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BOARD OF GOVERNORS
OP THE
FEDERAL RESERVE SYSTEM
ffice Correspondence
Chairman Booles
D a te
APrii k. 1946—
Siihject; Social Security Legislation
Pdohard A, Ifasgrave ?j %
In response to your recent suggestion, we have gone
intp current proposals for broadening the social security system*
I am attaching a summary statement and analysis of the various
plans -which has been prepared by Mr# Stettner*
Hearings on social security are now being held by the
House Ways and Means Coimnittee and by the Senate Committee on
Education and Labor•
? a y s a n ^ Means Comnittee hearings are based on a
report prepared oy a special comaittee staff and are limited to
topics discussed in the report. For this reason they m i l not
cover the more ambitious programs, especially health insurance*
On the points covered by the committee report, the staff experts
are in general agreement -with the proposals of the Social Security
Board and the pertinent provisions of the Wagner-Murray-Dingell
Bill* The hearings m i l deal primarily with certain improvements
in present programs, including a broadening of coverage under the
old-age insurance, some liberalization of benefits, and the introduction of permanent disability insurance* The committee probably m i l produce a b i l l recomending improvements along these
lines, but i t is unlikely that they m i l involve any considerable
cost increases "which would require an immediate step-up of pay
roll tax rates* The extension of coverage under old-age insurance
•will pay for itself and disability benefits may be financed for
the time being by drawing on the 7 billion dollars now accumulated
in the old-age insurance trust fund* The present level of rates
is considered adequate to finance the program probably for a decade,
or if benefits are liberalized for at least 5 years*
The hearings ip. the Senate Education and Labor Committee
deal with a health insurance plan, generally simife r to the plan
included in the ?fagner-IJurray-Dinp:ell Bill of 1914-3* a s well as in
i t s later l°il\3 version* In terms of a pay roll tax, the cost of
this plan would require something like-a 3 point increase in
present rates* This would raise the Federal pay roll tax (excluding the employer contribution to unemployment insurance) from i t s
present level of 1 per cent to 2^ per cent, payable by employers
and employees each* There i s some Administration pressure behind
To* Chairman Socles
- 2 -
the health insurance program ("witness President Truman's message
of November 19^5) an<3- considerable popular support• However, the
opposition (mainly the American Medical Association) i s well organized and the outcome unpredictable*
The recent recommendations by the Social Security Board,
the Wagner-Murray-Dinfell B i l l , and the House committee report,
a l l imply a significant shift in attitude towards social security
financing* There i s increasing agreement that eventually a substantial part of the cost should be paid for out of general Treasury
receipts, perhaps on the basis of a t r i p a r t i t e division between
employers, employees, and Government* Also, there appears to be
agreement that further additions to the social security fund should
be avoided and the system be continued on a pay-as-you-go basis*
Attachment
OUTLOOK FOB SOCIAL SECURITY
By
Walter F* Stettner
Various proposals for a modification and expansion
of the Social Security System are now before Congress. The
most important are here discussed and summarized.
Present Status
The present social security legislation provides for
a Federal system, of old-age and survivors insurance, a FederalState system of unemployment compensation, and for Federal
grants to the States for assistance to certain needy groups*
The old-age insurance system (OASl) is financed by a
pay roll tax on the first $3,000 of -wages in certain covered
employments, payable at the rate of one per cent by employers
and employees each# According to the revised Social Security
Act of 1939# this rate was supposed to rise to 2 per cent in
U a n & reach 3 per cent in 19U9* However, each year since
the Congress has suspended the increase* Nevertheless,
and due largely to the sharp increase in covered pay rolls during the -war, the OASI Trust Fund has grown steadily and now exceeds 7»3 billion dollars, this sum being invested in Treasury
securities of varying maturities* Benefit payments are running
at an annual rate of 300 million dollars* The average monthly
benefit level is ^2?4. for a single person, or lijif. for a worker
and two children.
The coverage of the system is limited. The most important groups excluded are the agricultural workers, the selfemployed, the domestic workers, employees of non-profit institutions, Federal, State and local employees, and railroad workers*
In 19^5 these excluded groups comprised approximately 21 million
persons, or over two-fifths of civilian employment* Railroad
workers, Federal employees, and a large proportion of State and
local employees, however, are covered by separate retirement
plans*
compensation system is financed by
y
a pay roll tax of 3 per cent payable by employers in covered
occupations on the first |3*000 °** "wages for each employee*
- 2The tax is a Federal tax, but up to 90 per cent can be offset
by State employment taxes, the remaining 10 per cent being used
to finance administrative expenses of the State systems. As a
result of experience rating systass provided for inmost States,
the average tax rate on employers in I9I4I4. -was 1#8 per cent
rather than 2.7 per cent* The balances available to the States
in the Unemployment Trust Fund are now 6.8 billion dollars as
against 2.1 billion in IQILU l/ Employers with less than 8 employees in industrial and commercial employment are excluded
from the unemployment compensation system in many States, as
well as most of the groups also excluded under the OASI#
The present Social Security Act further includes a
number of Federal grants to the States for assistance payments
of various kinds (including the needy aged, blind, and dependent children), which now amount to about I4.OO million dollars a
year*
Current Proposals for Social Security Expansion
The more important proposals are contained in (l) the
latest Annual Seport of the Social Security Board, (2) the Social
Security Amendments Act introduced in May 19^5 (a revised version
of the I9J4.3 Wagner-Murray-Dingell Bill) and the related National
Health Act introduced in November 19ij5# an(i (3) "kke recent report by the social security staff of the House Committee on Ways
and Means.
Recommendations of the Social Security Board
The social Security Board has advocated at various
times a comprehensive insurance system which wouldoover nearly
all gainfully employed and include benefits for temporary and
extended disability and health insurance provisions, as well
as old-age and imemployment insurance. According to the Board* s
recommendation this comprehensive system would be placed &n a
national and federally controlled basis. In its Annual iteport
for 19^-3 'k*10 Board estimated that the probable entire cos€ of
such a comprehensive system for the next decade could be covered
by a 12 per cent pay roll tax. If we assume an average level
of covered pay rolls of around 80 billion, this would imply a
total cost in the neighborhood of 10 billion dollars. The Board
visualized that eventually the cost would be borne by a threeway division between employers, employees, and the Government.
1/ The anticipated changes in the size of the Old-Age and Un"Suployment Trust Funds under present operations up to the middle
of 19lj.7 are shown in the latest Budget# The estimates indicate
that a further increase of the OASI Trust Fund by about one billion dollars annually is expected for the iiroediate future. Deposits and withdrawals by States, from ttie Unemployment Trust
Fund, over the same period, however, are expected to balance out#
- 3 No very recent estimates by the Board are available. However,
the revised Wagner-Mirray-Dingell Bill contains a downward revision of the pay roll tax to 8 per cent, and i t may be assumed
that the Board i s not opposed to this change*
Until a comprehensive system i s adopted, the Board
recoimnends the improvement and broadening of the present system. Such recommendations are restated in the Annual Report
for 191+5 •
(a) The main proposals with respect to old-age and
survivors insurance are* the extension of coverage to all gainfully employed workers, the reduction of the qualifying age for
women to 60 years, an increase in benefits particularly for lowpaid workers, and an increase in the amount of annual earnings
subject to the pay roll tax from ^3,000 to ^3,600. The Board
recommends further that benefits equal to those for old-age retirement be paid to people suffering extended disability, and
that credit be e*iven to servicemen for their period of service.
To meet the cost of this broadened system of old-age
insurance and disability, the Board recommends the enactment
of a long-range financing plan looking toward an eventual t r i partite division of cost. In a recent testimony, Chairman
Altmeyer stated specifically that the present combined rate of
2 per cent would probably be sufficient to cover the current
costs of the expanded OASI program for the next 5 years or
more. An increase in the combined rate to J+ per cent would
probably be sufficient to cover the current costs for 10 years
or more. Also, the Board estimates that the cost of adding
extended disability insurance to the present system would amount
to a further 1 to 2 per cent of covered pay rolls after 15 or
20 years.
(b) With respect to unemployment insurance, the Board
reconmends inclusion of a l l employers of one or more in covered
industries and the inclusion of workers in fields of employment
not now covered wherever this i s administratively feasible.
The Board has also recommended uniform unemployment benefits
to Federal workers during the reconversion period and the inclusion of seamen.
If the Federal-State system of unemployment insurance
is continued, the Board recommends the substitution of a grantin-aid system in place of the present credit-offset provision.
A straight Federal tax, probably one per cent, would be levied
in place of the present 3 per cent tax with the 90 per cent
-h credit-off set • This -would raise Federal pay roll receipts,
which -would be applied toward Federal matching grants for both
benefits and administration* Minimum benefit standards -would
be required as a condition for these grants* The Board also
recommends the establishment of a permanent reinsurance fund
to insure the adequacy of future funds*
As an expansion of the present system, the Board
recomr.ends the inclusion of cash benefits for temporary disability as part of the unemployment insurance system* Extended and peimanent disability, as mentioned under (a), -would
be part of the OASI* This would involve an additional cost
of approximately 1 per cent of pay rolls*
(c) The Board also recommends, without detail, the
establishment of a national system of health insurance under
Federal law with decentralized administration, but it has not
advanced any detailed proposals. Again, however, it may be
presumed that the Board is in support of the Health Insurance
Bill discussed below* In addition to the social insurance
provisions, the Board recommends a comprehensive Federal-State
program of public assistance* Federal grants would be avail able to the States for payments to needy persons regardless
of place of residence and to groups not now provided for by
Federal grants* Matching grants to all States would be supplemented by variable grants vAiich would take into account
variations in State income and thereby remove present inequities* The Board further recommends the abolition of the
present provision limiting matching grants for aid to dependent children to a certain benefit amount and proposes Federal
financial participation in medical care payments for needy
persons* The variable grant provision for public assistance
•would rreatly improve the economic effects of the present system, because of the kind of taxes which the States impose for
financing their relief expenditures*
The Wagner-Murray-Dingell Bill (S.1ORO)
The Wagner-Murray-Dingell Bill (originally introduced
in 1910 an(i resubmitted in a revised form in 1914-5) "would establish a unified and comprehensive insurance system, including
health and disability insurance* There would be only one pay
roll tax at a proposed rate of 8 per cent on the first f3#6OO
of wages, divided equally between employers and employees* 2/
j 7 In the earlier (1914-3) version of the Bill a pay roll tax
of 12 per cent was proposed, similar to that suggested in the
Social Security Board* s 19il3 report* The new version of the
Bill provides for benefits somewhat larger than those suggested in 19i|-3« The lower rate proposed reflects allowance for
A 5 P e r cent tax would be levied on the self-employed, who
would be excluded from unemployment and temporary disability
insurance* Pay roll tax receipts in a fairly prosperous early
postwarVear under this system might range from 6 to 8 billion
dollars*
(a) The specific provisions under each type of insurance correspond on the whole to the recommendations of the
Social Security Board* For the old-age, survivors, and extended disability insurance, the bill would reduce the eligible
age of women to 60 years, would extend the coverage to all
gainfully employed, and would increase the minimum and the
primary benefits*
(b) The bill establishes a Federal system of unemployment and temporary disability insurance with extended coverage* For both unemployment and disability, the basic weekly
benefit would range from 5 "to 20 dollars (excluding dependents*
allowances), the waiting period would be reduced to one week
and benefits -would be paid up to 26 weeks a year* In addition
to the maximum duration of disability benefits, the bill provides for the payment of weekly maternity benefits up to 12
weeks to each woman eligible for disability* The provisions
under this section would be administered by the Social Security
Board*
(c) The health insurance section of the bill provides for medical, dental, hospitalization, and home nursing
benefits to insured individuals and their dependents* The
program would be under the supervision of the Surgeon General
with a ^National Advisory Medical Policy Council1' advising
him on questions of broad policy and administration* In administering this section, the facilities and services of State
and local departments and agencies would be utilised where
practicable* Three per cent of the wages collected under the
unified contribution of 8 per cent would be allocated to a
special account within the tfNational Social Insurance Trust
Fund" called ffPersonal Health Service Account" from which all
benefits would be paid* Expenditures for dental and home
nursing benefits would be financed by appropriations from
general funds allocated to this fund*
2/ (Footnote cont*d from page I4.)
additions to the Unemployment Trust Fund since 19h3* Also, it
makes allowance for the Congressional desire—reflected in the
freezing of OASI pay roll tax rates—to minimize further addition to the OASI Trust Fund* Accordingly, a government contribution to OASI at an early date, say after 5 o r 10 years, may be
expected under this bill* Also, some government contribution
would be required to finance certain parts of the health insurance scheme (dental and home nursing benefits) which were not
included in the I9I4.3 version of the Bill*
- 6These health insurance provisions of the Social
Security Amendments Act have also been introduced by the same
sponsors as a separate measure in the National Health Act*
This b i l l was introduced on November 19, 1945 in response to
President Truman1 s message outlining a comprehensive national
health program* In addition to prepaid health service benef i t s , the b i l l contains the provisions of S*1050 concerning
grants to States for public health services and maternal and
child health services* Unlike S*1050~and for strategic
reasons 3/—""th® Health Act contains no specific financing
recoirniencTations, but the wording suggests that the cost of
physicians and hospitalization benefits could be covered by
something like the 3 P e r cent pay roll tax as proposed in the
more comprehensive bill* The cost of dental and home-nursing
benefits wotild be financed from general appropriations*
(d) The Social Security Amendments Act also establishes a comprehensive Federal-State assistance program* I t
includes variable Federal "grants' to States for both payments
to assistance recipients and administration varying with the
per capita income of the State, and would eliminate citizenship and residence requirements as a condition for eligibility*
The assistance system would be broadened to include a l l needy
persons and Federal grants would be available for payments for
medical services* In addition to the social insurance and publ i c assistance provisions, the Act also proposes a national
system of public employment offices and provides for grants and
loans for hospital and health center construction*
The Report of the Ways and Means Conmittee Staff
This report was prepared in answer to a House Resolution adopted in March 19U5 after the old-age insurance tax had
been frozen for another year* The resolution authorized the
committee to study the need for amending and expanding the
Social Security Act with particular reference to old-age and
survivors insurance*
The voluminous report was prepared under the direction of L* J* Calhoun, a foimer assistant general counsel to
the Social Security Board* The report does not deal with the
whole field of social security, since health insurance and
temporary disability are not covered* (in view of this limitation, many of the recommendations are put forward without
prejudice to what would be desirable if a more comprehensive
system were established*) In general, the report i s cautious
in i t s recommendations and on many issues limits itself to an
analysis of other proposal^*
37 Inclusion of financing provisions would have automatically
Teferred the b i l l to the House Yfays and Means Committee*
- 7Old-Age and Survivors Insurance. The committee staff
is most specific in i t s recommendations for revising the present
old-age and survivors insurance system. I t recommends an expansion of coverage to all groups now excluded and the lowering
of the eligible age for "women to 60 years• The report favors
a liberalization of benefits, but on the -whole is very cautious•
The liberalization of benefits provided for in S.1050 i s d i s cussed but neither endorsed nor rejected. The report recommends the inclusion of .benefits for extended disability as
part of the OASI program and as a f i r s t step suggests that
such insurance be applied f i r s t to the age group from 55 * o
60.
On the question of financing the report agrees with
the Social Security Board recommendations for an eventual t r i partite division of the costs between employers, employees,
and the Government. To achieve this goal, a modification of
the present statutory provisions is recoirraended. In place of
the increase provided for under present law, the report recommends that the pay roll tax rate be raised by one-half of one
per cent every ten years starting in IQhff until 1977* when a
3 per cent level would be reached. After that time the rate
should be revised upward or downward only if the anticipated
Federal subsidy exceeds one-third of the total annual cost or
the Trust Fund reaches some chosen total like 20 or "$0 billion
dollars. Since this recommendation does not deal with health
insurance or the financing of temporary and extended disability
insurance, i t does not have to face the problem of an immediate
increase in costs.
Unemployment Compensation. In general, the report
appears to be in favor of maintaining the present Federal-State
system, with an extension of coverage. I t also recoirsnends a
modification of the present merit rating system.
On the subject of public assistance, the report
favors the recommendations of the Social Security Board and
the Vfagner-Murray-Mngell B i l l . I t reconmends the adoption
of variable Federal grants for general relief, a program now
entirely financed by the States and localities, and the introduction of variable grants for all public assistance programs.
The report also favors the elimination of Federal maximum
limits for assistance and the full Federal matching of medical
care payments, as well as the elimination of residence requirements*
- 8 Summary Comparison
Despite substantial agreement there are also some
significant differences between the three proposals. The most
far-reaching proposals are those embodied in the Murray-WagnerDingell Bill which -would establish immediately a comprehensive
national system of social insurance, including health and disability insurance* It would also provide for an immediate increase in pay roll taxes from the present effective rate of
approximately U to 8 per cent, applicable to the first $3*600
of wage incomes*
The Social Security Board, though apparently in
basic agreement with these proposals, seems to feel that the
present time is not opportune for such sweeping changes, and
accordingly has advanced proposals for more limited improvements* Though the Board also reoonmends the introduction of
a national health and disability insurance system, its more
detailed suggestions are directed toward improvements within
the oresent framework of OASI and unemployment compensation
systems* For the present, the Board has not recommended an
increase of social security taxes*
The recommendations of the Ways and Ifeans Committee
staff are more limited than 8ither of the other two* Health
insurance and temporary disability are not considered and only
minor adjustments in unemployment insurance are proposed* The
staff report, however, is in substantial agreement with the
other proposals regarding a broadening of the present Federal
provisions on public assistance.
The widest area of agreement between the three proposals is on the subject of benefit provisions and coverage
under the old-age and survivors insurance and on the inclusion
of extended disability insurance under the OASI* All proposals,
moreover, contemplate an eventual tripartite division of the
costs, which indicates an important departure from traditional
thinking on social security financing*
Current Developments and Prospects
On February 25, the House Ways and Means Coroiittee
opened hearings on Social Security Eevision which are expected
to be continued for several weeks* The hearings do not deal
with any specific legislation but are intended primarily to be
based upon the staff report to the Committee* The Wagner-MurrayDingell Bill will be discussed only to the extent that its provisions deal with the topics discussed by the report* In the
~9 ~
Senate, the Committee on Education and Labor has started hearings on the National Health Act On April 2*
From the meager information "which is available, it
is difficult to venture a guess as to the probable outcome of
the present Congressional action* The fact that immediate
action in the Senate will be limited to a discussion of health
insurance rather than the whole area covered by the Social
Security Amendments Act -would seem to indicate that the sponsors do not have much hope of passing the more comprehensive
measure at the present time»fVTresident Truman has indorsed
the health insurance proposals. He has not as yet delivered
a similar message indorsing the social security proposals of
the Yfapner-Murray-Pingell Bill, although he has covered most
of its aspects in his recent Budget Message and in earlier
statements*
All public opinion polls point to a widespread popular support for some form of compulsory health insurance*
However, there is also a fomidable opposition led by the
American Medical Association, and it is doubtful whether much
progress will be made even on the subject of health insurance*
If any action is forthcoming, it may take either the form of
the National Health Act, or of grants-in-aid to State systems
or of Federal support to voluntary systems*
The prospects of action on improvements in the oldage insurance system are somewhat brighter* It is likely
that the coverage will be considerably extended, credit for
military service given, and the eligibility age of women reduced to 60 years* Also the wage limit will probably be raised
from $3,000 to ?>3,6OO, benefits will be somewhat liberalized,
*nd permanent disability provisions may be included* Yftiether
a change in the financing methods will be part of the revision
is more problematic. There seems to be a strong feeling in
the House for replacing the present system of freezing the
tax annually by a longer-range policy* However, there is also
strong opposition against raising the pay roll tax rates at
the present time and emphasis is still on a pay-as-you-go
plan* If a modification of present rates should be recommended, it may well be along the lines suggested by the Committee
staff*
1|/ It should, however, be mentioned that an Act dealing with
Federal assistance for the construction of hospitals and health
centers has recently been passed by the Senate and is now before
the House*
- 10 Any substantial changes of the present unemployment
compensation system beyond a possible extension of coverage
to employers m t h one or more employees in industry and commerce are unlikely* Both with regard to unemployment compensation and the other aspects of the social insxxrance system,
a great deal will depend upon the course of economic developments in the next few years and how Congress and the public
at large appraise the outlook for the future•
@FedFRASER