View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Form?. R. 131
*

BOARD DF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Jffice Correspondence
To

Chairman Eccles

From

Date

Eraile Despres




Subject: Notes on Social Security

As you requested some weeks ago, I hare been
familiarizing myself with the detailed provisions of our
social security legislation, in an effort to find some
immediately practicable and effective measures for removing the deflationary effects of the present system. Although I have not been altogether successful in this
search, you may be interested in the attached memorandum,
which provides figures showing the draft upon incomes
involved in the present system, and discusses some possible lines of action.

Attachment

«, 1940

March 6, 1940

NOTES ON SOCIAL

The estimated balances in the old-age and survivors insurance
trust fund and in the unemployment trust fund on June 30, 1940, December
31, 1940, and June 30, 1941 are shown in the following table, together
with the actual balances in these funds on December 31, 1939:

{In millions of dollars)

i
Dec. 31, 1939

j 1,442

I
June 30, 1940
Dec. 31, 1940

I 1,753
| 2,032

I
June 30, 1941

| 2,333

I

Total

Unemployment

I Old-age

I

1,510

I

1,797
2,097

I

2,382

I

I
I

2,952

I
I
|

3,550
4,129

I
|

4,715

According to these estimates the accumulated balances in the
old-age and surviTors insurance trust fund and in the unemployment trust
fund will each grow at the rate of nearly #50 million a month during the
period covered by the table. The estimated receipts and expenditures of
these funds from the end of 1939 to the middle of 1941 are as follows:




(in millions of dollars)
Receipts
Contributions
a • Old-age
1940-lst half
1940-2nd half
1941-lst half
Total
b • Unemployment
1940-1st half
1940-2nd half
1941-lst half
Total
o. Old-*ge plus Unemployment
1940-lst half
1940-2nd half
1941-lst half




Total

Interest

296
329
316

43

Total

Expenditure s
AdminBene- istration
Total
fits

Net
Receipts

65

339
329
381

15
35
65

13
15
15

28
50
80

311
279
301

941

108

1,049

115

43

158

891

460
470
465

37
20
30

497
490
495

210
190
210

210
190
210

287
300
285

1,395

87

1,482

610

610

872

756
799
781

80
20
95

836
819
876

225
225
275

13
15
15

238
240
290

598
579
586

2,336

195

2,531

725

43

768

1,763

-3-

The excess of social security tax receipts over benefit payments involves a corresponding draft upon community income, and particularly upon the buying power of the lower and middle income groups.
Since the groups chiefly affected consume currently all or nearly all
of their income, this draft upon incomes directly produces a nearly
equivalent contraction in the volume of consumer purchasing; when account
is taken of the indirect, cumulative effects of this primary curtailment
of consumer demand in diminishing incomes and activity in the consumer
goods industries and in reducing their need for makiBg capital outlays,
the total curtailment of national income attributable to the piling up
of idle reserve funds is substantially larger and greatly exceeds in
amount the current additions to these funds.
The marked restrictive effect upon national income exerted by
our present social insurance system could be relieved by any measure
which (1) reduced taxes payable into the trust funds, (2) increased
benefits chargeable to such funds, or (3) permitted accumulated reserves
to be used in financing new public projects which would not otherwise
be undertaken. Action along one or more of these lines would now be
particularly useful in that it would provide a stimulus to national income, output, and employment without increasing the Treasury's budgetary deficit; action on a substantial scale would, in fact, materially
reduce the Treasury1s deficit through the effect of higher national
income in raising tax revenues.




Old Age
Any proposal to reduce payroll taxes or introduce comprehensive coverage for old-age pensions would be regarded as running counter
to the "contributory principle", and the specious attractiveness of
this phrase constitutes a chief obstacle to adequate revision of the
existing old-age pension system. Since the 1939 liberalizing amendments to the Social Security Act were supposedly the outgrowth of
careful and prolonged deliberation by experts, considerable hesitancy
exists about raising these questions so soon again. On the other hand,
the polls of public opinion and other indicators have shown that adequate
old-age pensions are overwhelmingly popular; it is also likely that lowering of payroll taxes would be warmly welcomed. Despite the reluctance
to deal with such matters in an election year, a case can be made out
for reopening these issues now.
Assuming that a fight against the "contributory principle" can
be successfully waged at this time, two possible lines of action may be
mentioned:




1. Lower the old-age payroll tax from 2 to 1 percent until such time as outpayments from the fund become
equal to receipts, thereby reducing revenues by over $300
million a year. This would merely retard but xsould not
halt the further accumulation of reserves; such reserves
are already adequate to meet contingencies. Half of the
old-age payroll tax is explicitly deducted from workersf
pay envelopes and the remainder is paid by employers. The
reduction in the workers1 share of the tax (over #150
million) would provide a direct addition to workers1 buying power; the decrease in the tax paid by employers would
operate in the first instance chiefly to increase business
profits and would be only gradually reflected in higher
wages or lower selling prices.

-5-

2. Replace the present Federal grants to States
for old-age assistance and the contributory benefit
payments by a uniform Federal pension of, say, $15 a
month to single persons and $25 to married couples, to
be paid to all retired persons over the age of 65 whose
incomes are not currently sufficient to make them liable
for Federal income tax* While the cost of such a program
is difficult to estimate, it seems probable that outpayments would not greatly exceed the sum of payroll tax
receipts plus amounts currently being expended by the
Federal Government for old-age assistance. By reducing
the need for State and local outlays for old-age assistance, which are running at about $215 million a year, a
comprehensive Federal system of old-age pensions would
also provide relief to State and local budgets.
If it is not feasible either to reduce payroll taxes or adopt
a flat pension for all old people in the lower income groups, the only
means of reducing substantially the draft on incomes involved in the
present system would be through investment of reserve funds in socially
beneficial public projects of a sort which would not otherwise be undertaken. The receipts accruing to the old-age and survivors insurance
trust fund, instead of being returned to the Treasury in exchange for
special Treasury securities, might be used for such purposes as expanded
public construction of workers* houses, construction of hospitals, or
rural resettlement and rehabilitation programs. If the accumulation of
reserves is to continue, it is appropriate to hold that these funds
should be invested in ways which will directly add to the countryfs
durable assets and that these assets should be of a type which will
particularly benefit the groups which bear the cost of payroll taxes.
If the "contributory principle" is to be retained, this change in invest-




-5-

ment procedure would do a good deal to mitigate its adverse effects on
buying power and national income.
Of tlxe methods discussed above for relieving the deflationary
effects of the present old-age pension system, reduction of payroll
taxes would be most prompt in producing some effects. The administrative tasks involved in a changeover from the present system of assistance
and contributory benefits to a flat pension would doubtless make it impossible to begin payments on the new basis much before the beginning of 1941,
while a change in the method of investing the trust fund could scarcely
result in increased public construction activity until next year.
Unemployment
Our brief experience with unemployment insurance has already
shown clearly that the relationship between taxes and benefits is seriously
unbalanced. The balance in the unemployment trust fund at the beginning
of 1940 was nearly four times estimated 1940 benefit payments, and such
payments will, it is estimated, provide outlets for only 40 percent of
the fund's receipts during 1940. Under these circumstances employers'
groups are pressing for a reduction in taxes while organized labor of
both the A.J. of L. and C.I.O. camps is urging liberalization of benefit
provisions.
In most States unemployment insurance taxes are levied on the
employer. Since tax reductions would not be immediately passed along to
workers or consumers, and because the advocacy of increased unemployment




-7-

insurance benefits is one point on which the A.F. of L. and C#I.O. agree,
the Federal Government can best lend its support to the movement for
liberalization of benefits.
It is in respect to duration of benefits and waiting period
rather than to rate of weekly benefit that the State unemployment insurance systems are chiefly defective. The period for receiving benefits
varies from three to sixteen weeks, as contrasted with a duration period
of about twenty-six weeks tinder the British system. The waiting period
in this country, though varying greatly from State to State, probably
averages between two and three weeks.
A bill (H.R. 776S) introduced in the House by Representative
McCormack provides for (l) the establishment of minimum insurance benefit
standards, (2) further liberalization of benefits combined with lowering
of taxes in States which, after having fulfilled these minimum standards,
continue to show a surplus of receipts over outpayments, and (3) a reinsurance fund to reimburse States whose tax collections and accumulated
reserves are insufficient to maintain benefits in accordance with the
minimum standards set by the bill. Since most State legislatures do not
meet in 1940, July 1, 1941 is fixed in the bill as the deadline for putting
these minimum standards into effect. These standards include a benefit
period of at least twenty weeks, a waiting period of not over one week,
and a weekly rate of compensation equal to 60 percent of full time weekly
earnings. Although the bill may require revision in some particulars, the
general character of its approach to the problem of correcting the defects
in present State unemployment insurance systems seems sound, and its provi-




sion for a reinsurance fund would be a first step in the transition to
a unified Federal system of unemployment insurance•