AUTOMATIC ADJUSTMENT
OF MAXIMUM EARNINGS BASE

1. MAXIMUM INCREASED BY PERCENTAGE INCREASE IN AVERAGE WAGES, ROUNDED TO NEAREST $600

2.INCREASE LIMITED TO EVERY TWO YEARS, BEGINNING WITH 1973

Mr. BALL. Mr. Chairman, a very important proposal of the President's that was adopted by the House is in the area of the so-called retirement test.

ELIMINATING WORK DISINCENTIVES IN THE RETIREMENT TEST

PRESENT

ANNUAL EXEMPT AMOUNT

$1-for-$2 ADJUSTMENT +1680-2880

$1-for-$1 ADJUSTMENT Above $2880

MONTHLY MEASURE

Mr. BALL. This is the provision that limits the amount of social security benefits that a beneficiary gets if he continues at work and earns above specified amounts.

The major problem that we have been grappling with in this test is to reduce the disincentives to work that are inherent in taking away part of people's benefits when they earn more than a specific amount. The present provision is particularly bad in that respect in relation to earnings above the $2,880 level.

Let me just take time to remind you of how this test works today. As shown here on the chart, under present law an individual gets his full benefits for a year if in that year he earns $1,680 or less. Then

there is a band between $1,680 and $2,880 where his benefits are reduced by $1 for each $2 earned, and that is fine. But above $2,880 his benefits are reduced by a dollar for every dollar that he earned, with the result, of course, that with the expenses of working, and with the fact that he pays income tax on earnings and not on social security, he actually is worse off by earning somewhat over $2,880 than if he had confined his earnings to $2,880 or less.

Let me remind the committee that notwithstanding these annual tests, an employee gets his full benefits for any month in which his wages are $140 or below.

Among the changes proposed, the most important one in principle is to eliminate the dollar-for-dollar area, and instead have the $1for-$2 rule apply to all earnings above the exempt amount.

The proposal is for a $2,000 exempt amount instead of $1,680. The shift from $1,680 to a $2,000 exempt amount just about recognizes the increase in wages that nas taken place since the $1,680 was established.

The CHAIRMAN. Would you mind being a bit more explicit so someone who is not familiar with it can understand precisely what you mean by that. Give us an illustration of how it works now and how it would work under your proposal.

Mr. BALL. Well, Mr. Chairman, suppose a man earned at the present time $1,780 in the course of a year. His first $1,680 is exempt entirely, but he has $100 over that, and there is a one-for-two adadjustment on that $100. We take $50 away from his annual total of social security benefits under present law.

Under the proposal, because of raising the exempt amount to $2,000, the entire amount of $1,780 would be exempt, and we would pay him his full social security benefits.

Then, under present law, if the individual earned over $2,880, we start taking away from his social security one dollar for every dollar that he earns. Our proposal is not to do that, but to continue a one-for-two deduction all the way up, until all the social security benefits are eliminated.

The CHAIRMAN. While you are rounding figures off why didn't you just make that $3,000 or $2,800 rather than $2,880.

Mr. BALL. The $2,880 is a figure $1,200 above the $1,680 exempt amount, Before the present test was enacted the exempt amount was $1,500 and the $1-for-$2 reduction applied in a $1,200 span from $1,500 up to $2,700. When the exempt amount was raised from $1,500 to $1,680, the $1,200 span was continued.

Raising the exempt amount is of course another matter-really. That is really a matter of both cost and principle to an extent, I would say, Mr. Chairman. If you went as high as $3,000 for the annual exempt amount, a fairly significant number of people would be eligible at age 65 to draw social security even though they continued to earn just as they had before. They wouldn't really be retired people; they would just be people who suddenly reached a given age. You would be paying them on an annuity basis. We have always taken the view-although I know there are many Members of the Congress who have disagreed with this-that the funds of the program really ought to be conserved for people who have suffered a loss of income by having to retire or partially retire.

More important than that, though, is the fact that if you raised the exempt amount as high as $3,000, instead of a relatively modest cost for the proposal to go to $2,000, you would have a very expensive proposal.

Senator TALMADGE. What is the cost of the present proposal?

Mr. BALL. The present proposal costs 0.13 percent of payroll, I am informed. You might be interested

The CHAIRMAN. In dollars how much is that?

Mr. BALL. This is the average cost over a 75-year period.

The CHAIRMAN. Yes, but how much next year?

Mr. BALL. For the first full year, the cost is estimated at $570 million.

Senator CURTIS. Mr. Chairman, may I ask how do you apply the monthly test, on earnings test, for retirement?

Mr. BALL. Yes; the monthly test, Senator Curtis, is an overriding test. You really say that regardless of how much the individual has earned during the year-you might take a person who earned as much as $5,000-you say that nevertheless, in any month in which he has earned wages of $140 or less, he nevertheless gets a benefit for that 1 month regardless of his annual earnings.

Senator CURTIS. So if an individual is in a business or profession where he can crowd certain employment into 1 month there is no limit except for that month?

Mr. BALL. That is correct. For the self-employed, because you can't determine a self-employed person's income by the month, the test is whether he has rendered substantial services in his business during a month. If he didn't work in his business during a particular month, then he would be eligible for benefits for that month even though the earnings for the year might exceed the annual exempt

amount.

I might remind the committee why the law is set up that way. It is particularly significant as people move in and out of employment. Take the first year of retirement. If you stuck solely to an annual test, an individual who had relatively high earnings in the first 5 or 6 months might be put in a position where you wouldn't pay him any benefits for the rest of that year. Yet he is retired when he stops work.

In order to start paying him benefits right away, you use the monthly test, and say, well, he isn't earning anything after he retired in May, and therefore you can pay him for the rest of the year, even though early in the year he had quite high earnings.

The same applies if he goes back to work after he has retired and then retires again. There is a lot of movement in and out of employment.

Senator CURTIS. I am not critical of it.

Mr. BALL. No; I know.

Senator CURTIS. I think it has to be that way but I wondered how it would apply to the self-employed. For instance, a lawyer might go back for the month of tax returns and make himself four or five thousand dollars, and still he could draw his benefits for 11 months. Mr. BALL. If he does nothing else during the rest of that year he draws benefits for 11 months. It seems to me he really is a retired person in the case you have cited.

Senator GORE. Mr. Chairman, may I ask a question.

Mr. Ball, isn't there some unfairness involved in applying this test to earned income alone leaving no ceiling, no adjustment, no reduction whatsoever applicable to people with income from investment.

Mr. BALL. It doesn't seem so to me, Senator Gore, for this reason. I think the principles on which this system is built are really very sound from the standpoint of the question you raised. People get their social security benefits without regard to any income, other than work income, that they may have, with the idea that social security benefits are relatively low and we hope that people will have private pension plans that supplement the benefits, and that they will have private savings that will supplement the benefits. Unless you let people have their private savings, their private pensions, and also social security, then you can't encourage that voluntary saving activity, and you can't build on social security.

As soon as you write in what amounts to an income test or a means test, and say, "We are going to reduce your social security because you have dividends or interest earnings or a private pension" as soon as you do that I think you have moved over toward a welfare-type program, and also you have discouraged individual savings throughout life.

Senator GORE. Well you have explained it very well but I don't think you have answered the question of the inherent unfairness involved. True we hope that people will have other sources of income, but the present policy which you are recommending to continue, discriminates against those who are not so fortunate.

Mr. BALL. I really don't believe it does, Senator Gore. Thinking of this as a retirement system where your benefits are based on the earnings that you had in the past, you must test whether you have retired or partially retired. This is the reason for looking at your earnings. It is just a test of whether you have retired or not.

We don't look at other income, because that has nothing to do with the question of whether you have retired, any more than you would look at savings in paying benefits under a private retirement system. In a private system you would test whether the individual has left his employer, or whether he left his industry under an industrywide plan, or whether he has left the Government under the Civil Service system. Then you pay him his retirement benefits and you don't look at any other income or resources he may have.

Senator GORE. Of course, this is based on the goal which I really wished to question, of requiring people to quit work before they are entitled to benefits. I think with the improvement in medical care, the advances we have made in longevity, and in the elongation of health and capabilities into the later years of life, that we may need to reexamine this whole question of placing a premium upon retirement. A man 62 or 65 years of age can contribute a great deal to his country. You are not a boy yourself, and you seem to be in your prime here this morning.

Mr. BALL. I hope I stay that way this morning, Senator.

[Laughter.]

Senator, we very much agree with the importance of having a situation in which people are not seriously penalized for taking jobs, and I think the present test does that, above this line of $2,880.

Senator GORE. This I would disagree with you on. I think with the present high cost of living that this figure is too low.

Mr. BALL. What I am saying is that we are proposing, and the House has approved, the dropping entirely of this idea of taking away dollar for dollar from your social security benefits when you earn above the exempt amount. Instead the bill provides that for earnings above $2,000, we will reduce social security benefits by only one dollar for each two you earn. This is a major step in the direction of what you are seeking, which is to have no barriers to the employment of older people. Now there would be an even stronger incentive to work if you abolished the retirement test altogether, I agree

Senator GORE. Well, I will close with this.

Mr. BALL. Abolishing the test is very expensive.

Senator GORE. If this theory is to be continued then I think we must have some ratio that applies with respect to unearned income as well as earned income.

Mr. BALL. I would hate very much to see the Congress do that, Senator, for the reasons I have explained. It really is introducing an income test into the program. Instead of basing benefits on earnings and contributions. You wouldn't get the benefits if you are one of the people who have saved. That would be a very big departure in this program. Instead of being a base which you will hope people will add to, you would be saying, in effect, "If you are one of those who save on your own you are not going to get your social security." I think that would be a bad change in the program.

Senator GORE. Well, you are persuasive in that regard but not very persuasive to me with respect to this low limit on earned income. Mr. BALL. I will settle for 50-50.

Senator GORE. Thank you. [Laughter.]

That is the best deal I have had in a long time.

Senator WILLIAMS. What would be the cost of the program to make that $2,400 rather than $2,000?

Mr. BALL. That would be 0.08 percent more, Senator. This provision in the bill for $2,000 would cost 0.13 percent. It would add 0.08 percent more to go to $2,400 and then have a $1 for $2 adjustment for all earnings over $2,400.

Senator HANSEN. Mr. Chairman.

The CHAIRMAN. As Chairman of the Committee, I started it so I should accord everyone else the same courtesy that I insist upon myself and I will. But after we have this round of questions at this pause, I am going to suggest that we merely make notes and save our questions until our turn comes. But I am not going to deny other Senators the same advantage I insisted upon and accord myself. I suggest that after this break we let Mr. Ball finish his presentation in chief and then I will call upon the Senators.

I am planning to recognize the junior Senators first this time and you will be the first one, Senator Hansen.

Mr. BALL. Did Senator Williams get the answer to his question? The CHAIRMAN. Did you get it?

Senator WILLIAMS. I didn't hear it.

Mr. BALL. It was 0.08 percent, in addition to the 0.13 percent for the $2,000 in the bill. It would cost 0.08 percent more to raise that $2,000 to $2,400. It starts to get very expensive as you raise it to where you hit a lot of full-time workers.