sons over 65, to be paid for by additional social security taxes levied on those still paying them.

The combination resisting this legislation is impeded by the usual handicap of groups which oppose expansion of Federal subsidies. They are immediately arraigned by many politicians and "liberal" economists as champions of privileged private interest against exigent public and private neeeds of a growing nation that must be met if the United States is to remain a "first-class" power. And if, as in the present instance, the subsidy they question, either per se or with respect to cost, is being urged as "humanitarian," those who raise this question are denounced as heartless.

The National Association of Manufacturers, the Chamber of Commerce of the United States, the American Medical Association, the American Farm Bureau Federation, the National Grange and other components of this second lobby are now laboring under these handicaps. And they have another. There is division among them over whether there should be a Federal free health program for the aged at all and, if so, how it should be financed.

ALL FOR FEDERAL SUBSIDY

These are no problems for the lobby which is frightening the presidential year politicians in both parties with pressure for the type of subsidy provided in most of the bills before Congress. The measure offered by Representative Forand of Rhode Island differs only in minor detail from bills proposed by Senators Humphrey and Kennedy. The legislation proposed by eight "Republican liberal" Senators, headed by Javits of New York and Cooper of Kentucky, differs from the Forand draft in some fundamental aspects: for example, participation in the program would be voluntary, and premiums would be based on ability to pay, ranging from 50 cents to $13 a month. But this too would require a Federal subsidy, levied on the general taxpayers, of $480 million annually. The States would "pay" the other $640 million.

The President also has felt the pressure of the political argument that, if the administration and the Republican party do not evolve what Senator Cooper calls a "positive" program, a huge vote will be cast against their national ticket by millions of the citizens over 65. And, though he has not yet approved any particular measure, the President and the Republican congressional leaders recently set up "guidelines" that accept the principle of the Forand bill, and include voluntary participation in a private insurance system at the State level, and premiums graded on income. Here again the general taxpayer would underwrite the deficit by Federal subsidy.

This widespread, bipartisan acceptance of the principle for which Democrats have been the pioneers-early New Dealers, and now Forand, Kennedy, Humphrey, etc.—is acceptance of the premise that Government should, and is able to, underwrite health care for persons over 65. Basic dissent is not heard much in Washington. But the following, from a speech by Dr. Frank G. Dickinson, head of medical economic research for the AMA, is the most eloquent statement of another principle:

"Our problem (of elderly persons with a growing percentage of the popular vote) is to get men and women together as individuals to ask themselves: 'Do I want to ride piggyback to the grave on the backs of youth?' A man of 50 will pay into social security for only 15 years, his son for 40, at the same rate of wages received, or into a general subsidy on ratio of earnings. There is no morality which will justify this exploitation of youth."

But this is a voice crying in the political wilderness of 1960.

WASHINGTON'S BIRTHDAY.

Re actuarial balance or soundness

DEAR FRED: Thanks for your good letter and enclosing your grade card. You may yet be the valedictorian of your high school class. I enclose a small check for your personal use with the consent of your mother.

So your social studies teacher told you that Federal aid to the aged for hespital and/or medical care should be brought under the "trusted and tried” social security principle because the reports of the social security advisory committee and the actuary state that the fund is kept in actuarial balance. Now you want grandpa to explain that new term. Stated very simply, Fred, that new term is another way of saying that the Federal Government has the power to change taxes and that this power will not diminish throughout the period-to the year 2000, or the year 2050-covered in the estimates of the actuary. To brag 76123-61-pt. 2-45

or boast of actuarial balance or actuarial soundness, other than as a reflection of good housekeeping, is to brag or boast about the power to tax being an attribute of the sovereign power. The power to tax is an inherent attribute of sovereignty.

I can state it even more simply. How much gas should you have in your car when you start a very long trip with an unlimited credit card in your pocket, knowing that the conveniently located filling stations are likely to charge you an ever-higher price for gas and assuming that the weather and road conditions will remain average? That amount of gas in the tank is "actuarial balance," if you have an unlimited credit card.

You may recall that you cornered grandpa last summer during our pleasant visit with some puzzling questions about the attributes of sovereignty, a subject which had been discussed in your social studies class. It merely means, in regard to your new term, that the Government is all of us and its power to tax will not diminish over the years. In this sense the old-age and survivors insurance trust fund and the schedule of benefits and increased tax rates are always obviously in actuarial balance; and "actuarially sound."

More specifically, the actuary of the Social Security Administration and his able advisers are entitled to use the term "actuarial balance" but it is necessary that you understand that certain assumptions have been made and projected into the unknown future-regarding the price of gasoline and the highway conditions. Their estimates are, of course, no better than their assumptions. If the assumptions are not realized, the tax rate can be later increased (or decreased); benefits received are not geared to taxes paid.

You might say they are talking about the long future as actuarial years and not as real years with Congress in session every year; and the likelihood that at many sessions Congress will continue to increase the benefit; and every other year or so Congress will continue to increase your social security taxes. Pity the poor actuary. Before making a change in the tax rate or the benefits, the House Ways and Means Committee will require the actuary to make new calculations, up to the year 2000 or 2050, to check on the actuarial balance. In other words, actuarial balance merely means that the Federal Government will continue to have an unlimited power to tax the people, and the actuary's figures will indicate whether the tax should be increased this year, next year, or 2 or 3 years from now; and by how much. This "ritual" may curb increases in benefits and sometimes expedite tax increases. This "ritual" could, however, mean the difference between success and bankruptcy for an insurance company because its policyholders hold enforcible contracts.

Rising taxes will be a continuous problem for your generation; it would be a greater problem for me and my generation if Congress would ever charge higher taxes for older workers and lower taxes for younger workers; it should have required step-rate taxes by age some years ago. But, Fred, don't be unkind to the politicians. As long as the proportion of older voters increases, there will be tremendous pressure from the right and the left on our political leaders to increase the benefits for both the rich and the poor who were born many years ago; and at the expense of your generation. It is to be expected.

Actuarial balance should not confuse you. The Supreme Court has twice ruled that this is a tax-welfare system, not an insurance system. Some people carelessly refer to the word insurance with a capital "I" as it appears in the title of a section of the law; apparently the Supreme Court would have held the Social Security Act unconstitutional, on tax grounds, in 1936 and perhaps again in 1960 if the law had provided for an insurance system spelled with a small "”. Don't be confused by the power of Congress to use any words it chooses in drafting laws. Congressional semantics is also a facinating feature of our republican form of government. Unfortunately, some people who should and do know better confuse many bright young persons like yourself, and even your teachers, by using insurance with a capital “I” as if it were insurance with a small "i". The term "actuarial balance" only adds to that confusion; so does "actuarial soundness." Actuarial terms are vital in describing private insurance operations but not in a tax-welfare program such as OASI.

Give my love to your brother and sister and, of course, to your fine parents.

Love,

GRANDPA D.

[From the Journal of Insurance, December 1960]

THE SOCIAL SECURITY PRINCIPLE

(Frank G. Dickinson, National Bureau of Economic Research)

Although some of the mature characteristics of the expanding social security program are still obscure, it should now be possible to point out a few of the developing patterns of the system. What is its image? The 25th anniversary of the signing of the act by President Franklin D. Roosevelt, on August 14, 1935, was duly celebrated last August in Washington, in the press, and by some significant discussions of the history of the act. Furthermore, Dr. Francis E. Townsend died a few weeks after the 25th anniversary. Most historians would grant that the pressure of his grassroots movement during the 1930's was one of the factors responsible for the enactment and the expansion of the Social Security Act. Moreover, some of the recent amendments indicate a trend in the general direction of Townsendism although, of course, the leader of this mass movement would not grant that many of his ideas had already become incorporated in the law through amendments. Only 4.3 percent of the 8 million persons age 65 and over in 1935, however, have received old-age and survivors insurance (OASI) benefits. Another reason for making an appraisal at this time is that the first Republican administration after the law was enacted is now ending. The mere statistic that almost $80 billion of social security taxes have been collected, is still another reason for trying to make an overall appraisal at the present time.

This was and is an omnibus law. A discussion of the trend of the development. of social security can be far sharper if the public assistance and unemployment insurance programs are excluded. This is not for the purpose of attempting to understate the importance of these other programs but rather to make the present. task somewhat simpler. Some reference will be made to old-age assistance in this discussion; moreover, most references to the "social security principle" involve only OASDI, the "contributory" systems.

THE 1960 AMENDMENTS

The amendments of 1960 helped to define the general pattern of social security legislation. Perhaps the most important provision was the elimination of age 50 as the minimum for disability benefits, the "D" in OASDI. The disability income system, effective in 1957, has a rather short history and the emerging pattern is a little difficult to discern. Students of insurance, familiar with the history of the loss experience under disability clauses of life insurance policies, will recall that disability has a historical pattern of rather small losses for a number of years. Then when a great depression comes along, the loss ratio may increase from some modest figure, such as 25 percent, to 200 or more percent. The disability experience has thus far been favorable and the disability trust fund has grown rather steadily. Moreover, the role to be played by unemployment insurance in relation to disability benefits, in the event of a prolonged depression, is by no means clear. Perhaps it would be necessary to consider unemployment insurance and disability protection together in a long depression. Hence, this article will give only minor attention to the "D" in OASDI.

1 Several sources were used extensively in preparation of this article. The first was, "Misconceptions and Missing Perceptions of Our Social Security System (Actuarial Anesthesia)," reprinted from the Transactions of the Society of Actuaries, vol. XI, meeting No. 31, November 1959. The reprint contains the paper of this title by Ray M. Peterson (812-851), the discussion of the paper by 12 actuaries (852-893), and Mr. Peterson's review of the discussions (893-919). The second general source was the series of actuarial studies of the Social Security Administration developed under the direction of Robert J. Myers, particularly studies No. 40-49. The third source was another publication of the Social Security Administration, "The Social Security Act: Its First 25 Years." Social Security Bulletin. August 1960. Considerable use was also made of a number of articles in the Social Security Bulletin and in some actuarial publications. The selection of items and general background reading was only a small sample of the vast amount of literature available on this subject. The literature on the tax side is less extensive than that on the benefits side.

2 Remarks by Senator Javits, p. 15, 954, Congressional Record for Aug. 23, 1960.

Several other features of the 1960 legislation also help to reveal the general pattern of development. The retirement test was eased so that persons aged 65-72, earning more than $1,200 a year, would lose only $1 of benefits for each $2 earned between $1,200 and $1,500. Under the new law, $1 of benefits will be lost for each $1 earned over $1,500. (Briefly, by the old rule, 1 month's pension was sacrificed for each $80 or fraction thereof earned in excess of $1,200 in a year.) The weakening of the retirement test should increase the number of persons in the age group 65 to 72 years who will receive OASI pensions.

A second feature of the 1960 amendments was a series of changes which will make it easier for some workers to qualify for pensions. The agreement between the House and the Senate, under considerable pressure, on medical care for the aged, finally resulted in a compromise measure to keep these benefits within budgetary control by adding certain benefits under old-age assistance, a State-Federal program. This is, therefore, an assistance, not an "insurance" or "contributory" program. The circumstances under which this agreement was reached between the House and the Senate suggest, however, that the future of this type of legislation is still open to question. The alternative measures (Forand and Kennedy-Anderson bills) would have brought the new coverage under the OASI "contributory" system.

GET 85 PERCENT, PAY 5 PERCENT

Approximately 85 percent of the OASI benefits in 1959 was paid to retired persons 65 years of age and over (including some women 62 to 65 years of age). The effect of the amendments of 1960 on this ratio will not be clear for some time to come. The weakening of the retirement test will tend to increase this percentage. (The removal of age 50 as the minimum age for disability benefits would decrease the comparable percentage for OASDI; the 85 percent refers only to OASI.) The direction, on balance, is not possible to determine at the present time. The important fact is that 85 percent of the OASI benefit dollars, at the present time is paid to retired persons; of the tax dollars paid, only 5 percent are paid by persons age 65 and over. The retired are "favored" by a ratio of about 85 to 15 on benefits received; and by a ratio of 5 to 95 on taxes paid. These ratios would seem to throw into clear relief the contentions of some that the trend in OASI is toward a balanced program for both the old and the young.

TRANSFER PAYMENTS FROM THE YOUNG

In the general economic sense, OASI is a system which features transfer payments from the young to the old. There has been, as yet, no general support for new amendments which would primarily benefit the young. The two most common featues of some social security systems in other countries, which would bring this about, namely, maternity benefits and the child endowment, have not been widely discussed in the United States. (Rather, methods to reduce population growth are receiving more attention.) Moreover, the greatest likelihood at the present writing, would be for some kind of legislation based on the social security principle, to finance the medical and hospital care of retired citizens, such as was proposed under the Forand and Kennedy-Anderson bills in 1960; and for further increases in the amounts of OASI pensions. Such measures would, of course, provide outright transfer payments from the young to the old.

In a more popular vein, one might say that such bills would require young bankers to pay the hospital (and the medical) bills of retired bankers, require working farmers to pay the health bills of retired farmers, require young laboring people to pay the medical and hospital bills of retired laborers. One could carry this description of the transfer payments into the area of the traditional income distributions: these proposals would require the rich young to pay the hospital and medical bills of the rich old, the middle-income young to pay the health bills of the middle-income old, and the poor young to pay the hospital and medical care bills of the poor old; and the six crisscross pairings which could be made. Nothing of practical importance appears on the horizon which would indicate that the percentage of payments to the retired under OASI would fall much below 85 percent in the near future.

This establishes one emerging pattern quite clearly. Social security legislation as regards OASI in the United States has, after 25 years, become rather well established as a system of transfer payments from the young to the old. Many students of social security programs will agree that this is what has happened and is what should have happened. Nevertheless, it furnishes the first pattern clearly emerging after a quarter century.

LEGAL ACCURACY

There is a strange contrast between the voluminous hearings before the committees of the House and the Senate on the many amendments to the Social Security Act and some Social Security Administration pronouncements, and, on the other hand, what might be called legal pronouncements. The Supreme Court, in 1936, in Helvering v. Davis (301 U.S. 619, 640), clearly indicated that the Social Security Act (OASI) was constitutional because the system of old-age benefits was a form of public charity. Also in the Government's brief for Arthur S. Flemming, Secretary of the Department of Health, Education, and Welfare, in the recent case of Flemming v. Nestor, the pronouncement (1959) was again that social security was a welfare instrument. The Court agreed. This charity concept is also found in the reasoning of the Internal Revenue Service that social security benefits were considered tax exempt because they came within the scope of the tax law exempting from taxation "the value of property acquired by gift" (I.T. 3447, Cumulative Bulletin, 1941-1, p. 191). If one were to treat merely the legal aspects of this developing program, there would be very little difficulty in observing a rather consistent pattern starting with the first Court decision bearing on the constitutionality of the original Social Security Act. That pattern is that there is no necessary relationship between taxes paid and benefits received and that the OASI benefits should be viewed as coming under the general statutes regarding gifts.

MAXIMUM TAXES PAID

Some simple observations about social security taxes may help to bring the problem of definition into sharper focus. During the period 1937-49, the (OASI) tax was 1 percent on maximum wages of $3,000, or a maximum tax of $30 a year for an employee. During this 13-year period, a person who was continuously employed in a covered position at an annual wage of $3,000 or more and paid his tax every year, would have paid $390. The maximum tax in 1950 was $45, as shown in table 1. In 1959, he would have paid $120, 21⁄2 percent of $4,800; and in 1960 he would have paid $144, 3 percent of $4,800. Thus, the maximum taxes that could have been paid by an employee during the 24 years, January 1, 1937, to December 31, 1960, was $1,290. (Separating out the one-fourth of 1 percent tax for disability would introduce a refinement which would be confusing for the present purposes.) If we were to deduct from that amount roughly $190, the balance of $1,100 could be said to be the net payment by the individual who has worked and paid maximum taxes every month. The $190 could be considered a very rough approximation of the value of the protection received before attaining age 65-survivorship benefits, lump-sum death benefit, and since January 1, 1957, disability protection.

Approximate amounts will simplify this search for the emerging social security principle. This procedure omits the whole question of interest on the OASI trust fund. Currently, interest earnings on the OASI trust fund are being used to pay current claims. If interest may be, for the moment, disregarded, we can say that this maximum case represents $1,100 in taxes. (This $1,100 is not represented by Government bonds set aside in Washington, as most of the revenue received during the 24-year period was spent to pay concurrent benefits. Hence "prepayment" and "prepaid" are used in a very restricted sense herein.)