SECTION VII EFFECT OF H.R. 4222 ON THE SOCIAL SECURITY SYSTEM As I pointed out previously, Mr. Chairman, the proponents of national compulsory health plans invariably choose Title II of the Social Security system as their financing vehicle. H.R. 4222 follows the same pattern. It seeks to take advantage of the widespread public acceptance which the Social Security system has gained. As a financing mechanism, the Act is often described as "time-tested" and "tried and proved." This is not quite the case. The Social Security system has not yet been tested by time, nor has it been proved invulnerable to all of the strains which may be placed upon it. This is one of two points that I should like to discuss here. The second is the effect the passage of H.R. 4222 would have on the Social Security Act. When Social Security was first introduced in this country, its generally accepted purpose was to provide a basic foundation of protection against want and destitution. On this "floor of protection," as it has been called, it was expected that individuals and employers would build additional security programs and retirement plans. Social Security's function was simply to represent a partial replacement for loss of wages. Upon signing the Social Security Act on August 14, 1935, President Roosevelt said this: "We can never insure one hundred per cent of the population against one hundred per cent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age..." We realize that Title II of the Social Security Act has been changed, and frequently, since 1935. The tax rate has increased through the years, as has the benefit schedule; the groups within the working population covered have expanded; the retirement age has been lowered from 65 to 62 for men as well as for women. The program has grown to include permanent disability payments, as well as retirement income, first at age 50 and now at any age. These pressures continue and almost certainly will continue in the years ahead. However, without arguing the advisability of the individual liberalizations, we feel it has been most important that, throughout this quarter-century, Congress has retained the basic principle that this program is to provide a floor of protection. - H.R. 4222 calls for a change in this principle from a floor of protection to a service benefit, provided through the Social Security mechanism. I have discussed the philosophical aspects of this suggestion earlier in my testimony. At this stage, I should like to comment on some of the lessons we may learn from experience abroad. The addition of service benefits to Social Security is, as I pointed out before, a dangerous deviation from the original concept of the Act. If H.R. 4222 were adopted, it would set a precedent of farreaching importance and one whose implications for the future are grave indeed. Pass this Bill, and the floodgates are opened for countless other proposals to be financed through the Social Security mechanism. Not only is this political realism, but it is also borne out by the experience of European countries. Most of them started out modestly. But most of them at present have become veritable Christmas trees of benefits, staggeringly costly, and far removed from the concept or purpose of the original plans. For example, in France the employer now must pay Social Security taxes for the national pension system, for the supervisor pension plan, for employees' income tax relief, for work accidents, for apprentice education, plus an allowance for the employees' houses or apartments and for the employees' families. Taking just four basic categories of social insurance abroad (old age survivors-disability, health and maternity, family allowances, and work injuries), we find that the French employer pays 27.25 per cent of payroll and the employee six per cent. In West Germany the respective figures are 13.65 per cent and 11 per cent, while in Italy the breakdown is 32 to 70 per cent for the employer, according to the type of industry, and 5.25 per cent for the employee. The Social Security system cannot, as the Committee knows, withstand a limitless burden. Let us see how it looks at the moment and how it is regarded by the general public. ་་ Time and again, the public has been told that Social Security is "insurance." It has heard this from government officials and from many others presumed to be well-informed. The public, believing what it has been told, equates the Social Security system with private insurance, and translates this relationship into terms of its own experience. In this "translation" process, the worker comes to think of the money deducted from his paycheck as an insurance premium. He assumes that the Federal Government handles that "premium" in the same way a commercial insurance company would. In his mind, he sees his premiums accumulating in his own personal reserve fund, bearing the label, "Hold for the retirement of John R. Smith." In other words, he believes that he has a contract; that he is purchasing an equity in the Social Security system; that he is buying benefits on a quid pro quo basis; and that they will be made available to him upon retirement. I needn't point out, Mr. Chairman, that this is a highly inaccurate description of the Social Security system. Far from being insurance, Social Security is actually a program in which a gross payroll tax is imposed upon active workers to pay for the retirement benefits of their elders. Somewhat misleadingly, this is called "pay as you go" financing. This is taken to mean that the worker pays as he goes. Actually, pay as you go financing means that the government raises currently, through taxes, funds to pay the cost of benefits currently due. To bear this out, for the years 1956 through 1965, tax collections for OASDI are expected to total $115.1 billion, while OASDI benefits and expenses will total $114.5 billion. This does little to accumulate reserves; and it is a far cry from prepayment. Private insurance, on the other hand, involves full reserve financing. It is a prepaid system. And the dollar sum of all payments into the fund, together with the interest income earned from its investment, are sufficient to pay off all liabilities for guaranteed or promised benefits. Commercial insurance is actuarially sound, whereas Social Security can stay in business only because of the government's power to collect taxes. If the government suspended Social Security taxation, the system would collapse. Should taxes cease in 1965, it is estimated that only 20 per cent of the benefits for those then on the rolls would be covered with no provision for those not on the rolls. And if this were to happen, those citizens who believed they had built up an equity in the system would have no claim whatsoever against the United States Government. This is true because the Social Security Act was a measure enacted pursuant to the power of the Congress to tax and to spend money in aid of the general welfare. This was restated in an opinion handed down on June 20, 1960, by the Supreme Court of the United States. It is evident, therefore, that Social Security encompasses no contractual relationship between the individual and his government. The individual's potential benefits under the Social Security program are statutory in nature and may be altered or abolished at any time by Congress. Thus, those persons contributing to Social Security are not paying for their own future benefit but are paying for someone else's current benefit. In turn, the current contributor hopes that future generations will also provide him with Social Security benefits upon retirement. The vast majority of present beneficiaries of the OASDI system receive a great deal more in terms of benefits than they ever contributed through taxes. In 1954, for example, each Social Security beneficiary was receiving an average of $30 in benefits for each 50 cents paid in taxes. Twenty-nine dollars and fifty cents of that was paid by younger workers. This ratio has undoubtedly increased for existing beneficiaries since the extension of benefits in 1956 and 1958 and again this year with the enactment of P.L. 87-64. Thus, those presently retired with OASDI coverage are receiving a considerable subsidy from the younger generation. And further increases in Social Security benefits simply increase the tax load on the younger worker. It is argued that we must also consider the concept of social adequacy. In other words, the retirement income of the aged must be substantially more than simply adequate: the floor of protection must also be carpeted. But as pointed out by Ray M. Peterson, Vice President of the Equitable Life Assurance Society of the United States, "The pendulum swings the other way for the youngest members and for all new entrants. Social adequacy for some means individual inequity for others." Since 1939, the concept of individual equity has gradually given way to the concept of social adequacy. This has been the result, at one time or another, of deferring scheduled tax increases, extending coverage to new groups, and increasing benefits for both retired and non-retired groups without imposing new tax increases to cover their cost. Estimates by competent actuaries of the accrued liabilities resulting from the Social Security program range from $289 billion to more than $600 billion. The size of this obligation depends upon several guesses concerning the future, even including the level of interest rates and the longevity of our senior citizens. We do not, of course, expect that Congress will, at any time in the foreseeable future, deny the aged the benefits promised in Title II, even though no contractual obligation exists. Such an expectation would not only go against our belief in the integrity of this government but also against political realism, since, at almost any given point in time from now on, half or more of the voters will have been paying into the Social Security system for twenty years or more. On the other hand, we also believe that Congress would do well to avoid being entrapped into a change which can only lead to a more and more arduous schedule of taxation on employer and employee alike. I am suggesting, Mr. Chairman, that there is a limit to the size of the tax burden that future generations will be willing to accept, just as there is a limit to their capacity for carrying this inherited debt. By the same token, there is a limit to the number and size of benefits that can be added to the Social Security mechanism, social adequacy notwithstanding. Of this I am convinced: when we talk about placing the health care of the aged under Social Security, we are talking about a staggering potential addition to the program. In another section of this testimony I have pointed out the difficulty of estimating the costs of H. R. 4222. It is enough here to say that costs are unpredictable, but staggeringly high. As the program expanded--and it undoubtedly would--the entire Social Security system would either be placed in jeopardy or Congress would be required to augment Social Security revenues with general revenue funds. The danger of either course is too obvious to the Committee to require any further elaboration from me. ΤΟ However, presently scheduled increases in the Social Security tax will reach nine and one-quarter per cent of payroll by 1968. increase the rate even further, as H.R. 4222 proposes, and to raise the tax base from $4,800 to $5,200 as well, should, simply on the basis of cost, give Congress pause. Again, there is the contributory principle theoretically inherent in the Social Security system which requires that benefits will not be paid unless the worker has contributed to the system for a miniUn period of time. Introducing so-called "free" medical care for all persons now receiving OASI benefits quickly junks this principle. addition, millions of active workers and their employers would pay in taxes only a fraction of the benefit costs by the time those workers reached retirement. In Thus, another category of unearned benefits would be added to the permanent Social Security debt with which future generations must cope. It has been estimated that this addition to the permanent Social Security debt would run from $15 billion to $20 billion. How long would the benefits proposed under H.R. 4222 be 11mited to the aged? How long will the original intention of providing a basic floor of protection survive? |