Arthur J. Altmeyer
Oral History Interview
Arthur F. Simermeyer
ARTHUR J. ALTMEYER
The Development and Status of Social Security in America
NOTE: This essay (first published in 1963) is from Somers, Gerald G., ed. Labor, Management, and Social Policy: Essays in the John R. Commons Tradition. Copyright 1993. Reproduced by permission of the University of Wisconsin Press.
This book is available from the University of Wisconsin Press. Voice: (800) 829-9559, Fax: (800) 473-8310. E-Mail: email@example.com. Web site at http://www.wisc.edu/wisconsinpress/about.html
The Influence of Commons
John R. Commons did not actually participate in the drafting of the Social Security Act or in the research leading to the recommendations upon which the act is based, yet his teachings and general philosophy of social legislation had a profound influence upon those who were charged with the responsibility for developing a social security program for this nation. The President of the United States, members of his Cabinet, and the technical staff upon which they relied were all familiar with the contributions that Professor Commons had made in the field of social legislation, particularly labor legislation. Indeed, a number of Commons' former students served as senior advisers to the President and his Cabinet Committee on Economic Security, which made the recommendations upon which the Social Security Act is based. They were selected for the very reason that they were known to have worked with Professor Commons in the drafting and administration of social insurance laws which were precursors of the social insurance provisions of the Social Security Act.
Commons had participated in the drafting and administration of the Wisconsin Workmen's Compensation Act of 1911, which was the first state law of its kind to go into effect in this country. Workmen's compensation was the first and only form of social insurance in this country until 1932, when the Wisconsin Unemployment Compensation Act was passed. This law was the outgrowth of ten years of effort by Commons and his students in drafting bills which were introduced in successive sessions of the legislature.
In its original form the Wisconsin Unemployment Compensation Act, strictly speaking, was not an unemployment insurance law, since each employer's liability for the payment of unemployment benefits to his employees was limited to the amount of his own reserve fund. However, immediately after benefits first became payable (1936) the law was amended to provide for partial pooling of funds so that, while each employer's rate of contribution continued to be determined by the amount in his particular reserve account, unemployed workers were paid the full amount of benefits to which they were entitled regardless of the amount of an employer's reserve.
In addition to having actually played an important role in the enactment of the Wisconsin Workmen's Compensation Act and the Wisconsin Unemployment Compensation Act, Professor Commons was an early advocate of other forms of social insurance, such as health insurance, old age and invalidity insurance, and widows' and orphans' insurance. He devoted to this subject 111 out of 464 pages of Principles of Labor Legislation, the book he wrote in collaboration with John B. Andrews. (l) In that book he called the message of Emperor William I to the German Reichstag in 1881 the beginning of "a great new movement in labor legislation." It is important to note that the origin in this country of what we now call social security will thus be found more largely in our labor legislation than in our poor relief laws. This is in sharp contrast to Great Britain, where the development was influenced more largely by dissatisfaction with its Poor Law. This difference in the relative influence of labor legislation and poor relief legislation accounts for many of the basic differences to be found in the social security systems of these two countries.
It is not too much to say that the philosophy underlying the Social Security Act is the same philosophy which Professor Commons expounded to his students throughout the years. It was a philosophy he traced to a group of French economists known as the Solidarity School, which came into prominence at the turn of the century. Commons had been much impressed by the writings of Leon Bourgeois, who undertook to clarify the concept of solidarity, which had previously been used in a rather metaphysical sense. Bourgeois employed the term "solidarity" to designate a kind of quasi contract. This legal gloss contributed greatly to the success of his theory, and appealed to Commons.
But probably more important was the fact that Bourgeois believed, as Commons believed, that solidarity (sometimes referred to as solidarism ) was a substitute for both unrestrained individualism and complete socialism. Moreover, they both believed that solidarism found its practical expression in association based upon a mutuality of interests, and that this mutuality of interests transcended or at least reconciled conflict of interests. Thus Commons could say, in commenting on a court decision upholding the constitutionality of a workmen's compensation law: "Partnership of capital and labor, solidarity of individuals within a class, group responsibility of employers, becomes a theory of jurisprudence to a limited extent, in place of the theory of individual responsibility." (2)
Both men recognized two forms of solidarism:
non-governmental and governmental. Both believed that a maximum
of non-governmental collective action was desirable, but that this
needed to be buttressed by collective action in the form of social
legislation. As early as 1916 Commons wrote: "Thus social insurance
accomplishes what, in France, is called solidarism, as a correction
of individualism.... The solidarism of social insurance enforces
the joint responsibility of employer, employee, and the community."
(3) "Group insurance and welfare systems are coming,"
he predicted, "because, like accident compensation, they fill
the next largest gap in the struggle of capital and labor.... The
drawback is that they cannot make it universal. The backward, indifferent,
incompetent or small employer should be brought up to the level
of these pioneers. Only compulsory insurance can bring this about.
... But this argument of solidarity ... cannot be carried too far....
Carried to the extreme it is socialism, just as individualism carried
to its extreme is anarchism." (4)
The Enactment of the Social Security Act
During the years Commons was active in the development of social insurance legislation, it was assumed that the power to enact social legislation, if it existed at all, resided solely in the states. Two federal child labor laws, one based on the power of the Federal Government to regulate interstate commerce and the other based on the taxing power, had been declared unconstitutional. The doubt this aroused as to the constitutionality of federal social legislation was of great concern to President Franklin Roosevelt's Cabinet Committee on Economic Security, since the President wished to place chief reliance on a nationwide comprehensive system of social insurance for the prevention of destitution and to rely on public assistance only to the extent necessary because social insurance benefits were inadequate or were not payable in individual cases.
The two forms of social insurance that the President wished to have enacted immediately were unemployment insurance and old-age insurance. As regards unemployment insurance, he had already endorsed a bill introduced by Senator Wagner of New York and Congressman Lewis of Maryland. This bill levied a federal tax on payrolls and allowed an offset against this tax for contributions that employers made under state unemployment insurance laws. Even if the President had not indicated his preference for a federal-state plan such as this instead of a straight federal system, it is probable that his Cabinet Committee would have recommended such a system for two reasons. One reason was that this plan had the advantage that it stood the best chance of being upheld by the U. S. Supreme Court. This was because it followed the precedent established by the Federal Estate Tax Act, which allowed an offset against this tax for payments made under state inheritance tax laws. Furthermore, if the federal law should be declared unconstitutional it was likely that many state laws would continue to function because they were self-sustaining. The other reason was that there was bitter disagreement among the advocates of unemployment insurance as to what the substantive provisions of the law should be. Under a straight federal system decisions would have to be made as regards these substantive matters for the entire country without the advantage of any experience and without an opportunity to experiment on a state-by-state basis with differing provisions.
There had been much argument among the advocates of unemployment insurance as to whether there should be a straight federal system or a federal-state system, probably a majority favoring a straight federal system, although they could not agree on the substantive provisions. Those who favored a straight federal system urged that if a federal-state system was adopted it should be of what was called the subsidy type instead of the tax offset type. They favored the subsidy type (which would have provided a 100% federal grant-in-aid to the states ) because they believed it would be possible to establish stronger federal requirements as regards the benefit provisions of state unemployment insurance laws.
Of course, the same difficulty would have been experienced in securing agreement on these substantive provisions as under a straight federal system. Moreover, legal authorities were agreed that the more federal requirements there were under either the subsidy type or the tax offset type of system the greater was the danger of the federal law being declared unconstitutional.
As it turned out the Congress would probably have been unwilling to include very stringent federal requirements since it eliminated a very important one that the Committee on Economic Security had recommended. This was that each state unemployment insurance law must provide that at least 1% on each employer's payroll subject to the law must be paid into a pooled state fund. The states however would be free to adopt either an individual employer reserve type of law or a 100% pooled fund type of law under which all of the employers' contributions would be pooled. If Congress had accepted this recommendation it would probably have resulted in a more adequate general level of benefits, for reasons that will be discussed later.
The President had indicated to his Cabinet Committee on Economic Security that, while he wanted a nationwide system of social security, he felt it desirable to rely upon the states to the maximum extent in the actual operation of the system. The Cabinet Committee first explored the possibility of operating an old-age insurance system on a state-by-state basis. The actuaries consulted were unanimous in advising the committee against this. They pointed out that the great movement of workers across state lines made it impossible to estimate the future age composition of each state or the length of time that individual workers would be working in a particular state before retiring. The actuaries were of the opinion that this difficulty could be mitigated but not entirely overcome if each state was required to adopt a uniform system and to transfer records, wage credits, and contributions of workers who moved from one state to another.
The committee was convinced that the constitutionality of such a system was open to as much doubt as a straight federal system. It was also appalled at the administrative difficulties that would be involved. Hence it decided to recommend a straight federal system. There was not much difficulty in reaching agreement on substantive provisions, with the exception of financing. The Secretary of the Treasury insisted that the system be completely self-sustaining for all time to come. The rest of the committee was of the opinion that there should be a relatively small subsidy out of general revenues. The President supported the position taken by the Secretary of the Treasury.
The committee considered very carefully the desirability of also recommending a system of health insurance. Its staff devoted considerable time to a study of this form of social insurance. Likewise, this subject was studied intensively by a medical advisory committee appointed by the Cabinet Committee. However, this medical advisory committee could not reach an agreement. It appeared that the furthest the representatives of the American Medical Association on this medical advisory committee might go would be to consider insurance against "catastrophic illness."
The Cabinet Committee concluded that it would be better to defer making a specific recommendation until after Congress had acted upon its other recommendations, which were less controversial.
Besides recommending the two forms of social insurance, unemployment insurance and old-age insurance, the Cabinet Committee also recommended two forms of public assistance: old-age assistance and aid to dependent children. Both of these forms of public assistance would be based on individual need, as distinguished from social insurance, which provided benefits related to wage loss without any showing of individual need. The committee recommended that these forms of assistance be provided under state law and that the states be given federal grants-in-aid to help finance the cost.
Lastly, the Cabinet Committee recommended federal grants-in-aid to help the states finance maternal and child health and welfare services. It also recommended that more federal funds be made available to the U. S. Public Health Service and the Federal Office of Vocational Rehabilitation to provide more liberal grants-in-aid to the states for public health work and vocational rehabilitation.
Thus it may be said that the program recommended by the Committee on Economic Security consisted of three parts. As a first line of defense against destitution the committee recommended two forms of social insurance. As a second line of defense against destitution it recommended two forms of public assistance. Thirdly, in addition to these income maintenance programs, it recommended certain health and welfare services. The Congress accepted these threefold recommendations and added to them assistance to the blind as another form of public assistance. However, the Congress changed the name of the legislation from economic security to social security as being more appropriate to its varied and far-reaching character.
On August 14, 1935, President Roosevelt signed
the bill, calling it "a cornerstone in a structure which is
being built but is by no means complete"--and the Social Security
Act became a part of the law of the land and a part of the American
way of life.
The 1939 Changes in the Law
The Social Security Board in 1937, in cooperation with the Senate Finance Committee, appointed an advisory committee to recommend changes in the old-age insurance system; the research staff of the Board served this committee as well as the Board. There was particular need to consider changes in the old-age insurance system. It had been called a "fraud" and "a cruel hoax" during the presidential campaign of 1936. This attack continued after the campaign was over and was centered on its financing provisions.
The criticism was that the large reserve which would accumulate in the early years was unnecessary, would encourage extravagant demands for increased benefits, and was fictitious because it would consist only of worthless IOU's, meaning U. S. Government bonds.
The Board suggested that the terms of reference of this advisory committee be made broad enough to include consideration of changes in benefits as well as of the method of financing. Benefit changes, the Board believed, not only were desirable per se but would reduce the size of the reserve. The advisory committee's recommendations, submitted in December 1938, coincided on the whole with the recommendations the chairman of the Social Security Board had made in 1937 to the President. Congress accepted the old-age insurance changes and amended the Social Security Act in 1939. These changes had the effect not only of liberalizing retirement benefits during the early years of operation of the system but of placing them on a family basis. In addition they provided what really amounted to life insurance for widows and orphans. The face value of this "life insurance" equals the face value of all private life insurance written in this country. All of this was accomplished without increasing the long-range cost. This seeming miracle was performed by lowering the amount of benefits payable to single workers who would retire many years hence, and eliminating refunds to estates of deceased workers who had not drawn benefits equal to 3.5% of the wages upon which contributions had been paid.
In the field of unemployment insurance, the Board recommended and Congress agreed that the maximum annual earnings subject to the federal unemployment tax be fixed at $3,000, as under the old-age insurance system. Very little importance was attached to this change at the time. In retrospect it is clear that it would have been far better to have amended the old-age insurance title to remove the limitation of $3,000. The effect of a maximum limitation in both unemployment insurance and old-age insurance (now old-age, survivors, and disability insurance) has been to create a serious lag in the adjustment of benefits to take account of the steeply increasing general wage level.
In the field of public assistance Congress accepted the recommendation of the Board that public assistance records be kept confidential. It also accepted the Board's recommendation that state public assistance agencies ( and state unemployment insurance agencies ) be required to employ their staffs in accordance with a merit system. The Congress thus validated the policies previously adopted by the Board without specific legislative authority.
Another recommendation of the Board which Congress accepted should also be mentioned. It was that the public assistance titles be amended to make it crystal clear that public assistance could be provided only on the basis of individual need. This was important because the Townsend flat pension plan was still a hot political issue. Still another recommendation by the Board which was accepted by the Congress was that the federal grant for aid to dependent children be raised 33.3% to 50%, as it already was for old-age assistance and blind assistance.
However, one important recommendation of
the Board was not accepted. The Board had recommended that the federal
grant for public assistance be related to the fiscal capacity of
each state instead of being a uniform 50%. It was not until nineteen
years later (1958) that Congress accepted this principle.
The Period 1940-49
After the 1939 amendments, there was little permanent federal legislation in the field of social security until 1950. This was largely because of the nation's preoccupation with the war and postwar problems. At his first press conference following the attack on Pearl Harbor on December 7, 1941, President Roosevelt announced that "Old Dr. New Deal" had to be replaced by "Dr. Win-the-War." But in spite of his concern with the war, the President continued to urge the expansion of social security. President Truman also repeatedly urged expansion of the system. The National Resources Planning Board made an extensive report in 1943 on Security, Work, and Relief Policies which included recommendations for improvement of the social security program. In spite of all this, and the further fact that Lord Beveridge's famous report on Social Insurance and Allied Services had received widespread publicity in this country, there was little actual legislation.
Aside from an amendment in 1946 making survivors of veterans who die within three years of their discharge eligible for survivors' benefits, the only amendments to the old-age and survivors insurance system during the decade of the "forties" were those restricting its coverage and freezing the scheduled increases in the contribution rate. The so-called Gearhart Amendment of 1948 narrowed the definition of "employee" so as to exclude an estimated 600,000 persons. President Truman made this an important issue in the presidential campaign of that year. The initial contribution rate of 1% each by employers and employees based upon wages up to a maximum of $3,000 a year was frozen six times during the period 1939-50. Under the 1935 law it had been scheduled to rise to 3% each by 1950.
In unemployment insurance a temporary provision for federal loans to state funds was in effect from 1944 to 1949, but no state found itself obliged to apply for such loans. In 1944 state unemployment agencies acted as agents of the Federal Government in paying readjustment allowances to unemployed veterans. In 1946 maritime workers were brought into the system. And in 1948 the definition of "employee" was narrowed as in the case of old-age and survivors insurance.
In public assistance, federal grants were liberalized on three occasions. The Congress did not accept the Board's recommendation that the percentage of federal matching be related to the fiscal capacity of each state as measured by its per capita income. Instead, it adopted a matching formula which was only roughly related to fiscal capacity.
Failure to extend the coverage of the old-age and survivors insurance system and to increase monthly benefits to take account of the rising wage level and increasing cost of living meant that benefits became more and more inadequate. This created the anomaly that as late as 1950 more aged persons were receiving on the average higher monthly payments under old-age assistance than under the insurance system.
So far as the federal-state unemployment
insurance system was concerned, the failure of the states to increase
weekly benefits to take account of rising wage levels resulted in
a steady decline in the ratio of the average weekly benefit to the
average weekly wage. In 1939 the average benefit was 41% of the
average weekly wage; in 1950 it was 35 %. The maximum duration of
benefits had been increased, yet 1,800,000 unemployed workers exhausted
their benefit rights before they could find other jobs. This represented
more than one-third of all beneficiaries.
The Period since 1949
In January of 1949 President Truman in his Budget Message and his Message on the State of the Union repeated his previous recommendations. He followed this by handing the chairman of the Ways and Means Committee two draft bills prepared by the Commissioner for Social Security. One of the bills covered old-age and survivors insurance and the other covered public assistance.
After many months of hearings, the Ways and Means Committee approved extensive changes in the Social Security Act, most of which were accepted by the Senate Finance Committee and became law in 1950. The most important amendments affecting the old-age and survivors insurance system were the following:
- The coverage of the law was extended to include farm workers and domestic workers as well as urban self-employed persons.
- The eligibility requirements were greatly liberalized.
- The monthly benefits were almost doubled.
- An increase in the monthly benefit for each year a worker had been insured was eliminated.
- The contribution rate was increased from 1 to 1.5% each for employers and employees for the first time since the law was passed in 1935.
The most important amendments affecting public assistance were:
- The addition of another title providing for federal grants to the states to help finance assistance to needy persons who were permanently and totally disabled.
- The liberalization of aid to dependent children to permit the states to include the needs of the caretaker as well as the children.
- The liberalization of aid to the needy aged, blind, and disabled to permit the states to include in their disbursements which were eligible for federal matching both cash assistance to individuals in medical institutions and direct payments to doctors and hospitals.
One very important amendment which the Ways and Means Committee accepted but the Senate Finance Committee rejected was the expansion of the old-age and survivors insurance system to include monthly benefits for permanent total disability.
The general significance of the 1950 amendments was that they extended the coverage of the old-age and survivors insurance, and liberalized both the benefits and the eligibility requirements, so that for the first time the number of aged persons receiving public assistance began to decline.
It was not at all certain before the 1950 amendments that this contributory social insurance system with both benefits and contributions related to past wages would survive. Thus the Ways and Means Committee said in its report: "There are indications that if the insurance program is not strengthened and expanded, the old age assistance program may develop into a very costly and ill-advised system of non-contributory pensions, payable not only to the needy but to all individuals at or above retirement age who are no longer employed." (5)
In 1952 there was some further liberalization in both old-age and survivors insurance benefits and in old-age assistance. One amendment to the old-age and survivors insurance system appears on the face of it inexplicable; it gave a permanently and totally disabled person the right to have his benefit rights frozen as of the time his disability began, although no benefits would be paid until he reached the minimum retirement age of 65, or unless he died. Without such a provision his average wage upon which benefits are calculated would decline because the period during which he could not earn wages would be included in the divisor. However, he could not make application for freezing his benefit rights before July 1, 1953, and the amendment became ineffective June 30, 1953!
The reason for this curious provision was that the Senate Finance Committee would not agree to the freezing amendment as adopted by the Ways and Means Committee and the House of Representatives. It was only possible to get this sort of agreement, which would be abortive unless affirmative legislation was passed before July 1, 1953.
It was also provided that the determination of whether a person was permanently and totally disabled would have to be made by a state agency, and that the federal agency administering the law could reverse the state agency's decision only if it was favorable to the applicant. It could not reverse it if it was unfavorable. All of this strange arrangement was due to the combined opposition of lobbyists for the American Medical Association, private insurance companies, and employers' organizations.
In 1954 Congress amended the old-age and survivors system in several important respects. It made the disability "freeze" provision actually effective. It extended the coverage to include farm operators and most professional self-employed persons, and it also liberalized the benefits.
Regarding unemployment insurance, the first major extension of its coverage was made in 1954, by including federal employees under the state laws and by reducing from 8 to 4 the number of employees which would make an employer subject to the federal unemployment tax. Another 1954 amendment provided for setting up a federal loan fund of $200,000,000 to assist states whose reserves had become depleted.
In 1956 there were two major changes in the old-age and survivors insurance system. Benefits were made payable for permanent total disability after 50 years of age. Retirement benefits were made payable to women at age 62, with an actuarial reduction in the monthly amount because of retirement before age 65. However, surviving widows could draw benefits at age 62 without any reduction. Both of these changes were strongly opposed by the Administration, particularly the payment of disability benefits. Members of the armed forces and all professional self-employed persons except doctors were covered without opposition.
There were no 1956 changes in the unemployment insurance law. However, federal grants to the states for public assistance were liberalized.
In 1958 the old-age, survivors, and disability insurance benefits were further liberalized, and dependents of permanently and totally disabled workers were given the same benefits as dependents of retired workers. In unemployment insurance, provision was made for loans to states to cover the cost of extending the duration of benefits. Federal grants to the states for public assistance were further liberalized, and for the first time the federal grant was related to the fiscal ability of each state, as measured by its per capita income.
In 1960 the major change in the old-age, survivors, and disability insurance system was to make disability benefits payable at any age. The only change in unemployment insurance was to raise the federal unemployment tax by one-tenth of 1% to provide additional federal funds for grants to the states for administrative expenses and loans to states with depleted reserves.
An extremely important change was made in public assistance by what is known as the Kerr-Mills bill. A new section was added to the old-age assistance title of the Social Security Act which provided federal matching of the cost of medical care for persons over 65 years of age who were not sufficiently needy to qualify for cash assistance to cover their ordinary expenses but who were unable to pay their medical expenses. The percentage of the total cost met by the federal grant ranges from 50 to 80%, depending upon the per capita income of a state. The federal matching of cost of medical care provided for recipients of cash old-age assistance was correspondingly liberalized.
In 1961 the old-age, survivors, and disability insurance was liberalized in a number of respects: men were allowed to qualify for monthly benefits at age 62 with the same actuarial reduction as women; the minimum monthly benefit amount was increased; the monthly benefit payable to adult survivors was increased; the eligibility requirement was liberalized; and the amount a beneficiary could continue to earn without affecting his monthly benefit was increased.
A Temporary Extended Unemployment Compensation Act was passed that year which provided for outright grants ( instead of loans as in 1958) to the states to extend the duration of benefits for workers who exhausted their benefit rights and were still unemployed. This act was financed by an increase of four-tenths of 1% in the federal unemployment tax.
In public assistance there was further liberalization in the federal sharing of the cost. There were also two other very significant changes in the program for aid to dependent children. However, both are temporary. One (effective until 1967) is an amendment which makes eligible those children who are needy because their parents are unemployed. The other (effective until 1964) is an amendment which provides federal grants to assist the states in paying the cost of foster family care for needy children who must be removed from their own homes because of the inability of the parents to provide properly for their welfare. This historical summary has dealt so far only with the changes made in the provisions of the Social Security Act, and has not mentioned other important social legislation in the field of social security. The first form of social insurance in this country was workmen's compensation covering employment injuries; federal employees were covered as early as 1908. As already stated, Wisconsin's Workmen's Compensation Act of 1911, which Professor Commons helped draft, was the first state law to go into effect. Today all states have similar laws, in addition to federal laws which now cover not only federal employees but also longshoremen and harbor workers, and private employees in the District of Columbia.
There are also federal social insurance laws protecting railroad workers. The Railroad Retirement Act, originally passed in 1934, was declared unconstitutional while the Social Security Act was still under consideration. In 1937 another Railroad Retirement Act was passed which has been in effect ever since, and provides not only retirement benefits but also benefits in case of permanent total disability. In 1938 a Railroad Unemployment Insurance Act was passed which was amended in 1946 to provide not only unemployment benefits but also cash sickness benefits.
Four states also passed laws during the period 1942-49 providing for cash sickness benefits to compensate for wage loss.
Legislation on veterans' benefits should
also be mentioned. This provides cash benefits under certain conditions,
as well as extensive medical care for both service and non-service-connected
disabilities. In many countries that have comprehensive social security
systems, military benefits are more closely coordinated with the
general social security system than in this country. Although members
of the armed forces were brought under the old-age, survivors, and
disability insurance system in 1956, benefits are still payable
for service-connected disability and death, and retirement pay is
provided, in addition to the social insurance benefits.
Appraisal of the Present Social Security System
The foregoing historical discussion has described how our social security system has developed throughout the years. However, in order to appraise our present social security system properly it is not enough to know about its historical development. It is essential that we examine more closely the purpose to be served by a social security system in a country such as ours, and determine the extent to which we have achieved that purpose.
One hundred and twenty-five countries throughout the world now have some form of what we call social security. Some of these countries have a relatively high-level economy, some a relatively low-level economy. Distinctive social and political differences exist among them. Although there has been a tendency for nations to copy from each other, the various social security systems necessarily reflect these differences.
Since the United States has a high-level economy, the first question that must be considered is whether there is enough economic insecurity to require the establishment of a social security system. This question answered itself during the Great Depression of the thirties. But our per capita gross national product--after the change in the price level has been taken into consideration--has trebled since then.
There is no question that the proportion of our population which suffers from actual poverty, regardless of how that term may be defined, is much less than it was thirty years ago. President Roosevelt in his second inaugural address said: "I see one-third of a nation ill-housed, ill-clad, ill-nourished." But even today we must acknowledge the inescapable fact that much poverty still exists in the midst of the most affluent society in history. Robert J. Lampman, in his study for the Joint Economic Committee of Congress, estimated that in 1957 19% of our people were in what he termed "low-income status." This he defined as a minimum income ranging from $1,157 for a single person to $3,750 for a family of seven or more.
But the proportion of our total population in low-income status does not tell the whole story about economic insecurity. Much of our poverty is concentrated in certain areas of our country and in certain groups of our population, such as the aged, the disabled, the widowed and orphaned. Moreover, practically our entire population is exposed to major economic hazards which may plunge them into poverty at any time. These economic hazards are inherent in a system of free enterprise characterized by increasing industrialization, urbanization, technological changes, and changes in consumer demand. All of these changes have led to a less self-sufficient family group and greater dependence upon an uninterrupted paycheck for continuing security.
It is true that increased wage levels have resulted in increased savings, private insurance, and home ownership. However, the adequacy of such protection is less, relative to the wage loss that occurs when a worker's income is interrupted through unemployment, sickness, permanent disability, old age, or death. Thus we find that in our high-level economy the major cause of economic insecurity is interruption of wage income rather than inadequate income while working.
The interrelationship of mass production, mass consumption, mass advertising, mass installment buying, and social security was once described as follows by Charles E. Wilson, at one time president of General Motors Corporation, and later Secretary of Defense: "I do not consider that federal pensions fully paid for by employer and employee are in any sense contrary to free enterprise, but amount to an extension of the principle of group insurance.... We have millions of salesmen abroad in our country trying to persuade these same people to spend the last dollar they can get their hands on. We have radio, television and all forms of advertising programs designed to entice them to spend their money, and with the best of intentions they are likely to arrive at their old age without on their own initiative having accumulated adequate personal savings." (6)
The generally accepted primary purpose of social security in this country is to assure through a governmental program minimum basic protection against major personal economic hazards which are likely to cause widespread destitution. In some other countries a good deal of emphasis has been placed on social security as a means of effecting a redistribution of income. In the United States the emphasis so far as redistribution of income is concerned is to redistribute a worker's income over periods of non-earning as well as of earning.
Another purpose served by social security is the maintenance of mass purchasing power. In the early days of our social security system, when we were still suffering from the Great Depression, social security was regarded by some as a panacea for restoring and maintaining general prosperity. Some economists then and now, while not regarding social security as a panacea, have advocated manipulating social security benefits in a specific manner to serve as a contra-cyclical force to a greater extent than they do normally.
As late as the advent of World War II some economists were advocating uniform old-age pensions financed to a considerable extent out of general revenues rather than by payroll taxes. They favored increasing the size of the monthly pension during periods of recession and decreasing it during periods of business expansion. Today there is one well-known economist, Kenneth Galbraith, who advocates that unemployment benefits be similarly increased and decreased depending upon the phase of the business cycle.
It seems to the present writer that carrying out such proposals would impair the fundamental social purpose of providing security for individual human beings, out of all proportion to what their effect might be on maintaining general economic stability. Certainly the individuals actually experiencing economic loss due to old age or unemployment continue to have the same need for protection regardless of the various phases of the business cycle. Unfortunately the Congress of the United States itself has failed to realize this fact, as will be pointed out later in the discussion of unemployment insurance.
In appraising the extent to which our social security system has achieved its primary purpose of assuring a minimum basic protection against major economic hazards, we need to consider not only the magnitude of these hazards and the adequacy of the protection but also whether the maximum amount of protection is provided at a minimum cost, in accordance with a consistent principle, and in proper relationship to our economic, social, and political institutions.
The magnitude of these hazards, the adequacy
and cost of the protection afforded can best be discussed in quantitative
terms in connection with each phase of social security. However,
at this point a word should be said regarding the determination
of the consistent principle to be observed and the determination
of the proper relationship to our economic, social, and political
institutions, since these are pervasive considerations which must
be kept in mind throughout. Actually, they are questions of public
policy which only our elected representatives can finally resolve.
Thus, our federal and state legislatures have concluded that established
individual need shall be the principle to be followed in providing
public assistance, and that loss of wages shall be the principle
in determining the amount of social insurance benefits. They have
also determined that social insurance is preferable to public assistance
as a protection against destitution. They have not accepted the
principle of "equal shares," as it is called in Great
Britain, which underlies the payment of uniform benefits unrelated
to either individual need or wage loss. Likewise, Congress has decided,
some phases of social security can best be administered by the Federal
Government and others by state governments. The implementation and
the effect of these public policy decisions will be covered in the
discussion which follows.
Another contributor to this volume is discussing workmen's compensation in detail However, since it was the first form of social insurance to emerge in this country and since it influenced the development of later forms, particularly unemployment insurance, it should be discussed here generally. Unfortunately when we consider what has happened to workmen's compensation during the more than half century it has been in effect in this country, we find a discouraging record of failure to live up to its high purpose of providing prompt and adequate compensation to injured workers. The early laws, which were admittedly crude, inadequate, and experimental, have not been materially improved in many states. Indeed, in many states benefits today are even less adequate in terms of the wage loss sustained. Litigation has delayed prompt payment, and administrators have failed to protect the rights of injured workers.
The percentage of wage loss which these state laws specify shall be paid sounds good, running all the way from 50 to 97.5%. But the low weekly maximum dollar-amounts result in most states in only about a third of the actual wage loss being paid in cases of temporary disability. In cases of permanent disability the situation is far worse, because there are also limitations on the number of weeks that compensation can be paid and on the total amount. In cases of death the situation is still worse. Only nine states provide for weekly payments to a widow for life or until remarriage and for minor children until a specified age is reached. Therefore it is fortunate that the federal old-age, survivors, and disability insurance system now provides widows' and orphans' benefits and permanent total disability benefits.
Occupational diseases are not covered at all in two states, and in twenty states only certain specified occupational diseases are covered. Even the amount of medical care that must be provided in case of injury is limited in seventeen states.
If we take into account all the limitations placed upon the amount of benefits a worker and his dependents can receive, it is doubtful whether these benefits cover even as much as one-third of the wage loss sustained. And after all these years only about 80% of the wage and salary earners of this country are covered. Some of these laws cover only what are termed "hazardous employments"--although it is small comfort to a worker to learn that he is not entitled to compensation because he was injured in a nonhazardous employment. Moreover, most of the state laws do not cover small employers or domestic or agricultural employment.
The main reason that legislatures do not include small employers and domestic or agricultural employment is the high cost of an insurance policy. Less than two-thirds of the premiums paid to private insurance companies is returned in benefits.
There are other reasons for this sad state of affairs in workmen's compensation. Some people ascribe it to the fact that state legislatures are impressed by the argument which is often advanced, that the increased cost to employers would drive business out of the state. Actually, the aggregate benefit payments now made are equivalent to less than two-thirds of 1% of covered payrolls. But this sort of argument has led the AFL-CIO to call for the enactment of a national workmen's compensation law.
A fundamental proposal such as this can be considered only in relation to what changes are made in social insurance generally, particularly in compensation for non-occupational sickness and disability. However, unless wholly new factors are introduced into the situation, we are not likely to see any more improvement in state laws in the next fifty years than we have seen in the last fifty. Therefore, assuming a continuance of the present state-by-state system, this writer believes that injured workers should be given the right not only to receive their benefits under the state workmen's compensation law but also to sue their employers for damages if they believe they can prove their injury was due to negligence on the part of the employer. The employer should not be allowed to plead contributory negligence on the part of the employee. In return for employees being guaranteed their benefits under the workmen's compensation law, the measure of damages in a suit against the employer should be restricted to wage loss, actual and prospective, with no allowance for pain and suffering and other non-economic factors that are usually taken into consideration for non-occupational injuries.
Employers with government contracts are already
required to observe the wage and hour provisions of the Federal
Fair Labor Standards Act. If they were also required to pay workmen's
compensation benefits in accordance with the provisions of the U.
S. Employees' Compensation Act, the resulting disparity of benefits
payable to employees, depending upon whether or not they worked
on government contracts, might induce the states to improve their
workmen's compensation laws. Whether or not workmen's compensation
continues to be a responsibility of the states, any fundamental
solution would necessarily involve superimposing workmen's compensation
benefits upon the general social insurance system in a rational
manner. These supplementary workmen's compensation benefits would
be in recognition of the special obligation resting upon employers
in the case of work injuries. This is the solution arrived at in
Great Britain and in a number of other countries.
The U. S. Supreme Court, in upholding the constitutionality of the Federal Unemployment Tax Act, specifically recognized that its fundamental purpose was the relief of unemployment. How adequately has the law achieved this purpose? It has, of course, induced all states to enact unemployment insurance laws so that their employers could claim an offset of 2.7% against the federal payroll tax. However, the federal law does not lay down any minimum benefit requirements that must be met by the state laws. Let us therefore examine these state laws and their operation during the last quarter century to determine whether the fundamental purpose of the federal law had been achieved.
Because of the complete lack of experience upon which to base estimates of unemployment insurance costs, the Social Security Board in 1935 recommended very conservative provisions both for the percentage of weekly wage to be paid and for the duration of benefits. It was contemplated that benefits would average at least 50% of the wage loss. However, as wages have increased, the states have failed to increase sufficiently the maximum amount that can be paid, with the result that benefits now average only 35% of wage loss as compared with 41% in 1939.
While the duration of benefits has been increased under most of the state laws, more than one out of four of all beneficiaries have exhausted their benefits during recent years. Moreover, 13,500,000 workers are employed by employers who have not been made subject to these laws. The result is that at this writing only about half of the workers who are unemployed are actually drawing any benefits under these laws, and those who do are receiving benefits averaging hardly more than a third of their wage loss. So actually only about 20% of the total wage loss due to unemployment throughout the nation is compensated.
There has been an increase in the amount of wages and the length of employment necessary to qualify for benefits. But more disturbing are the increasingly harsh disqualification provisions. Of course, since it is the purpose of unemployment insurance to provide protection in periods of involuntary unemployment, there should be some provision disqualifying a person who voluntarily quits his job without good cause, is discharged for misconduct, or refuses to accept suitable work. But twenty states disqualify a worker even though he has been obliged to quit his job for admittedly good personal cause, such as the fact that the conditions of employment are undermining his health, or he is obliged to move to another locality, or he has been offered a steadier job or another job at better pay.
Certainly in a system of free enterprise workers should be free to exercise their right to move from one job to another in the interest of making the greatest use of their skills and bettering their standard of living. Yet these states disqualify unemployed workers who have quit for any of these reasons, because their laws require the worker to prove that he quit for good cause attributable to his employer.
It is not too much to say that these disqualification provisions indicate that the state unemployment insurance laws have moved away from providing protection at times of involuntary unemployment, in the direction of providing such protection only if the unemployed worker can prove not only that he is involuntarily unemployed but also that his unemployment was the fault of his previous employer.
This situation has developed largely because the federal law does not protect employers in states that may desire to have an adequate unemployment insurance law from unfair competition by employers in other states that have inadequate laws. There is no question that it was the intent of the law to protect them. At first thought it might be concluded that the imposition of a uniform federal unemployment tax of 3% would prevent unfair interstate competition. However, the actual average contribution rate based on taxable wages varies widely from one state to another. In 1960 the range was .54 to 2.96%, because the law includes a provision which permits employers to claim the 2.7% offset against this tax not only for contributions they have actually paid under a state unemployment insurance law but also for those they have been excused from paying because of their favorable experience with respect to unemployment or to the payment of unemployment compensation to their employees. This is known as employer experience rating. It has sometimes been asserted that only the advocates of the Wisconsin type of unemployment insurance law favored employer experience rating, but actually the advocates of other types also favored some form of experience rating.
When the Social Security Act was under consideration, the main argument made for this provision was that it would give individual employers an incentive to stabilize their employment, thus preventing unemployment. In the course of time, more emphasis came to be placed on the argument that this sort of provision properly allocates the "social cost" of unemployment. According to this argument, the cost of unemployment should be included in the employer's cost of production of goods and services, like the cost of wages and materials and other expenses, in order to arrive at the true cost of production.
This change of emphasis may have come about because there is no statistical evidence that employer experience rating has had any general effect in stabilizing employment. However, individual employers have said that they took steps to stabilize their employment because of this incentive.
It was, of course, recognized that the effect of employer experience rating would be that employers in different states, like those in different parts of the same state, would pay different rates of contribution. But it was assumed that those with the same unemployment experience would pay substantially the same rates. Unfortunately this has not proved to be the case; they may pay widely differing rates.
This is caused partly by the differences in the basic type of employer experience rating system that is included in the various state laws. It is also partly due to the fact that some states charge all the benefits received by an unemployed worker to the recent employer; some charge them to past employers in inverse chronological order; and some charge them to past employers in proportion to the past wages paid by these employers.
Only five states use the decline in an employer's payroll as a measure of his experience. In all the rest the sole measure is the amount of benefits paid to his former employees. This direct relationship between an employer's contribution rate and the amount of benefits paid to his former employees naturally creates an incentive not only to stabilize his labor force and oppose improper claims but also to keep the level of benefits low and eligibility conditions high.
Much of the variation in the average contribution rate for all employers from state to state is due to variations in the volume of unemployment. But much of it is also due to variations in the relative adequacy of the state laws. Thus nine of the twelve states with the lowest ratio of employers' contributions to total payroll (ranging from .36 to .76% had either lower benefit rates or higher exhaustion rates in 1960 than the average of all states. Six of the nine had both lower benefit rates and higher exhaustion rates than the average of all states.
Hence it has come about that unemployment insurance in this country has been considered too much as a tax program and too little as a program intended to pay adequate benefits to unemployed workers. The specter of interstate competition has been present in attempts to improve benefits, just as in the case of workmen's compensation, although the Federal Unemployment Tax Act was intended to prevent this. However, instead of achieving reasonable uniformity it has resulted in employers with the same employment experience being charged widely varying rates, and workers with the same employment history being entitled to widely varying benefits in the various states.
It seems to this writer imperative that the Federal Government assume greater responsibility in the field of unemployment insurance. There can be no question but that the Federal Unemployment Tax Act was responsible for the very existence of the state laws. Certainly the causes and cure for unemployment are for the most part beyond the control of the individual states.
The Congress recognized the necessity for a government move when it enacted what is known as the Temporary Extended Unemployment Compensation Act of 1961, which paid benefits out of the Federal Treasury to workers who continued unemployed after exhausting the benefits which state unemployment insurance laws allowed them. This law, as its name indicates, expired on June 30, 1962, and, as a committee report says, was intended only to help offset the effects of the current recession. A number of states have also passed laws providing for an extended duration of benefits only when the percentage of insured unemployment rises to a specified rate.
The President has recommended permanent federal legislation of this character. However, helpful as this legislation can be in providing compensation for long-term unemployment during a period of recession, it does not provide any protection to workers who remain unemployed after their benefit rights expire during periods when the general rate of unemployment is lower. There is a considerable amount of long-term unemployment at all times in most states from such causes as automation and chronically depressed industries and areas. And of course such legislation does nothing to assure that the weekly benefit compensates for a reasonable proportion of the wage loss.
This writer believes that Congress should enact permanent legislation incorporating minimum benefit standards in the Federal Unemployment Tax Act and providing that the Federal Government share in the cost of benefits. The federal unemployment tax in 1961 was 3.5%, of which .8% was retained by the Federal Government. Half of this .8,% was intended to finance federal grants to the states to cover the entire cost of administration of the state unemployment insurance laws, and half was intended to cover the cost of the Temporary Extended Unemployment Compensation Act. If minimum benefit standards were incorporated in the federal law, the temporary increase of .4% in the federal rate should be restored and used to reimburse the states for a large proportion of the cost of benefits above a specified level of total payroll. This would not only help to spread some of the risk of unemployment over the entire nation but also provide a positive incentive to the states to make their laws more adequate.
A more fundamental change would be to substitute for the present complicated federal tax offset plan a simple system of federal grants of 50% of benefit payments and administrative expenses payable out of a straight federal payroll tax. This approach would result in still greater spreading of the risk as between states and would also offer still greater encouragement to the states to make their laws more adequate.
The most important of the minimum standards that should be incorporated in the Federal Unemployment Tax Act would of course be the weekly benefit rate and the duration of benefits. The rate should not be less than that recommended by both President Eisenhower and President Kennedy: high enough so that the great majority of insured workers would be eligible for weekly benefits equal to at least half of their average weekly wage. The maximum duration should be at least as high as that contemplated in the Temporary Extended Unemployment Compensation Act, namely 39 weeks.
The coverage of the Federal Unemployment Tax Act should be extended to include all the kinds of employment covered by the federal old-age, survivors, and disability insurance system. It should apply to all employers who have employed one or more employees during twenty or more weeks. This would automatically result in the states extending the coverage of their unemployment insurance laws to correspond.
The maximum earnings of $3,000 per employee
which are subject to the employer's tax should be raised at least
to the level of the maximum subject to the payroll tax under the
old-age, survivors, and disability insurance system, which is now
$4,800. On the average, only 60% of an employer's total payroll
is now taxed. Therefore the tax-rate could be reduced correspondingly,
and the total yield would remain the same. This change would not
only simplify employers' reports but reduce the tax burden on small
employers, whose proportion of high-wage earners is usually smaller.
The Old-Age, Survivors, and Disability Insurance System
The other social insurance program contained in the Social Security Act, namely the federal old-age, survivors, and disability insurance system, presents a brighter picture. As its name implies, this system provides not only retirement benefits but also benefits for permanent total disability and benefits to widows, orphans, and dependent parents when an insured person dies. The face value of this survivors' insurance protection is now $550 billion.
At the present time 95% of all employees and self-employed persons are covered under this system or some other public retirement system, as compared with 65% in 1937. Eighteen million persons are now receiving monthly benefits amounting to $15 billion a year. The chief groups without any protection are the less regularly employed agricultural and domestic workers. This gigantic social insurance system, which has been called "the largest insurance company in the world," is administered at a cost of 2%.
As has already been mentioned, the benefit formula has been liberalized a number of times. Because of that fact and because of the rising wage level throughout the years, the average monthly benefit of a retired worker without dependents has increased from $22.10, when monthly benefits first became payable in 1940, to $76.16 in September 1962. This increase in the average benefit represents about the same proportionate increase as the increase in the average annual earnings of insured workers. However, this average benefit represents only about 25% of the average monthly wage being earned by insured workers. This rather low percentage is due to a considerable degree to the very liberal eligibility requirements that were put in the law in 1950 and liberalized still further in 1960 and 1961. The result has been that millions of workers with very little past employment in insured employment were able to qualify for at least the minimum benefits. The effect of these liberalized minimum requirements on the average benefit is demonstrated by the fact that the average monthly benefit being paid to disabled workers, who have to meet more stringent requirements, was $89.84 in September 1962. This represented 30% of the average monthly wage being earned by insured workers.
Of course, the addition of dependents' benefits results in a retired worker with a wife who has also reached the minimum retirement age receiving a 50% increase in his monthly benefit. Survivors' benefits have also been added since the original law was enacted. So the total benefits can amount to as much as $254 a month, depending upon the average wage of the insured worker and the number of eligible dependents. But even so the benefit level should be raised at least 33.3%. This should be accomplished by liberalizing the benefit formula and by raising the maximum amount of annual earnings taken into account in calculating the benefit.
The benefits payable to low-wage earners have been liberalized more than those payable to high-wage earners. Thus the minimum monthly benefit payable to a retired worker without dependents has been quadrupled and is now $40, instead of $10, as it was in the beginning. However, the maximum monthly benefit payable to a retired worker has increased only 50% and is now $127, instead of $85, as it was in the original act.
Compensation for a larger proportion of the wage loss suffered by a low-wage earner is desirable from a social standpoint since his need is presumably greater than that of a high-wage earner. However, it is also necessary to make certain that individual equity is also maintained. Even though high-wage earners receive a smaller proportion of their wage loss as a benefit, they still receive far more protection than they could purchase from a private insurance company with the contributions they have made. This will continue to be so for employees dying or retiring during the next twenty years and for self-employed persons during the next fifteen years.
But eventually, as the scheduled rate of increase in the contribution rate goes into effect, there will be some high-wage earners without dependents who will not receive their money's worth. Before that time is reached, the law should be amended so that the contribution rate for both employees and self-employed persons will not be permitted to increase beyond the level which assures that they do receive their money's worth.
The reduction in the scheduled increases in the contribution rate of employees and self-employed persons could be offset by applying the employers' contribution rate to their total payroll instead of only up to the maximum individual earnings taken into account for the calculation of the individual worker's contribution and benefit. At the present time the maximum annual earnings taken into account are $4,800. This results in only 80% of the total payroll of employers subject to the law being taxed.
The benefits now payable for permanent total disability should be payable for all disabilities continuing beyond six months. Determining whether a disability is both total and permanent is often difficult. Moreover such a determination is destructive of a worker's morale and hampers rehabilitation efforts. In addition to paying benefits for extended disability, the present cumbersome, confusing, and illiberal arrangement between federal and state officials for determining disability should be abandoned.
Besides improving both the benefit provisions
and financing provisions, the system should be extended to cover
the 5% of workers not now protected under any public insurance system.
Insurance against Wage Loss Due to Non-Occupational Temporary Disability
Two other kinds of contributory social insurance usually found in social security systems are not contained in the present Social Security Act: insurance to cover wage loss due to temporary disability and insurance to cover the cost of medical care. The Railroad Unemployment Insurance Act insures against wage loss due to unemployment caused by disability as well as by lack of work. The entire cost is borne by the employers. Also, four states have temporary disability laws, which cover more than 11,000,000 employees--almost one-fourth of those employed in private industry.
A clear distinction should be made between insurance to cover wage loss due to disability and insurance to cover the cost of medical care. Thus the American Medical Association, which opposes compulsory health insurance, in 1938 passed a resolution approving its committee report that it unreservedly endorsed insurance against loss of wages during sickness as it has distinct influence toward recovery and tends to reduce permanent disability.
The accident and health insurance companies, of course, have always opposed this kind of social insurance. Unfortunately they protect less than 10% of the ten-billion-dollar annual loss of income due to sickness. Moreover, the companies writing individual policies pay back to these policyholders in benefits only half of every dollar they collect in premiums.
If we add to the protection provided by commercial accident and health insurance policies the protection provided under the laws already mentioned and that provided under formal paid sick leave plans covering both private and public employees, 28% of the total wage loss is compensated. It is interesting to note that half of this protection is provided under government auspices, that is, under the laws mentioned and through sick leave granted to federal, state, and local government employees.
Not only does existing protection cover only a small proportion of the total wage loss due to sickness but it largely fails to cover low-wage earners working for small employers in both rural and urban areas, the very groups who most need it. Therefore the extension of social insurance to provide cash indemnity for a part of the wage loss due to sickness is essential.
A nationwide system of protection against wage loss due to non-occupational disability might be provided in either of two ways: adding it to the protection provided under the federal-state unemployment insurance system or to the protection provided under the federal old-age, survivors, and disability insurance system. If it were added to
unemployment insurance, the Federal Unemployment Tax Act should require the states to pay benefits for unemployment due to temporary disability as a condition for their employers receiving the 2.7% offset against this tax.
Three of the four states which now have temporary disability insurance laws link them to unemployment insurance. At one time, it seemed that many more states would do this. However, no state has adopted a temporary disability insurance law since 1949. Therefore there is no likelihood of many states acting soon unless the Federal Unemployment Tax Act is amended as suggested. There are various arguments pro and con as regards the desirability of linking temporary disability insurance to unemployment insurance. To this writer, the most important argument against doing so is the fact that the states have shown so little interest and have failed to enact reasonably adequate unemployment insurance laws.
The advantage of providing this protection
under the federal old age, survivors, and disability insurance system
is that it could be related closely to the existing protection for
wage loss due to permanent total disability. Thus a disabled worker
would receive his benefits for wage loss due to temporary disability
during the first six months of his disability. Before the end of
that time a determination could be made as to whether he was permanently
and totally disabled, and if he was he would continue to receive
his benefits without interruption. Of course if the law, instead
of requiring a determination of permanent total disability, were
amended to compensate for total disability extending beyond six
months, the relationship would be even closer.
Only a general appraisal of the need for health insurance, as seen by this writer, will be undertaken here. It is well known that the cost of medical care has risen more steeply than other main items entering into the cost of living. The Consumer Price Index prepared by the Bureau of Labor Statistics shows that since 1949 all medical costs have increased twice as much, and hospital costs four times as much, as the index of all consumer prices.
Even with this increase, expenditures for private medical care are only 4% of the gross national product and 5.6% of the total personal income of the American people. The real problem is how to spread the cost of medical care. Fifty-two other countries have chosen social insurance.
Social insurance to cover the cost of medical care, usually called "health insurance," is simply a method of spreading the cost of medical care. The result is that instead of those individuals who are unfortunate enough to be sick being obliged to bear the whole cost, at a time when they can least afford to do so, the cost is borne by everybody through a system of prepayment into a common fund.
Health insurance, of course, is not socialized medicine. Under socialized medicine, medical services are provided by physicians employed by the government and in hospitals owned by the government. Under health insurance medical services are provided by private practitioners who are reimbursed from the insurance fund for the services they render.
As a matter of fact, we do have considerable socialized medicine in this country today. The federal, state, and local governments own and operate three-quarters of all the hospital beds in the United States. In government hospitals and with doctors on the public payroll in whole or in part, the taxpayers finance full medical care for all members of the armed forces, for all veterans with service-connected disabilities, and for many veterans with non-service-connected disabilities. The government also provides complete care for tubercular and mental patients.
In addition, the various units of government are paying out larger and larger amounts for medical care to the indigent. The Federal Government also pays for the medical care of dependents of members of the armed forces. From all the foregoing, it is apparent that the various units of government are paying a large portion of the medical bill of this country.
Those who oppose government health insurance believe that private health insurance can be depended on to help people meet the cost of medical care. This is now the position of the American Medical Association. This represents a change in the position that it took in 1932. At that time it officially approved a report which stated: "It seems clear then that if we must adopt in this country either of the methods tried out in Europe, the sensible or logical plan would be to adopt the method to which European countries have come through experience, that is a compulsory plan under governmental control." (7)
Much has been said about the growth of private health insurance plans. But all forms of private insurance to cover the cost of medical care, including all nonprofit plans such as Blue Cross and Blue Shield, as well as all commercial insurance, in total cover only 22% of the 24-billion-dollar annual medical bill of this country, which is less than the percentage paid out of public funds. Moreover, most of the persons protected by private insurance are in the middle and higher income brackets and live in the larger cities. As in the case of insurance against wage loss due to temporary disability, the commercial insurance companies writing individual policies pay back to these policyholders in benefits only half of every dollar they collect in premiums.
Therefore it seems to this writer that some form of governmental health insurance is necessary. As a matter of fact, we already have in operation in every state in the nation a system of health insurance applicable to occupational accidents and diseases, namely workmen's compensation. Health insurance is simply more inclusive and covers non-occupational accidents and diseases.
It would be possible for Congress either to enact legislation that would create a strong inducement for the states to pass health insurance laws, or to enact a wholly federal health insurance law. In either case the administration would have to be decentralized, so that the necessary arrangements with doctors and hospitals could be subject to adjustment on a local basis. The local doctors and hospitals should be permitted to choose the method of remuneration they desire. There should also be free choice of physicians and free choice of patients. Voluntary nonprofit organizations that provide or pay for health services should be reimbursed for services rendered.
The 18,000,000 retired workers and their wives, disabled workers, and widows and orphans now drawing monthly cash benefits under the federal old-age, survivors, and disability insurance system are in particular need of protection against the cost of medical care. Retired workers are in an exceptionally difficult situation since their average income is much less than that of younger persons but their medical costs are far greater.
Only through collecting a small contribution based upon the wages of insured workers during their working years can health insurance be financed to protect them when they become old or disabled or when they die leaving dependents. It is then too late to collect a premium because their wage income has ceased.
This writer believes that it would be desirable to provide immediate insurance protection to these groups against major medical costs, such as the cost of hospital care, surgical and medical care provided in hospitals, and diagnostic services to hospital outpatients. Protection should also be provided as rapidly as possible for nursing home care and for visiting nurses' services.
The cost of administering these benefits would be small. The centralized system of record keeping and the nationwide network of local offices of the old-age, survivors, and disability insurance system would of course be utilized for determining eligibility. Likewise, nonprofit, cooperative, prepayment medical care plans would be utilized to the fullest extent. This would strengthen and stimulate the growth of nonprofit plans, which are now confronted with the necessity of rejecting low-income high-cost families, or charging them higher rates than they can afford to pay, or attempting to spread the cost over all contributors. Commercial insurance companies have for the most part chosen the first two alternatives. Therefore they would be little affected since they have not found it feasible or profitable to insure these groups.
Those who oppose providing protection against the medical costs of persons already entitled to cash benefits under the old-age, survivors, and disability insurance system advocate that this protection be provided only to "medically needy" persons--that is to persons who are self-supporting except for medical costs. This approach was adopted by Congress when it passed what is known as the Kerr-Mills bill in 1960.
As already explained, this bill amended the old-age assistance title of the Social Security Act to provide federal matching to the states for the medical costs of persons whose property and income made them ineligible for cash assistance. However, these persons still must meet a somewhat more liberal income and resources test administered by a public welfare agency.
Since this approach is a form of public assistance, we should consider here the basic public policy which is involved. This is whether we shall rely primarily upon contributory social insurance in order to prevent destitution before it occurs or upon public assistance to relieve destitution after it occurs.
As has already been stated, President Roosevelt and his Cabinet Committee were convinced that social insurance was preferable, and contemplated the eventual establishment of a comprehensive system of social insurance which would prevent all but exceptional cases of destitution. Contributory social insurance, they believed, not only sustains but promotes a system of free enterprise because it utilizes well-known principles of insurance to achieve both social adequacy and individual equity. They consider that its specific advantages, as compared with public assistance, were that (1) benefits were based on presumptive need measured by wage loss instead of on investigated need; (2) costs were covered by contributions made by or on behalf of the beneficiaries instead of out of general taxes. This writer believes that experience has demonstrated the soundness of these views.
The approach in the Kerr-Mills bill is contrary
to the basic policy underlying the original Social Security Act,
since it accepts public assistance as a satisfactory substitute
for contributory social insurance instead of as only supplementary.
It also assumes that our present public assistance system is adequately
meeting the needs of persons who are wholly destitute and that the
states can meet their share of the cost of medical care for persons
who are not destitute. Therefore let us look at the actual functioning
of our public assistance system.
At the present time 7,500,000 destitute persons in this country are receiving cash public assistance and 6,000,000 are receiving surplus food or food stamps. There is of course a very large overlap in these figures. Of the 7,500,000 persons receiving cash public assistance, 6,500,000 are in the categories for which the Federal Government makes grants under the Social Security Act: 2,350,000 needy aged, 3,650,000 dependent children, 400,000 needy persons who are permanently and totally disabled, and 100,000 needy blind. In addition 1,000,000 are receiving what is called general assistance, for which federal grants are not available. People receiving general assistance include the needy unemployed, the seriously disabled, older persons who have not yet reached the age of 65 which would qualify them for old-age assistance, mothers who cannot qualify for aid to dependent children because the children are over 18.
Our failure to develop an adequate and comprehensive system of social insurance during the last quarter century is the principal reason that the Federal Government and the states have been obliged to rely upon public assistance to a far greater extent than was ever contemplated. But while a large proportion of these millions of needy persons would not have been obliged to apply for public assistance if a more adequate social insurance system had been in effect, it would be a mistake to assume that this could prevent all destitution. There are hazards causing destitution that social insurance cannot insure at all or cannot insure adequately. Thus, two-thirds of the children receiving aid to dependent children are in need because of the breakdown of the family, resulting in divorce, separation, or desertion of a parent, or because the mother was unwed. Only the third who are needy because of the death or disability of a parent could have been protected under social insurance. A large number of those receiving public assistance are low-wage earners or irregularly employed. Social insurance which provides benefits related to wage loss cannot be a substitute for adequate wages and stable employment.
Therefore it is essential that we have an adequate and humane system of public assistance. Unfortunately our present system does not achieve this objective. According to the Report of the Advisory Council on Public Assistance submitted in 1960, three-fourths of the states do not meet the full needs in one or more of the federally aided categories, the needs of recipients being determined by the states' own standards. The situation in general assistance, which, as already stated, is not federally aided, is far worse. For example, the national average monthly payment per recipient is $26.47, as compared with $68.78 for old-age assistance.
The failure of the states to provide adequate public assistance is due in considerable degree to their limited capacity to do so, even though the Federal Government pays as much as 80% of the cost in some states. In many states public attitudes toward needy people are responsible for inadequate appropriations. This is clearly the primary reason in a number of high- and middle-income states.
A number of changes in the federal law are necessary to improve our public assistance system. Certainly the Federal Government should share in the cost of "general assistance." It was thought at the time the Social Security Act was passed that the persons not covered by the specific categories would constitute a small residual group which the states and localities could take care of. However, the number receiving general assistance has been as high as 1,600,000 in recent months.
Congress has recently recognized that the states need federal aid in meeting the needs of unemployed workers with children who have been obliged to apply for general assistance. It passed a temporary law, expiring June 30, 1967, which broadened the definition of "dependent child" to include children who are needy because of the unemployment of a parent. This law helps the states meet the increased costs of general assistance due to unemployment during a period of recession. However, even in years of high employment there have been 375,000 of these persons receiving general assistance and countless hundreds of thousands more who are in need but receiving no assistance. For instance, seventeen states have laws which make families with an employable member ineligible for assistance even though no work is available.
The federal aid for the existing four categories is more liberal for the needy aged, blind, and disabled than it is for aid to dependent children. The matching formula is roughly related to the per capita income of the states. If it were more strictly related, so that high-income states received a smaller proportion of the total federal aid, there would be no increase in cost to the Federal Government for providing aid to the states for all needy persons regardless of whether or not they fell within specifically defined categories.
Besides simplifying the federal matching formula and making it more equitable, the federal law should require the states to meet 100% of the need of applicants for public assistance. The states should be required to establish a standard budget which they certify is sufficient to provide reasonable subsistence compatible with decency and health. Undoubtedly, the standard budget of each state will be affected by the standard of living of self-supporting workers, so that low-income states will have a lower standard than high-income states. The only solution to this dilemma is to undertake the development of programs which will raise the per capita income of these low-income states.
The federal law should also require the states to eliminate residence qualifications. The reason the Federal Government is bearing 60% of the total cost of public assistance for the country as a whole is to protect needy Americans regardless of where they happen to live in the United States of America. This is essential since every year 5,000,000 Americans move from one state to another.
Besides improving the federal law to assure that public assistance is made more adequate in meeting the needs of destitute persons, it is highly important that the Federal Government provide more funds to the states for financing constructive social services of all kinds. At present the Federal Government shares on a far less liberal basis in the cost of administration of public assistance than in the cost of the assistance given to needy persons. Congress apparently has looked upon administration as simply overhead expense, failing to recognize that proper administration of public assistance involves rendering vital social services to recipients and to applicants. The entire process of determining eligibility and extent of need should be carried on in a manner that helps restore self-confidence, encourages the desire to become self-supporting, and promotes stronger family responsibility. Specialized services also need to be provided to accomplish these purposes.
Not only should general administrative costs
be reimbursed by the Federal Government on as liberal a basis as
the cost of assistance, but specialized services designed to prevent
or reduce dependency should be reimbursed on a still more liberal
basis. Moreover, federal funds should be made available for the
education and training of persons equipped to provide these services.
The Cost of Social Security
In a very real sense, social security is not an added expense to the nation but a social mechanism whereby existing costs are met in a more equitable and less burdensome manner. The loss of family income-- due to unemployment, sickness, permanent disability, economic old age, and death--is a fact, whether or not protection is provided against it. The cost of medical care is a fact, whether or not protection is provided against it. What contributory social insurance does is to spread workers' income to cover periods of non-earning and to enable workers to pay for medical expenses while they are well instead of when they are sick.
It is true of course that social security represents an allocation of a certain proportion of our gross national product. But it must be borne in mind that to the extent social security reduces dependency and stabilizes purchasing power it increases the gross national product.
At present we are using 6% of our gross national product for social welfare, including social insurance, public assistance, public health and public medical services (but not including veterans' programs, which amount to 1% ). This is about the same percentage as when the Social Security Act was enacted. Of course, within this 6% there has been a large increase in the proportion going into social insurance and a large decrease in the proportion going to relief and work relief.
All of the improvements suggested here in both the social insurances and public assistance, including medical care for the beneficiaries under the old-age, survivors, and disability insurance system, would increase the percentage of our gross national product devoted to social welfare to 8%. A universal comprehensive health insurance system would require the allocation of another 3%.
Devoting this proportion of the gross national product to social welfare would provide the American people a basic protection upon which they could build more effectively a higher degree of well-being through savings, private insurance, home ownership, and industrial welfare plans. It would not mean that everyone would be guaranteed all the good things of life without any effort on his part. It would not mean a redistribution of wealth but a redistribution of welfare. What it would mean is more genuinely equal opportunity in a free society. Thus, it would be a validation of Professor Commons' philosophy of social solidarity expounded to his students a half century ago.
(1) Principles of Labor Legislation, New York, Harper, 1916.
(2) Industrial Goodwill (New York, McGraw-Hill, 1919), p. 56.
(3) Principles of Labor Legislation (rev. ed., 1920), p. 499.
(4) Industrial Goodwill, pp. 89-90 102.
(5) U. S. House of Representatives Report No. 1300, Social Security Amendments of 1949, 81st Cong., 1st Sess., p. 2.
(6) Charles E. Wilson, speech before the Chicago Executives' Club, January 6, 1950, entitled "Economic Factors of Collective Bargaining."
(7) Medical Care for the American People: Final Report of the Committee on the Costs of Medical Care, Adopted October 31, 1932 (Chicago, Univ. of Chicago Press, 1932), pp. 164-65.