April 1947 was $160 for nonschool employees and $185 for school employees as compared with an average monthly wage of about $205 in manufacturing industries.

Almost half the total number of State and local employees are not covered under any retirement system, and of those who are so covered, probably about four-fifths lack adequate survivorship protection. The need of this group for the protection of the old-age and survivors insurance program is clear. An equally important reason for extending old-age and survivors insurance to employees of State and local governments is to give public workers continuous protection when they shift from one government unit to another, or between government units and private industry. Existing State and local staff retirement systems are designed primarily for those who continue in the service of the particular unit until their retirement; the majority of those who leave the service before retirement age normally forfeit any rights to retirement benefits they may have acquired. Similarly, persons who enter government employment from private industry may lose all or part of the protection they have acquired under oldage and survivors insurance.

Although jobs in State and local government agencies are more stable than in many areas of private industry, there is nevertheless a substantial turn-over. In April 1946, a typical month, 3.4 million persons were employed by State and local governments, while during the whole year about 4.3 million were so employed. Thus, several hundred thousand had temporary employment in these units, or shifted from permanent government jobs to work in other fields. In 1944, about one-seventh of all nonschool employment for State and local government units was on a part-time basis and about one-eighth of all State and local employment was temporary. Even for the permanent, full-time jobs, the annual turn-over probably ranges from 4 to 7 percent.

Many proposals previously advanced for covering these workers have advocated excluding, on either a permissive or a mandatory basis, various limited groups of State and local employees, apparently in fear that coverage under old-age and survivors insurance would weaken or even completely destroy their State and local retirement system. As pointed out in the Council's recommendations for coverage of Federal and railroad employees, retirement systems supplementary to old-age and survivors insurance perform a valuable and necessary function. When coverage is extended to State and local employees who are members of staff retirement systems, those systems can be adjusted to supplement the basic old-age and survivors insurance benefits. Private employers have demonstrated that such adjustments can be made satisfactorily and without any loss in total retirement protection. The Council believes that in light of (a) the incontrovertible merit of the retention and development of supplementary plans, (b) the fact that employees under industrial pension systems did not suffer losses in benefits attributable to adjustment to the old-age and survivors insurance program, and (c) the fact that State and local governments have recognized the need for, and taken action to provide, retirement protection for their employees, any fear that the availability of old-age and survivors nsurance will lead government units to reduce the total protection ufforded their employees is unjustified.

9. A Study of Social Security Protection for the Possessions of the

United States

A commission should be established to determine the kind of social security

protection appropriate to the possessions of the United States The social insurance and public assistance provisions of the Social Security Act do not at present apply to Puerto Rico, the Virgin Is. lands, Guam, or other possessions of the United States, even though the livelihood and security of the people of such possessions are bound up with the United States economy. The kind of social security protection to be afforded to these people should be based on detailed studies of economic and social conditions in the islands. Matters that require investigation include wage rates, regularity of employment, extent of unemployment, incidence of illness, and the nature of public assistance and public health provisions now administered by the insular governments.

The extended inquiry which would be called for, particularly since areas outside the continental United States are involved, is believed by the Council to be beyond its function. For this reason the Council proposes that a special commission be established to make such inquiry and recommend appropriate social security legislation. The commission should represent the general public, including residents of the possessions, as well as agencies such as the Federal Security Agency and the Departments of Labor, Agriculture, Interior, Commerce, and Treasury, which either have a special interest in the islands or would normally concern themselves with the problems at issue.

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10. Inclusion of Tips in the Definition of Wages The definition of wages as contained in section 209 (a) of the Social

Security Act, as amended, and section 1426 (a) of subchapter A of chapter 9 of the Internal Revenue Code should be amended to specify that such wages shall include all tips or gratuities customarily

received by an employee from a customer of an employer Tips or gratuities paid directly to an employee by a customer of an employer, but not "accounted for” by the employee to the employer, are not now included in wages as defined for benefit and contribution purposes. Only a small part of all tips are now accounted for. Consequently, substantial numbers of workers in such service industries as hotels, restaurants, barber shops, and beauty parlors are denied the degree of protection they would acquire if all such payments were included in their wage records. Some workers may fail to qualify for benefits because, except for tips, their remuneration is inconsequential. This condition is especially illogical since tips are frequently contemplated in the wage contract, are earned in the service of the employer, and are received for services generally recognized as performed in the interest of the employer.

Tips are included in taxable income under the Federal income tax law. Moreover, in about half the States, such payments are reported under the State unemployment insurance laws on a more inclusive basis than under the program of old-age and survivors insurance.

Estimates indicate that full inclusion of tips and gratuities would sharply increase the wage credits of approximately a million workers now covered by the old-age and survivors insurance program. The increase for roughly two-thirds of that number would amount to about 40 percent of their wages as reported under present interpretation of the law. According to Department of Commerce estimates, $183,000,000 was paid in tips in 1939; $196,000,000 in 1940; $238,000,000 in 1941; $308,000,000 in 1942; and $396,000,000 in 1943. If a similar rate of increase continued after 1943, as seems likely during years of high prices, the total amount now paid in tips might well exceed half a billion dollars a year. The inclusion of such additional sums in the wage credits of approximately a million workers in covered service industries would clearly have an important effect on their benefits rights and their contributions to the trust fund.

In the absence of an exact reporting of tips by persons receiving them, it would be possible to permit employers to report a reasonable estimate of the tips received by their employees, as is now done under some of the State unemployment insurance laws. In making such estimates, the employer would take into account the volume of business handled by the employee, the tips reported by other employees, the type of establishment, and any other pertinent factors. The employer should not be held responsible for any inaccurate reporting of tips by his employees, however, and should be protected from penalties on this account. Procedural and administrative questions could be settled by appropriate regulations designed to implement the intent of the law.

Adoption of this recommendation, the Council believes, would bring the contributions paid and the benefits received by a large number of people more nearly in line with their actual earnings, thus ending an inequity to persons whose employment is covered by the program but who receive much of their remuneration for such employment in a form not now considered wages. It would also result in greater uniformity in interpretation of wages in laws relating to income taxes, unemployment insurance, and old-age and survivors insurance.


11. Insured Status

To permit a larger proportion of older workers, particularly those newly

covered, to qualify for benefits, the requirements for fully insured status should be 1 quarter of coverage for each 2 calendar quarters elapsing after 1948 or after the quarter in which the individual attains the age of 21, whichever is later, and before the quarter in which he attains the age of 65 (60 for women) or dies. Quarters of coverage earned at any time after 1936 should count toward meeting this requirement. A minimum of 6 quarters of coverage should be required and a worker should be fully and permanently insured if he has 40 quarters of coverage. In cases of death before January 1, 1949, the requirement should continue to be 1 quarter of coverage for each ? calendar quarters elapsing after 1936 or after the quarter in which the age of 21 was attained, whichever is later, and before the quarter

in which the individual attained the age of 65 or died The Council recommends a "new start” in the eligibility requirenents which will require the same qualifying period for an older • As under the present program, a calendar quarter in which the worker has $50 or more in earnings from overed employment.

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worker now as was required for a person who was the same age when the system began operation. All workers who will have attained age 62 before the middle of 1949 would be insured with the minimum of 6 quarters of coverage, just as workers of the same age in 1937 could be insured with the minimum number.

A major reason for the fact that the old-age and survivors insurance program has been slow in replacing public assistance as the chief method of meeting income loss in old age is the difficulty which older people face in meeting the present eligibility requirements. Eleven years after the inauguration of the program only about 20 percent of the population aged 65 and over is either insured under the program or receiving benefits.

Eligibility requirements for the older workers as difficult to meet as those of the present program (24 quarters of coverage will be required under present provisions for those attaining age 65 in the first quarter of 1949) mean an unwarranted postponement of the effectiveness of the insurance method in furnishing income for the aged. In a contributory social insurance system, as in a private pension plan, workers already old when the program is started should have their past service taken into account. The unavailability of records of past service prevents giving actual credits under old-age and survivors insurance for employment and wages before the coverage becomes effective, but eligibility requirements and the benefit formula can and should take prior service into account presumptively. To pay benefits to all the current aged-including those who have not worked at all since the inauguration of the system-might endanger the character of the benefit based on contributions and work records, but in getting the system started, it is important to make due allowance for those who, because of age, will probably continue at work for only a short period.

All persons who reached age 62 before the middle of the year in which the system began to operate (1937) could be fully insured under the present act if they acquired six quarters of coverage. Those who attained age 62 in the third or fourth quarters of 1937 needed 7 quarters, and so on, while, as indicated above, those attaining age 65 in the first quarter of 1949 will need to have had 24 quarters. After 1956, under the present provisions, all persons who had attained age 21 before 1937 will need the maximum requirement of 40 quarters.

Unless the present provisions are modified, all persons covered for the first time in January 1949 who are less than 57 years old will have to have 10 years of coverage before they can become eligible for retirement benefits, while even those aged 65 will need six more years of steady employment before they can receive benefits. A "new start, treating those newly covered workers in the same way that the program treated other occupational groups when they were first covered, seems reasonable and fair.

While it would theoretically be possible to liberalize requirements only for newly covered workers and to retain the present provisions for all others, this is not a practical or desirable solution. Shifts between covered and noncovered employment are so common that it would be all but impossible to establish a fair criterion for determining, for the purpose of special eligibility requirements, which individuals should be treated as belonging to a newly covered occupation. Any liberalization designed to reduce the handicap of newly covered workers must be a generally applicable provision.

The Council recommends that the liberalization of eligibility requirements should apply only to individuals living at the date of coverage extension. This proposal is consistent with the treatment accorded survivors under the 1939 amendments when the provisions for survivor benefits were made applicable only in cases of death after December 31, 1939. Considerable administrative difficulty would arise if the eligibility for benefits of individuals who died before the amendment of the law were reconsidered.

Of the various possible methods of adjusting the fully insured status requirement for newly covered workers, the one we recommend seems to us to offer the advantages of uniformity and simplicity and at the same time to provide a much-needed liberalization in the requirements for all older workers. It would also reduce the disadvantages which many workers normally in covered employment now face because of their work during the war in Government shipyards, munitions plants, emergency Government agencies, and other noncovered occupations.

The new-start method would be impractical if extension is on a piecemeal basis. More than one "new start," we believe, would be indefensible and would tend to weaken public confidence in the program. It would be possible to use the new-start plan, however, even though coverage is not extended to Federal and railroad workers until later, since available records of past employment and wages for these workers would permit crediting their back wages. Under such an arrangement, amounts equivalent to the contributions which would have been collected if the workers had previously been covered under old-age and survivors insurance could be transferred to the old-age and survivors insurance trust fund from the trust funds for their separate Federal retirement systems.

The "new start” would result in payment of retirement benefits to a much higher proportion of the aged during the early years of the system, but it would not increase beneficiary rolls and costs in the later years since the eligibility requirements would remain the same for workers now young.


12. Maximum Base for Contributions and Benefits

To take into account increased wage levels and costs of living, the upper

limit on earnings subject to contributions and credited for benefits should be raised from $3,000 to $4,200. The maximum average monthly wage used in the calculation of benefits should be increased

from $250 to $350 6 A social insurance program must be adjusted periodically to basic conomic changes. In a dynamic economy, provisions which were uppropriate at the time they became effective inevitably become • While the majority of the Council favor increasing the upper limit to $4,200, some favor keeping the imit at $3,000 and some favor increasing it to $4,800. The reasons for these two positions are given in ppendix I-F.

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