1965 Advisory Council



1965 Advisory Council on Social Security

A generation ago the United States established a system of contributory social insurance providing protection against the loss of earnings due to retirement in old age. Under this system employees, together with their emp]oyers, and self-employed persons make contributions during their working years and receive a continuing income for themselves and their families when they no longer have income from work.

As enacted in 1935 this social security program was limited to the risk of retirement in old age, and it was limited in coverage to industrial and commercial employees. Today, the program covers practically all kinds of employment and self-employment, and provides benefits for the wives and children of retired workers as well as for the retired worker himself. It provides benefits, also, for survivors of deceased workers and for totally disabled workers and their dependents when the disability is expected to be of long-continued and indefinite duration. Over the years the program has been improved and broadened in other ways as well. From time to time benefits have been increased, and other adjustments have been made, to take account of social and economic change and to improve the protection provided.

For the vast majority of Americans this Federal program of social secunty gives assurance that old age, total disability or death will not mean the end of a regular family income. Some 20 million men, women and children--1 out of 10 Americans--are receiving social security benefits every month. During 1964 about 77 million earners paid social security contributions. Nine out of ten children and their mothers can look to the program for a regular income if the head of the family should die. Over 85 percent of the people past 65 are either getting benefits or will be entitled to benefits when they or their husbands retire. About 53 million workers have now worked long enough in covered employment so that they and their families have disability insurance protection.

The Council strongly endorses the social insurance approach as the best way to provide, in a way that applies to all, that family income will continue when earnings stop or are greatly reduced because of retirement, total disability or death. It is a method of preventing destitution and poverty rather than relieving those conditions after they occur. And it is a method that operates through the individual efforts of the worker and his employer, and thus is in total harmony with general economic incentives to work and save. It can be made practically universal in application, and it is designed so as to work in ongoing partnership with voluntary insurance, individual savings, and private pension plans.

Under the social security program the right to benefits grows out of work; the individual earns protection as he earns his living, and, up to the maximum amount of earnings covered under the program, the more he earns the greater is his protection. Since, unlike relief or assistance, social security benefits are paid without regard to the beneficiary's savings and resources, people can and do build upon their basic social security protection and they are rewarded for their planning and thrift by a higher standard of living than the benefits alone can provide.

The fact that the program is conttibutory--that employees and self-employed workers make contributions in the form of earmarked social security taxes to help finance the benefit--protects the rights and dignity of the recipient and at the same time helps to guard the program against unwarranted liberalization. The covered worker can expect, because he has made social security contributions out of his earnings during his working lifetime, that social security benefits will be paid in the spirit of an earned right, without undue restnctions and in a manner which safeguards his freedom of action and his privacy. Moreover, the tie between benefits and contributions fosters responsibility in financial planning; the worker knows that improved benefits mean higher contributions. In social insurance the decision on how to finance improvements is always an integral part of the decision on whether they are to be made.

Because of these characteristics of social insurance the Council believes that where it can be properly applied it is much to be preferred to the method of public assistance, with its test of individual need, and the Council therefore strongly favors the improvement of social insurance as a way of reducing the need for assistance. The Council recognizes the need for an adequate public assistance program, but it believes that assistance should play the role of a secondary and supplemental program designed to meet special needs and circumstances which cannot be dealt with satisfactorily by other means.

No matter how well designed and administered, assistance has serious inherent disadvantages in terms of human dignity and incentives to work and save. People view receipt of assistance as meaning a loss of self-support. In contrast, they view social insurance as an extension of self-support. People who have led productive lives and have supported themselves through their own efforts do not want to see their self-reliance end with their ability to work.

Moreover, applying for assistance is at best a negative experience. Eligibility for assistance depends upon the individual's asking the community for help and proving that he is without the resources and income to support himself and his family. On the other hand, under social insurance the individual proves, not that he lacks something, but that he has worked and contributed, and has thus earned a right to a benefit.

In all its considerations a primary concern of the Council has been the financial soundness of the program. Clearly, no change in the program should be made, and no present trend should be permitted to continue, if the result were to jeopardize financial soundness in any way. In the light of this primary concern, the Council has undertaken to assure that the financing will be sufficient to meet all benefit and administrative costs as they fall due.

The Council has also considered the economic impact of the program. In important respects the program supports consumer demand and helps to prevent deflation. Because of social security, 20 million retired people, disabled people, widows and orphans now have an assured regular income which, of course, continues undiminished even when other segments of consumer income decline. Moreover, the program operates automatically to compensate in part for the loss of income arising from the higher rate of retirement that occurs when the general level of employment declines.

The Council is concerned, however, about the deflationary effect of the present contribution schedule in the years just ahead. Under that schedule there would be a shift from an approximate balance of income and outgo in 1965 to an annual rate of trust fund accumulation of about $4 billion beginning in 1968. The Council recommends a large reduction in the size of these accumulations.

The Council is concerned also that in both the short run and the long run, the economic impact should be reasonable--and should he capable of being absorbed by the economy and by the employee, employer and the self-employed without undue burden or strain. For this reason the Council is recommending that needed increases in both the contribution rate and the contribution and benefit base be put into effect gradually so that there will not be large changes in the level of contributions at any one time.

The Council's major recommendation in the pages that follow is for the extension of the program so that workers (and their employers) and the self-employed will make contributions during their working years in order to have protection against the cost of hospital care and related services in old age or in the event of permanent and total disability. The Council believes that the time has come to apply the method of social insurance to this pressing problem in order to assure the continuing effectiveness of retirement protection. While social security cash payments, if adequate, can assure that the older person and his family, or the disabled person and his family, will be able to meet regularly recurring, budgetable costs of food, clothing and shelter, they cannot in practice be made sufficient to replace the need for insurance protection against the large and uncertain costs of hospital care. If our social insurance system is to be truly effective in preventing both dependency and the fear of dependency, the system must be broadened to include hospital insurance for the aged and the totally disabled. Otherwise more and more of these people will have to turn for help to public assistance with all the disadvantages that this has for them and for society as a whole.

The Council is also concerned that the social security cash payments be made more adequate and, particularly, that the system take into account increases in prices and earnings levels that have occurred since the last time major revisions were made in the benefit provisions. One of the strengths of social insurance is its ability to adjust to changing economic conditions so that retired and disabled persons and survivors can share on a reasonable basis in the increasing productivity of our economy.

Other major recommendations of the Council relate to the way in which the social security program is financed, the maximum amount of annual earnings taxable and creditable toward benefits under the program (the contribution and benefit base) and the level of benefits and extensions of coverage.

The Council's recommendations, together with the considerations which prompted them, are presented in three parts. Part I presents the Council's findings with respect to the financing of the social security program, assuming no changes in the benefit and coverage provisions. Part II presents recommendations for an extension of the program to help meet the cost of hospital care and related services for the aged and the totally disabled. Part III of the report presents the Conneil's recommendations for improving the cash benefit provisions, extending the coverage of the program and financing the recommended changes.