In January 1940 the Director of the Bureau of Old-Age and Survivors
Insurance circulated a memorandum to all Bureau personnel throughout the
country. This memorandum from the Director sought to explain in plain
terms the reasons for enactment of the 1939 Amendments. John Corson, as
Director of the Bureau, was technically the number four official at the
Social Security Board at this time. However, since he was in charge of
virtually all of the operations related to the Social Security program,
he was arguably the most important single person in the organization.
In the months following passage of the 1939 Amendments, Corson had been
travelling the country explaining the 1939 law to employees of the Agency.
This Director's Bulletin put in written form Corson's remarks. His views
are a significant expression of the viewpoint of the Social Security Board
on the '39 law and his remarks should be understood as reflecting the
views of the top administrative officials of his day.
REASONS FOR THE 1939 AMENDMENTS
TO THE SOCIAL SECURITY ACT
Ours is and, I hope, will remain a somewhat unique organization.
It is unique in that it is a democratic organization in which each member--(not
each "employee")--is expected to play his part, not as a cog in the machinery,
but as a thinking individual. His part is not just to take orders, but
to give suggestions and make constructive criticisms as well as to carry
out the necessary instructions. There are many new problems. Their solution
requires real thought and intelligence rather than just obedient conformity
with an increasing volume of rules and regulations. In that spirit I hope
each may play his part in this organization.
When Congress adjourned last August, it left the Bureau of Old-Age Insurance
(as it was then named) with four big tasks ahead.
(1) The first of those was the preparation of interpretative regulations,
forms and procedures, and so forth, to govern the administration of
the amendments to title II.
(2) The second task was to develop among our present staff a real understanding
of these amendments to title II. By a real understanding I mean something
more than a memorization of the words that make up the statute. I mean
an understanding of the reasons for these amendments. I believe them even
more important than the memorization.
(3) A third task was to build a larger organization to do a larger
job. This meant the opening of field offices and the adding of personnel,
to insure that we do the job, and do it well.
(4) The fourth task was to "clear the decks" so as to be current by
January first. This was essential in order that we could concentrate
on the new job.
We have been engaged for four months in the second of these tasks; the
development of a thorough understanding of these amendments. To develop
a real understanding of these amendments and the reasons for them, we
must think through some of the basic terms we use; terms that we have
used very naively in the past three years without thought as to what they
really meant. We must consider the meaning of such terms as "social security"
and "social insurance." What do they mean? What do they imply?
"Security" in itself is not difficult to define. It has a relatively commonplace
meaning. Security, for you, for me, and for the average covered worker
implies the assurance of a continuing income. It means the assurance that
we can look forward to a salary check coming in at the end of next week
as it did last week. Give us that assurance and we will make our own security.
But when you tack onto the word "security" the word "social" we have a
term that means very little to any individual, and implies as many different
things as there are individuals. The word "social" is confusing. It has
the same derivation as has the word "society." Society, to us, means the
aggregate of the 130,000,000 American people between Canada and Mexico.
When we talk about social security, we mean the security of this society.
Against what are we trying to make our society secure? We are trying to
make it secure against at least two tangible, concrete things; namely,
1. A large proportion of the members of that society becoming dependent
on society for its support--without resources of its own;
2. Loss of the purchasing power of this same large proportion of the American
We are trying to make society secure against the effects of both of those
two contingencies. Social insurance is one of the ways in which we endeavor
to make society secure.
"Insurance" is a term we all claim to understand, but "social insurance
is a new term with no clearly understood meaning. Insurance is an orderly
and logical provision in advance for some future contingency. Social insurance
then is an orderly and logical provision in advance for contingencies
that this society will meet. Through one form of social insurance--unemployment
compensation--we endeavor to make orderly and logical provision to tide
the workers over periods of temporary unemployment. Through another form
of social insurance--that in which you and I are engaged--we are endeavoring
to protect society against the contingency that it will be called upon
to support a large proportion of the people over sixty-five who can no
longer support themselves. Basically, each form of social insurance
serves to replace a part of that wage income that made for the individual's
own security and makes simutaneously for the protection of society against
the necesisty of his support. Through unemployment compensation we
replace a part of that wage income when it is lost by unemployment. Through
workmen's compensation we replace part of that wage income when it is
lost through industrial accident. Through old-age insurance we replace
part of the wage income when it is lost because the individual can no
longer work in old age. Through survivors insurance we replace part of
the income which is lost as a result of the death of the wage earner.
The basic purpose of all forms of social insurance is to replace a sufficient
part of that wage income when it is lost as a result of any of these hazards--unemployment,
accident, old age, or death of the wage earner--to insure not only that
the individual may look forward to protection, but that society as well
may be protected against the hazards which it faces.
Observed from this point of view, the 1939 amendments to title II assume
a more understandable shape. They may be grouped under five principal
headings. To do so will make their character and their purpose still clearer.
1. Several of these amendments which can be usefully classified in
this first category are designed to provide protection for a greater proportion
of the aged people. Protection for a greater number of the aged is
essential not alone that more of the aged can look forward to the future
with assurance that they will not be in want, but as well that this society,
represented by the government, can look forward to the future with some
assurance against the twin hazards of dependency and depression that it
has faced in the last decade. To attain these objectives the amendments
include two particular provisions: first, Section 209-b provides
for the crediting of wages earned after age 65 toward benefits in the
future. That means that about 300,000 individuals who have attained age
65 since 1936 can now look forward to the same protective monthly income
when they can no longer work as any other younger insured individual;
second, Sections 905 and 907 provide for the application of the
pay-roll taxes on wages earned after 65 back to January 1, 1939. There
is greater significance to this than we might at first realize. That means
that approximately 450,000 people who were over 65 on January 1, 1937,
can now look forward to the protection of a monthly income upon retirement.
By means of the two amendments two large groups may look forward to retirement
with a monthly old-age insurance payment for the first time--those
who attained age 65 between January 1, 1937, and January 1, 1940, and
those who were 65 before January 1, 1937. This means that 750,000 people
who are for the first time given protection will be the claimants, not
in the distant future, but primarily in the first years of this program,
during 1940 and 1941.
To effect the inclusion of those groups it was necessary to make several
other changes which are especially significant in our administration of
this job. To qualify these elderly individuals who have but a brief time
before they can no longer work, the eligibility requirements must be relaxed.
The relaxation of these eligibility requirements brings into our work
the terms "fully insured status," "quarter of coverage," and "average
monthly wage," (Section 209(g) and (f)). The memorization of the exact
meaning of these terms is essential; an understanding of the reasons
for these provisions is equally important.
Under an insurance program, to be eligible for benefits a worker should
have made some minimum contribution. In determining what this minimum
should be, three difficult problems must be considered. First, this minimum
must not be so great as to exclude older workers who retire soon, or younger
workers who die. Second, this minimum must not be so great as to exclude
the worker in covered employment because of temporary unemployment. Third,
this minimum must be large enough to exclude the worker in non-covered
employment who seeks to qualify by just a minimum of employment in covered
industry. Should, for example, a person who was a farmer from 1937 to
1945, when he becomes about 66 years of age and realizes he isn't going
to work much longer, be able to turn to work in covered employment for
1-1/2 years and qualify for benefits? Or should he be expected to meet
the same requirements for benefits as the individual who has been in the
system and contributed during the entire period from 1937 to 1945? These
problems are answered in terms of "fully insured status." At the same
time "currently insured status" offers protection for the wage earner
who, by virtue of his youth or brief employment, dies before he has built
up "fully insured status." Old age is a future risk against which individuals
can be expected to make provision. Death is a current risk, in that it
may be an event of the next week.
Consider the chronological development of these eligiblity requireinents.
Under the 1935 Act it was necessary to have worked in at least five years,
and have earned at least $2,000 in wages, to qualify for monthly benefits.
The draft of the bill reported out by the House Ways and Means Committee
would have required that a worker should have worked at least two years,
and earned $600 in wage. As finally enacted, the eligibility requirements
are neither 5 years and $2000, nor 2 years and $600, but 6 quarters (or
1-1/2 years), and a minimum of $300 in wages. In short, these eligibility
requirements were considerably relaxed for persons already old.
There will be individuals who still won't be either "fully insured" or
"currently insured." Yet in any insurance program it is essential that
an individual shall have been a part of the system and contributed for
at least some part of the time. That minimum has been considerably reduced;
it has been reduced to a point where it will not exclude the worker customarily
employed in covered industry. If it excludes the agricultural worker,
or the self-employed person who is occasionally employed in covered industry,
that is, of course, to be expected.
The inclusion of these older workers within the system necessitates not
only the relaxation of their eligibility requirements, but as well the
calculation of their benefits on the basis of an average wage rather than
an accumulation of wages. This older worker will not have had an opportunity
to accumulate, in the brief time during which he will be employed after
1936 or after January 1, 1939, a sufficiently large accumulation of wages
to permit the calculation of an adequate benefit. Hence, it is essential
that his benefits be related to his rate of earnings rather than to an
2. The second_group_into which these amendments can be classified includes
those designed to provide more adequate protection for those whose need
is greatest; more adequate benefits for those who would not be able
under the 1935 law, to build up benefits adequate for subsistence. Under
the previous law an individual earning $75 a month would have required
10 years in which to build up rights to a benefit of $20 a month. Under
the amended.law this worker can build up the right to a benefit of that
size in a year and a half. In short, the monthly insurance benefits have
been made more adequate and more generous for two groups: first, those
workers who were already old in 1937; and second, those workers who because
their earnings are always low, were unable to build up adequate benefits
even though employed a relatively long period of time. For those two groups
the benefits are now much more nearly adequate.
Why is it essential that a social insurance system pay adequate benefits?
These older workers have contributed very little. Why should they receive
more generous, more adequate benefits? Because unless they do receive
benefits at least adequate for subsistence, a social insurance program
does not insure society against the necessity of supporting these individuals
through emergency relief. If society is to be protected against (a) the
necessity of supporting a large number of dependent old people, and (b)
the loss of their purchasing power, when they are no longer able to earn
a wage, they must receive benefits at least adequate for subsistence.
To accomplish this objective the amended law provides in Section 202(b)
for supplementary benefits to the aged wives of retired workers, and in
Section 209(e) and (f) for the calculation of benefits by a formula applied
to the worker's "average monthly wage." Together these provisions serve
to increase the size of the average benefits that will be paid and adapt
them better to the actual needs of the average elderly worker. Only four
or five States will pay to old-age assistance clients amounts as great
as the average old-age benefit that will be paid in that State. In other
States, old-age insurance benefits will be substantially greater than
old-age assistance payments.
While increasing the average benefit to make it adequate to enable these
workers or their dependents to support themselves, the amended law simultaneously
provided for larger benefits for those who participate in this insurance
system for longer periods. Section 209(e)(2) provides that the worker's
benefit shall be increased 1 percent for each year in which he was paid
$200 or more of wages under the system. Not only is it necessary to provide
that every worker, even though his earnings are low or the time he has
had to contribute is short, (if he has been in the system for a reasonable
minimum period) shall be eligible for adequate benefits, but in an insurance
program it is essential that the worker who has been in the system
a longer time and contributed more shall receive a larger benefit.
3. The third_category into which the_changes to title II_may_conveniently_be
grouped include those that provide for the extension of the scope of
protection to a hazard faced by every worker that was not covered by the
Act enacted in 1935. Interestingly enough, I think we should find that
this is the one hazard that you and I have protected ourselves against
through the use of private insurance. We have not bought private insurance
against unemployment. We could not have bought such protection. Nor have
many bought accident insurance. I venture, too, that not many of us have
bought private insurance to protect ourselves against our own dependency
in old age. Most of us have bought life insurance to protect our wives
and children in the event of our death. That hazard, the hazard that the
covered worker would die and leave his wife and children dependent upon
society, was not provided for in 1935.
Those paragraphs under Section 202 which provide for widow's benefits,
widow's current insurance benefits, children's benefits, and parent's
benefits, protect the average wage earner against this hazard. These provisions
represent a far-reaching change in the character of this insurance program.
In the past, of all of the claims paid, 56 percent have been payments
made upon the death of the wage earner. Similarly, the claims for survivors'
benefits--widows' benefits, children's benefits, and parents' benefits--will
represent a major part of our job in the future. In the past, when an
individual became 65 he came to your office to file his claim. In the
future there is no reason for him to come to your office upon his 65th
birthday. There is no reason for him to come in at 75 unless he is ready
to retire. In the meantime, many workers will have gone on working, and
died before they ever came to file a claim for benefits. The person who
does come to your office to for benefits is more often the survivor.
In paying benefits to survivors an accumulated wage base is not feasible.
The prospect of death is a current risk. The young wage earner who comes
into the system at 23 may die, not 10 years hence but he may die in three
years or even a year and a half. Before he has had an opportunity to accumulate
a sufficient base for benefits. Hence, an "average wage" base must be
substituted for an accumulated. Yet, the "average monthly wage" when used
in calculating benefits for some retiring workers will be difficult. There
will be individuals, particularly at first, who will have earned during
the period they worked in covered employment, let's say, $150 per month,
whose "average monthly wage" will be only $50 or $75. This result arises
from the use of an average wage determined by dividing the total wages
earned when employed by the number of months in the entire period when
the individual might have been employed in covered employment. Why?
This system, established in 1935, was designed to cover a certain limited
group. Originally, agricultural, domestic, government and self-employed
workers were specifically excluded. For the limited group in covered employment
it must be recognized that the individual will be unemployed a portion
of the time. Unemployment of any normal duration will not materially affect
the calculated average monthly wage and the benefits based upon it, The
individual whose benefit will be substantially reduced by the use of the
"average monthly wage" will be the one who works most of the time in excluded
employment--self-employment, agriculture, etc.--and only a part of the
time in covered employment. In relation to his earnings in covered employment
his "average monthly wage" and consequent benefits will be much less than
his rate of remuneration when employed. In individual cases this may be
difficult to explain. The way to meet his problem is not to revise all
of our formulas, but to extend coverage to agricultural workers.
A similar problem arises from unemployment which is the result of disability.
Suppose at age 55 or 58 a man becomes totally and permanently disabled.
For 7 or 8 years he is unable to work. He sees his average monthly wage
steadily decreasing and his "insured status" expire. That will be very
difficult to explain. Yet the reasonable and practical method of meeting
this problem is to provide disability insurance, to provide benefits during
his disability. The problem now does not represent a weakness of the present
system, but illustrates the necessity for another type of social insurance.
4. The fourth-categgory into which these amendments may be classified
includes those provisions which advance the date upon which the payment
of monthly benefits commences and those which change the manner in which
benefits are financed.
When the 1935 Act was written, there were two reasons why it was thought
necessary to defer beginning monthly benefits for five years. The first
reason was to provide time in which to build up the administrative organization
and machinery necessary to administer a huge job. The second reason was
that it was thought necessary, under the original Act, to build up a reserve
accumulated from tax payments over these early five years and subsequent
years, which would provide a part of the resources to pay benefits the
The experience of the last three years has indicated that this administrative
machinery has been built adequately in but three years. An accurate and
efficient recordkeeping organization has been built which is adequate
by enabling us even now to answer expeditiously any of 30,000,000 employees'
inquiries as to the status of their personal insurance accounts.
Simultaneously an extensive and well trained field organization has been
established which required a relatively small expansion to undertake the
big job in the future. And, as well, a small but highly efficient corps
of adjudicators has been recruited and carefully schooled. It is not necessary
to postpone the payment of benefits longer on this account.
During these last three years you have heard much criticism, based upon
a dearth of understanding, of the reserve. One criticism was that the
accumulation of this reserve had a harmful effect upon the national economy
by reducing the purchasing power of workers. The purchasing power was
reduced by a large sum taken out in payroll taxes while a small sum was
replaced in benefits. The effect of these amendments is to much more nearly
balance the effect upon purchasing power within the next several years.
In 1940, after the reduction of the payroll tax rate, the tax income will
approximate $525,000,000 while the amount paid to beneficiaries in benefits
will be about $114,000,000. In 1941 benefit payments will approximate
$298,000,000, and 1942, $431,000,000. In a program of social insurance,
the maintenance of such a balance may be important. One of the basic objectives
of social insurance, you will recall, is to protect society against a
loss of purchasing power. Social insurance will never, by itself, equalize
the national purchasing power. It should not be so designed, however,
as to contribute to the instability of purchasing power.
There appears to be some incongruity in the reduction of taxes (Section
1400, Int. Rev. Code) on the one hand, and the increase of benefit payments
on the other. Yet this incongruity is not real when it is learned that
the annual outlay for benefits under this new program in the future will
be less than the annual disbursements under the old program. Despite the
fact that larger benefits will be paid in the earlier years and new benefits
are provided for the wives, widows, children, and parents of retired workers,
the ultimate annual outlay will be less.
There are several reasons for this: first, the elimination of the
lump-sum death payments, which would have in the future become very costly;
second, the addition of survivors benefits, and wives benefits,
do not represent as large an addition to the cost as might at first be
supposed; many of the wives, widows, and parents will have built up right
to "primary insurance benefits" themselves; they will not receive both
benefits but the larger; the added cost is only the difference between
the two benefits; third, the revision of the manner in which benefits
are calculated through the use of an average wage and a new formula means
that, while larger benefits will be paid to lower wage-earners, smaller
benefits will be paid to higher wage-earners.
We have ahead of us a job as big as any job the Federal government has
undertaken for a long time. Our success will depend on how well we have
made preparation--how well we have done the four jobs Congress left for
us last August.