Arthur J. Altmeyer


A Statement by
A. J. Altmeyer,
Chairman of the Social Security Board
Before the Senate Committee on Finance on October 14, 1943

The question which I understand the Committee wishes to discuss today is whether the increase from 1 percent on employers and employees, respectively, to 2 percent each, scheduled for next year in the contribution rates of the Federal Old-Age and Survivors Insurance program is justified. A comprehensive review of the existing social security legislation and the factors which have led up to the present situation will show, I hope, that such an increase is desirable from the standpoint of the insurance program. I shall limit my discussion solely to the desirability of the scheduled increase in relation to the social insurance system, although I believe there are additional good reasons which arise out of the present financial status of the insured contributors and the Government during this wartime period.

I should also like to make it clear at the outset that in presenting my reason today for the scheduled increase I do not propose to discuss the question as to whether the insurance program should be operated on a "full" reserve basis or on a pay-as-you-go basis, or on some modified basis with a contingency reserve involved. While the Congress did not make a final and explicit determination in the 1939 law with respect to the question of long-run financing, this is a matter for the Congress to decide in relation to the coverage and benefit structure of the insurance program.

Should the Congress finally decide that a limited coverage insurance system, such as the present system is, should be self-sustaining without any contribution from the Government out of general taxes, it will be necessary eventually to obtain additional contributions from employees and employers in order to make up the difference between the 1 percent which is now being collected and the contribution rate which must be levied under a self-sustaining system. On the other hand, if the Congress should eventually decide that Government contributions out of general taxes should be made to the insurance system, the more contributions which the Government now collects from employees and their employers the smaller need be the ultimate subsidy. The Social Security Board has recommended that the insurance system should be eventually financed, in part, from sources other than payroll taxes. However, the Board believes this contribution from other sources can be and should be deferred until the mounting annual cost reaches a high level expressed as a percentage of payroll, and that in the meantime the scheduled increases in payroll contributions should be permitted to become effective.

I should also like to say that while certain arguments by analogy with private insurance can be made in support of the scheduled tax increase, I do not intend to discuss these today since such discussion opens up the debatable question of the similarity and contrast between private and social insurance. In passing it may be noted, however, that already the total liability which has accrued for the payment of insurance benefits is several times in excess of the amount in the existing trust fund.

Under certain assumptions the level annual cost has been estimated to be 7 percent of payroll. On this basis there would now exist a deficit of nearly $13.5 billion. Other assumptions would yield a lower level annual cost estimate. However, none of the actuarial estimates which have been made on the basis of present economic conditions and other factors now clearly discernible result in a level annual cost of the insurance system of less than 4 percent of payroll. On the basis of 4 percent level annual cost it may be said that the fund already has a deficit of about $5.4 billion. My own personal opinion at the present time after considerable study of the many unknown factors which must now be used in any long-run actuarial estimates, is that the level premium cost of the present insurance system is likely to be in the neighborhood of 5 to 6 percent of payroll. Thus, instead of the present reserve fund being too large, the fund is small when tested on the basis which any private insurance company would be compelled to use. While social insurance cannot be judged by a too rigorous application of private insurance concepts, nevertheless, this comparison indicates that the existing trust fund is not unduly large in view of its liabilities.

Finally, I do not intend to discuss the broad economic aspects of financing the OASI insurance system. While we must frankly recognize that the goods and services purchased by insurance benefits at any given time are paid out of the national income produced by the generation then engaged in productive work, we should not conclude that the methods followed in financing social insurance benefits are of no significance in enabling the Government to meet its future social insurance obligations. Just as we recognize that although the costs of the war are being met now by all of us through inability to purchase goods and services, we nevertheless realize that it is important how we allocate the money cost to particular individuals and to the Nation as a whole over a period of time through taxation and the redemption of war bonds later on. In other words, we recognize that the question of financing any governmental disbursement also involves the question of the Government's financial ability to meet all its costs at any particular time and the impact of such costs on individuals. In the last analysis, the ability of the Government to meet its costs rests upon the financial integrity of the Government, its over-all financial burden, and the over-all tax system used to meet its burden. Whatever may be the differing views on these matters, I believe it is fair to say that the scheduled increase in the OASI taxes would result in helping both the Government and the social insurance contributors to be in a better position to meet their long-run obligations.

The 1935 Law

As you know, the Social Security Act became law on August 14, 1935, after many months of careful deliberation by the Congress. It incorporates a two-fold approach to the problem of old-age security: non-contributory old-age assistance, payable on the basis of a determination of need, and contributory old-age retirement insurance based on wages earned in insured employment.

The Federal old-age insurance law first came into operation on January 1, 1937, when contributions became payable from employers and employees at a rate of 1 percent on each. This same rate of contribution is still in effect today. The law at that time, however, provided that monthly old-age retirement insurance benefits would not become payable until January 1, 1942--that is, after an individual had contributed at least 5 years to the insurance system.

Amendments of 1939

In 1939, Congress made a number of significant changes in the old-age retirement insurance program, most of them along the lines recommended by an Advisory Council on Social Security and the Social Security Board. The Advisory Council was created in May 1937 by the Senate Committee on Finance and the Social Security Board. The most important changes were as follows:

1. The old-age insurance system was expanded to furnish protection for widows, orphans, and the dependent parents of insured workers who die prematurely. This is a logical and necessary part of any contributory insurance system, since many contributors die before reaching retirement.

2. Monthly benefits became payable in 1940 instead of 1942, as provided in the original law.

3. The entire system was shifted from individual protection to family protection. In addition to the monthly survivorship benefits, provision was made that an insured wage earner who retires would receive an additional benefit of 50 percent when his wife also reaches the age of 65.

4. The step-up from 1 percent to 1.5 percent in the contribution rate, which in the 1935 act was scheduled for January 1, 1940, was eliminated contrary to the recommendation of the Social Security Board and the Advisory Council.

The Present Federal Old-Age and Survivors Insurance Law

The old-age and survivors insurance program is the only one of the social security programs administered entirely by the Federal Government. Contributions are collected from the worker and his employer through the Bureau of Internal Revenue of the Treasury Department. The Social Security Board administers the benefits through the Bureau of Old-Age and Survivors Insurance.

The various monthly benefits payable under the law range between a minimum of $10 per month to a maximum of $85 per month. The amount paid to each individual depends upon the amount of wages the insured worker received in covered employment since the insurance plan first became effective and the length of time such person was in the insurance system. The lump-sum benefits which are paid may range from a minimum of $60 to $300 or more.

At the present time about 750,000 individuals are drawing monthly insurance benefits. In addition, lump-sum death payments are being made with respect to 10,000 deceased workers each month. The rate of disbursements for these various insurance benefits now averages $14 million per month.

At the present time the contributions are 1 percent on the wages of the employees and 1 percent on the employer's payroll--making 2 percent in all. These rates are scheduled to increase to 2 percent each in 1944 and '45, or a total of 4 percent; and to 2.5 percent each, or a total of 5 percent, during 1946, '47, and '48; and to 3 percent each, or total of 6 percent, in 1949 and thereafter. These increases are already provided in existing law.

The revenue received comes into the Federal Treasury, and an amount equivalent to the contributions received is deposited automatically in the Federal Old-Age and Survivors Insurance Trust Fund. A board of trustees supervises the Trust Fund. The three members of the board of trustees are the Secretary of the Treasury, the Secretary of Labor, and the Chairman of the Social Security Board.

Employers send their contributions and the contributions which they have collected from their workers to the collector of internal revenue every 3 months, on quarterly reports, listing the name, social security account number, and wages of each individual employed by the employer during the particular quarterly period. These records are sent by the Treasury Department to the Social Security Board offices in Baltimore, Maryland, where the records are kept for each individual under the supervision of the Bureau of Old-Age and Survivors Insurance through a method of mechanical bookkeeping.

Contributions are collected and benefits are payable on the basis of employment covered by the insurance system. During 1942 over 45 million individuals had wages covered under the insurance system and during 1943 it is estimated that the number will reach 48 million for the year even though self-employed businessmen and farmers, agricultural labor, domestic servants, employees of non-profit institutions, Federal, State, and local governmental employees, and certain other groups are excluded from the system at the present time.

Financial Operation of the Present Law

Contributions collected for old-age and survivors insurance during the fiscal year 1943 totaled $1.1 billion. Expenditures for benefit payments and administration during this period were $176.8 million. Total administrative expenses are equal to 2.5 percent of the premiums collected. The total assets of the old-age and survivors insurance trust fund, as of June 30, 1943, represented $4.3 billion, which was invested in Government obligations at an average interest rate of approximately 2.3 percent. A complete statement of the financial aspects of the old-age and survivors insurance system was included in the Third Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance Trust Fund, which was sent to the Congress in accordance with the requirement in the Social Security Act. Table 3 of this report shows the distribution of the assets of the Trust Fund at the end of the fiscal year 1942.

Assets of the fund as of the end of the last fiscal year represented an average of about $75 per worker with wage credits under the old-age and survivors insurance system. Total tax collections for the calendar year are estimated at approximately $1.3 billion and total disbursements for benefits and administrative expenses are estimated at about $200 million. The additional 1 percent step-up scheduled for next year is estimated to yield $1.4 billion for the calendar year 1944 of which half would come from employees and the other half from employers.

Wartime Influence on the Trust Fund

The contributions now being collected are higher than was originally anticipated at the time the 1939 amendments were enacted. Similarly, the benefit payments are a great deal less than was originally estimated. The marked rise in contributions reflects, of course, the high levels of wartime payrolls. It may be worth while to mention those factors in greater detail.

Increased employment, steadier work, and higher wages. The general availability of work of a steady character and at higher wages has increased earnings in covered employment. As a consequence, the contributions to the Trust Fund are at a high level. During 1937 the average taxable wage of workers contributing to the insurance system was $900. By 1940 it had risen slightly to $930. In 1941 it was $1,028. In 1942 it was $1,181. Our estimate for 1943 is about $1,400. In 1937 the total of taxable wages was about $30 billion. In 1942 it was $53 billion and in 1943 it will be well over $65 billion, or more than twice the amount in the first year.

These increases also result in higher wage credits accumulating which will increase future monthly benefits payable at death or retirement. Therefore, while this situation results in an abnormal upturn in contributions during this period, there is a more or less off-setting liability created for settlement over many years in the future when more and larger benefits will become due.

Deferred retirements and suspensions of benefits. With the need for maximum use of available manpower many individuals above the age of 65 who are already eligible for retirement benefits have remained on the job or returned to work, and thereby deferred or interrupted their retirement. Since monthly benefits are not payable for months in which an individual is working in covered employment and to the extent that these deferments and suspensions exceed those which, except for the war, would have taken place, there is an obvious increase in the assets of the fund. At the present time there are between 500,000 and 600,000 wage earners 65 year of age and over who are eligible to old-age insurance benefits but who are still working and who are, therefore, not drawing their old-age insurance benefits. However, the benefits to be paid to those who have deferred retirement to a later age than otherwise, will be greater in amount by reason of being determined, partly at least, on the currently high wage levels. Nevertheless, the net result of the factors mentioned will be an increase to the fund.


The major reason why it would be unwise in the opinion of the Social Security Board to defer the increase in the contribution rates now scheduled to take effect on January 1, 1944, may be stated as follows:

(1) The chief reason why a graduated schedule of contribution rates was incorporated in the 1935 Social Security Act was to permit the ultimate contribution rates of the program to become effective gradually and thereby give employees, employers, and the economy generally an opportunity to become adjusted to the changes. In 1939 the law was amended to postpone a step-up in the contribution rate from January 1, 1940, to January 1, 1943. Last year, the law was again amended to postpone a step-up in the contribution rate to January 1, 1944. These several changes do have the affect of substituting uncertainty for certainty which should be an essential characteristic of a system of social insurance. Today employment, wages, and the national income are at record levels--at levels far in excess of anything experienced in the past. If we depart once again from the original schedule of contributions at a time when ability to make these contributions is at a maximum, we increase the uncertainty as to when the next step-up in contribution rates will occur.

(2) As I indicated earlier the average annual cost of the present insurance system based upon existing economic conditions and other factors now clearly discernible results in a rate of not less than 4 percent of payroll; and some of our actuarial estimates yield a level premium cost in the neighborhood of 7 percent of payroll. We are now engaged in making the revisions in our actuarial estimates based upon information which has become available from the first few years of operation of the law, the 1940 census, and changes due to the war.

There are numerous factors which must be given consideration in the actuarial cost analyses of the old-age and survivors insurance system. Among the more important are: (1) Mortality. (2) Population progress dependent upon births, deaths, emigration, and immigration. (3) Family composition. (4) Employment. (5) Income level. (6) Length of the productive period. (7) Length of the period of dependent childhood. (8) Length of the period of retirement. (9) Invalidity. (10) Interest rates. (11) Migration between covered and uncovered employment. (12) The war.

The cost factors cited can pyramid rather strikingly. Persons could go to work early, stay at work late in life, might avoid any serious periods of unemployment, might have small families, and might live under mortality conditions no better than the present. On the other hand, the period of preparation for employment could be lengthened, the period of retirement could be lengthened, the interruptions of work might be frequent and serious, mortality might improve so as to lengthen the life of the pensioners, families might be larger so as to increase family benefits in case of the death of the worker, etc. Also the proportion of workers by sex can shift and, viewing the past, considerable change is likely in wage income. Administrative determinations as to benefit qualification can add a certain amount of ultimate costs--so can legal decisions as to specific definitions and rights.

While it is impossible, because of the reasons cited, to reach absolutely final conclusions as to future costs, all actuarial calculations indicate a steeply increasing annual cost, because of the growing proportion of the aged in our population, the growing number of aged persons who will become entitled to benefits, and the increasing amount of benefits per person due to the fact that benefits are related to the length of time a person has been insured. This steep increase in the future benefit costs will result in eventual annual disbursements 15 to 20 times the present annual disbursements.

(3) As I have pointed out, the contribution rates scheduled for 1944 in the existing law, together with interest receipts to the trust fund, are probably inadequate to meet the benefit payments provided in the existing law and the administrative expenses of the program, depending upon developments which cannot be foreseen with confidence. Any reduction in the scheduled contribution rates would lessen what would otherwise be the size of the fund, and hence, would reduce the future interest income of the fund. This would increase the likelihood of an eventual deficit, or would hasten and increase the size of such a deficit. No doubt the existing law would be amended before an actual deficit developed. At such time an increase in contribution rates or a reduction in the scope or level of benefits, or a Federal subsidy, or some combination of the three, would become necessary. A reduction in the tax rates scheduled to apply in 1944 would be a step toward such an eventual situation. While no immediate difficulties are apparent in the financing of the insurance system the fact that the Congress did not explicitly provide in the law what should be done in case present contributions are inadequate in the long run makes it impossible to determine the financial policy under which we are operating. Until the Congress is able to make a more definite commitment on the financial policy of the insurance system it seems unwise to continue to levy contributions which meet only a small part of the long-run cost.

(4) A consideration of the legislative history of the provisions of the existing law concerning the reports which the Board of Trustees of the Trust Fund is required to make to Congress supports the view that the scheduled tax rates for the year 1944 should not be reduced. It is true that the existing law requires the Board of Trustees to report to Congress whenever the Board is of the opinion "that during the ensuing five fiscal years the trust fund will exceed three times the highest annual expenditures anticipated during that five-fiscal-year period." However, the law does not require Congress to take any action upon the receipt of such a report, nor does it suggest that the three-time rule is the sole indicator of the proper size of the reserve. Indeed, this provision was written into the law with the thought that it would be meaningful only with respect to the reserve when the benefit load has reached a considerable degree of stability and not for the early years.

(5) The great increase in contribution income, due to the war, is readily apparent, but the extent of the drain on the Trust Fund, which will occur when economic activity slackens is frequently overlooked. Since no one can tell when the war will end, prudent management of the insurance system should allow for the possibility that economic activity may decrease sharply within the year following the war. If a sharp decrease in employment does occur a large proportion of the recipients will elect to receive their benefits. A decline in economic activity would, therefore, increase benefit disbursements and at the same time reduce payrolls and tax income. If we recognize that it is possible that during the post-war period there may be a long continued period of high disbursements and low income, the Trust Fund at the end of that time may be less than what would be desirable in view of the long-run increase in costs.

(6) The unusually high level of tax receipts under the old-age and survivors insurance program during the past year or so should not be thought of an constituting a clear "gain" to the Trust Fund. The wages which give rise to the increased current receipts will also, in the future, serve to qualify many individuals for benefits who would not otherwise receive them and will increase the potential benefit amounts payable to other individuals. In other words, the increased present income to the fund means increased future disbursements from the fund. A reduction in the scheduled tax rates of the program because of wartime fluctuations in the amount of taxable wages under the program would seem to be unsound in the light of the increasing liabilities.

(7) In the early years of the operation of the old-age and survivors insurance system the actuarial value of the benefits provided is very many times the value of the individual worker's contribution. For example, a single individual who contributes for 10 years to the system and at the maximum salary taxable under the law ($250 per month) might have obtained from a commercial insurance company an annuity of $2 per month with his own contributions; whereas, this law entitles him to benefit of $44 per month--or 22 times the amount purchasable from an insurance company by his own contributions (Senate Report No. 734, 76th Congress, p. 16). A married man might be entitled to $66 per month or 33 times the value of his own contributions. Hundreds of thousands of aged persons are now working in war industries at good wages. At the present rate the insurance contributions which they will pay during the entire war will be returned to them completely in the first month or two that they draw benefits when they retire after the war. Moreover, the actuarial value of the survivorship benefits alone is equivalent to a 1 percent contribution. The present value of these survivors' benefits at the date of death (corresponding to the face amount of life insurance) is between $3,000 to $10,000 for most families (and as high as $15,000 for some families). Therefore equity to the contributors who do not receive benefits until after many years indicates that the contribution rates be increased.

(8) In addition to the equity of levying contributions at the 2 percent rate, it is desirable to increase the rate to 2 percent in order to convey to the contributors a better appreciation of the value and the cost of their insurance protection. The continuation of the present 1 percent rate tends to depreciate the cost and the protection afforded in the minds of employees, employers and the public generally. As I have just pointed out, the real value and cost of the insurance benefits provided are substantially in excess of the rate of contributions now being collected. Yet I believe it is fair to say that at the present time there are not a sufficient recognition on the part of the contributors of the real value and cost of the protection that is being afforded. I wonder how many people realize, for example, that the 1939 amendments resulted in the Government's underwriting life insurance having a face value of $50 billion. I know of no better way to bring home both the value of the benefits and the fact that these benefits will cost very substantial sums than to put something like the true price on the product.

In the history of social insurance throughout the world the major difficulty of social insurance systems has been the lack of adequate financing of old-age retirement benefits. It is always easiest to delay levying the necessary insurance contributions, thus perpetuating and strengthening the belief that the insurance benefits are meager and the costs of the insurance system are low. Inevitably when the time comes to increase the taxes many reasons can always be advanced as to why the imposition of the additional taxes is unwise or impossible. In this country we are still in a position to avoid these mistakes by getting clearly established now that if our people want social insurance they must be willing to pay for it. The time to obtain the necessary contributions is when people are able to pay for the insurance and are willing to pay for it because they can be shown that they are getting their money's worth. If we should let a situation develop whereby it eventually becomes necessary to charge future beneficiaries rates in excess of the actuarial cost of the protection afforded them, we would be guilty of gross inequity and gross financial mismanagement, bound to imperil our social insurance system. Social insurance financing is admittedly a difficult and complex problem. However, we are all of one mind in wanting to make social security secure, and I am confident we can and will provide the necessary ways and means of doing so.