J. Douglas Brown
THE AMERICAN PHILOSOPHY OF SOCIAL INSURANCE*
BY J. DOUGLAS BROWN
*Sidney Hillman memorial Lecture delivered at University of Wisconsin, November 18, 1955. Part of this lecture was also delivered at Social Security Administration Headquarters in Baltimore, Maryland on November 7, 1957.
This edition of Dean Brown's 1957 speech was published in 1972. It has been considerably revised and edited from the transcript of the original speech. The Q&A session from the 1958 edition has been dropped and the tone and emphasis of much of the body of the speech has been changed.
This edition of Dean Brown's 1957 speech was published in 1972. It has been considerably revised and edited from the transcript of the original speech. The Q&A session from the 1958 edition has been dropped and the tone and emphasis of much of the body of the speech has been changed.
The depression which had its trough in 1932 shook the United States out of a quarter of a century of lethargy in solving the problem of human want and distress arising out of the free play of business activity under a laissez faire system. Earlier attempts at alleviating this problem were indirect and centered upon such efforts as the reform of the banking system. That men should be thrown out of work by periodic "bad times" was considered inevitable and to be the occasion for charity rather than statesmanship. That banks should fail and businesses go bankrupt was a more practical challenge to the limited economic understanding of our political leaders, and the result was the Federal Reserve Act of 1913. It was an ex-college professor, Woodrow Wilson, who secured the passage of this limited but constructive approach to the prevention of depressional unemployment. He may have helped the bankers and the businessmen over the smaller bumps in the road, but the worker was still the first man off the tail-board when the going got rough.
Our first attempts at social insurance in this country were strongly influenced by our hesitancy to deal directly with the problem of human want and distress arising out of business activity. To move on the pitiful effects of industrial accidents, we felt we must proceed by the circuitous route of replacing employers' liability. The burden of the legal superstructure imposed upon the state systems of workmen's compensation in this country because they were fathered by lawyers and mothered by judges have impaired their effectiveness to this day. This parentage imbedded the concept of blame so deeply in social insurance thinking that even a great depression. failed to uproot it. In all fairness it must be admitted that the emphasis on prevention in workmen's compensation programs through variable insurance costs did stimulate a continuing safety movement which later turned out to be a good industrial relations practice in any case.
The depression of 1932, however, proved once for all to even the conservative elements, in America that the forces of economic competition and change were too inherent in our system of political economy to rely upon prevention alone for the protection of our citizens against distress caused by loss of earnings. At long-last, it was realized by many that the emphasis must shift, so far as the worker was concerned, to a system of benefits payable as a matter of right regardless of the degree to which the employer or the government succeeded in eliminating disastrous economic or physical hazards along the way. So many able, willing and thrifty workers faced want and distress that the older concept of personal responsibility or blame for one's dependency was no longer tenable, at least as a general principle.
In post-dated national introspection we can now see that we came by this older concept honestly, if not too wisely. We were a people who drew many of our economic virtues from the mores of an agricultural economy. On the farm and in the village the sources of minimal living were ever present and usually cheap. Thrift was closely reflected in physical action and tangible resources--a well-kept farm and house, and a cellar well stocked with food. The man who faced want had failed to exercise thrift and since labor was always scarce, he could trade work for food with those who were more foresighted.
But not all of our inheritance of economic philosophy came to us from the pleasant farms and villages of America. A tough and stubborn overlay of thought came from across the Atlantic, from the smoke and soot of British industrialism. The best British minds had solved the problem of separating competition and conscience. one was for weekdays and the other for Sunday. It was left to God to resolve the two and Adam Smith had helped God out of his predicament. The individual worker was primarily a factor in production. The emphasis was placed heavily on "worker," and "individual" had but statistical significance. America had few economists who could challenge the authority of their British colleagues and what did they know about political economy compared to the successful businessman?
It would be a satisfying conclusion for one in the profession to be able to say it was the economists who at long last persuaded the American businessman that the doctrine of economic harmonies was out of date. But that would be far from fact. It was rather the people through the power of the universal franchise who demanded that government do what neither private industry nor private charity could do, provide a solid and respectable floor of protection between the loss of a job and the loss of personal dignity. It was the resurgence of the recognition of the individual, his rights within a civilized society, that became the political dynamite that blasted away the barriers to making our government more fully a government for the people rather than merely a framework for regulating the free play of economic forces. While many organized groups, labor, farmers and the aged, spearheaded the drive for governmental intervention, it was the people who gave the irresistable weight. Fortunately our political leaders, and especially our President, were quick to reflect the will of the people.
It was out of this resurgence of recognition of individual rights that the American approach to social insurance got its start. We were not a people to be bought off by a Bismarck seeking to perpetuate an empire. Nor were we a class-divided society that sought a leveling kind of wholesale relief. Rather we wanted our government to provide a mechanism whereby the individual could prevent dependency through his own efforts. We wanted to keep the individual in the picture as a person and not merely a statistic. Our idea of social security was a social mechanism for the preservation of individual dignity, not for the insurance of a political status quo.
Twenty years is far too short a time to permit the development of mature historical perspective concerning any significant development in human affairs. We are still too close to the mountain to distinguish the higher peaks from the closer foothills. Further, anyone who participated in such a development is likely to emphasize aspects that were important in his mind during the heat of the campaign rather than those results which may have come about almost unconsciously by general acceptance and without stirring debate. But it is an interesting exercise to attempt to outline an American philosophy of social insurance and to suggest how that philosophy originated. Like most ideological phenomenon in America, it will not be accepted as either universal or orthodox by anyone, including the speaker. We are a nation of dissenting pragmatists who indulge in inductive processes only under the mild compulsions of academia.
The first and foremost element in our philosophy of social insurance has already been suggested. Without that element social insurance does not exist. It is that the system must provide protection as a matter of right and not as a benevolence of a government, an institution or an employer. In establishing social insurance, our Federal and State governments reversed the presumption that a payment to an eligible individual was a generous act of mercy by a sovereign, to the presumption that such a payment, under social insurance, was the honest fulfillment of a contract between citizen and state. The right of the eligible beneficiary is protected, in general, by the conscience of the electorate and, in particular, by an established appeals machinery.
It is unnecessary to repeat that this concept of individual right in social insurance is peculiarly compatible to the American mores. We have fought for our rights more than once and our ancestors came here to preserve them. We are not given to the acceptance of wholesale assurances. We deeply prefer individual rights. We may on occasion crowd into great halls and stadia, but we prefer to hold our own ticket.
II. A second element in our philosophy of social insurance entered into our legislation, State and Federal, almost without conscious recognition or debate. It is that all citizens should be eligible to coverage under a system regardless of class or level of income, and that, in principle, exceptions to coverage were to be made only for constitutional or administrative reasons. Unlike European systems, American programs arose in a classless society in which individual economic status, and with it social position, was ever in a state of flux. The wage earner of yesterday was the manager of today, and if luck failed, the unemployed wage earner of tomorrow. Why should not the first segment of his earnings be protected under social insurance since as a citizen he should be able to enjoy the advantages of an individual "contract" under a universal system?
III. A third element in our philosophy of social insurance again arises out of the essential emphasis upon the individual in the American mind. Under our approach, within limits, the individual worker establishes the level of his protection by his individual contribution to our economy. The limits to this principle are important, but the concept is central. Benefits, by and large, in American system are firmly related to the wage system. Differentials in wages resulting from the efforts of the worker are reflected to a degree in differentials in benefits. The relative continuity of earnings under the wage system is also reflected to some degree in the level of protection. The simple device of averaging wages over a period in the determination of benefits has important significance in adding a factor related to contribution through time to that of the economic worth of such contribution in a single period of time.
The concept of differential benefits-related to wages and duration of earnings is essentially a conservative element in our social insurance philosophy. We still believe in America that a man should be rewarded for his own efforts. An established differential in one's earning and living standards is a precious asset, not only to the individual but to society in its progress toward a better world. The motivation of the individual from within himself is a primary and essential source of power in a free society. It can be attenuated by external measures only at the peril of an accumulating loss of momentum. It should only be set aside as a primary determinant of a benefit structure at the outside margins of that structure when other considerations, also stemming in the last analysis from the necessity for motivation, become paramount.
The degree to which differential benefits should reflect differential earnings or contribution has been one of the most thoroughly debated issues in our social insurance philosophy. Our old age and survivors insurance system went through a radical change in this respect early in its existence. It has continued to be an issue in repeated revisions. Our state unemployment insurance programs have also reflected a restless rethinking of the problem. The issue has been summed up in the expression "equity vs. adequacy." The dangers of short-sighted action are still with us.
As a social mechanism it is not incumbent upon social insurance to reflect in full proportion the differentials of the wage system either at the lower and upper limits or in the gradations within these limits. Differentials, as a factor in motivation, must be measured by the response they receive, not by their arithmetic. The response to a thousand dollar differential among university professors is very different from its response among big league ball players. Given the principle of differential benefits, the slope of the gradations can be tested in their effect only by the response of those coming under the system. At the lower limit, an obviously inadequate benefit reduces the overall attractiveness of coming under the system and securing its benefits -rather than relief. This is, of itself, a deterrent to motivation. At the upper limit, there is a zone where individual effort, undergirded but not measured by an social mechanism, should be largely responsible for the extra degree of personal security attained. Our greatest danger at present appears to be that lagging benefit structures will dangerously foreshorten the spread of differentials by low ceilings justified only by legislative inertia.
Fortunately in America, the differential concept in social insurance has been reinforced by the need of our systems to reflect wide geographical differentials in our wage structure. We had two good reasons for building our systems on this foundation, to preserve motivation and to relate earnings and benefits in diverse economic situations. If another reason were needed, it was our predisposition for accounting machinery which made percentage computations of wages both easy and convenient in the payroll offices of the country.
IV. A fourth element of our philosophy of social insurance is in the process of evolution. It is still debatable as, to its pervasiveness in our thinking and as to its desirability in certain areas of protection. This is the concept of protection of the family unit as such by social insurance against all the hazards which that unit might face. On the one hand, old age and survivors insurance, covering a lifetime risk, has been extended to prevent dependency in old age of both man and wife and also to prevent dependency in the family through the premature death of the head of the family. Steps are under consideration to protect the wage earner where permanent and total disability deprives him of earnings in his later years. On the other hand, state unemployment insurance systems are moving but slowly toward providing supplemental benefits related to the wage earner's family needs. The protection of the family against the losses and costs of illness is a great unknown country in which the explorer, let alone the philosopher, faces a vast, unmapped wilderness.
That the family is a distinct and cherishes unit in American society is almost an axiom. The farm was operated as a family economy. The city-ward drift has had its unfortunate effects, but the return ebb to suburbia has tended to re-establish the vigor of the family tradition.
One need but scan magazine advertisements or TV-guides to be convinced that the family is here to stay. Even the airlines and the railroads reflect this fact.
But why has the concept of the family unit been slow in entering fully into our philosophy of social insurance? It seems again to be a reflection of the essential individualism of the American citizen. There is still the tradition that a man's family is his business, not the government's. So long as he can support himself, it is not the concern of the state how many children (not wives) he has. Granted death and old age may terminate his ability to support his family and social insurance protection is welcome against these contingencies. But he is not sure that he wants his children counted during temporary periods of unemployment and would prefer, perhaps, a differential benefit more fully proportional to his earnings.
I have left to last an element in the American philosophy of social insurance which I hope will grow from strength to strength despite severe limitations put upon it by what are to me short-sighted theoretical and political considerations. This is the concept of joint contributions by both employer and employee. In the development of our old age and survivors insurance system, this concept was adopted almost without debate. In the state by state development of unemployment insurance it was introduced in a minority of states and has been gradually withdrawn even in most of these. The argument that the employer was primarily responsible for lay-offs and therefore he should pay for benefits was too strong to resist, even where the soundness of this argument was questioned. The loss of employee contributions was the price we paid for so-called merit rating. I still feel that the price was greater than the gain.
The soundness of the concept of joint contributions in an American system of social insurance does not arise out of economics. It stems from our political and social traditions. Of course, arguments can be made about shifting and incidence, as with all taxes or costs, but the fact remains that the first incidence of any contribution to government or to any other recipient, church, family or trade union, is of great psychological importance. Out of such incidence political influence arises, loyalty and responsibility are encouraged, and personal satisfaction and dignity Are gained. Why does a church prefer the contributions of the many to the largesse of the few if it did not realize the tremendous psychological value of contribution as a stimulus to individual responsibility and dignity?
Social insurance systems must be within the state but separate from the state. To be strong, responsible and alive, they must have the interest and attention of the citizen, not as voter alone, but as contributor and beneficiary. In America we have a wholesome suspicion of big government. And now we have given government the tremendous task of providing a floor for our individual security. I for one would feel more certain that our leaders in government would continue to respect the sanctity of the trust we have imposed upon them if every potential beneficiary who is gainfully employed were both a voter and a contributor to all social insurance systems.
These five elements appearing in American social insurance systems seem to have sufficient definition to make them anchor points of an American philosophy. Perhaps this is all we can expect to discern in the experience of two decades. There are, however, other aspects of social insurance policy which arise out of our system of government or out of diverse and changing political philosophies which might be mentioned. They are, perhaps, not so much elements of an American philosophy of social insurance as examples of necessary accommodation in such systems to the environment in which they have developed.
First is the fact that our social insurance program contains a mixture of federal, and state elements. This arises in part out of the historical accident that some states, such as Wisconsin and Ohio, were already active in respect to unemployment insurance legislation at the time the national government entered the field. While the national government in 1935 established a compelling and controlling framework for the separate state systems, the continued resistance to any further federal encroachment upon the states' domain has been a dominant characteristic. This is, however, less an element in our social insurance philosophy than an introduction into another important field of American social policy of our persistent defense of state prerogatives.
In economic and actuarial terms, a social insurance system would be most efficient if it covered the area of a national economy. Insurance administration is basically a routine operation for which unit costs decline with increasing size. Even in the more complex field of private life insurance, companies of great size have been outstandingly successful. The risks of old age, death, survivorship, disability and unemployment can be better averaged over a wider area. In a limited reserve system in which mutually offsetting flows of contributions and benefit payments are depended upon heavily in current financing, a wider averaging of risks is very important. Apart from the political environment, the only justification for decentralization is the more complete adjustment of administrative methods to varying local conditions. But this is a normal problem in all national activities having impact upon local situations, such as the postal system, the forest and park services, the internal revenue service, and rivers and harbor work. The administration of old age and survivors insurance on a national basis with regional and local offices appears to be effective.
Attempts to secure through reinsurance the advantage of sharing the risk of unemployment on a nationwide basis have proved unsuccessful. What might appear to be a sound social insurance philosophy is counterpoised against a philosophy of government which has great vitality. Perhaps only a severe and protracted business depression will break down the resistance to nationalizing our state systems of unemployment insurance.
A second feature of American social insurance systems which arises out of our pragmatic political philosophy, as opposed to any distinct philosophy of social insurance, is the lack of definition in respect to reserve policies, state or federal. Early in the development of our old age insurance system, the size of the reserve to be accumulated was a burning question. To avoid a large reserve, the scale of contributions was held down. The question of eventual governmental contributions to the system to compensate for these low rates during the early years of the system has been shelved for our children and grandchildren to answer. With a vast national debt, there is a plethora of government securities for social insurance trust funds. Reserves have risen to impressive levels but no one seems worried. The early issue between "pay-as-you-go" and "large reserves" seems to have faded into the background. In old age and survivors insurance, we have let the actuaries worry about the problem of balancing income and outgo over time. Perhaps this is a mark of financial sophistication. We trust specialists in most aspects of life, why not in the planning of the financial aspects of social insurance? In any case, the essential security of the national system rests upon the taxing power of the United States Government and the willingness of the people to have it exercised.
The degree of accumulation of reserves in state unemployment insurance systems has also been the result of pragmatic political considerations rather than any reasoned philosophy., The predominant determinant of such reserves has been the various formulas for merit rating, rather than the probable drain on reserves in time of heavy unemployment. Built-in controls on merit rating related to the size of reserves have been a limited concession to the need for planning, but otherwise the practical politician has had more influence than the actuary or the economist specializing in social insurance. The notion that the state government should contribute to the unemployment insurance reserve in time of heavy drains has yet to shock the unbelieving ears of state legislators. We have schooled them all too well that the employer pays the bills for unemployment insurance.
A third feature of American social insurance systems which is more a matter of practice than a theory is also a reflection of our persistent faith in the capacity of employers to assume a heavy share of the cost of worker security. This is the strong and growing acceptance of the concept of supplementation of social insurance benefits by employer financed benefits. The early battle in old age insurance to make that system a universal floor of protection upon which company pension plans could build has been more successful than was thought possible. And now both supplementary retirement benefits and supplementary unemployment benefits are common goals in collective bargaining. Instead of a two-layer system of protection, social and individual, we have a three-layer system with a juicy slice of supplementary, protection inserted into the sandwich as a result of vigorous collective bargaining. Perhaps it was too much to hope that the ceiling on benefit differentials would be raised fast enough to parallel the differentials in earnings in our most prosperous and most strongly organized industries. Since even the trade union leaders who have won supplementary benefits remain uncertain of their proper relation to social insurance systems (let alone the State of Ohio), it is understandable if such supplementation is not yet made an amendment to our philosophy of social insurance.
It is well to end this discourse with this reference to amendment. I have found in lecturing on social insurance for many years that such lectures have a high rate of obsolescence. Facts change rapidly; philosophies more slowly, but inevitably, in the light of individual and public understanding. This lecture is no exception. But it is far more fun to try to understand a rapidly evolving social mechanism in a dynamic America, even at the expense of rewriting one's lectures every year, than to add a few footnotes to the completed history of an ancient state.
A lecture bearing the name of a leader** who added so much impetus to both change and understanding in the America he loved should bear the imprint "Subject to change without notice!" He would understand this fully because he himself rewrote repeatedly many pages in the history of labor in this country.
(**Editorial Note: Reference is to Mr. Sidney Hillman, in whose memory this lecture was initially delivered.)
Selected Readings on the Beginnings of Social Security
1. Abbott, Grace, From Relief to Social Security: The Development of the New Public Welfare Services and Their Administration University of Chicago Press, Chicago, 1941, 388 pp.
2. Altmeyer, Arthur J., The Formative Years of Social Security, The University of Wisconsin Press, Madison, 1966, 314 PP.
3. Brown, J. Douglas, An American Philosophy of Social Security: Evolution and Issues, Princeton University Press, Princeton, 1972, 244 pp.
4. Cohen, Wilbur J., "The First Twenty-Five Years of the Social Security Act; 1935-1960", Social Work Year Book 1960, National Association of Social Workers, New York, 1960, pp. 49-62.
5. Epstein, Abraham, Insecurity: A Challenge to America: A Study of Social Insurance in the United States and Abroad (3rd revised edition), Random House, New York, 1936, 821 pp.
6. Haber, William, and Cohen, Wilbur J., (eds.) Readings in Social Security, Prentice-Hall, Inc., New York, 1948, 643 pp.
7. Lampman, Robert J., Social Security Perspectives: Essays by Edwin E. Witte, University of Wisconsin Press, Madison, 1962, 419 pp.
8. Lubove, Roy, The Struggle for Social Security 1900-1935, Harvard University Press, Cambridge, 1968, 276 pp.
9. McKinley, Charles, and Frase, Robert W., Launching Social Security: A Capture-And-Record Account 1935-1937, The University of Wisconsin Press, Madison, 1970, 519 PP.
10. Mitchell, Broadus, The Economic History of the United States, Vol. IX, "Depression Decade: From New Era Through New Deal, 1929-1941" Rinehart and Co., New York, 1955, 463 PP.
11. Perkins, Frances, The Roosevelt I Knew, Harper and Row, New York, 1964 (paperback edition), 409 pp.
12. Rubinow, I. M. The Quest For Security , Henry Holt and Company, New York, 1934; 683 pp.
13. Schlabach, Theron J., Edwin E. Witte: Cautious Reformer, State Historical Society of Wisconsin, Madison, 1969, 290 pp.
14. Schlesinger, Arthur M., Jr., The Age of Roosevelt-The Coming of the New Deal, Houghton-Mifflin Co., Boston, 1958, 669 pp.
15. Social Security In America:The Factual Background of the Social Security Act as Summarized From Staff Reports to the Committee on Economic Security, Social Security Board Publication No. 20, Government Printing Office, Washington, 1937, 592 pp.
16. Witte, Edwin E., The Development of the Social Security Act, The University of Wisconsin Press, Madison, 1962, 220 pp.
About 10 publications are expected to be printed in the series captioned "The Beginnings of Social Security." This publication is in that series. In addition, the selected, annotated bibliography entitled Basic Readings In Social Security, published by SSA's Office of Research and Statistics, contains many additional readings relating to the beginnings of social security.