Arthur J. Altmeyer


by Arthur J. Altmeyer
Chairman Social Security Board

May 1943

In its Seventh Annual Report to the Congress the Social Security Board made a number of suggestions for modifying and strengthening the social security program. Among these suggestions are the extension and expansion of the contributory social insurance program, including the establishment of a national unemployment insurance system and the addition of insurance benefits for the sick and disabled to the old-age and survivors benefits now provided. In addition, the Social Security Board has also recommended that Federal grants to the States for assistance to the needy aged, blind, and dependent children be liberalized and that the Federal Government provide Federal grants to the States for assistance to any needy individual. All these suggestions taken together would greatly assist the States, counties and municipalities. Even with the tremendous increase in employment and wages, due to the war program, States and localities are now providing assistance to over 5 million individuals. The first impact of the cessation of war activities will undoubtedly require many additional individuals to seek relief and aid from their local government units. A broadened and expanded social security program will aid the States, counties, and municipalities to meet the inevitable responsibilities which will be thrust upon them in the future.

The respective responsibilities of the Federal and State Governments are markedly different in the case of social insurance and in the case of public assistance. The cost of social insurance is borne by contributions based on payroll and the benefits are paid on the basis of wage loss without a needs or means test. The cost of public assistance is borne out of general revenues and assistance is granted only on the basis of an investigation as to the individual's need.

Since the cost of social insurance is related to payrolls, it is important that employers not be subjected to unfair interstate competition because of varying rates of contributions in the various States. In the case of public assistance there cannot be this unfair interstate competition because the cost is borne out of general revenues.

The benefits under social insurance are related to wage loss. Thus there is an automatic adjustment to the presumptive need of the beneficiaries and an automatic adjustment to varying wage levels throughout the nation. Therefore, there is no necessity for investigation and determination of individual need in light of local circumstances as is true in the case of public assistance.

In this article space will permit only a discussion of the problem of unemployment insurance.

In 1935, the Social Security Act in laying the foundations for our social security program, provided for a uniform national administration of old-age insurance but for separate State administration of unemployment insurance. At the time the law was enacted, opinion was sharply divided between the advocates of a single Federal unemployment insurance system and those who favored separate State systems. Thus, the Committee on Economic-Security, whose recommendations formed the basis for the development of the original act in 1935, said:

"A federally administered system of unemployment compensation is undoubtedly superior in some respects, particularly in relation to employees who move from State to State. This presents a problem, involved in State administration, which we do not at this time know how to solve, although we do not regard it as insoluble and recommend that it should be made one of the major subjects of study of the Federal administrative agency. We recognize also that in other respects State administration may develop marked inadequacies. Should these fears expressed by the champions of a federally administered system prove true, it is always possible by subsequent legislation to establish such a system. We recommend that it be expressly provided in the Federal act that all States must include in their statutes provisions to the effect that those acts shall not be deemed to create any vested interests preventing modification or repeal and that a similar reservation of power be made by the Federal Government. Accordingly, the Congress can at any time increase the requirements which State laws must fulfill and may, if it sees fit, at some future time, substitute a federally administered system for the cooperative Federal-State system we recommend."

The most striking fact developed by an examination of the operation of the Social Security Act since 1935 is the difference between certain features of unemployment compensation and old-age and survivors insurance. Old-age and survivors insurance, being administered by a single agency, requires only one set of records for the entire Nation while in unemployment compensation, administered by separate State agencies, there are 51 sets of records. Old-age and survivors insurance provides uniform conditions of eligibility for benefits and uniform rates of benefits throughout the country, so that persons in similar circumstances are treated similarly. In unemployment compensation eligibility for benefits and the rate and duration of benefits vary from State to State so that a worker may find himself ineligible in one State when he would be eligible in another, and his benefits may be higher or lower in one State then in another with the same earnings. Also, since old-age and survivors insurance is on a national basis, migration from one State to another does not affect an individuals benefit rights, whereas under unemployment compensation an individual may earn substantial wages in several States and yet never become eligible for benefits because he has not earned enough in any one State. During recent years it has become evident, too, that with funds segregated in separate State reserves the existing contribution rates are more than sufficient to permit one State to pay fairly liberal benefits while some other State funds will be threatened with insolvency. In old-age and survivors insurance with a single national fund for the benefit of all insured workers, this difficulty does not arise.

Inadequacies of Present System

While benefits have been made somewhat more adequate for those who are eligible they are still quite inadequate to meet the needs of the unemployed. One of the reasons no doubt is that each State tries to avoid putting any greater burden on its employers than is borne by employers of neighboring States. The Social Security Act was designed to remove this danger of inter-State competition by the imposition of a uniform national contribution rate but this was in large part vitiated by the provision for employers' experience rating. As the provisions for experience rating have developed, an employer's contribution rate may be reduced to a minimum not because he stabilizes employment, but merely because little was paid out as benefits to workers. Every State is thus under pressure not to increase benefits any more rapidly than neighboring States do. Under such circumstances competition may take the form of reducing benefits rather than reducing unemployment. An even greater defect is the limited duration of benefits. In both 1940 and 1941, about one-half of all persons receiving unemployment compensation benefits completely exhausted their benefits before they were re-employed. In one State two-thirds were still unemployed when their benefits were exhausted. And this was in a period of business activity with rising employment. In a time of poor business it would be much worse. If unemployment compensation is to serve as an effective part of our national social security program, it must be so modified as to carry a much larger portion of the burden of unemployment.

Another difficulty deriving from the present structure of unemployment compensation is the fact that many workers who are employed in several States in the course of a year may qualify for only limited benefits or many not qualify at all because their earnings are divided between the several State systems. The number of workers moving between States has increased greatly because of war activity and some solution for this problem must be found.

A further problem arises in connection with the utilization of the funds collected. The total now held in all of the State funds combined is over $3 billion. At the present time the benefits paid in the country as a whole are low compared with total contributions collected. This has led to demands for a reduction in contribution rates. But it must be remembered that the total reserves do not constitute a single national fund from which benefits can be paid in any given State. They are divided into 51 separate State funds, each available only on the basis of employment within such State. It is true that some of these State funds are larger than would be necessary to meet any prospective demands but others are by no means secure. When we consider the situation in a number of States in the light of prospective post-war unemployment, there appears to be no justification for a reduction of contributions in those States. It is of course desirable to keep contributions to a practical minimum and not build up unnecessary reserves but it is equally essential that we take into account anticipated future demands in determining what is necessary. If unemployment compensation is to accomplish its purpose, adequate reserves must be built up during periods of good business such as the present to take care of large scale unemployment in later bad years.

It would be difficult even in normal times to deal with this problem under separate State systems without putting very heavy burdens on those States where unemployment tends to be concentrated and under the impact of the war it is quite impossible. Millions of workers are moving from one employer to another, from industry to industry and from State to State. The situation is well illustrated by the case of an employer who customarily employs about 600 and has a contribution rate of only of 1 percent. Today he is employing more than 12,000 war workers. When war work ceases and the 12,000 workers are laid off, these workers will be entitled to unemployment benefits. The question arises as to how a State with hundreds of such employers will be able to meet its obligations.1/


These considerations have led the Social Security Board to the conclusion that steps should be taken at the earliest possible moment to make our program of unemployment insurance a more effective instrument for dealing with unemployment especially during the post-war period. The Board is particularly concerned that this matter should not be viewed as an abstract question of States' rights or of Federal administration versus State Administration. From a legal standpoint, the question of States' rights has probably been settled by the United States Supreme Court when it upheld the constitutionality of the Federal old-age insurance system. Justice Cardozo, who wrote the opinion in that case, said:

"The problem is plainly national in area and dimension. Moreover, laws of the separate states cannot deal with it effectively. Congress, at least, had a basis for that belief. States and local governments are often lacking in resources that are necessary to finance an adequate program of security for the aged. Apart from the failure of resources, states and local governments are at times reluctant to increase so heavily the burden of taxation to be borne by their residents for fear of placing themselves in a position of economic disadvantage as compared with neighbors or competitors. We have seen this in our study of the problem of unemployment compensation. A system of old age pensions has special dangers of its own, if put in force in one state and rejected in another. The existence of such a system is a bait to the needy and dependent elsewhere, encouraging them to migrate and seek a haven of repose. Only a power that is national can serve the interests of all."

Certainly no one would question that unemployment is at least as great a national problem as old age. So far as invading a field which historically has belonged to the States, the facts are that before the Social Security Act was under consideration, only one State had enacted an unemployment compensation law and it is doubtful whether that law would have remained on the statute books were it not for the fact that the present Federal Social Security Act creates an irresistible inducement for the States to enact unemployment compensation legislation. As a matter of fact, it was contended by opponents of unemployment compensation in 1935 that this Federal inducement constituted coercion and invasion of States' rights. Certainly those who so contended cannot now logically argue that relieving the States of an obligation allegedly forced upon them in 1935 is an invasion of States' rights. However, such discussions get us nowhere in deciding the basic question of what kind of an unemployment compensation system is best from the standpoint of simplicity, adequacy and financial soundness.

The causes and cure for mass unemployment are beyond the control of individual States. The Federal Government in the past has been obliged to assume prime responsibility for coping with the problem of mass unemployment and undoubtedly will have to do so in the future. It is vital that there be no division of that responsibility, in order that the related approaches toward a solution may be completely integrated. Government stimulation of private enterprise, public works, and unemployment compensation are all necessary to cope with the problem of unemployment. What is done or not done in one respect has a profound effect on what can or must be done in the others. During the post-war period, the policies followed in the demobilization of the armed forces and in the termination of war contracts will vitally affect the volume of unemployment compensation payments. On the other hand, the adequacy or inadequacy of unemployment compensation benefits must be taken into account in determining the policies to be followed in the demobilization of the armed forces and in the termination of war activities. Under such circumstances, division of responsibility may well lead to failure to act consistently and effectively.

The essential element in an effective unemployment compensation system is the pooling of risks so that unemployment which is caused by nation-wide forces can be met on a national basis. Our great private insurance companies do not write all their business for a given risk in a single area and certainly no risk needs wider distribution and more general pooling of funds than does unemployment. This is more true now then ever before since war demands have created a national labor market. If all the unemployment compensation funds built up under the Social Security Act were pooled the present danger of insolvency of the funds in some parts of the country upon the closing of defense plants would be greatly reduced. This means that both the workers and employers of those communities would have greater protection.

If there were established a single national system of unemployment insurance, comparable to the system of old-age and survivors insurance, employers could make a single set of reports for all social security purposes. At present large employers may have to send in a number of different types of reports in a number of States. Likewise there would be a single set of administrative procedures for all employers and all workers regardless of the State in which they operate. Also workers would have all their earnings credited in a single account for all social security purposes. This would make the whole system much easier to understand and would permit many workers to qualify for benefits who cannot do so now because their earnings are divided among several States.

There is some fear that a comprehensive Federal social insurance system would mean a huge bureaucracy, controlling the daily lives of our people. However, it should be borne in mind that what is being proposed is really a government insurance company which would collect premiums and pay benefits in accordance with a specific schedule fixed by Congress. It would have no regulatory power whatsoever.

The establishment of a uniform national system of records and reports, of benefit standards and administrative procedures does not mean centralized administration. While records and reports should be centralized for purposes of simplification and economy the administration of benefits should be decentralized to the local communities. This has already been done to a large extent in old-age and survivors insurance and in the case of unemployment benefits it would be even more important. Just as in the Selective Service system and in the war-time rationing programs it is highly desirable to keep such administration as close as possible to the persons affected. Local insurance offices staffed by local personnel would be responsible for the immediate administration. Advisory Boards and Appeals Boards would preserve local interest and initiate and insure adequate consideration of local and State customs and standards and of special industrial conditions.

As the entire social security program is extended to cover additional risks the inevitable relationship of the several provisions and the essential unity of the program as a whole become even more clear. Separate legislation, separate records, separate reports, separate reserve funds, separate administrative procedures become increasingly burdensome and cause confusion and dissatisfaction and needless expense. One contribution rate, one record-keeping system and benefit-disbursing machinery, so that each of the problems of individual insecurity can be approached on a nation-wide front, will prove more simple and economical and will serve the insured persons much more effectively.

President Roosevelt presented this view when, in his Budget Message of January 7, 1942, he said "I recommend an increase in the coverage of old-age and survivors insurance, addition of permanent and temporary disability payments and hospitalization beyond the present benefit programs, and liberalization and expansion of unemployment compensation in a uniform national system." Moreover, in view of the present danger of inflation and the need to prepare now for sudden and extreme changes after the war, he urged that, in order to "advance the organic development of our social security system and at the same time contribute to the anti-inflationary program," action be taken immediately to expand the social security program as he had suggested. In developing such an expanded program we should take advantage of the experience of recent years to simplify and to strengthen all of our social security programs so that they will become a more effective instrument in preserving our Nation and our way of life.

1/ See "The Impact of War on Unemployment Compensation" Employment Security Review, November 1942, pages 3-4.