Committee on Economic Security (CES)

Volume VI. Social Insurance

J. Economic Reform and Security Proposals


First Tentative Outline, August 16, 1934

Edwin E. Witte


First Tentative Outline, August 16, 1934

The problem of economic security is conceived to be that of protecting people, particularly those in the lower income groups, against hazards which frequently involve large numbers of them and their dependents in want and destitution. Diverse, fundamentally different approaches to this problem have been suggested among which are the following:

  • The Social Insurance Approach

Social insurance is based on familiar insurance principles, but is a form of group insurance, established and controlled pursuant to law. It contemplates definitely defined risks and protection against these risks on a contractual basis. It also contemplates distribution of the risk (whether on a plant, industry, state, or national basis), rather than individual savings accounts.

Social insurance is conventionally divided into a number of separate categories, each for some defined risk. The most important of these are: accident insurance, health insurance, invalidity insurance, unemployment insurance, old age insurance, survivors' insurance, and maternity insurance. Several of these forms of insurance are combined in various countries, but nowhere is there now a completely unified social insurance system. Such a unification, however, is at least conceivable on the basis of insurance against involuntary loss of earnings from any cause whatsoever, and, even if complete unification is deemed undesirable, unification of the administrative agencies concerned with the several forms of social insurance may be desirable.

The social insurance approach is one behind which there is a wealth of experience, that on the whole seems quite favorable. Because it is the approach which has been most discussed, however, it has the weakness of old prejudices and controversies. Further, it manifestly cannot guarantee complete security and must be related to the present relief and unemployment situation.

  • The Annuity Approach.

The common characteristics of all proposals having this approach is that each individual has a separate reserve account from which benefits are paid to him alone. Contributions by the individual are taken for granted, but there may also be contributions by employers and the state. This principle is now applied in some of the pension plans for public employees and seems best adapted to retirement annuities. It can conceivable, however, be given broader application. Professor Paul Haensel of Northwestern University, in an article in the American Federationist for August 1934 on "A Workmen's Savings Fund Plan as a Scheme for Social Insurance", outlines one such plan, which would afford protection in any situation of long continued loss of earnings, with any balance remaining at time of retirement convertible into a life annuity. Professor Westerfield of Yale would have no compulsion and would use accumulated savings solely for the purchase of life annuities.

All annuity plans have the merit that the individual would carry all or a substantial part of the cost of his protection, and presumably, would be far less likely to malinger. Further, plans of this type can very readily be adapted to persons who are not industrial workers but need protection quite as much as do the industrial workers; and such plans would arouse relatively little opposition among industrialists. They all fail, however, to include any element of distribution of the risk. The people who most need protection (those longest unemployed or sick) would soon be without reserves and, hence, have no protection, whereas if all reserves were pooled, the least fortunate would to a considerable extent be carried by the more fortunate. The importance of this factor is suggested by the fact that all persons insured under the British unemployment insurance system in December 1932 who had been insured continuously for eight years, 32% had never drawn benefits at any time during the eight years.

  • The Guarantee of Work

This approach starts from the premise that what the workers really want is continued employment rather than any benefits which gives them a part only of their former wages; and this is also assumed to be by far the best policy to society at large.

Plans making this approach would place emphasis upon the development (with advance planning) of public work programs to take up slack in private employment, employment of the unemployed in producing goods for themselves, and subsidies to (possibly compulsion applied to) industries to maintain employment; or, as an alternative to all these, the complete socialization of industry.

The objective sought in this approach is one which most completely answers the ideal of economic security, as it related to the problem of unemployment. Even if it were attained, however, it would not eliminate the necessity for other methods of protection against the hazards of accident; sickness, old age and death. Further, it must be acknowledged that, with the best efforts, there still would be times when not everybody could be given work (either because the work they have been doing is highly specialized, because there is no demand for the products, or any number of other causes). In such cases, presumably, some form of relief or cash benefits would have to be given. Viewed in this light, this approach is not radically different from other plans which contemplate a residuum of relief, but its emphasis is upon work rather than relief.

As a plan for coping with the unemployment problem, this method of approach, while very attractive to the unemployed and, at least initially, also the public, would very likely prove quite costly. Its possibilities, moreover, depend upon a satisfactory solution of the vexing problem of the wages to be paid on public work, and the willingness of manufacturers and employed wage earners to permit the unemployed to produce the products other unemployed people (or people on relief) need.

  • The Relief (Maintenance) Approach.

This approach starts with the situation that now confronts the country. There are 16,000,000 people on relief who must be taken care of. Any sort of insurance system will still leave the bulk of this load to be taken are of on a relief basis. Work programs may be desirable, but again must be related to present relief load. Regardless of industrial trends it is certain that we will be faced with very long relief lists for years to come. Hence, the major emphasis should be upon relief and the best possible organization for meeting the present situation and the probable future load. It is assumed, in this approach, that the federal government must remain in the relief picture for years to come, but that there must also necessarily be cooperation with the state and local governments.

This approach is taken by people who believe that relief costs must be kept down to a minimum - and who, consequently, want to give relief only in kind and strictly on a basis of need and in an amount merely sufficient for subsistence. It is taken, however, also by many people who are quite dissatisfied with present relief methods and would like to see s great deal more spent upon relief than now.

This approach may be criticized as a defeatist attitude and as being concerned only with the immediate future. Inevitably, however, all other approaches must needs take into consideration the present situation. Either the new plans must absorb the relief load, or this must be regarded as an emergency situation to be met apart from the permanent program. In either case, the present relief situation must clearly be brought into the program proposed for economic security.

  • Possible Combination of the Preceding Approaches.

It is quite evident that a program for economic security can combine features of all of the above approaches. Considering, first, unemployment, an unemployment insurance scheme can be combined with a program for extensive public work, self-employment of the unemployed, and subsidies to private employers. It also can include provisions for emergency relief after insurance benefits are exhausted and can be integrated with the present relief situation. Through introducing suitable tests of willingness to work or contributions by the employee, the advantages of the annuity approach might conceivably be attained. Similarly, there can well be a combination of the social insurance approach with al least some of the others suggested in dealing with the problems of old age and sickness.

Edwin E. Witte

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