Sidebilder
PDF
ePub
[ocr errors]

outmoded. This is what has happened to the limitation placed on the amount of wages subject to contributions and allowed as wage credits.

In 1939, when the $3,000 maximum wage base was established, nearly 97 percent of all workers in covered employment had wages of less than $3,000 a year, and thus they were required to pay contributions on their total wages and could have their total wages counted toward benefits. Even among workers who were steadily employed throughout 1939, fewer than 5 percent received wages of more than $3,000 a year. With the general rise in wage levels since 1939, however, the $3,000 limitation has tended to exclude from taxation and use in benefit computations part of the wages of a substantial proportion of covered workers. In 1945 about 14 percent of all covered workers had wages exceeding $3,000, and among workers who were steadily employed throughout the year, about 24 percent had wages in excess of that amount.

The wage base for contributions and benefits under the program should be higher not only because of increases in the level of wages but also because of price increases. Since the base has not kept pace with rising prices, benefits now supply a smaller proportion of the costs of maintaining the beneficiary's previous standard of living than they did in 1939. Today for example, $4,200 a year represents a somewhat lower standard of living than $3,000 a year could purchase a decade ago. Raising the upper limit on wages is necessary if the relationship between benefits and standards of living which was intended in the 1939 amendments is to be maintained.

To take full account of the increase in wages and prices, the limitation on taxable wages would have to be raised to somewhat more than $4,800. The Council, however, recommends that a part of the increase in wages be disregarded by changing the limitation to $4,200 as a conservative adjustment to the rise in wage and price levels which has occurred since the $3,000 figure was adopted. With a wage base of $4,200, about 95 percent of the workers in covered employment in 1945 would have had all their wages from covered employment available for benefit purposes.

If the old-age and survivors insurance program is to fulfill its function, benefits for all insured workers must be increased. Since the American system of relating benefits to past wages rests on the principle that considerations of individual security and individual incentive require a relationship between benefits and the previous standard of living of the retired person, benefits must be increased for higher-paid wage earners as well as for workers in the lowerincome brackets. Comparisons between the primary insurance benefits payable under the plan proposed by the Advisory Council and those payable under the present program appear in table 1. As those figures show, we recommend that a worker with an average monthly wage of $350 (the maximum) shall have the potential protection of a primary insurance benefit representing 22.5 percent of his average monthly wage. Under the present program, that percentage represents the primary insurance benefit of a worker who has earned $3,000 or morę a year and who has had 40 years of coverage.

TABLE 1.-Primary insurance benefit and its ratio (percent) to specified average

monthly wages under the Advisory Council's proposals and under the present law 1

Present law

Advisory Council's

proposal :

10 years of coverage 20 years of coverage 40 years of coverage

Average monthly

wage

Percent
Percent
Percent

Percent
Primary of aver-Primary of aver. Primary of aver. Primary of aver.
insurance age insurance age insurance age insurance age
benefit monthly benefit monthly benefit monthly benefit monthly
wage
wage
wage

wage

[blocks in formation]

1 The percentage is higher when a wife's benefit is also payable.
1 Uniform for all years of coverage.
"Maximum primary insurance benefit possible under the benefit formula.

An objective of the present law is to have workers in the highest wage brackets covered by the system pay the costs of their own benefits over a full working lifetime. Under the benefit formula we have recommended, benefits for the $4,200-a-year man bear approximately the same relation to his contributions as benefits under the present law bear to the contributions of the $3,000-a-year man.

With the increased base, the high-paid person will have somewhat higher benefits than he would have had if only the formula were changed, but he will in the long run, pay for nearly all the increase in the cost of his benefits. If the wage base is not increased, those in the higher wage brackets will have higher benefits without having contributed toward the cost of the increases.

13. Average Monthly Wage The average monthly wage should be computed as under the present law,

except that any worker who has had wage credits of $50 or more in each of six or more quarters after 1948 should have his average wage based either on the wages and elapsed time counted as under the present law or on the wages and elapsed time after 1948, which

ever gives the higher result Persons whose occupations have been excluded from coverage under the present program will suffer serious disadvantage after coverage is extended, unless an alternative is permitted for the present method of calculating the average monthly wage. Under the present law, benefit amounts are based on an average computed, in general, by adding all wage credits a worker has received for covered employment and dividing that sum by all the months elapsing since 1936, except for quarters before the worker reached age 22 in which he received less than $50. On this basis, a worker who has been in an employment hitherto excluded from coverage will always be penalized for his former lack of coverage, since, in effect, his wages from newly covered employment will be averaged over all the months elapsed

83404449

since 1936 or since he reached age 22, if later. His low average wage, in turn, will result in a low benefit amount.

The Council believes that an appropriate way to eliminate this handicap for newly covered groups would be to have their average wages computed from the date of the coverage extension, just as the average wage now disregards periods before January 1, 1937, for those in employments first covered as of that date. Since large numbers of workers have been in both covered and noncovered employment, however, it would be almost impossible to establish a sound basis for determining which individuals should be treated as belonging to a newly covered group. The opportunity to profit from the provisions designed for the newly covered groups must, therefore, be open to all persons.

Unless previously covered workers also have the alternative of & "new start,” moreover, many will fare worse than those newly covered, since the relatively low wages paid in the late thirties and early forties will tend to reduce their average wages and thus yield benefit amounts lower than those of newly covered persons in comparable jobs.

Some insured persons will have little or no covered employment after the date coverage is extended; others will have too small an amount to form a fair basis for determining an average; and others may have employment after the “new start” at wages much lower than their previous earnings. The starting point of January 1937 specified in the present law should, therefore, be retained as an alternative and the individual worker's average wage computed from that date if it gives a higher amount than would the "new start."

The new start for all, on an alternative basis, appears to be the only equitable plan, but for the reasons pointed out in the recommendation for a new start on insured status (recommendation 11, p. 29) we do not recommend a new start unless coverage is extended broadly as of one date.

[ocr errors]

14. Benefit Formula

To provide adequate benefits immediately and to remove the present penalty

imposed on workers who lack a lifetime of coverage under old-age and survivors insurance, the primary insurance benefit should be 50 percent of the first $75 of the average monthly wage plus 15 percent of the remainder up to $275. Present beneficiaries, as well as those who become entitled in the future, should receive benefits computed according to this new formula for all months after the effective date

of the amendments The benefit formula of the present program, with its automatic increase of 1 percent for each year of coverage, in effect postpones payment of the full rate of benefits for more than 40 years from the time the system began to operate. Under such provisions, if the benefit amount of a retired worker after he has had a lifetime of coverage represents a reasonable proportion of his average wage, that for older workers who have been in the system for only a few years and for the survivors of younger workers will almost of necessity be inadequate. Thus, the survivors of a man who began working at age 20 and dies at age 30 will have rights to benefits only about threefourths as large as those which the same average monthly wage would have provided if he had lived to age 65. Yet the worker who dies at an early age has had less opportunity than have older workers to accumulate savings and other resources to supplement the benefits payable to his survivors. The Advisory Council believes that adequate benefits should be paid immediately to retired beneficiaries and survivors of insured workers but considers it unwise to commit the system to automatic increases in the benefit for each year of covered employment.

+ The members of the Council who favor retaining $3,000 as the maximum annual wage credit and tarsbe wages would retain $250 as the maximum average monthly wage. They advocate & primary insurado benefit representing 50 percent of the first $75 of that monthly wage plus 15 percent of the remainder op

to $175.

Benefits payable under old-age and survivors insurance, with the beneficiaries' other permanent resources, should suffice to supply at least the basic necessities of life for the great majority of beneficiaries. The present program does not achieve this objective. Field studies made by the Bureau of Old-Age and Survivors Insurance in 1941 and 1942 in seven cities showed that one-third of the primary beneficiaries surveyed had insufficient nonrelief income, assets, and possible help from relatives in their household for a maintenance level of living and that, taking account of their own permanent resources only, nearly two-thirds of the beneficiaries had less than was required for a maintenance budget.

Inadequate as benefits were in 1941-42, they are even less adequate now that costs of living have increased by at least 60 percent. The average primary benefit now being paid is only about 10 percent higher than that paid in 1940. The table in appendix I-D shows the distribution of benefits being paid under the present program at the end of 1947. The inadequacy of these benefits is self-evident.

The benefit formula in the present Social Security Act provides a primary benefit representing 40 percent of the first $50 of the average monthly wage and 10 percent of the next $200. It is thus weighted in favor of workers whose average wages are low. As a result of increases in wage rates, the effect of the original weighting, however, has been substantially reduced. In 1939, when the program was drafted and approved, $50 represented about one-half the average monthly earnings of fully employed persons in covered employment. By 1947, fully employed workers were receiving an average of about 185 a month. As a conservative recognition of the effect of wage ncreases on the original weighting, the Council recommends a change n the benefit formula to make $75 the upper limit for that part of he average monthly wage to which the higher percentage is applied.

This change, however, will not in itself sufficiently increase the rimary benefits of low-wage workers. Many beneficiaries now on he rolls receive benefits based on an average monthly wage of less han $75. These beneficiaries and others in the future whose benets are based on low wages lack outside resources and should not be enied the right to more liberal benefits. If the benefit formula gave 0 percent, rather than 40 percent, of the first $75 of the average nonthly wage, the beneficiaries whose rights are based on low wages rould receive fairly substantial increases in their benefit amounts.

# The standard used was based on the WPA maintenance budget. For a single man living alone, it ranged om $463 in Philadelphia-Baltimore to $505 in St. Louis. For an aged couple it ranged from $773 to $814. ossible

aid from relatives in the household, the imputed rental value of homes the beneficiaries owned, come from employment, and income from the liquidation of assets were among the resources taken into count. Since the studies were made shortly after the beneficiaries became entitled to benefits, many

them still had incomes and resources that could not be expected to continue in later years. For a fair cture of their economic security, therefore, the studies attempted to differentiate between temporary sources and those which could be considered permanent, such as old-age and survivors insurance benefits, tirernent pay, insurance annuities, imputed rent from the homes they owned, and the estimated amounts at could be realized from their assets prorated over their life expectancy.

We also propose that the percentage applied to the portion of the average wage above $75 be increased to 15 percent. If that percentage remains fixed at 10 percent, there will be too little spread between the benefit amounts of low-income and high-income workers. Thus, for an average monthly wage of $100, the primary benefit would be only $10 less than that for an average wage of $200, a differential that we believe is insufficient for the wage interval of $100$200, which now includes the great majority of workers in covered employment.

We believe that benefits should be related to the continuity of the worker's coverage by and contributions to the system, as well as to the amount of his earnings. Under our recommendations, accordingly, benefits will continue to vary—as they now do—with both these factors. Thus, in figuring the average monthly wage (recommendation 13, p. 33), a worker's total wage credits are—and would continue to be-divided by the total number of months that he might have been contributing to the system. His average wage, and consequently his primary benefit, will therefore be the smaller for each month lacking in his record of covered employment. In our opinion, this method of adjusting benefits permits sufficient differentiation between workers who are steadily employed in covered jobs and those whose covered employment is only brief or intermittent. Thus, an increment is not needed for the purpose of such differentiation.

With coverage broadly extended, the increment would serve largely to reward younger workers for their greater contributions by paying them higher retirement benefits than those paid to persons who were old when the system started. To us, such discrimination seems undesirable. The older worker should not be penalized for the fact that he could not contribute throughout his life. We propose, in effect, that, as in many private pension plans, the older worker receive credit for his past service and acquire rights to the full rate of benefits now.

[ocr errors]

TABLE 2.Illustrative old-age benefits under present formula 1 and that proposed by

Advisory Council ? (NOTE.-Potential beneficiary in covered employment continuously from Jan. 1, 1937, to date shown)

Entitlement date

Basic amount :

Average monthly

Wage

Jan. 1, 1949 (12 years Jan. 1, 1957 (20 years Jan. 1, 1977 (40 years
of coverage) of coverago)

of coverage)

Present

law

Advisory
Council
proposal

Present

law

Advisory
Council
proposal

Present

law

Advisory

Council proposal

Present

law

Advisory

Council

proposa)

$50. $75. $100. $125 $150 $200. $250 $300. $350..

$20.00
22. 50
25.00
27. 50
30.00
35.00
40.00
140.00
* 40.00

$25.00
37. 50
41. 25
45.00
48. 75
56. 25
63. 75
71. 25
78. 75

$22. 40
25. 20
28.00
30. 80
33. 60
39. 20
44. 80
44. 80
4 44.80

$25,00
37. 50
41, 25
45.00
48.75
5R, 25
63. 75
71. 25
78, 75

$24.00
27.00
30.00
33.00
36.00
42.00
48.00
448.00
4 48.00

$25.00
37. 50
41. 25
45.00
48. 75
56. 25
63. 75
71, 25
78. 75

$28.00
31. 50
35.00
38. 50
42.00
49,00
56.00
56.00
4 56.00

$25.00 37.50 41.25 45,00 4873 56 25 @3.75 71.25 78.75

1 40 percent of the first $50 of the average monthly wage plus 10 percent of the next $200, increased b5 1 percent of the sum of the foregoing for each year of coverage. 3 50 percent of the first $75 of the average monthly wage plus 15 percent of the next $225.

Under present law, the benefit amount without the increment for years of coverage; under the Advisory Council's proposal, the amount payable. * Maximum average monthly wage used in computing benefits under present law is $250.

« ForrigeFortsett »