Committee on Economic Security (CES)

Volume VIII. Committee Activities


Suggestions for a Long-Term and Immediate Program for Economic Security



Edwin E. Witte

Submitted for Consideration to the Advisory Council

The program herewith presented does not represent the matured judgement of anyone. It has not been submitted either to the Committee on Economic Security or the Technical Board. Neither of these bodies has reached any final conclusions, except upon the few points upon which the President has spoken positively. It has been prepared by the Executive Director to serve as possible basis for discussion by the Advisory Council and to facilitate its consideration of the problems of economic security.

The suggestion in this report are premised on the assumption that the Committee on Economic Security was appointed primarily (1) to formulate a long-time program for meeting the several hazards which are likely to involve individuals in dependency and distress, and (2) to make recommendations upon the legislation which should be presented to the next Congress to make at least a beginning toward the realization of this long-time program. What should be done in present emergency situation is a responsibility of other agencies. Similarly, measures and policies are vitally important to economic security, but again, other agencies occupy the field. Moreover, this committee is a direct outgrowth of the President's message of June 8th in which he stressed the approach to our economic problems from the individual point of view. Consequently, while every recommendation made must be examined in the light of its effects upon economic recovery and stability, the major measures necessary to bring about the realization of this most important objective cannot be dealt with here.

Economic security for the individual cannot be attained by any single measure. The problem is extremely complex because it involves so many widely varying situations and so many different hazards. These call for differing duplications, although, manifestly, not all of them can be put into operation at once.

1. Unemployment Insurance.

A comprehensive economic security program must clearly include unemployment insurance. This is not a panacea, but a valuable measure of protection for industrial workers who normally work steadily and have reasonably stabilized employment relations. It confers only limited benefits, but these are free from all taint of charity. It is not sufficient for such long periods of unemployment as many workers have experienced in this depression, but, if intelligently handled, will prove very helpful at the onset of depression and entirely adequate for most of the unemployment in normal times.

The country is well prepared for legislation in this subject next winter. Such legislation was indicated in the President's message of June 8th and is expected by both industry and labor. It should, clearly, be included in both the long-time and immediate programs for economic security.

For practical reasons, it is desirable that unemployment insurance should be developed as a cooperative federal-state undertaking, rather than as an exclusively national system. Under such a cooperative plan, the Committee on Economic Security will have to concern itself with two distinct legislative measures (or distinct parts of a single measure): (1) A Federal excise tax to simulate action by the states in unemployment insurance and (2) an unemployment insurance law for the District of Columbia (and, possibly, for interstate carriers).

A. Federal Tax Law

The federal tax measure should incorporate the following features:

(a) The tax to be levied should be an excise tax in industry at a rate of 3% of the annual payroll excluding from consideration any excess above $2,500 per year ($50 per week) in the salaries paid to any employee. Against this tax a credit should be allowed, up to 80% of the tax, for contribution paid during the year to unemployment insurance or reserve funds, established pursuant to a state law which satisfies the standards prescribed in the federal act. The first levy of this tax should be for the year 1936 and be collected in the winter of 1937. If the federal reserve board index of production for the year of 1935 shall be below 90% of the index for 1929, the rate of tax to be collected in the first year shall be only 1%, but after one year the full rate shall come into effect.

(b) Only essentially necessary standards should be written in the federal law governing the conditions which the state laws must fulfill to have payments made under their provisions count as a credit against the federal tax. These standards, however, should include the following:

(1) The state law must provide that all moneys paid into the state unemployment insurance fund or into house or industrial funds sanctioned by the state law, must be paid into the federal reserve bank of the district (or directly into the Treasury), to be held, invested, withdrawn, and liquidated under rules and regulations to be issued by the federal reserve board (or the Secretary of the Treasury). An interest rate of 3% is to be paid in the average deposits and the statute is to require that the funds be so handled as to promote economic stability.

(2) The state law must provide that all moneys collected under its provisions be used exclusively for the payment of benefits for involuntary unemployment except that a small percentage (say not more than 5%) may be used for administrative purposes. Subject to this limitation the rate of benefits, the length of the waiting period, the ratio of weeks of compensation to weeks of employment, etc., is to be left entirely to the states.

(3) The state must agree to cooperate with the federal government in the conduct of public employment offices under the terms of the Wagner-Peyser Act and that these offices shall be the local agencies through which unemployment insurance act shall be administered. The state law must also provide that all employees connected with the administration of the unemployment insurance act shall be selected on a merit basis, in accordance with the state civil service law or if there is no such law, of rules and regulations prescribed by the Secretary of Labor.

(4) If a state law permits employers to set up house or industrial funds and provides that payments into these funds may be reduced or suspended when reserves of specified amounts per employee have been accumulated, such employers shall be allowed a credit against the federal tax up to the amount which they would have to pay but for this provision, but only on condition that the Secretary of Labor shall certify that the state law in operation requires employers to pay at least as liberal benefits as are provided in the District of Columbia law. (This should be a severable section of the federal act, as its constitutionally seems more doubtful than that of any other provision.)

(5) If a group of employers operating in several states desire to set up an industrial fund such fund must comply with the highest standards in force in any of the states in which its members operate.

(c) The 20% of the federal tax actually collected from employers in states which enact unemployment insurance laws should be used to establish a reinsurance and interstate transfer fund. Allotments from this fund should be made to state and industrial funds which are exhausted by reason of unusual unemployment. Plus this the fund should be used to pay benefits to employees who have exhausted their benefits from state or industrial funds but have unused credits by reason of prior contributions to some other state or industrial fund.

(d) The Department of Labor should be charged with responsibility for approval of the state laws and also with assistance to the states in the solution of problems of administration. It should continuously study the operation of the unemployment insurance laws and develop statistics from which it may be possible in time to give unemployment insurance an actuarial basis and also to introduce varying rates for different industries in accordance with their risk and merit-rating provision. The Employment Service should be developed as the principal administrative agency in unemployment insurance and its cost defrayed from the 20% of the tax retained by the federal government.

(e) the federal law should include a provision for payment by the federal government of contributions under the state unemployment insurance laws in behalf of people employed in work projects carried on by federal government, so that these workers may gain credits under the unemployment insurance laws on the same basis as if employed by private employers.

B. District of Columbia (or model state) Act.

This model law must be a complete unemployment insurance law. No attempt will here be made to outline all of the provisions of such an act. Instead only some of the more debatable points will be set forth, to furnish a basis for the concrete discussion of the problems involved. It is suggested that

(a) To conserve the funds for times of real need and for the steadiest groups among the workers, it is desirable to have a relatively long waiting period (three or four weeks) and a low ratio of weeks of benefit to weeks of employment (say one to six), with a provision for additional weeks of benefit for periods of employment without drawing benefits (say one week of additional benefits for each six months of employment without drawing benefits).

(b) the rate of benefits should be high enough to enable unemployed workers to live without having to draw on their savings or go on relief, while drawing insurance benefits. A benefit rate of at least 50% with a maximum of $25 per week seems desirable.

(c) Coverage should be limited to employers of six or more employees and should include agricultural workers on the same basis as other employees.

(d) For the District of Columbia a pooled unemployment insurance fund should be established rather than an unemployment reserves system. (It may, however, be advisable to prepare another model bill on the reserves principle).

(e) No contributions should be required from employees. (In the report, however, it should be made clear that states may require contributions from employees, which would enable them to increase benefits.)

(f) No provisions should be made for extended benefits of any kind.

(h) No provisions should be made at this time for varying the contribution rates by industries or plants in accordance with their individual experience (but it is recommended that the Department of Labor study this problem and collect statistics on the basis of which something along this line may be done when adequate data is available.)

2. Provisions of Employment

Unemployment insurance, while a valuable first line of defense for the majority of our industrial workers, has distinct limitations. Only about half of all employed persons can be brought under unemployment insurance laws and even for those who are under these acts the benefits are limited, so that, at least in depression periods, many will exhaust their benefits before they get back to work. Consequently, there must be additional measures for security to meet the unemployment problem of workers not under unemployment insurance or who have exhausted their benefits.

The problem of what shall be done with the present unemployed lies largely outside of the scope of this committee, as this problem has been assigned for study to another committee named by the President. Consequently, it seems unnecessary to make any recommendation on the advisability of an extensive emergency housing or other work program at this time, although this may not be inappropriate.

It must be recognized, however, that, quite apart from the immediate situation, there is a distinct place for emergency work in a comprehensive long time security program. Accordingly, the following recommendations are presented for discussion:

(a) As far as practicable, public support of the able-bodied should take the form of work relief. Such work relief should be made as nearly like private employment as possible, but the selection of employees will have to be on a modified means test basis and the total wages that can be earned should be less than in private employment.

(b) Emergency work should be economically useful but should be work which would not be undertaken in the near future as part of a normal public works program.

(c) Normal public works should be planned on a developmental rather than a relief or rehabilitation basis: however, particularly in periods of prolonged depression, employment on public works should be utilized to provide employment for as many qualified people on relief lists as possible. It is believed that the dual objective of keeping public work on a strictly employment basis and of using public works to reduce relief costs during depressions projects be selected from persons referred by the public employment offices and interchange of information between the employment and relief offices.

(d) Normal public works, as well as emergency work, should as far as possible be planned in advance and as much public work postponed to periods of depression as is economically and practicably feasible.

(e) There should be set up in the federal government an agency to coordinate emergency work, rehabilitation, employment, and public works activities. These several activities may remain within the jurisdiction of the departments within which they now fall, but an interdepartmental committee should be set up to consider and advise on their common problems.

3. Relief

(a) Relief of the unemployables should be primarily a state and local function, but the federal government can get out of the relief picture only as the relief load is reduced to those who cannot be taken care of in a more satisfactory way. A sudden termination of federal relief, without provisions, is inadvisable.

(b) The relief problem in depression periods and, to some extent, also at other times is more than a matter of support or of employment. It involves economic rehabilitation and often retraining and transfer of population. It is these more difficult aspects of meeting the relief problem which should, at least in part, be regarded as a federal responsibility.

(c) All relief and rehabilitation activities in the states should be coordinated in a state welfare department, with a similar set-up locally. The existing poor laws should be modernized along the lines of the present F.E.R.A. rules. Grants of federal emergency relief funds at this time may well be used to induce the states to modernize their poor laws and to establish coordinated welfare departments.

(d) The Federal Emergency Relief Administration and the Committee on Economic Security should be succeeded by a National Welfare Administration, with responsibility for all activities of federal government concerned with people who need public assistance, and with the continuance of all uncompleted studies of the Committee on Economic Security. The National Welfare Administration should be one of the departments represented on the coordinating board referred to under 2 (e) above.

4. Old Age Security

One large group now on relief which does not belong there is composed of old people who have little or no prospect of ever getting back to a basis of self support. Altogether, in the neighborhood of 1,000,000 people over 65 years of age are at present in receipt of public relief in some form and at least one-third of all aged people are without means of support of their own. The percentage of the aged in the population is rapidly increasing and it is estimated will be more than twice as great when this country reaches a stable population.

Old age security presents a very difficult problem primarily because it is necessarily very costly. A male person who reaches age 65 still has more than eleven years of life expectancy ahead of him; a woman of that age, 15 years. These are such long periods that thousands of dollars are required for the support of each person who reaches age 65 during the remainder of his or her life.

There are two major measures which might be taken to provide greater security for the people of 65 years of age or over; (1) a federal subsidy to the state old age assistance laws, and (2) a federal system of old age insurance.

(a) Federal subsidy to state old age assistance laws. The federal government may subsidize the state old age assistance laws by a grant of one-third of the amounts actually expended for old age pensions under the provisions of these laws by the state and local governments. Such a subsidy would probably result in the passage of additional state old age assistance laws and could be used to liberalize the existing laws. It has the great advantage that through this means the condition of the people now old who are without means of support can be materially improved. While under these laws only old people without adequate means of support can get pensions, they are not subjected to the stigma and uncertainty of relief. The existing laws, however, are so restrictive that a federal subsidy would hardly seem warranted without changes in these laws to bring under their protection a much larger percentage of the old people without means than at present. To this end the federal subsidy should be made conditional upon changes in the old age pension laws to reduce the maximum residence period, to make the means test less rigid, an to insure better administration. All these conditions can be set forth in the federal act, the administration of which should be vested in the national welfare administration.

A federal subsidy to the state old age assistance laws will involve a considerable outlay from the United States Treasury, this is in part offset by reduced relief expenditures. The actuaries estimate that in the first year that the law would be in effect the cost would be $61,000,000, with an increasing cost thereafter, until, after five years, when it is assumed the entire country will have old age assistance laws and these laws will be fully operative, the annual costs may run as high as $250,000,000 per year.

(b) Old Age Insurance. The state old age assistance laws are all essentially relief measures. They are non-contributory, with all costs defrayed from public funds, but are available only to old people who are dependant and without means of support. In European countries similar laws have been supplemented by compulsory systems of old age insurance. Under such laws employers and employees and the public are required to contribute and the right to pensions is entirely divorced from the question of need.

Old age insurance has much to recommend it. After it has been in operation for some time, it should reduce governmental costs for the support of the aged and it has the great advantage that it represents savings, not a mere gratuity. The two limiting factors are: cost, and the fact that old age insurance can be applied compulsorily only to the employed population.

Actuaries estimate that a contribution of 4% on payroll (which may be divided between employers and employees as desired) will, if begun at age 20 or 25, produce enough money to permit of the payment of an annuity at age 65 equal to 1-1/3% of the average wage throughout the period of employment multiplied by the number of years of employment--(an annuity of 40 to 60% of the average wage). A 4% contribution at this time is a heavy one, particularly if added to the contributions for unemployment insurance. Moreover, such an old age insurance system would not produce a substantial pension for any of the people who are now of middle age or over, unless the government supplied a part of the deficiency. This has generally been done in industrial pension systems and also under old age insurance laws abroad. Assumption by the government of accrued liability, however, again is very costly. For the government to assume this liability now would involve an annual cost in the neighborhood of $500,000,000, which would continue for from 35 to 40 years. The above cost estimated are based on the assumption that it is desirable to set up old age insurance on a strictly reserve basis. Our actuarial consultants, however, advise us that this would be well nigh impossible on a nation-wide basis, since it would result in the accumulation of reserves which ultimately will amount to between 50 and 60 billion dollars. Such a sum is altogether too large to be manageable from an investment point of view. As an alternative, the actuaries have suggested a pay-as-you-go plan, under which no part of the accrued liability would be met during the first 23 years and the full 4% rate of contributions would not be reached until after 15 years- (the initial rate being only 1% divided equally between employers and employees.) After 23 years, however, the government would have to subsidize the plan by above $750,000 per year and this amount would have to be increased until it reached a maximum of about $2,500,000,000, which thereafter would have to be continued indefinitely. (This amount represents the interest in the contributions from employers and employees used currently instead of being invested). This plan avoids the necessity of very large reserve funds and of heavy immediate contributions by employers, employees and the government, but would in another generation involve the government in very great costs, (which will in any event be very great, as there will be so many aged to take care of).

In view of the above consideration it is believed to be inadvisable for the government to assume any accrued liability. With a reduced national income, such as we now have, there would appear to be no justification for having the present or future generations pay for pensions to people who are not in need. An old age insurance system making no provision for accrued liability is justifiable, as no substantial pensions could be paid under its provisions for many years to come; further, no old age insurance system can possibly be extended on a compulsory basis to others than employees, and voluntary old age insurance has never proven widely attractive.

5. Medical Care in Low Income Groups

Serious illness of wage earner or any number of his family is one of the major causes of dependancy in normal times. The wage loss due to illness and still more, the cost of medical care constitute a very serious hazard against which people in low income groups are in need of mich better protection than they now enjoy. Likewise there is great need for a fairer system of compensation to physicians for services rendered to these people in low income groups, and there is still need for greatly expanded preventive work in the public health field.

Health insurance is a method of affording protection against the economic losses due to illness to this large group in the population, which has behind it a successful European experience. In this country there have been in the last few years a number of developments which suggest that health insurance may be feasible within a comparatively short time.

Nevertheless, it seems doubtful whether any recommendation on health insurance or any other phase of the problem of medical care should be made at this time, other than that of continued study. It is unlikely (and probably unwise) that anything can be done along these lines without very considerable support from the medical profession and after the profession as a whole is very much better informed on the subject than it is now. The study undertaken by this committee on economic security in this field has stirred a vast ferment of interest in the medical profession and the several medical advisory committees which have been created constitute a good medium through which practical proposals acceptable to the profession can be worked out. It is consequently recommended that the study of this problem be continued by the National Welfare Administration, with a view toward the development of a program which will be alike beneficial to the public and to the medical profession.

6. Security for Children

The very large percentage of children in the relief population and the many widowed and deserted families included in relief lists suggest that there is great need for special measures to provide security for children. The measures recommended are:

(a) Federal subsidies to strengthen the state mothers' pension laws. These subsidies should not exceed one-third of the amounts expended under these laws and should be conditioned upon observance of standards to be prescribed in the federal act. They should be administered by the Children's Bureau. An estimated cost of around $75,000,000 per year is involved against which there must be counted as an offset large expenditures for relief now going to widowed and deserted families and other families similarly situated in which there is no breadwinner.

(b) Federal subsidies should be given for health work for mothers and children, particularly in rural areas along the general lines of the Shepard-Towner act, but with modifications.

7. Workmen's Compensation

To meet the hazards of industrial accidents, this country now has the workmen's compensation laws, which, with all their defects, have operated on the whole quite beneficially. There is, consequently, no reason for any fundamental change in our methods of meeting this hazard. The following recommendations, however, seem appropriate:

(a) The Department of Labor should actively interest itself in securing greater uniformity in the state laws and raising their standards and should serve as a clearing house for information on workmen's compensation and its administration.

(b) Passage of a workmen's compensation act for employees of interstate carriers should be recommended.

8. Non-Industrial Accidents

Non-industrial accidents can best be dealt with as a part of health and invalidity insurance. With the workmen's compensation laws in existence in this country, there is no room for accident insurance along European lines.

9. Survivor's Insurance

It is desirable that after an old age insurance system is adopted, provisions be made for re-payment of the employee's contributions with interest to his widow or family should he die prior to reaching pension age or before he has received a pension equal to the amount he contributed. In view of the high cost of old age insurance, even without such a provision it seems inadvisable to add this additional cost.

A more general form of survivor's insurance such as has been adopted in several European countries, may be ultimately desirable, but is not immediately feasible.

10. Invalidity Insurance

Invalidity is the most serious of all economic hazards that can strike any individual, but fortunately affects only a relatively small part of the population. Experience with invalidity insurance in this country has been very unsatisfactory and there is no basis now for a possible compilation of the costs. Consequently, it is suggested that there be no recommendation on invalidity insurance except that the National Welfare Administration shall collect statistics for the computation of costs and further study the possibilities of invalidity insurance.

Edwin E. Witte
Executive Director

November 15, 1934.