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APRIL 1968

Uranium: A New
Commercial Energy Source ... . . . page

Social SecurityDevelopment and Financing ... . .. page 10

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City, Missouri 64198. Permission is granted to
reproduce any material in this publication.

•
•

A E
I

By Richard F. Young
RANIUM- a d e nse, h a rd , nickel-white
metallic element u ually regarded as rare
- is actually pre ent in the ea rth's crust to a
greater extent th an such "common" elements
as mercury, si lver, or iodine. The bulk of uranium seems to be present in the upper 12 to 13
miles of the earth ' solid cru t, although minor
amounts of urani um are fo und in basalt rocks
uch as those for ming oc a n fl oo r . It al ·o
i fou nd in wry small quantiti s in metco rit s
and tra c s hav bee n isolated in ca wat r.
During much of the period after the di scovery of u ran ium , relatively little interest wa
directed toward it. ln 1938, however, Otto
Hahn and Fritz Strassman di scovered that the
uranium nucl eus undergoes fi ss ion when bombarded with neutrons, with the accompanying
release of several neutrons and very large
amounts of energy. This raised the possibility
of relea se of nuclear energy in a sustained
chain reaction. Tn 1942, the now famous work
of Enrico Fermi a nd hi s assoc iates ushered in
the atomic age by proving th e technical feasi bility of a contro1led chain reaction. Development for military purpo ·e proceeded under
urgent wartime conditions a nd the mushroom
cloud beca me the sy mbol of this new energy
source .
Nuclear weapons haw proved their destructive capabilities. However, used to peaceful and
productive ends, one pound of uranium-if it
could be completely consumed by the fission
process- would yield as much energy as three
million pounds of coa l. Unlike the fossil fuelscoal , oil, and gas- where ene rgy is released
by the mol ecular interaction of fu el and oxygen.
nuclear energy is produced by the interaction s
within the nucleus of the atom.
D efense dem and s sustained a uranium rush
Monthly Review

•

April 1968

of considerable proportions during the I 940's
and 1950's. P ersonal fortunes were made by
individual prospectors and amateur geologist ,
and land and u ra nium stock spec ulation became rampant. During thi s tim e, the Atomic
Energy Commiss ion ( AEC) regulated the purchase a nd stockpilin g of thi s trategic metal.
Then, in 1958, th e bubble burst when AEC
resc rv s ca u ht up with d fe nsc need . Due to
the lead tim · o n long- term contracts, AE '
pr c ur mcnt for wcap ns peaked in 1960 a nd
follow d a downward course with ach succeed ing y ar ( hart I ). Then, nea rly a decad
after defense demand began to decline, total
demand for uranium was spurred by the adaptation of nuclea r energy to civilian needs. The
subsequent growth in civilian demand has resulted in a second uranium rush even greater
than the uranium hunt of the 1950's.
Foremost a mong the civilian uses of u ra nium
is that req uired by electric power gene rators.
Chart 1

IUM DE AND

Thousands of Tons
Uranium Oxide

U.S. Electric Utility /
Requirement~

AEC Procurement
For Weapons

,J
0

1947

'50

'55

'60

'65

'70

'75

'80

SOURCES : Rem a rks by Allan E. Jones, Manager, Grand Junc tion Office, USAEC, presented before the Ninth Annual Minerals
Symposium, Urani um Section, Moab , Utah , May 22 , 1964 ; and
Ker r- McG ee Corporation estimates .

Uranium: A New

A major turning point in the development of
atomic energy was reached with the rapid and
widespread acceptance of nuclear power plants;
for historical purposes , 1966 may well m a rk
the year nuclear power really came of age .
DEMAND SITUATION

The years ahead undoubtedly will witness
considerable population g rowth and rapid
technological progress-forces which will stimulate vast increases in world demand for
electricity. The notion th at population growth
and industrial progress wi11 spell an increase in
power demand and con umpti o n i undersco red by speculation that a substanti al iner asc in average p r capita r 'quirem cnts for
electricity also is likely to take place.
At present, the dema nd for electrical ene rgy
doubles every 8 to l 0 years, twice as fast as
the growth in demand for total energy. Total
energy consumption is expected to increase by
50 per cent b etween l 965 and 1980 and by
250 per cent between 1965 and 2000. In 1965,
less than 1 per cent of the electric generating
capacity of the Nation was nuclear. It is estimated that 23 to 30 per cent will be nucl ear
by 1980 and about 50 per cent by the year
2000. 1
Another pertinent factor is the grow in g
market share of new operating capacity being
captured by nuclear faciJities. Last year, dom estic utilities placed orders for nuclear plants
amounting to more than half of the capacity
of all new electric power plants purchased.
Long-range forecasts indicate that, by the turn
of the century, virtually all new large generating
plants will be nuclear. 2
Late in 1962, the ABC's re port to President
Kennedy indicated a b elief th at by 1980 nuclear
powe r would account for approximately 40,000
1
" Nucl ea r P ower M ay Supply H a lf of all Elec tric ity by
Year 2000," H ea ting, Piping and Air Co11ditio 11i11g, M ay
1967, p . 51.
~Glenn T. Seabo rg, "Meeting W o rld Nuclear Fuel Requirements ," Nuclear Engineering, February 1967, p. 98 .

megawatts. a Since that date, a series of upward
rev isions have been publi shed with the current
estimate amounting to three or four times the
original one. The swi ng to nucl ea r plants is
gaining momentum so rapid ly that private forecasts now predict capacity as great as 200,000
megawatts by 1980.
Nuclea r plants arc being built at a pace
that not eve n their strongest upporters thought
likely as rece ntly as two years ago, as nuclear
fuel captures the major sha re of th e new
market. In short, th e nucl ear power age ha s
arrived and the power plant of th e future is
here today. Beh ind the power industry 's rapid
and dramatic turn to nucl ea r ge nerati o n li es
th e fact that power cos t p r k il ow;1tt ho ur is
very attra tiv in large nucl ar plants that ca n
b ba se loaded, that is, op rated at, or near,
capacity a hi gh percentage of th e tim . The
growth of nucl ea r powe r does not spell a sud den end to fossil-fuel generating facilities. Indeed, with the rapid growth in total demand
for electricity, the Nation may well need all
available capacity. In this sense, it is not strictly
a question of substitution or replacement but,
rather, of which type of powe r gene rator will
best fulfill th e burgeo ning need for more
electric power.
Atomic plants can produce large a mo unts
of elect rical energy at relatively littl cost per
unit. These faci lities a ppea r subj ect to those
economi es pertinent to large-scale operations;
only in areas of low-cost gas, or unusually lowcost coal, or with low power demand , a re
nuclear plants unable to compete successfully
with fossil fuels. 1
ROLE OF THE AEC

Nucl ea r power mu st be considered th e offspring of the AEC- the major purch a, er of
uranium to date. The agency's facilit ies enri ch
natural uranium and tran form it into a usabl e
fu el. The major objectives of Federal uranium
"One megawa tt equals 1,000 kilowatt s.
'John T. Sherman , "Ura nium ," E n gin ee ring and Mining
.lournal. February 1967. p. 129.

Federal Reserve Bank of Kansas City

Commercial Energy Source

Table 1

FUEL

ENTS

(In per cent)
Uranium Oxide
Conve rsion
Enrichment
Fabrication
Reprocessing
Plutonium cre dit
Uranium cre dit

33
5
37
... 33
10
( 12)
. ( 6)

... . . .. .. .. .

100
NOTE : These f ig ures represent approximations . They will vary ,
depend ing up o n such factors as the price of uranium oxide,
cost of conve rs ion, and degree of enrichment.
SOURCE : G o rd o n P. Corey, " U. S. Nuclear Power Strides Augu r
150,000 MW by 1980," Electrical World, Moy 15, 1967, p . 84 .

suppl y po li c ies a rc to : ( 1 ) cs tabli . h toll
c nri c hm ·ntr. as th rr r rr d mean s for o btainin
nri c h d uranium from th e AE , ( 2)
h Ip a sur a viabl e d mcs ti c uranium minin 1
a nd milling indu try, a nd ( 3 ) provide incentives for priva te industry to expa nd its exploration for new uranium reserves and its production capability to meet forecas ted commerci al
requirements. The F ederal Governm ent also
can provide broad support in gathering and di sseminating information on the status of resource developm ent , production capability, and
require ments ; a nd the developm ent of basic
knowledge about u ra nium .0 Tn pursuin g it
goal s, th e AE
procures raw ma te ri als, produces nucl ear materi al ·, and a ttends to weapons development a nd fabrica tion , reactor developme nt, and physical re ea rch.
In tran sformin g natural uranium into fuel,
enrichment and fabrica tion play very importa nt
roles. Uranium enrichment remains the domain
of the AEC, a fact partly attributable to the
strategic value of uranium and the importance
of the enriching process to the production of
nuclear wea pons.
The price of nuclear fu el i crucial in dete rmining the long-run competitive position of
r. "Enrichment" is th e process of improvin g the qu a lity of
uranium by in creas in g the percentage o f ~h e materi al
suitabl e fo r use as nuc lear fu el. The AE levi es a cha rge.
or "loll," for pe rforming thi s servi ce.
.
0
Wilfrid E . J o hnson, " G ove rnment and th e U ra nium Industry," Address before the Atomi c Industri al F o rum ,
Chicago, Ill ., November 6, 1967, p. 1 I .

Monthly R view

April 1968

nuclear powe r. The cost of nuclea r fu el includes cha rges for raw uranium oxide (ye llow
cake ) , conve rsion , enrichment, fabrication , and
re process ing, reduced by credits for depl e ted
uranium , plutonium , and othe r by-product recove ries. Approxim a te rela tion ships of the cost
compone nts for a typical nucl ear unit arc
found in T able 1.
Lead tim e also is importa nt in producing
fu els beca use th e re is abo ut a 9- to 12-month
inte rval required to purc hase uranium conce ntrate, conve rt it to a gaseous state, a nd
ca rry o ut toll enri chm e nt a t a n A E C diffu sion
pl a nt.
A s a mo no psoni st- a sin gle bu y r ·o ntrolling
th e lcnwn I fo r th e produc t o r a lar re numbe r
f s II rs- th e A
has bee n abl e to r gul at
th e pri
of uranium or for ma ny yea rs. How
rapidly th e nuclea r powe r industry adva nces
depe nds la rge ly upc n th e price a nd supply of
fu el. Without prope r price incentives, mining
ope ra tion s ma y not be eco nomically feasible.
The AEC price will be m a inta ined at $8 per
pound of uranium oxide (U :~ O ,J, in specification grade conce ntrates, through 1968.
The ra pid develo pme nt of nucl ea r powe r
faciliti es plu s new effort to wa rd o re de posit
di sco ve ri es po rte nd th e poss ible developme nt
of new dc m:rnd a nd supply relationship .7 In
thi s vein , Wilfrid . John son , ommi ssione r,
AEC, has sta ted th a t:
. . . Exce pt for some re m aining unce rtainty as to the size of the commercial
market in 1971 and 1972, after expiration
of AEC purchase contracts, it a ppears
that we m a y anticipate a relatively smooth
transition from a Governm ent to a private
marke t. On the othe r hand , th e rate of
nucl ea r orde r a nd corre ponding uranium
require me nts, coupled with the curre nt
tight ura nium ma rket have caused some
conce rn ove r both short-te rm and lon gterm nucl ea r fu el availability .A
7
U . ., Burea u o f Mines. Co 111111o d i,_r D ata S 11111111aries,
J a nu a ry 1967 , p . 158 .
RJohnson. p. 4.

Uranium: A New
EXPLORATION EFFORTS

The resurgence of activity in uranium, due
to electric power generation, has encouraged
an expansion in exploration. Estimated power
needs require a cumulative output of a quarte r
million tons of uranium fuel valued at approximately $4 billion between now and 1980. The
AEC currently recognizes only about 60 per
cent of that amount in uranium reserves, necessitating the discovery of tremendous additional
reserves and providing the impetus for renewed
activity in uranium exploration. It has bee n
estimated that prospectors drilled as much as
10 tim s as many fee t of ea rth and rock in
1967 as in 1966, and that the ura nium indu stry
wiU inve t about $1 billion by 1980 to find new
deposits to meet projected demands for a surging nuclear power industry. It also is expected
that most of the domestic uranium producers
will be operating at or near capacity into the
1970's.
The character of exploration has changed
markedly from that of earlier periods. The
lonely prospector and the weekend geologist
of the 1950's have been replaced by large
corporations supporting vast exploratory activities. The number of major companies in the
uranium bu ines is several times the number
a decade ago and includes many of the major
petroleum companies. Most of these firms are
relatively new to the field but their well-trained
staffs and financial capabilities make them
particularly well suited for these operations.
It is estimated that 8 to 10 million feet of
exploratory drill holes will be drilled in the
next 3 years. Indications are that the industry
must find not only new uranium deposit , but
whole new districts to meet long-term requirements.
ESE V S, IMPORTS, AND B EEDE

Requirement estimates lead to the question
of whether uranium supplies will be available
at prices reactor users can afford. If the nuclear
6

power industry is to avert a fuel shortage, relief must be found from pressure on the domestic supply of uranium. There are answers
to this problem , however. New reserves may
be di scovered through the extensive and intensive current and planned exploration projects.
The AEC could lift its present embargo on the
use of foreign ore in the United States, and
breeder reactors-capabl e of generating more
fu el th a n th ey consume-may be developed
into a commercial reality. Each of these prospects will now be di scussed in turn .
urrc nt rese rves in the United State arc
es tim ated a t 200,000 tons of uranium oxide,
whi ch ca n b min d and s Id at a pric o f $ I 0
a po und , r less, or 350 000 tons if a pric of
up to $ 15 a pound for uranium is ace ptable.
(The current AEC price of uranium is $8 a
pound .) If one assumes a requirement for an
eight-year forward reserve, which the AEC
considers reasonable, production through 1980,
plus reserves necessary at that time, must total
650,000 tons; this means that roughly a half
million tons of uranium must be found between
now and the end of 1980. 0 Improved exploration technology , such as the use of airborne
electronic sensing devices , i being developed,
and drillin g and mapping are proceeding at a
rapid pace .
A econd alternative in providing for uranium needs exists in the ea ing of import restrictions , an action which might be taken by
1973 or earlier. The Commission has indicated
that it might remove the restrictions on foreign
uranium for domestic use when its members
have reasonable assurance of the viability of
the domestic uranium industry. The Commission has taken the position that imports are to
augment, not replace, domestic production. 1 0
Before the end of the century, breeder reactors may begin to reduce the demand in
some egments of the uranium industry. D evelopment of the breeder reactor is expected
0

Johnson , p. 3.
Johnson, pp . 10-11.

al Re erv

Bank of K n as lit

Commercial Energy Source

ultimately to cut fuel costs substantially, possibly by two thirds or more. Breeder reactors,
however, may be 15 to 20 years away from
making a commercial impact and certainly it
will be a long tim e before breeders will have
a significant effect on total uranium requirements. It is unlikely that many fu11-sca1c
breede rs will be in se rvice before the late
1980's or that an optimum mix of breeder
and the rmal reacto rs can be achieved before
the 1990's. Even then , annual uranium requirements may continue to rise. 11
While none of these three possibilities appear
capable of dealin g with all of the potenti al
pr s. ures upon th dom stic uranium supply ,
some co mbin ation th r of may serv to f r tall a ny poss ibl
hortagc .

Because little air pollution is attributable to
nuclear-powered utilities, the growing public
concern over air pollution has focused on coalfueled power generators. However, there is concern about the thermal pollution of water by
nuclear plants . Vast amounts of water are
utilized by nucl ea r generators to cool various
pieces of operating apparatus. Present day
nuclear power plants operate with lower team
pres ure than do plant burning coal , oil, or
gas; hence, the nucl ea r plants are le s effici ent
and discharge about 50 per cent more waste
heat through their condenser cooling systems. 1 2
As a result, in the Northwest, nuclear power
generators have raised the temperature of nearby lakes and streams to the detriment of fish
and wildlife. 13 This problem also has been encountered in the Northeast. The problem is
acute in fresh water strea ms where the water
temperature is raised downstream as well as at
11
Gordon P. orey, "U .. Nuclear Power trides Augur
150,000 MW by 1980," Electrical World , May 15. 1967,
p. 145.
12
Burt Schorr, "Generatin g Pl ants Pose a 'Thermal Pollution ' Threat to River , Lakes," The Wall Street Jo11m a/ ,
December 1, 1967, pp. I , 21.
13
Anthony Netboy, "Nuclear Power on Salmon Rivers,"
The Nation , October 9, 1967, pp. 337-339.

Monthly R view

•

April 1968

the point of discharge. Giant cooling towers
and other devices have been suggested as possible solutions to this problem and it appears
that the long-run benefits may more than cover
the initial addition al cost.
On the other hand , warm water discharged
by nuclear plants has had a positive effect in
increasi ng oy ter yields off the ea t coast.
Thermal "pollution" of coa tal waters mi ght
well be the key in reviving th e American lobster
industry since New England lobstermen have
contended that those waters are cooler than
usual , th ereby reducing th e number of lobsters
in that a rea.
Th possibi lity of accidents in atomic power
plants is a nother probl em. A pie e of sheet
metal tri ge red an incident last year at the
nrico Fermi Atomic Power Plant on th
shores of Lake Erie and the inves tigations are
still continuing. Engineers at the Fermi plant
insist, however, that even the worst blowup
could not rupture the reactor's thick shield.u
There also are hazards connected with uranium mining. Efforts are underway, however, to
improve the miners' environment and to protect
men from conditions that cannot practicably
be further improved, to develop better methods
of monitori ng th e expo ures men are subject
to , and to better understand the relationship
between cx posur and lung cancer incidence. 16
As serious as the e difficulties are, none are
presently thought to be insurmountable. Solutions arc thought to be largely a matter of
priorities and cost and should not seriously
hinder the long-run recovery of the uranium
industry or the development of nuclear power.
DIS
Development in the uranium and nuclear
power indu tri e are of considerable interest
' ' "Eight-In ch Piece of Sheet Metal T rigge red Accident in
At omic Pl ant." Th e National Ob serl'er. November 6,
1967, pp . J, 10.
10
U.S ., Co11gressio11al R ecord, 90th Co ng., 1st Sess., 1967,
Radiation Hazards Co mpen sa tion Act, pp. S 17002S17010; and Johnson, p. 13.

Chart 2
MINE

PROCESSING PLANT
N

OCATION

Counties with ura nium mining
Uranium process ing pl a nt (1 3)

,.., ....
I

POWER PL

~ Pla ,me d nuclea r powe r pla nt (3)
N

I-

z
0

SOURCE: U. S., Department of Inte rior , Minerals Yearbook, Vol. 111 , 1965; Vol s. 1-11, 1966.

to the Tenth F dcral R e crvc Di trict. Since
1960, more than 80 pe r cent f the tonn age
mined and more than 75 per cent of the valu e
derived from the N a tion 's uranium mine can
be attributed to three District states-New
Mexico, Wyoming, and Colorado. In 1966,
about 600 mines in all of the uranium-mining
states produced 4.3 million tons of ore valued
at $84 million. The percentages of value
produced in the three leading states were: N ew
M exico-46 pe r cent, Wyoming- 21 per cent,
and Colorado- 13 per cent .
Chart 2 and Table 2 indicat that not o nly
is more tha n three fourths of the N ation '
uranium production taking place in the District but that 17 counties in three states
account for a1l of the District's ouput. The
latest AEC estimates showing economically re8

coverabl uranium de posits a r , fr m th Di trict's point of vi ew, very encouraging. The e
deposit are principally in the Ambro ia L a ke
a rea nea r Grants, N ew M ex ico (about half of
the total) , in the Gas HilJs and Shirley Bas in
areas of west central Wyoming, and in the
Uravan mineral belt in western Colorado. 10
The District is the dominant area of the
Nation in uranium mining and processi ng. At
the end of 1966, uranium proces ing wa
carried on at 17 plants in 14 locations. Only
four of these plants a rc located out idc the
T enth Di trict. District plant sites include
Ca non City, Grand Junction , Rifle, and Ura van, Colorado ; Bluewa ter, Grant , and Shiprock, New M ex ico ; and th e Gas Hill s, Shirley
'

orey, p. 84.

Federal Reserve Bank of Kanc;a

City

Uranium: A New Commercial Energy Source

Table 2

CTION

URA

(In millions)
1960

Co lo.
N . Mex.
Wyo .

1961

1962

1963

1964

Tons

Value

Tons

Value

Tons

Value

Ton s

Value

8.0

$152

8.0

$148

7.1

$138

5.6

1.1
3.8
1.4

23
62
27

1.3
3.6
1.5

22
62
28

1.1
3.5
1.3

18
64
26

1.0
2.3
1.2

1965

Tons

Value

$116

5.7

16
41
24

0.8
2.1
1.2

1966

Tons

Value

Tons

Value

$112

4.4

13
38
23

0.6
2.0
1.0

$ 84

4.3

$ 84

0 .6

38
18

2.1
1.1

41
18

SOURCE : U. S ., Department of Interior, Minerals Yearbook, Vol. Ill, 1965; and U. S., Bureau of Mines, Commodity Data Summaries,

January 1967.

Basin, and Jeffrey City areas of Wyo ming.
There are two plants in Grants , N ew M exico ,
and three in th e G as Hill s of Wyo ming.
The re a rc curr ntly pl ans f r pow r-gc neratin nucl a r r acto rs in two District stat s. onstruction is exp ctcd to begin in 1968 on a
plant in olorado a nd two in tallations are now
planned for eas tern Nebraska. The plant at
Plattevil1e, Colorado, will have a capacity of
330,000 kilowatts (KW) and a startup date
of 1971. The Nebraska plants-at Fort Calhoun and Brownville-will have capacities of
457 ,400 KW and 778 ,000 KW, respectively,
and startup dates of 1971 and 1972.
Economies resulting from large-scale operations appear to make nuclear power more easily
adaptable to more densely popul ated and highly
industrialized regions. While it may be so me
time before large areas of the District have
electrical power from nucl ear-energized sources,
the District-and certainly the Di trict tates
of New Mexico, Wyoming, and Colorado-will
enjoy the revenues accruing to uranium miningprocessing regions.

More direct comments about the strengths
and weaknesses of nuclear power seem appropriate at this point. The advocates of ato mic
power have some rather di stinct advantage in
that the developm ent of nuclea r energy is a
part of national policy and enjoys heavy
Government support. Strength also is drawn
from the fact that a relatively few, very large,

Monthly Review

•

April 1968

techn icall y oriented firms are devoting large
sums to re earch and development in this area.
Proponents of th e furth e r development of
nucl ar I w r point out th at, where power ca n
b onsumed in v ry lar e quantities , nucl ea r
en r )y is r la ti vc ly incxpe n iv . Other advantages include the fact that, since nucl ea r
fu el is compact, the price of nucl ear electricity
does not depend upon the location of the
plant. Additionally, if breeder reactors are
successful , an essentially inexhaustible source
of energy will be available on the earth's crust.
Tt is possible for nucl ear power plants to be almost pollution free.
The disadvantages of nuclear energy center
on two a pects. At present, nucl ea r energy is
cheap only if ge nerated by very la rge plants.
Secondly elabora te a nd expe nsive preca ution
a re required to assure safe operation of nucl ea r
pow r pla nts. In add ition , the di posal of radioactive wastes is relatively complicated. 11
If the indu stry continues to capitalize upon
inherent strengths and overcome current problems, the outlook for uranium appears extremely bright as the industry makes the transition from weapons demand to fueling electric
powe r ge nerators. The growth in demand for
lectric power in thi s N ation signifies expansion for an indu try providing a growing hare
of new generating capacity.
Alvin M . Weinberg, " U ra nium- Coal, Rivals or
Partners?" Mechan ical Engineerin g, M arch 1967, pp .
32-33.

By James R. Ukockis

ns inception in 193 5, th e Social
Security progra m has undergone a number
of legislative ch anges. These changes, coupled
with the maturing of the progra m, have led
to manifold changes in its importance for both
the N ation as a whole a nd for individu al
citizens. Moreover, the change in the la t few
yea rs have bee n e pecialJ y significa nt since
they invo lved imp rta nt n w kinds of b n fits
and r venue so urces.
In light of th
d v lopments, it is a ppr pria te to revi ew the hi story of the program
and focus some attention on the issues involved
in the means now being used to support it.
Reviewing the major changes in the program
provides perspective for judging current and
future revenue needs. Previous considerations
of Social Security revenues have tended to be
limited to the immediate problem of whether
or not revenues could be expected in adequate
amounts. This artide will examine some issues
involved in pre ent reve nu e a rrange ment .
Becau e th e rev nue and benefi t sid
of
the Old Age, Survivors, Di ability, and Health
Insurance (OASDHI) progra m a re closely
related, it is impossible to consider revenues
apart from the program as a whole. Perhaps
the most basic issue is how one views the
role of the program. At one extreme is the
view that it is essentially a retirement and
insurance plan which relates the security received to previous ex pe ri ence as a member
of the labor force. At th e other extre me is the
view th at the progra m is a major part of thi
country's effort to provide for the mmmrnm
needs of it less fortunate citizen .
IN CE

The original Social Security Act was pas ed
in 1935 and covered a large proportion of the
10

workers in comme rce and industry. It required
th at a 1 per cent tax be paid by both the
empl oyer and th e employee on the first $3 ,000
of ea rnings per year. In addition , the original
Act included a schedul e of gradu al rate increases for the en uing years which was to
rise to a max imum rate of 3 per cent in 1949
and th ereafter.
Over th y a rs, th c ve r·1 of th e pr gra m
ha s b n xpa nd d rep at dl y. ln 1940 , ju t
und r 58 p r ce nt f all p rs ns in paid employment were ligible for coverage, but by
1967 th e fi gure had increased to about 93 per
cent. Legislation during the 1940's exte nded
coverage to railroad workers for the survivor
benefits in effect under Social Security. Gratuitous coverage also was granted during this
period to certain veterans of World War II.
The 1950 Act was one of the most sweeping
in terms of ex panding coverage. On a compulory basi , it brought regularly employed farm
and dom es tic workers, non fa rm self-employed
per ons ( except profess ional groups) , and Federa l civili an employ e not under th e Federal
employee retirement system into the program.
State and local government employee not
under retirement systems and employees of
nonprofit institutions were added on an elective basis. In 1954, coverage was extended to
certain additional regularly employed farm and
domestic workers, farm self-employed, and
certain professional self-employed people (lawye r , doctor , denti st , a nd other medical
groups we re excluded). At the sa me time,
state and local gove rnment mployees under
ret irement sy terns, who had been excluded by
the 1950 Act, were allowed the option of joining the system. The 1956 Act extended coverage further, adding members of the uniformed
services and most remaining professional selfF- de

I Rec-, rv

Bonk of Kon5ar, City

Soc101 Security

employed persons ( doctors of medicine being
the major exception). Self-employed doctors of
medicine and interns were brought into the
program by the 1965 Act. The legislation of
1967 further included all ministers and members of religiou orders on a compulsory ba is,
except in cases where ex pressed religious objections were involved.
Benefits provided in the original Act included monthly benefit to retired workers and
a lump-sum paym nt at death. The 1939 Act
contained provision extending benefit payments to th dependent of a retired worker,
pr vided th e w if wa s over th e retirement age
of 65 a nd th e ch ildr n unde r 18. Benefits als
we r provid cl to such d p nd nts in th cv nt
th cov red work r was d ceas cl. T h ·t 956
Act lower d th e retirem nt age for women to
62 , but provided permanently reduced benefit
amounts for retirement at th at age. Benefits to
disabled workers between the ages of 50 and
64 also were incorporated into the program
at that time. The 1958 Act extended disability
benefits to the dependents of the disabled
worker, subject to the same conditions as applied in th e ca e of retired workers. In 1960,
the minimum age 50 requirement wa eliminated for di abi lity b nefits. The followin g
yea r, the retirement ag for m n wa lowered
to 62, as had been done a rli er for women.
The 1965 Act further reduced the minimum
eligible age for widows to 60 , and raised the
age of eligible dependent children from 18 to
21 , provided they attend school. Two entirely
new types of benefits also were inaugurated in
the 1965 Act: hospital and related benefits,
and a suppl ementary medical coverage program available on a voluntary ba i , both for
people aged 65 and ov r. l n 1967, the minimum eli gible ag for di abled widows wa et
at 50 years old.
T able 1 shows the average ben fit a mounts
received under variou circumstances for selected years from 1940 to 1967. During that
period, the average monthly benefits paid to
Monthly Revi w •

April 1968

Development and Financing

retired workers increased almost four times.
The 1967 Amendments to the Social Security
Act provided for a minimum increase in all
monthly benefi ts of at least 13 per cent.
Further, the increase in the taxable earnings
called for in the 1967 legislation will lead to
still higher average monthly benefits in the
future by raisi ng the maximum allowable earnings on which calcul ations of benefit amounts
are based .
The developme nt of the financing arrangeme nts of the Social Security program is summarized in Table 2. Since 1937, the maximum
annu al ea rnin gs subj ect to Social Sec urity taxe
hav incr asecl fro m $3,000 to $7,800 and th e
tax rat pa id by mpl oy s and mpl oy r. ha s
inc r ased from I p r c nt to 4.4 per cent each.
Self-emp loyed persons origi nally were taxed
at the rate of 2.25 per cent in 1951, and currently are taxed at a rate of 6.4 per cent. The
rate paid by self-employed persons historically
has been three fourths of the combined rate
paid by the employees and employers for Old
Age, Survivors, and Disability Insurance, but
for the H ealth In surance the rate is the same
a that paid by employee . The supplementary
111 dical benefits provided by the 1965 Act are
Table 1

N ER
SOHi
D C RCUMS ANCES

Surviving
Wido w
of
Retired Retirement Disabled
Worker *
Age *
Worker *
(per
(per
(per
month )
month )
month )

1940
1945
1950
1955
1960
1965
1966
1967

$22.60
24.19
43 .86
61 .90
74.04
83 .92
84.35
85 .11

$20.28
20.19
36.54
48.69
57 .68
73 .75
74. 10
74.59

$89.31
97.76
98 .09
98 .27

Ho spital
lnsurance t
Medical
(per
lnsurancet
claim )
(per b ill)

$615.00
649.00

$86.00
62 .00

*All figu res are for end of year excep t 1967, which is average
for Au g ust .
t Figure for 1967 is for Ju ne.
:j: Figu re for 1966 is for period December 3, 1966, to January 20,
1967; figure for 1967 is for period Jun e 30, 1967, to August 3,
1967.
SOURCE : Social Security Bulletin, December 1967.

l l

Social Security

Table 2
DEVELOPMEN

HI TAX BASE
AND RATES
1 37 - 1968

Workers Eligible
for Coverage

Numbe r

Rates *

As
Per Cent
of Total
Base Paid
Maximum
Employ- Tax able
ment
Earnings

1.500
1.500
2 .000

4,200
4,800

2 .500

4,800
4,800

3 .000
3 .125

91.2

4,800

3.625

92 .3

6,600
6,600
7,800

4.200
4.400
4.400

64.5

1960
1962
1963

59.7
60 .3
61.2
63 .0
64 .0

90 .5
90.5
90 .7
90.9

1966

71. l

1967
1968

1.000

$3,000
3,000
3,600
4,2 00

38.7
49.6
49.9

1957
1959

Self Employ ed

(I n per cent)

( In millions)

1937
1950
1951
1954

Emplo)'e e
and
Employer
(each )

79.4
79.5

2.250

2 .250
3 .000
3 .37 5
3 .750
4 .500
4.700
5 .400
6 .150
6.400
6.400

* Rates shown

include Disability Insurance starting 1957 and
Hospital Insurance starting 1966.

contingent upon payment, by those over 65
desiring coverage , of a monthly voluntary contribution which was to be increased to $4 in
April 1968. The total contributions received
for the suppl eme ntary medical coverage are
matched by appropriations of general revenues.
Neither voluntary contribution nor appropriations of general revenu es on a continuing ba is
had been used by th e Social Security program
prior to 1965. The 1967 Act, in addition to
raising the maximum taxable earnings, contained a new schedule of future rate increases
which rises gradually to a high of 5.9 per cent
each for employees and employers in 1987.
Not surpri singly, these developments in coverage, benefit . a nd financing are reflected in
mea ure of the relative importa nce of the
program (Chart J ) to total national economic
activity meas ured in term of gross national
product (GNP)-the total value of all goods
and services produced. The total revenues of
the trust fund s which make up the OASDHI
program have increased from .37 per cent of
12

GNP in 1940 to 3.94 per cent in fiscal 1967over a tenfold increase . If the total contributions made to the trust funds ( total revenues
less interest on reserve fund assets, one-time
appropriations, a nd certain interfund transfers)
are related to total receipts of the Federal
Government, the results vary from 3.76 per
cent in 1940 to 19.03 per cent in fi scal 1967.
To the individual , the grow ing importa nce of
the Soci al Security tax may be indica ted by
noting th at his max imum contribution has
increased from $30 a year unde r the original
Act to $343 .20 a year in 1968. Even when
allowance is made for incr as s in p rsonal
incom , th tax ha s inc r as d in r lativ importance. In fact, th max imum mpl oyee c ntribution xpr s cd as ·1 per cent of per capita
personal income almo t doubled between 1940
and 1967. Another indication of the impact
of the Social Security tax for many individuals
is that, in 1967, a married man with two chilChart 1
MEASURES OF T
FL TIVE IMPORTANCE
OF THE OASDHI PROGRAM
Per Cent

Total Revenues of Trust Funds

GNP

1 - -t- l
0 .-----.l. ..Per Cent
20

l L. 1 111

Total Contributions to Trust Funds
Total Feder a l Receipts

11Lili1..1ll1ltll1

Per Cent
10

Maximum Employee Contribution
5

\
As a Per Ce n't of
Pe r Copi'to Person al In co me

~___,_J
'l
1940

'45

'50

l l
'55

In Do llar s

'60

J I 00

'65 '67

SOURCES: Calculated from Social Security Administration and
Survey of Current Business publications .

Federal R serve Bank of Kansas City

Development and Financing

dren (taking the minimum standard deduction)
had to earn in excess of $4,340 before his
F ederal personal income tax exceeded the
amount paid in Social Security tax. Thus, in
aggregate and individu al term s, the economic
significance of the Soci al Security program ha
increased considerably in recent years.
I A CIN
The issues related to the current revenue
meas ures of the Social Security program may
be divided into two groups: those related to
specific revenue measures and those related to
the financin g arrangement as a whole. The
fir t gro up nee itat s co nsideratio n of each
. p cific r vcnu ' s urc : th ta x s on ·mploy s- mpl ycrs and th e s If- ~mpl oy d, hospital and med ica l
ntribution , intcre t earning. , and tran sfe r. from gen rat fund . The
s cond group, which is not dealt with in this
article, concern qu estions such as the di stribution of th e burden, growth, the cyclical implications, and the implications for security and
flexibility.
The tax on employees historically has been
an effective revenue producer-paid with little
se riou s objection and subject to few compliance problems. While recognizing thi , we also
should rec gnize mo t of the f avorab lc reception has been accorded when the impact of
th tax on individual s was substantially less
ignificant than at present. Wh ether th e favorable reception will continue to characterize the
still higher tax projected for future years is
difficult to judge.
It has been pointed out that the existence of
an annual maximum for the employee tax
tends to produce undesirable seasonal variation in income flow .1 Most pe rson whose
annual income exceeds the max imum amount
taxable for Social Security will exceed the
maximum some tim e before the end of the
year. After the tax has been fully paid, the
take-home pay of such perso ns increases until
1
Tax Foundation , Tnc., Eco110111ic Aspects of rh e Social
Security Tax (New York: the Foundation, 1966).

Monthly Review •

April 1968

the start of the following year, when deductions are resumed. The result is a considerable
variation in quarterly revenue collections for
the Social Security Administration. A number
of schemes de igned to eliminate this trait,
while keeping a ceiling on the annual taxes
paid, have been proposed but at the very least
they complicate the administration of the tax
significantly.
In past years, the use of a payroll tax was
felt to have some benefit as an aid in the
enforcement of income taxes. The widespread
use of withholding plans, however, has tended
to minimize the contribution o f the tax in this
regard .
Two o f th e mor
ommonly stat d advan l'1 g 'S attributed to th tax n mployccs ar
r lated to b ncfit . One of these i that the
relationship between the employee tax and
benefit levels serves to reduce th e pressure for
benefit increases. The point appears less than
certain for a number of reasons. For example,
there is no one-to-one relationship between
the taxes individu als pay and the benefits they
may expect to receive, meaning a person could
pressure for a doU ar increase in benefits reaonably certain th at hi tax would go up by
omcthing Jc s (the difference being paid out
of th tax on employers, interest earnings,
etc.) . Furthermore, b n fit increases may favor
ome individu als more th an others; for example, higher benefits for dependents mean
more to a married person th an an unmarried
one, but both would be subject to the same
tax increase. Yet, experiences of other countries suggest a tax on employees does induce
ome added responsibility. 2 The other advantage often attribut d to the tax on employees
is that it give ri e to th e feeling by recipient
the benefits are th eirs a a matter of right.
The importance of thi s feature also may be
overrated.
A tax on e mployers for Social Security ,
u ed in many countries beside the United
2Evelin e M . Burns, Social S ec urity and Public Policy
( New York: McGraw-Hill Boo k Co., 1956), p . 158.

Social Security--

States, also poses questions, such as who actually bears the burden of the tax since it is
widely recognized that employers may shift a
tax to their employees or customers through
lower wages or higher prices. Since we cannot
determine exactly who bears the burden of the
employer tax, it is interesting to consider each
of the alternative poss ibilities. If the burden
rests on the employe r, it is not in harmony
with viewing th e Soci al Security program as
a way for individuals to provide for themselves in years to come. If the burden is shifted
to employees, what is the rational e of continuing th e present empl oyer tax? Would it be bette r to abol ish the employer tax and cha nge
the m1 loy tax so as to mor d irectly determine how th tota l. bu rden is distributed
a mong workers? The last poss ibility- the burden passed to consumers through higher prices
- also weakens th e link between workers'
taxes and their benefits and raises the question: Why continue taxing employers? Y et,
there may be some appeal to having a share
of the burden distributed among the population in a p attern related to how much of
labor's effort they consume in goods and
services.
There are also issues related to the specific
form of the tax presently used. The present
tax ra te on e mployers is qual to th e rate paid
by their employees. Since the productivity of
labor, and hence wage levels, varies from industry to industry, the impact of the tax also
varies. For example, in 1962 the average
proportion of total wages subject to tax was
80 per cent for manufacturing firm s and only
67 per cent in mining. 3 Further, the employer
tax may encourage individual firms to substitute capital equipm ent for labor in order to
reduce this element of total production costs
although technical problems, financial difficulties, and union resista nce undoubtedly act as
barriers to such su bstitution. If the present
form of the employer tax does favor some
~Tax Foundation, p . 23.

industries and production methods, the tax
needs to be reevaluated .
The tax on self-employed persons produced
total revenues equal to less than 10 per cent
of the amount derived throu gh employee and
employer taxes in 1965. 4 To elf-employed
individuals, however, the tax may have significant impact since the entire contribution is
paid by one person rather than divided between employees and employers. Being a
blend of the employee-employe r taxes (in the
sense that the self-employed rate is halfway
between what each of th e others pays alone
and their combi ned ra te) , many of the is ues
related to tho c tnes arc relev ant here also.
For xamplc, qu sti ns a )a in a ri , co nce rning
th directn ss of th ti b twee n tax s paid
and the be nefits expected, and the ex tent to
which the burden of the tax may be shifted
to consumers through higher prices. Again,
while the present arrangement perhaps has a
certain fl avor of fairness , relating it to either
an insurance or welfare view of the broad objectives of the program is difficult.
The m andatory Hospital Insurance contribution, which is currently levied at the rate
of .6 per cent ( out of the total 4.4 per cent
OAS DH I levy on empl oyees and employers) ,
imply may be considered as part of the
employee and employer taxes and trea ted accord ingly. The voluntary monthly contribution
paid for the Supplementary M edical Insu rance,
on the other hand, is quite different. Established by the 1965 Act in conjunction with
the Medicare program, persons over 65 may
decide whether to enroll in the program during
specified time intervals. Certain provisions in
the law serve to discourage persons from
remaining outside the program until medical
ex penses are imminent. Y et, the ex istence of
any option at all gives rise to the question:
Who will choose not to participate? Two groups
come to mind- those with exceedingly low
·•U.S ., Depa rtm e nt of Hea lth , Educatio n , a nd W elfare,
Socia l Security Administration , Social Sec urity Bulletin ,
Annual Statistical Supplem ent, 1965, p. 31.

Federal Reserve Bank of Kansas City

Development and Financing

incomes, and those who feel they run a very
low risk. Those who elect not to participate
because they judge the risk to be small are
probably few. However, to the extent pe rsons
can correctly anticipate what the risks are,
the absence of such persons from the program
has the effect of increa ing the benefit co ts
per person of tho e who do elect to enroll.
Those with low incomes who elect not to
enroll are, in effect, putting th e burden of
their medical expenses on other publ ic and
private agencies. If higher rates for the volunta ry coverage should prove n ce ary in
th e future, th e problem co uld become mor
a ut . The ba sic iss u th r for is o ne of
d cidin r h w tar
a ro l • th OA. DH I program is go ing to play in financin 1 m di al
care for persons over 65. Th present a rrangement does harmonize with th e view of Social
Security as an insurance device, but is not
Jikely to sa tisfy those with more of a welfare
outlook. To provide for the minimum medical
needs of everyone ove r 65 through the H ealth
Insurance progra m might require a mandatory, and perhaps broader, source of revenues
th an currently used.
Inte rest ea rnin gs a rc de rived from the Social
Security reserve fund s by inv sting th em in
debt obliga tion s of the Federal Gove rnment.
These interes t ea rnings are paid out of general
revenues . Thus, to the extent that rese rves are
built up and invested, interest ea rnings enable
the Social Security Administration to pay for
part of its benefits by use of general revenues .
As mentioned earlier, the continuing appropriation of general revenues for the Supplementary Medical Insurance program contained
in the 1965 Act represented a new d velopment in that it enabl ed genera l fund s, o ther
than .interes t income, to be u ed. Yet, there
is some precedent for using genera l fund s. In
1949, Congress authorized appropriations from
general revenu es but no a ppropri ations actu ally
were made and the authorization was repealed
in the 1950 Act. It also should be noted th at
Monthly Review • April 1968

Britain and N ew Zealand have used general
revenues for their social security progra ms. ''
Obj ections to the use of general revenues
in this country are founded on the fear that
using general revenu es will tend to cause demands for overly gene rou s benefit s and unduly
high program costs or altern ately, th at Congres might b e I s willing to libe ralize benefits if the fund a re to com e from ge neral
revenues. The issues are much the sa me as
the assertion of fi scal discipline being derived
from the employee tax. If, in fac t, the use of
an ea rm arked employee tax does exert some
di ciplinc on th e progrnm , then relying on
o the r mor
ncrnl r vcnu so urc s wou ld app ar to e ntail I s. fi , ca l di s iplin .
A qu stion whi ch goes begg ing in any di cussion of ge neral revenue upport relates to
the institutio nal ar ra ngements or limitations
governi ng their transfer to the Social Security
program. Given a concern for fi scal discipline,
to make appropriations on a regular basis wi th
no guidelines as to amounts would be least
satisfactory. A somewhat restricted approach
would be to limit general revenue appropriations to one third of the total contributions
paid into the trust fund s-in effect, making
the Federal Gove rnm ent a n eq ual partner with
e mployees a nd empl oyer in upporting the
program .0 Anoth er would be to limit the appropriations to a mounts necessa ry to maintain the
"real" value of the accumulated reserve, i.e. ,
make up any losses in the value of the reserves
owing to inflation . With accumulated reserves
of, say, $20 billion, an increase of 1 per cent
in prices would therefore necessitate an appropriation of about $200 million . Another alternative a rra nge men which appea rs unlikely to
involve extensive fiscal di scipline problems
would be to u e appropriations only in conjunction with the extension of cove rage to
r. Burn , p . 172.
Se na tor Robert F. Ke nnedy o nce introduced a bill , endor eel by JO of hi s co ll eagues, whic h proposed a fo rm of
thi s idea. See D a n Co rdtz, "Socia l Sec urity: Driftin g Off
Course," Fort 1111 e. LXXV T, No. 7 ( D ecem be r 1967) , p .
208.
0

Social Security-Development and Financing

additional persons. Each time new persons are
brought into the program, a problem arises in
paying for the benefits of those who become
eligible for them before their contributions
have continued Jong enough to fu1Iy provide
the necessa ry financing. Since over 90 per cent
of those in pa id employm ent or self-employed
are currently eligible for coverage, the appropriations necessa ry under such a n a rrangeme nt
would be minim al a nd e v ntu ally would cea c .
Since 1935, the Soci al Security progra m has
changed grea tly in te rm s of its coverage, benefit , a nd fin a nc ing. The covera c of the program has be n xpancl cl o ntinuall y and curre ntly includes a bo ut 93 p r c nt o f p rs ns
in paid e mploym e nt as co mpa red to o nly 58
per cent in 1940. Benefit have been increa sed
both in ter ms of eli gibility a nd the a mounts
of the benefits. Correspondingly, the financing
of the program h as undergone numerou s
changes. The basic employee-employer tax h as
risen from the original m ax imum of $30 each
to $343.20 in 1968, through higher rates and
a larger maximum taxable ea rnings base. Taxes
on self-e mployed p e rsons, voluntary contribution s for medical in urance, a nd limited matching a ppropria tion s from g ncral fund s also
have b een introduced.
Each revenue source used by th e program
is subj ect to diffe re nt points of view a nd , in
some ca es, questions of fact. Concerning th e
tax on employees, the more important issues
turn on subjective reactions to the tax-how
it will be received by taxpayers as the b ase
and rates are increased furth er, the fi scal discipline it imposes on dema nds for increased
benefits, and th e extent to which participants
view their p ay ments a being for a re tire ment
and in urancc progra m. The tax on e mployer
involves a critical qu es ti o n of fact: Does the
employe r b ea r the burden or does he shift it
to hi s employees or cu tome rs through lowe r
wages or highe r prices? No m a tter who bears
the burden , howeve r, some difficulties a re en16

countered in trying to relate the tax to objectives of the Soci al Security program as a whole.
Further, serious implications for resource alloca tion are prese nt since the tax does not fall
uniformly on employers in differe nt industries.
Beca use the tax on self-employed per ons is
only three fourth s as much as the combined
e mployee-e mploy r taxes a nd it is paid by one
party rather than divid ed be tween two , there
is a possibility it m ay have so me impact on
the form of busine s organization. On the
other ha nd . as a blend of th e e mployeeemployer taxes, ma·ny of the issu es involved in
those taxes arc releva nt for th e self-e mployed
tax also. The vo lunta ry m nthly m clical co ntr ibutio n paid by th ose ov -r 65 wh
lcct to
par ti cip a te in th e Suppl mc nta ry M di cal I art
of the progra m must be con ide rcd w ith explicit reference to the objectives to be e rved.
Whether thi s part of the program seeks to
provide low cost insurance or to provide the
major portion of the medical needs of those
over 65 has a great bea ring on the adequacy
a nd wisdom of this form of financing. The
advisability and extent to which general funds
should b e used to p ay for certain types of
Social Secur ity benefit s may hinge largely on
whether their use will lead to de ma nd s for
overly gc ncro u benefits. H uch revenue we re
to be widely regarded as unlimited or involving
little acrifice, th e costs of the prog ra m could
quickly exceed sensible proportions.
An empirical evaluation of the Social Security program indicates it is likely to continue
growing, though stemming more from greater
benefi ts per individual than from covering
more occupations as in the past. To the extent
that thi s occurs, more revenu e will be needed
to provide th e nece ary addition al fin a ncing.
A addit ional reve nu es a rc needed , the ource
of these revenue are likely to be reviewed
more carefully. The most reali tic methods of
fin a ncing future addition al benefits will be
contingent upon the philosophy underlying the
Social Security program.
Federal Reserve Bank of Kansas City

Full text of Economic Review (Federal Reserve Bank of Kansas City) : April 1968

FRASER