FUTURE DIRECTIONS IN SOCIAL SECURITY UNRESOLVED ISSUES: AN INTERIM STAFF REPORT (By Dorothy McCamman, Consultant) PART 1 INTRODUCTION When Senator Frank Church, chairman of the Senate Special Committee on Aging, announced on September 13, 1972, that the committee would hold hearings on "Future Directions in Social Security," he said in part: It is clear, I think, that we in this Nation can no longer rely on catch-up benefit raises or even an automatic cost-of-living adjustment mechanism. We have to grapple with other issues : How can we make the payroll tax less onerous for so many workers? What more can be done-besides adjusting the Social Security "retirement test"—to deal with one of the biggest complaints now made by the elderly— the feeling that they are being forced to give up work when they reach retirement age? How can we make retirement more secure for women? How can we deal fairly with elderly members of minority groups, so many of whom do not live to age 65? Should general revenues be used for specific, limited purposes? Five hearings held in Washington, D.C., in 1973, heard testimony from the following witnesses: January 15, 1973, Robert M. Ball, Commissioner of Social Security. January 22, 1973, Nelson H. Cruikshank, president, National Council of Senior Citizens. January 23, 1973, John A. Brittain, the Brookings Institution: J. Douglas Brown, provost and dean of the faculty, emeritus, Princeton University; William L. Mitchell, former Commissioner, Social Security Administration, and consultant to National Retired Teachers Association-American Association of Retired Persons. July 25, 1973, Wilbur J. Cohen, cochairman, Institute of Gerontology, University of Michigan-Wayne State University; dean, school of education, the University of Michigan; and Secretary of Health, Education, and Welfare, 1968-69. Max Manes, chairman of Seniors for Adequate Social Security, New York, New York. July 26, 1973, Cyril Brickfield, legislative counsel, National Retired Teachers Association and the American Association of Retired Persons, accompanied by Hon. John Martin, consultant, and former U.S. Commissioner on Aging: James Hacking, legislative representative; Hon. William Mitchell, consultant, and former Social Security Commissioner; Peter W. Hughes, legislative representative; and Tom Borzilleri, economic consultant. Bar (1) bara F. Marks, acting directing attorney, National Senior Citi zens' Law Center; accompanied by Richard Michael Dull attorney. An opportunity to hear the views of senior citizens, many of them representing local programs or national organizations, was provided by a hearing in Twin Falls, Idaho, on May 16, 1974. The records of these hearings, published in six parts, also include numerous statements and letters from concerned organizations and individuals.1 Also in the series of hearings on "Future Directions in Social Secu rity"—but not included in this Interim Report—were two that focused on the new Supplemental Security Income program. These hearings were held in Washington, D.C., on July 15 and 16, 1974. (Parts 7 and 8.) The Interim Report has a dual purpose: (1) to summarize the unresolved issues in our Social Security program that were identified by the witnesses, along with their suggestions for improvement, and (2) to delineate areas that need detailed attention through future hearings. The Interim Report concentrates on the cash benefits of the OASDI system, largely ignoring the health benefits of Medicare. This is not because the committee is unaware of the essential importance of health protection to economic security. Indeed, the committee agrees wholeheartedly with the finding of the 1971 White House Conference on Aging that "This Nation can never attain a reasonable goal of income security so long as heavy and unpredictable health costs threaten incomes of the aged." Medicare and Medicaid, however, have been the subject of intensive scrutiny by the Subcommittee on Health of the Elderly, which will continue to concern itself with an evolving program of national health insurance. The new program of Supplemental Security Income is considered only in relation to its effect on OASDI, not with respect to the program itself. Here, too, the committee is holding intensive hearings on the adequacy of SSI payments and the operation of the assistance program. The records of the six hearings are thus broader in scope than this Interim Report. ') FINANCING Unquestionably, the witnesses consider that the major unresolved issue in future directions in Social Security is the financing of the system. While the most recent benefit increase has been achieved without an increase in the overall contribution rate, there is no doubt that the payroll tax already places a heavy burden on workers with low or modest wages. Furthermore, new long-range forecasts released in June 1974, significantly change previous projections and indicate that after 1 "Future Directions in Social Security," hearings before the Speecial Committee on Aging, United States Senate. 93d Congress: Part 1. Washington, D.C., January 15, 1973 (pages 1-94). 10 years there will likely be a need for an 0.5 percentage-point increase in the current tax rate of 5.85 percent. At the time of the Senate committee hearings in Washington, projections then available permitted the assumption that the current tax rate for cash benefits was sufficient to finance payments-including increases related to the cost of living and higher earnings-up to the year 2011. The question of financing of the system has thus become even more acute than when these hearings were held. The payroll tax-when considered without relation to benefits-is unquestionably regressive. One witness, concerned primarily with the regressivity of the payroll tax, suggested that the ultimate goal be the financing of the system exclusively through general revenues. Recognizing that full replacement of the payroll tax by the income tax "would require an increase in income tax yield on the order of 50 percent" which would be difficult to put through the legislative process, the witness also suggested a more modest internal reform of the payroll tax structure "by means of exemptions and deductions from pooled earnings identical to those under the income tax." 4 But to consider the contributions without regard to benefits was analogous, said the witness who followed him, to the research of a panel of aerodynamicists who found that "the wings of a bumblebee provided insufficient lift to support the bumblebee in flight." As with bumblebees, so with many social institutions, if they are dissected into their separate parts, those parts appear to a specialist to be ill-designed and nworkable. But through long evolution as integrated entities, the institutions have gained a mysterious capacity to survive and function effectively. Contributions and benefits in social insurance are not separable entities, artificially stuck together, but are, rather, inseparable, interlocking elements in a single concept. Without this interlock, you end up with a program of doles financed by general taxation." Overwhelmingly, the testimony favored preservation of the contributory principle of Social Security, with benefits as an earned right. How then can principles that have such widespread acceptance be preserved at the same time that the burden of payroll taxes is lowered, especially for those with relatively low earnings? And specifically, how can general revenues share in the costs of the system, with the share of financing and the level of benefits predetermined rather than eft to the action of each Congress? Following are some of the proposals. General revenues equivalent to prior service credits. Nelson H. Cruikshank, president of the National Council of Senior Citizens, advocated use of general revenues to finance the benefit costs equivalent to prior service credits—that is, the cost of paying full benefits to workers who are so close to retirement when first covered that contributions paid by them and by their employers finance only a portion of the benefit. Mr. Cruikshank reaffirmed the position stated in an earlier report he prepared for the committee: I went on to say in the report I prepared for this committee 3 years ago, "There is sound justification for financing through general revenues that part of See Appendix 1, pp. 25-29. Ibid., Part 1, p. 34, Robert M. Ball. Ibid., Part 3, pp. 178-9, John A. Brittain. Social Security costs which is equivalent to prior service credits. Workers already close to retirement age when the system was first started, or when coverage was extended to their employment, received full benefits even though the contributions they and their employers paid would finance only a small part of the benefit. While this was sound public policy and kept many old people off relief, it did mean that these benefits had to be financed from future contributions. There is no justification for expecting presently covered workers to pay for this 'accrued liability'-estimated in the long run to amount to one-third of the total cost of the program-through a regressive payroll tax. A far fairer method would be to finance this share from general revenue sources to which all taxpayers contribute and through a more progressive tax structure." I stand on this position today-that the best way of financing our Social Security system is to introduce general revenues in combination with a higher wage base, thus preserving the essential value of earned rights and at the same time lessening the regressivity of the tax. (Part 2, p. 124.) The same purpose would be achieved by the proposal of Wilbur J. Cohen, former Secretary of Health, Education, and Welfare, that a Federal contribution out of general revenues be considered for meeting the cost of benefits paid to individuals with fewer than 40 years of contributions-in effect, benefits above the amount paid for by employer and employee contributions. Specifically, he said: Therefore, I favor at some point when Congress has the money, Congress paying the difference between the cost of what the individual paid for his benefit and what the benefit did produce, which is roughly about one-third of the total cost of benefits in perpetuity. That seems to me, if you want to reduce the contribution rates at some point and have a logical method of introducing a general revenue subsidy, that is an intelligent, rational way which pension systems use to finance the transitional cost when the system has started with the longrun cost. (Part 4, p. 252.) Refund of contributions to low-income workers. To reduce the regressivity of the payroll tax and still retain the psychological advantages of the contributory system, it was suggested that the income tax system be used to make refunds to low-income families to compensate for the Social Security taxes they had paid. Mr. Cohen testified: The proposal advocated by Senator Russell Long of the Senate Finance Committee, which has passed the Senate by an overwhelming vote in 1972 as a part of H.R. 1, to refund to low-income individuals 10 percent of their earningsroughly the combined Social Security contribution-warrants support. (Part 4, p. 251.) Mr. Brittain suggested: An alternative means of substituting the income tax for the payroll tax is to integrate the two: the income tax could absorb the employee's share of the payroll tax directly, or the employee's payroll tax payments could be credited against his individual income tax. The burden of the employee tax would be fully removed if cash refunds were paid to those whose employee payroll tax exceeded the income tax. Any psychological advantage of the earmarked tax could be retained with either of these devices, while in effect the income tax was substituted for the employee tax. Integration of course need not be restricted to the employee tax. The taxpayer could also receive credit for the employer tax paid in his name. This would be consistent with the finding that the employee also pays that tax as a result of the restraint it imposes on real wage rates. (Part 3, p. 180.) Mr. Brown spoke strongly against such proposals, on grounds of social insurance principles as well as administrative complexities, saying: What I keep coming back to, sir, is that any way you work it, a reduction of contributions for the low-income person is essentially introducing an individual needs test into a system designed to avoid a needs test. (Part 3, p. 191.) |