The social budgeting approach

Years ago the well-known actuary Miles M. Dawson pointed out that under a compulsory social-insurance system the many rigidities and limitations of private insurance need not be present. Thus, in a system where the existence of future generations of participants was assured through the State's taxing power, there was not only no need for a reserve, but more important it would be both possible and preferable at the commencement of the compulsory program to bring into benefit status all those who would have been receiving benefits had the program started long before. Such a program would be truly contributory, for though the individual would not be paying for the benefits he himself was to receive in the future, he would be paying an equivalent cost by paying for the benefits of those now aged or disabled or orphaned or widowed. In return for his paying for the benefits of these others, he is assured that when in the future he becomes aged or disabled or deceased, he or his survivors' benefit will be paid for by those then in their productive years. As Dawson says, such an approach would say to every man: "In consideration of a contribution of your full share of the cost of providing this indemnity for all other contributing members of society, society will cover the entire hazards of your having the responsibilities resting upon you which make the insurance requisite or desirable." (Proceedings, Eighth International Congress of Social Insurance (1908), p. 192.) The adaptation of this approach, as many students of the subject visualize it, would be (1) to determine each year the amount which could be raised through some predetermined form of direct taxation specifically earmarked for socialsecurity purposes, (2) to determine the number of persons eligible for socialsecurity benefits and their respective proportionate shares, and (3) to divide (2) into (1) to obtain the amount of each share. As visualized, each of the aged would receive the same size share, not only because of the difficulty of devising variable shares on any pertinent basis but primarily because a uniform individual benefit would be considered socially preferable, for reasons partially indicated below. On the other hand, it might be desirable to pay benefits to some other category, such as orphans, at some uniform level different from the uniform level for the aged.

To illustrate, assume that the social-security tax method decided upon was to yield a total of $8,700,000,000 in 1951. This amount, incidentally, is just onehalf of the mean of the high and low estimates of the cost (assuming present earnings levels (in the year 2000 of H. R. 2893 plus public assistance, a cost to be paid by a population much less than twice the present population. Assume further for 1951 a total of 11,000,000 aged, to have one benefit unit apiece, 2,000,000 under 65 but chronically disabled also to have one unit apiece, and 2,000,000 dependent children to have three-quarters units apiece. The number of benefit units would total 14,500,000, so that each benefit unit would be $600 annually, or $50 monthly.

Social budgeting is distinct from current Townsend proposals in that social budgeting avoids any form of hidden tax and keeps costs fully in the open. The Townsend form of tax, misnamed "gross income" tax, is really a gross-receipts tax, which could be included several times, and to an immeasurable extent, in the price of every commodity. An appropriate tax for social budgeting would be a flat percentage added to the individual normal income tax rate.

A system of uniform benefits under the social budgeting approach may be compared with the present or proposed old-age and survivors insurance legislation, with respect to the various problems under consideration, in the following way:

Under suggested system there would

Benefit amounts largely dependent on wages received in long-past years lack be no wage-benefit relationship from flexibility to meet changing price levels and other conditions. Adjustments of benefit formula designed to remedy this situation do not meet problems of all beneficiaries, provide only temporary solution, and result in increased complications.

which inflexibility could result, and benefits could be made to change automatically with economic and fiscal developments.

5. PROTECTION AGAINST UNDUE LIBERALIZATION

Deferment of major benefit load results in temptation to overliberalize present benefit rates. Future costs cannot be closely forecasted and would be ignored even if they could be foretold.

Fact that cost of any liberalization would have to be borne immediately by the public would be main bulwark against undue liberalization.

6. APPROPRIATENESS IN MEETING SOCIAL NEED

Differential treatment provided is not in accord with, but if anything in inverse relation to, the need to which social insurance is properly applicable (i. e., that need which cannot be provided for by individual effort or through the various forms of private insurance). Moreover, though ostensibly weighted relatively in favor of the lower-paid, the benefit formula now operates to give the greatest actual public subsidies to the higher paid.

Suggested system would give effect to "floor of protection" concept and avoid special subsidies. Uniform social security benefit would be supplemented by individual's own savings, private pensions, etc. Local public assistance supplementation, not federally subsidized, would also be available.

7. RELATION TO PUBLIC ASSISTANCE

Since the OASI recipient now often sees that public assistance has served to put both him and the nonrecipient (or noncontributor) in exactly the same position, and since public-assistance payments are more numerous than OASI benefits and of larger average amount (not having OASI's inflexibility), public assistance now has the function of adversely competing with the program.

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To the limited extent to which public assistance would be needed to supplement the suggested system, it would constitute true supplementation.

8. ADMINISTRATIVE EFFICIENCY AND ECONOMY

Despite the efficiency with which wage reports are processed and wage records are maintained, the cost of these operations is appreciable, and relatively higher costs and less efficient operations may be expected with respect to some of the excluded groups whose coverage is now contemplated.

Which is the cooperative method?

These operations would be eliminated, and there would also be savings in other operations. The existing income-tax machinery would suffice for collecting contributions.

If we are to accept as our aim cooperative welfare instead of paternalistic welfare, and if we seek to preserve the ingredients Dean Brown speaks of, namely individual incentive and mutual responsibility, we should ask ourselves which of these two social-security methods is more nearly the cooperative method and which is more nearly the paternalistic. The following are some of the questions whose answers may guide us to a solution :

1. Which is the more paternalistic in its effect, a program under which for some decades to come a substantial proportion of those in need are left to the mercies of needs test public assistance, or a system under which each individual in the categories where need is presumed received a benefit which is his own to use as he sees fit?

2. Which is the more cooperative and which the more paternalistic, a virtually noncontributory program promising expensive benefits for token considerations, hiding true costs and therefore stimulating the demand for even more expensive benefits, or a system under which the present worker in paying for the benefits of those who can no longer contribute is contributing an amount equivalent to the real value of his own benefits?

3. Which is the more paternalistic, a program whose benefits may be tied in unrealistically to economic conditions of years already past and can be revised only through congressional wrangling over complicated and discriminatory formulas, or a system under which both income sources and benefit levels can vary automatically with economic changes?

4. Which is the more paternalistic, a program which uses public funds to subsidize the continuance of the differential of the high-paid worker's income over that of the low-paid worker, or a system which recognizes that the high-paid worker is better able than the low-paid to supplement his flat social-security benefit through nonsubsidized thrift and insurance channels, thus maintaining his differential through his own efforts and the medium of private enterprise?

The above are some of the many questions which can and should be asked in choosing our pattern of social security. As Dean Brown points out, the decisions made in the year 1950 may have far-reaching effect.

The CHAIRMAN. The next witness is Mr. John D. Battle, vice president of the National Coal Association.

Mr. Battle?

STATEMENT OF JOHN D. BATTLE, EXECUTIVE VICE PRESIDENT, NATIONAL COAL ASSOCIATION

Mr. BATTLE. My name is John D. Battle. I appear here on behalf of the National Coal Association. The National Coal Association is the trade association of bituminous coal producers, with membership comprising about 75 percent of the commercial production of bituminous coal in the United States and with members in each of the major coal-producing States in the Nation.

As a representative of the bituminous coal-mining industry, I do not appear here today as a specially qualified social-security expert. I do appear for the purpose of explaining to the committee some of

VALUES OF INDIVIDUAL EMPLOYEE'S BENEFITS AND PAYROLL TAXES UNDER H. R. 2893

NOTE--Values of benefits are actuarial values, as of retirement age, of employee's own (primary) benefits and of wife's and widow's benefits which may become payable after his retirement. Computation of wife's and widow's benefits makes allowance for probability of there being no wife or widow qualified to receive such benefits and also makes allowance for effect of benefit maximum.

Pay-roll tax values are interest accumulations of net employee taxes to retirement age, the net tax after 1949 being one-half percent of pay roll less than the assumed total employee tax. Benefit of survivorship is ignored, and it is assumed that this saving plus one-half percent of pay roll is applied to the cost of survivor and disability claims incurred before retirement. Total employee tax rates assumed are 2 percent for 1950-59, 21⁄2 percent for 1960-69, 3 percent for 1970-79, and 31⁄2 percent for 1980-84, though H. R. 2893 provided no tax rate higher than 2 percent. Steady earnings of $1,200 a year for one employee and $4,800 (or more) for the other are assumed from 1950 on, while before 1950 the assumed earnings are $750 and $3,000 (or more), respectively. Fluctuating earnings could produce the same benefit values with lower tax values.

United States 1939-41 white population mortality and 21⁄2 percent interest are assumed.

our industry's special problems under old-age and survivors' insurance, and also to express our position on the proposals of broadening the wage base, adding disability benefits, and sharply increasing benefits. The recommendations which we shall make are of vital importance to the coal industry.

You have before you a bill which in 1951 will impose old-age and survivors' insurance taxes at double the rate which has been in effect up to the beginning of this year. In addition, it would apply to $3.600 of an employee's annual wage instead of $3,000. The Social Security Commissioner has asked that the base be made $4,800, and some union representatives have demanded an even broader base.

You gentlemen will appreciate the difference between the $30 annual maximum per employee we have been paying, and the $72-over twice the old maximum-which we shall be paying next year if H. R. 6000 is enacted as presently written. You will understand the impact of the $96 maximum for next year proposed by Mr. Altmeyer-more than three times our maximum before this year.

Under Mr. Altmeyer's proposal, 15 years from now we would pay $144 per year tax on our high-wage employees-nearly five times the initial $30 maximum per employee. The withholding tax for social

security would also be $144. This would be for this one program alone. You must also bear in mind that if the wage base for old-age and survivors' insurance is broadened the same broadening for unemployment compensation will be almost certain to follow. The unemployment compensation tax the industry must also bear adds as much as an additional 3 percent tax on wages.

The Commissioner has urged a benefit formula producing a present benefit of around $123 per month for an old couple with maximum coverage of $250 per month since the system began, and $139 per month 15 years from now. He has urged, however, that the $400-per-month man should receive much higher benefits than the $250 man, and would tax him and his employer and pay him benefits on an additional $1,800 per year in wages.

Old-age and survivors insurance was adopted as a measure to place a floor of protection under persons who might otherwise prove to be a relief problem in their old age. We do not subscribe to any theory that the $400-per-month man needs more Government protection than the $250-per-month man, nor do we believe the proposal for imposing 60 percent more taxes on the $400 man and on his employer can be justified. We accordingly urge you to retain the present $3,000 maximum annual wage base.

Under the proposed tax schedule, it is estimated in the report accompanying H. R. 6000 that OASI taxes will be 4.6 billion dollars per year 5 years from now, 5.9 billion dollars per year 10 years from now, and 8.3 billion dollars per year 20 years from now, and that a trust fund of over 60 billion dollars will have been accumulated by then. These were intermediate estimates, and the possible range is so broaddepending on future economic conditions, longevity, employment practices, etc.-that the so-called reserve may be much lower, or greatly higher than 60 billion dollars.

It seems obvious to us that greatly increasing present tax burdens to pile up this theoretical reserve may lead only to the size of the reserve being used as an argument for still further benefit liberalization. We are certain of only one thing-the proposed increase in the pay-roll tax from 12 to 2 percent next year on top of the 50-percent increase which occurred last January 1, would be a tremendous burden on our already precarious economy.

The inevitable effect of the impact of these additional regressive taxes will be to reduce both corporate margins and take-home pay just at a time when our economy is in need of encouragement. It would be ironical to jeopardize our basic security-a sound economy-by taxes levied in the name of social security.

Our association is thus opposed to the proposed increase in the payroll taxes.

H. R. 6000 proposed to add disability benefits to the present programs. Your committee has heard competent witnesses whose backgrounds and actual experience entitle their opinions to great weight, demonstrate why this pay-roll-tax-supported program of benefits paid "as a matter of right" should not be undertaken, and why the costs will be tremendous. No equally competent witness has denied their conclusions.

Our association opposes this tremendously expensive and questionable program of disability benefits.