Committee on Economic Security (CES)
Volume II. Old Age Security
Papers in Support of Old-Age Provisions of Bill
BRIEF IN DEFENSE OF OLD-AGE BENEFITS AS PROVIDED IN THE SOCIAL SECURITY BILL
By Joseph P. Harris,
Assistant Executive Director,The President's Committee on Economic Security
1. Magnitude of the Old-Age Security Problem
In 1900 there were approximately 3,000,000 persons over 65 years of age in the United States. By 1930 this number had increased to 6,600,000 or more than double. It is estimated that by 1960 the number of persons over 65 years of age will have doubled again, reaching the number 13,590,000, or more than four times the figure for 1900. It is estimated that the number of aged persons will continue to increase until about the end of the century when it will be more that 19,000,000 persons and from that time on will continue at about the same rate.
The magnitude of the old-age problem is indicated not only by the very great increase in aged persons which is rapidly taking place, but also by the increasing dependency of aged persons. At the present time it is estimated that about 800,000 persons over 65 years of age are on the unemployment relief rolls. Most of these persons will never be able to find employment again. A much larger number of persons above 45 years of age are now unemployed, many of whom will never be able to secure regular employment again. The increasing difficulty of persons past middle-age of securing new employment is well known. Millions of families approaching old-age have had their lifetime savings wiped out during the depression and will be dependent in old-age.
When these various factors are taken into account the enormous magnitude of providing security against dependency in old age is apparent. There is a widespread public sentiment demanding more adequate provisions for old age. This sentiment is based upon the belief that society can well afford to take care of its aged members more adequately and more humanely than it has in the past. The problem requires sound statesmanship. There is no easy, simple or single solution. The joint activities of the local, state and Federal governments are necessary to cope with the problem.
2. The Place of Federal Old-Age benefits in the Social Security Program.
The economic security program for old-age consists of two separate complementary parts:
(a) Federal aid to old-age assistance plans.
(b) Federal old-age benefits.
(A third part of the program calling for voluntary old-age benefits by persons not covered under the Federal old-age benefits was eliminated by the House. While desirable, it is decidedly less important than the other parts of the program.)
This brief will deal particularly with Federal old-age benefits. It was stated several times on the floor of the House that old-age benefits are the heart of the whole program. President Roosevelt, while Governor of New York, in a message to the Legislature in 1931, made the following statement:
"In 1929 I recommended to the Legislature a commission to report on Old-Age Security against want. The report of this commission resulted in the passage of the Old-Age Security bill, by the last Legislature, and actual payments under the new law went into effect on January first of this year. I have many times stated that I am not satisfied with the provisions of this law. Its present form, although objectionable as providing for a gratuity, may be justified only as a means intended to replace to a large extent the existing methods of poor-house and poor-farm relief. Any great enlargement of the theory of this law, would, however, smack of the practices of a dole. Our American aged do not want charity, but rather old age comforts to which they are rightfully entitled by their own thrift and foresight in the form of insurance. It is, therefore, my judgement that the next step to be taken should be based on the theory of insurance by a system of contributions commencing at an early age. In this way all men and women will, on arriving at a period when work is no longer practicable, be assured not merely of a roof over head and enough food, to keep body and soul together, but also enough income to maintain life during the balance of their days in accordance with the American standard of living."
Federal old-age benefits and unemployment compensation are forms of social insurance; the other parts of the program are forms of public charity. Real social security upon a broad, satisfactory basis can never be achieved except through social insurance which will provide benefits as a right rather than as a charity. The benefit payments which in the future will be made to workers through social insurance will be vastly larger than gratuitous aid which can be paid by the state and local governments with the assistance of the Federal Government. For these reasons, the two forms of social insurance--old-age benefits and unemployment compensation--are in fact the heart of the social security program.
If these features are eliminated, the only things which are left are the several grants to the states in aid of various forms of public charity. As the President has said, what the American worker desires is to provide his own security against dependency and want rather that to receive public charity.
3. Provisions for Old-Age Insurance Abroad
Old-Age insurance is now in effect in practically all of the industrial countries of the world, as the following list indicates:
Union of Soviet Socialist Republics
4. Limitations on Gratuitous Old-Age Assistance (Pensions)
While it is generally recognized that gratuitous old-age pensions are the best method of taking care of needy aged persons, particularly when compared with our poor-farm and institutions for the aged, nevertheless, it must be recognized that there are serious drawbacks to old-age pensions. These are as follows:
(a) They will be always a form of public charity and as such will be a form of a dole.
(b) They will necessarily be limited in amount because the funds therefor will have to be raised through taxation.
(c) The amounts available will depend in part upon the financial ability of the state and local government.
There will be a constantly increasing demand for large gratuitous old-age pensions, a demand that the Federal Government bear a larger and larger share, and political pressure to secure the adoption by Congress of taxation devices for this purpose, which would have serious economic consequences. The cost of old-age pensions, if enacted alone without the adoption of an old-age benefit system, will mount very rapidly in the future. The actuaries of the Committee on Economic Security have estimated that even at the low average of $25 per month the cost by 1960 will be over $2,000,000,000 a year, half of which would be borne by the states and local units of government. It is almost inevitable, however, that if only old-age pensions are provided, there will be a great pressure upon Congress to increase the amount, to lower the age limits, and to permit all persons regardless of need to draw pensions. The actual cost in the future of old age pensions, if we make no provision for Federal old-age benefits, will probably be greater than these estimates. We only need consider some of the old-age pension proposals now before Congress to see what the pressure in the future will be.
There is already being demanded old-age pensions for everybody regardless of need and since there is little possibility of the states and local units of government providing the necessary funds, pressure will be made for the Federal Government to take it over entirely. There will also be constant pressure to lower the age limit.
The best safeguard against political pressure of this kind for the enactment of lavish old-age pension plans is the adoption of a system of old-age annuities or benefits under which the majority of workers will be covered and will be enabled to make their own provisions for old-age security, to be received as a right and not as a public charity. When 20,000,000 American workers are building up out of their own payments old age benefits right, they will look with disfavor upon propaganda for large gratuitous old-age pensions.
The enactment of a law providing Federal aid to state old-age assistance plans without making any other provision whereby citizens may make their own provisions for old-age through a form of insurance would be ill-advised. While old-age assistance to needy aged persons is essential, the best provision is to avoid dependency in old-age through a form of social insurance.
5. Broad concept of Old-age Security Contained in Social Security Bill
The provisions for old-age benefits of the Social Security bill in Title II are upon a far more generous scale then is to be found in any foreign country. The benefits payable may run up to as high $85 per month, while in England, for example, the old-age insurance pays only $2.43 per week per person or to a man and his wife a total of only about $20 per month. Comparisons with other countries are difficult to make owing to the difference in the cost of living, wage scales, etc., but it may be safely said that the old-age benefits provided in Title II are the most generous in amount in any country in the world.
This is altogether fitting and proper. It is an answer to those who charge that the social security program is wholly inadequate. With gratuitous old-age pensions of $30 a month or more, it is not practicable to set up a system of old-age benefits without providing much higher maximum monthly payments.
6. Advantages of Old-Age Benefits to the American Worker
They provide a means whereby the American worker may build up his own old-age security, as matter of right, sufficient in amount to provide some the comforts of life instead of merely a subsistence.
7. Advantages to Employers
The advantages of a system of old-age benefits are identical with those of retirement systems which many of the most progressive companies in this country have set up. They enable employers to provide security against dependency and old-age for their employees, and to operate more efficiently and economically, retiring their superannuated employees.
The fact that many companies have voluntarily set up retirement systems, despite the difficulties of attempting this problem upon an individual company basis, is ample evidence of the advantages which accrue to employers.
CRITICISMS OF FEDERAL OLD-AGE BENEFITS
Criticism No. 1:
The payroll taxes of 6% will impose a heavy burden upon industry.
Those who advance this argument usually disregard the fact that the payroll taxes will not become payable until 1937 and then only at the rate of 1% upon employers. They will be stepped up gradually at 3-year intervals, reaching a maximum of 3% upon employers in 1949--14 years from now.
The effect of payroll taxes may be easily exaggerated. Data taken from the United States Census of Manufacturers for 1933, released on January 23, 1935, shows that a 1% payroll tax, if charged to the value of the manufactured product, would have increased the price only .21 of 1%. Since the taxes apply alike to all employers, the cost will tend to be shifted on to the consumer. This will tend to make old-age security a legitimate charge against industry, which should be the case.
Industry universally includes in the cost of production the charge of depreciation and obsolescence of equipment. If this is a proper charge against production, the same is true of the using up of the human machine. The provision for old-age benefits supported financially by the payroll taxes makes it possible to provide for the entire lifetime of the worker in his normal period of employment instead of throwing him upon the community after his span of productivity has passed.
Those who object to this payroll tax upon employers usually fail to take in to account the advantages of a system of Federal old-age benefits for the employers as well as their employees. By providing for the retirement of superannuated employees, the system of old-age benefits operates similarly to private retirement systems to increase personnel efficiency. This is indicated in all studies of retirement plans. The following illusive quotations may be cited:
The National Industrial Conference Board, a leading research organization supported wholly by large industrial and trade associations, published a report in 1925 entitled "Industrial Pension Systems in the United States", in which it was said (p. 11):
"If in addition a pension system affords the employer a definite as well as human method for retiring superannuated employees, it also justified its cost as aid to management. Elimination of ineffective workers by the pension route is well adapted to raise the level of efficiency in the active force. It clears the way of promotion for younger employees, while favorably affecting the morale of the entire organization."
The same organization published a report in 1931 entitled "Elements of Industrial Pension Plans", which stated:
"Another reason for this interest is the reported experience of large companies that have found their pension plans to be a saving rather than an added expense because of the opportunity afforded thereby to increase the average efficiency of their working forces by the prompt and just elimination of aged workers who can no longer render a fair work equivalent for their wages. The view that a pension plan pays for itself through savings which absorb the costs, and that the company without a plan is paying the larger price in hidden costs, is a challenging one and naturally draws frequent discussion." (p.10)
"In general, the economic advantages claimed by the advocates of pensions, and to a large extent realized in practice, may be summed up in the terms 'elimination of waste' and 'stimulation of efficiency'. A pension plan tends to eliminate the economic waste due to: (1) The retention in productive occupations of aging workers who can no longer render a fair return in the value of their service for the amount of wages paid them, (2) the consequent slowing down of the pace of the plant, (3) the blocking of the path to promotion for the younger workers, and (4) the general demoralization of the force. In addition to the immediate savings through elimination of waste the pension plan brings further gain through stimulation of efficiency: (1) By quickening the pace of the younger workers now relieved of the drag of older employees with impaired working capacity. (2) by opening the way to promotion all along the line, especially at the start of the pension plan, and (3) by improving in various ways the plant morale. More specifically, the efficiency of the individual worker is stimulated by the feeling of security and hopefulness that results when the individual is relieved of the fear of destitution and dependency in old-age and by the sentiment of loyalty and good will fostered by the pension plan, which thus operates as a spur to the ambition of the worker and incites him to a more intensive and sustained effort. Similarly, the efficiency of the organization as a whole is increased by the improvement of industrial relations, the development of a cooperative spirit and the promotion of constancy and continuity of employment."
A special committee of the United States Chamber of commerce made a report in 1932 on "Employees Retirement Annuities", which stated (pp. 7-8):
"The committee submits the following statement of general principles and recommendations for the consideration of the membership of the Chamber of Commerce of the United States:
"1. Regard for the personal interests of their employees, for the welfare of society in general, and for efficient administration of their own enterprises should prompt employers to develop some method for aiding in providing for the financial security of their superannuated employees.
"2. The retirement of superannuated employees of long service on annuities is an aid to the profitable and efficient administration of business enterprises and is advantageous to employer, to employees and to the public. The annuity plan should provide for reasonable minimum payments."
A system of old-age benefits has also other very important advantages to employers. It will greatly increase the purchasing power of the large and growing groups of persons over 65 years of age. It will also reduce very materially the burden of general taxation which employers would be called upon to bear to pay for gratuitous old-age pensions. The public hearings of the Finance Committee indicate very little opposition on the part of industry itself to the establishment of a system of Federal old-age pensions. The criticisms raised were in regard to details rather than as to the general principle. The great need for social legislation to provide against dependency in old-age is widely recognized. It is also recognized that the problem cannot be satisfactorily met by individual companies, but requires national legislation corresponding to that of practically all other countries of the world.
Criticism No. 2:
The 6% payroll taxes will be borne ultimately by the worker.
Those who are afraid of the effects of the payroll tax upon industry assume that industry will bear the entire amount; others who are opposed to a payroll tax assume that the worker will bear the entire amount. These points of view are, of course, contradictory. The truth of the matter is that the employees, employer and the consuming public will each bear a part.
A payroll tax is appropriate in connection with old-age benefits in which the worker participates. This form of taxation would be unsuitable to support the general burden of the Government, but for this particular purpose it is entirely appropriate. This is indicated by the position of the American Federation of Labor. President William Green stated in the hearings before the Senate Committee that labor did not protest the payment of a payroll tax for this purpose. No other tax can possibly be as appropriate or lent itself so readily to this purpose.
Criticism No. 3:
The payroll taxes will postpone recovery.
This criticism loses sight of the fact that the tax becomes payable in 1937 and at a very small amount and does not reach the maximum amount until 1949--20 years after the present depression set in.
Criticism No. 4:
Federal old-age benefits are an invasion of states' rights.
No state at the present time has a provision for old-age benefits. A system of old-age benefits must be designed to run throughout the lifetime of the worker. People in this country move from state to state too much to make it practicable to operate state plans. While legally any state could set up a state system, practically it would be impossible to do so, and in fact no state has done so. It is notable that while practically all other industrial countries have set up old-age systems this country has not due to the inability of states singly to cope with the problem.
It is not an invasion states' rights but rather a measure which will protect the states against the large burden of old-age assistance in the future.
Criticism No. 5:
Federal old-age benefits will require a large Federal bureaucracy.
While a considerable number of public employees will be required to operate the system, it is easy to exaggerate this factor. It is anticipated that the public employment offices will be used as the local arms of administration of the benefits instead of setting up duplicating machinery. The Post Offices will be used for the sale of stamps in connection with the collection of payroll taxes.
Criticism No. 6:
The proposed large reserve funds are not practicable.
It is asserted but without proof that as reserve funds accumulate in the old-age benefits accounts Congress will vote them out in more generous benefits without regard to the actuarial liabilities of the funds. This is, of course, merely assertion.
It is also asserted that a reserve fund which will amount up to $30,000,000,000 or more in the future is unmanageable. The Treasury anticipates no difficulty in this regard. If the public debt of the Federal Government is retired, investment in state and local obligations may be permitted at any time. If the past is any guide to the future, the total public debt in this country, Federal, state and local, by 1980 will be several times the present amount.
Criticism No. 7:
Federal old-age benefits will destroy private retirement systems which are often more adequate.
The number of workers protected by individual retirement systems at the present time, exclusive of railroads, is estimated at only about 2,000,000 persons. Many of these are in unfunded retirement systems which are dependent upon the future financial condition of the particular company and afford little real protection to the worker. It has been estimated that only 4% of the workers employed by companies having such systems ever actually draw retirement benefits. This is due to turnover and to dismissal of employees before reaching the age of retirement. It is thus apparent that industrial retirement systems provide little security against dependency in old-age. Existing systems may be revised as supplemental systems by employers who wish to make more adequate retirement provisions.
Crticism No. 8:
Old-age benefits should be financed by other forms of taxation.
Every old-age insurance system in the world provides some employee contribution. It is believed by many that there should be a Government contribution out of general taxes. This is provided in the old-age security plan in the provision for gratuitous old-age pensions. It is also provided in the guarantee of 3% interest on the fund incorporated in the law.
This is a question which does not require settlement at the moment. If in the future it is decided to support old-age benefits partially by general taxation, this policy can be adopted.
Criticism No. 9:
This is a large problem which requires further study.
This is always the plea of those who are opposed to social reform. We have had study of social insurance in this country for 20 years. The Committee for Economic Security has studied the old-age security systems of foreign countries and has had on its staff some of the leading students of old-age security in the world. What the country needs now is not further study but legislation.
Criticism No. 10:
The Federal old-age benefits are unconstitutional.
This point is covered in separate memoranda.