead, the amounts of benefits paid to individuals might, in general, rise gradually over the next generation based on the increasing period of insurable employment of prospective beneficiaries previous to retirement. In this way the costs of the system would be adjusted to the period in which the beneficiaries had contributed to the cost of operating the system either directly through wage deductions or indirectly .through the economic income they had helped to produce.

(2) The minimum benefit granted should, however, be sufficient to prove a considerable item of income to the recipient and to warrant the administrative costs of distribution. It was concluded, therefore, that no benefits should 'be paid during the first 5 years in which the system was in effect and in which contributions were paid. At the end of 5 years annuities should be begun at an initial rate of not less than 15 percent of average wages. After that time the rates would

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increase with the number of contributions made. The annuity would amount to approximately 50 percent of average wages for a person on whose behalf contributions were paid throughout his entire working life. For many years the benefits would be insufficient to provide subsistence unless supplemented from other sources; yet they would have considerable effect in lessening the amount of assistance required. A benefit of these proportions would greatly exceed for many years that "earned" by the contributions assessed in the individual case. The limitation of benefits to those amounts which could be financed by the contributions of the beneficiary and his employer would result in seriously inadequate protection for a large majority of individuals for a generation to come. For this reason, it was believed that the minimum such as that proposed should be established.

(3) Insurance benefits should be so graduated relative to contributions that (a) persons of lower average income and (b) persons coming under the system relatively late in life should receive higher proportionate benefits. As a social mechanism aimed at the prevention of dependency, an old-age insurance system should be adjusted in some measure to the relative needs of various classes of beneficiaries even though need is not a determinant in the individual case. A further method of insuring that the system will be geared to the needs of persons of small or moderate incomes is the elimination of such income as exceeds a stated amount per week or per month from, the wage base upon which benefits and contributions are based.

(4) If old-age insurance benefits axe paid to persons continuing in regular employment after attainment of age 65, they will become, in effect, a subsidy to older workers in competing in the labor market. Since the employment and wage rates of younger workers would be :adversely affected by such subsidized competition, it was felt that old-age insurance benefits should be suspended in those cases where otherwise qualified persons were regularly employed. It was believed that the social advantages of encouraging retirement at age 65 far outweighed the objection that individual equities would be reduced when benefits were thus suspended. Since the benefits paid after retirement would, in most instances, greatly exceed those financed by the employee's contribution, there was little basis for this objection. In any event, the main purpose of the plan is to provide a partial compensation for the loss of earned income.

It was felt that a death benefit related to contributions should be paid in a lump sum on the death of persons covered under the system. Where old-age insurance benefits have been paid to the deceased individual, the death benefit should be reduced by the amount of such payments. In this way an equitable relationship

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could be preserved between the benefits accruing to those who survive to an old age and to the dependents of persons who die at younger ages. A fair arrangement would be the return of the contributions made by the deceased worker to his dependents. While a supplementary system of survivors' insurance paying regular monthly benefits to qualified dependents is socially far more desirable than the benefit here described, it was not deemed advisable to recommend such a system until further investigation was possible.

The Source and amount of Contributions.-In deciding upon the question of how to meet the cost of an old-age insurance system, all possible sources of Federal revenue were considered. It was believed that personal income taxes with the present exemptions could not be expected to yield sufficient additional revenues to meet the new charges even on the basis of sharply increased rates. Corporate income taxes and inheritance taxes were likewise considered inadequate as a main source of additional funds. Sales taxes, both general and limited, were seen to involve serious fiscal and economic problems warranting their rejection. The incidence of such sales taxes, furthermore, did not appear to bear a reasonable relationship to the purposes served by the new expenditures. After a thorough canvass of the possible sources of income for a system of old-age insurance, it was decided that the following should be utilized: (1) Taxes paid by employees in covered employments determined as a percentage of earnings, (2) .taxes paid by employers in covered employments' determined as a percentage of pay roll, and (3) subsidies by the Federal Government financed through taxes not borne by workers. The reasons supporting the use of each of these sources may be outlined.

(1) It is both just and expedient that the future beneficiaries of a system of old-age insurance should bear a part of the cost of its operation. Since benefits under an insurance system would be received as a matter of right without a~ test of means, the employee eligible to coverage would obtain a virtual equity in the protection afforded. It seemed but proper that the group of our citizens obtaining this assurance of security in their old age should assist in making it possible. Income from gainful employment is a fair measure of financial ability to pay as well as a proper determinant of normal benefits needed to maintain a satisfactory existence following retirement. The determination of contributions as a percentage of earnings rather than as a fixed sum avoids the possibility of hardships in those cases where low earnings are received. Since adjustments in the scale of benefits would be possible, there would be no occasion for a graduated scale of contributions in seeking to approximate more closely the greater proportionate ability of higher income groups.

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The setting aside of a percentage of wages has long been a customary method of thrift among American wage earners. Percentage deductions from wages are now being made by many employers in all types of private and public enterprises in financing pensions and other forms of thrift. By contributing through similar deductions to an old-age insurance system, the individual worker would establish an earned right to a benefit related to the contribution made. It is believed that such an arrangement would be both practical to administer and acceptable to the great majority of American employees. By sharing in the cost of the old-age insurance system, the workers of the country would be led to assume a greater interest in its proper administration. The importance of efficiency and economy of operations, the necessity for conservative policy in the determination of benefit rates, and the advantages of strict enforcement of collections would be far better understood by persons who, week by week, were helping to finance the system. Resting on a broad base of sustained public interest, the program would gain a large measure of stability.

(2) The cost of maintaining industrial employees in old age after years of productive employment has long been accepted as a reasonable charge against production. Just as industry, generally, has become accustomed to meeting charges for the depreciation and replacement of its material equipment, many employers have developed programs for the payment of retirement allowances to their superannuated employees. These employers include industrial corporations, railroads, public utilities, governments, ~ educational institutions, and other organizations. Such costs are considered proper additions to the cost of production.

It appeared appropriate and reasonable, therefore, that employers in covered employments should contribute to a system of old-age insurance designed to protect their employees. In order to maintain a direct relationship between labor services obtained and the contributions paid by the employer, it was felt that contributions should be computed as a percentage of the earnings paid to an employee covered under the system. The basis of computation of the employer contribution should be identical with that used in determining the contributions of his employees.

There was much reason to believe that the burden of employer contributions to an old-age insurance system would in large measure be shifted to the consumer. The uniform application of the charge throughout a particular industry would serve to facilitate this shift. Competitive conditions, variations in labor costs per unit of output, and relative elasticities of demand for particular products and services would, however, affect the degree to which such shifting might

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take place in any situation. It might be that a part of the burden of employer contributions would in some instances be borne partly by the wage earners of an industry through indirect effects upon employment and wage rates. It was believed, however, that in time the incidence of the cost of employer contributions would be spread so broadly over the whole community that no hardship would be imposed upon any particular group. Since the great majority of our citizens, whether rich or poor, employed or self-employed, would be benefited by the establishment of an effective program of old-age security, a broad distribution of the costs of such a program did not seem unjust.

It was felt that the contributions of employers and employees should be at the same rate. While arguments could be advanced for other ratios, experience under contributory pension plans in this country and under compulsory contributory programs abroad indicates the advisability of equal contributions. With such sharing of costs, an insurance system would be accepted as a truly joint enterprise of the employers and workers of the country, aided and supervised by the Government as representing the public as a whole.

Since the assessment of new charges of the character here considered would involve a complex series of adjustments on the part of industry and the public, it was felt that the initial rates of contributions established should be as low as economical administration would permit. Expenditures for benefits would mount but gradually under the program here considered so that such low initial contribution rates would provide adequate income not only for current benefits but for the creation of a contingency reserve. It must be remembered that even if benefits began after contributions had been collected for 5 years, only that age group just reaching retirement would be eligible for benefits. Meanwhile, contributions would be received from all other age groups from youth through middle age. As time passed and more persons qualified for benefits under the system, it would be necessary to increase the income from contributions. It was felt, therefore, that the joint rates of contributions should be raised in steps of 1 percent each at intervals of 5 years from an initial rate of 1 percent. Under such a program, industry, employees, and the public would have adequate time to become adjusted to the gradually increasing cost of the system without serious hardship on any group in our population.

(3) The determination of the maximum rates of contribution to be levied upon employers and employees involved the question of how far the cost of an old-age insurance system should be assessed upon these groups. Since the charge upon the employer might be shifted elsewhere, the question arose as to whether the final incidence of this

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charge could be determined sufficiently to warrant more than limited use. Employee contributions might well impair the living standards of the workers if rates encroached upon income necessary for decent subsistence.

Contributory old-age insurance would in years to come assume an increasing proportion of the public cost of old-age security. Employers, and especially workers, should not be expected to bear the cost involved in paying more adequate benefits in the early years of the system than individual contributions would warrant, if they are also to build up even partial reserves for the future. Such more adequate benefits would be intended, among other things, to relieve the recipient of the need for State old-age assistance. To the extent that assistance costs were reduced, the expenditures of the Government would be reduced-a saving which should not accrue at the expense of insurance contributors.

It was felt that the maximum joint rate of contributions by employers and employees to the old-age insurance program should be set at 5 percent. It was estimated that the rates of contributions here considered would be sufficient to finance the system for approximately 25 years. After this period subsidies would be necessary.

The Accumulation and Marintemance of a Reserve.-In order to insure the availability of funds for the regular payment of old-age insurance benefits to eligible beneficiaries at all times, it was decided that a reserve fund should be accumulated from contributions made to the system in the early years of its operation. An important function of this reserve is to provide funds to meet increasing expenditures which may result in the future from gradual secular changes in the following factors: (1) a decline in the average age of retirement, (2) an increase in the average wage level, and (3) variations in mortality rates before and after retirement. A major depression, moreover, might unexpectedly accelerate any or all of these changes and might call for an unanticipated drain upon the old-age account. The assets of this reserve fund should be invested in the securities of the Federal Government in order to insure the utmost safety and liquidity. During the 25 years when the income exceeds outgo and when reserves are being accumulated, experience would indicate a basis for more accurate decisions as to the exact size of the reserve, how it should be accumulated and over what period of time, and what functions it should serve in addition to those enumerated above.

Coverage.-Since a compulsory program of contributory old-age insurance is intended to prevent destitution in old age, it may be argued that the benefits of the system should be extended to all per-

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sons whose incomes warrant the payment of contributions. The administrative difficulties involved in such universal coverage are, however, readily apparent. An attempt to base contributions on incomes accruing in the form of profits, interest, or rents would be fraught with many difficulties of identification and measurement which would far outweigh the advantages of bringing the recipients of these incomes, as such, within such a system. On the other head, incomes received in the form of wages or salaries could be mare readily determined as a basis for assessment. As a class, wage earners are more in need of old-age protection than are the recipients of other types of income, hence public support for the enforcement of contributions on their behalf could be more readily secured. Further, the payment of wages is a practical basis for contributions assessed on both the employer and the employee. With the employer acting as the agent of the Government in the collection of the employee's contribution and remitting the proceeds along with his own contributions, great economies in. administration would be possible. At the same time the employee's interest in insuring a complete record of contributions would serve as an aid in the enforcement of accurate reporting upon less conscientious employers. For these reasons it was deemed desirable to limit the coverage of an old-age insurance system to persons employed for wages or salaries.

Administrative difficulties suggested further limitations of coverage to eliminate, at least in the early years of a system, certain types of employments in which it would be difficult to enforce the collection of contributions. In the case of farm labor and domestic servants in private homes, a large number of individual workers are employed in small establishments scattered over a wide area, frequently at some distance from any city or town. The close relationship which exists between employer and employee, the frequent absence of accounting records, and the usual provision of a part of compensation in the form of maintenance would greatly handicap effective enforcement. While the need of these groups for protection in old age was very apparent, it seemed expedient to postpone their inclusion until after administrative experience could develop in less difficult areas of operation.

Since Congress had already established retirement programs covering a large proportion of the employees of the Federal Government, it did not seem expedient to include such employees under a general contributory old-age insurance program at this time. Railroad employees had also been, covered under special enactments and should be excluded. The employees of the several States and their subdivisions must be excluded because of constitutional limitations on Federal jurisdiction.

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With these exceptions, it seemed proper to include within the system all gainfully employed workers regardless of the character or size of the establishment in which they were employed. All workers face the contingency of dependent old age, whether employed in large factories or in small shops or offices, and only serious administrative difficulties, previous legislation, or constitutional limitations should be permitted to interfere with the provision of basic, uniform protection related to contributions.

It was fully recognized in advocating full coverage that there would be a real likelihood that many small employers might evade their obligations, especially at the outset. It was believed, however, that the extent of noncompliance would, with proper educational effort on the part of the Government and with a policy of severe penalties for deliberate evasion, steadily diminish. Since there is a constant flow of workers from large to small establishments, it was believed that limited coverage would eat at the actuarial foundation of the system as well as lessen the adequacy of the benefits afforded. Moreover, the administrative difficulties of ascertaining coverage under a plan limited to establishments with a certain number of employees might prove quite as formidable as those faced in assuring coverage of all establishments.

Administration.-The administrative requirements of old-age insurance are not complicated in comparison with those involved in unemployment compensation, with its need to determine the cause of severing employment, the possibility of reemployment, the suitability of available work, and similar questions. The 'volume of individual contribution records which must be kept, however, would involve administrative technique on a scale which is new to this country.

Efficient administration would therefore require the services.of a staff of specialists in administrative detail. It was felt that experienced administrators from both Great Britain and Germany should be included in any group of experts who might be assembled. The administration of the old-age insurance plan should be the function of an independent board vested with authority to direct all phases of social insurance, working in close cooperation with both the Department of Labor and the Treasury. It would cooperate with the former in all relations with wage earners and employers, with particular reference to the employment agencies, ands with the latter in the collection, investment, and disbursement of funds.

The advantages of an independent board were considered numerous and important. The membership of the board should include outstanding persons in the field of social insurance administration whose services could be procured with difficulty if they were offered positions

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as lesser officials in any department. In the interests of the insured population, both in the formulation of regulations and in the development of new policies and practices, the board should be a nonpolitical organization, protected as far as possible from political influence, even such as might arise from an executive department under a politically minded administration. The actual handling and investment of funds would be carried on by the Treasury. The smooth functioning of a program of this magnitude would necessitate a highly competent technical staff. It would probably be easier to obtain appropriate classifications for such employees under the Classification Act in a new independent board than in a new bureau in an established department. In inaugurating an insurance system the Government would assume a new type of financial responsibility to its citizens which should be focused in a body where full time and interest would be directed toward meeting that responsibility.

Legislative Proposals.-It was recommended to the Congress that the Federal Government adopt a program of old: age benefits.e To this end it was specifically proposed that legislation should include two separate measures, one a taxing measure and the other a permanent appropriation measure.

The taxing measure was to contain (1) a tax upon the income of 'the workers who were to receive annuities upon reaching retirement age; and (2) an excise tax upon the pay rolls of the employers of these workers. In determining the tax rates, it was considered desirable that the amount yielded be equivalent to the worker and employer contributions which would havA been required if the program proposed had been a contributory old-age insurance system.

The following tax schedule was recommended

Years	Excise tax on employers' payrolls (percent)	Income tax on employees' wages (percent)
1937-41	1/2	1/2
1942-46	1	1
1947-51	1 1/2	1 1/2
1952-56	2	2
1957 and thereafter	2 1/2	2 1/2

The proceeds derived from these taxes were to be allocated to an oldage fund to be established in the Treasury.

While it has been recognized that administrative difficulties might stand in the way of collecting taxes from agricultural and domestic workers and their employers, these groups of workers were included in the bill originally introduced in Congress. This was in accord-

{6} See Committee on Economic Security, Report to the President (U. S. Government Printing Office, Washington, D. C., 1935), p. 29; Committee on Economic Security, Old-Age Security Staff Report (mimeographed report, January 193&), p. 30.

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ante with recommendations submitted by the Committee on Economic Security to the President on January 15, 1935.

It was considered advisable to bring under the tax program as wide a group of workers as possible, for under the proposed plan only through the payment of taxes could a worker earn the right to an old-age annuity. However, certain exemptions were recommended. The most important groups exempted and the reasons for their exclusion from the tax and annuity program may be briefly summarized. The annuity program was primarily designed for persons in lower-income groups. It was, therefore, recommended that nonmanual workers earning in excess of $250 a month be exempted from the taxes, and in consequence excluded from the benefits recommended. Because they were already provided for under public retirement systems, it was recommended that employees of the Federal Government subject to the United States Civil Service Retirement Act and persons covered by the United States Railroad Retirement Act, together with their employers, be exempt from the tax. Furthermore, since, under the Constitution, the Federal Government cannot impose taxes upon States and subdivisions of States, it was considered necessary to exempt these political jurisdictions, together with their employees, from the tax.

The appropriation measure proposed the authorization of the amount raised by the taxes described above as a permanent appropriation to be used for building and maintaining the fund from which the old-age benefits should be paid. This.proposed appropriation measure provided that a worker, on arrival at the age of 65 years, should receive an annuity based upon the number and amount of tax payments made on his behalf. Under the proposed program, a worker was not eligible for an annuity unless 200 weekly tax payments had been made on his behalf within a 5-year period prior to his attaining age 65. A further condition for the receipt of an annuity was retirement from gainful employment. For workers entering the system during the first 5 years of its existence a minimum benefit of 15 percent of average wages was proposed. Gradually these benefits would increase with the number and amount of tax payments. It was estimated that a worker who had been covered by the system during his entire working life would receive an annuity representing between 40 and 50 percent of his average wage.'

While it was hoped that the annuities proposed would be adequate for workers of modal earnings, it was realized that the benefit schedule would not permit low-paid workers to earn annuities sufficiently.

The proposed method of computing the old-age annuities on the basis of the tag payments made on behalf of a worker is described in detail on pp. 38-38 of Committee on 10;coppmlc security, Old-Ape Security Staff Report (mimeographed, January 1936,

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large to permit them to retire from gainful .employment. For this reason it was proposed that a larger relative annuity be provided for lower-paid workers by weighting more heavily the first $15 of average wages in the computation of benefits.

In addition to the annuities payable to workers under the conditions described above, it was proposed that death benefits be provided for the survivors of workers who had been covered by the system. The death benefit was to equal the aggregate amount of the worker's own tax payments less the total amount which the worker had received as an annuity. It was also recommended that provisions be made for a lump-sum endowment to a person who had made tax payments but who reached age 65 without being qualified for an annuity. The amount proposed as this lump-sum payment was to equal the worker's own tax payments plus interest.

Table 45 shows the progress of the tax and benefit payments during the next half century under the proposed old-age annuity plan. Under the proposed old-age annuity program the taxes collected would be in excess of the benefits paid out for about 25 years. For this reason a reserve would be accumulated in the old-age fund, which, according to actuarial forecasts, would amount to approximately 15 billion dollars in 1965. Since the forecasts indicated that after that time the benefit payments would be in 'excess of the taxes collected, it was recommended that, in order to keep the reserve at that level, the Federal Government should obtain the necessary additional funds from taxes borne by the recipients of higher incomes.

(IMAGE OF TABLE 45)

Congressional Reconstruction of the Program. -- The recommendations briefly outline above were embodied in titles III and IV of the economic security bill introduced in the House of Representatives on January 17, 1935 (H. R. 4120), but this bill was not enacted. On April 4, 1935, the social security bill (H. R. 7260) was introduced and became law on August 14, 1935 (Public, No. 271, 74th Cong.) {8}

The provisions of the Social Security Act differ considerably from the economic security bill as originally introduced. The following schedule of taxes was adopted by Congress:

Years	Excise tax on employers' payrolls (percent)	Income tax on employees' wages (percent)
1937-39	1	1
1940-42	1 1/2	1 1/2
1943-45	2	2
1946-48	2 1/2	2 1/2
1949 and thereafter	3	3

A comparison of this schedule with the one recommended (see p. 210) shows that the income taxes levied upon workers and the excise taxes levied upon employers not only start at higher rates than in the recommended program but that a maximum of 3 percent is reached in 1949 instead of the maximum of 21/2 percent in 1957 proposed in the economic security bill. In addition to the variance in rates, the Congress exempted certain employments which were covered by the tax in the original bill. The most important of these exemptions are agricultural labor and domestic service in a private home. The recommendation that nonmanual workers earning in excess of $250 per month be exempted from the tax was not adopted. Under the Social Security Act the remuneration of manual and nonmanual workers in excess of $3,000 a year from any one employer will not be subject to the tax. In this manner all employees and their employers regardless of wage level will pay taxes with respect to the first $3,000 of annual wages.

Under the act the taxes are collected as are other internal revenues and are not allocated as was proposed to an old-age fund, but are merged with the general funds of the Government in the Treasury.

The provisions of title II of the act differ considerably from the underlying principles of the proposed program. In the first place, the appropriations authorized are not measured by any taxes collected under title VIII, but are measured by an "amount to be determined on a reserve basis in accordance with accepted actuarial principles." The amount required from year to year may be much mare or considerably less than the revenues from the taxes levied in title VIII.

{8} Ch. 531, 49 stat. 820.

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Secondly, the worker's right to an annuity and the right of his estate to a death benefit are not conditioned upon the payment of taxes by him or on his behalf; nor is the amount of benefit measured by the amount of taxes paid as was the case under the provisions of the economic security bill. Benefits axe paid to the worker or to his estate on the basis of his status as a worker and are measured by the wages he has earned. Should no taxes be paid, the worker will, nevertheless, receive his annuity and his heirs will be protected. The obligation of the Government to the old-age account is not conditioned upon the realization of sufficient revenue from the taxes to reimburse the Treasury for the appropriation to the old-age account.

The original economic security bill made the receipt of benefits contingent upon the payment of taxes. Thus, persons in employments exempted from the taxes were automatically excluded from the receipt of benefits. In the Social Security Act it is provided that wages received in certain employments are not to be counted in the computation of benefits. The most important of these exempted employments ,are, agricultural labor and domestic service in a private home.

The economic security bill was based on the assumption that higher-paid employees would make their own provision for old-age protection. In the measure as enacted, Congress brought under the benefit system all workers in covered employments regardless of their earnings, but with the provision that only the first $3,000 of yearly salary paid to the individual by an employer should be counted in the computation of benefits.

Thus, under the provisions of the Social Security Act there exists no interdependence between the taxing and the appropriation provisions. In the sense in which the term is used in other countries, the old-age benefit provisions do not constitute a system of old-age insurance. However, in spite of eliminating the contributory features of the proposed program submitted to Congress, the Government in the Social Security Act has accepted the responsibility of building up ,a, fund from which the worker in industry will receive a retirement income related to his standard of living as reflected in the wage level at which he has worked.

VOLUNTARY OLD-AGE ANNUITIES

Voluntary Continuance in the Old-Age Annuity System.-In the report of the Committee on Economic Security to the President it was suggested that persons who under the Nation-wide annuity system qualified for annuities by fulfilling minimum requirements of 5 years of coverage and 200 tax payments be permitted to

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continue tax payments voluntarily until age 65 if they left covered employment before reaching the retirement age. This provision would have made it possible for workers who had only a short period of service in an employment covered by the old-age annuity system to increase the amount of their old-age benefits.

The structure of the old-age benefit program enacted by Congress in the Social Security Act left no possibility for the continuance in the system on a voluntary basis for workers who left covered employment prior to the retirement age.

Annuity Certificates.-In addition to the old-age benefit plan, it was proposed that there be established, as a related but separate undertaking, a voluntary system of old-age annuities. Under such a plan the Government would sell to individuals, on a cost basis, deferred life annuities similar to those issued by commercial insurance companies. In consideration of premiums paid at specified ages, the Government would guarantee the individual concerned a definite amount of income starting at approximately age 65 and continuing throughout the lifetime of the annuitant.

The primary purpose of a plan of this character would be to offer persons not included within the old-age benefit scheme a systematic and safe method of providing for old age. However, the plan could also be used by insured persons as a means of supplementing the limited old-age income provided under the old-age benefit plan.

It was believed that a satisfactory and workable plan, based on the following principles, could be developed without great difficulty

(1) The plan should be self-supporting, and premiums and benefits should be kept in actuarial balance by any necessary revision of the rates indicated by periodic reexaminations of the experience.

(2) The terms of the plan should be kept as simple as practicable to effect ~ economical administration and to minimize misunderstanding on the part of the individuals served. This could be accomplished by limiting the types of annuity offered to two or three of the most usual standard forms.

(3) In recognition of the fact that the plan would be intended primarily for the lower- and middle-wage classes, provision should be made for the acceptance of relatively small premiums, such as $1 per month, and for limitation of the maximum annuity payable to any individual under the plan to approximately $100 per month.

(4) The plan should be aimed primarily at the provision of old-age income, and this objective should be recognized by eliminating from the annuity contract the features of cash surrender and loan values and, possibly also, the return of premiums in the event of death prior to retirement.

(5) The plan should be managed by the insurance authority along with the old-age annuity system..

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No estimates were made as to the amount of annuity reserves which would be accumulated under a plan such as that proposed above. It was believed, however, that the fiscal problems presented by such reserves would not be serious. The proposal for a system of voluntary annuities supplementing the old-age benefit system was not included in the Social Security Act as passed by Congress.