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An economic analysis of the Federal Old Age and Survivors' Insurance act

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An economic analysis of the Federal Old Age and Survivors' Insurance act

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Content A N ECONOMIC ANALYSIS OF THE FEDERAL OLD ACE AND SURVIVORS• INSURANCE ACT by Gordon B ru n h ild A D is s e r t a tio n P re s e n te d to th e FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In P a r t i a l F u lf illm e n t o f th e R eq u irem en ts f o r th e D egree DOCTOR OF PHILOSOPHY (Econom ics) A ugust 195? UMI Number: DP23267 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. Dissertation Publishing UMI DP23267 Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106- 1346 ¥ h , D Eo, ‘5% This dissertation, written by G.Qrdon...Brmhil& ....................... under the direction of Guidance Committee, and approved by all its members, has been pre sented to and accepted by the Faculty of the Graduate School, in partial fulfillment of re quirements for the degree of D O C T O R OF P H I L O S O P H Y I m Dean Guidfthce Committe, Chairman TABLE OF CONTENTS CHAPTER PAG E PART I SETTING OF THE PROBLEM I . INTRODUCTION....................................... . . . ................... 1 The sco p e o f t h i s s t u d y ...................................... 6 S ta te m e n t o f th e problem .................................. 6 M ethods o f p ro c e d u re ........................................... 6 B a sic o u t l i n e o f th e s t u d y ............................. 7 I n c r e a s in g im p o rta n ce o f O ld Age and S u r v iv o r s ’ In s u ra n c e ........................................... 7 The r o l e o f I n f l a t i o n ................................. 9 * f - < \_The a g in g o f th e p o p u l a t i o n ................... 10 ^Change in s o c i a l f o r c e s ............................. 11 Review o f th e l i t e r a t u r e ...................................... 14 I I . EVOLUTION OF OLD AGE AND SURVIVORS' INSURANCE........................................................ iff H is to ry up to p a s sa g e o f th e S o c ia l S e c u r ity A c t ..................................... Iff M onthly b e n e f i t fo rm u la ...................................... 23 O r ig in a l fo rm u la f o r m onthly b e n e f i t c a l c u l a t i o n s ......................................................... 23 Com plete r e v is i o n in 1939 25 D e te rm in a tio n o f a v e ra g e m o n th ly wage- 25 CHAPTER C om putation o f p rim a ry In s u ra n c e b e n e f i t . . . ............................. Changes u n d er th e 1950 amendment A lte r n a te s t a r t i n g d a te . . . B e n e f it fo rm u la . .................... The one p e r c e n t In crem en t . . Changes su b se q u e n t to 1950 . . . B e n e f it fo rm u la ............................. The "d ro p o u t" .................................. The r e tir e m e n t p ro b lem .................... C o m p arativ e a n a ly s is ........................ D e p e n d e n t's and s u r v iv o r s ' b e n e f i t s D ep e n d en ts' b e n e f i t s ................... W ife 's b e n e f i t ............................. H u sb a n d 's b e n e f i t ........................ D ependent c h ild r e n .................... S u rv iv o r s ' b e n e f i t s ........................ W idow's b e n e f i t . . . . . . . C h i l d 's b e n e f i t ............................. W idow er's b e n e f i t ........................ P a r e n ts ' b e n e f i t ........................ Some g e n e ra l l i m i t a t i o n s . . C o m p arativ e a n a ly s i s ................... O th er b e n e f i t p r o v is io n s an d r e s t r i c t i o n s F u lly in s u r e d .................................................... iii PACE 26 27 2? 28 28 28 28 29 30 31 33 3k 3k 35 35 36 36 37 38 39 1 * 0 kz k3 iv CHAPTER PAG E C u r r e n tly - in s u r e d s t a t u s ............................. 4-5 The d i s a b i l i t y f r e e z e and d i s a b i l i t y in s u ra n c e b e n e f i t s . . ................................. k6 Lump sum b e n e f i t s ............................................... ^8 R e tire m e n t t e s t .................................................... 51 ; ^F in an cin g .................................................... 53 | T a x e s 53 j I Maximum ta x a b le l i m i t ...................................... 55 ! C overage u n d er th e s y s t e m .................................. 55 S e lf e m p l o y e d ......................................................... 56 Newly c o v e re d e m p l o y e e s ................................. 5? A g r ic u ltu r e , home w o rk e rs , d o m e stic w o rk e rs and fish e rm e n ................................. 58 A g r i c u l t u r e ......................................................... 58 Home w o r k e r s ......................................................... 58 D om estic w o r k e r s ............................................... 59 F is h in g in d u s tr y ............................................... 59 R a ilro a d w o r k e r s .................................................... 59 Government em ployees . . . ............................. 60 Members o f th e arm e4 f o r c e s ........................ 61 G e o g ra p h ic a l s c o p e ....................... 62 C o n clu d in g a n a ly s is ............................................... 63 PART I I SELECTED THEORETICAL ANALYSIS V CHAPTER PACE I I I . SHIFTING- AND INCIDENCE OF THE OLD AGE A N D SURVIVORS' INSURANCE TAXES ................................. 70 The e m p lo y e e 's c o n t r i b u t i o n ....................... 71 The m a jo r ity v ie w p o in t . . . . . . . . . 71 The c l a s s i c a l ap p ro a c h ...................................... 73 The e m p lo y e r's c o n t r ib u t io n o f th e p a y r o ll t a x ..................................................................................... 75 T r a d iti o n a l v i e w .................................................... 75 P o p u la r v i e w .............................................................. 77 P ra g m a tic v i e w ......................................................... 78 S h i f t i n g to n o n -la b o r f a c t o r s ........................... 79 S h if tin g th e e m p lo y e r's p a y r o ll ta x . . . . 79 S h i f t in g backw ard to l a b o r ............................. 80 S h if t in g a m a jo r p a r t o f th e b u rd en fo rw a rd to th e c o n s u m e r ................................. 82 The b a s ic th e o ry ........................ 83 B u sin e ss c y c le and m o n etary co m p lica t i o n s .................................................... . . . . 85 A d m in is tra tiv e ly fix e d p r i c e s ................... 88 C ost d i f f e r e n t i a l s ........................................... 89 The e m p iric a l e v id e n c e . . ........................ 89 Wage e a r n e r s ' s h a re o f th e t o t a l c o n s u m p tio n ......................................................... 90 P a r t i a l in c id e n c e on th e em p lo y er . . . . 91 Vi i t CHAPTER PAG E ' S h if t in g back to r e n t , norm al p r o f i t s 3 and i n t e r e s t ................................. . . . . . 93 S h if t in g from o rg a n iz e d to u n o rg a n iz e d la b o r . ............................................... 9* * - C on clu d in g o b s e rv a tio n s ...................................... 96 * IV . ANALYSIS OF THE OLD AGE AND SURVIVORS' INSURANCE R E S E R V E ........................................... 98 i F a c tu a l b a c k g r o u n d ........................................... 98 ' i A lte r n a te f in a n c in g m ethods ........................ 98 j C u r r e n t- c o s t f in a n c in g ................................. 98 ; A c tu a r ia l r e s e r v e ........................................... 99 { ! C o n tin g en cy r e s e r v e ...................................... 100 The p r e s e n t system a com prom ise . . . . 101 F u n c tio n o f th e r e s e r v e ............................. 105 B e n e f its r e c e iv e d ............................................... 105 B u d g e tary b a s i s ........................................... 108 I n c r e a s in g im p o rta n c e of b e n e f i t p a y m e n ts ............................................... 109 C o n g re s s io n a l com m itm ents ........................ I l l V a r ia tio n b etw een ta x e s and paym ents . I l l A c tu a r ia l a c c u ra c y ........................................... 112 Economic management b a s e s ............................. 116 A T r u s t e e 's c h o ic e o f a c tio n ........................ 11? L im ita tio n s o f R e serv e Fund Management 119 v i i ; CHAPTER PACE ! j The m a jo r c r i t i c i s m s o f th e r e s e r v e p r o g r a m ............................................................. 120 j F i c t i t i o u s r e s e r v e 120 ! The r e s e r v e e n c o u ra g e s e x tra v a g a n c e . . 125 P r iv a te in s u ra n c e a n a lo g y ................................... 129 Heavy b u rd en on th e p o o r and th u s d e f l a t i o n a r y in e f f e c t ........................................ 131 i I I I n f l a t i o n a r y e f f e c t s o f r e s e r v e . . . . 135 j P r ic e l e v e l c h a n g e s ...................................... . 137 l F is c a l p o l ic y 139 ; i C o n clu d in g o b s e rv a tio n s 141 i i PART I I I EFFECT OF O LD AGE A M D SURVIVORS' INSURANCE O N SELECTED VARIABLES V. INCOME TRANSFERS WHICH RESULT FROM THE SOCIAL SECURITY A C T ............................................... 145 B a sic c l a s s i f i c a t i o n o f governm ent e x p e n d itu re s .............................................................. 145 F a c to r-p u rc h a s e e x p e n d itu re ..... . 145 T ra n s fe r e x p e n d itu re s ...................................... 146 Group t r a n s f e r paym ents and r e d i s t r i b u t i o n o f i n c o m e .................................................................. 147 Case s tu d y 1 9 4 1 .................................................... 149 R e s u lts of th e 1941 s t u d y ........................ 153 M ajor w eak n esses o f th e M ushkin s tu d y . 153 CHAPTER A llo c a tio n o f f e d e r a l governm ent e x p e n d itu re s fey income g ro u p s T o ta l r e d i s t r i b u t i o n Case s tu d y 1951 • • • The sp en d in g u n i t s . C o n trib u tio n s . . . B e n e f it paym ents . . T o ta l r e d i s t r i b u t i o n in 1951 C o n clu d in g o b s e rv a tio n s . . . . V I. THE EFFECT OF OLD AGE AN D SURVIVORS* INSUR ANCE O N PERSONAL SAVINGS AND CONSUMPTION EXPENDITURES .................................................................. Concept o f p e rs o n a l s a v in g s ............................. D e f in itio n o f p e r s o n a l s a v in g s . . . . . The s t a t i s t i c a l p r o b l e m ....................... . . . S urvey o f consum er fin a n c e f ig u r e s on consum er s a v in g s ........................................... F am ily sp en d in g and s a v in g in w a rtim e . The e f f e c t s o f th e s o c i a l in s u ra n c e program on p e r s o n a l sa v in g s and consump tio n e x p e n d itu re s ............................................... The s t a t i s t i c a l a n a ly s e s . . ........................ The e f f e c t o f th e r e s e r v e fund on p e rs o n a l s a v in g s and consum ption e x p e n d itu re s . . C on clu d in g a n a ly s is ........................................... . v 1 1 1 " i PAGE < 155 160 16k 167 173 i? k ' 182 183 ] 18k ' ie k 187 199 • « ix CHAPTER P A G -E V II. THE METHODS BY W HICH SOCIAL SECURITY AFFECTS SAVINGS MOTIVES ............................................. 200 M o tiv es fo p sa v in g s and consum ption . . . 201 K eynes' a n a l y s i s ............................................... . 201 O s te n ta tio n as a consum ption m o tiv e . . 202 The e f f e c t o f s o c i a l s e c u r ity on sa v in g s m o t i v e s ............................................................................ 205 P re c a u tio n and f o r e s ig h t ......................................... 205 ' I I The f a c t o r s t h a t c a u se I n c r e a s e d sa v in g s 207 I n t e n s i f y o th e r s a v in g s m o tiv e s In c re a s e d m o tiv e f o r p e n s io n s The e f f e c t o f in s u r a n c e , h a b i t , and C o n g re s sio n a l w h im ...................................... 210 P ro m o tio n al d e v ic e s u sed by i n s t i t u t i o n a l s a v e r s ............................................... 212 In c re a s e d aw aren ess o f s e c u r i t y th ro u g h p e n s i o n s ...................................... . 213 A minimum governm ent program a id s p r i v a t e p e n s io n p la n s ............................. 215 E f f e e t on r e a l e s t a t e s a v in g s . . . . 215 E f f e c t on d i s s a v i n g ...................................... 216 S t a t i s t i c a l ev id en ce o f in c r e a s e in s a v in g s m o tiv e s .................................................... 217 S av in g s th ro u g h f i n a n c i a l i n s t i t u t i o n s . 217 X I I I 1 CHAPTER PACE S a v in g s th ro u g h l i f e in s u ra n c e com p a n ie s ..................................... 221 T ren d s in i n d u s t r i a l p e n s io n s ................... The sa v in g s-in c o m e r a t i o ...................................... i L ong-run p a t t e r n ..................................... 226 \ \ K u z n e ts' stu d y o f s a v in g s .... .. 226 G o ld sm ith ’ s s tu d y o f s a v in g s ................... 229 ' C auses o f th e s e c u l a r d e c lin e o r ! s t a b i l i t y o f th e sa v ln g s-in c o m e r a t i o . 233 S h i f t to urban l i v i n g ........................ 23*1- Irapaot o f new consum er g o o d s .......... 2 3 * * - The d e c lin in g p o s i t i o n o f th e s e l f - em ployed .............................................................. 236 R e d is tr ib u t io n o f in c o m e ................... 237 The s h i f t to w ard a s m a lle r fa m ily . . 2 * 1 -2 C o n clu d in g o b s e r v a t i o n s ............................. 2 * 1 -3 V I I I . THE RELATIONSHIP OF OLD AGE AND SURVIVORS' INSURANCE TO INVESTMENT ...................................... D e f in itio n o f In v e s tm e n t e x p e n d itu re s . . 2 * 1 -6 M o tiv es and d e te rm in a n ts o f in v e stm e n t e x p e n d i t u r e s ..................................................... 2* f8 E x p e c ta tio n s o f p r o f i t ............................. 2**8 Non p r o f i t m o tiv a tio n s ...................................... 251 P a y r o ll ta x e s and c a p i t a l e x p a n sio n . . . 251 The d e p re s s io n p e r io d ........................ 251 p e r io d s open CHAPTER D ire c t e f f e c t s ................... P s y c h o lo g ic a l e f f e c t s D uring th e w ar an d p o s t w ar W in d fa ll p r o f i t s . . . . Tax in c r e a s e s ................... R e d is tr ib u tio n o f income P s y c h o lo g ic a l a s p e c ts L a b o r-s a v in g d e v ic e s . . M o n -p ro fit m o tiv e s . . . In v e stm e n t e x p e n d itu re s in an economy ................................. The c o s t o f c a p i t a l . . . B ro o k in g s I n s t i t u t i o n stu d y S o c ia l s e c u r i t y and th e su p p ly o f " v e n tu r e ” c a p i t a l . . . . The r o l e o f v e n tu re c a p i t a l V en tu re c a p i t a l by income g ro u p The p r o g r e s s iv e Income ta x and th e u p p e r income g ro u p ............................. The e m p lo y e r's c o n tr ib u tio n . . . C o n clu d in g o b s e rv a tio n s .. . . .. IX . THE ASSOCIATION BETW EEN SOCIAL INSURANCE A N D RETIREMENT OF THE AGED . . . . Employment and th e la b o r f o rc e . . P a r t i c i p a t i o n in th e la b o r f o r c e . x l PAGE I 251 252 253 25^ 256 259 260 265 267 267 268 269 272 273 277 277 X li | CHAPTER PACE j The c a u s e s o f r e t i r e m e n t 283 j C om prehensive s t u d i e s ...................................... 283 The h i r i n g p r a c t i c e s o f em p lo y ers . . . 289 E x te n t o f th e s e b a r r i e r s .................. 292 R easons g iv e n f o r em ployment r e s t r i c t i o n s .................................................................. 29^ C om pulsory r e tir e m e n t ...................................... 295 E f f e c t o f th e r e tir e m e n t t e s t ......... 298 S a fe g u a rd a g a in s t p re m a tu re r e tir e m e n t . . 300 F in a n c ia l s a fe g u a rd s ...................................... 300 P s y c h o lo g ic a l s a fe g u a rd s ............................. 305 C on clu d in g o b s e rv a tio n s ............................................. 307 PART IV EVALUATION X. SU M M A R Y AND CONCLUSIONS................................ 311 Summary o f h i s t o r y and s e le c te d t h e o r e t i c a l p r o b l e m s ................................................... 311 Amendments to th e a e t ............................ 311 F in a n c in g p r o v is io n s ........................................... 312 Im p o rta n t t h e o r e t i c a l p ro b lem s . . . . 313 The in c id e n c e o f th e p a y r o ll ta x . . . 313 The n a tu r e o f th e r e s e r v e .............. 313 The e f f e c t s o f o ld a g e and s u r v iv o r s ' in s u ra n c e on s e l e c t e d v a r i a b l e s . . . . 31^ The r e d i s t r i b u t i o n o f in c o m e ........................ 315 LIST OF TABLES TABLE I . I I . I I I . IV. V. V I. V II. PAGE C om parative M onthly B e n e f its U nder th e S o c ia l S e c u r ity Act and th e S u b seq u en t Amendments f o r a R e tir e d I n d iv id u a l . . . 32 C o n trib u tio n and B e n e f its Under th e Old Age and S u rv iv o r s 1 In s u ra n c e A ct by Income C la s s f o r 1 9 ^ 1 ........................................... 150 E stim a te d D is tr ib u ti o n o f A ll M ajo r F e d e ra l Government E x p e n d itu re s by Income C la ss f o r F i s c a l Year 19^1 . . . . 156 The R e d is tr ib u t io n o f Income R e s u ltin g from The Old Age and S u rv iv o rs ' In s u ra n c e Program i n 19^1 U nder Two D if f e r e n t A s s u m p tio n s ........................................... 161 C o n trib u tio n s and B e n e f its U nder th e Old Age and S u rv iv o r s ' In su ra n c e A ct by Income G la ss f o r 1 9 5 1 ........................................... 168 P a y r o ll Tax P e rc e n ta g e o f T o ta l Money v Income f o r 1951 Compared w ith M u sg ra v e 's S tudy f o r 19^8 Under A lte r n a tiv e A ssum ptions • ......................................................... 1?2 E stim a te d D is tr ib u ti o n o f A ll M ajor F e d e ra l Government E x p e n d itu re s by Income C la ss f o r F i s c a l Y ear 1951 . . . . 175 x i l l CHAPTER PAGE P e rs o n a l sa v in g s an d consum ption e x p e n d i t u r e s ......................................................... 315 The g e n e ra l e f f e c t ........................................... 315 E lim in a tio n o f assu m p tio n t h a t th e a v e ra g e p r o p e n s ity to consume rem a in s c o n s ta n t ............................. 316 The s t a t i s t i c a l p a t t e r n ............................. 317 E v a l u a t i o n ................................................................... 318 In v e stm e n t e x p e n d itu re s ....................................... 318 E a rly r e t i r e m e n t ............................................... . 320 C o n clu d in g o b s e r v a t i o n s ...................................... 321 F i s c a l p o lic y ......................................................... 321 B e fo re World War I I ........................................... 321 A f te r th e s t a r t o f World War I I . . . 323 Economic g r o w t h .......................................................... 325 BIBLIOGRAPHY.............................................................. 32? TABLE V I I I . I IX. X. X I. X II. X III. The R e d is tr ib u t io n o f Income R e s u ltin g from th e Old Age an d S u rv iv o r s ' In s u r ance Program in 1951 Under Two D if f e r e n t A s s u m p tio n s ................................ . . The E f f e c t o f th e O ld Age and S u r v iv o r s ' In s u ra n c e A ct on S av in g s and Consum ption in 1941 A ssum ing E x cess Funds a r e Used to Pay G en eral Government E x p e n d itu re s . The E f f e c t o f th e O ld Age and S u r v iv o r s ' In s u ra n c e A ct on S av in g s and C onsum ption in 1951 A ssum ing E xcess Funds a r e Used to Pay G e n e ra l Governm ent E x p e n d itu re s • The E f f e c t o f th e R eserv e Fund on S av in g s and C onsum ption in 1941 A ssum ing E xcess Funds a r e Used to Pay G en e ral Government E x p e n d itu re s ................... * ................................. The E f f e c t o f th e R e serv e Fund on S av in g s and Consum ption in 1951 Assum ing E xcess Funds a r e Used to Pay G eneral Government E x p e n d itu re s .............................................................. A nnual In c re m e n ts o f I n d iv id u a l S av in g s and i t s Com parison W ith D isp o sa b le Income f o r S e le c t Y ears 1933-1954' . . . . TABLE XIV. XV. XVI. I XV II. j X V III. XIX. XX. P ro p o rtio n o f T o ta l Money Incom e, P ro p o r t i o n o f S av in g s and th e S av in g s Income R a tio o f Each T en th o f th e N a t i o n ^ S pending U n its f o r S e le c te d Y ears 1929- L abor F o rc e T rends f o r P e rso n s 65 Y ears o f Age and O ver f o r S e le c te d Y ears 1890- xv I 1 PAGE R a tio n a l Incom e, P e rc e n ta g e D i s t r i b u ti o n Between Flow o f Goods to Consum ers and N et C a p ita l F o rm atio n f o r O v er-L ap p in g D ecades 1869— 193S ....................... 227 R a tio o f B oth Consum ption E x p e n d itu re s and P e rs o n a l S av in g s to D isp o sa b le Income by D ecades 1929-1955 ............................. Mean Incom e, Mean S av in g s and S a v in g s Income R a tio by O c c u p a tio n a l Group f o r J .............................................................................. 235 ! 239 281 R easons f o r T e rm in a tio n o f L a s t C overed Employment B e fo re E n title m e n t, M ale O ld-Age In su ra n c e B e n e f ic ia r ie s 19kQ- 1951 end Fem ale B e n e f ic i a r ie s 1951 ♦ • • 28^ Unemployment R a te s f o r Wage and S a la ry W orkers, By Age G roups, F i r s t Q u a rte r: 19^8-1952 ....................................................................... 290 LIST O F FIGURES FIGURE 1 . G raphic A n a ly s is o f S h i f t i n g P a y r o ll Tax . . . 2 . I n d iv id u a l s ' S aving in L if e In s u ra n c e Com panies 1950-1952 . . . . . . . . . . . . 3 . The Growth o f P r iv a te I n d u s t r i a l P e n sio n P la n s , 1930-1951 .............................................................. I*. R e g re ssio n L in e and a S c a t t e r Diagram Showing R e la tio n s h ip Between P e rs o n a l S a v in g s and P e rs o n a l D isp o sa b le Income 1897 to 1952 . . 5 . P e rc e n t o f R e tir e d Men W orkers a t End o f Y ear 1951 Ever Reemployed F u ll Time A fte r R e c e iv in g T e rm in a tio n o f L a s t C overed Employment B efo re B e n e f it P aym ents, by Reason f o r T e rm in a tio n and Y ear o f F i r s t B e n e fit ........................................... ................................. PAGE 86 222 225 232 286 TABLE XXI. x v l l PAGE I S iz e o f Money Income in 1951 o f C o u p les H on-M arried Men, H on-M arrled Women J Aged 65 and Over Who Were R e c e iv in g j B e n e f its In th e S u rv ey Y e a r ............................. 30 ^ j PART I ■ c- SETTING- OF THE PROBLEM CHAPTER I UJTROD0GTION The Old Age and S u rv iv o r s ' In s u ra n c e P ro v is io n s of th e S o c ia l S e c u r ity A ct becam e law on A ugust 1 ^ , 1935* S in ce t h a t tim e th e law h as been amended s i g n i f i c a n t l y on f iv e d i f f e r e n t occasions.-*' However, c o n tro v e rs y c o n tin u e s on some m ajo r p h a s e s . A few in d iv i d u a ls su ch a s P a u l L. P o i r o t , B ruce A lg e r, and W . R ulon W illiam so n have c r i t i c i z e d many o f th e p r i n c i p l e s and p r a c t i c e s u n d e rly in g th e c u r r e n t Old Age In su ra n c e Law. For exam ple, in an e x c e r p t from th e b o o k le t S o c ia l S e c u r i t y , p u b lis h e d by th e F o u n d atio n f o r Economic ! E d u c a tio n , P au l L. P o ir o t m akes th e fo llo w in g s ta te m e n t in r e f e r r i n g to th e Old Age and S u rv iv o r s ' In s u ra n c e Law: The seme tim e -w e a th e re d code o f e t h i c s w hich advo c a te s h o n o rin g o n e 's f a t h e r and m o th e r recommends r e s p e o t f o r th e l i f e and liv e lih o o d — th e p r i v a t e p r o p e r ty — of o th e r s . To v i o l a t e any p a r t o f t h a t code d e s tr o y s th e m eaning o f th e r e s t o f i t . S o c ie ty can n o t e n fo rc e a law w hich g u a r a n te e s s e c u r i t y to th e ag e d by d e n y in g th e p ro d u c e r th e r i g h t to th e p ro d u c t o f h is own e f f o r t s . The b e s t t h a t s o c ie ty can do i s to g iv e th e in d iv id u a l a chance to h o n o r and r e s p e c t h i s e l d e r s . T h is means a llo w in g th e in d iv i d u a l h i s c h o ic e c o n c e rn in g th e u se to b e made o f h i s own l i f e an d h i s own p ro d u c tiv e e f f o r t s . . . . . . . S in c e a weak p e rs o n can n o t f o r c e a s tr o n g p e rs o n to h e lp him , i t w ould seem w ise to p u t th e a p p e a l on some b a s i s o th e r th a n c o e r c io n . T h is m eans * * - A s i x t h amendment to th e S o c ia l S e c u r ity A ct became law on A ugust 1 , 195b. r e t r i e v i n g th e r e s p o n s i b i l i t y f o r o ld -a g e s e c u r i t y from | th e hands o f g overnm ent, w hich depends e x c lu s iv e ly uponi th e pow er o f c o e r c io n .2 Congressm an B ruce A lg e r, in r e f e r r i n g to th e d l s a - j I b i l i t y p r o v is io n s o f a b i l l to amend th e S o c ia l S e c u r ity j I A ct t h a t was p a s s e d by th e House o f R e p re s e n ta tiv e s i n i J u l y , 1955» and w h ich l a t e r becam e law in 1956, s t a t e d j t h a t In th e d i s a b i l i t y program i t a p p e a rs t h a t i f we w an ted to k i l l i n i t i a t i v e and c r e a te th e b e s t e n v iro n m ent f o r 'g o l d b r l c k s ' p o s s i b l e , w e 'v e done i t i n th e p r e s e n t b i l l , The te m p ta tio n i s t h e r e —why s h o u ld a man r e h a b i l i t a t e h im s e lf and b e ta k e n o f f a f e d e r a l p e n s io n ? F u r th e r , w i l l t h e r e be sh o p p in g aro u n d t o f in d a d o c to r to s u p p o rt th e claim f o r a f e d e r a l p e n sio n ? Why sh o u ld f i f t y y e a rs be th e d e s ig n e d age? Any f o o l i s h f i s c a l program e n d a n g e rs o u r n a tio n e c o n o m ic a lly — p a r t i c u l a r l y su ch a com prehensive program ; a s t h i s . I n f l a t i o n i s alw ay s th e d a n g e r to th e v a lu e o f money, T h is program c o u ld b r in g on i n f l a t i o n , i n f l a t i o n c o u ld in tu r n k i l l th e program by w a te rin g th e money, an d b a n k ru p t th e n a t i o n .3 W . R ulon W illia m so n , an a c tu a r y who h as w orked w ith th e T ra v e le rs In s u ra n c e Company, th e S o c ia l S e c u r ity A d m in is tra tio n , an d th e W yatt Company, made th e fo llo w in g s ta te m e n t b e f o r e th e S en ate F in a n c e Com m ittee in 195^ c o n c e rn in g H .a . 9366, w hich in an amended f o r a was p a s s e d by C ongress th e same y e a r: In 1935» when th e o r i g i n a l S o c ia l S e c u r ity A ct 2P au l L. P o i r o t , "Econom ic A sp e c ts o f S o c ia l S e c u r ity ," F a c ts Forum . 5^23 , Ja n u a ry , 1956. ^B ruce A lg e r, " S e c u rity o r a G rave S i tu a t i o n ," F a c ts Forum. 5*19» J a n u a ry , 1956. w as p a s s e d , we la e k e d a c l e a r p e r s p e c tiv e o f w hat lay- a h e a d . Knowledge h as a c c u m u la te d . The b a s is f o r r e s p o n s ib le a c tio n h as grow n. To p e r s i s t in e r r o r I s c u lp a b le . To d e s ig n a te e r r o r a s t r u t h i s in e x c u s a b le , j You members o f th e S e n a te F in an ce Com m ittee have a ! trem en d o u s r e s p o n s i b i l i t y . S h are t h a t r e s p o n s i b i l i t y j w ith y o u r f e llo w c i t i z e n s . Count upon t h e i r c a p a c ity , j t h e i r i n t e l l i g e n c e , t h e i r se n se o f f a i r p la y . Our c u r r e n t p la n s o f OASI and O A A a r e b a d p la n s , p e r n ic io u s p la n s — th e r e v e r s e o f I n d iv id u a l t h r i f t and in s u r a n c e p r o v is io n s . H.R. 9366 w o rsen s them b a d ly . You can no lo n g e r have th e a l i b i o f ig n o ra n c e . Too much w a te r h a s flo w e d o v e r th e dam, s in c e th e e r r o r s of 1 9 3 5 » 1 9 3 9 » and 1950 w ere p e r p e t r a t e d . I h a v e , in my r e c e n t s ta te m e n ts to th e Ways and Means C om m ittee, to my f e llo w a c t u a r i e s — c o p ie s o f w hich h av e been s e n t to each o f you— o u tli n e d a s p re a d in g o f p u b lic c h a r i t y m ore w id e ly , m ore t h i n l y , on th e way to th e ch an ce o f r e g a in in g p e r s o n a l co m p eten ce. I d o n ’ t l i k e to be th e v ic tim o f p o o r ly p la n n e d p a u p e rism . Do you?^ The a c t h a s a ls o b een c r i t i c i z e d b e c a u se i t d o e s n o t o p e r a te on a p a y -a s -y o u -g o b a s i s . F o r I n s ta n c e , Meriam i d e fe n d s th e p a y -a s -y o u -g o p o s i t i o n an d s t a t e s t h a t J From th e s ta n d p o in t o f n a t io n a l f i s c a l p o l i c y , th e ■ p r a c t i c a l v a lu e o f a l a r g e s o c i a l s e c u r i t y r e s e r v e i s q u e s tio n a b le . . . . When b e n e f i t paym ents ex c eed c a sh incom e from O .A .S .I. t a x e s , and a w ith d ra w a l h a s to b e made from th e r e s e r v e to p ay b e n e f i t s , th e n a t i o n a l governm ent w i l l have to r a i s e th e money to c a s h i t s p ro m ise s to p a y . I t can th e n t a x , b o rro w , o r is s u e c u rre n c y i f t h e r e i s no T re a s u ry s u r p lu s from w h ich th e p ro m is e s to p ay can be redeem ed. The r e s e r v e s th e r e f o r e a r e , u n d e r t h i s p r a c t i c e , n o th in g m ore th a n p ro m ise s t o pay k W . Rulon W illiam so n , S ta te m e n t o f , H e a rin g s B e fo re t h e Com m ittee on F in a n c e , U n ite d S ta te s S e n a te , 83d C o n g re s s , 2d s e s s i o n , on H .R. 9366 (W ashington: Government P r i n t i n g O f f ic e , 195**-)» P» k In th e fu tu re .-* Mr. A. D. M a rs h a ll, r e p r e s e n tin g th e Chamber o f Commerce b e f o r e th e Com m ittee on Ways an d Means o f th e House o f R e p re s e n ta tiv e s in 195A, p ro p o se d t h a t a p a y - a s - you-go system s h o u ld b e e s t a b l i s h e d . He s t a t e d t h a t The Chamber o f Commerce o f th e U n ite d S ta te s . . . h a s lo n g s tu d ie d th e s o c i a l s e c u r i t y system and f o r t h i s p u rp o se e s ta b li s h e d th e S o c ia l L e g is la tio n C om m ittee. A f te r in t e n s i v e w ork, o u r com m ittee co n c lu d ed two y e a rs ago t h a t th r e e b a s i c changes i n th e system w ere v i t a l to i t s p ro p e r f u n c tio n in g . These c h a n g e s, w ith th e arg u m en ts f o r and a g a in s t them , w ere p r e s e n te d by referen d u m to th e C ham ber's o r g a n iz a tio n members th ro u g h o u t th e c o u n try . They w ere a d o p te d by an overw helm ing v o te o f 1? to 1 . The seco n d b a s ic change i s t h a t th e system s h o u ld be s e lf - s u p p o r ti n g on a p a y -a s -y o u -g o b a siB w ith th e p r e s e n t c o n t r i b u t o r s p a y in g enough to p ro v id e th e b e n e f i t s f o r t h e i r own p a r e n t s and g r a n d p a r e n ts . The p r e s e n t t r u s t fu n d r e s e r v e sh o u ld be r e ta in e d and e x c e ss c o n tr ib u t io n s in good tim e s s h o u ld sup p lem en t th e p r e s e n t r e s e r v e to p ro v id e a g a in s t th e need f o r s h a rp in c r e a s e s in ta x r a t e s in p e r io d s o f b u s in e s s r e c e s s i o n .6 At l e a s t one w r i t e r b e l ie v e s t h a t th e R eserve i s n o t a e t u a r i a l l y so u n d . E. C. Harwood, D ir e c to r o f th e A m erican I n s t i t u t e f o r Economic R e se a rc h c r i t i c i z e s Old Age and S u rv iv o r s ' In s u ra n c e on th e b a s is t h a t th e R eserv e Fund i s n o t a e t u a r i a l l y sound. -’Lewis M erlam , R e lie f and S o c ia l S e c u r ity (W ashing to n : The B ro o k in g s I n s t i t u t i o n , lpJ6TT~p- 8A. 6A. D. M a rs h a ll, s ta te m e n t o f , H e a rin g s B e fo re th e C om m ittee on Ways and M eans, House o f R e p r e s e n ta tiv e s . 83d C o n g ress, 2d s e s s i o n , on H .R. 7199 (W ashington: Governm ent P r i n t i n g O f f ic e , 195A ), PP* 812-813- 5 ! Many p e o p le have th e u n d e rs ta n d in g t h a t t h e i r S o c ia l S e c u r ity ta x e s w ould h e a c c u m u la te d a s a fu n d f o r t h e i r 1 r e tir e m e n t. Such i s n o t th e c a s e . A lth o u g h th e o r i g i n a l id e a was to make th e s o c i a l s e c u r it y program j a c t u a r i a l l y sound by a c c u m u la tin g th e n e c e s s a ry r e s e r v e ! fu n d , t h a t id e a h as been abandoned. The u n s ta te d r e a s o n f o r ab an d o n in g th e a c t u a r i a l l y sound id e a w as, ' I su p p o se , sim p ly t h a t th e p o l i t i c i a n s c o u ld n o t b r in g { th e m se lv e s to v o te th e ta x e s t h a t w ould have been ! n e c e s s a r y . Taxes w ould c o s t v o te s ; much b e t t e r t o o f f e r th e p e o p le la r g e b e n e f i t s a p p a r e n tly a t low c o s t. The f a c t o f a c t u a r i a l u n so u n d n ess p ro b a b ly w i l l rem ain c o n c e a le d from th e p u b l i c 's u n d e rs ta n d in g f o r many y e a r s , and i t w i l l th e n b e some o th e r p o l i t i c i a n s ' (and th e p u b l i c 's ) w o rry . In th e m eantim e, th e p r e s e n t p o l i t i c i a n s can p a ra d e aro u n d in S a n ta G la u s' b e a r d s . I p e r s o n a lly c o n s id e r th e w hole arran g em en t th e g r e a t e s t sw in d le o f m odern t i m e s .7 Many a r t i c l e s and books have been w r i t t e n by d i f f e r e n t i n t e r e s t e d p a r t i e s on t h i s s u b je c t d u rin g th e ! 1 i :p a s t few y e a rs ; y e t , to d a t e , th e r e i s n o t a s a t i s f a c t o r y i {econom ic a n a ly s is o f th e e f f e c t s o f O ld Age and S u r v iv o r s ' i ! In s u ra n c e . Much o f th e c u r r e n t m a te r ia l a n a ly z e s o n ly th e non-econom lc a s p e c ts o f th e s u b j e c t . A ls o , a g r e a t d e a l o f th e l i t e r a t u r e shows a o n e - s id e d em p h asis to w ard t h i s s u b j e c t . T hus, d u r in g th e fo rm a tiv e y e a rs o f th e p ro g ram , many w r i t e r s su ch a s P au l H. D ouglas and M axwell S te w a r t, w hose v ie w p o in ts a r e q u o te d i n C h a p te r IV on p ag es 1 3 1 -1 3 2 , c o n s id e re d o n ly th e r e c e s s io n a r y c h a r a c t e r i s t i c s o f S o c ia l In s u ra n c e . T his I s u n f o r tu n a te when one c o n s id e rs th e m a g n itu d e and Im p o rtan ce o f o t h e r a s p e c ts o f Old Age and T e . 0 . Harwood, q u o te d by W illiam J . M a ttiso n in What W ill S o c ia l S e c u r ity Mean t o You? (G re at B a rr in g to n , M a s s a c h u s e tts : A m erican I n s t i t u t e f o r Economic R e se a rc h , 1 9 5 2 ), p p . 8 4 -8 5 . S u r v iv o r s ’ In s u ra n c e in th e U n ite d S ta te s a t th e p r e s e n t tim e . T h e re fo re , th e r e i s a n eed f o r f u r t h e r stu d y an d a n a l y s is o f Old Age and S u r v iv o r s ’ I n s u ra n c e . I . THE SCOPE OF THIS STUDY ! S ta te m e n t o f th e Problem ; i I t i s th e p u rp o se o f t h i s r e p o r t to exam ine th e e f f e c t s o f Old Age and S u r v iv o r s ' In s u ra n c e on c e r t a i n a s p e c ts o f th e A m erican economy s in c e th e en actm en t o f th e law i n 1935• S ince S o c ia l S e c u r ity a f f e c t s , e i t h e r d i r e c t l y o r i n d i r e c t l y , a lm o st ev e ry p h ase o f th e econom y, i t i s im p o s s ib le t o c o v e r a l l th e econom ic im p l ic a tio n s in one r e p o r t . i M ethods o f P ro c e d u re i i The p ro c e d u re h as been to m e asu re, by means o f * econom ic and s t a t i s t i c a l a n a l y s i s , th e im p act o f t h i s r e l a t i v e l y r e c e n t program on th e fo llo w in g v a r i a b l e s : incom e t r a n s f e r s and incom e r e d i s t r i b u t i o n , p e rs o n a l s a v in g s , in v e stm e n t e x p e n d itu r e s , co n su m p tio n e x p e n d itu r e s , and e a r l y r e tir e m e n t. B e fo re a co m p reh en siv e s tu d y o f th e e f f e c t o f t h i s com pulsory g o v ern m e n tal in s u r a n c e program on th e above ite m s can be s u c c e s s f u l ly u n d e rta k e n , i t i s n e c e s s a r y to a n a ly z e two t h e o r e t i c a l p ro b le m s: s h i f t i n g o f Old Age and S u rv iv o r s ' In s u ra n c e ta x e s , an d th e econom ics 7 , t o f th e R eserve Fund. i • i B a s ic O a tlin e o f th e S tudy B a rt I i s th e I n tr o d u c to r y s e c tio n o f t h i s r e p o r t . B e s id e s t h i s I n tr o d u c to r y c o n c e p tio n i t in c lu d e s a c h a p te r on th e h i s t o r y o f th e . Old Age and S u r v iv o r s 1 In s u ra n c e A ct. B a rt I I s e e k s to d e te rm in e who b e a r s th e b u rd en o f j th e p a y r o ll t a x and p r e s e n ts an econom ic a n a ly s is o f th e J R e serv e Fund. J B a rt I I I m easu res th e e f f e c t o f t h i s S o c ia l j i In s u ra n c e Law on th e s e le c te d v a r i a b l e s and th e in f lu e n c e s I * i o f t h e s e v a r i a b l e s on th e b u s in e s s c y c le and econom ic | I g ro w th . | B a rt IV p r e s e n ts b o th th e summary and th e c o n c lu d in g o b s e r v a tio n s o f t h i s d i s s e r t a t i o n . ] I I I . IHCREASING IMPORTANCE OF OLD AGE A M D SURVIVORS' INSURANCE The e n t i r e f i e l d o f O ld Age and S u r v iv o r s ' In s u ra n c e w i l l o b v io u s ly become more im p o rta n t w ith th e p a s s a g e o f tim e . G re at advancem ent h a s a lr e a d y been a c c o m p lish e d s in c e th e o r i g i n a l a d o p tio n o f S o c ia l S e c u r ity on th e F e d e ra l le v e l.® The 195^ am endm ents a lo n e made some ®In a l l th e S o c ia l S e c u r ity Act I n c lu d e s n in e s e p a r a te p ro g ra m s, ( l ) Unemployment in s u r a n c e , (2) Old Age an d S u rv iv o r s ' In s u ra n c e , (3 / O ld ag e a s s i s t a n c e , (M A id t o th e needy b l i n d , (5 ) A id to d ep e n d en t c h ild r e n , 8 j a d d i t i o n a l te n m il l i o n p e rs o n s e l i g i b l e f o r Old Age an d S u r v iv o r s 1 I n s u r a n c e . D e sp ite th e trem endous e x p a n sio n in 195**# C o n g ress h a s s in c e f u r t h e r ex ten d ed th e p ro g ram . The House p a s s e d a b i l l in J u ly , 1955#^ by a v o te o f 372 t o 31 t h a t becam e law on A ugust 1 , 1956# c o v e rin g a l l p r o f e s s io n a l g ro u p s (la w y e rs , d e n t i s t s , v e t e r i n a r i a n s , e t c . ) ex c e p t p h y s ic ia n s . The b i l l a llo w s a l l women b e n e f i c i a r i e s ( p r im a r ily widows and w iv e s) to become e l i g i b l e f o r p r o r a t e d b e n e f i t s a t th e j i ; ja g e o f s ix ty -tw o in s t e a d o f s i x t y - f i v e . In a d d itio n , th e I I I ; t o t a l l y d is a b le d men and women a r e e l i g i b l e to r e c e iv e ; j b e n e f i t s a t th e ag e o f f i f t y i n s t e a d o f a t s i x t y - f i v e , 1© * i j if they Qualify. » T h is s tu d y i s to o l i m i t e d i n sc o p e t o a n a ly z e t h i s I (6) M a te rn a l and c h l l d - h e a l t h s e r v i c e s , (7 ) S e rv ic e s f o r i 'c r i p p l e d c h i l d r e n , and ( 8 ) C h ild -w e lfa re s e r v i c e s . F ed eral! ; S e c u r ity Agency, S o c ia l S e c u r ity A d m in is tra tio n , S o c ia l ' S e c u r ity in th e U n ite d S ta te s (W ashington: Government ! j P r i n t i n g O ff ic e , 1 9 4 8 ), p p . 8 -1 4 . In 1950 a n in th program ! I w hich p ro v id e s a i d to d is a b le d in d iv i d u a ls was added to the! ! p ro g ram . In 1956 d i s a b i l i t y b e n e f i t s to q u a l i f i e d d isa b le d ! ‘ i n d i v i d u a l s was added to th e O ld Age and S u r v iv o r s ’ i ! In s u ra n c e P rogram . However, f o r th e p u rp o s e s o f t h i s j ! d i s s e r t a t i o n S o c ia l S e c u r ity and Old Age and S u rv iv o r s ' j : In s u ra n c e a r e u se d in te rc h a n g e a b ly , s in c e t h i s s tu d y I s ; l i m i t e d to th e l a t t e r p ro g ram . | | ^The b i l l in amended form became law on A ugust 1 , ! 1 9 5 6 . C h a rle s I . S c h o ttla n d , " S o c ia l S e c u r ity Amendments o f 1956: A Summary and L e g i s l a t i v e H is to r y ," S o c ia l ! S e c u r ity B u l l e t i n , 19:11# S ep tem b er, 1 956. j I iO T itle I , "A B i l l to Amend T i t l e I I o f th e S o c ia l j , S e c u r ity A c t," U nion C a len d a r No. 367 (H .R . 7225)# 8 4 th ! | C o n g re ss, 1 s t s e s s io n , J u ly 1 4 , 1955# PP* 1 -2 8 . j long ran g e tr e n d i n any d e g re e o f d e t a i l . However, i t Is ' f i w o rth -w h ile a t t h i s tim e to show some o f th e ev id en ce th a t le a d s s tu d e n ts o f th e problem to conclude t h a t Old Age and ! I S u rv iv o rs ' In su ra n c e w i l l p la y an in c r e a s in g ly i n f l u e n t i a l j r o l e in th e f u tu r e American economy. ] ^ ^ The r o l e o f i n f l a t i o n . — As lo n g a s i n f l a t i o n j p e r s i s t s , p o p u la r demand w i l l le a d to l a r g e r b e n e f i t s . ! They, in tu r n , w i l l a c c e l e r a t e th e problem o f s u f f ic ie n t. i re v e n u e , [ i f th e governm ent r e a l l y p la n s on m eeting i t s 1 I o b l i g a t i o n s , e i t h e r p a y -a s-y o u -g o f in a n c in g o r a l a r g e r e s e rv e i s th e o n ly a l t e r n a t i v e . ^ In 195^, Q veta Culp Hobby, S e c re ta ry o f th e Departm ent o f H e a lth , E d u catio n and W e lfare, in a r e p o r t to th e S enate Committee on F in an ce ! p o in te d out t h a t ; i Old-age and S u rv iv o rs ' In su ra n c e b e n e f i t l e v e l s were! o r i g i n a l l y f ix e d in th e m id-1 9 3 0 's , d u rin g a d e p ressio n ] economy. B e n e fit in c r e a s e s en a cte d by C ongress s in c e th e n have done l i t t l e more th an keep pace w ith th e i n f l a t i o n a r y t r e n d w hich o u r n a tio n h as h e r e to f o r e e x p e rie n c e d . ^ V In recommending in c r e a s e s in b e n e f i t s w hich have now become law , S e c r e ta ry Hobby s ta te d t h a t in h e r o p in io n "a re a d ju stm e n t in b e n e f i t s to ta k e in to account th e im proved s ta n d a r d o f th e b a s ic elem ents of l i v i n g f o r th e 1 Gveta Culp Hobby, sta te m e n t o f , H earings B efore th e Committee on F in a n c e , U n ite d S ta te s S e n a te , 83d C o n g re ss, 2d s e s s i o n , on H.R. 9366 (W ashington: Government P r i n t i n g O ff ic e , 1 9 5 ^), p . 139* 10 I American w orker I s n e c e s s a ry . b e n e f i t p a t t e r n h as been c o n t in u a l ly upw ard. Not o n ly have th e r a t e s I n c re a s e d , b u t dependent and s u r v iv o r b e n e f i t s have a ls o been added s in c e th e I n c e p tio n of th e la w . '"7 The ag in g of th e p o p u la tio n . — A ll a v a ila b le s t a t i s t i c s I n d ic a te t h a t th e p e rc e n ta g e o f th e American p o p u la tio n o v er s i x t y - f i v e y e a rs of age i s I n c r e a s in g a t a i v e ry r a p id r a t e . Since 1870, th e number o f p e o p le o v e r s i x t y - f i v e y e a rs o f age has been c o n s ta n tly in c r e a s in g . At t h a t tim e th o s e o v er s i x t y - f i v e y e a rs o f age c o n s t i t u t e d 3 p e r c e n t o f th e p o p u la tio n , o r one m il lio n in a p o p u la t i o n o f f o r t y m i l l io n . *-3 By 1930, 5*^ p e r cen t o f th e t o t a l p o p u la tio n were over s i x t y - f i v e y e a rs o f ag e, and by 1950 th e aged c o n s t i t u t e d 8 p e r c e n t o f th e p o p u la tio n , o r 1 2 .3 m illio n o u t o f a t o t a l p o p u la tio n o f 150.7 m i l l i o n , com pared w ith 6 .6 m illio n in 1 9 3 0 . If th e p r e s e n t tr e n d c o n tin u e s , by 1970 one out o f ev ery te n p e rso n s w i l l be o ver s i x t y - f i v e y e a rs o f ag e. One o f th e m ost im p o rta n t problem s c r e a te d by th e 1 2 L q c . c l t . ^ F o r h i s t o r i c a l f ig u r e s se e : U n ite d S ta te s D epartm ent o f Commerce, Bureau of th e C ensus, H is to r ic S t a t i s t i c s o f th e U n ited S t a t e s 1789-19A5 (W ashington: Government P r i n t i n g O ff ic e , 19^5)» pp. 2 6 -2 8 . •^ L o e. c i t . changing age s t r u c t u r e i s th e In c re a s e d p o l i t i c a l power 1 I a v a i l a b l e to th o s e p e rso n s who have l i v e d p a s t t h e i r most i p ro d u c tiv e y e a rs . As th e t r e n d c o n tin u e s , th e aged w i l l j S become an I n c r e a s in g ly e f f e c t i v e p r e s s u r e group on b o th thej n a t i o n a l and l o c a l l e v e l s . F o r exam ple, In T ennessee, J p e rs o n s who a r e o v e r f i f t y y e a rs o f age a r e excused from p a y in g th e s t a t e p o l l ta x . The Townsend movement d u rin g th e 1930‘ s , and th e many s o c i a l s e c u r i t y amendments s in c e th e 1 9 ^ 0 's , a r e o t h e r i l l u s t r a t i o n s o f th e in c r e a s in g p o l i t i c a l im p o rtan ce o f th e aged. Change in s o c i a l f o r c e s . — Many o f th e s o c ia l forces!,, w hich o r i g i n a l l y gave r i s e to th e Old Age and S u r v iv o r s ’ In su ra n c e law a re s t i l l c a u sin g campaigns f o r in c re a s e d i ! b e n e f i t s . C o n d itio n s r e s u l t i n g from te c h n o lo g ic a l change, 1 u r b a n iz a tio n , m o b il ity , and s m a lle r f a m il ie s have c r e a te d s o c ia l problem s among th e ag e d . The o ld age group has been f o rc e d to a d ju s t to changes in r e s id e n c e , to changes in s o c i a l r o l e , and to reduced a u t h o r i t y . A lso , many of to d a y 's c h ild r e n move away from t h e i r home community a s soon a s th e y a r e o f l e g a l a g e . Thus th e c u r r e n t fa m ily s t r u c t u r e in o u r s o c ie ty i s n o t o n ly s m a lle r but o f te n o n ly tem porary i n n a t u r e . As one a u t h o r i t y has p u t i t , The c u r r e n t problem o f th e aged seems to s p rin g l a r g e l y from th e f a c t t h a t we have d ev elo p ed a h ig h ly i n d i v i d u a l i s t i c fa m ily in which th e r i g h t s of m a rria g e p a r tn e r s t o e n jo y th e f u l l developm ent and e x p re s s io n o f t h e i r p e r s o n a l i t i e s unhampered by t h e i r p a r e n ts i s g e n e r a lly re c o g n iz e d , an d in w hich th e r i g h t s o f c h ild r e n a r e g iv e n p re c e d e n c e in fa m ily p h ilo s o p h y and in s o c ia l th in k in g o v e r th e r i g h t s o f th e g ra n d p a re n t g e n e ra tio n . U n fo rtu n a te ly , from th e s ta n d p o in t of th e h a p p in e ss o f th e aged in an u r b a n - in d iv id u a l!z e d c u l t u r e , w ith i t s anonym ity, i t s sm a ll f a m i l i e s , and i t s ca eh -to -m o n th l i v i n g , th e r e i s l i t t l e p la c e f o r th e o ld in th e fam ily c i r c l e and t h e r e i s , t h e r e f o r e , g r e a t l o n e l i n e s s and i s o l a t i o n . 1* Not o n ly a r e th e aged in to d a y 's s o c i e t y l o n e l y , j i b u t th e y no lo n g e r r e c e iv e t h e r e s p e c t t h a t was fo rm e rly a s s o c ia te d w ith t h e i r y e a r s . In an a g r i c u l t u r a l s o c i e t y (su c h as I re la n d ) th e t i t l e t o th e la n d rem ains in th e p a r e n t s ' hands u n t i l d e a th , and th e younger g e n e r a tio n s j m ust r e s p e c t th e p a r e n ts who r e t a i n economic c o n tr o l o v er j th e fa m ily w e a lth . In an i n d u s t r i a l s o c i e t y , on th e o th e r j hand, th e r e i s l e s s l i k e l i h o o d o f a s u f f i c i e n t amount o f ' w e a lth b ein g p a s s e d on by th e p a r e n ts to demand r e s p e c t J from th e c h i l d . In f a c t , p a r t o f th e j u s t i f i c a t i o n o f Old Age and S u rv iv o rs ' In su ra n ce stem s from th e d e s i r e o f o ld e r w orkers who can no lo n g e r f in d employment to become In d ep en d en t o f t h e i r o f f s p r i n g . C h ild re n a ls o seek to be f r e e from th e t r a d i t i o n a l r e s p o n s i b i l i t y o f su p p o rtin g t h e i r p a r e n ts who l i v e lo n g e r th a n th e y d id in o ld e r t i m e s . ^ A ccording to R. D. L an d is, th e Townsend Clubs -*R. D. L a n d is , "Emergency Problem s o f th e A ged," R eadings In S o c ia l S e c u r i t y , W illiam Haber and W ilbur J . Cohen ( e d s .) (New York: P r e n tic e - H a ll, 1 9 ^ 8 ), p . 23^* ^ A n t r e S ie g f r i e d , A m erica a t M id-C entury (New York: H a rc o u rt, B race and Company, 1955)* P* 325* and o th e r o ld age groups have h e lp e d th e aged re g a in t h e i r l o s t p r e s t i g e and s o c ia l s t a t u s In s o c i e t y . ! U ndoubtedly, th e numerous Townsend c lu b s th ro u g h o u t | i th e c o u n try have g iv en th e o ld a new fo c u s o f I n t e r e s t ; j | th e y have u n ite d o ld p e o p le in numerous com m unities In a c ru sa d e , s t i r r i n g t h e i r em otions w ith new v i s i o n s ; j g iv e n them a cau se f o r w hich to work and f i g h t ; g iv e n ! them a sens© o f u n ity w ith t h e i r f e llo w s in a w o rld in I w hich th e y a r e b a rr e d from most form s o f normal s o c ia l i p a r t i c i p a t i o n , a u n ity w ith p eo p le o f t h e i r k in d , such a s th e many o ld p e o p le la c k in an age t h a t c o d d le s , p r o t e c t s , and humors th e o ld b u t does n o t u se and o f te n does n o t heed them .17 There I s e v e ry re a so n to assume t h a t th e aged w i l l c o n tin u e to Jo in o r g a n iz a tio n s t h a t prom ote o ld age s e c u r i t y in an e f f o r t to reco u p t h e i r l o s t s t a t u s . j Dr. Donald David b e lie v e s th a t th e w orker to d a y I s jtu r n in g to th e w e lf a r e s t a t e and th e l a b o r union in o rd e r I ! to s a t i s f y h is b a s ic d e s i r e s . Dr. David b e l ie v e s , how ever,! t h a t th e m a te r ia l g a in s d e riv e d from t h e s e i n s t i t u t i o n s a re m e re ly im p e rfe c t s u b s t i t u t e s f o r what men r e a l l y d e s i r e : "freedom to engage in c r e a t i v e a c t i v i t i e s , to make t h e i r own d e c is io n s , and to ta k e p r id e in t h e i r accom plish m e n ts ." 1® I f th e s e a re th e o b j e c t i v e s .o f th e w orking p o p u la tio n , th e y m ust lik e w is e be th e o b j e c t i v e s o f th e aged. ^ L a n d i s , o p . c l t . , p . 235* ^ D o n a ld K. D avid, "The Danger o f D r i f t i n g ," The W elfare S ta te and th e n a t io n a l W e lfa re . Sheldon Glueck ( e d .j (Cam bridge, M a ssa c h u se tts: A ddison-W esley P r e s s , 1 9 5 2 ), p . 98. IV I I I . REVIEW OF THE LITERATURE : i S o c ia l S e c u r ity has been th e s u b je c t o f a g r e a t many b o o k s, p e r i o d i c a l s , and o th e r p u b l i c a t i o n s . In th e e a r l y ! y e a rs of th e program , many th o ro u g h s t u d i e s o f th e e n t i r e f i e l d of S o c ia l S e c u r ity w ere p u b lis h e d . Some of th e most j i p o p u la r ones were Paul H. D ouglas, S o c ia l S e c u rity i n th e j I U n ited S ta te s (1936); Maxwell S te w a rt, S o c ia l S e c u r ity (1939); and W illiam W ith ers, F in an c in g Economic S e c u r ity in th e U n ited S ta te s (1939)* An e x c e lle n t stu d y on one a s p e c t o f S o c ia l In su ra n c e i s J . S. P a rk e r, S o c ia l S e c u r ity l R eserv es (I9*f2). 1 T here a r e two e x c e lle n t te x tb o o k s and a s u p e r io r book o f re a d in g s on th e e n t i r e f ie ld , o f S o c ia l In s u ra n c e : ] 1 E v e lin e M. B urns, The American S o c ia l S e c u r ity System j (1951); Domenico G -agllardo, American S o c ia l I n s u r a n c e . r e v is e d e d i tio n (1955); and W illiam Haber and W ilbur Cohen, R eadings on S o c ia l S e c u rity (1 9 ^ 8 ). A lso , most s ta n d a r d t e x t s on Labor Economics, T a x a tio n , and P u b lic F in an ce in c lu d e a t l e a s t one c h a p te r on S o c ia l S e c u r ity . For exam ple, th e fo llo w in g t e x t s have im p o rta n t s e c tio n s on problem s r e l a t i n g to th e S o c ia l S e c u r ity A ct: L loyd C. R eynolds, Labor Economics and L abor R e la tio n s (195*0; W . S. W oytlnsky and A s s o c ia te s , Employment and Wages in th e U n ite d S ta te s (1953); and W illiam H. A nderson, T a x a tio n and The American Economy (1951)* 15! i Many o r g a n iz a tio n s have conducted s p e c ia l s tu d i e s j and have p u b lis h e d r e p o r ts on d i f f e r e n t a s p e c ts o f s o c i a l ! in s u r a n c e . Some o f th e b e s t known a r e The B rookings I n s t i t u t i o n stu d y ; Lewis Merlam* R e lie f and S o c ia l S e c u rity (19^6); The R a tio n a l I n d u s t r i a l C onference Board s tu d i e s ; Henry W . S te in h a u s , F in an c in g Old Age ( 1 9 ^ ) . and W illiam J . S h u ltz , S o c ia l S e c u rity and th e Economics o f S avlngs (19^8); and th e T w entieth C entury Fund s tu d y conducted by John J . Corson and John W . M cConnell, Economic Meeds o f O lder P e o p le . In a d d itio n to th e s e groups a re such o rg a n iz a tio n s s p e c i a l i z i n g in s o c i a l s e c u r i t y as th e R esearch C o u n cil f o r Economic S e c u r ity , headed by G-erhard H lr s c h f e ld , and th e American A s s o c ia tio n f o r S o c ia l S e c u r ity , fo rm e rly headed by Abraham E p s te in (o fte n r e f e r r e d to by th e p o p u la r p r e s s a s th e f a t h e r o f American s o c i a l s e c u r i t y ) . j Some o f th e most im p o rta n t governm ent s tu d ie s p u b lis h e d by members o f th e S o c ia l S e c u r ity A d m in is tra tio n a r e S o c ia l S e c u r ity in America (193?)» S o c ia l S e c u r ity in th e U n ite d S ta te s (1 9 ^8 ), S o c ia l In su ra n c e F in an c in g in R e la t ion to Consumer Income and E x p en d itu re (19^6), and S e le c te d F in d in g s on th e R a tio n a l Survey o f Old-Age and S u r v iv o r s 1 In s u ra n c e B e n e f ic i a r ie s (1951)- In 1952, th e R a tio n a l P la n n in g A s s o c ia tio n made a s i g n i f i c a n t stu d y e n t i t l e d P en sio n s in th e U n ited S t a t e s . A nother u s e f u l stu d y was p re p a re d by th e J o i n t Committee on R a ilro a d R e tirem en t L e g i s l a t i o n , Economic Problem s o f an Aging P o p u la tio n (1 9 5 3 ). The Committee on L ong-range Work and I R e lie f P o l i c i e s o f th e N a tio n a l R esources P lan n in g Board p r e s e n te d , in 19^2, a v e ry com prehensive r e p o r t e n t i t l e d S e c u r i t y , Work and R e lie f P o l i c i e s * The Departm ent o f H e a lth , E ducation and W elfare p u t o u t a com prehensive b ib lio g ra p h y on th e ag in g in 1 9 5 5* B esid es th e s e s p e c ia l governm ent s tu d i e s and r e p o r t s , th e r e a r e c o n g re s s io n a l h e a rin g s and r e p o r t s on th e v a r io u s s o c i a l s e c u r ity am endments, an annual r e p o r t by th e S o c ia l S e c u r ity A d m in is tra tio n , and an annual r e p o r t from th e Board o f T ru s te e s o f th e F e d e ra l Old-Age and S urvivors* In su ra n c e T ru st Fund. In a d d i t i o n , th e D ep a rt ment o f Labor has conducted many s tu d ie s r e l a t i n g a t l e a s t i n d i r e p t l y to s o c i a l s e c u r i t y . For exam ple, B u lle tin No. 1092 o f th e Bureau o f L abor S t a t i s t i c s co n cern s Employment and Economic S ta tu s of O lder Men and Women (195^). One governm ent m onthly i s d ev o ted e x c lu s iv e ly to s o c i a l s e c u r i t y ( S o c ia l S e c u r ity B u l l e t i n ) . There have been v a r io u s s t a t e commission i n v e s t i g a t i o n s and c o n fe r e n c e s , as w e ll a s u n i v e r s i t y c o n fe re n c e s . For exam ple, on June k and 5 of 1953 th e S t a t e o f P e n n sy lv a n ia and Temple U n iv e r s ity co n d u cted a J o in t c o n feren c e on th e age b a r r i e r s to employment. The U n iv e rs ity of M ichigan has a ls o con d u c te d s e v e r a l c o n fe re n c e s on th e a g in g , such as th e one In 1 ? 1955 on e a rn in g o p p o r tu n iti e s f o r o ld e r w o rk e rs. Yet In a l l t h i s a v a i l a b l e m a te r ia l t h e r e a r e o n ly two th o rough s tu d i e s on th e economic e f f e c t s o f s o c ia l s e c u r i t y : Seymour 1 . H a r ris , Economics o f S o c ia l S e c u r ity (19&L), and Id a C. M errlam , S o c ia l S e c u r ity F in an c in g (1 9 5 2 ). Both s t u d i e s , in c o n t r a s t to t h i s r e p o r t , t r y to co v e r th e e n t i r e f i e l d o f s o c i a l s e c u r i t y . The book by P r o f e s s o r H a rris i s t h e more comprehen s iv e o f th e two r e p o r t s . I t i s , how ever, o u t o f d a t e , sin c e th e S o c ia l S e c u r ity Law had been In e f f e c t f o r o n ly f o u r y e a rs when H a r r is w ro te h i s book. B e s id e s , P r o f e s s o r H a r r is n e g le c ts such im p o rta n t a s p e c ts a s th e e f f e c t o f s o c i a l s e c u r ity on r e tir e m e n t, and Income d i s t r i b u t i o n . 1 CHAPTER I I i EVOLUTION OF OLD AGE AND SURVIVORS' INSURANCE A b r i e f s tu d y of th e changes In th e Old Age and S u rv iv o rs ' In su ra n c e Law w i l l show how th e program h as i expanded. I t w i l l a ls o b r in g c l e a r l y t o l i g h t th e ch an g in g p h ilo s o p h y t h a t a p p e a rs to be e v o lv in g . I . HISTORY UP TO PASSAGE OF THE j SOCIAL SECURITY ACT -I i P r io r to th e 1 9 3 0 's th e p h ilo so p h y p r e v a i lin g in th e U n ite d S ta te s h e ld t h a t th e in d iv id u a l had th e r e s p o n s i- i b i l l t y f o r p ro v id in g through p e r s o n a l sa v in g s f o r h i s own j s e c u r i t y . The g e n e ra l b e l i e f b e f o r e 1930 was th a t i f an aged p e rs o n was in no p o s it io n to su p p o rt h im s e lf , h is fa m ily would ta k e c a re o f h i s n ee d s. The o nly perm anent p r o v is io n f o r th e needy aged i n most s t a t e s was th e "alm shouse." A sm a ll movement to w ard o ld age p e n sio n s was in d ic a te d by th e p a s sa g e o f o ld age a s s i s t a n c e a c t s on th e p a r t o f te n s t a t e s and one t e r r i t o r y . These p e r m itte d th e c o u n tie s to p ay o ld age p ensions.'*’ In U tah and Wyoming th e law s w ere ^ In seven o f th e s t a t e s and th e one t e r r i t o r y th e "law s w ere of th e o p tio n a l ty p e , i . e . , th e y l e f t th e a d o p tio n o r r e j e c t i o n o f an o ld age a s s i s t a n c e system to th e d i s c r e t i o n of th e c o u n tie s . For t h i s re a so n th e s e 19 m a n d a to ry .2 U nlike th e o th e r two s t a t e s C a lif o r n i a p ro v id e d f o r s t a t e a i d to th e c o u n tie s . In a d d itio n th e s t a t e law p ro v id e d up t o one hundred e ig h ty d o l l a r s p e r y e a r f o r each aged p erso n s u p p o rte d u n d er th e a c t . 3 These j s t a t e s t a t u t e s w ere in s p ir e d by th e F r a t e r n a l Order of E ag les and th e American A s s o c ia tio n f o r O ld Age S e c u r ity j I (headed by Abraham E p s te in ) . Dr. Paul D ouglas has g iv e n th e fo llo w in g e x p la n a tio n a s t o th e cau ses o f t h i s e a r l y p e n sio n movement: T his d r i f t was caused by th e I n c r e a s in g p r o p o rtio n of o ld p e o p le in th e t o t a l p o p u la tio n and by th e I n c r e a s in g i n a b i l i t y o f th e s e o ld p e o p le to o b ta in g a in f u l employment. T his l a t t e r developm ent was in tu r n c r e a te d by th e d e c re a s e in th e p r o p o rtio n o f p e rs o n s who w ere se lf-e m p lo y e d as a g r i c u l t u r e , th e h a n d i c r a f ts and sm all t r a d e gave way to l a r g e - s c a l e I n d u s tr ia lis m and by th e in c r e a s in g speed of in d u s t r y w hich made i t more d i f f i c u l t f o r o ld p e o p le to be reem ployed once th e y had l o s t t h e i r jo b s . A grow ing d i s l i k e o f co u n ty po o r farm s a s p ro p e r i n s t i t u t i o n s to c a r e f o r th e in d ig e n t aged a ls o c o n tr ib u te d to th e s e u n d e r c u rr e n ts of s e n tim e n t.** The o ld age p e n sio n movement g a in e d momentum d u r in g th e e a r l y days o f th e d e p r e s s io n . A ccording to S e n a to r D ouglas, law s had v e ry l i m i t e d e f f e c t . 1 1 S o c ia l S e c u r ity B oard, S o c ia l S e c u rity in America (W ashington: Government P r i n t i n g O f f ic e , 1937), p . l£o7 2 I b i d . . p . 161. 3 c a l i f o r n l a S ta tu t e s 1 9 2 9 . C hapter 530, S e c tio n 21, pp. 918-919* ^Paul H. D ouglas, S o c ia l S e c u r ity in th e U n ited S ta te s (New York: McGraw-Hill Book Company, 1936), p p . 5«*6. 20 j The In c id e n c e of unemployment was e s p e c i a l l y se v e re j upon th e aged a s w e ll a s upon th e y o u th s . In a d d i t i o n , [ th e f a i l u r e of banks and th e g r e a t d e c lin e s in th e v a lu e s o f r e a l e s t a t e and o f s to c k s and bonds com- j p l e t e l y swept away th e sa v in g s o f many p e rso n s and g r e a t l y im p a ire d th e r e s e r v e s o f even more. By th e end of 193A t h e r e were ap p ro x im a te ly t h r e e - q u a r t e r s of a i m il lio n aged p e rso n s who were on d i r e c t r e l i e f from th e i f e d e r a l governm ent, in a d d i tio n to th o s e r e c e iv in g j m ain ten an ce from o th e r s o u r c e s .5 " ^ i As a r e s u l t o f th e d e p re s s io n many s t a t e s p a s s e d o ld age p e n s io n la w s. By Jan u ary 1 , 1935» “tw e n ty -e ig h t s t a t e s and two t e r r i t o r i e s had o ld age a s s i s t a n c e l a w s .“6 S ta te o ld age a s s i s t a n c e , how ever, was handicap p ed j by th e f i n a n c i a l bu rd en s o f th e d e p r e s s io n . By th e end of j 193^ th r e e o f th e s t a t e s w ith o ld age a s s i s t a n c e law s were j n o t p ay in g b e n e f i t s b ecause o f la c k of fu n d s . “The average; m onthly g r a n t p a id ran g ed in th e v a r io u s s t a t e s from 69 c e n ts in N orth D akota to $26.08 in M a s s a c h u s e tts .“7 «phe o v e r - a l l average m onthly p e n s io n f e l l fro© n in e te e n d o l l a r s in th e e a r ly p a r t of 193^ t o $16.16 in December o f t h a t j y e a r. S h o rtly a f t e r h is a d d re s s t o C ongress on June 8, 193^> P re s id e n t R o o se v e lt a p p o in te d a Committee on Economic S e c u r ity to stu d y th e e n t i r e q u e s tio n o f sa fe g u a rd s “a g a in s t m is fo rtu n e s which can n o t be w h o lly e lim in a te d in ^Loe. c l t . 6S o c ia l S e c u r ity in A m erica, l o c . c l t . ? I b id . . p . 163* 21 t h i s man-made w o rld of o u r s , ”® and to make a r e p o r t by J a n u a ry 1 , 1935• The Committee was composed o f th e S e c r e ta r y o f th e T re a su ry , t h e A tto rn e y -G e n e ra l, th e S e c r e ta r y o f A g r ic u ltu r e , th e R e lie f A d m in is tra to r , and th e S e c r e ta r y o f L abor, w ith th e l a s t named s e rv in g a s c h a i r - man. T his com m ittee a p p o in te d a s t a f f u n d er Dr. Edwin E. j W itte , o f th e U n iv e r s ity o f W isconsin. Mine a d v is o ry com m ittees were a l s o s e t up u n d er th e le a d e r s h ip o f such p e r s o n a l i t i e s a s Dr. A. J . A ltm eyer and D r. Frank P. Graham. The C om m ittee’s r e p o r t , w hich was su b m itte d to C ongress by th e P re s id e n t on Ja n u a ry 17, 1935* c o n ta in e d a recom m endation f o r a com pulsory Old-Age In su ra n c e System , a system o f v o lu n ta ry a n n u i t i e s , a com pulsory unemployment j in s u ra n c e p la n , and a system o f o ld age a s s i s t a n c e t o th e c u r r e n t needy th ro u g h m atching F e d e ra l g r a n ts to th e s t a t e s .9 While th e com m ittee was making i t s i n v e s t i g a t i o n , Dr. Townsend came o u t w ith a p la n to be fin a n c e d by a n a t i o n a l t r a n s a c t i o n s ta x w hich p roposed t h a t a l l p e rs o n s I - - -....... ■ ------- j Q I P r e s id e n t F ra n k lin D. R o o se v e lt, sta te m e n t made by F.D .R . in h is m essage to C ongress on June 8, 193^* R eport t o th e P re s id e n t o f th e Committee on Economic S e c u r ity (W ashington: Government P r i n t i n g O ffic e , 1935)* P« V. ^Committee on Economic S e c u r ity , R eport t o th e P r e s id e n t (W ashington: Government P r i n t i n g O ffic e , 1 9 3 5 ), p . 30. 22 over s i x t y , i r r e s p e c t i v e of m eans, w ere to r e c e iv e two hundred d o l l a r s a month p ro v id e d th e y a g re e d to r e t i r e and to spend th e money w ith in a month o f i t s r e c e i p t . t The Committee on Economic S e c u r ity had recommended t h a t o ld e r w orkers be p a id a n n u i t i e s w hich would e v e n tu a lly come o u t o f th e g e n e r a l fu n d . S e c re ta ry o f th e T re a su ry M organthau i s c r e d i te d w ith th e p ro p o s a l made d u rin g th e C o n g re ssio n a l h e a rin g s t h a t th e Old Age In su ra n c e p la n be p la c e d on a s e lf - s u p p o r tin g b a s i s . The b i l l w hich was su b m itte d to C ongress on Ja n u a ry | 17» 1935» was r e p o r te d out of com m ittee i n th e House o f R e p re s e n ta tiv e s on A p ril 5* 1935* and i n th e Senate on June i 18, 1935* Both th e S enate and th e House o f R e p re s e n ta tiv e s i i e lim in a te d th e r i g h t o f th e S o c ia l S e c u r ity Board to s e l l v o lu n ta r y o ld age a n n u itie s to th o se who w ere not in c lu d e d under th e com pulsory p r o v is io n s o f th e a c t . The S en ate p a s s e d th e b i l l in amended form on June 19* by a v o te o f 7b to 7- I t had been p r e v io u s ly approved by th e House o f R e p re s e n ta tiv e s on A p ril 19* by a v o te o f 371 to 33*^° A J o i n t C onference Committee e lim in a te d th e d if f e r e n c e s betw een th e b i l l s a s p a s se d by th e House and S en ate d u rin g th e second week of A ugust. The P r e s id e n t, on August 1A, 1935* sig n e d th e a c t . 10Maxwell S. S te w a rt, S o c ia l S e c u r ity (re v is e d e d i t i o n ; New York: W . W . N orton and Company, 1939)* P» 136. 23 I I . M ONTHLY BENEFIT FORMULA i The e n t i r e b e n e f i t s t r u c t u r e h as been s u b je c t to s i g n i f i c a n t m o d if ic a tio n s . I n s te a d o f s e c u r i t y f o r th e wage e a rn e r a lo n e , s e c u r ity f o r th e w hole fa m ily , headed j by th e wage e a r n e r , has e v o lv e d . The b e n e f i t fo rm u la h as | I ! changed from com putation on th e b a s is o f t o t a l wages ea rn e d I to one based on av erag e wages e a rn e d . S ucceeding law s h a v e ; l i b e r a l i z e d th e b e n e f i t s . O r ig in a l Formula f o r M onthly B e n e fit C a lc u la tio n s The o r i g i n a l form ula was based on t o t a l wages or s a l a r i e s e a rn e d . The m onthly b e n e f i t payment was d e t e r m ined in th e fo llo w in g m anner: 1 /2 o f 1 p e r cen t o f th e | f i r s t th r e e th o u sa n d d o l l a r s , p lu s 1/12 o f 1 p e r c e n t on l i f e t i m e co v ered e a rn in g s betw een th r e e th o u sa n d d o l l a r s and f o r t y - f i v e th o u sa n d d o l l a r s , p lu s 1 /2 4 o f 1 p e r c e n t on a l l e a rn in g s o v e r f o r t y - f i v e th o u san d d o l l a r s w ith maximum m onthly payment l i m i t e d to e i g h ty - f iv e d o l l a r s . ^ B e n e f its w ere p a y a b le to any one in f i e l d s o f co v ered employment who e a rn e d a minimum o f two th o u sa n d d o l l a r s a f t e r J a n u a ry 1, 193?* and who r e c e iv e d some wages in each y ear d u rin g th e f i v e - y e a r p e r io d which fo llo w e d , or b e fo r e re a c h in g s i x t y - f i v e y e a rs o f a g e . Wages o v e r th r e e ^ " S e c tio n 202, T i t l e I I , S o c ia l S e c u r ity A ct, P u b lic Law No. 2?1 (H.R. 7260), C ongress, 2d s e s s io n , August 1 4 , 1935, p p . 4 -5 . 2^! th o u sa n d d o l l a r s earn ed in any one y e a r w ere excluded in ! com puting th e b e n e f i t s . T his b e n e f i t form ula was w eig h ted in fa v o r o f th e p o o r, and in f a v o r o f th o se w ith o n ly a few y e a rs of S o c ia l| S e c u r ity c r e d i t . The u pper l i m i t o f th e a n n u ity was e i g h t y - f i v e d o l l a r s a month o r one th o u sa n d tw enty d o l l a r s a y e a r. No a n n u i t i e s w ere to be p a id on t h a t p o r tio n o f a p e rso n * s income w hich exceeded th r e e th o u sa n d d o l l a r s p e r y e a r. The minimum m onthly payment under th e law would be 1 /2 o f 1 p e r c e n t o f two th o u sa n d d o l l a r s , o r te n d o l l a r s , | s in c e no one whose t o t a l e a rn in g s were l e s s th an two th o u sa n d d o l l a r s was sch ed u led to r e c e iv e an a n n u ity . F or exam ple, i f a w o rk er e a rn e d t o t a l wages o f tw elv e th o u san d d o l l a r s in co v e re d employment b e fo re he r e t i r e d in 19^ 2 , h i s m onthly b e n e f i t under th e 1935 Act w ould have been computed a s fo llo w s : 1 /2 o f 1% of 13,000 * 1 1 5 .0 0 1 /1 2 o f 1% o f #9 ,0 0 0 = 7 .5 0 #2 2 .5 0 The f i r s t m onthly payment was t o be made on Ja n u a ry 1 , 19A 2 . However, under th e 1939 amendment th e d a te was moved up to Ja n u a ry 1 , 19**Q. I b i d . , p p . 6- 7 . Complete R ev isio n In 1939 i B efore even th e f i r s t m onthly payment was made, th e system upon w hich th e b e n e f i t s t r u c t u r e r e s t e d came u nder com plete r e v i s i o n . The new fo rm u la was b ased on av e ra g e ! wages earn ed I n s te a d of t o t a l wages e a rn e d and made j * i p o s s i b l e th e paym ent of h ig h e r b e n e f i t s d u rin g th e e a r l y ^ y e a rs o f th e s y s te m 's o p e r a tio n . A w o rk er whose e a rn in g s av e ra g e d one hundred d o l l a r s a month and who worked in co v e re d employment f o r te n y e a r s b e fo r e r e tir e m e n t w ould r e c e iv e $2 7 .5 0 u n d e r th e 1939 r e v is i o n as compared w ith $22.50 under th e o r i g i n a l a c t . However, th e r e v is e d wage fo rm u la would have p a id lo w er m onthly b e n e f i t s to th o s e who r e t i r e d w ith a t l e a s t se v en te en y e a rs of co v erag e. D e te rm in a tio n of av e ra g e m onthly w age. - - The averagej m onthly wage fo rm u la ap p e a rin g in th e 1939 amendment was d e te rm in e d . . . by d iv id in g th e t o t a l wages p a id an in d iv id u a l b e f o re th e q u a r t e r in w hich he d ie d or became e n t i t l e d to r e c e iv e p rim a ry in s u ra n c e b e n e f i t s , w hichever f i r s t o c c u rre d , by th r e e tim es th e number o f q u a r te r s e la p s in g a f t e r 1936 and b e f o r e such q u a r te r in w hich he d ie d o r became so e n t i t l e d , ex c lu d in g any q u a r te r p r i o r to th e q u a r t e r in w hich he a t t a i n e d th e age o f tw e n ty - two d u rin g w hich he was p a id l e s s th a n $50 o f wages in any q u a r t e r , a f t e r th e q u a r t e r in w hich he a t t a i n e d age s i x t y - f i v e , o c c u rrin g p r i o r to 1 9 3 9. 1 * * -^ A f te r se v en te en y e a rs t o t a l m onthly b e n e f i t s would have been $29-50 under th e 1935 a c t a s compared w ith $2 9 .2 5 under th e 1939 amendment. • ^ S e c tio n 201, T i t l e I I , S o c ia l S e c u r ity Act Amendments o f 1939* P u b lic Law No. 379 (H.R. 6635). 7 6 th C on g ress, 1 s t s e s s io n , August 10, 1939, p . 19* : 26 The fo rm u la amounted t o ta k in g t o t a l covered e a rn - ; I Inge and d iv id in g t h i s f i g u r e by th e number of months th a t had e la p s e d s in c e Ja n u a ry 1 , 1937* Thus, i f a w orker who j r e t i r e d on J a n u a ry 1 , 1955» had earned 1*1-3,200 s in c e j i J a n u a ry 1, 1937» h i s average m onthly wage would have been 8* 1 - 3 ,2 0 0 -j- 216 ( th e number o f months in v o lv e d ) o r two hundred d o l l a r s . Com putation o f p rim ary In su ra n c e b e n e f i t . — The m ethod of com puting th e p rim a ry in s u ra n c e b e n e f i t u n d er the; 1939 a c t was a s fo llo w s : i akQ p e r centum of th e amount o f an i n d i v i d u a l 's av e ra g e m onthly wage" p ro v id in g i t "does n o t exceed 1 5 0, o r i f such av erag e m onthly wage exceeds | 5 0 , * * 0 p e r centum of i 1 5 0, p lu s 10 p e r centum of th e amount by w hich such av erag e m onthly wage ex ceed s $50 and does n o t exceed $2 5 0. "^5 fjae sum o b ta in e d from th e above com putation was in c re a s e d by 1 p e r centum f o r each y e a r in which th e w orker ea rn e d a t l e a s t two hundred d o l l a r s in covered em ployment. F or exam ple, i f a w o r k e r 's av e ra g e m onthly wage was one hundred d o l l a r s and he w orked f o r te n y e a rs , th e n h i s m onthly i b e n e f i t s would be computed in th e fo llo w in g manner: 1 5 I b i d ., p . 18. 27 40 p e r cen t o f $50 * | 2 0 .Q0 10 p e r c e n t o f $50 * 5 .0 0 T o ta l 10 p e r c e n t o f f>25 §25.00 2.50 T o ta l 127.50 Changea Under th e 1950 Amendment A lte rn a te s t a r t i n g d a t e . — The 1950 law , w hich c o n ta in e d th e n e x t m ajor r e v i s i o n , s e t up Ja n u a ry 1 , 1951* a s an a l t e r n a t e s t a r t i n g d a t e . However, any one who had become tw enty-tw o y e a rs o ld b e f o r e J a n u a ry 1, 1951» and has ea rn e d a t l e a s t f i f t y d o l l a r s In each o f s i x q u a r te r s a f t e r th a t d a t e , I s s t i l l given th e ch o ice of u s in g th e o r i g i n a l s t a r t i n g d a te , J a n u a ry 1, 1937, o r th e a l t e r n a t e d a t e , Ja n u a ry 1 , 1951 *16 Since a v e ra g e e a rn in g s w ere h ig h e r f o r m ost w orkers a f t e r 1950 th a n th e y were from 1937 to 1950, t h i s new s t a r t i n g d a te w i l l I n c re a s e b e n e f i t s to m ost o ld age r e c i p i e n t s . Those who do not m eet th e s ix q u a r te r re q u ire m e n t t e s t m ust use th e o r i g i n a l s t a r t i n g d a t e . The main p u rp o se o f s e t t i n g up a new s t a r t i n g d a te was to en ab le th o s e who became co v ered f o r th e f i r s t tim e in 1950 to r e c e iv e b e n e f i t s com parable w ith th o se who had been co v ered s in o e 1 937. I f th e a l t e r n a t i v e s t a r t i n g d a te ^ S e c t i o n 1 0 4 , T i t l e I , S o c ia l S e c u r ity Act Amendment of 1950, P u b lic Law Ho. 73^ (H.H. 6000), 8 1 s t C o n g ress, 2d s e s s io n , August 28, 1950, p . 33* had n o t been s e t up, th e new ly co v ered g ro u p s w ould, In I i m ost c a s e s , have ea rn e d s u b s t a n t i a l l y lo w er b e n e f i t s on r e tir e m e n t b e c a u se o f th e la c k o f wage c r e d i t s d u rin g th e I f o u r te e n - y e a r p e r io d when t h e i r o c c u p a tio n s w ere n o t eo v ered under S o c ia l S e c u r ity . B e n e fit fo rm u la . — Bnder t h i s amendment th e b a s ic fo rm u la f o r com puting p rim ary b e n e f i t s was r a i s e d to 50 p e r c e n t o f th e f i r s t one hundred d o l l a r s o f th e average m onthly wage, and to 15 p e r c e n t o f th e r e s t .-* ’7 The maximum ta x a b le e a rn in g s was r a i s e d from two hundred f i f t y d o l l a r s to th r e e hundred d o l l a r s a t t h a t tim e . The one p e r c e n t In c re m e n t. — The one p e r c e n t in crem en t f o r e v e ry y ea r o f coverage was dropped from th e com putation in 1950. T his had the e f f e c t o f g iv in g th e same b e n e f i t to th o s e who r e t i r e a f t e r w orking o nly a s h o rt tim e in covered employment as t h a t g iv e n to th o se who work f o r a s much a s f o r t y y e a rs , p ro v id e d th e y a r e b o th f u l l y In s u re d . The e lim in a tio n o f l a r g e r b e n e f i t s f o r p ro lo n g e d s e r v ic e i s an im p o rta n t f a c t o r as i t re d u c e s th e r e l a t i o n s h ip betw een th e m onies p a id in and th e subseq u en t b e n e f i t s . Changes S ubsequent to 1950 B e n e fit fo rm u la . — In 1952 th e fo rm u la was a g a in 1 7 I b id . . p . 3 2 . changed. Under t h i s r e v is io n a p erso n r e c e iv e d 55 p e r c e n t ' o f th e f i r s t one hundred d o l l a r s and a g a in 15 p e r c e n t o f J th e n e x t two hundred d o l l a r s . T h e c u r r e n t fo rm u la , w hich came in t o e f f e c t in 195^, r a i s e s from one hundred d o l l a r s t o one hundred te n d o l l a r s th e amount o f av e ra g e e a rn in g s I to w hich th e 55 p e r c e n t f a c t o r a p p l i e s . An a d d i t i o n a l ; c la u s e in c r e a s e s th e 15 p e r c e n t f a c t o r t o 20 p e r c e n t . At th e sake tim e th e maximum e a rn in g s to which th e fo rm u la a p p l ie s a r e now t h r e e hundred f i f t y i n s t e a d o f th r e e hundred d o l l a r s p e r m o n th .2® The minimum p rim ary b e n e f i t paym ents have ev o lv ed from te n d o l l a r s in 1939 to t h i r t y d o l l a r s in 195^* The maximum p rim ary b e n e f i t h as been In c re a s e d from e ig h ty d o l l a r s In 1950 to th e p r e s e n t amount of # 108.50. The "d r o o o u t. "— The 195^ 1958 amendments m eet th e problem o f n ew ly -co v ered g ro u p s in a way t h i s i s a ls o 1 O S e c tio n 2 , S o c ia l S e c u r ity Act Amendments of 1952, P u b lic Law No. 590 (H.R. 7800), 82nd C ongress, 2d s e s s io n , J u ly 18, 1952, p . 2 . •^ S e c tio n 1 0 2 , T i t l e I , S o c ia l S e c u r ity Act Amendments of 195^* P u b lic Law No. 781 (H.R. 9366), 83d C on g ress, 2d s e s s io n , Septem ber 1, 195^, p» 11* 2®The p u rp o se of ch an g in g th e b e n e f i t fo rm u la under th e 195^ amendment was " to b r in g b e n e f i t s more in l i n e w ith p r e s e n t-d a y p r i c e and wage l e v e l s . " The Committee on F in an ce o f th e S e n a te , R eport of th e S en ate to accompany H.R. 9 3 6 6 . S o c ia l S e c u r ity Amendments of 195k, 83d C on g ress, 2d s e s s io n , R eport No. 1987 (W ashington: Government P r i n t i n g O ff ic e , 195^)* P» !• 30 adv an tag eo u s to p r e v io u s ly co v ered w o rk e rs . A ll q u a l i f i e d i n d iv i d u a ls can now "drop o u t" t h e i r f i v e lo w e st y e a rs of 21 e a rn in g s . T his p r o v is io n th u s g iv e s th o s e a lre a d y c o v ered th e a d v a n ta g e o f some f u tu r e p r o t e c t i o n a g a in s t th e lo w e rin g o f th e a v e ra g e m onthly wage b e c a u se o f p e r io d s o f unemployment, d i s a b i l i t y , o r low e a rn in g s . However, f o r p e o p le coming u n d er the p r o v is io n s of th e law sin c e 1956 th e f i v e y e a r "d ro p o u t" w i l l m e re ly se rv e t o en ab le them to be in c lu d e d w ith o u t th e lo s s o f fo u r y e a rs o f co v e ra g e . The "dro p o u t" p r o v is io n te n d s f u r t h e r to d e s tr o y th e r e l a t i o n s h i p betw een paym ents and b e n e f i t s . This d is c r e p ancy i s o f f s e t by th e f a c t t h a t th e w o rk e r’ s o ld age s e c u r i t y w i l l n o t be d e s tro y e d by c irc u m sta n c e s beyond h is c o n t r o l . The R etirem en t Problem Under th e o r i g i n a l a c t wages e a rn e d a f t e r s i x t y - f i v e w ere n o t in c lu d e d in m onthly b e n e f i t d e te rm in a tio n . The 1939 amendment in c lu d e d th o s e who were w orking a f t e r s i x t y - f i v e y e a rs of a g e . Thus a p e rso n c o u l d , a f t e r t h a t tim e , e a rn needed q u a r t e r s of coverege a f t e r p a s s in g h is s i x t y - f i f t h b ir th d a y . As a r e s u l t o f a 19^6 amendment th e a d m in is tr a to r s 21 C h a rles I . S c h o ttla n d , "S o c ia l S e c u r ity Amendments of 1956: A Summary and L e g i s l a t i v e H is to r y ," S o c ia l S ecurity B u l l e t i n , 1 9 :8 , Septem ber, 1956. 31 w ere g iv e n th e “a u t h o r iz a ti o n t o compute th e m onthly b e n e f i t a s of a tim e when, a l l o th e r c o n d itio n s o f e l i g i b i l i t y b e in g m e t, th e h ig h e s t b e n e f i t amount w ould I r e s u l t . ”22 The amount c o u ld be recom puted a f t e r b e n e f i t s < j * w ere r e c e iv e d . T his c la u s e e n a b le d th o s e who re a c h e d th e j age o f s i x t y - f i v e to c o n tin u e work a t a low er wage w ith o u t re d u c in g t h e i r m onthly b e n e f i t s when th e y su b se q u e n tly r e t i r e d . Due to th e s e changes i t became n e c e s s a ry to recom p u te , a c c o rd in g t o th e new fo rm u la , th e b e n e f i t s p a i d to p r e v io u s ly r e t i r e d p e o p le . The method ad o p ted has been to j in c r e a s e th e paym ents by means o f a c o n v e rsio n t a b l e . For J exam ple, th e 195^ amendment g u a ra n te e s a b e n e f i t in c r e a s e of a t l e a s t f iv e d o l l a r s to a l l p r e v io u s ly r e t i r e d p e o p l e .2^ C om parative A n a ly s is Table I i l l u s t r a t e s th e e f f e c t iv e n e s s o f th e b e n e f i t p r o v is io n s u nder th e o r i g i n a l S o c ia l S e c u r ity A ct. A com parison i s made w ith th e su b se q u en t amendments i n th e c a se o f em ployees who w orked f o r b o th te n y e a rs and f o r t y y e a rs (assum ing v a r io u s a v e ra g e w ages). 22 A ngela J . M urray, “S o c ia l S e c u r ity Amendments of 1 9 ^ » “ S o c ia l S e c u r ity B u l l e t i n , 9:7-8* Septem ber, 1 9^ 6 . 2^W ilbur J . Cohen, B obert M. B a ll, and R obert U. M yers, “S o c ia l S e c u r ity Act Amendments o f 195**•>,l S o c ia l S e c u r ity B u l l e t i n , 1 7 :8 , Septem ber, 195^* TABLE I COMPARATIVE M ONTHLY BENEFITS UNDER THE SOCIAL SECURITY ACT A N D THE SUBSEQUENT AM ENDM ENTS FOR A RETIRED INDIVIDUAL (In th e case of th e o r ig in a l a c t and th e 1939 amendments ten years and f o r ty y ea rs of work in covered employment i s assumed) Average Monthly Wage 10 y ears 1935 Law ^0 years 10 years 1939 Amendment kO years 1950 Amendment 1952 Amendment 195^ Amendment 50 117.50 132.50 $22.00 |2 8 .0 0 $25.00 $27.50 $30.00 100 22.50 51.25 27.50 35.00 50.00 55.00 55.00 250 37.50 81.2.5 i*4.00 56.00 72.50 77.50 88.50 300 — --------- ------ ------ 80.00 85.00 98.50 350 ------ ------ ------ ------ - — 108.50 SOURCES: Lyle L. S eh m ltter and B e tti C. G-oldwasaer, "The Revised B e n efit 1 Schedule under Old-Age In su ra n c e ," S o cia l S e c u rity B u l l e t i n . 2 : 9 , September, 1939* W ilbur J . Cohen, "S o c ia l S e c u rity Act Amendments of 1952," S o cia l S e c u rity | B u l l e t i n . 15:5. September, 1952. Wilbur J . Cohen, Robert M. B all and Robert J . Myers, "S o cia l S e c u rity Act I Amendments of 195^: A Summary and L e g is la tiv e H is to ry ," S o cial S e c u rity B u l l e t i n . ' 1 7 :8 , September, 195^. ^ 33 I t can be r e a d i l y o b se rv e d from th e t a b l e t h a t each su c c e e d in g amendment h as l i b e r a l i z e d th e b e n e f i t paym ents. Yet a s in g le r e t i r e d w orker w ith f o r t y y e a r s o f co v erag e w ould have r e c e iv e d a h ig h e r m onthly b e n e f i t u nder th e o r i g i n a l a c t th a n u n d er any o f th e l a t e r amendments, p r i o r to 1 9 5 2 . On th e o th e r hand, a s in g le b e n e f i c i a r y w ith l e s s th an se v e n te e n y e a rs of coverage w ould have r e c e iv e d s m a lle r paym ents by th e te rm s o f th e 1935 Act th a n u n d er th e su b seq u en t a m e n d m e n ts.^ I I I . DEPENDENTS1 AND SURVIVORS' BENEFITS P robably th e most s i g n i f i c a n t s e c tio n o f th e 1939 Act i s th e p r o v is io n f o r paym ents to members of th e fa m ily o t h e r th an th e wage e a r n e r . These b e n e f i t s show an im por t a n t d e p a rtu re from th e p r i n c i p l e o f r e l a t i n g paym ents to c o n t r i b u t i o n s . However, i n d i v i d u a l e q u ity i s n o t d is c a r d e d ok In th e ca se o f a s i n g l e w orker who r e t i r e s w ith an a v e ra g e wage o f #250 a f t e r f o r t y y e a rs o f coverage u n d er Old Age and S u r v iv o r s 1 In s u ra n c e , h i s b e n e f i t payment would have been #81.25 P© ** month u n d er th e o r i g i n a l a c t . H is a v e ra g e m onthly s u b s is te n c e would have been #56.00 u n d er th e 1939 amendment, #72.50 u n d e r th e 1950 amendment, #77*50 u n d er th e 1952 amendment, and #88.5© u n d e r th e 195** amend m ent. At no tim e up to 195** w ould th e b e n e f i t have e q u a le d th e amount t h a t w ould have b een p a id u n d er th e o r i g i n a l @ > G t> * ^ F o r in s t a n c e , i f th e w orker r e f e r r e d to In th e p re v io u s f o o tn o te had o nly te n y e a rs o f cov erag e u n d e r th e S o c ia l S e c u r ity A ct, h i s m onthly b e n e f i t payment upon r e tir e m e n t w ould have am ounted to o n ly #37*50 in 1935 as com pared w ith #A4.0G u nder th e 1939 amendment. c o m p le te ly , a s a l l o f th e s e fa m ily paym ents a r e com puted in i term s o f th e p rim a ry b e n e f i t o f th e wage e a r n e r on r e t i r e ment o r a f t e r d e a th . D epen d en ts1 B e n e f its j j W ife1a b e n e f i t . — A f te r th e w ife a t t a i n s s i x t y - f i v e ; y e a rs o f age, she i s e n t i t l e d to o n e - h a lf h e r r e t i r e d ! h u sb a n d ’ s p rim a ry b e n e f i t , p ro v id e d she m eets c e r t a i n re q u ire m e n ts : ( l ) I f she i s p a i d a p rim a ry b e n e f i t , a l i k e amount must f i r s t be d ed u c ted from any com pensation t h a t she sh o u ld r e c e iv e a s a d e p e n d e n t. (2) The w ife m ust be l i v i n g w ith h e r husband a t t h e tim e she becomes s i x t y - f i v e y e a rs of a g e . 2 ^ (3) The aged w ife can r e c e iv e b e n e f i t s o n ly a f t e r th e m a rria g e has been in e f f e c t f o r a t l e a s t th r e e y e a r s , u n l e s s th e c o u p le a r e p a r e n t s of a c h i l d . T h e re fo re , i f an employee becomes e l i g i b l e f o r a f i f t y d o l l a r a month F e d e ra l Old Age b e n e f i t , and h i s w ife m eets th e above re q u ire m e n ts , she i s e n t i t l e d to tw e n ty -fiv e d o l l a r s a m onth. The 195© amendment a ls o p ro v id e s b e n e f i t payment eq u a l to o n e - h a lf th e p rim a ry in s u ra n c e to w ives u n d e r The 1956 amendment allo w ed b o th r e t i r e d p rim a ry women b e n e f i c i a r i e s and aged w ives to e l e c t to r e c e iv e an a c t u a r l a l l y re d u c e d b e n e f i t betw een th e a g e s o f s ix ty -tw o and s i x t y - f i v e . S e h o ttla n d , q p . c l t . , p . ? . ^ S e c t i o n 10A, T i t l e I , P u b lic Law No. 73^> o p . c l t ., p* 3®* I 35 i s i x t y - f i v e y e a rs o f age p ro v id e d th e y have in t h e i r c a re c h i ld r e n under e ig h te e n y e a rs o f age a t th e tim e th e wage e a r n e r r e t i r e d . 2® I Husband1 s b e n e f i t .— Under th e 1950 ®-ct a dependent | i husband o v er s i x t y - f i v e y e a rs o f ag e , who i s r e c e iv in g a t 1 t i 1 l e a s t h a l f h i s su p p o rt from h i s w ife a t th e tim e she s becomes e n t i t l e d to Old Age In s u ra n c e b e n e f i t s , i s e l i g i b l e to a b e n e f i t payment eq u al to o n e - h a lf th e b e n e f i t o f h is w if e . To q u a l i f y th e husband must e i t h e r be th e f a t h e r o f h e r c h i l d r e n , o r he must have been m a rrie d to h i s w ife a t l e a s t th r e e y e a rs b e f o r e t h e f i l i n g o f h i s a p p l i c a t i o n . ^ As i n th e ca se of th e w i f e 's b e n e f i t , a d iv o rc e o r a p rim a ry b e n e f i t ex ceed in g o n e - h a lf h is w i f e 's b e n e f i t im m ed iately te r m in a te s paym ent. In a d d i t i o n , th e w ife m ust be c u r r e n t l y in s u r e d a s w e ll a s f u l l y I n s u re d . This p r o v is io n p la c e s an e x tr a b u rd en on a woman whose hu sb an d i s to r e c e iv e a b e n e f i t b ased on h e r e a r n in g s . Dependent c h i l d r e n . — A dependent u n m arried c h i l d u n d er e ig h te e n y e a rs o f age i s a ls o e n t i t l e d to o n e - h a lf th e f a t h e r 's o r m o th e r 's b e n e f i t . The b e n e f i t s to p s i f th e c h i l d m a r r ie s , i s ad o p ted (e x c e p t f o r a d o p tio n by a s t e p - 2 8 lf th e dependent c h i l d q u a l i f i e s f o r a d i s a b i l i t y b e n e f i t a f t e r r e a c h in g th e age o f e ig h te e n th e m o th e r 's b e n e f i t i s c o n tin u e d . S c h o ttla n d , op,. c i t ., p. 7. 29 s e e tio n 101* T i t l e I , P u b lic Law Mo. 73^, o p . c i t . . , p . ?• ip a re n t, g ra n d p a re n t, a u n t, o r u n c le su b se q u en t to th e d e a th o f th e p rim a ry b e n e f ic ia r y ) o r a t t a i n s th e age o f e ig h te e n . 30 However, i f th e dep en d en t c h i l d became t o t a l l y d is a b le d b e fo re e ig h te e n y e a rs o f age and th e d i s a b i l i t y ; has c o n tin u e d u n in te r r u p te d s in c e th a t tim e , th e c h i l d i s j e l i g i b l e to r e c e iv e a d i s a b i l i t y b e n e f i t i n d e f i n i t e l y , p ro v id e d he q u a l i f i e s f o r th e b e n e f i t S u r v iv o r s 1 B e n e f its Widow*s b e n e f i t . — B e sid e s th e p r o t e c t i o n to th e in s u r e d * s fa m ily w h ile he i s l i v i n g , c e r t a i n b e n e f i t s i a c e ru e to members of th e fa m ily a f t e r th e d e a th of th e in s u r e d . A widow who was l i v i n g w ith o r b e in g s u p p o rte d by h e r husband a t tim e o f h i s d e a th i s e n t i t l e d to a payment am ounting to t h r e e - f o u r t h s o f h e r h u sb a n d ’s p rim ary b e n e f i t u n t i l she r e m a r r ie s , d ie s , o r becomes e n t i t l e d to a p rim a ry b e n e f i t o f h e r own t h a t i s eq u a l to o r ex ceed s t h r e e - f o u r t h s o f th e p rim a ry in s u r a n c e amount o f h e r d e c e a se d hu sb an d . In o rd e r t o be e l i g i b l e f o r th e p e n s io n , th e widow must be s ix ty -tw o y e a rs o f age s in c e 1956 o r have u n d er h e r c a re d ependent c h i ld r e n under e ig h te e n y e a r s o f a g e .^ 2 When h e r youngest c h i l d re a c h e s e ig h te e n y e a rs of 3®I b l d . , p . 8. ^ S c h o t t l a n d , l o o , e l t . 32mA woman whose husband d ie s e i t h e r f u l l y o r c u r r e n t l y in s u r e d , i s e n t i t l e d to a m o th e r’ s b e n e f i t eq u a l ' “ ' " " " ' ' ..................... 37 a g e , a widow u n d er s ix ty -tw o y e a rs o f age lo s e s h e r b e n e f i t u n t i l she re a c h e s h e r s ix ty -s e c o n d b i r t h d a y . I C h ild 1 s b e n e f i t .— Under a 1950 amendment I f o n ly j one c h i l d s u r v iv e s th e d e c e a se d w o rk e r, th e c h i l d r e c e iv e s ! { t h r e e - f o u r t h s of h i s f a t h e r ’s p rim ary b e n e f i t . - ^ The c h i l d 's b e n e f i t had p r e v io u s ly been l i m i t e d to o n e - h a lf th e ; p rim a ry b e n e f i t . 3** I f a w o rk e r d ie s le a v in g more th a n one d ep en d en t c h ild u nder e ig h te e n y e a rs o f a g e , each c h i l d r e c e iv e s o n e - h a lf o f h i s f a t h e r 's p rim a ry b e n e f i t . S ince 1950 an a d d i t i o n a l o n e - f o u rth o f th e p rim a ry b e n e f i t I s d iv id e d e q u a lly among a l l th e c h i l d r e n .35 b e n e f i t ends i n amount to t h r e e - f o u r t h s o f h i s p rim a ry b e n e f i t I f she h as in h e r c a re a c h i ld o f h is , by b lo o d o r a d o p tio n , who \ i s e n t i t l e d to a c h i l d 's b e n e f i t , p ro v id e d she I s n o t e n t i t l e d to a p rim a ry b e n e f i t eq u al to o r g r e a t e r th a n th e m o th e r 's b e n e f i t . . . and p ro v id e d a ls o t h a t she h as not r e m a rr ie d , was l i v i n g w ith o r b e in g s u p p o rte d by him a t th e tim e o f h is d e a th , and h as f i l e d an a p p l i c a t i o n f o r th e b e n e f i t u n le s s sh e was a lr e a d y e n t i t l e d to a w i f e ’ s b e n e f i t." Domenico G a g lia rd o , American S o c ia l In su ra n c e ( r e v is e d e d i t i o n ; lew York: H arper and B r o th e rs , 1955)» p . 90 ♦ 33 i b i d . , p . 91• 3**Section 201, T i t l e I I , P u b lic Law No. 379, op,. c l t •$ p* ♦ -^A d i s t i n c t i o n i s made between a c h i l d 's b e n e f i t when th e p a r e n ts a r e l i v i n g and when th e y a r e d e c e a se d . See p ag e s 35-36. " I f th e in s u r e d p a re n t i s l i v i n g and e n t i t l e d to a p rim a ry b e n e f i t , each c h i l d 's b e n e f i t i s e q u a l in amount to o n e - h a lf o f th e p rim a ry b e n e f i t . I f th e p a r e n t h as d ie d , th e amount i s computed d i f f e r e n t l y . When o n ly one c h ild i s e n t i t l e d to a b e n e f i t , th e amount i s t h r e e - f o u r t h s o f th e p rim a ry b e n e f i t . I f t h e r e a r e two o r more c h ild r e n , th e ©mount f o r each i s o n e - h a l f th e p rim a ry b e n e f i t p lu s and a d d i t i o n a l amount eq u a l t o o n e - f o u r th of 38 when th e c h ild re a c h e s e ig h te e n y e a rs o f age u n le s s he 'q u a l i f i e s f o r a d i s a b i l i t y b e n e f i t , m a r r ie s o r i s ad o p ted by any one e x c e p t a s te p - p a r e n t , g r a n d - p a r e n t, o r u n c l e . ^ j 1 Widower1 s b e n e f i t . — A widower whose w ife d ie d b o th j j f u l l y and c u r r e n t l y In su re d a f t e r A ugust, 1950, r e c e iv e s i t h r e e - f o u r t h s th e p rim a ry b e n e f i t o f h i s d e c e a se d w ife j a f t e r re a c h in g s i x t y - f i v e y e a rs o f age i f she was f u r n i s h in g a t l e a s t h a l f of h i s s u p p o r t.37 The b e n e f i t i s te rm in a te d by re m a rria g e o r by any o f th e o th e r r e a s o n s t h a t a p p ly t o th e te rm in a tio n o f th e widow’ s b e n e f i t . j I f th e aged widow o r widower of an in s u re d p e rso n i s to q u a l if y th e m a rria g e m ust e i t h e r have been in e f f e c t th e p rim a ry b e n e f i t d iv id e d by th e number o f c h i ld r e n . j Thus, i f th e r e a r e two c h ild r e n each o n e ’ s b e n e f i t w i l l be e q u a l to f i v e - e i g h t h s of th e p rim a ry b e n e f i t . G ragliardo, l o c . c l t . ^ A lth o u g h th e law does n o t s p e c if y t h a t th e r e I s any l i m i t a t i o n a s to th e number o f dep en d en t c h ild r e n who a re e n t i t l e d to b e n e f i t s b a se d on one wage r e c o r d , th e maximum fa m ily b e n e f i t l i m i t a t i o n s d is c u s s e d on p ag e s A l-^2 have th e e f f e c t o f re d u c in g th e c h i l d ’ s b e n e f i t s o th e rw is e p a y a b le in th e c a s e of a widow and t h r e e c h i ld r e n . "L ike w is e , t h i s maximum w i l l s e rv e to red u ce th e o rp h a n ’ s b e n e f i t s (in th e e v e n t t h a t th e r e i s no widow e l i g i b l e f o r b e n e f i t s ) when t h e r e a r e more th a n f o u r o rp h an s e l i g i b l e f o r b e n e f i t s w ith r e s p e c t to one i n d i v i d u a l 's w ages. When e v e r any o f th e maxirauras s e rv e to red u ce th e t o t a l b e n e f i t s w hich would o th e rw is e be p a y a b le , a p ro r a t a r e d u c tio n i s made in a l l b e n e f i t s . " B ureau o f Old-Age an d S u rv iv o rs ' In s u ra n c e , A n a ly s is D iv is io n , A c tu a r ia l S e c tio n , " F e d e ra l Old-Age and S u rv iv o r s ' In s u ra n c e : A Summary o f th e 1939 Amendments," S o c ia l S e c u r ity B u l l e t i n , 2 :1 2 , December, 1939- 3 ? S e c tio n 101, T i t l e I I , F u b lic Law No. ?3A, o p . c l t . , p p . 9 - 1 0 » _____________________ 39 1 f o r one f u l l y e a r b e fo re d e a th of th e p rim a ry b e n e f i c i a r y o r i t must have been consummated th ro u g h i s s u e . 3® I f th e b e n e f i c ia r y l e g a l l y ad o p ted th e c h i l d of th e d eceased w h ile- ■ I th e m a rria g e was in e f f e d t and th e c h i l d was under e ig h te e n j y e a rs of ag e, th e widow o r widower a ls o q u a l i f i e s u n d er th e ! 1 9 5 0 A c t . 3 9 P a r e n t s 1 b e n e f i t . — Payments t o th e dependent p a r e n t s o f a f u l l y in s u re d p e rso n who d ie s can be made o n ly i f no widow, w idow er, o r c h i ld can q u a l i f y f o r b e n e f i t s . ^ 0 B efore 1946 th e p a r e n t was r e q u ir e d t o have been "w h o lly 1 1 d ependent upon th e in s u re d p e r s o n . S i n c e th e 1950 amendment th e p a r e n t must have been r e c e i v i n g a t l e a s t one- h a l f o f h is s u p p o rt from th e p rim ary b e n e f i c i a r y a t th e tim e o f th a t i n d i v i d u a l 's d e a th . The p a r e n t o r p a r e n t s a r e now e n t i t l e d to t h r e e - f o u r t h s of th e d e c e a s e d 's p rim a ry 3®A d i s t i n c t i o n i s th u s made betw een a w idow 's and w id o w e r's b e n e f i t on th e one hand and a w i f e 's and h u s b a n d 's b e n e f i t on th e o t h e r . In th e form er case th e s u r v iv o r must have been m a rr ie d to th e p rim a ry b e n e f i c i a r y f o r a t l e a s t one y e a r b e f o re d e a th , w h ile in th e l a t t e r c a se th e dependent b e n e f i c ia r y must be m a rr ie d to th e p rim a ry b e n e f i c i a r y a t l e a s t th r e e y e a rs im m ediately p re c e d in g th e f i l i n g of an a p p l i c a t i o n f o r b e n e f i t s . See G a g lia rd o , op. c l t . . , pp. 89-90. 3 9 s e c tio n 104, T i t l e I , P u b lle Law Wo. 734, l o c . c l t . ^ S e c t i o n 201, T i t l e I I , P u b lle Law No. 379, op. c l t . , p . 7* ^ L o c . c i t . b e n e f i t . ^ As in th e c a se o f o th e r d e p e n d e n ts , th e p a r e n t 's b e n e f i t i s l o s t i f he m a rr ie s , d i e s , or becomes e n t i t l e d to a p rim a ry in s u ra n c e b e n e f i t . The term p a r e n t means The m other o r f a t h e r of an in d i v i d u a l , a s te p - p a r e n t o f an in d iv i d u a l by a m a rria g e c o n tr a c te d b e f o r e such in d iv id u a l a t t a i n e d th e age o f s ix t e e n , o r an a d o p tin g p a r e n t by whom an i n d iv i d u a l was ad o p ted b e f o re he a t t a i n e d th e age o f s i x t e e n . ^ Some g e n e r a l l i m i t a t i o n s . — F i r s t o f a l l , any b e n e f i c i a r y m ust a p p ly f o r h i s b e n e fit, a f t e r he becomes e l i g i b l e . As one p o p u la r iz e r p o in ts o u t: So many women a r e unaw are th a t t h e i r h u s b a n d 's S o c ia l S e c u r ity e n t i t l e s them t o d e a th b e n e f i t s t h a t some f i e l d o f f i c e s now a sk u n d e rta k e rs in t h e i r a r e a s t o t e l l n ew ly -b ereav ed f a m il ie s ab o u t t h e i r p o t e n t i a l p a y m e n ts.44 A lso, paym ents a r e l o s t th ro u g h d e a th , m a rr ia g e , and d e p o r t a t i o n . The l a t t e r p r o v is io n h as been in e f f e c t o nly s in c e Septem ber 1 , 1954. However, d e p e n d e n ts ' o r s u r v i v o r s ' b e n e f i t s based on th e re c o rd o f a d e p o rte d i n d iv i d u a l a r e "p ay ab le u n le s s th e d ep en d en ts a r e n o t c i t i z e n s o f th e U n ite d S ta te s and a r e o u ts id e th e U n ite d h p S e c tio n 101, T i t l e I , P u b lic Law No. 734, o b . c l t . , p . 11. 43lqC. c l t ♦ ^ S i d n e y M a rg o liu s, I t ' s Your Money—Come and Get I t (New York: Gold Medal Books, Faw cett P u b lic a tio n s , 1 9 5 D , p . 2 2 . I . *1' S t a t e s ." ^ In ca se o f d iv o r c e , t h e form er spouse of th e r e t i r e d w o rk e r lo s e s a l l b e n e f i t s u n le s s th e spouse i s a m other j w ith a c h ild u n d er e ig h te e n . > ! S ta r tin g w ith th e 1939 amendment, maximum fa m ily j |b e n e f i t l i m i t a t i o n s w ere im posed upon d ependent and j s u r v iv o r b e n e f i c i a r i e s . Under th a t a c t , t o t a l b e n e f i t s c o u ld not exceed "an amount e q u a l to tw ic e a p rim a ry In su ra n c e b e n e f i t o f such in d i v i d u a l , o r an amount eq u a l to 80 p e r cen t o f h i s av erag e m onthly wage. . . . However, n e i t h e r l i m i t a t i o n co u ld re d u c e the t o t a l b e n e f i t s below tw en ty d o l l a r s . The 1950 Act e lim in a te d th e f i r s t p r o v is io n and s e t th e minimum r e d u c tio n o f th e 80 p e r c e n t l i m i t a t i o n to f o r t y d o l l a r s . At p r e s e n t th e t o t a l fa m ily b e n e f i t cannot be red u ce d .b elo w t h e j t a r g e r sum o f f i f t y d o l l a r s o r one and o n e - h a lf tim e s t h e p rim a ry in su ra n c e b e n e f i t . ^ In t h i s -*U. S. D epartm ent of H e a lth , E d u c a tio n and W elfare, S o c ia l S e c u rity A d m in is tra tio n , Your S o c ia l S e c u r ity (W ashington: Government P r i n t i n g O ff ic e , 1955) » P* ^ S e c t i o n 201, T i t l e I I , P u b lic Law No. 379, .££- c i t . , p . 8. ^ U n d e r a c u r r e n t law , "Ihen two o r more m onthly b e n e f i t s a re p a y a b le on th e b a s i s o f one in s u r e d p e r s o n ’s e a r n in g s , a s f o r example an o ld - a g e , a w i f e 's , and a c h i l d 's b e n e f i t , th e sum o f th e in d iv id u a l m onthly b e n e f i t s com puted a s e x p la in e d above may be re d u c e d . I f th e t o t a l i s more th a n 150, and i f i t a ls o exceeds 80 p e r c e n t o f th e in s u r e d p e r s o n 's av e ra g e m onthly wage, th e n th e t o t a l w i l l be re d u c e d to 80 p e r c e n t o f th e av e ra g e m onthly wage o r to 1 * 2 way f u l l b e n e f i t s a r e g u a ra n te e d f o r a r e t i r e d w orker and j h i s w if e . B efo re 1950 th e r e was no g u a r a n te e t h a t a w ife would r e c e iv e a f u l l o n e -h a lf o f th e p rim a ry b e n e f i t . The 195^ law s e t th e minimum m onthly payment t o any ■ ■ s u r v iv in g b e n e f i c i a r y a t t h i r t y d o l l a r s , th e same amount j a s th e minimum o ld -a g e in s u ra n c e b e n e f i t . P re v io u s ly th e j minimum paym ents a p p lie d o n ly t o th e p rim a ry in s u ra n c e b e n e f i c i a r y , th e s u rv iv o rs r e c e i v i n g t h e i r r e s p e c tiv e j \ p r o p o r ti o n a te s h a r e . Since th e in c e p tio n of dependent and s u r v iv o r b e n e f i t s in 1939» a maximum fa m ily b e n e f i t has been i n s t i t u t e d . However, th e maximum b e n e f i t l i m i t a t i o n has in c re a s e d 135 pet* c e n t s in c e 1939* The maximum i s now two hundred d o l l a r s a s compared w ith e i g h t y - f i v e d o l l a r s in | 1939* C om parative A n a ly s is Since d e p e n d e n ts and s u r v iv o r s r e c e i v e a s e t p e rc e n ta g e o f th e wage e a r n e r ’s b e n e f i t , th e in c r e a s e d paym ents one and o n e -h a lf tim es th e in s u r e d p e r s o n ’ s p rim ary in s u ra n c e am ount, w hichever i s th e g r e a t e r . But in no ca se w i l l th e t o t a l be red u ce d below #5©* F u rth e rm o re , i f one o r more of th e b e n e f i c i a r i e s i s a c h i l d whose f a t h e r and m other had d ie d f u l l y o r c u r r e n t l y in s u r e d , th e t o t a l w i l l n ot be red u ced below 80 p e r c e n t of th e sum o f th e av e ra g e m onthly wages o f b o th p a r e n t s . However, i f th e t o t a l s t i l l exceeds $200 a f t e r t h i s r e d u c tio n i s made, th e n th e t o t a l w i l l be red u ced to $200. . . . When a r e d u c tio n in th e t o t a l amount o f b e n e f i t s i s n e c e s s a r y , each one i s re d u c e d p r o p o r t i o n a t e l y , except t h a t th e p rim a ry b e n e f i t i t s e l f i s n e v e r re d u c e d ." G a g lia rd o , o p . c l t . , p . 92. to th e p rim a ry in s u ra n c e b e n e f i c i a r y u n d er th e 1 9 5 0 , 1 9 5 2, and 195* * amendments have l e d t o in c re a s e d b e n e f i t s f o r a l l d ep e n d en ts and s u r v iv o r s . A widow whose husband had worked! j | (fiv e y e a rs in co v e re d employment and had e a rn e d an a v e ra g e j I I |o f two hundred and f i f t y d o l l a r s p e r month w ould have i J i ir e e e iv e d #31*50 p e r month u n d e r th e 1939 Act a s compared i w ith #54.50 u n d er th e 1950 A ct. In 1952 h e r b e n e f i t s am ounted to #5 8 *2 0 , and a t th e p r e s e n t tim e th e y have r i s e n to # 6 6 .4 0 . The l a r g e s t upward r e v is io n s betw een 1939 and 1950 o c c u r in th o s e groups whose b e n e f i t p r o p o r tio n s have been in c re a s e d : dependent c h ild r e n and aged p a r e n t s . IV. 0THEH BENEFIT PROVISIONS AND RESTRICTIONS F u lly i n s u r e d . — To be f u l l y in s u r e d under th e r e v i s e d a c t of 1 9 5 0 , a w orker must meet one of two r e q u i r e m e n ts. Any w o rk er w ith a t l e a s t s i x q u a r t e r s o f co v erag e who h as been s u b je c t to th e p a y r o l l ta x in o n e - h a lf o f th e q u a r t e r s e la p s in g a f t e r 1 9 5 0, o r a f t e r th e a tta in m e n t o f th e age of tw e n ty -o n e , i s f u l l y In s u re d a t th e tim e he r e t i r e s or d l e s . ^ C h a rte rs b e fo re 1950 a r e co u n ted . The e f f e c t o f t h i s p r o v is io n was t o b rin g in 1950 as 48 For exam ple, i f a man d ie d on J a n u a ry 1, 1954, a f t e r having w orked one and o n e - h a lf y e a rs (6 q u a r t e r s ) in eo v e re d employment, he would d i e f u l l y in s u r e d . He worked in co v e re d employment f o r 6 o f th e 12 q u a r t e r s e la p s in g a f t e r Ja n u a ry 1 , 1951> and b e f o r e h is d e a th . a new s t a r t i n g d a t e In o r d e r to d e te rm in e f u l l y in s u r e d s t a t u s . T his e n a b le d many w o rk e rs who w ere s u b je c t t o p e r io d s o f v o lu n ta r y o r in v o lu n ta r y unemployment b e f o re |l950 to become f u l l y i n s u r e d . The a l t e r n a t i v e re q u ire m e n t to be f u l l y in s u r e d i s t h a t a w orker m ust o b ta in f o r t y q u a r te r s o f coverage some- : i tim e b e fo re he r e t i r e s o r d i e s . T his i s th e m ethod by w hich m ost i n d i v i d u a l s w i l l become f u l l y In s u re d in th e J j f u t u r e , s in c e any p e rso n m e etin g t h i s re q u ire m e n t i s p erm a n e n tly in s u r e d , i r r e s p e c t i v e o f th e number o f q u a r t e r s t h a t have e l a p s e d .-5° An a l t e r n a t i v e p r o v is io n f o r a c h ie v in g f u l l y In s u re d s t a t u s was a d o p te d in 195^* The p u rp o se o f t h i s s e c tio n , a c c o rd in g to th e r e p o r t of th e Committee on Ways and Means, i s to g r a n t a tem p o rary m easure of r e l i e f t o th o s e newly co v e re d w orkers who, a lth o u g h th e y a r e c o n tin u o u s ly engaged in co v e re d work a f t e r 195^, d i e o r r e t i r e b e fo re th e y can m eet th e re q u ire m e n ts f o r in s u r e d s t a t u s * 1 under th e 1950 amendments. A p e rs o n i s now f u l l y in s u r e d i f a t th e tim e ^ S e c t i o n 10k, T i t l e I , P u b lic Law Bo. 73k, l o c . c l t ♦ SOGragliardo, o p . c i t . , p . ?9- 52-Coramittee on Ways end Means o f th e House of R e p r e s e n ta tiv e s , R eport o f th e House o f R e p r e s e n ta tiv e s to Accompany H.R. 9 3 6 6 , S o c ia l S e c u r ity Amendments of 1%$k, 83d C ongress, 2d s e s s io n , House R eport Bo. 1698 (W ashington: Government P r i n t i n g O ff ic e , 1 9 5 ^ ), p* 21. ks \ of d e a th o r a tta in m e n t o f s i x t y - f i v e he h a s been c o v e re d in a l l th e q u a r te r s t h a t have e la p s e d s in c e 195^* The minimum I tim e n e c e s s a ry to q u a l if y u n d er t h i s p r o v is io n i s s ix ! q u a r t e r s of c o v e ra g e . The a l t e r n a t i v e s t a t u s co m p u tatio n j ends a f t e r th e t h i r d q u a r t e r o f 1958, s in c e th e w o rk e r j w ould in any e v e n t be f u l l y co v ered u n d er th e 1950 la w . I I A nother s e c tio n o f th e 195^ law g iv e s f u l l y in s u r e d j s t a t u s to th o s e who d ie d betw een Ja n u a ry 1 , 19^0» and I i Septem ber 1 , 1950, i f th e d e c e a se d had s i x q u a r te r s o f j c o v e ra g e . T his p r o v is io n a lo n e w i l l a f f e c t about two h u n d red th o u san d p e o p le .^ 2 In e f f e c t th e 195^ amendments go a lo n g way to p ro v id e f u l l y I n s u re d s t a t u s f o r alm ost everyone who i s i c u r r e n t l y w orking in co v e re d em ploym ent. Thus a w o rk er can r e c e i v e f u l l b e n e f i t s a lth o u g h he has s e rv e d v e ry l i t t l e tim e in a jo b in c lu d e d u n d er Old Age and S u rv iv o rs ' In s u ra n c e . A f u l l y In s u re d p e rso n and h is fa m ily o r s u r v iv o r s a r e e n t i t l e d to a l l th e b e n e f i t s under th e S o c ia l S e c u r ity A ct, a lth o u g h a fem ale m ust be b o th f u l l y and c u r r e n t l y in s u r e d b e fo re a dependent husband o r a s u r v iv in g widower w i l l be e l i g i b l e f o r b e n e f i t s . C u r r e n tly - in s u r e d s t a t u s . — A c u r r e n t l y - i n s u r e d p e rs o n i s one who has been p a id wages of a t l e a s t f i f t y co ^ Cohen, B a ll, and M yers, o n . c i t . . , p . 10. 46 d o l l a r s f o r a t l e a s t s i x of th e tw e lv e c a le n d a r q u a r t e r s * im m ed iately p re c e d in g th e q u a r t e r in w hich he d ie d . A c u r r e n t l y - i n s u r e d p e rso n i s not e l i g i b l e f o r a ! i m onthly b e n e f i t . The lump sum d e a th b e n e f i t w i l l be p a id j to th e p ro p e r h e i r . The c h i l d ’ s and th e widowed m o th e r's m onthly b e n e f i t s a r e p ay a b le to th e s u r v iv o r s o f p e o p le who i have been c u r r e n t l y in s u r e d . The D i s a b i l i t y F re e z e and D i s a b i l i t y In s u ra n c e B e n e f its B efore th e 195** amendments th e e n t i r e p e r io d o f j I d i s a b i l i t y was In c lu d e d in d e te rm in in g In s u re d s t a t u s . 5** As a r e s u l t a w o rk er who became t o t a l l y d is a b le d f o r a re a s o n a b ly lo n g p e r io d of tim e re c e iv e d l i t t l e i f any b e n e f i t s upon r e t i r e m e n t . ; Under th e c u r r e n t law any p e r io d o f perm anent d i s a b i l i t y I s to be d is r e g a rd e d in d e te rm in in g an i n d i v i d u a l 's in s u r e d s t a t u s and in f i g u r i n g b e n e f i t s due him o r h i s f a m ily . The law r e q u ir e s t h a t th e d i s a b i l i t y m ust l a s t a t le s ,s t s i x m onths b e f o r e i t can be c o n s id e r e d . The im p a ir ment must be m e d ic a lly d e te rm in a b le and m ust be e x p e c te d e i t h e r to l a s t f o r an i n d e f i n i t e tim e o r to r e s u l t in d e a th . B lin d n e s s , p e r s e , c o n s t i t u t e s d i s a b i l i t y u nder th e S e c tio n 104, T i t l e I , P u b lic Law No. 734, l o c . c i t • 5^The S o c ia l S e c u r ity amendments o f 1952 c o n ta in e d a p r o v is io n f o r a d i s a b i l i t y f r e e z e w hich was n ev er p u t in to e f f e c t . See S e c tio n 3> P u b lic Law 590, pp. c i t . , pp_._4r?7_*____________________________________________________________ ty? l a w . 55 D i s a b i l i t y d e te rm in a tio n I s to be made by an a p p r o p r ia te s t a t e agency, s u b je c t to re v ie w by th e 1 S e c r e ta r y of H e a lth , E d u catio n and W e lfa re . The approved s t a t e agency w i l l be d e te rm in e d by an agreem ent betw een th e ; ! D epartm ent o f H e a lth , E d u c a tio n and W elfare and th e s t a t e i in v o lv e d .56 Any in d iv id u a l who i s d i s s a t i s f i e d w ith th e i d e c is io n made by an a u th o r iz e d s t a t e agency has th e r i g h t ' i to a p p e a l to th e S e c re ta ry of H e a lth , E d u ca tio n and W elfare; i and th e n to th e c o u r ts . j R e h a b i l i t a t i o n s e r v ic e i s a ls o p ro v id e d under th e J i law b e c a u se , An in d iv i d u a l would n o t meet th e d e f i n i t i o n o f d i s a b i l i t y i f he can, by re a s o n a b le e f f o r t and w ith s a f e t y to h im s e lf , a c h ie v e re c o v e ry o r s u b s t a n t i a l r e d u c tio n o f th e symptoms o f h i s c o n d i t i o n .57 A ll paym ents to th e v o c a tio n a l r e h a b i l i t a t i o n a g e n c ie s f o r s e r v ic e s re n d e re d a r e to be met from th e Old Age and S u r v iv o r s 1 I n s u ra n c e T ru st Fund. In o r d e r to be e l i g i b l e f o r th e d i s a b i l i t y f r e e z e , a p e rs o n m ust have a c q u ire d a t l e a s t tw en ty q u a r te r s o f co v e ra g e o u t o f th e f o r t y q u a r t e r s e n d in g w ith th e q u a r t e r in w hich d i s a b i l i t y b e g in s . In a d d i t i o n , he must have a c q u ire d s ix q u a r t e r s o u t o f th e l a s t t h i r t e e n q u a r t e r s " ^ S e c tio n 106, T i t l e I , P u b lic Law Ho. 7 6 l, o p . c i t . , p p . 29«*32. 56I b i d . . p . 3 1 . 5?Cohen, B a ll, and Myers, op. c l t . , p . 12. j A8 'In c lu d in g th e q u a r t e r in w hich th e f r e e z e i s to become ( e f f e c t i v e . T h e re fo re , one m ust be in co v ered employment , 1 (fo r a s u b s t a n t i a l p e r io d o f tim e in o r d e r to be e l i g i b l e ; I I f o r th e f r e e z e . j I The d i s a b i l i t y f r e e z e i s to be r e t r o a c t i v e . A j p e rso n who was d is a b le d a s e a r l y a s th e f o u r t h q u a r t e r o f ! 19^1 may be a b le to e s t a b l i s h d i s a b i l i t y , p ro v id in g he was c o n tin u o u s ly d is a b le d and f ile © an a p p l i c a t i o n b e fo re J u ly 1 , 1957- In such c a se s th e d is a b le d o ld age b e n e f i c i a r y w i l l b eg in r e c e iv in g paym ents com puted w ith th e p e r i o d o f d i s a b i l i t y ex c lu d e d . B eginning in J u ly , 1957, d i s a b i l i t y In su ra n c e b e n e f i t s w i l l be p a y a b le to t o t a l l y d is a b le d w orkers betw een th e ages of f i f t y and s i x t y - f i v e who q u a l i f y f o r th e d i s a b i l i t y f r e e z e . However, f o r th e p u rp o se o f th e s e paym ents b lin d n e s s does not c o n s t i t u t e presum ed d i s a b i l i t y . 5 9 Lumn Sum B e n e fits The a v e ra g e p e rso n i s unaware o f th e f a c t t h a t a lump sum payment i s a ls o p ro v id e d f o r u n d er th e S o c ia l S e c u r ity A ct. 5® Section 106, T i t l e I , P u b lic Law No. 761, o p . c l t . . p . 2 9 . 59S e c tio n 103» T i t l e I , S o c ia l S e c u r ity Act Amend ment o f 1956, P u b lic Law No. 880 (H.R. 7225), 8Ath C o n g ress, 2d S e s s io n , August 1 , 1956, p . 9* * » -9 The h e i r s o f in d iv i d u a ls who d ie d b e fo re J a n u a ry 1 , 19*4-0, c o u ld c o l l e c t only a lump sum paym ent. Under th e o r i g i n a l 1935 A et, i f th e d e c e a se d d ie d b e f o r e h i s s i x t y - : i f i f t h b ir th d a y , t h e e s t a t e was p a id 3 1/2 p e r cen t of h is j i t o t a l wages e a rn e d in covered em ployment. I f d e a th to o k | p la c e a f t e r th e age o f s i x t y - f i v e , th e e s t a t e was to be p a id th e d i f f e r e n c e betw een th e t o t a l amount o f paym ents r e c e iv e d by th e d e c e a se d and 3 1 /2 p e r c e n t o f a l l co v ered wages earn ed by th e d e c e a s e d .6° j Under th e 1935 Law a l l in d iv i d u a ls who w ere n o t f q u a l i f i e d f o r m o n th ly paym ents were to r e c e iv e 3 1 /2 p e r j c e n t o f t o t a l wages earn ed upon r e t i r e m e n t . Thus s in c e th e j I m onthly paym ents d id not s t a r t b e f o r e 19*4-0, a l l wage i e a r n e r s who r e t i r e d b e fo re J a n u a ry 1 , 19*4-0, r e c e iv e d o n ly t h i s lump paym ent. A p e rso n who r e t i r e d on Ja n u a ry 1 , 1 9 3 9, and had e a rn e d maximum wages s in c e 1937, would have r e c e iv e d f o u r h u n d red and tw e n ty d o l l a r s upon r e t i r e m e n t . The 1939 amendments changed t h e s u r v iv o r s ' lump sum paym ents to an amount eq u al to s ix tim es th e p rim a ry b e n e f i t o f th e d e c e a se d . T h is , in e f f e c t , m eant t h a t th e h e i r s o f a p e rs o n who worked from 1937 to 19*4-7, and whose e a rn in g s av erag ed two hundred d o l l a r s a m onth, would r e c e iv e |2 3 1 (138.50 x 6 ) . T his lump sum payment was ^ S e c t i o n 203, T i t l e I I , P u b lic Law Ho. 271, l o c . c l t . 50: r e s t r i c t e d to s i t u a t i o n s where no m onthly b e n e f i c i a r i e s e x i s t e d . The d e c e a se d a ls o h ad to be f u l l y o r c u r r e n t l y in s u r e d in o r d e r f o r h i s h e i r s to be e l i g i b l e f o r ! b e n e f i t s . - 1 - The re q u ire m e n t t h a t no m o n th ly b e n e f i c i a r i e s jean e x i s t was dropped in 1 9 5 0 .^ 2 At th e p r e s e n t tim e , * I t h e r e f o r e , a lump sum s u r v i v o r 's payment i s made upon i d e a th , i r r e s p e c t i v e o f o th e r b e n e f i t s . However, u n d er th e 195^ amendment, th e r a t e was red u ced to a sum eq u a l to t h r e e tim e s th e p rim a ry in s u ra n c e b e n e f i t , w ith a maximum i o f |2 5 5 - A lso , th e payment i s made t o m is c e lla n e o u s h e i r s o n ly i f th e r e i s no widow or w i d o w e r . ^ Then, to o , th e payment i s in te n d e d to meet b u r i a l ex p en ses and i s t h e r e f o r e made o n ly on c o n d itio n t h a t th e s u r v iv o r has p a id th e ex p e n ses o f b u r i a l , w ith th e e x c e p tio n o f th e widow o r w idow er. T his l a t t e r p r o v is io n a p p e a rs i n b o th th e 1939 and 1950 A c ts. The o n ly d i f f e r e n c e i s t h a t under th e 1939 Act c h ild r e n and p a r e n ts a u to m a tic a lly r e c e iv e d th e lump sum b e n e f i t s i r r e s p e c t i v e o f f u n e r a l c o n t r i b u t i o n s . ^ A ll c la im s f o r lump sum payment m ust be f i l e d w ith th e 61S e c tio n 201, T i t l e IX, P u b lic Law Ho. 379. l o c . c l t . ^2S e e tlo n 101, T i t l e I , P u b lic Law Ho. 73^* o n ♦ c i t • , p . 11♦ k^L o c. c l t . ^ S e c t i o n 201, T i t l e I I , P u b lic Law No. 379» l o c . c l t . D epartm ent o f H e a lth , E d u catio n and W e lfare. In summary, I t can be seen t h a t th e lump sum b e n e f i t h as ev o lv ed from a payment r e l a t i n g to o r i g i n a l c o n tr lb u - s tlo n sw h en m onthly b e n e f i t s w ere n o t p a y a b le to a re im b u rse -j ] ment f o r f u n e r a l expenses o f a l l f u l l y o r c u r r e n t l y insured* i p e o p l e . | i R e tire m e n t T est In o rd e r to r e c e iv e m onthly b e n e f i t s u n d er th e Old Age and S u rv iv o r s ' In su ra n c e A ct, c e r t a i n r e tir e m e n t s t i p u l a t i o n s m ust be m e t. The p r e s e n t r u l e s a r e v e ry j l e n i e n t a s com pared t o th o s e fo rm e rly in e f f e c t . As l a t e i a s 19^9 any r e t i r e d w orker who ea rn e d o v e r #14-.99 in co v e re d employment in any m onth would be d e n ie d b e n e f i t s f o r t h a t month, a lth o u g h any amount c o u ld be e a rn e d i n non co v e re d em ploym ent. The 1950 law r a i s e d th e minimum e a rn in g s to f i f t y d o l l a r s and f r e e d th o s e o v er s e v e n ty - f iv e y e a rs o f age from any r e tir e m e n t t e s t .^5 In 195^ th e exem ption from th e r e tir e m e n t t e s t was e x ten d ed t o th o s e over se v e n ty -tw o . In 1952 th e m onthly e a rn in g b a se was r a i s e d a g a in ( t h i s tim e to s e v e n ty - f iv e d o l l a r s ) . ^ ^ W i lb u r J . Cohen and R obert J . M yers, " S o c ia l S e c u r ity Act Amendments of 1950: A Summary and L e g i s l a t i v e H is to r y ," S o c ia l S e c u r ity B u l l e t i n , 13:11* O c to b e r, 1950. ^^W llbur J . Cohen, " S o c ia l S e c u r ity Act Amendments o f 1 9 5 2 ," S o c ia l S e c u r ity B u l l e t i n , 1 5 :6 , Septem ber, 1952. 52 I The p r e s e n t law u se s b o th an a n n u a l and a m onthly t e s t . The amount t h a t a p e rs o n may e a rn In any c a le n d a r i y e a r w ith o u t l o s i n g any b e n e f i t s I s now one th o u sa n d two I i h un d red d o l l a r s . The law a l s o p ro v id e s t h a t a f t e r a p e rso n ! i 1 jhas e a rn e d one th o u sa n d two hundred d o l l a r s In any one y e a r! I ; i j one m o n th 's b e n e f i t w i l l be w ith h e ld f o r e v e ry month In w hich more th a n e ig h ty d o l l a r s I s e a r n e d .^7 This p r o v is io n e n a b le s wage e a r n e r s to ta k e I n t e r m i t t e n t f u l l - t i m e work o r earn h ig h e r wages a t r e g u la r p a r t- tim e work th a n was fo rm e rly p o s s i b le w ith th e lo s e of o n ly a few m o n th s1 b e n e f i t s . F o r exam ple, i f an in d iv id u a l was fo rm e rly a t o p f l i g h t s c i e n t i s t , and I s o c c a s io n a lly employed f o r s p e c i a l jo b s a t a s u b s t a n t i a l s a l a r y , b e s id e s h o ld in g a r e g u l a r p a r t- tim e jo b , he c o u ld earn one th o u sa n d two hundred d o l l a r s in Ja n u a ry and e ig h ty d o l l a r s in e v e ry o th e r month w ith th e l o s s of o n ly one m o n th 's b e n e f its .^ ® The c u r r e n t law e lim in a te s one p r e v io u s i n e q u i t y t h a t e x i s te d w ith re g a rd t o so u rc e s o f incom e. P r e v io u s ly , u n co v ered work was e x c lu d ed , w hereas th e c u r r e n t r e tir e m e n t t e s t now a p p lie s t o a l l income ea rn e d by th e p e n s io n e r in th e U n ite d S t a t e s . However, b e n e f i t s a r e w ith h e ld f o r any ^ S e c t i o n 103, T i t l e I , P u b lic Law Ho. 761, o p . c i t . . , p . 23- ^ R o b e r t J . M yers, B 01d-Age and S u rv iv o rs In s u ra n c e : R e tire m e n t T e st Under th e 195^ Amendments," S o c ia l S ecu rity ! B u l l e t i n . 1 7 :1 ^ , December, 195^* i 53 j month In which a b e n e f i c i a r y works in n o n -c o v e re d em ploy- j ment o u ts id e th e U n ite d S ta te s on seven o r more d a y s .^ ^ V. FINANCING I J I iTaxes f ! : The o r i g i n a l S o c ia l S e c u r ity Aet p ro v id e d f o r e q u a l j t c o n t r ib u t io n s t o be made by b o th em ployer and em ployee and { a r a t e sch ed u le w hich s t a r t e d w ith a 1 p e r c e n t le v y on each p a r t y and p ro g re s s e d to 3 P© ** c e n t (6 p e r c e n t i n j I t o t a l ) by 19^8. The r a t e was to be In c r e a s e d to 1 1 /2 p e r ! c e n t on th e em ployer and em ployee by 19*K).?® However, th ro u g h a s e r i e s o f p e r io d ic r a t e f r e e z e s th e 1 /2 o f 1 p e r c e n t in c r e a s e d id n o t m a t e r i a l i z e u n t i l 1950* ! In 195^ th e r a t e was in c re a s e d to 2 p e r c e n t on b o th th e employee and em ployer. T h is in c r e a s e was a c c o rd in g to th e te rm s o f th e 1950 amendment, w hich a ls o p ro v id e d f o r a s p e c i a l r a t e on t h e newly co v e re d se lf-e m p lo y e d . Congress b e lie v e d t h a t s in c e th e se lf-e m p lo y e d were t o r e c e iv e th e same b e n e f i t s a s em ployees co v ered u n d e r th e sy stem , th e y sh o u ld n o t be p e n a liz e d by h av in g to pay a s h ig h a r a t e a s t h a t of b o th employee an d em ployer com bined. Y et, i n o rd e r to keep some a c t u a r i a l r e l a t i o n s h i p in th e 69I b l d . , p . 13- S e c tio n 801, T i t l e V I I I , P u b lic Law No. 271, o p . c l t . , p . 19* 54 sy stem , th e se lf-e m p lo y e d sh o u ld have to p a y a h ig h e r r a t e th a n t h a t ch arg ed th e employee a lo n e . So a s p e c ia l ached- u le f o r th 6 s e lf-e m p lo y e d was s e t up u n d er th e law . I t j ■ s ta rte d a t 2 1 /2 p e r cen t and in c re a s e d to 3 p e r ce n t in j 1 195 4 . o -; X - ; | 1 j <The c o n s ta n t I n c r e a s e o f b e n e f i t s th ro u g h s u c c e s s iv e ! l e g i s l a t i o n meant t h a t th e t a x r a t e must c o n t in u a l ly be j I in c r e a s e d in s te p s in o r d e r f o r th e governm ent to be a b le ! to m eet i t s o b l i g a t i o n s and a t th e same tim e m a in ta in a s u f f i c i e n t r e s e r v e . Under th e combined in f lu e n c e o f t h e 1950, 1954 and 1956 amendments, th e f o llo w in g ta x r a t e sc h e d u le i s c u r r e n t l y In f o r c e . Y ears Employee Em ployer Self-E m ployed 1957-1959 2 1 /4 2 1 /4 3 3 /8 1960-1964 2 3 / 4 2 3 /4 4 1 /8 1965-1969 3 1/4- 3 1 /4 4 7 /8 1970-1974 3 3 /4 3 3 /4 5 5 /8 71 1975 and t h e r e a f t e r 4 1 /4 4 1 / 4 6 3 /8 0 .5 p e r c e n t o f th e combined em ployer-em ployee c o n t r ib u t io n and 0 .3 / 8 p e r c e n t o f th e se lf-e m p lo y e d c o n t r ib u t io n I s a l l o c a t e d f o r m onthly d i s a b i l i t y b e n e f i t s , and goes in to a s e p a r a te d i s a b i l i t y in s u ra n c e t r u s t fu n d in accordance w ith S e c tio n 201, T i t l e I I , P u b lic.L aw No. 880, o jd. c l t . , p . 39* ■" “ " " ‘ “ " 5 5 ; th e 1956 amendment Maximum Taxable L im it i j Under th e 1935 Act th e ta x a p p lie d to o n ly th e f i r s t j ! i t h r e e th o u s a n d - d o lla r s o f c o v e re d e a r n in g s . T his f i g u r e ! was r a i s e d to t h r e e th o u sa n d s i x hundred in 1950. At Ip re e e n t a l l a n n u a l e a rn in g s up to f o u r th o u sa n d two hundred a r e t a x e d j 7 3 > ; i The maximum av e ra g e m o n th ly wage on w hich b e n e f i t s j i a r e b ased has c o rre s p o n d in g ly been r a i s e d from two hun d red and f i f t y d o l l a r s under th e 1939 amendment to th e c u r r e n t f i g u r e o f th r e e h u n d red and f i f t y d o l l a r s p e r m onth. V I. COVERAGE UHDER THE SYSTEM I I B efore th e 1950 amendment a g r e a t number o f A m ericans w ere ex c lu d e d from p a r t i c i p a t i n g in th e S o c ia l S e c u r ity Program . In 19**7 i t was e s tim a te d t h a t tw e n ty - f o u r m il lio n out o f a t o t a l w orking f o r c e o f 57*1 m i l l i o n w ere n o t covered u n d er Old Age and S u rv iv o r s ' I n s u r a n c e . ^ T h e re fo re , k.2 o u t o f te n w o rk e rs were ex c lu d e d from th e S o c ia l S e c u r ity A ct. Today i t i s e s tim a te d t h a t o n ly e ig h t i - - - . 72 S c h o ttla n d , o p . c i t . , p . 9* 73 S ect ion 10**, T i t l e I , P u b lic Law Ho. 761, o n . c i t ., p. 2 7• ^ " S o c i a l and Economic D a ta ," S o c ia l S e c u r ity B u l l e t i n . 10:37» December, 19**7. 56 o u t o f one hun d red wage e a r n e r s o r se lf-e m p lo y e d rem ain s i u n co v e re d . i i I Some o f th e I n e l i g i b l e o c c u p a tio n s b e f o r e 1950 w e re :| ! * 1 . A g r i c u l t u r a l la b o r j 2 . C asual la b o r | 3* D om estic s e r v ic e 6 . Fam ily employment ! 5 . F e d e ra l governm ent s e r v ic e 6 . S e rv ic e on f o re ig n v e s s e l s ; 7. S ta te and l o c a l governm ent s e r v ic e j 8. S e rv ic e f o r r e l i g i o u s , c h a r i t a b l e and s i m i l a r o r g a n iz a tio n s . j 9. S e rv ic e f o r r a i l c a r r i e r s ! 10. S e rv ic e f o r m is c e lla n e o u s n o n - p r o f i t o r g a n iz e - j t i o n s . | 1 1 . S e rv ic e f o r a f o r e ig n governm ent ■ 12. S e rv ic e f o r a f o r e ig n governm ent i n s t r u m e n t a l i t y 13. S e rv ic e s o f s tu d e n t n u rse s and i n t e r n e s 16. S e rv ic e s of fish erm e n 15. S e rv ic e in new spaper d i s t r i b u t i o n .75 S elf-E m ployed In 1950 some 6 ,6 m i l l i o n se lf-e m p lo y e d w ere b ro u g h t u n d er th e a c t .? ^ The 195^ and 1956 amendments c o n tin u e d t h i s tr e n d by e x te n d in g cov erag e t o s e lf-e m p lo y e d farm o p e r a to r s and a l l p r o f e s s i o n a l groups e x c e p t d o c to rs of m e d ic in e . M in is te r s and members of r e l i g i o u s o r d e r s can be 7*5 Dwight H. D ille y , "The W ag e-E arn er's O pinion o f th e S o c ia l S e c u r ity Act and th e R e la tio n s h ip o f th e Act to His S av in g H a b its and In v estm en t P o l i c i e s (u n p u b lish e d M a s te r 's t h e s i s , The U n iv e r s ity o f S o u th ern C a l i f o r n i a , Los A n g eles, 1 9 6 1 ), p . 160, Appendix B. "^George J . L e lb o w itz , "Old-Age and S u rv iv o r s ' In s u ra n c e : C overage Under t h e 1950 Amendments," S o c ia l S e c u r ity B u l l e t i n , 13:3> December, 1950. v o l u n t a r i l y co v e re d In th e se lf-e m p lo y e d c a te g o ry hy f i l i n g ! I a c e r t i f i c a t e o f d e s i r e , p ro v id e d th e y r e c e iv e f i n a n c i a l c o m p e n s a t i o n . j i ’ j INewly Covered Employees ! i i I B eginning in 1950 c e r t a i n h o u s e -to -h o u s e sa lesm en , ‘ ! | l i f e in s u ra n c e sa lesm en , and com mission d r i v e r s became ; i co v ered u nder th e a c t a s em ployees, n o tw ith s ta n d in g t h e i r I i norm al s t a t u s a s in d ep en d en t c o n t r a c t o r s . J Employment in c e r t a i n ta x -e x em p t n o n - p r o f it ! ! c h a r i t a b l e , r e l i g i o u s and e d u c a tio n a l o r g a n iz a tio n s w ere b ro u g h t w ith in th e system u n d er th e 1950 amendment, p ro v id e d a t l e a s t tw o - th ir d s o f th e em ployees d e s ir e d coverage.^® Coverage was ex te n d e d on a com pulsory b a s i s to some n o n - p r o f i t employment f o r c e r t a i n o r g a n iz a tio n s such a s v o lu n ta r y em p lo y ers' b e n e f l e i a r y a s s o c i a t i o n s , a g r i c u l t u r a l o r g a n iz a tio n s , and f r a t e r n a l b e n e f i c i a r y s o c i e t i e s . Any em ployee o f a n o n - p r o f i t o r g a n iz a tio n m ust e a rn f i f t y d o l l a r s in a q u a r te r to be eovered under th e a c t . 77 James E. M arquis, "Old-Age and S u rv iv o r s ' In s u ra n c e : Coverage Under th e 195^ Amendments," S o c ia l S e c u r ity B u l l e t i n , 1 8 :9 , J a n u a ry , 1955* ^ H o w ev er, any em ployee who d id n o t d e s ir e to be co v e re d co u ld have rem ained o u t o f th e S o c ia l S e c u r ity System . Yet a l l p e rs o n s who became em ployees o f th e o r g a n iz a tio n a f t e r i t was b ro u g h t u n d e r th e system w ere a u to m a tic a lly In c lu d e d . L e lb o w itz , o p . c i t . , p» ?• A g r i c u l t u r e , Home W orkers, D om estic W orkers and F isherm en ! i Under th e 1950 amendment far® w o rk e rs were In c lu d e d : In th e law f o r th e f i r s t tim e , p ro v id e d th e y w ere r e g u l a r l y ' employed and r e c e iv e d ca sh wages o f a t l e a s t f i f t y d o l l a r s ■ jin a c a le n d a r q u a r t e r . \ | i A g r i c u l t u r e . — A g r i c u l t u r a l w o rk e rs (e x c e p t th o s e j em ployed In c o n n e c tio n w ith guri n a v a l s t o r e s o r th o s e | i te m p o ra rily a d m itte d to t h i s c o u n try ) who ea rn a t l e a s t j one hundred and f i f t y d o l l a r s in cash w ages d u rin g a c a le n d a r y e a r from a s in g l e em ployer, o r p e rfo rm s a g r i e u l - j t u r a l la b o r f o r th e em ployer on tw en ty o r more days d u rin g j th e y e a r computed on a tim e b a s i s , a r e p r e s e n t l y c o v e r e d .^ : I Home w o r k e rs ♦— In 1950 se lf-e m p lo y e d home w o rk e rs j i became covered a s em ployees, p ro v id in g th e y met th e fo llo w in g re q u ire m e n ts : ( l) th e y work a c c o rd in g to th e s p e c i f i c a t i o n s o f t h e p e rso n f o r whom th e work i s done on m a t e r i a l s o r goods f u r n is h e d by th a t p e rso n and r e q u ir e d to be r e tu r n e d to him o r th e p e rso n he d e s ig n a te s ; (2) th e y a r e p a id c a sh wages o f |5 0 o r more d u rin g a c a le n d a r q u a r te r ; and (3) th e y a r e s u b je c t to s t a t e l i c e n s i n g laws.°Q Through th e e lim in a tio n o f th e l i c e n s i n g r e q u i r e ment , a p p ro x im a te ly one h u n d red th o u san d a d d i t i o n a l home w o rk e rs were c o v e re d a f t e r 195^* Even th o s e home w o rk ers 79 S e c tio n 105, T i t l e I I , P u b lic Law Ho. 880, o n . c i t . , p . 22• ^®Cohen, B a l l , and M yers, op. c i t . , p . 6. who a r e p r e s e n t l y ex clu d ed from coverage a s em ployees may he co v e re d a s s e lf-e m p lo y e d p e o p le Domestic w o rk e rs . — D om estic w o rk e rs in p r i v a t e j I homes, and th o s e who perform s e r v ic e s n o t i n th e e m p lo y e r's ' i i j t r a d e o r b u s in e s s , who ea rn o v e r f i f t y d o l l a r s in c a s h 1 I , |w ages from a s i n g l e em ployer d u rin g a c a le n d a r q u a r te r a r e j c o v e re d under th e 195^ amendments, I r r e s p e c t i v e o f th e I number o f days th e y work. j F is h in g i n d u s t r y . - - Employees in th e f is h in g In d u s- I t r y who work o n .v e s s e ls of l e s s th a n te n to n s became j co v e re d under S o c ia l S e c u r ity a f t e r 195^* I n e q u a l i t i e s in ! I th e law s a r e e x e m p lifie d by th e f a c t t h a t t h e i r em ployers j were co v ered as s e lf-e m p lo y e d by th e 1950 amendments. ; R a ilr o a d Workers The R a ilr o a d R e tire m e n t Act was p a s s e d by C ongress in 1 9 3 5 * Due to l e g a l p r e c e d e n t, th e r a i l r o a d s have been r e g u l a t e d only by C ongress th ro u g h th e I n t e r s t a t e Commerce Commission. Thus a s e p a r a te r e tir e m e n t system was e s t a b l i s h e d , and a s a r e s u l t r a i l r o a d w orkers were ex c lu d ed from th e S o c ia l S e c u r ity A ct. The 19^7 amendment to th e R a ilr o a d R e tirem en t Act p ro v id e d f o r c o o r d in a tio n betw een th e two a c t s . The amendment p r o v id e s t h a t In a l l c a s e s ex cep t r e tir e m e n t c a s e s in w hich th e in d iv id u a l had 10 y e a rs o r more of r a i l r o a d em ploym ent, b e n e f i t s a r e p a y a b le u n d er one program o r th e o t h e r 60 j 1 b a s e d on com bined r a i l r o a d com pensation and Old-Age and. S u rv iv o rs ' In su ra n c e w ages. P ro v is io n s f o r f i n a n c i a l , in te rc h a n g e a r e such a s to p la c e th e Old-Age and S u rv iv o rs ' In s u ra n c e t r u s t fu n d in th e same p o s i t i o n i t w ould have been in i f r a i l r o a d employment w ere co v e re d by Old-Age and S u r v iv o r s ' I n s u ra n c e . “ 1 i j T h erefo re th e r e c o rd of th e i n d i v i d u a l 's r a i l r o a d ! 1 work i s t r a n s f e r r e d from th e R a ilro a d R e tirem en t B oard to ■ S th e S o c ia l S e c u r ity A d m in is tra tio n u n le s s th e w orker had c r e d i t f o r a s many a s one h u n d red tw enty m onths o f r a i l r o a d ! s e r v i c e . i Government Employees P ro v is io n was made u n d er th e 1950 and 195^ amend m ents to in c lu d e u n d e r S o c ia l S e c u r ity a l l f e d e r a l c i v i l i a n em ployees n o t a lr e a d y co v e re d under th e F e d e r a l C i v il S e rv ic e R e tirem en t System , w hich has been i n o p e r a tio n s in c e 1920. In 1950, co v erag e was exten d ed to s t a t e and l o c a l governm ent em ployees u nder v o lu n ta r y agreem ent betw een th e s t a t e s and th e f e d e r a l governm ent. However, I f th e s t a t e p o s s e s s e d a r e tir e m e n t system f o r t h e i r em ployees, i t had to be d is s o lv e d b e f o r e a f e d e r a l - s t a t e agreem ent c o u ld become e f f e c t i v e . The 195^ amendment made coverage 81 Committee on F in a n c e , U nited S t a t e s S e n a te , Ma.tor D if fe re n c e s in th e P re s e n t S o c ia l S e c u r ity Law and H .R . 9366 a s P assed by th e House of R e p re s e n ta tiv e s R e la tin g to Old-Age and S u r v iv o r s ' In s u ra n c e and P u b lic A s s is ta n c e (W ashington: Government P r i n t i n g O f f ic e , 1 9 5 ^ ), P« ! a v a i l a b l e to em ployees tinder a s t a t e o r l o c a l r e tir e m e n t sy stem . The o n ly req u irem e n t was t h a t a m a jo r ity o f ! i e l i g i b l e em ployees must v o te in fa v o r o f co v e ra g e. The j s t a t e may co v er em ployees u n d e r th e f e d e r a l system who f o r ' some re a s o n a r e n o t p r e s e n t l y e l i g i b l e u n d er t h e i r s t a t e i 1 r e tir e m e n t sy stem . C e rta in g ro u p s such a s policem en and j ' RO i fire m e n a re g e n e r a lly ex clu d ed from s o c i a l s ec u ri t y . j t Members o f th e Armed F orces S e rv ic e p e r s o n n e l a r e f u l l y co v e re d f o r th e f i r s t tim e u n d er th e S o c ia l S e c u r ity Amendment o f 1956. However, th e 19A6 amendment h as p ro v id e d t h a t W orld War I I V e te ra n s who d ie d w ith in t h r e e y e a rs w ere deemed (1) t o have d ie d as f u l l y in s u r e d in d iv i d u a ls ; (2) to have r e c e iv e d an av e ra g e m onthly wage o f not l e s s th an |1 6 0 ; and (3) . . . to have been p a id n o t l e s s th an |2O0 o f wages in each c a le n d a r y e a r in w hich th e y had t h i r t y days o r more o f a c t i v e s e r v ic e a f t e r Septem ber 1 6 , 19& 0 . 83 Under v a r io u s amendments form er members of th e Armed F o rc e s w ere g r a n te d s o c ia l s e c u r i t y wage c r e d i t s o f one h u n d red s i x t y d o l l a r s p e r month f o r a c t i v e p a r t i c i p a t i o n d u rin g th e W orld War I I and th e P o st War p e r io d (Septem ber ® 2 S e c tlo n 101, T i t l e I , P u b lic Law No. 761, o p . c i t . , pp. ^ S e c t i o n 201, T i t l e I I , S o c ia l S e c u r ity Act Amendments o f 19^-6, P u b lic Law No. 719 (H.R. 7037)> 7 9 th C o n g ress, 2d s e s s io n , August 10, 19L6, p . 2. ! 62 1 6, 19*K> to J a n u a ry 1 , 1957) • I f th e d is c h a rg e was u n d er d is h o n o ra b le c o n d itio n s o r i f th e servicem an d id n o t s e rv e f o r n i n e t y d a y s, th e wage c r e d i t was n o t g r a n te d . The wage! I i c r e d i t co u ld a ls o be u sed i n d e te rm in in g s u r v i v o r s ’ o r d e p e n d e n ts ' b e n e f i t s . G eo g ra p h ic a l Scope The S o c ia l S e c u r ity A ct co v ers a l l p e o p le w ith in thej U n ite d S ta te s and th e fo llo w in g p o s s e s s io n s : "A lask a, j iH aw aii, P u erto R ic o , and V irg in I s la n d s , r e g a r d le s s o f c i t i z e n s h i p o r residence"®**' w ith some e x c e p tio n s such a s | 1 a l i e n s engaged in s e l f em ployment, o r a l i e n farm c o n t r a c t w o rk e rs . The 1956 amendment, how ever, suspends b e n e f i t paym ents to c e r t a i n a l i e n s who a r e o u ts id e th e U n ited i S t a t e s f o r more th a n s i x m onths. The 1950 amendments ex ten d ed co v erag e t o U n ite d S t a t e s c i t i z e n s em ployed a b ro a d by Am erican em p lo y ers. The c o v e ra g e was f u r t h e r ex ten d ed in 195^ to th o s e c i t i z e n s em ployed by s u b s i d i a r i e s o f American com panies, p ro v id e d th e d o m e stic c o r p o r a tio n a g r e e s to pay th e e m p lo y e r's tax.®-* ^ " M a jo r D iffe re n c e s in th e P re s e n t S o c ia l S e c u r ity Law and H.R. 9 3 6 6 ," p . 5« ^ M a r q u is , op. c i t . . , p p . 9 -1 0 . VI. CONCLUDING- ANALYSIS i The in t r o d u c t i o n o f th e av e ra g e m o n th ly wage form ula! i jin 1939 c o n s t i t u t e d a s i g n i f i c a n t m o d if ic a tio n to th e | I j o r i g i n a l a e t . Those w orkers who were n o t c o n s i s t e n t l y in ; j th e la b o r fo rc e found t h a t th e b e n e f i t th e y would have i !r e c e iv e d u nder th e t o t a l wage form ula was re d u c e d . The ! I t o t a l wage fo rm u la which was d e sig n e d to h e lp low-wage , i b r a c k e ts a ls o h e lp e d s h o r t- tim e b r a c k e ts w ith in th e in su re d ; g ro u p s . F or exam ple, a woman t h i r t y - f i v e y e a rs of age who worked f iv e y e a r s , e a rn in g a t o t a l o f f i f t e e n th o u sa n d d o l l a r s , and th e n rem ain in g o u t o f th e w ork fo rc e f o r ! i |tw e n ty - f iv e y e a rs w ould have r e c e iv e d $22.50 a month under j j t th e f u l l wage fo rm u la , as compared w ith $16.63 u nder th e j 1939 a m e n d m e n t. rj^g a v e ra g e wage fo rm u la , t h e r e f o r e , p e n a liz e d w o rk ers who were co v e re d o n ly a s h o r t tim e u n d er S o c ia l S e c u r ity . j In a d d i tio n to th e casusJL w o rk e r, t h i s group in c lu d e s th o s e p e o p le who w ere a b s e n t f o r a lo n g p e r io d of tim e from co v ered employment f o r such re a s o n s a s s ic k n e s s , unem ploym ent, o r work in n o n -co v ered em ploym ent. As a r e s u l t , th e a v e ra g e m onthly wage fo rm u la makes th e b e n e f i t c o n tin g e n t on th e c o n t in u ity o f a w o rk e r's 86 However, th e woman in t h i s i l l u s t r a t i o n would n o t in r e a l i t y r e c e iv e any b e n e f i t s u nder S o c ia l S e c u r ity b e c a u se she w ould be n e i t h e r f u l l y o r c u r r e n t l y in s u r e d . t L c o n t r ib u t io n to th e c o s t o f th e system , r a t h e r th a n to th e a c t u a l s iz e o f th e c o n t r i b u t i o n made. T h e re fo re , th e p r i n c i p l e of paym ent based on need i s w eakened s in c e th e need o f th e in d iv i d u a l v a r i e s I n v e r s e ly to r e g u la r em ployment. The a v e ra g e m onthly wage fo rm u la a ls o e n a b le s th e governm ent to make l a r g e r b e n e f i t paym ents from th e s t a r t . S in ce th e a v e ra g e wage i s th e b a se on w hich th e r a t e i s a p p l ie d , th e r e c i p i e n t o f th e b e n e f i t g a in s n o th in g f o r a c c r u in g h ig h e a rn in g s in co v e re d employment o v er a lo n g p e r i o d of tim e . T h e re fo re , a p e rso n who worked th e r e q u i r e d s ix q u a r t e r s and r e t i r e d a f t e r th e s t a r t i n g d a te in 1951 would r e c e iv e th e same b e n e f i t a s a man who had been w orking in co v e re d employment sin c e 1937 (assum ing b o th men ea rn e d th e same a v e ra g e m onthly w age). The 1939 amendment p a r t i a l l y o f f s e t t h i s l e v e l l z l n g q u a l i t y o f th e a v e ra g e m onthly wage fo rm u la by p r o v id in g f o r a one p e r c e n t in crem en t to th e b e n e f i t payment f o r es.ch y e a r worked in covered em ployment. However, th e e lim in a tio n o f t h i s in crem en t u nder th e 1950 amendment d e s tr o y e d th e d i r e c t r e l a t i o n s h i p betw een b e n e f i t s and p ro lo n g e d y e a rs o f co v e ra g e . Yet an i n d i r e c t r e l a t i o n s h i p betw een b e n e f i t s and co v erag e o v e r tim e s t i l l e x i s t s s in c e th e a v e ra g e m onthly wage i s re d u c e d th ro u g h an I n c r e a s e in th e d en o m in ato r of th e e q u a tio n . T h e re fo re , i f co v e ra g e i s n o t c o n tin u o u s a f t e r th e o r i g i n a l s t a r t i n g d a t e , t o t a l wages do n o t in c r e a s e (th e n u m e ra to r o f th e e q u a tio n ) w h ile I th e tim e f a c t o r ( th e d en o m in ato r o f th e e q u a tio n ) c o n tin u e s I i jto i n c r e a s e . j j The in t r o d u c t i o n (u n d e r th e 1950, 195** and 1956 |amendments) o f J a n u a ry 1, 1951 > a s an a l t e r n a t i v e s t a r t i n g d a t e , th e d i s a b i l i t y f r e e z e , th e d i s a b i l i t y b e n e f i t , and | th e f i v e - y e a r d r o p o u t, f u r t h e r red u ced even th e i n d i r e c t ! i r e l a t i o n s h i p betw een b e n e f i t s and paym ents t h a t e x i s t e d I I a f t e r th e in t r o d u c t i o n o f th e av erag e m o n th ly wage fo rm u la .i F u rth e rm o re , a p r o v is io n u n d e r th e 1939 amendment a llo w s a p e rs o n t o In c lu d e wages e a rn e d a f t e r s i x t y - f i v e y e a rs o f a g e . C onceivably a man who became s i x t y - f i v e y e a rs o f age b e f o r e Ja n u a ry 1 , 1955 * and who n e v e r w orked in c o v e re d employment c o u ld work f o r e ig h te e n m onths in covered employment e a rn in g th r e e h u n d red and f i f t y d o l l a r s a m onth, r e t i r e and draw th e maximum b e n e f i t o f $108.50 a m onth. The re q u ire m e n t in tr o d u c e d in th e 1939 amendment t h a t an I n d iv id u a l m ust be f u l l y In s u re d in o r d e r to be e l i g i b l e f o r a l l b e n e f i t s e lim in a te d from coverage th o s e w o rk e rs who were n o t c o n s i s t e n t l y in th e w ork f o r c e . Only i n d i v i d u a l s who e i t h e r had f o r t y q u a r te r s o f co v erag e o r w ere co v ered in h a l f th e q u a r t e r s e la p s in g a f t e r th e s t a r t i n g d a te w ere e l i g i b l e f o r b e n e f i t s . The 1950 amend ment h e lp e d o l d e r w o rk ers a c h ie v e f u l l y In s u re d s t a t u s by p r o v id in g an a l t e r n a t e s t a r t i n g d a t e . The 195** amendment g r a n te d f u l l y I n s u re d s t a t u s to anyone w ith a t l e a s t s i x j q u a r t e r s o f c o v e ra g e , p ro v id e d t h a t he was in s u re d in e v e ry q u a r t e r a f t e r J a n u a ry 1 , 1955* j The p r o v is io n f o r d e p e n d e n ts ' and s u r v iv o r s ' p a y - j s m ents in th e 1939 amendment was c o n s id e re d by th e N a tio n a l j R e so u rces P la n n in g Board to be th e most Im p o rtan t d e p a r tu r e ; j a t t h a t tim e from th e p r i n c i p l e o f p r o p o r t i o n a l i t y betw een paym ents and c o n t r ib u t io n s Thus w o rk e rs w ith d e p e n d e n ts w ere in a p o s i t i o n t o g ain b e t t e r p r o t e c t i o n u n d er th e Act 1 ! i | th a n s i m i l a r w o rk e rs w ith o u t d e p e n d e n ts . These b e n e f i t s r e f l e c t an e f f o r t to em phasize fa m ily p r o t e c t i o n in ! c o n t r a s t to th e O ld Age In s u ra n c e f o r th e p rim a ry b e n e f i c i a r y o n ly , w hich c h a r a c t e r i z e d th e o r i g i n a l S o c ia l f S e c u r ity A ct. The e v o lu tio n o f th e lump sum b e n e f i t from a paym ent r e l a t e d to c o n t r i b u t i o n s in l i e u o f m onthly b e n e f i t s to a reim bursem ent f o r f u n e r a l e x p e n se s i s f u r t h e r e v id e n c e of th e s e p a r a tio n o f th e b e n e f i t system from th e revenue s o u rc e . Even u n d e r th e 1935 Act t h e r e w ere p r o v is io n s t h a t m o d ifie d th e p r o p o r t i o n a l i t y betw een b e n e f i t s and th e ft1 ? N a tio n a l R esources P la n n in g B oard, Committee on Long-Range Work and R e lie f P o l i c i e s , S e c u r i t y , Work and R e l i e f P o l i c i e s , House o f R e p r e s e n ta tiv e s , 7 8 th C o n g ress, 1 s t s e s s io n , Document No. 128, P a r t 3 (W ashington: Government P r i n t i n g O ffic e , 1 9 4 3 ), P* 184. p a y r o l l ta x In f a v o r o f th o s e w o rk ers who, w ith o u t such p r o v i s i o n s , w ould have r e c e iv e d l i t t l e o ld age p r o t e c t i o n . These p r o v is io n s in c lu d e d a f l a t m onthly minimum b e n e f i t l paym ent and a w e ig h te d b e n e f i t fo rm u la i n f a v o r of th e j jlo w e r-p a id w o rk e rs . The fo rm u la h as been changed s in c e th e o r i g i n a l law was e n a c te d , in c r e a s in g th e minimum b e n e f i t 300 p e r c e n t, w h ile th e maximum b e n e f i t h a s in c r e a s e d o nly j 28 p e r cent.®® F or exam ple, a p e rso n w ith an a v e ra g e i i m onthly wage o f one hundred d o l l a r s w ould r e c e iv e a b e n e f i t ; i | o f f i f t y - f i v e d o l l a r s a month upon r e t i r e m e n t , w h ereas a | p e rs o n w ith th e maximum a v e ra g e m onthly wage of t h r e e h u n d red and f i f t y d o l l a r s w ould r e c e iv e f l0 8 .5 0 . I f b o th j p e o p le worked te n y e a rs b e f o r e th e y r e t i r e d , th e Second : i n d iv i d u a l w ould have p a id e ig h t hundred and f o r t y d o l l a r s i n ta x e s a s com pared w ith th e two hun d red and f o r t y d o l l a r s p a id by th e f i r s t p e rso n (assum ing a 2 p e r c e n t p a y r o l l t a x ) . T h e re fo re , 3 .5 tim e s a s much in ta x e s b r in g s o n ly 2 .0 tim e s a s much in b e n e f i t s over a te n - y e a r p e r io d . The la w , t h e r e f o r e , a c t u a l l y r e f l e c t s a compromise betw een two p u rp o s e s : th e a tte m p t to r e l a t e in d iv i d u a l b e n e f i t s to th e w o rk e r’s p r e v io u s wages an d th e a tte m p t to p r o t e c t th e d i s a b l e d , th e d e p e n d e n t, and th e p o o r. S in ce ®^Robert J . M yers, ”Qld-Age and S u r v iv o r s ’ In s u ra n c e : H is to ry o f th e B e n e fit F o rm u la ,” S o c ia l S e c u r ity B u l l e t i n . 1 8 :1 3 , May, 1955* th e c o n t r i b u t i o n r a t e i s l e v i e d upon a l l co v ered wages up t o f o u r th o u sa n d two hundred d o l l a r s , w h ile th e b e n e f i t s a r e l i m i t e d to c e r t a i n s p e c i f i c c o n tin g e n c ie s , a t r a n s f e r paym ent ta k e s p la c e from w o rk e rs and t h e i r em ployers to j b e n e f i c i a r i e s . T here i s s t i l l some r e l a t i o n s h i p betw een j s b e n e f its and c o n t r i b u t i o n s , b u t th e r e l a t i o n s h i p h as been w eakened by th e s e v e r a l amendments to t h e S o c ia l S e c u r ity A c t. BART II SELECTED THEORETICAL AHALYSIS CHAPTER I I I : i i SHIFTING AND INCIDENCE OF THE OLD AGE j AND SURVIVORS' INSURANCE TAXES 1 i ! i I I i I t l a n e c e s s a r y to d e te rm in e who b e a r s th e f i n a l i !im pact o f any t a x b e f o r e I t s e f f e c t s on t h e g e n e ra l economy can be m easured. I f , f o r exam ple, th e ta x i s s h i f t e d > fo rw a rd , th e wage e a r n e r a s a consumer w i l l b e a r th e ( l a r g e s t p o r t i o n , b u t p a r t o f th e burden w i l l , n e v e r t h e l e s s , be p a s s e d on to n o n - la b o r e le m e n ts. I t i s alm o st im p o s si b l e , o f c o u rs e , t o d e te rm in e th e e x a c t p r o p o r tio n o f th e b u rd en w hich each Income group would b e a r s in c e t h a t would depend on many f a c t o r s . However, th e u l t i m a t e e f f e c t s upon th e economy w ould be c o n s id e r a b ly d i f f e r e n t th a n i f th e e n t i r e t a x w ere e i t h e r s h i f t e d backward t o l a b o r , c a p i t a l , o r r e n t , o r a b s o rb e d by th e em ployer. As p r e v io u s ly n o te d , t h e r e a r e two d i s t i n c t ta x e s u n d er th e Old Age and S u rv iv o r s ' In su ra n c e law : th e t a x im posed on th e em ployee, and th e ta x im posed on th e em p lo y er. S in ce th e r a t e s im posed upon th e em ployer and em ployee a r e e q u a l, i t i s o b v io u s t h a t C ongress in te n d e d t h a t th e in c id e n c e sh o u ld be b o rn e a t th e p o in t o f Im p a c t. Thus th e employee i s e x p e c te d to b e a r h a l f th e ta x th ro u g h wage d e d u c tio n s , and th e em ployer i s e x p e c te d to b e a r th e o th e r im lf out o f p r o f i t s . The th e o ry i s t h a t th e em ployer h a s th e b e n e f i t o f t h e w o rk e r 's s e r v ic e s d u rin g ! ' ” ”.... ........ .. 7 1 ; p r o d u c tiv e y e a rs and sh o u ld th e r e f o r e h e a r a p a r t o f th e c o s t of ujjkeep a f t e r th e f a c t o r 's e n e r g ie s h a re been s p e n t . I . THE EMPLOYEE'S CONTRIBUTION i The overw helm ing w eig h t of o p in io n p la c e s th e j In c id e n c e o f th e em p lo y ee's c o n t r ib u t io n a t th e p o in t o f im p a e t.1 T his c o n c lu s io n i s b a se d on a number o f g e n e r a lly a c c e p te d p r o p o s i t i o n s . | The M a jo rity V lew polnt j A ccording to P h i l i p T a y lo r, one o f th e m ajo r reaso n s! f o r b e l i e v i n g t h a t t h i s ta x i s n o t s h i f t e d I s th a t t h e r e i s a lm o st no chance o f e s c a p in g i t th ro u g h m ig ra tio n to a n o th e r jo b .^ At p r e s e n t, o n ly a few h ig h ly s k i l l e d j p r o f e s s i o n s , c a s u a l w orkers and c i v i l s e r v ie e em ployees a r e exempt from co v erag e u nder th e Old Age and S u rv iv o r s ' In s u ra n c e A ct. The chances a r e v e ry rem ote t h a t any p e rso n would go to th e expense and e f f o r t o f l e a r n i n g one o f th e s k i l l e d p r o f e s s io n s in o r d e r to escap e a 2 p e r cen t ta x . A second re a s o n f o r b e l ie v i n g t h a t th e ta x i s n o t C. Low ell H a r r ie s , ''P u b lic F in a n c e ," A Survey o f Contem porary E conom ics, Y ol. I I , B ern ard F . H aley ( e d .) (Homewood, I l l i n o i s : R ich ard D. Irw in , 1 9 5 2 ), p . 266. 2P h ilip E. T a y lo r, The Economics of P u b lic F in an c e ( r e v i s e d e d i t i o n ; Hew York: The M acm illan Company, 1953)> p p . fy?l-k?2. s h i f t e d i s th e r e l a t i v e l y sm a ll r a t e . 3 I t i s v e ry u n lik e ly ! t h a t w o rk ers w ould le a v e th e l a b o r m ark et in o rd e r to avoid! th e payment of a 2 p e r c e n t t a x . T h erefo r© , as th e r a t e is i in c r e a s e d and becomes in tim e more burdensom e, th e p o s s i b i l i t y of d e s tr o y in g th e d e l i c a t e b a la n c e betw een th e J u t i l i t y o f t r u e income and t h e d i s u t i l i t y o f e f f o r t a t th e j m argin i s in c r e a s e d . j Then, to o , th e low r a t e h a s n o t a s y e t s tim u la te d s e r i o u s union a g i t a t i o n f o r wage I n c r e a s e s even in th e J p r e s e n t i n f l a t i o n a r y p e r io d . T his i s e s p e c i a l l y t r u e i f one ta k e s th e v ie w p o in t t h a t a s tr o n g u n io n w i l l push f o r {maximum wages c o n s i s t e n t w ith th e l i m i t o f i t s b a r g a in in g | t ! pow er. : i A nother r e a s o n g iv e n by T a y lo r i s " th a t th e t a x j p r o v id e s funds f o r r e tir e m e n t income o f l a b o r e r s , p a r t i a l l y e l i m i n a t i n g th e n eed f o r p r i v a t e sa v in g f o r o ld a g e . 1 1 ^ Thus th e ta x may a c t e i t h e r a s a p a r t i a l e l im in a tio n of th e need f o r p r i v a t e s a v in g , o r i t may be a c c e p te d by th e w o rk e r as a f o rc e d sa v in g t h a t , in th e ab sen ce o f th e t a x , he w ould have n eed ed to p erfo rm f o r h im s e lf . In f a c t , % any w orkers w i l l r e c e iv e b e n e f i t s l a r g e r th a n th e ac cu m u late d ta x so t h a t t h i s , to o , a c t s a s a r e s t r i c t i o n ^The r a t e i s now 2 1/U- p e r c e n t on b o th th e em ployer and th e em ployee. The s e l f em ployed t a x i s 3 3 /8 p e r c e n t. a T a y lo r, l o c . c i t . 73 ; on th e d e s i r e to s h i f t th e burden e l s e w h e r e . 1 1 ^ I From an h i s t o r i c v ie w p o in t th e r e a r e s t i l l o t h e r j re a s o n s f o r b e l i e v i n g t h a t th e ta x h as n o t been s h i f t e d . j I F i r s t , up to 1950 th e r a t e was o n ly 1 p e r c e n t. Second, in i ! th e e a r l y y e a rs o f th e program th e r e was w id esp re ad unem- 1 p lo y m en t, and th u s even o rg a n iz e d l a b o r we,e in no p o s i t i o n j to p r e s s i t s dem ands. 3hen, to o , d u r in g th e w ar wages w ere! s u b s t a n t i a l l y f r o z e n . j j S ince 1950 th e e m p lo y e e 's c o n t r i b u t i o n has been jin c re a s e d by one and o n e - q u a r te r p e rc e n ta g e p o i n t s . Even 1 | i f o rg a n iz e d l a b o r , u n d er th e g u is e of m a in ta in in g ta k e - 1 jhome p a y , fo rc e d th e em ployer to g iv e an e x t r a 1 p e r c e n t I wage I n c r e a s e , a t l e a s t th e o r i g i n a l 1 p e r c e n t w ould s t i l l | 1 be b o rn e by l a b o r . The C l a s s i c a l A pproach Under th e c l a s s i c a l approach i t i s e v id e n t t h a t a p a y r o l l ta x m ust in th e lo n g run be s h i f t e d . S ince w o rk e rs r e c e iv e o n ly s u b s is te n c e , t h e i r lo w ered s ta n d a r d o f l i v i n g , a s a r e s u l t of th e ta x , must e i t h e r I n c r e a s e th e d e a th r a t e o r d e c r e a s e th e b i r t h r a t e . Thus th e p o p u la tio n in a l a t e r g e n e r a tio n would be r e l a t i v e l y s m a lle r , and th e ta x w ould be s h i f t e d th ro u g h th e d e c re a s e in th e su p p ly ^W illiam H. A nderson, T ax atio n and th e American Economy (New York: Prent l c e - H a l l , 1 9 5 1 )» P P • h7 0 -h 7 1 . 7 k cu rv e f o r l a b o r . 6 As to w here th e In c id e n c e would r e s t , a I i d isa g re e m e n t a ro s e between Adam Smith and David R ic a rd o . Adam Sm ith h e ld t h a t a p a y r o l l t a x l e v i e d on a m a n u fa c tu re r w ould be p a id by th e consum er, w h ile th e same ta x l e v i e d on a g r i c u l t u r e w ould r e s u l t in re d u c e d r e n t . ? David R icard o I h e ld t h a t th e em ployer would b e a r th e t a x o u t o f p r o f i t s . ® Today th e v a s t m a jo r i ty of eco n o m ists d is a g r e e w ith th e c l a s s i c a l th e o r y , b e l ie v i n g t h a t s in c e wage r a t e s in th e U n ite d S ta te s a r e above th e s u b s is te n c e l e v e l , w o rk e rs can a b s o rb a d e c r e a s e i n take-hom e pay w ith o u t an a d j u s t - ! ment in th e p o p u la tio n . One modern te x tb o o k sums i t up a s fo llo w s: R is in g p r o d u c t i v i t y , custom , p u b lic o p in io n , and th e c o l l e c t i v e b a r g a in in g pow er o f l a b o r have r e s u l t e d in wage l e v e l s embodying v a r y in g s ta n d a r d s o f c o m fo r t, and p u b lic r e l i e f and G h a rity p re v e n t o b v io u s s t a r v a t i o n o f th e unem ployed.9 Then, to o , th e c l a s s i c a l r e l a t i o n betw een Income and th e b i r t h r a t e h as been q u e s tio n e d by m ost modern O tto Von M ering, The S h i f t i n g and In c id e n c e o f T a x a t1on ( P h ila d e lp h ia : The B ls k is to n Company, 191*2), p . 181*. ? Adam S m ith , The W ealth o f M ations (Cannan e d i t i o n ; New York: Random House, 193?)* P* 816. ®David R ic a rd o , On th e P r i n c i p l e s o f P o l i t i c a l Economy and T a x a tio n , P ie ro S r a f f a ( e d . ) TSsmbrldge: Cambridge U n iv e r s ity P r e s s , 1951)* P* 226. ^W illiam J . S h u ltz and C. Low ell H a r r ie s , Am erican P u b lic F inance ( s i x t h e d i t i o n ; New York: P r e n t i c e - H a l l , 195k), p . 183. L I econom ists.'*'0 I I . THE EMPLOYER* S CONTRIBUTION OP THE PAYROLL TAX ! j There a r e many d i f f e r e n t o p in io n s a s to th e I n c l - ! dence o f th e e m p lo y e r's c o n t r i b u t i o n . T r a d iti o n a l View The g e n e r a l o p in io n 11 among modern ec o n o m ists b e fo re | I19^0 was t h a t l a b o r b e a rs th e in c id e n c e o f th e p a y r o l l ta x t |th ro u g h backw ard s h i f t i n g from th e em ployer e i t h e r in th e j (form o f reduced w ages o r te c h n o lo g i c a l unem ploym ent.12 j |T h is th e o ry was o r i g i n a t e d p r i o r to th e S o c ia l S e c u r ity Act! |i n r e f e r e n c e to th e com pulsory in s u ra n c e premiums l e v i e d on, i th e em ployer in v a r io u s s t a t e w orkm an's com pensation law s.1^ 10Von M erin g , l o c . c i t . 11Though a t l e a s t one w r i t e r in th e Economic J o u r n a ls b e lie v e d t h a t in th e lo n g ru n e i t h e r l a b o r o r th e consum er b o re th e burden o f th e p a y r o l l ta x . F r i t z Lehmann, "The H ole o f S o c ia l S e c u r ity L e g i s l a t i o n , " P ro c e e d in g s Supplem ent, Am erican Economic R eview , 2 9 :2 2 1 , M arch, 1939. 12C arl Shoup, "Taxing f o r S o c ia l S e c u r i t y ," A nnals o f th e American Academy o f P o l i t i c a l and S o c ia l S c ie n c e . 2 0 2 7 l§ 6 , March, 1939. ^ T a u s s i g , a s e a r l y a s 1911, in r e f e r r i n g to w ork m a n 's co m p en satio n , s t a t e d t h a t , "JDlrect and im m ediate r e d u c tio n s o f w ages a r e h ig h ly im p ro b ab le. H ere, a s in o t h e r s im ila r s i t u a t i o n s , t h e r e i s l i k e l y t o be enough s la c k in th e a d ju s tm e n t of w ages and p r o f i t s to e n a b le some t i g h t e n i n g , some d r a in on p r o f i t s , w ith o u t any im m ediate e f f e c t on w ages. But when su c h a system i s in s te a d y ! 76; The th e o ry was a l s o e x p re s se d In 1929 in r e f e r e n c e t o th e ! p a y r o l l t a x Im posed u n d er E n g lis h law.-*-*4 ' The same v ie w p o in t h as been s u b s t a n t i a l l y u p h e ld by P r o f e s s o r T ay lo r in h i s r e c e n t te x tb o o k . T a y lo r p o i n t s o u t, how ever, t h a t p a r t of th e burden r e s t s upon th e consum er and th e em ployer. I t seems c l e a r from th e e v id e n c e , . . . t h a t th e I m a jo r p a r t of th e in c id e n c e o f th e e x c is e s i s upon j unem ployed l a b o r in th e lo n g ru n . The rem ain d er of i th e in c id e n c e i s upon b u y e rs o f th e p r o d u c ts an d upon j th e s e l l e r s , th e m ajo r s h a re of t h i s rem a in d er b e in g | upon b u y e r s .15 One d i s c i p l e o f t h i s v ie w p o in t h as gone so f a r a s to s t a t e th e fo llo w in g d i c t a a b o u t th o s e who h o ld any o th e r i io p in io n : I P erh ap s th e s tr a n g e t h e o r i e s now c u r r e n t may be o p e r a t i o n , and h a s been f o r some tim e i n o p e r a tio n , e v e ry em ployer knows t h a t th e a c t o f employment In v o lv e s n o t o n ly w ages, b u t th e a d d i t i o n a l c h a rg e s a l s o . H is c a l c u l a t i o n s m ust be c o rre s p o n d in g ly e f f e c t e d . The outcome i s l i k e l y to be t h a t th e in s u r a n c e c h a rg e s w i l l u l t i m a t e l y come o u t of th e w o rk m an s own e a r n in g s ." F. W . T a u s s ig , P r i n c i p l e s o f E conom ics. V ol. I I (Hew York: M acm illan Company, 1911)» p . 327. l^«The m a rg in a l em ployers who w ere j u s t a b le t o pay t h e i r way u n d er th e o ld c o n d itio n s w i l l now be o b lig e d to le a v e b u s in e s s s in c e i t i s no lo n g e r p r o f i t a b l e . The I n c r e a s e d c o s t o f la b o u r w i l l te n d to d im in is h th e demand f o r i t . . . . The p re se n c e o f th e s e unem ployed w i l l mean an a c t i v e c o m p e titio n amongst workmen f o r employment. The em ployer w i l l th e n be a b le to i n s i s t on changes fa v o u ra b le to h im s e lf ." Jo s e p h L. Cohen, "The In c id e n d e o f th e Cost o f S o c ia l I n s u r a n c e ," I n t e r n a t i o n a l L abor Review. 2 0 :8 2 2 , November, 1929- ^ T a y l o r , o p . c i t . . p . ^76. 77 e x p la in e d a s th e p ro d u c ts o f la b o r o r s o c i a l ec o n o m ists; who have l i t t l e o r no u se f o r economic th e o ry s in c e j t h e i r s tu d e n t d ay s and who f i n d l i t t l e v a lu e in th e s u b je c t anyway. S in ce i t s c h i e f f u n c tio n h as a p p e a re d t o be t h a t o f th ro w in g a b s t r a c t and e m b a rra ssin g o b s t a c l e s in th e way o f t h e i r p la n s f o r s o e i a l a c t i o n , | an a l t e r n a t e e x p la n a tio n may be found i n t h a t s tr a n g e \ d i v i s i o n o f l a b o r now e x i s t i n g in th e te a c h in g o f i econom ics w hereby one g ro u p r e p r e s e n ts a m a ste ry o f ) th e o r y and a n o th e r a m a s te ry o f s p e c i a l i z e d d e s c r i p t i v e ! s u b je c t m a t t e r . 1© j P o p u la r View The m ost p o p u la r v ie w p o in t among th e g e n e r a l p u b lic , l a b o r l e a d e r s , th e b u s in e s s w o rld , and some r e c e n t econo m is ts i s t h a t a l a r g e f r a c t i o n o f th e t a x i s p a s se d on to th e consum er in th e form o f h ig h e r p r i c e s , ^ w ith th e o th e r f a c t o r s o f p r o d u c tio n h a v in g to a b so rb some o f th e b u rd e n . One r e c e n t w r i t e r co n c lu d e s t h a t in th e c a se of m o n o p o lis t i c c o m p e titio n th e p a y r o l l t a x r e s t s m a in ly on th e consum er, though p a r t o f th e burden i s a b so rb e d by th e 1 ft em ployer th ro u g h a r e d u c tio n in n e t incom e. At v a r ia n c e w ith t h i s ap p ro ach i s th e b e l i e f t h a t b o th l a b o r and th e em ployer m ust b e a r t h a t p a r t o f th e ■ ^ R u ssell B onder, "The P ro b a b le I n c id e n c e o f S o c ia l S e c u r ity T a x e s, n American Economic R eview , 2 6 :^ 6 3 , S eptem ber, 1936. •^S ee f o r exam ple, Sam A rnold, ’ ’Forw ard S h i f t i n g of a P a y r o ll Tax U nder M o n o p o lis tic C o m p e titio n ,M Q u a r te r ly J o u r n a l o f E conom ics, 6 1 ;2 8 3 -2 8 ^ , F e b ru a ry , 19^7. 18 H a r r i s s , l o c . c i t . burd en n o t s h i f t e d to th e c o n s u m e r .^ P r o f e s s o r S h u ltz b e l i e v e s t h a t l a b o r a lo n e b e a r s t h a t p o r t i o n of th e ta x w hich i s n o t s h i f t e d f o r w a r d .2® P ra g m a tie View The p ra g m a tic v ie w p o in t co n c lu d es t h a t th e ; . . . in c id e n c e o f th e s e ta x e s ca n n o t be p r e d i c t e d w ith any g r e a t d e g re e of a s s u ra n c e . On th e w h o le, th e I s a f e c o n c lu s io n would seem to be t h a t i t i s d iv id e d among em p lo y ers, la b o r , and consum er; b u t in what p r o p o r tio n c a n n o t d e f i n i t e l y be s a i d . 21 P r o f e s s o r W itte goes one s te p f u r t h e r when he I i d e c la r e s t h a t j I Very p r o b a b ly th e u lti m a t e in c id e n c e o f ta x e s o f , t h i s k in d w i l l v a ry in d i f f e r e n t s i t u a t i o n s and f o r • d i f f e r e n t com m odities. The c o u r ts h av e alw ays r e f u s e d i t o ta k e c o g n iz a n c e o f th e p o s s i b le s h i f t i n g o f t a x e s , J arid t h i s seems to be th e so u n d e st r u l e in th e d e v e lo p ment o f g o v ern m e n tal p o l i c i e s w here th e u ltim a te j in c id e n c e o f t h e ta x e s i s o b scu re o r d e b a ta b le , . . . i I A p p a re n tly P r o f e s s o r B urns changed h e r mind betw een th e American Economic Review a r t i c l e w r i t t e n in 1936 (se e f o o tn o te 19) and th e l a t e s t e d i t i o n o f h e r te x tb o o k . She ^ E v e l i n e M. B urns, " F in a n c ia l A sp e c ts o f th e S o c ia l S e c u r ity A c t," A m erican Economic R eview , 2 6 :1 2 , M arch, 1936. 20W llliam J . S h u ltz , "Economic E f f e c t s o f P a y r o ll T a x e s," T a x e s, 2 2 :2 , Ja n u a ry , 19****. H arold M. G-roves, F in a n c in g Government ( f o u r t h e d i t i o n ; Mew Xork: Henry H o lt and Company, 195**)» P* 1*10. ^ E d w ln E. W itte , "Old Age S e c u r ity in th e S o c ia l S e c u r ity A c t," The J o u rn a l o f P o l i t i c a l Economy, U>5:Z6, F e b ru a ry , 1937- i s now o f th e o p in io n t h a t i t i s p ro b a b le t h a t a m a jo r p a r t j o f t h e e m p lo y e r's ta x w i l l be s h i f t e d . . . . b u t p r e c i s e l y how f a r I t i s s h i f t e d to consum-I e r a in g e n e r a l by an I n c r e a s e in p r i c e , and h6w f a r to j w o rk e rs in th e form o f a f a i l u r e to g iv e wage in c r e a s e s ! t h a t would o th e rw is e o c c u r, and how f a r a b so rb e d by I b u s in e s s th ro u g h r e d u c tio n in p r o f i t s , i s s t i l l a j m a t t e r of s p e c u l a t i o n .23 j Shifting to Non-Labor Factore J In th e m ost com prehensive s tu d y on th e In c id e n c e of ! { p a y ro ll ta x e s so f a r co n d u c te d , Seymour H a r r is c o n c lu d e s i ! j t h a t i t i s p o s s i b l e f o r p o r t i o n s o f th e ta x to be b o rn e by f a c t o r s o f p ro d u c tio n o th e r th a n la b o r th ro u g h backw ard ! | s h i f t i n g . 2^ | : i III. SHIFTING THE EMPLOYER'S PAYROLL TAX 1 The d is c re p a n c y in v ie w p o in ts among some o f th e l e a d e r s o f th e econom ic p r o f e s s io n i s a d i r e c t r e s u l t o f v a r y in g assu m p tio n s c o n c e rn in g th e f u n c tio n in g o f a c a p i t a l i s t i c economic system such a s t h a t fo u n d in th e H n ite d S t a t e s . I t i s th e p u rp o se o f t h i s s e c tio n to a tte m p t a r e c o n c i l i a t i o n among th e d i f f e r i n g o p in io n s in o r d e r to 23 E v e lin e M. B urns, The American S o c ia l S e c u r ity System (1951 e d i t i o n ; B oston: Houghton M i f f l i n Company, 1951 r,” p . U 9 . 2^Seymour E. Harris, Economics of Social Security (New York: McGraw-Hill Book Company, 1 9 ^ 1)" "pp. ^36-539♦ shed l i g h t on t h i s im p o rta n t problem . S h i f t i n g Backward to L abor j The th e o ry f o r lo n g -ru n s h i f t i n g i s b ased on m a rg i- I n a l p r o d u c t i v i t y a n a ly s e s . j i P r o f e s s o r H a ll a c c u r a t e l y and c l e a r l y s t a t e s t h e 1 i a ssu m p tio n s u n d e r ly in g h i s view t h a t l a b o r b e a rs th e ta x th ro u g h backward s h i f t i n g . 2^ F i r s t , t h e r e w i l l be no in c r e a s e in th e t o t a l demand f o r goods and s e r v ic e s by j re a s o n o f a d o p tio n of p a y r o l l ta x e s . T h is assu m p tio n i s b a se d on th e f a c t t h h t 'a t a x w ould not a f f e c t th e t r a n s a c t i o n e q u a tio n of exchange (th e q u a n t i t y o f money o r c r e d i t and I | i t s c i r c u l a t i o n ) . Second, th e su p p ly o f goods and s e r v i c e s w i l l n o t be^ d e c r e a s e d . As P r o f e s s o r Brown has p o in te d o u t in r e f e r r i n g to a g e n e r a l s a l e s ta x , Such a g e n e r a l ta x can n o t red u ce th e o u tp u t o f goods u n le s s w o rk e rs a r e w i l l i n g to rem ain i d l e — f o r t h e r e i s no u n ta x e d l i n e to go i n t o — o r u n le s s owners o f c a p i t a l o r la n d a r# w i l l i n g to l e t t h e i r c a p i t a l o r la n d l i e i d l e and to r e c e iv e no income a t a l l from i t . S u re ly , m ost men w ould, in tim e , a c c e p t wages v e ry c o n s id e r a b ly | lo w e r r a t h e r th a n be c h r o n i c a l l y i d l e , and m ost owners o f c a p i t a l w ould r a t h e r have v e ry g r e a t l y re d u c e d r e t u r n s on t h e i r c a p i t a l r a t h e r th a n l e t t h e i r c a p i t a l d e p r e d a t e u n u se d and g e t no r e t u r n s a t a l l . 26 James K. H a ll, " In c id e n c e o f F e d e r a l S o c ia l S e c u r ity Pay R o ll T ax es," Q u a r te r ly J o u r n a l o f E conom ics, , November, 1938. 2^H arry Gunnison Brown, "The In c id e n c e o f a G en eral O utput o r a G-eneral S a le s Tax, " The J o u r n a l o f P o l i t i c a l Economy, Wl',2.5h, A p r i l , 1939-__________ ______________ ___ 81 I i One means by w hich w o rk e rs c o u ld hope to e sc a p e th e j s h i f t o f ta x e s t o them would be to seek employment i n non- ' i j ta x e d i n d u s t r i e s . However, b e c a u se o n ly h ig h ly s p e c i a l i z e d j ! p r o f e s s i o n s a r e now exempt from th e t a x , t h i s i s o n ly a rem ote p o s s i b i l i t y . The t h i r d assum ption i s t h a t v a r i a t i o n s in l a b o r ’ s s ta n d a r d of l i v i n g w i l l n o t a f f e c t th e number o f w o rk e rs , s in c e la b o r i s above th e s u b s is te n c e l e v e l , and th e c l a s s i c a l th e o r y w i l l th e r e f o r e n o t a p p ly . A ls o , a s P r o f e s s o r jVon M ering h as p o in te d o u t: “A S o c ia l S e c u r ity ta x i s i i a c t u a l l y a com pulsory in s u r a n c e premium in fa v o r of th e !w o rk e rs .H T h e re fo re , " I t i s c o n c e iv a b le t h a t th e ’ tax* i s ; c o n s id e r e d by l a b o r to be a b e n e f i t w hich im proves t h e i r j s ta n d a r d o f l i v i n g by th e amount o f th e t a x . ”27 j The f o u r th assu m p tio n i s t h a t w ages c o n s t i t u t e th e d i s t r i b u t i v e s h a re most v u ln e r a b le to r e s i s t i n g a s h i f t o f th e t a x . Here H all r e f e r s to M a r s h a ll’ s a n a ly s is on th e d is a d v a n ta g e s o f la b o r in b a r g a in in g . M a rs h a ll p o in te d out t h a t Labour i s o f te n s o ld u n d er s p e c i a l d is a d v a n ta g e s , a r i s i n g from t h e c l o s e ly co n n e c te d group o f f a c t s t h a t l a b o u r power i s 'p e r i s h a b l e , ' t h a t th e s e l l e r s o f i t a r e commonly p o o r and have no r e s e r v e fu n d , and t h a t th e y cannot e a s i l y w ith h o ld i t from t h e m a rk e t.28 27 Von M ering, o p . c l t . , p . 193* A lfre d M a r s h a ll, P r i n c i p l e s o f Economics ( e ig h th e d i t i o n ; New York: The M acm illan Company, 1 9 2 0 ), p . 5b7. ___________________________________________________________________________ T his d is a d v a n ta g e i s c u m u la tiv e sin c e lo w e re d wages lo w e r e f f i c i e n c y and t h e r e f o r e w ages. The l a s t assu m p tio n i s t h a t th e demand f o r l a b o r w i l l be, d e c re a s e d in re sp o n se to th e e x t r a c o s t p la c e d upon managem ent. Thus l a b o r must ta k e a wage r e d u c tio n I n o rd e r to m a in ta in employment a t th e p re v io u s l e v e l . T ay lo r p o i n t s o u t t h a t t h e r e w ould n o t be th e p s y c h o lo g ic a l im p etu s to r e s i s t s h i f t i n g on th e p a r t o f th e i i w o rk e r s in c e he lo o k s upon th e e m p lo y e r's t a x as a f o rc e d ; s a v i n g .30 ■ ! 'S h i f t i n g a M ajor P a r t o f th e Burden Forw ard to th e Consumer I i I 1 j Those who b e lie v e t h a t a m a jo r p a r t o f th e burd en i s s h i f t e d fo rw ard t o th e consum er have co n ten d ed t h a t th e ! i f i r s t f o u r a ssu m p tio n s m e n tio n e d in th e p re v io u s s e c tio n I i a r e f a l s e . j P r o p o s itio n s two, t h r e e , and f o u r , f o r exam ple, a r e b a se d on an I n e l a s t i c su p p ly curve f o r l a b o r . However, a good c a se can be made f o r th e p r o p o s itio n t h a t th e su p p ly c u rv e f o r la b o r i s p r e s e n t l y e l a s t i c . F o r exam ple, s tr o n g l a b o r u n io n s have c o n s i s t e n t l y re p u ls e d a tte m p ts to re d u c e wages d u rin g d e p r e s s io n s when l a b o r 's m a rg in a l rev en u e p r o d u c t i v i t y was low . From 8 8 .6 c e n ts p e r h o u r in 1929 2^ I b l d . . p . 5^9. 30 T a y lo r, l o c . o i t . m a n u fa c tu rin g r e a l wages (a v e ra g e h o u rly e a rn in g s d iv id e d J by th e consum er p r i c e index) in c re a s e d t o 9 1•7 c e n ts in ! 1 9 3 3 During th e same y e a rs unemployment among c i v i l i a n la b o r fo rc e s in c r e a s e d from 3*2 p e r c e n t to 2 ^ .9 per* c e n t .32 j 1 Unions d e s i r e to k eep wages up d u r in g r e c e s s io n s j i even tho u g h d o in g so le a d s to unem ploym ent. T his u n io n 1 p r e f e r e n c e can be l o g i c a l l y e x p la in e d on th e prem ise t h a t j t "wage p o lic y i s d e te rm in e d by th e em ployed r a t h e r th a n by ! i th e unem ployed. A re d u c tio n a p p e a rs to be a com plete lo s s to th e f u l l y em ployed w o rk e r. "33 One m ust remember t h a t l a y o f f s a r e o f te n b a se d on s e n i o r i t y , and a s a r u l e th e ;o ld e r w o rk ers c o n t r o l th e u n io n s . 1 1 i The b a s ic th e o r y . — Assuming an e l a s t i c su p p ly curve! 1 f o r l a b o r , th e m a rg in a l p ro d u c e rs in c o m p e titiv e l i n e s o f i p r o d u c tio n a r e f o r c e d in to b a n k ru p tc y th ro u g h th e le v y o f th e p a y r o l l t a x . T his i s p a r t i c u l a r l y t r u e sin c e i t i s j re a s o n a b le to assume t h a t p ro d u c e rs a r e l e s s m echanized th a n t h e i r in f ra m a r g in a l c o m p e tito rs . Thus the burden of 31 Committee S t a f f o f th e J o i n t Com mittee on th e Economic R eport and th e O ffic e o f S t a t i s t i c a l S ta n d a rd s , Bureau o f th e B udget, 1955 H i a t o r l e a l and D e s c rip tiv e Supplem ent t o Economic I n d i c a t o r s , 8Ath C ongress, 1 s t s e s s io n (W ashington: Government P r i n t i n g O ff ic e , 1955)» p . 29 • 32 I b i d . , p . 23. 33John T. Dunlop, Wage D e te rm in a tio n Under T rade U nions (seco n d e d i t i o n ; New York: A ugustus M. K e lle y , 1 9 5 0 ), p . 69. Bk th e t a x on a p e r ~ u n it- o f - o u tp u t b a s i s w ould be h ig h e r f o r th e m a rg in a l c o m p e tito r and w ould t h e r e f o r e f o r c e him out of b u s in e s s . In n o n -c o m p e titiv e i n d u s t r i e s th e a v e ra g e em ployer can c u t b ack p r o d u c tio n and th u s e a u se unem ploy m ent. The d e c re a s e in th e su p p ly sc h e d u le o f th e n a t i o n ’ s goods a llo w s th e e n tr e p r e n e u r s to r a i s e p r i c e s and th u s s h i f t th e ta x o n to th e consum er, assum ing th a t demand re m a in s c o n s ta n t. However, th e em ployer may a ls o in tr o d u c e new m achin e ry , c a u s in g unem ploym ent, in o r d e r t o c u t c o s t t o th e l e v e l a t w hich c o s t e x i s t e d b e f o r e th e i n t r o d u c t i o n o f th e p a y r o l l ta x . N e v e r th e le s s , th e ta x w ould n o t le a d to j lin c re a s e d p r i c e s in th e s h o r t run i f th e m a ch in e ry lo w e rs i th e c o s t of p ro d u c tio n s u f f i c i e n t l y to e q u a l th e ta x b u r d e n . P r o f e s s o r S h u l t z , o n th e o th e r h an d , h as demon s t r a t e d how s h i f t i n g ta k e s p la c e in th e lo n g run i f c a p i t a l i s s u b s t i t u t e d f o r l a b o r . A ccording t o S h u ltz , an in c r e a s e in p r i c e s w ith some r e d u c tio n in la b o r w ould r e s u l t . The im m ediate e f f e c t , how ever, w ould be a d ro p in employment (and some d e c re a s e in wages s in c e th e s u p p ly c u rv e f o r la b o r i s n o t p e r f e c t l y e l a s t i c ) to cover th e in c r e a s e d c o s t of la b o r due to th e ta x . A ccording to th e law o f d im in is h in g m a rg in a l p r o d u c t i v i t y , th e m a rg in a l 3^ S h u ltz, o p . c l t .. pp. 2-5- [p ro d u c tiv ity o f c a p i t a l d e c lin e s a s i n c r e a s i n g q u a n t i t i e s a r e a p p l ie d . At th e same tim e th e c o s t o f o b ta in in g c a p i t a l i s in c r e a s e d due to th e new ly em erged demand. The in c r e a s e d demand f o r c a p i t a l would s ti m u la te p ro d u c tio n an d , in tu r n , w ould le a d t o employment i n th e c a p i t a l - p ro d u c in g i n d u s t r i e s . A lso , l a b o r ’ s m a rg in a l p r o d u c t i v i t y cu rv e i s r a i s e d a s l a b o r i s combined w ith l a r g e r p ro p o r t i o n s o f c a p i t a l . The in c r e a s e d f a c t o r paym ents in c r e a s e demand and th u s e n a b le th e p ro d u c e r to r a i s e p r i c e s . I n c r e a s e d p r i c e s f u r t h e r I n c r e a s e th e m a rg in a l p r o d u c t i v i t y o f a l l th e f a c t o r s . I f th e in c r e a s e d m a rg in a l p r o d u c t i v i t y of la b o r does n o t co m p letely com pensate f o r th e ta x , some unemployment w i l l s t i l l re m a in . To th e e x te n t th a t l a b o r ’ s su p p ly curve i s n o t c o m p le te ly e l a s t i c , some r e d u c tio n in jwages a ls o ta k e s p l a c e . 35 B u sin e ss c y c le and m o n etary c o m p lic a tio n s . — C onsid e r a t i o n of th e p o s s i b i l i t y o f s h i f t i n g t h e p a y r o ll t a x to th e consumer assum es t h a t th e r e i s s u f f i c i e n t m onetary e l a s t i c i t y to s u p p o rt th e p r i c e i n c r e a s e . I t must be remembered t h a t P r o f e s s o r H a ll had s t a t e d a s h i s f i r s t assu m p tio n t h a t a p a y r o ll t a x does n o t a f f e c t th e t r a n s a c t i o n s e q u a tio n . How i t seems l o g i c a l t h a t th e a b i l i t y o f th e p ro d u c e r to p a s s th e ta x fo rw ard i s a s s o c i a t e d w ith th e " F o r a g r a p h ic p r e s e n t a t i o n o f P r o f e s s o r S h u l t z 1 th e o r y see F ig . 1 . 86 F i g u r e 1 G r a p h i c A n a l y s i s o f S h i f t i n g P a y r o l l T ax MC2 M P E m p lo y m e n t M Pi a M a r g i n a l P r o d u c t i v i t y o f L a b o r MP2 * M a r g i n a l P r o d u c t l v i t y o f L a b o r D ue t o R e e o m b ln a tlo n o f F a c t o r s P l u s P r i c e I n c r e a s e MP3 ■ M a r g i n a l P r o d u c t i v i t y o f L a b o r N e c e s s a r y , A s s u m in g a n A b s e n c e o f U n e m p lo y m e n t MCi ■ M a r g i n a l C o a t b e f o r e P a y r o l l T ax MC2 - M a r g i n a l C o s t a f t e r P a y r o l l T ax E i - O r i g i n a l E m p lo y m en t E2 ■ E m p lo y m e n t a f t e r O r i g i n a l A d ju s tm e n t E3 - F i n a l E m p lo y m en t A s s u m in g 8ome U n em p lo y m en t C i • Wage R a te a n d Wage C o s t b e f o r e T ax C2 • Wage C o s t a f t e r Tax C3 - F i n a l W age C o s t A s s u m in g Some U n e m p lo y m e n t Cjj. » F i n a l W age C o s t A s s u m in g No U n e m p lo y m e n t SOURCE: W. J . S h u l t * , "E c o n o m ic E f f e c t s o f P a y r o l l T a x e s , " T a x e s . 2 2 : 5 , J a n u a r y , 19^ - sta g e o f the b u sin e ss c y c le . During an in f la t io n a r y i iperio& , v e l o c i t y may be in c r e a s e d a s p r o d u c e rs draw upon i i d l e b a la n c e s to f in a n c e th e I n c r e a s e d wage and c a p i t a l b i l l . Then, to o , d u rin g p e r io d s o f b u s in e s s optim ism th e p ro d u c e rs may, th ro u g h b o rro w in g from th e b an k in g sy stem , in c r e a s e b o th th e su p p ly o f bank c r e d i t an d i t s c i r c u l a t i o n i D uring p r o s p e r i t y t h e r e i s no problem o f d e c re a s e d demand due to th e unemployment c r e a te d b y th e t a x . W orkers who a r e l a i d o f f t h e i r jo b s a r e l i k e l y t o th in k th e l a y - o f f i s f o r b u t a, s h o r t p e r io d o f tim e and to m a in ta in t h e i r consum ption a lm o st I n t a c t th ro u g h th e u se o f p a s t s a v in g s . ‘ A lso , unemployment com pensation i s a v a i l a b l e to many ; i (d is p la c e d w o rk e rs . Then, to o , th e governm ent p u ts th e money ta k e n th ro u g h ta x e s b a c k in to c i r c u l a t i o n . F u r th e r m ore, th e r e a r e I n c r e a s e d paym ents t o c a p i t a l and th e s t i m u la tio n to th e c a p ita l- p r o d u c i n g i n d u s t r i e s from th e in c r e a s e d demand f o r c a p i t a l . T h e re fo re , i t may be p o s s i b l e to s ti m u la te th e e n t i r e economy th ro u g h th e a c c e l e r a t i o n e f f e c t . Even i f s u f f i c i e n t demand and m o n e tary su p p ly a r e n o t fo rth c o m in g to en a b le th e e n tr e p r e n e u r to r a i s e p r i c e s , p h y s ic a l unemployment may n o t r e s u l t . I f u n f i l l e d v a c a n c i e s e x i s t in l a b o r m a rk e ts , a r i s e in w ages w i l l re d u c e th e demand f o r la b o r w ith o u t a f f e c t i n g th e su p p ly . D uring d e p r e s s io n s m ost of th e f a c t o r s m en tio n ed above a r e p r e s e n t . However, b o th b u s in e s s and consum er p sy c h o lo g y a r e n e g a tiv e a t t h a t tim e and th e b u s in e s s man i s u n l i k e l y to draw on i d l e b a la n c e s t o f in a n c e in c r e a s e d c o s t s . I t i s l o g i c a l to assume th a t a s u b s t a n t i a l p a r t o f th e t a x i s b o rn e by la b o r i n th e f o r a of unemployment (u n d er th e assu m p tio n of an e l a s t i c su p p ly cu rv e of l a b o r ) .! » \ I f su c h c o n d itio n s e x i s te d o v e r a lo n g p e r io d of tim e , th e j t su p p ly curve o f l a b o r w ould u n d o u b te d ly become i n e l a s t i c , ! and e v e n tu a lly t h e w orkers w ould of n e c e s s i t y be w i l l i n g to* work a t red u ced r a t e s . I T h e re fo re , i t may be l o g i c a l t o co n c lu d e t h a t a j [ r e l a t i v e l y l a r g e r amount o f s h i f t i n g to t h e consumer w i l l j ta k e p la c e d u rin g an i n f l a t i o n a r y p e r io d th a n d u rin g a I d e f l a t i o n a r y o n e . Even th e su p p ly cu rv e o f a s tr o n g u n io n j i s more l i k e l y to be somewhat i n e l a s t i c d u r in g a p e r io d o f I h ig h unem ploym ent. Yet o t h e r f a c t o r s te n d to i n t e r v e n e . The governm entj i s l i k e l y to p a r t i c i p a t e in d e f i c i t f in a n c in g as i t d id in th e l a s t d e p r e s s io n . A lso , d is b u rs e m e n ts from th e Fund a r e h e a v ie r th a n r e c e i p t s d u rin g th e l a t e r s ta g e s of th e p ro g ram . T h e re f o re , even d u r in g d e p r e s s io n s , th e t a x may be s h i f t e d to th e consum er (p ro b a b ly in th e f o r a of s t l c k i - n e a s o f p r i c e s ) . A d m in is tr a tiv e ly f ix e d p r i c e s . — A nother f a c t o r w hich le a d s one to b e l ie v e a s u b s t a n t i a l p o r t i o n o f th e ta x i s s h i f t e d to th e consum er, a t l e a s t In th e s h o rt r u n , i s t h a t many p r i c e s a r e a d m i n i s t r a t i v e ly f i x e d e i t h e r by q u a s i-g o v e rn m e n ta l b o a rd s o r by o l i g o p o l i s t s . O l ig o p o li s ts commonly f i x t h e i r p r i c e s (o r th e governm ent f i x e s them) . . . on th e b a s i s of e s tim a te s o f c o s ts a t v a r io u s l e v e l s o f o u tp u t and p ro b a b le demand a t s p e c if ie d p r i c e s . . . . Though th e y a r e c l o s e l y I d e n t i f i e d w ith l a b o r c o s t s , th e r e i s l i t t l e re a so n to b e lie v e t h a t in b u d g e t and p r i c e d is c u s s io n s th e s e ta x e s a re p la c e d in a c a te g o ry e n t i r e l y s e p a r a te from o t h e r paym ents to go v ern m en t.36 Coat d i f f e r e n t i a l s . — In a d d i t i o n , th e rem oval of a n o th e r a ssu m p tio n , nam ely, t h a t a l l i n d u s t r i e s u t i l i z e th e same p r o p o r tio n o f la b o r to o th e r f a c t o r s , le a d s one t o th e c o n c lu s io n t h a t p ro d u c tio n w i l l be r e s t r i c t e d in c e r t a i n l i n e s , th u s a llo w in g p r i c e i n c r e a s e s . O b v io u sly , th o s e i n d u s t r i e s w ith a g r e a t e r p r o p o r ti o n a te l a b o r c o s t w i l l be f o rc e d t o r a i s e p r i c e s h ig h e r th a n th e o t h e r s , to c u t back p r o d u c tio n more d r a s t i c a l l y , o r to a llo w more m a rg in a l firm s, to go o u t o f b u s in e s s . In th e lo n g ru n a r e l a t i v e c o n t r a c tio n o f p ro d u c tio n m ust ta k e p l a c e . T his c o n t r a c t i o n of p r o d u c tio n e n a b le s th e e n tr e p r e n e u r s to r a i s e p r i c e s . The E m p iric a l Evidence The B ro o k in g s I n s t i t u t i o n s e n t a q u e s tio n n a i r e to one th o u sa n d m a n u fa c tu rin g com panies in 19^9♦ These m a n u fa c tu re rs w ere asked i f th e y f e l t t h a t th e em p lo y ers' 3 ^Lewia H. Kimmel, Taxes and Economic I n c e n tiv e s (W ashington: The B rookings I n s t i t u t i o n , 1 9 5 0 ), p . 22. 90 | e x c is e p a y r o l l t a x had been re c o v e re d th ro u g h h ig h e r p r i c e s j betw een 1946-19^8. ! Of th e 190 com panies r e p ly in g to th e q u e s tio n , 130 o r s l i g h t l y o v er tw o - t h i r d s , w ere o f th e o p in io n t h a t th e y had re c o u p e d th e e m p lo y e r's e x c is e s th ro u g h t h e p r i c i n g p r o c e s s . 37 I f th e s e f i g u r e s a r e v a l i d , th e n tw o - th ir d s o f th e in c id e n c e i s p a s s e d on to th e consum ers d u r in g p ro s p e ro u s y e a r s . Wage e a r n e r s ' sh a re o f th e t o t a l c o n su m p tio n . — I f th e t a x i s s h i f t e d fo rw ard to th e consum er, wage e a r n e r s and s a l a r i e d p e o p le w i l l a c c o u n t ro u g h ly f o r t w o - th ir d s of th e In c id e n c e s in c e t h a t i s th e p r o p o r tio n o f n a t i o n a l income g o in g to th e s e f a c t o r s . From 1929 th ro u g h 1953 1 |com pensation o f em ployees v a r i e d betw een 5 8 .2 p e r c e n t and 1 ! 7 3 .6 p e r c e n t o f n a t i o n a l i n c o m e . 38 Over t h i s tw e n ty - f iv e y e a r p e r io d th e m edian p r o p o r tio n o f n a t i o n a l Income 1 r e c e iv e d by em ployees was 65 p e r c e n t . T h is p r o p o r tio n 1 was r e c e iv e d by w o rk e rs in 1 9 ^6 , 19^7* and 19^9* Those who d e r iv e t h e i r Income from b u s in e s s p r o f i t s ( c o r p o r a te o r in c o rp o r a te d ) r e c e iv e d on th e a v e ra g e 29 p e r c e n t o f n a t i o n a l incom e. That le a v e s 6 p e r c e n t to be 37I b l d . , p . 181 3 8 u n ite d S t a t e s D epartm ent o f Commerce, O ffic e of B u s in e s s Econom ics, n a t i o n a l Incom e, 195^ e d i t i o n , a Supplem ent to th e Survey o f C u rre n t B u s in e ss (W ashington: Government P r i n t i n g O f f ic e , 1 9 5 ^ ), p p . 2 2 -2 3 . 91 ; d i s t r i b u t e d betw een r e n t and i n t e r e s t . f I P a r t i a l In c id e n c e on th e Em ployer Those who b e lie v e t h a t th e em ployer f i n a l l y b e a r s a p o r tio n o f th e t a x r e l y on a t l e a s t one o f th e fo llo w in g a ssu m p tio n s: t F i r s t , t h a t th e low t a x r a t e p la c e d on th e em ployer w i l l not. s ti m u la te s h i f t i n g . Second, t h a t c o n t r a c ts a t s e t p r i c e s w ith th e governm ent o r la b o r p r e v e n t a c t i v e ' s h i f t in g . T h ird , t h a t a la r g e segm ent o f i n d u s t r y i s c h a r a c t e r iz e d by o lig o p o ly o r m o n o p o lis tic c o m p e titio n . F o u rth , t h a t w o rk ers e a rn l e s s th a n t h e i r m a rg in a l p r o d u c t i v i t y . I t i s , g e n e r a l l y » a g re e d t h a t a t a h ig h t a x r a t e management has a g r e a t e r i n c e n ti v e to s h i f t th e t a x . However, a s P r o f e s s o r A nderson p o in ts o u t ( i f a l l p a y r o l l ta x e s a r e c o n s i d e r e d ) , even a t th e c u r r e n t r a t e th e t a x " r e p r e s e n ts a r e l a t i v e l y h ig h f ix e d c o s t t h a t th e em ployer w i l l a tte m p t to s h i f t i f a t a l l p o s s i b l e . "39 The argum ent b ased on s e t c o n t r a c t s a p p lie s t o th e s h o rt run o n ly . As soon a s th e c u r r e n t c o n t r a c t s e x p i r e , th e em ployer w i l l a tte m p t to s h i f t th e t a x . M o n o p o lis tic c o m p e titio n and o lig o p o ly p r e s e n t an i n t e r e s t i n g p o s s i b i l i t y o f t a x a b s o r p tio n . I f each o f th e firm s i s a t l e s s th a n optimum s i z e , i t s u n i t c o s ts a r e in 39 Anderson, oj>. e l t ., p . ^71. e x c e s s o f th e minimum. As a r e s u l t i t can be assumed, t h a t th e m a rg in a l firm s w i l l go o u t of b u s in e s s . The i n f r a - m a rg in a l firm s may th e n in c r e a s e p ro d u c tio n a p p ro a c h in g th e optimum l e v e l , and p a r t o f th e t a x may be ab so rb e d in a r e d u c tio n of u n i t c o s t s . I f o u tp u t i s in e x c ess o f th e optimum and m a rg in a l firm s a r e n o t l i q u i d a t e d , th e n each I I p ro d u c e r by c u t t i n g back p r o d u c tio n may move to th e optimum and a b s o rb th e t a x In c o s t r e d u c t io n s . However, th e s e exam ples o f ta x tr a n s f o r m a tio n in to a more e f f i c i e n t c o s t i p o s i t i o n assume t h a t c o m p e tito rs a r e unaw are o f th e t r u e ! n a t u r e o f th e m a rk e t. In r e a l i t y , th e s e assu m p tio n s a p p ly t o o n ly a v e ry sm a ll segm ent o f th e e n t i r e b u s in e s s j ! jcom m unity. j A nother p o s s i b i l i t y i s t h a t In some i n d u s t r i e s th e 1 i m a rg in a l firm s I n c r e a s e t h e i r e f f i c i e n c y , a f t e r th e t a x i s In tro d u c e d , by r e a r r a n g in g t h e i r f s n t o r s o f p r o d u c tio n . Economic e x p l o i t a t i o n o f la b o r (p a y in g l a b o r l e s s th a n I t s m a rg in a l p r o d u c t i v i t y ) may c h a r a c t e r i z e c e r t a i n segm ents of Am erican i n d u s t r y . E x p lo it a tio n u s u a lly o c c u rs w here th e su p p ly cu rv e f o r l a b o r i s i n e l a s t i c b ec au se o f im p e rf e c t know ledge, g e o g ra p h ic a l im m o b ility of l a b o r , and la c k o f b a r g a in in g s k i l l by l a b o r . ^ P o s s i b i l i t i e s o f e x p l o i t a t i o n a r e p a r t i c u l a r l y g r e a t i f th e in d u s tr y f a c e s ^®Clyde W illiam P h l l p s , O u tlin e o f Economics ( r e v i s e d e d itio n * Los A n g eles: U n iv e r s ity o f S o uthern C a l i f o r n i a , 1 9 ^ 8 ), pp. 9 9 -1 0 0 . _____ _____ .. 93 ; a k in k e d demand c u rv e f o r I t s p r o d u c ts , s in c e th e m a rg in a l i c o s t c u rv e may c u t th e m a rg in a l revenue c u rv e w ith in th e co m p an ies' d is c o n tin u o u s r a n g e . ^ E x p lo it a tio n may a l s o e x i s t in s p e c i a l i z e d s k i l l s w here th e w o rk e r f i n d s t h a t th e o p p o r tu n ity c o s t o f moving to o th e r o c c u p a tio n s i s low.**'2 iHowever, in th e lo n g ru n t h e r e i s a te n d e n c y f o r e x p l o i t s - , I i tl o n to toe e lim in a te d and f o r wages to e q u a l m a rg in a l I p r o d u c t i v i t y .* ^ The em ployer w i l l toe f o r c e d to atosorto a 1 i p a y r o l l t a x in c a s e s where e x p l o i t a t i o n o f l a b o r e x i s t s on ! i an I n d u s tr y l e v e l , under c o m p e titiv e c o n d i t i o n s , s in c e th e ; m a rg in a l firm s w i l l n o t toe f o r c e d out o f b u s in e s s . In th e c a se o f m o n o p o lis tic c o m p e titio n o r o lig o p o ly , on th e o th e r hand, th e em ployer c o u ld s t i l l cu t back p r o d u c tio n and th u s I n c r e a s e p r i c e s I n s te a d o f a b s o rb in g th e t a x . S h i f t i n g Back to R e n t, Normal P r o f i t s and I n t e r e s t P r o f e s s o r Seymour H a r r i s shows t h a t th e b u s in e s s man can s h i f t a p a r t o f th e b u rd en back in to r e n t , norm al p r o f i t s , and i n t e r e s t i f I t i s assumed t h a t th e su p p ly of c a p i t a l , la n d in u s e , and e n tr e p r e n e u r s h ip i s r e l a t i v e l y ^Gr. F. Bloom “A R e c o n s id e ra tio n of th e Theory o f E x p l o i t a t i o n , ” Q u a r te r ly J o u r n a l o f E conom ics, 55: ^ 1 3 - ^ 2 , May, 19^1. ^ A l b e r t L. M eyers, E lem ents o f Modern Economics ( f o u r t h e d i tio n ; New Xork: P r e n t i c e - H a l l , 1 9 5 b ), pp. 206- 207* ^ 3 ? h e lp s , op. c i t . , p . 98. .....................9b] f ix e d in th e s h o r t ru n . I f , a l s o , i t i s assumed t h a t i c a p i t a l i s a complement to ( i n s t e a d o f a s u b s t i t u t e f o r ) la b o r and t h a t t h e su p p ly o f la b o r i s e l a s t i c , th e n i t i s p o s s i b l e f o r l a b o r to p a s s on th e burden t o th e o t h e r f a c t o r s . ^ The c ru x o f th e argum ent i s t h a t a r e d u c tio n in ; l a b o r 's m a rg in a l p r o d u c t i v i t y w i l l a ls o d e c re a s e th e p r o d u c t i v i t y c u rv e s f o r com plem entary f a c t o r s . I f th e su p p ly cu rv e o f th e s e o t h e r f a c t o r s i s i n e l a s t i c , th e f a c t o r s w i l l rem ain in p r o d u c tio n a t d e c re a s e d com pensation r a t e s . The p o s s i b i l i t y o f s h i f t i n g th e t a x to c a p i t a l , I n t e r e s t , and p r o f i t s i s p a r t i c u l a r l y g r e a t i f th e s e f a c t o r s a r e r e c e i v i n g a q u a s i - r e n t (a te m p o ra ry s u r p lu s income b ec au se o f r e s t r i c t e d su p p ly in r e l a t i o n to dem and). The m a jo r d e f e c t in t h i s th e o ry i s t h a t th e rew ard s to two o f th e t h r e e f a c t o r s ( c a p i t a l and e n tr e p r e n e u r s h ip ) a r e e l a s t i c in th e lo n g r u n . ^ A lso, th e s e f a c t o r s a r e a s u b s t i t u t e f o r , a s w e ll a s a complement t o , la b o r . S h i f t i n g from O rg a n ize d t o U norganized L abor None of th e a u t h o r i t i e s m en tio n s th e p o s s i b i l i t y one s e c tio n o f th e l a b o r group may be f o r c e d to b e a r a ^ H a r r i s , o p . c l t . , p p . ^17-^20. b5i n famous a n a lo g y o f s to n e s , M a rsh a ll p o i n t s o u t t h a t I f th e su p p ly of s to n e s can be in c r e a s e d o v e r a p e r io d o f tim e p e o p le w i l l g a th e r them u n t i l th e p o i n t , " o r m argin a t w h ich th e p r o b a b le g a in o f so d o ing w ould in th e lo n g run J u s t rew ard th e o u tla y o f l a b o r and c a p i t a l I n v o lv e d .M M a r s h a ll, o p . c l t ., p . 418. 95 m a jo r p o r tio n o f th e t a x . However, t h i s i s a l o g i c a l l I p o s s i b i l i t y i f one assum es t h a t la b o r i s d iv id e d in to u n ion and n o n -u n io n g ro u p s and t h a t th e u n io n s have o rg a n iz e d a l l th e p ro d u c e rs w ith in an i n d u s t r y . The u n io n group te n d s to w ard an e l a s t i c su p p ly c u rv e and th e n o n -u n io n gro u p to w a rd an i n e l a s t i c one. As was p r e v io u s ly p o in te d o u t, i f an i n e l a s t i c su p p ly curve f o r la b o r i s assum ed, th e t a x In c id e n c e r e s t s on l a b o r . I f , on th e o t h e r h an d , an e l a s t i c su p p ly c u rv e i s assum ed, th e t a x i s l i k e l y t o be s h i f t e d fo rw ard t o th e consum er, w ith l a b o r b e a r in g some o f th e t a x in th e form o f re d u c e d wages and unem ploym ent. Now i f th e union la b o r m a rk et i s c h a r a c t e r i z e d by an e l a s t i c s u p p ly c u rv e , th e n th e unem ployed u n io n members w i l l , in th e lo n g ru n , move i n t o th e n o n -u n io n la b o r m a rk e t. T his w i l l in c r e a s e th e s u p p ly sc h e d u le o f n o n -u n io n l a b o r com peting in th e same m a rk e t and th u s f u r t h e r red u ce wages o f n o n -u n io n l a b o r . T h e re f o re , u n io n la b o r has s h i f t e d p a r t o f th e in c id e n c e t o n o n -u n io n l a b o r . The view t h a t u n o rg a n iz e d l a b o r b e a r s a g r e a t e r p r o p o r ti o n o f th e in c id e n c e i s s tr e n g th e n e d by th e f a c t t h a t o rg a n iz e d l a b o r r e a e t s a t a f a s t e r p a c e t o a p r i c e i n c r e a s e th a n does u n o rg a n iz e d la b o r . Then, to o , p r i c e i n c r e a s e s a r e a b u rd en on a l l l a b o r , w h ile wage r e d u c t io n s a r e a burden o n ly on th o s e whose wages a r e re d u c e d . Between Septem ber, 19^6, and S eptem ber, 1955, w o rk ers in 96 I n d u s t r i e s where u n io n s a r e s tr o n g , such a s th e s t e e l work e r s , in c r e a s e d t h e i r av e ra g e w eekly e a rn in g s 107 p e r c e n t. The a u to w o rk e rs in c re a s e d t h e i r s 82 p e r c e n t; th e m eat p a c k in g w o rk e rs , 12^ p e r c e n t; th e r a i l r o a d w o rk e rs , k-6 p e r c e n t; th e c o a l m in e rs , 57 p e r c e n t; and th e c o n s tr u c tio n w o rk e rs , 73 p e r c e n t. D aring the* same p e r i o d , in s e l e c t e d I n d u s t r i e s w here u n io n s a r e w eak, th e p e r c e n ta g e o f I n c r e a s e was a s fo llo w s : r e t a i l tr a d e w o rk e rs , 58 p e r c e n t; t e x t i l e m i l l w o rk e rs , 50 p e r c e n t; and la u n d r y w o rk e rs , Jk p e r c e n t . **6 T h e re fo re , i t i s a p p a re n t t h a t a f t e r an i n i t i a l p r i c e in c r e a s e o rg a n iz e d la b o r i s in a b e t t e r p o s i t i o n t o f o r c e wages up th a n i s u n o rg a n iz e d l a b o r . IY. CONCLUDING OBSERVATIONS I t seems l o g i c a l to co n c lu d e t h a t in th e lo n g run th e em ployees' c o n t r i b u t i o n r e s t s on l a b o r , and t h a t th e em ployers* c o n t r i b u t i o n i s s h i f t e d in l a r g e p a r t to th e consum er in th e f o r a o f a p r i c e in c r e a s e , ^ h e w o rk e r w i l l b e a r th e l a r g e s t p a r t of th e p r i c e i n c r e a s e . The r e s t o f th e t a x th e r e f o r e i s b orne by la b o r in th e f o r a o f re d u c e d wages o r unem ploym ent, though th e r e may be some s l i g h t s h i f t i n g to th e o t h e r f a c t o r s o f p r o d u c tio n , I n c lu d in g a b s o r p tio n by th e e n tr e p r e n e u r . Some ta x tr a n s f o r m a tio n ^ "W h a t th e AFL-CIO M erger M eans," U. S. News and World R e p o rt, 39:29, December 16, 1955* 97' w i l l a ls o ta k e p l a c e . i I A s i g n i f i c a n t p o in t i s t h a t u n o rg a n iz e d la b o r seems 1 i to b ea r a h ig h e r p ro p o r tio n o f th e in c id e n c e than doe3 o r g a n iz e d la b o r . In th e f i n a l a n a ly s is much depends on th e a t t i t u d e of l a b o r to w ard s th e program . Both o r g a n iz e d and unorgan iz e d l a b o r w i l l b e a r a l a r g e r p o r tio n of th e burden th ro u g h d i r e c t backward s h i f t i n g i f th e su p p ly c u rv e o f la b o r i s i n e l a s t i c . The su p p ly cu rv e may be i n e l a s t i c i f l a b o r c o n s id e r s th e e m p lo y e r's c o n t r ib u t io n a s a fo rc e d sa v in g s j by l a b o r . j i In th e s h o r t run th e em ployer w i l l b e a r th e l a r g e s t ! i p o r t i o n o f th e e m p lo y e r's p a y r o l l t a x . T his i s t r u e j b e c a u se th e t a x i s i n i t i a l l y p a id by him , and because c o n t r a c t s w ith consum ers and la b o r p re v e n t p r i c e in c r e a s e s and wage r e d u c t io n s . I f th e s u p p lie s o f la n d and c a p i t a l a r e r e l a t i v e l y f i x e d and th e su p p ly o f la b o r i s e l a s t i c , th e n i t i s p o s s i b l e t h a t in th e s h o r t ru n th e ta x can be s h i f t e d to th e s e f a c t o r s . However, e v e n tu a l ly , th ro u g h e u t-b a c k s in p r o d u c tio n c a u se d by m a rg in a l firm s r e t i r i n g from th e I n d u s tr y o r th ro u g h in c re a s e d f a c t o r paym ents due t o th e s u b s t i t u t i o n of c a p i t a l f o r l a b o r , a m a jo r i ty o f th e t a x w i l l be s h i f t e d to th e consum er. CHAPTER IV j ANALYSIS OF THE OLD AGE AND SURVIVORS' INSURANCE RESERVE i I t l a th e p u rp o se o f t h i s c h a p te r t o a n a ly z e th e | I » econom ic argum ents p r e s e n te d in d e fe n s e o f th e R eserve and ! In c r i t i c i s m o f I t In o r d e r t o d e te rm in e i t s r o le in t h e A m erican economy. ! /\ 7 The t r u e n a t u r e o f th e R eserve Fund h a s h een a - / s u b j e c t o f c o n tr o v e rs y e v e r s in c e th e p a s s a g e of th e S o c ia l S e c u r ity Act o f 1935* The b a s ic problem i s th e n e c e s s i t y o f d e v is in g a m ethod f o r h a n d lin g th e problem o f th e r i s i n g f u t u r e c o s t s I a s s o c i a t e d w ith th e b e n e f i t p r o v is io n s o f th e O ld Age and ! t S u r v iv o r s ' In s u ra n c e Program . j i I . FACTUAL BACKGROUND j 1 A l t e r n a t e F in a n c in g Methods At l e a s t t h r e e d i f f e r e n t m ethods o f f in a n c in g Old Age and S u r v iv o r s 1 In su ra n c e have been p ro p o se d d u rin g r e c e n t y e a r s .^ C u r r e n t- c o s t f i n a n c i n g . — Under t h i s system , -^For a m ore com plete a n a l y s i s o f th e th r e e m ethods of f in a n c in g se e : R obert M. B a l l , "What C o n trib u tio n R ate f o r Old-Age S u rv iv o r s ' In s u ra n c e ? " S o c ia l S e c u r ity B u l l e t i n , 12:3-9* J u l y , 19^9* 99 1 eommonly c a l l e d " p a y -a s -y o u -g o " f in a n c in g , th e R eserve t i w ould be e lim in a te d a l t o g e t h e r . Revenue w ould g r a d u a l ly be i n c r e a s e d 't o m eet in c r e a s e d o u tla y s , an d each y e a r 's b e n e f i t s w ould be f in a n c e d from ta x e s c o l l e c t e d d u rin g t h a t same y e a r . ! The b a s ic o b je c ti o n to t h i s system i s t h a t " th e ! I e v e n tu a l r a t e s w ould be ’to o h i g h , ' p a r t i c u l a r l y i f i t i s assum ed t h a t th e y sh o u ld be p a i d e n t i r e l y by em ployers and w o r k e r s ." 2 ^ kf A c tu a r ia l r e s e r v e . — Under t h i s system c o n t r ib u t io n re v e n u e s , p lu s th e i n t e r e s t e a rn e d on th e T ru st Fund, sh o u ld be s u f f i c i e n t to pay b e n e f i t s and a d m i n i s t r a t i v e ex p e n se s in l a t e r y e a rs when th e t o t a l o u tla y s w ould exceed; th e re v e n u e s c o l l e c t e d th ro u g h th e medium o f th e p a y r o l l t a x . The Fund w ould rem ain p e r p e t u a l l y i n e x i s te n c e . v The a c t u a r i a l R eserv e can be f in a n c e d in two d i f f e r e n t w ays. Under l e v e l premium f in a n c in g th e governm ent w ould c o l l e c t th e t a x a t a u n ifo rm r a t e from th e s t a r t . The t a x r a t e w ould be much h ig h e r d u rin g th e e a r l y y e a rs of th e program th a n th e o u tla y n e c e s s a r y to m eet b e n e f i t s . The b a s ic re a s o n why t h i s m ethod o f f in a n c in g was n o t ad o p te d in 1935 was th e c o n d itio n o f th e economy a t 2 Ida C. M errlam , S o c ia l S e c u r ity F in a n c in g (W ashington: F e d e r a l S e c u r ity Agency, S o c ia l S e c u r ity A d m in is tra tio n , D iv is io n o f R e sea rc h and S t a t i s t i c s , B ureau R eport No. 17, 1 9 5 2 ), p . 13^* 100 t h a t tim e . The members o f th e A d v iso ry Committee on S o c ia l i S e c u r ity w ere u n w illin g to p la c e on th e b u s in e s s community ' th e b u rd en of a d d i t i o n a l heavy ta x e s The s te p premium system would p r o v id e f o r a g r a d u - j ! a t e d p e r i o d i c in c r e a s e in th e ta x r a t e , a llo w in g lo w e r j r a t e s d u r in g th e e a r l y y e a rs of th e p ro g ram . j L ik e th e l e v e l premium sy stem , th e R eserve w ould be s e t up on an a c t u a r i a l b a s i s . As a r e s u l t , i n t e r e s t e a rn e d i on th e T ru st Fund w ould be p r o v id e d to make up th e d i f f e r ence betw een c o n t r i b u t i o n re v e n u e and b e n e f i t paym ents. C ontingency r e s e r v e . — A f te r th e i n i t i a l p e r io d of fu n d a c c u m u la tio n , th e c o n t r i b u t i o n r a t e s would be f i x e d so a s t o y i e l d y e a r l y re v e n u e s ro u g h ly e q u iv a le n t to th e b e n e f i t d is b u rs e m e n ts . W ith o u tla y s r i s i n g s t e a d i l y , i t w ould be n e c e s s a r y t o in c r e a s e rev en u e re q u ire m e n ts p e r i o d i c a l l y u n t i l th e m a t u r i t y o f th e sy stem . i The maximum l e v e l o f th e c o n tin g e n c y R eserve w ould ! be s e t by law . I f th e Fund c o n tin u e d to grow a f t e r t h i s l e v e l was re a c h e d , e i t h e r th e b e n e f i t s w ould be in c r e a s e d ; o r th e m onies w ould be u sed to pay g e n e r a l governm ent j i e x p e n d itu r e s ; o r th e ta x r a t e w ould be re d u c e d in o r d e r to k eep th e Fund a t th e l e g a l c o n tin g e n c y l e v e l . The R eserve w ould f in a n e e any s h o r t- r u n d e f i c i t s ^Edwin E. W itte , ‘ ‘Twenty Y ears of S o c ia l S e c u r i t y , ” S o c ia l S e c u r ity B u l l e t i n , 1 8 :1 5 , O cto b e r, 1955* o c c a s io n e d by e i t h e r an u n p re c e d e n te d demand f o r b e n e f i t s o r an u n u su a l d ro p in r e c e i p t s . A f te r a p e r io d o f R eserve i d e p le tio n i t w ould have t o be b u i l t up a g a in to th e t r e q u ir e d l e v e l . The P re s e n t System a Compromise C ongress, i n 1935* com prom ised among th e d i f f e r e n t p ro p o se d m ethods. An Old Age R eserve A ccount was e s ta b l i s h e d in th e U n ite d S ta te s T re a su ry to m eet b e n e f i t paym ents under th e S o c ia l S e c u r ity A ct. C ongress o r i g i n a l l y a d o p te d a s te p premium t a x sy ste m . I t a l s o a g re e d to a p p r o p r ia te th e n e c e s s a ry fu n d s to keep th e R e se rv e on an a c t u a r i a l b a s i s . ^ The law r e q u ir e d t h a t th e I R eserv e ea rn 3 p e r c e n t compounded y e a r l y . The S e c r e ta r y l o f th e T re a su ry was a u th o r iz e d to i n v e s t fu n d s in e x c e s s o f c u r r e n t b e n e f i t paym ents o n ly in I n t e r e s t - b e a r i n g o b l i g a t i o n s of th e U n ite d S t a t e s . -5 There i s re a s o n to b e l i e v e t h a t i f th e t a x rev en u e d id n o t p rove s u f f i c i e n t t o m eet f u t u r e l i a b i l i t i e s o f th e sy ste m , i t was in te n d e d t h a t th e Government w ould make up th e d i f f e r e n c e . ^ S in ce b e n e f i t ^ S o c ia l S e c u r ity B oard, S o c ia l S e c u r ity in A m erica (W ashington: Government P r i n t i n g O f f i c e , 1 9 3 7 / » P» 225* ^ S e c tio n 201, T i t l e I I , S o c ia l S e c u r ity Act Amend m ents o f 1939, P u b lic Law No. 379 (H.R. 6 6 3 5 ), 76th C o n g ress, 1 s t s e s s i o n , A ugust 1 0 , 1939, P» 3 . ^ I t i s n e c e s s a r y t o c a l l a t t e n t i o n once more to th e f a c t t h a t th e law e x p r e s s ly p ro v id e s f o r a R eserve s u f f i c i e n t to p ay th e s e b e n e f i t s when d u e , b ec au se th e Oniversity of Southern California LMMWB 1 0 2 paym ents w ere n o t t o commence u n t i l 19^2, and b e c a u se ta x j c o l l e c t i o n s w ere to exceed b e n e f i t paym ents f o r many y e a r s , ! a s u b s t a n t i a l R e serv e was to be ac cu m u late d . The 1939 Act s e t up an Ind ep en d en t T ru s t Fund u n d e r th e s u p e r v is io n o f th e S e c r e ta r y of th e T re a su ry , th e S e c r e ta r y o f L ab o r, and th e Chairman o f th e S o c ia l S e c u r ity B oard. The law s p e c i f i c a l l y s t a t e d t h a t a l l m onies c o l l e c t e d from Old Age and S u rv iv o rs* I n s u ra n c e ta x e s w ere t o be p la c e d i n t h i s T ru s t F u n d .? | | At t h a t tim e C ongress a ls o p u t th e R eserve on a j se m i-c o n tin g e n c y b a s i s . The re q u ire m e n t o f an a c t u a r i a l j ! ,c a l c u l a t i o n was a b o lis h e d . The p r o v is io n th a t th e Fund j e a rn 3 p e r c e n t I n t e r e s t on i t s r e s e r v e s was changed. j A f te r th e 1939 amendment th e Fund c o u ld e a rn o n ly up t o th e! i a v e ra g e r a t e o f i n t e r e s t on th e p u b lic d e b t . F u rth e rm o re , j I th e t a x r a t e was "fro z e n " by th e 1939 amendments and p r e v a i l i n g o p in io n i s t h a t t h e R eserve w ould c o n s is t o n ly o f th e d i f f e r e n c e between t a x revenue and e x p e n d itu re s f o r b e n e f i t s and a d m i n i s t r a t i o n . A lthough in any one y e a r a R e serv e c a l c u l a t e d on t h i s b a s i s m ight in d e e d be s u f f i c i e n t to p la c e th e system in a c t u a r i a l b a la n c e , in many o t h e r s i t w ould n o t be s u f f i c i e n t . In o th e r w o rd s, th e a p p r o p r ia ti o n r e q u i r e d to k eep th e system in a c t u a r i a l b a la n c e would v a ry from y e a r to y e a r , depending upon th e th e n v a lu e o f f u t u r e l i a b i l i t i e s , a s d e te rm in e d b y a c t u a r i a l c o m p u ta tio n s. James S. P a r k e r , S o c ia l S e c u r ity R e serv es (W ashington: Am erican C o u n cil on P u b lic A f f a i r s , 1 9 ^ 2 ), p . 16. ? " F e d e ra l Old-Age and S u rv iv o r s ' In s u ra n c e : A Summary o f th e 1939 Amendments," S o c ia l S e c u r ity B u l l e t i n , 2 :1 5 , December, 1939* 103 i i su b se q u e n t l e g i s l a t i o n u n t i l th e 3 p e r c e n t combined r a t e j was a d o p te d in 1950, in a c c o rd a n c e w ith a 19^7 law.® 1 I The law a ls o p ro v id e d t h a t th e B oard o f T ru s te e s j m ust r e p o r t to C ongress i f a t any tim e d u r in g th e coming f i v e - y e a r p e r io d th e Fund ex c e e d s t h r e e tim e s th e h ig h e s t e s tim a te d y e a r ly e x p e n d itu r e .9 P resum ably, t h i s p r o v is io n im p lie d t h a t C ongress in te n d e d t o l i m i t th e s i z e o f th e R e s e rv e . Yet th e T ru s t Fund h as exceeded th e l i m i t in e v e ry y e a r s in c e 19**0 w ith o u t any a c tio n on th e p a r t o f C o n g ress. However, th e S en ate F inance Com m ittee, in recommending a f u r t h e r ta x r a t e fr e e z e in th e Revenue B i l l o f 194-2, | . . . d e c la r e d t h a t th e r e s e r v e w hich had b een j c r e a te d up t o t h a t tim e was ample to ta k e c a r e o f th e ! t o t a l re q u ire m e n ts f o r th e n e x t 5 y e a r s , and t h a t th e com m ittee t h e r e f o r e b e l ie v e d i t u n n e c e s s a ry to a p p ly j t h e 2 -p e r c e n t r a t e s sc h e d u le f o r 1943. I S im ila r argum ents w ere u sed by C ongress in o t h e r y e a rs in o rd e r to r e f r a i n from p u t t i n g i n t o e f f e c t th e sc h e d u le d ta x i n c r e a s e s . In 1944 C ongress a u t h o r iz e d governm ent c o n t r i b u t i o n s from g e n e ra l re v e n u e s i f n e e d ed in o rd e r t o m eet b e n e f i t ® "Soeial S e c u r ity L e g i s l a t i o n in 1 9 4 7 ," S o c ia l S e c u r ity B u l l e t i n . 10:13» S eptem ber, 1947* ^ S e c tio n 201, T i t l e I I , P u b lic Law Mo. 379, l o c . c l t . 1 0 ould Age and S u rv iv o r s ' In su ra n c e C o n trib u tio n R a t e s , n S o c ia l S e c u r ity B u l l e t i n , 8:4-8, December, 194-5* o b l i g a t i o n s . The p u rp o se o f t h i s p r o v is io n was to in s u r e I j t h a t th e f in a n c e s o f t h i s program w ould n o t he endangered by p a s t and p r o j e c t e d f r e e z i n g s o f th e t a x r a t e . 11 The T ru s t Fund, how ever, grew more r a p i d l y th a n had been j I a n t i c i p a t e d , due to h ig h w a rtim e employment and I n c r e a s e d ! e a r n in g l e v e l s . ^ In 1950 C ongress re a d o p te d a s t e p premium t a x system t h a t was to re a c h a maximum com bined r a t e o f 6 1 /2 p e r cen t a f t e r 1969- The t a x r a t e s w ere s u b s e q u e n tly e x ten d ed u n d er th e 195^ and 195b amendments. The 1950 amendment by r e p e a lin g t h e a u t h o r i z a t i o n ofj a governm ent c o n t r i b u t i o n shows t h a t C ongress w ants t h e system t o be c o m p le te ly s e l f - s u p p o r t i n g from th e c o n tr ib u t i o n s o f co v e re d i n d iv i d u a ls and em p lo y ers. Yet C ongress th ro u g h i t s p a s t a c tio n s shows t h a t i t i s a f r a i d o f to o i l a r g e a r e s e r v e . In th e 195b amendment C ongress s e t up a s e p a r a te T ru s t Fund to pay d i s a b i l i t y b e n e f i t s . An A dvisory C o u n cil on S o c ia l S e c u r ity F in a n c in g was a ls o e s t a b l i s h e d by t h i s l a t e s t amendment, w ith th e f u n c tio n o f re v ie w in g t h e s t a t u s o f th e Old Age and S u rv iv o r s ' In su ra n c e T ru s t Fund and th e * D i s a b i l i t y In su ra n c e T ru s t Fund in r e l a t i o n to th e b e n e f i t program b e f o r e e a c h sc h e d u le d ta x in c r e a s e . 11James S. P a r k e r, " F in a n c ia l P o lic y in Old-Age and S u r v iv o r s ' In s u ra n c e , 1 9 3 5 -5 0 ," S o c ia l S e c u r ity B u l l e t i n . 1 ^ :7 , Ju n e , 1951* The i n t e r e s t r a t e on in v e s tm e n ts h e ld by th e O ld Age and S u rv iv o r s ' In su ra n c e T ru s t Fund was changed by th e 1956 amendment to r e f l e c t th e lo n g term c h a r a c t e r o f th e i n v e s t m e n ts. The i n t e r e s t r a t e i s to be b a s e d on th e a v e ra g e r a t e o f i n t e r e s t b o rn e by a l l m a rk e ta b le , i n t e r e s t b e a r in g ' o b l i g a t i o n s o f th e U n ite d S t a t e s w ith a minimum red em p tio n j p e r io d o f f iv e y e a r s . ^ 2 I t i s p r e s e n t l y d e b a ta b le , ; how ever, w h e th e r th e p r e s e n t program r e a l l y f u l f i l l s th e c o n c e p t o f an a c t u a r i a l R e serv e b a se d on s t e p premium f in a n c in g . The argum ent t h a t t h e r e sh o u ld be a d i r e c t r e l a t i o n s h ip betw een c o n t r i b u t i o n s an d b e n e f i t s u p h o ld s th e th e o ry o f th e R eserv e. I t s t r e s s e s th e f a c t t h a t Old Age and S u r v iv o r s ' In s u ra n c e sh o u ld c o rre sp o n d t o th e b e n e f i t s - r e c e l v e d th e o ry o f th e d i s t r i b u t i o n o f th e ta x b u rd e n . A cco rd in g t o t h i s th e o ry , A ccum ulation of r e s e r v e s , a p a r t from any b u d g e ta ry c o n s i d e r a t i o n s , a p p e a rs a s an a p p r o p r ia te means f o r l i n k i n g up t h e amounts of th e ta x e s p a i d on b e h a l f of e a c h a n n u ita n t w ith th e am ounts o f p e n s io n s w hich a r e 12S e c tio n 103, T i t l e I , S o c ia l S e c u r ity Act Amend m ent o f 1956, P u b lic Law Ho. 880 (H.R. 7225), 8 ^ th C o n g ress, 2d s e s s io n , August 1 , 1956, p p . 1*J-15 • I I . FUHCTIQH OF THE RESERVE B e n e f i t s R eceiv ed p a y a b le t o h im .^3 The re a s o n u s u a lly g iv e n In e x p la in in g th e n e c e s s i t y i* f o r a r e l a t i o n s h i p betw een b e n e f i t s an a t a x paym ents i s th e f e e l i n g o f r e s p o n s i b i l i t y and s e l f - r e s p e c t t h a t an em ployee g a in s from th e know ledge t h a t he p a r t l y f in a n c e s h i s own p e n s i o n . ^ There i s a ls o t h e w id e s p re a d b e l i e f t h a t i t i s p r o p e r f o r th o s e r e c e i v i n g t h e b e n e f i t s to have c o n t r ib u t e d to t h e i r a c c u m u la tio n . Then, to o , a d i s t r i b u t i o n o f th e t a x b u rd e n on a b e n e f i t s - r e c e l v e d b a s i s m in im izes Income r e d i s t r i b u t i o n . I t i s a l s o m a in ta in e d t h a t when th e w o rk er s h a re s d i r e c t l y i n th e c o s t o f th e p ro g ra m , he i s more l i k e l y to r e s i s t p r e s s u r e f o r I n c r e a s e d b e n e f i t s from th e o ld age g r o u p s .^5 B e n e f its a r e p r e s e n t l y b ased on a v e ra g e m onthly e a r n in g s , w h ile ta x e s a r e c o l l e c t e d on t h e b a s i s o f t o t a l wages up to f o u r th o u sa n d two hundred d o l l a r s a y e a r . In ^K. P rib ra m , "The F u n c tio n s o f R e se rv e s i n Old-Age B e n e f it P l a n s , 1 1 Q u a r te r lv J o u r n a l o f E conom ics, 5 2 :6 3 3 , A u g u st, 1938. •^ % a rg a re t G ra n t, Old-Age S e c u r ity (W ashington: S o c ia l S cien ce R e se a rc h C o u n c il, 1 9 3 9 ), p . 128. ^ A c c o r d in g to th e D ir e c t o r o f th e R esearch C o u n cil f o r Economic S e c u r i t y , " I t r e q u ir e d l i t t l e p o l i t i c a l i n s i g h t t o se e t h a t th e s e p a r a tio n o f b e n e f i t s from rev en u e w ould open th e d o o r t o u n c o n tr o lle d sp e n d in g . The o r i g i n a l Act p ro v id e d t h a t th e need t o r a i s e re v e n u e sh o u ld a c t a s a b ra k e upon th e a tte m p t to r a i s e b e n e f i t r a t e s o r to expand c o v e ra g e ." G erh ard H ir s e h f e ld , S o c ia l S e c u r i t y , P a s t - P r e s e n t- F u tu r e (C hicago: R e sea rc h C o u n cil f o r Economic S e c u r i t y , 19M*), p . 53* o r d e r to keep ta x c o l l e c t i o n s and b e n e f i t paym ents f o r each, > i i w o rk e r c o r r e l a t e d , i t i s n e c e s s a r y to pay o u t in b e n e f i t s an amount hav in g some l o g i c a l r e l a t i o n to t h a t c o n t r i b u t e d i by th e em ployee. ! T h is i s n o t in te n d e d to im ply t h a t u n d er a s o c i a l j i in s u r a n c e system each b e n e f i c i a r y sh o u ld r e c e iv e e x a c t l y th e amount of h i s c o n t r i b u t i o n to th e Fund (p lu s accumu l a t e d i n t e r e s t ) . Those who co n ten d t h a t some w i l l pay f o r o t h e r s 1 b e n e f i t s u n d er th e p r e s e n t pro g ram , even though t h e r e i s a j 1 Fund, a r e c o r r e c t . The problem seems to a r i s e from j c o n fu s io n o v er th e d e f i n i t i o n o f s o c i a l in s u r a n c e . j I t cannot b e em phasized to o s t r o n g l y t h a t th e | ! p r e s e n t law ( a t l e a s t s in c e th e 1939 amendments) i s a f o r a ! o f com pulsory c o n t r i b u t i o n to a s p e c i f i c fu n d , th e d i s t r i b u tio n o f w hich i s d e te rm in e d by s o c ie ty f o r th e p u rp o se of p r o t e c t i o n a g a i n s t r i s k s t o w hich a l a r g e p a r t o f th e p o p u la tio n i s ex p o sed . S o c ie ty d e te rm in e s th e c o n tin g e n c ie s l i k e l y t o be d e t r im e n ta l to a l l o r a l a r g e segment o f th e p o p u la tio n . These c o n tin g e n c ie s a r e e s s e n t i a l l y w an ts f o r w hich many i n d i v i d u a l s f i n d th e m selv es u n a b le t o p ro v id e by t h e i r own a b i l i t y and f o r e s i g h t . 16 U nder s o c i a l in s u r a n c e c e r t a i n M aurice S ta c k , "The M eaning of S o c ia l S e c u r i t y ," R e ad in g s in S o c ia l S e c u r i t y , W illiam H aber and W ilbur J . Gohen T e d s.) (Mew York: P r e n t i c e - H a l l , 1 9 ^ 8 ), p p . • in d i v i d u a l s may be r e q u ir e d to c o n t r ib u t e to th e system even though t h e r e i s l i t t l e chance t h a t th e y th e m selv es w i l l e v e r b e n e f i t from i t . B u d g e tary B a sis Those who d e fe n d th e R eserve on a b u d g e ta ry b a s i s i u s u a l l y em phasize th e f a c t t h a t th e governm ent m ust c o l l e c t j s u f f i c i e n t re v e n u e to pay th e c la im s a s th e y m a tu re. ^ I The e s s e n t i a l f u n c tio n of th e R e se rv e , a c c o rd in g to t h i s sch o o l o f th o u g h t, i s to c l a r i f y , on a T re a su ry b a la n c e s h e e t, t h e c u r r e n t a s s e t s and f u t u r e l i a b i l i t i e s u nder th e A et. T h is view o f th e n a tu r e of th e R eserv e h as been c l e a r l y p r e s e n te d by E le a n o r L a n sin g D u lle s . The p r i n c i p l e d e te rm in in g th e amount o f a s s e t s in th e r e s e r v e fu n d i s t h a t th e y be s u f f i c i e n t t o y i e l d an income w hich— In a d d itio n t o p a y - r o l l t a x r e c e i p t s — w i l l f in a n c e b e n e f i t s in p e r p e t u i t y . The l i a b i l i t y s e t f o r t h in th e a c c o u n t i s th e p r e s e n t v a lu e o f e s tim a te d f u t u r e d is b u rs e m e n ts f o r b e n e f i t s . The r e s e r v e acco u n t s p re a d s on th e r e c o r d n o t o n ly t h a t p a r t of th e l i a b i l i t y w hich i s funded in th e form o f i n t e r e s t - b e a r in g a s s e t s , b u t a ls o t h a t p a r t w hich i s to be met o u t of . . . re v e n u e s. I f th e c a l c u l a t i o n s a r e r i g h t and t a x y ie ld s a r e as e s tim a te d , th e r i s i n g s lo p e o f ta x r a t e s i s j u s t s u f f i c i e n t l y r a p i d so t h a t p a s t a c c u m u la tio n s a t I n t e r e s t , p lu s f u tu r e re v e n u e s d is c o u n te d , w i l l in e v e ry s in g l e y e a r from now in p e r p e t u i t y eq u a l th e 17 The b e s t d e fe n s e o f th e R eserve from th e b u d g e ta ry v ie w p o in t i s made by A lanson W ilcox in an u n sig n e d a r t i c l e in th e Q u a r te r ly J o u r n a l o f E conom ics. "The Old-Age R eserve A ccount— A Problem in Government F in a n c e , H Q u a r te r ly J o u r n a l o f E conom ics. May, 1937- 109 l i a b i l i t y f o r b en efits.^-® The re q u ire m e n ts f o r th e R eserve t o o p e r a te e f f e c t i v e l y u nder th e b u d g e ta ry th e o ry a r e a s fo llo w s : (1) T hat j th e O ld Age and S u rv iv o rs* In s u ra n c e b e n e f i t paym ents a r e j t d e s t i n e d to become i n c r e a s i n g l y im p o rta n t in f u t u r e j j b u d g e ts . (2) T hat C ongress a c t u a l l y in te n d s to p ay th e s e j b e n e f i t s a s th e y m a tu re . (3) T hat a n n u a l in ta k e from p a y r o l l ta x e s and th e an n u a l b e n e f i t paym ents w i l l v a r y w id e ly a s tim e p r o g r e s s e s . (A) That i t i s p o s s i b l e to c a l c u l a t e in advance how much money m ust be c o l l e c t e d e v e ry y e a r in o r d e r to m eet th e paym ents as th e y m a tu re . I n c r e a s ln g im p o rtan ce o f b e n e f i t p ay m en ts. — From 1936 th ro u g h 1955 i t would h av e been v e r y ea sy t o le v y a p a y r o l l ta x t h a t w ould have y ie ld e d s u f f i c i e n t re v e n u e each y e a r t o pay th e b e n e f i t s m a tu rin g d u rin g t h a t y e a r. How e v e r , a s th e p la n m a tu re s, th e ex p e cte d b e n e f i t paym ents a re d e s t i n e d t o become so l a r g e t h a t i t w i l l be im p o s s ib le to r a i s e s u f f i c i e n t rev en u e from p a y r o l l ta x e s a lo n e . There a r e s e v e r a l r e a s o n s why th e c o s t o f Old Age and S u rv iv o r s ' In s u ra n c e w i l l r i s e s t e a d i l y over th e l i f e o f th e p la n even i f b e n e f i t paym ents a r e n o t in c r e a s e d by C o n g re ss. F i r s t , th e number o f aged p e rs o n s i s p e r i o d i c a l l y in c r e a s in g . Between 1870 and 1950 th e number o f E le a n o r L an sin g D u lle s , “F in a n c in g Old-Age I n s u r a n c e ,K The A nnals o f th e American Academy o f P o l i t i c a l and S o c ia l S c ie n c e . 2 02:176, M arch, 1939* i n d i v i d u a l s o v e r s i x t y - f i v e y e a rs o f age in c r e a s e d from one m i l l i o n t o tw e lv e m i l l i o n . Government a c t u a r i e s e s tim a te i t h a t b y th e y e a r 2000 th e r e w i l l be 2 5 .8 m i l l i o n o v e r J s i x t y - f i v e y e a rs o f a g e .1^ j In a d d i t i o n , a s th e system m a tu re s , paym ents w i l l be I | made o v e r lo n g e r p e r io d s o f tim e , s in c e l i f e e x p e c ta n c ie s a r e c o n s ta n tl y in c r e a s in g . For exam ple, in 1910 a w h ite i m ale s i x t y - f i v e y e a r s o f age had a l i f e e x p e c ta n c y o f e le v e n y e a rs . By 1950 i t was e s tim a te d t h a t such an ' in d i v i d u a l co u ld e x p e c t to l i v e f o r t h i r t e e n y e a r s . A w h ite m ale baby b o rn in 1910 c o u ld e x p e c t to l i v e f i f t y j y e a rs a s com pared w ith th e 6 6 .0 y e a rs o f l i f e e x p e c ta n c y J f o r su ch a baby bo rn in 1 9 5 0 .20 [ A nother problem c r e a t e d by th e a g in g o f th e p o p u la - j t i o n i s t h a t y e a r s o f b e n e f i t s w i l l in c r e a s e more r a p i d l y j th a n y e a rs o f a c c u m u la tio n o f p a y m e n ts i n t o th e R eserve Fund. P ro f e s s o r S p e n g le r e s tim a te s t h a t The r a t i o o f th e number of y e a rs th e r e p r e s e n t a t i v e w o rk er sp e n t In th e la b o r f o r c e to th e number he sp e n t in r e tir e m e n t . . . f e l l from 1 4 .1 :1 in 1900 to 7*4:1 in 1940; by 1975 i t w i l l be 6 .8 : 1 , g iv e n th e 1947 employment p a t t e r n , and 4 .3 :1 g iv e n a c o n tin u a tio n of ■^Board o f T ru s te e s o f th e F e d e ra l Old-Age and S u r v iv o r s ' In s u ra n c e T ru s t Fund, F o u rte e n th Annual R e p o r t, 83d C o n g ress, 2d s e s s io n , Document Mo. 121 (W ashington: Government P r i n t i n g O f f ic e , 1 9 5 4 ), p . 24. 20U n ite d S t a t e s D epartm ent o f Commerce, S t a t i s t i c a l A b s tr a c t o f th e U n ite d S t a t e s 1955 (W ashington: Government P r i n t i n g O f f ic e , 1 9 5 5 ), p . 8 ? . I l l 1 9 2 0 -4 0 t r e n d s .2^ C o n g re s sio n a l com m itm ents. — I t I s t r u e t h a t th e Fund i s n o t a commitment a s su c h . Yet p r o v is io n f o r a R e se rv e makes r e p u d ia tio n o f th e C o n g re s sio n a l o b l i g a t i o n l e s s l i k e l y . W ithout th e R e serv e i t m ig h t be c o n v e n ie n t ! f o r a f u t u r e C ongress to d e c l a r e i n a b i l i t y to pay b e n e f i t s a s th e y m a tu re . However, t h i s w ould be p o l i t i c a l l y im p ro b ab le so lo n g as a R eserv e e x i s t e d . i V a r ia tio n betw een ta x e s and •payments. — As p r e v i o u s ly p o in te d o u t , b e n e f i t paym ents w i l l be i n c r e a s in g a s t h e O ld Age and S u rv iv o rs ' In s u ra n c e Program m a tu re s . U n less i t i s p la n n e d to in c r e a s e c o n s t a n t l y th e g o v e rn ment 1s revenue a b u d g e ta ry d e f i c i t w i l l r e s u l t . The o n ly s o l u t i o n , t h e r e f o r e , i s t o b u i l d up a R e serv e by c o l l e c t i n g am ounts in e x c e ss o f p r e d i c a t e d d is b u rs e m e n ts d u rin g th e e a r l y p a r t o f th e program . on th e assu m p tio n o f a c o n s ta n t l e v e l o f n a t i o n a l income and p r o d u c t i v i t y , and by use o f m a rg in a l a n a l y s i s , P r o f e s s o r Seymour H a r ris h a s d e m o n stra te d how e q u a l t a x c o l l e c t i o n s a r e o f b e n e f i t t o th e economy a s com pared w ith in c r e a s in g t a x c o l l e c t i o n s : The d e s i r a b i l i t y o f h av in g m o d e ra te ta x e s o v er a lo n g p e r io d o f tim e i n s t e a d o f v e ry low r a t e s a t th e 21Jo sep h J . S p e n g le r, “P o p u la tio n T h eo ry ," A S urvey o f C ontem porary E conom ics, V o l. I I , B e rn a rd F. H aley ( e d . ) (Homewood, I l l i n o i s : R ic h a rd D. Irw in , 1 9 5 2 ), p . 108 b e g in n in g and co m p e n sa tln g ly h ig h e r r a t e s r e s t s upon ; th e p o s t u l a t e t h a t “com pulsory t r a n s f e r s w ith in an economy, o th e r th in g s b e in g e q u a l, in v o lv e a b u rd e n , t h a t in c r e a s e s more r a p i d l y th a n th e I n c r e a s e in th e amount o f th e t r a n s f e r . The t o t a l b u rd e n o v e r tim e w i l l be m in im ized i f t h e r e i s an e q u a l i z a t i o n o f th e j burd en of th e m a rg in a l d o l l a r o f each y e a r 's t a x a t i o n . . . . th e r e d u c tio n o f ta x e s by a d o l l a r now w ould l i g h t e n t o d a y 's b u rd en . But to m o rro w 's ta x e s w ould have to be I n c r e a s e d by a d o l l a r on e x t r a b u rd en s i b e in g th e n im posed. B ecause of o u r law o f in c r e a s i n g 1 m a rg in a l b u rd e n , th e g a in to d a y w i l l be l e s s th a n th e I l o s s t o m o r r o w . | i S ince i t s in c e p tio n th e Old Age and S u r v iv o r s ' - ! In s u ra n c e law h a s f a i l e d t o p ro v id e f o r th e a c c u m u la tio n o f r e s e r v e s in s u f f i c i e n t q u a n t i t y to m a in ta in a c o n s ta n t ta x r a t e . As p o in te d out in C h a p ter I I , th e t o t a l ta x r a t e a f t e r 1975 w i l l b e 8 1 /2 p e r c e n t a s com pared w ith th e p r e s e n t r a t e o f k 1 /2 p e r c e n t and th e o r i g i n a l r a t e o f 2 p e r c e n t. However, i f a R e serv e had n o t been accu m u late d , th e o r g in a l r a t e w ould have b een much lo w er th a n 2 p e r c e n t and th e f u t u r e r a t e w ould be g r e a t e r th a n 8 1 /2 p e r c e n t (assum ing c u r r e n t b e n e f i t sc h e d u le s and adequacy o f c u r r e n t a c t u a r i a l s t u d i e s ) . A c tu a r ia l a c c u r a c y . — The w eakest a s p e c t o f th e b u d g e ta ry argum ent i s th e assu m p tio n t h a t i t i s p o s s i b l e to c a l c u l a t e in advance th e am ounts n e c e s s a r y to m eet m a tu rin g o b l i g a t i o n s u n d er th e c u r r e n t law . The b a s i c problem i s th e n e c e s s i t y o f f o r e c a s t i n g o v e r a lo n g p e r io d o f tim e 22Seymour E. H a r r is , Economics of S o d a l S e c u r ity (Mew York: M cGraw -Hill Book Company, 1 9 ^ 1), P* 206. 113 s e v e r a l ite m s t h a t in th e p a s t have d e f i e d a c c u r a te p r e d i c - i t l o n . I t w ould b e n e c e s s a r y , f o r exam ple, t o know t h e i f o llo w in g v a r i a b l e s in o r d e r t o p r e d i c t th e f u t u r e R eserv e re q u ire m e n ts : th e f u t u r e p o p u la tio n , th e age d i s t r i b u t i o n of t h e p o p u la tio n , a v e ra g e in s u r e d w ages i n co v e re d t o c c u p a tio n s , th e av e ra g e o f r e t i r e m e n t , t h e a v e ra g e d e a th r a t e o f co v e re d em ployees, t h e e x te n t o f co v e re d employment on th e p a r t o f men and women, th e a v e ra g e p e r io d s of unemployment and s ic k n e s s among w o rk e rs, a v e ra g e i n t e r e s t r a t e s on governm ent b o n d s, fa m ily c o m p o sitio n , e x t e n t o f dependence o f p a r e n t s , and t r e n d s i n m a rr ia g e . I t w ould even be n e e e s s a ry to know th e p e r c e n ta g e o f th o s e p e o p le who w i l l n o t f i l e f o r t h e i r b e n e f i t s in th e f u t u r e . 23 i P r o f e s s o r Seymour H a r r i s , in 19*H» w ro te t h a t H even j by 1939 th e a n t i c i p a t i o n s o f 1935 w ere f a r o u t o f l i n e w ith w hat th e n seemed t o be r e a s o n a b le g u e s s e s . A cco rd in g t o P r o f e s s o r H a r r i s , th e m ost s e r i o u s m is ta k e s made in t h e a c t u a r i a l s t u d i e s o f 1935 w e re , f i r s t , a f a i l u r e to c o n s id e r s i g n i f i c a n t movements from unemployment to em ploy ment i n co v ered i n d u s t r i e s a n d , seco n d , an e r r o r in t h e ^ A d v is o r y C ouncil on S o c ia l S e c u r ity , R eport to th e S e n a te Committee on F in a n c e , Recommendations f o r S o c ia l S e c u r ity L e g i s l a t i o n , 8 0 th C o n g ress, 2d s e s s io n , Document No. 208 (W ashington: Government P r i n t i n g O f f ic e , 19^9)» p p . 5 0 -5 2 ; see a l s o S lad e M. K en d rick , P u b lic F in an ce (B o sto n : Houghton M if f lin Company, 1951)» P * 399* 2^ H a rris, o p . c l t . . p. 184-. e s tim a te o f th e f u t u r e p o p u la tio n o v er s i x t y - f i v e y e a rs o f I t a g e . T his e r r o r r e s u l t e d from th e u se of a 1930 m o r t a l i t y t a b l e . | A f te r th e p a s s a g e o f th e S o c ia l S e c u r ity Act th e J i |ta s k o f m aking lo n g -ra n g e e s tim a te s was a s s ig n e d t o th e J s u ffic e o f th e A c tu a ry (now c a l l e d D iv is io n of th e A c t u a r y ) . ! ■ t J { The te c h n iq u e p r e s e n t l y em ployed by th e D iv is io n o f th e j A ctu a ry i s to I n v e s t i g a t e ea ch s i g n i f i c a n t f a c t o r s e p a r a t e l y and s e l e c t th e h ig h e s t and lo w e s t v a lu e s f o r each f a c t o r t h a t a r e w ith in th e realm o f p o s s i b i l i t y . Then; a l l th e f a c t o r s t h a t w ould l e a d to a h ig h c o s t O ld Age and ! S u rv iv o rs* In s u ra n c e system , a s w e ll a s th o s e f a c t o r s which] would le a d to a low c o s t sy stem , a r e g ro u p ed t o g e t h e r . The D iv is io n m akes l e v e l assu m p tio n s ab o u t c e r t a i n v a r i a b l e s w hich e i t h e r change slo w ly o v e r tim e o r d e fy p r e d i c t i o n . F o r exam ple, i n th e a c t u a r i a l s tu d i e s c o n d u c te d d u rin g th e 1940’ s , such f a c t o r s a s th e s i z e and age d i s t r i b u t i o n o f th e la b o r f o r c e , th e I n c r e a s in g employment of women, and th e m ig r a tio n o f w orkers from a g r i c u l t u r e and o th e r n o n -c o v e re d i n d u s t r i e s In to m anufac t u r i n g and o th e r co v e re d i n d u s t r i e s , w ere h e ld c o n s ta n t. 2^For a th o ro u g h a n a l y s i s o f th e p r e s e n t a c t u a r i a l m ethods se e R o b e rt J . Myers and Eugene A. R aso r, Long- Range C ost E s tim a te s f o r Old-Age an d S u rv iv o rs * I n s u r a n c e , 1 9 5 4 , A c tu a r ia l Study Mo. 39 (W ashington: U n ite d S t a t e s D epartm ent o f H e a lth , E d u ca tio n and W e lfa re , S o c ia l S e c u r ity A d m in is tra tio n , D iv is io n o f th e A c tu a ry , 1 9 5 4 ), p p . 4 -23- 115 S in ce 195© th e s e f a c t o r s h ave been ta k e n in to c o n s id e r a t i o n , y e t th e c u r r e n t a c t u a r i a l s tu d i e s assume a l e v e l a v e ra g e an n u al w a g e .2^ The D iv is io n of th e A c tu a ry d u rin g r e c e n t y e a r s has ! made an in t e r m e d i a t e - c o s t e s tim a te by a v e ra g in g th e low - c o s t and h ig h - c o s t e s tim a te s . T his in t e r m e d i a t e - c o s t ! e s tim a te r e p r e s e n t s a c o n v e n ie n t s e t o f f i g u r e s t o u s e f o r j c o m p a ra tiv e p u r p o s e s . However, th e governm ent a c t u a r i e s a r e t h e f i r s t t o adm it t h a t th e s e f i g u r e s " a re n o t n e c e s s a r i l y th e c l o s e s t to what a c t u a l c o s ts w i l l be— a f i g u r e im p o s s ib le to d e v e lo p . 1,27 The lo w - c o s t, h i g h - c o s t , and i n te r m e d ia te - c o s t e s tim a te s of th e A c tu a r ia l D iv is io n have been s u b je c te d to s e v e re c r i t i c i s m by two fo rm e r members o f th e S o c ia l S e c u r i t y A d m in is tr a tio n .2® They m a in ta in t h a t th e g o v e rn ment a c t u a r i e s com bine f i g u r e s w ith a lm o st no r e g a r d t o I n t e r n a l c o n s is te n c y . Thus th e h ig h c o s t e s tim a te s combine a h ig h f e r t i l i t y r a t e , such a s e x i s te d d a r in g th e w ar boom, and a low employment a ssu m p tio n , in l i n e w ith e x p e rie n c e 2®Robert J . M yers, "Old-Age and S u r v iv o r s ' I n s u r an c e : F in a n c in g B a s is and P o lic y Under 195© Amendments," S o c ia l S e c u r ity B u l l e t i n , 1 9 :1 ? , S eptem ber, 195©• 27I b i d . , p . 19- 2®See C h a rle s C» K lllln g s w o r th , and C e rtru d e S c h ro e d e r, "Long-Range C ost E s tim a te s f o r Old-Age I n s u r a n c e ," Q u a r te r ly J o u r n a l o f Econom ics, 6 5 s199-213» May, 1951. 116 d u rin g th e d e p r e s s e d t h i r t i e s . The a r t i c l e by K illin g s w o rth and S ch ro ed er a l s o t p o i n t s o u t t h a t th e h ig h and low v a lu e s s e l e c t e d f o r many \ of th e f a c t o r s go beyond th e realm o f p o s s i b i l i t y and t h a t I a le v e l-w a g e assu m p tio n i s i l l o g i c a l in v iew o f th e m arked r i s e i n r e a l and money wages d u rin g th e p a s t c e n t u r y . From th e f o re g o in g d is c u s s io n i t seems o b v io u s t h a t th e r e a r e no c o m p le te ly r e l i a b l e a c t u a r i a l s tu d i e s a s t o j th e f u t u r e s i z e o f th e r e s e r v e . 30 ! Economic Management B ases The Board of T ru s te e s may in f lu e n c e th e A m erican economy th ro u g h i t s management o f th e R eserv e Fund. The money c o l l e c t e d from ta x e s and r e c e iv e d by th e T ru s t Fund ; from th e T re a su ry i s im m ed ia tely i n v e s te d in Government o b l i g a t i o n s . However, th e M anaging T ru s te e may p r e f e r to ^For a d e f e n s e o f th e A c tu a r i a l Goat E s tim a te s made by t h e D iv isio n o f th e A c tu a ry , see R o b e rt J . M yers, "Long- Range Goat E s tim a te s f o r Old-Age In s u ra n c e : Comment,1 1 Q u a r te r ly J o u r n a l o f E conom ics. 66:286-293* May, 1952. 3 0 A ccording t o th e l a s t a c t u a r i a l s tu d y on th e 1956 Act th e Old Age and S u r v iv o r s ' In su ra n c e R eserve was n o t f u l l y in a c t u a r i a l b a la n c e u n d e r i n te r m e d ia te - c o s t assum p t i o n s , a lfh o ugh i t was c lo s e t o an ex a c t b a l a n c e . . ’U nder h ig h - c o s t a s s u m p tio n s , how ever, th e R e serv e w ould be e x h a u s te d by 2001, w h ile u n d e r lo w -c o s t a ssu m p tio n s th e Fund w ould amount to 1369*722 m illio n by th e y e a r 2020. The s e p a r a te d i s a b i l i t y T ru s t Fund e s t a b l i s h e d by th e 1956 amendment showed a sm a ll f a v o r a b le a c t u a r i a l b a la n c e u n d er in te r m e d ia te - c o s t assu m p tio n s a t t h a t tim e . M yers, "Old Age and S u r v iv o r s ' In s u ra n c e : F in a n c in g B a s is and P o lic y Under 1956 Amendments," o p . e l f . . pp. 1 7 -2 0 . 117 h o ld th e c a sh f o r a s h o r t tim e r a t h e r th a n p u rc h a s e b o n d s, I f , In h i s Judgm ent, money w i l l be r e q u ir e d to m eet c u r r e n t l w ith d ra w a ls . The T re a su ry may a ls o impound th e fu n d s j r e c e iv e d from th e R eserve in exchange f o r i t s s p e c i a l i i c e r t i f i c a t e s o f in d e b te d n e s s . T h is w ould w ith d raw money j I from c i r c u l a t i o n and w ould t h e r e f o r e te n d t o be d e f l a t i o n - i a r y . T ru s te e * s c h o ic e o f a c t i o n . — The Managing T ru s te e has th e c h o ic e of I n v e s tin g th e t a x fu n d s i n s p e c ia l c e r t i f i c a t e s o f In d e b te d n e ss is s u e d by t h e T reasu ry , o r of p u rc h a s in g o u ts ta n d in g o b l i g a t i o n s a t th e m arket p r i c e . I f t h e fo rm er p ro c e d u re i s u se d th e o v e r - a l l e f f e c t o f th e t r a n s a c t i o n depends on w hat th e T re a s u ry does w ith th e f u n d s . I f th e l a t t e r c o u rse i s fo llo w e d and th e Fund a c c u m u la te s bonds from th e open m a rk e t, t h e e f f e c t i s s i m i l a r to an open m arket p u rc h a s e o p e r a tio n of th e F e d e r a l R eserve B oard. The Fund buys bonds from e i t h e r th e bank o r th e g e n e r a l p u b lic a n d , a s P r o f e s s o r J . D ouglas Brown p o i n t s o u t, th e l i k e l y r e s u l t i s "an a r t i f i c i a l s ti m u la tio n o f c a p i t a l In v estm en t and s to c k m arket s p e c u la t i o n . I f bonds a r e p u rc h a s e d from t h e b an k s, t h e i r ca sh r e s e r v e s a r e augm ented and a r e t h e r e f o r e a v a i l a b l e f o r D ouglas Brown, "The Old-Age R eserve A c c o u n t," Q u a r te r ly J o u r n a l of Econom ics. 5 1 :7 1 8 , A ugust, 1937* 118 l o a n s . When bonds a r e p u rc h a s e d from th e g e n e r a l p u b l i c , th e governm ent se n d s a check drawn on a F e d e r a l B eserv e Bank. These c h e e k s , in t u r n , a r e e v e n tu a l ly d e p o s ite d by th e bond s e l l e r s in a com m ercial bank. The com m ercial banki sen d s th e d e p o s ite d cheek t o th e F e d e ra l R eserv e Bank in j i t s d i s t r i c t and th u s in c r e a s e s r e s e r v e s a v a i l a b l e f o r J l o a n s . As Kemmerer shows in d is c u s s in g F e d e r a l R eserv e Bank open m ark et o p e r a t i o n s , th e banks "m ight send s u r p lu s fu n d s to th e money m ark et w here r a t e s w ould f a l l , o r th e y m ig h t even lo w e r t h e i r own l o c a l r a t e s to encourage b o r r o w in g ."32 Thus, in any c a s e , th e com m ercial b a n k s ' r e s e r v e s a r e I n c r e a s e d , and th e y can e i t h e r e x te n d f u r t h e r lo a n s o r make a d d i t i o n a l In v e s tm e n ts . I f th e R e serv e s e l l s open m arket p u rc h a s e d bonds to th e g e n e r a l p u b l i c , th e e f f e c t on th e economy i s th e r e v e r s e o f b u y in g by th e R e s e rv e .33 r e s u l t w i l l be to ta k e money o u t o f c i r c u l a t i o n by s u b s t i t u t i n g bonds f o r c h e c k in g a c c o u n ts in th e hands o f th e g e n e r a l p u b l i c , and 32Edwln W a lte r Kemmerer, and D onald L. Kemmerer, The ABO o f th e F e d e ra l R eserve System ( t w e l f t h e d itio n * New York: H arp er and B r o th e r s , 1 9 5 0 ), p . 98. 3^Any o b l i g a t i o n s a c q u ir e d by th e T ru s t Fund (e x c e p t s p e c i a l o b l i g a t i o n s is s u e d e x c lu s iv e ly to th e T ru s t Fund) may b e s o ld by th e Managing T ru s te e a t th e m ark et p r i c e , an d such s p e c i a l o b l i g a t i o n s may be redeem ed a t p a r p lu s a c c r u e d i n t e r e s t . S e c tio n 201, T i t l e I I , P u b lic Act No. 379, o p . c i t . , p . 1 1 9 i to re d u c e th e p rim a ry hank r e s e r v e s a v a i l a b l e f o r lo a n s . I n t e r e s t r a t e s on th e open m arket a r e l i k e l y t o r i s e and s e c u r i t y p r i c e s to f a l l i f b anks a r e f o r c e d t o l i a u i - ! d a te t h e i r I n v e s tm e n ts .^ ^ Banks may a ls o in c r e a s e t h e i r j i i n t e r e s t r a t e s when r e s e r v e s become s c a r c e . I f governm ent ; bonds a r e s o ld by th e Fund d u r in g d e f l a t i o n a r y p e r i o d s , th e ' p r i c e of bonds w i l l be f a r t h e r d e p re s s e d s in c e o th e r i n v e s t o r s a re a l s o d is p o s in g o f s e c u r i t i e s a t th e same t i m e .35 These u l t i m a t e r e s u l t s w i l l be m o d ifie d , how ever, by th e d is b u rs e m e n ts made from th e Fund s in c e money r e c e iv e d by b e n e f i c i a r i e s w i l l e v e n tu a lly f i n d i t s way in t o th e b a n k in g system . L im ita tio n s of R eserve Fund Manaarement. — The p o s s i b i l i t i e s f o r economic m a n ip u la tio n , tho u g h e x te n s iv e , a r e n e v e r t h e le s s l i m i t e d by th e S o c ia l S e c u r ity A ct. S p e c ia l bonds Is s u e d to th e Fund m ust b e a r i n t e r e s t e q u a l to th e av e ra g e r a t e on a l l i n t e r e s t - b e a r i n g o b l i g a t i o n s o f th e U n ite d S ta te s w ith a m a t u r i t y of o v e r f i v e y e a r s . In a d d i t i o n , th e law s t a t e s t h a t w i t s h a l l b e th e d u ty o f th e M anaging T ru s te e t o in v e s t su ch p o r tio n o f th e T ru st Fund a s i s n o t , in h i s Judgm ent, r e q u ir e d to m eet c u r r e n t ^^hSdward S. Shaw, Money, Income and M onetary P o lic y (C hicago: R ic h a rd D. Irw in , 1 9 5 0 ), p . 221. 3 5 w illlam H. A nderson, T ax a tio n and th e A u erlea n Economy (New York: F r e n t i c e - H a l l , 1951)» P* ^73* w i th d r a w a ls. " 3 6 I I I . THE MAJOR CRITICISMS OF THE RESERVE PROGRAM I t I s th e p u rp o se of t h i s s e c tio n t o a n a ly z e each one o f th e m a jo r c r i t i c i s m s d i r e c t e d a g a i n s t th e Old Age and S u r v iv o r s 1 T ru s t Fund. F i c t i t i o u s R eserve Those who w ould d i s c r e d i t th e Old Age and S u rv iv o r s ' In s u ra n c e R eserve m ention th e f a c t t h a t th e governm ent s u b s t i t u t e s "a p ro m ise t o pay" f o r c a sh c o l l e c t e d from th e w o rk e r and h i s e m p lo y e r.37 A ccording t o f o r a e r Dean C la re n e e E. Manion of th e U n iv e r s ity o f N o tre Dame, The sad f a c t I s t h a t a c t u a l l y t h e r e i s no R eserve Fund a t a l l ! As f a s t a s a c a sh b a la n c e a c c u m u la te s, i t I s l i f t e d o u t and sp e n t f o r c u r r e n t Government e x p e n se s. In p la c e o f t h i s c a sh th e Government p u ts i t s own I . O . U . 's — Government b onds. I n s te a d o f an a s s e t , t h e r e f o r e , th e R eserv e Fund t u r n s In to an I n t e r e s t - b e a r i n g l i a b i l i t y f o r th e A m erican T axpayer! The R eserve Fund becom es sim ply a p a r t of th e p u b lic d e b t , on w hich a l l A m erican ta x p a y e rs m ust pay ^00 m i l l i o n d o l l a r s a y e a r in I n t e r e s t c h a rg e s a l o n e ! 3 8 A s i m i l a r vlew i s e x p re s s e d by M axwell S te w a rt in ^ S e c t i o n 201, T i t l e I I , P u b lic Law No. 379, l o c . e i t . 3 7 D iiia r d S to k e s , "Does Our S o c ia l S e c u r ity System Make Sense?" Commentary, 1 7 :5 7 2 , Ju n e , 1 95b. 3® C larence E. M anlon, S ta te m e n t o f , q u o te d by Dennis R a n d a ll, " S o c ia l S e c u r ity — The IQU T hat May Never Be P a id !" C o n f i d e n t i a l . J'.bk, May, 1955* 12 1 r e f e r r i n g to th e I n t e r e s t e a rn e d by th e R e serv e. Who p ay s t h i s I n t e r e s t ? The a n sw e r, o f c o a r s e , I s th e g overnm ent. And I t cen o b ta in t h i s money th ro u g h t a x a t i o n . Thus we have t h e anom aly o f th e governm ent p i l i n g up a f o r t y to f i f t y b i l l i o n d o l l a r R eserv e Fund j in o r d e r t o o b ta in th e p r i v i l e g e o f t a x i n g th e p e o p le f o r money t o p ay o ld -a g e p e n s io n s . T h is c o u ld J u s t a s 1 w e ll have b ee n done in th e f i r s t p l a c e , b ec au se i t i s o b v io u s t h a t no m a tte r w hat f i n a n c i a l ju g g le r y i s j in d u lg e d i n , each g e n e r a tio n must p ay f o r th e s e c u r i t y o f i t s own a g e d .39 There a r e many o th e r c r i t i c s who have a t one tim e o r a n o th e r e x p re s s e d s i m i l a r v i e w s . ^ I One o f th e most i n f l u e n t i a l c r i t i c s d u rin g th e 1 9 3 0 ‘ s (Mr. A lb e r t L in to n , Chairman o f th e Board o f t h e 39Maxwell S. S te w a rt, S o c ia l S e c u r i t y ( r e v is e d e d i t i o n ; New York: W . W . N orton and Company, 1939) » p . 184. ^ " F e d e r a l bonds owned by ta x p a y e r s have ab o u t th e same k in d o f r e a l i t y a s New Y e a r’ s r e s o l u t i o n s . T hat i s why a R eserv e Fund, b e lo n g in g to s e v e r a l m i l l i o n ta x p a y e r s , and in v e s te d in bonds to be p a i d o u t o f t a x e s , h as a some- ;w hat g h o s t - l i k e a p p e a ra n c e ." D avid C. C o y le, Age W ithout F e a r (W ashington: N a tio n a l Home L ib r a r y F o u n d a tio n , 1937)» p . 4 9 . "O b v io u sly , how ever, th e Fund i s n o t t r u l y a fu n d f o r i t b e lo n g s t o th e Governm ent, a lth o u g h in t r u s t , and c o n s i s t s w h o lly o f th e G overnm ent’ s own o b l i g a t i o n s . No c o n c e rn ’ s own o b l i g a t i o n s h e l d in i t s own T re a su ry c o n s t i t u t e a fu n d , even in th e c a s e o f th e G overnm ent." A rth u r A. B a l l a n t i n e , "P rom oting S o c ia l S e c u r i t y ," V i t a l S p e e c h e s , 2 :5 2 8 , May 1 8 , 1936. "The d d - A g e R eserve A ccount w o u ld , o f c o u rs e , g e t i t s i n t e r e s t from th e Government S e c u r i t i e s . But w here w ould th e Government o b ta in th e i n t e r e s t t h a t i t p a id on th e s e c u r i t i e s ? From th e o n ly p la c e i t c o u ld o b ta in i t — th e g e n e r a l ta x p a y e r . The w hole e l a b o r a te R eserve Fund s e tu p w ould n o t r e l i e v e him o f any b u rd en w h a te v e r ." W inthrop W . A ld r ic h , " S o c ia l S e c u r ity — An A p p ra is a l o f th e F e d e r a l A c t," V i t a l S p eec h es. 2 :6 8 7 , A ugust 1 , 1936. 1 2 2 P ro v id e n t M utual L if e In s u ra n c e Company o f P h ila d e lp h ia ) h a s s h i f t e d h i s p o i n t o f v ie w . In 1939, Mr. L in to n I b e l i e v e d t h a t t h e i n t e r e s t e a rn e d on th e R eserv e Fund was | i f i c t i t i o u s . ^ In 1955* Mr. L in to n e x p re s s e d th e b e l i e f t h a t th e T ru s t Fund p e rfo rm s a d e f i n i t e f u n c tio n . i C o n sid er th e s i t u a t i o n w here th e OASI T ru s t Fund fo ri exam ple w ould own #20 b i l l i o n o f 2 1 /2 p e r c e n t govern-) raent bonds y i e l d i n g #500 m i l l i o n o f i n t e r e s t a y e a r . I f th e governm ent had n o t borrow ed t h i s #20 b i l l i o n from th e Fund i t w ould have done so from th e p u b lic so t h a t i t makes no d i f f e r e n c e to th e g e n e r a l ta x p a y e r s in whose hands th e bonds may be when i t comes to r a i s i n g g e n e r a l ta x e s to pay i n t e r e s t and p r i n c i p a l . However, i t makes c o n s id e r a b le d i f f e r e n c e to th e OASI o p e r a tio n when #20 b i l l i o n o f governm ent bonds a r e in th e Fund. The tim e i s l i k e l y t o come when OASI b e n e f i t s and exp en ses w i l l exceed th e c u r r e n t t a x r e c e i p t s ; and th e n th e #500 m i l l i o n o f i n t e r e s t w i l l be a v a i l a b l e t o h e lp m eet th e o u tg o . Were i t not so a v a i l a b le b u t was b e in g p a i d t o o t h e r s , p a y r o l l t a x r a t e s I w ould e i t h e r have to be I n c r e a s e d o r t h e r e w ould have j t o be a s u b s id y from g e n e r a l t a x a t i o n t o make up f o r i t s a b s e n c e . When th e bonds a r e h e ld by th e OASI T ru st Fund th e g e n e r a l ta x e s r a i s e d to pay th e $500 m i l l i o n o f i n t e r e s t s e rv e a d u a l p u rp o s e . They pay th e I n t e r e s t w hich w ould have to be p a i d i n any e v e n t and in a d d itio n make i t u n n e c e s s a ry , t o th e amount o f th e i n t e r e s t , to r a i s e p a y r o l l ta x e s o r to draw upon g e n e r a l re v e n u e s to m eet OASI o u tg o .^2 The m ere f a c t t h a t th e Government s u b s t i t u t e s i t s I . o . H . ’ s (governm ent bonds) f o r th e fu n d s c o l l e c t e d ^•M. A lb e rt L in to n , BSome A sp ects of th e R e serv e P ro g ra m ,w The A nnals o f th e A m erican Academy o f P o l i t i c a l and S o c ia l S c ie n c e . 2 0 2 :1 8 5> M arch, 1939* A lb e r t L in to n , C o n tr o v e r s ia l F a e e ts o f Old-Age S e c u r i t y . R e p rin t o f a p a p e r p r e s e n te d t o th e American P h ilo s o p h ic a l S o c ie ty , P h i l a d e l p h i a , P e n n s y lv a n ia , A p r i l 22, 1955 ( P h ila d e lp h ia : P ro v id e n t Mutual. L if e In su ra n c e Company, 1 9 5 5 ), PP» 3 5 -3 6 . I 123 th ro u g h th e p a y r o l l ta x e s d o es n o t mean t h a t th e R e serv e i s f i c t i t i o u s . GeQrge B. R obinson s t a t e s t h a t “th e f i c t i o n ^ was n o t i n th e p r o c e s s , how ever, b u t in th e p h ra s e s " * ^ usedj by t h e c r i t i c s o f th e R eserve who spoke of "mere bookkeep- ! s in g t r a n s a c t i o n s . 8 j P r o f e s s o r W ilcox to o k t h e p o s i t i o n in 1937 t h a t “th e! r e a l v a lu e of th e R eserve w i l l c o n s is t n o t in th e f a c t t h a t t h e Government w i l l h o ld i t s own bonds, b u t i n th e f a c t t h a t o t h e r p e o p le w i l l n o t h o ld them."*'*'**' T h e re fo re , th e R eserv e has th e e f f e c t o f re d u c in g th e n a t i o n a l d eb t owed j to i n d i v i d u a l s . T h is means t h a t th e i n t e r e s t paym ents on th e p r o p o r tio n o f th e d e b t t r a n s f e r r e d t o th e Government augm ents th e Old Age and S u rv iv o rs* In s u ra n c e R eserve i n s t e a d o f g o in g to th e g e n e r a l p u b lic . S ince th e n a t i o n a l d e b t in th e h an d s o f th e g e n e r a l p u b l i c i s re d u c e d , and th e i n t e r e s t paym ents a r e p r e s e n te d by th e T re asu ry t o th e Fund I n s te a d o f to th e g e n e ra l p u b l i c , th e R e serv e re d u c e s f u t u r e ta x b u rd e n s . The c o n f l i c t in v ie w p o in ts r e s u l t s from th e l a c k o f c l a r i f i c a t i o n w ith r e g a r d to tim e p e r io d s . From th e s h o r t - r u n , s i n g l e - y e a r v ie w p o in t, t h e r e i s a t r a n s f e r from th e ta x p a y e r to th e o ld age b e n e f i c i a r y o r k-a ^George B. R obinson, "Old-Age S e c u r i t y and th e T r e a s u r y ," J o u r n a l o f A cco u n tan cy . 73513» J a n u a ry , 19^2. W i l c o x , o p . c l t . . p p . ^62-463. I 12*- f jto th e r e c i p i e n t o f governm ent e x p e n d itu r e s . The R e se rv e a p p e a rs o n ly a s a bookkeeping t r a n s a c t i o n . The R e se rv e i s even f i c t i t i o u s i n th e se n se t h a t t h e r e i s n o t a p l a c e ; - - - — i T h e re fo re , a s Maxwell S te w a rt p o i n t s o u t, e a c h , I g e n e r a tio n p ay s f o r th e s e c u r i t y o f i t s own aged. However, lo o k in g a t th e R e se rv e , i t i s r e a l i n th e se n se t h a t an a b s o lu te r e d u c tio n in d e b t o r a r e d u c t io n o f th e d e b t o v e r w hat i t o th e rw is e would have been m ust ta k e p la c e a s a r e s u l t o f th e Fund a c c u m u la tio n . T his f a c t i s , n e g le e te d c o m p le te ly by S te w a r t. I n t e r e s t paym ents f o r p r i v a t e l y h e ld d e b t w i l l f a l l i n v e r s e l y t o th e a c c u m u la tio n o f p u b l i c s e c u r i t i e s in th e R eserve Fund. T h e re fo re , w ith a g iv e n amount o f governm ent e x p e n d itu r e s th e ta x e s o r b o rro w in g w i l l be re d u c e d to th e e x te n t o f sa v in g s on i n t e r e s t paym ents to p r i v a t e i n v e s t o r s . As th e A d v iso ry C o u n c il on S o c ia l S e c u r ity p o in te d o u t i n 19^9» The in v e stm e n t o f th e Old-Age and S u rv iv o r s ' In s u ra n c e Funds in Government s e c u r i t i e s does n o t mean t h a t p e o p le have been o r w i l l be ta x e d tw ic e f o r th e same b e n e f i t s a s have b een c h a rg e d .^ * The f o llo w in g exam ple i l l u s t r a t e s t h i s p o i n t . Suppose t h a t in y e a r X th e e x p e n d itu r e s u n d e r th e S o c ia l S e c u r ity System ex ceed th e ta x c o l l e c t i o n s by ^ T h e A d v iso ry C o u n cil on S o c ia l S e c u r ity , op. c l t . , p . * 7 . ; 125 IlOO m i l l i o n . I f th e r e w ere #5 b i l l i o n o f U n ite d S t a t e s 2 p e r c e n t bonds i n th e T ru s t Fund a t t h a t tim e , th e i n t e r e s t Income f o r one y e a r w ould be s u f f i c i e n t to b ra c e th e I t j d e f i c i t . T his i n t e r e s t would have to be r a i s e d by t a x a - j ! „ ! j ti o n . Yet i f t h e r e w ere no bonds in th e Fund, t h e flOO c j m i l l i o n to co v er th e d e f i c i t w ould a l s o have to be r a i s e d by t a x a t i o n , p l u s an a d d i t i o n a l $100 m i l l i o n to pay th e I n t e r e s t on th e #5 b i l l i o n o f governm ent bonds owned by th e p r i v a t e s e c t o r o f th e economy. The bonds w ould be in p r i v a t e hands b e c a u s e th e governm ent w ould have had t o borrow #5 b i l l i o n from p r i v a t e p a r t i e s i n o r d e r to f in a n c e t h a t p a r t o f th e d e f i c i t r e p r e s e n te d by bonds in th e T ru s t Fund. When th e governm ent o r i g i n a l l y c o l l e c t e d th e #5 b i l l i o n th ro u g h th e p a y r o l l t a x , th e money was g iv e n to th e T re a s u ry to f in a n c e th e y e a r ly d e f i c i t betw een re v e n u e and e x p e n d itu re s o r to r e t i r e th e p u b lic d e b t . I f th e T ru s t Fund p u rc h a s e d b o n d s on t h e open m ark et th e r e s u l t w ould have been th e sam e. Government d e b t w ould have been t r a n s f e r r e d from p r i v a t e o w n ersh ip t o th e Old-Age and S u rv iv o rs* I n s u ra n c e T ru s t Fund. The R eserv e E ncourages E x trav ag an ce I f , how ever, th e Government i n c r e a s e s i t s e x p e n d i t u r e s a s a r e s u l t o f th e S o c ia l S e c u r ity Program , th e n th e c r i t i c s who claim t h a t th e R eserv e i s f i c t i t i o u s i n e f f e c t 126 I a r e c o r r e c t in t h e i r a n a ly s e s . P r o f e s s o r Groves p o i n t s o u tj ith a t i I W hether th e ta x p a y e r w i l l b e n e f i t from th e R e se rv e depends upon w h eth e r th e governm ent e n la r g e s i t s e x p e n d itu r e s o v e r what i t w ould have sp e n t had th e r e b een no s o c i a l s e c u r i t y rev en u e i t c o u ld borrow . I f i t d o e s , th e n th e program makes p o s s i b l e a d d i t i o n a l p r e s e n t s e r v i c e s , b u t i t can be o f no h e lp to th e ta x - ; p a y e r l a t e r o n . I f i t d o es n o t, th e n th e i n t e r e s t e a r n in g s on th e s e c u r i t i e s h e ld by th e Fund re d u c e s th e t o t a l o b l i g a t i o n s t h a t w i l l have to be met in th e fu tu re .* * 6 The c o n s ta n t p r e s s u r e p la c e d upon Government f o r in c r e a s e d a id by th e d i f f e r e n t i n t e r e s t g ro u p s le a d s t o d e c re a s e d r e s i s t a n c e on th e p a r t of C ongress when a d d i t i o n a l rev en u e i s a v a i l a b l e . ! ! L arge r e s e r v e s may e n c o u ra g e p r e s s u r e t o u se th e fu n d s f o r in c r e a s e d b e n e f i t s o r f o r some o t h e r p u r p o s e .**7 As one a u t h o r i t y p u ts i t , C ongress may f o r g e t th e sound a c t u a r i a l p r i n c i p l e s w hich u n d e r l i e th e c r e a t i o n o f th e s e R e se rv e s and when th e y see fu n d s a c c u m u la tin g f a r in e x c e s s o f c u r r e n t p ay m en ts, th e y may be i n c l i n e d t o y i e l d t o t h i s p r e s s u r e group o r t h a t p r e s s u r e group and a p p r o p r ia te th e money f o r unw ise sp e n d in g In no way r e l a t e d to th e p u rp o se o f le g isla tio n .* * © However, t h e c r i t i c s o f th e Fund n e g le c t one ^ H a r o l d M. G roves, F in a n c in g Government ( f o u r t h e d i t i o n ; Hew York: Henry H olt and Company, 195**)# 290. **?See C a rl Shoup, "T axing f o r S o c ia l S e c u r i t y ," A nnals o f th e A m erican Academy o f P o l i t i c a l and S o c ia l S c ie n c e . 202:173» M arch, 1939 • **®E. B. S c h w u ls t, "Economic P roblem s A ris in g from S o c ia l S e c u r ity Taxes and R e s e r v e s ," P ro c e e d in g s : A m erican Economic R eview . 2 7 :1 2 8 , M arch, 1937* 127; i im p o rta n t a s p e e t when th e y a rg u e t h a t p a y r o l l ta x e s le a d to j ( in c r e a s e d governm ent e x p e n d itu r e s . They f o r g e t t h a t i f th e ! R e serv e i s e l im in a te d , a c u r r e n t - c o s t system m ust be s e t up! I in i t s p la c e . The c u r r e n t - c o s t system m ig h t a l s o e n c o u ra g e | 1 l i b e r a l i z a t i o n o f b e n e f i t paym ents th ro u g h d e s tr o y in g th e j p s y c h o lo g ic a l r e l a t i o n s h i p betw een b e n e f i t s and p a y r o l l i t a x e s . ^ Jam es, S. P a r k e r , a f t e r c o n d u c tin g a com prehensive s tu d y o f r e tir e m e n t sy stem s, co n c lu d e s t h a t The a c c u m u la te d A m erican e x p e rie n c e w ith s t a t e r e tir e m e n t sy ste m s, t e a c h e r s ' r e tir e m e n t sy stem s and ; o th e r g o v ern m e n tal r e tir e m e n t system s i n d i c a t e s t h a t th e r e s e r v e b a s i s c o n tin u o u s ly shows t h e r e l a t i o n betw een c o n t r i b u t i o n s and b e n e f i t s t o th e members of t h e sy stem s. B ecause i t k eep s t h i s r e l a t i o n s h i p alw ays b e f o r e th e I n s u r e d g ro u p , th e r e s e r v e b a s i s h as m inim ized p r e s s u r e f o r in c r e a s e in b e n e f i t s . 50 The e v id e n c e , o f c o u r s e , shows t h a t b e n e f i t s have been s i g n i f i c a n t l y l i b e r a l i z e d th ro u g h th e p a s sa g e o f th e 1939> 195©* 1952 and 195^ am endments. However, t h e r e was j no change in t h e b e n e f i t fo rm u la from 1939 th ro u g h 1 9 ^ - | T here i s a ls o re a s o n to b e l i e v e th a t th e p r e s s u r e f o r in c r e a s e d b e n e f i t s was ca u se d by f a c t o r s h av in g l i t t l e r e l a t i o n to th e s i z e o f th e R e se rv e , su ch a s th e i n c r e a s i n g power of th e p r e s s u r e groups w hich s u p p o rt th e p ro g ram , and th e in c r e a s e d c o s t o f l i v i n g . ^ R a y D. Murphy, " P ro v id in g Economic S e c u r i t y ," U n ite d S ta te s R eview , :6 , May 29# 195^- ^ ° P a rk e r, S o c ia l S e c u r ity R e s e r v e s . o n . o i t . , p . 189* ..........................”................. " 128 i Even I f governm ent e x p e n d itu r e s a r e in c r e a s e d a s a d i r e c t r e s u l t o f th e R e se rv e , th e r e i s s t i l l one o t h e r p o s s i b i l i t y t h a t may l e a d t o d e c re a s e d r e a l burden© i n th e } ;f u t u r e . I f d u rin g a p e r io d o f unem ployed r e s o u r c e s , when < th e m onies c o u ld n o t be p r o d u c tiv e ly em ployed e ls e w h e re , , th e Government u s e s th e Funds r e c e iv e d f o r c a p i t a l im provem ent, th e p r o d u c t i v i t y o f th e n a t i o n w i l l th e r e b y be i n c r e a s e d in th e f u t u r e . However, t h i s p o s s i b i l i t y i s n o t to o s i g n i f i c a n t . A fte r c o n d u c tin g a s tu d y o f t h i s s u b j e c t , th e Committee on Old-Age S e c u r ity o f th e T w e n tie th C en tu ry j Fund co n clu d ed “t h a t i t i s in p r a c t i c e h ig h ly d o u b tf u l w h e th e r th e a c c u m u la tio n o f t h e R eserve w i l l in c r e a s e th e r e a l c a p a c ity of f u t u r e g e n e r a tio n s t o c a r r y th e heavy b u rd e n o f th e a g e d . James S. P a r k e r to o k th e p o s i t i o n in 19^2 t h a t A ll th e o th e r w e lf a r e and r e l i e f e x p e n d itu r e s o f th e F ra n k lin D. R o o sev elt A d m in is tra tio n p r e d a te d th e a c c u m u la tio n o f any s u b s t a n t i a l r e s e r v e . Many o f them a n te d a te d th e S o c ia l S e c u r ity Act i t s e l f . Even th e opp o n en ts o f th e r e s e r v e w i l l adm it t h a t th e t r e n d to w ard g r e a t e r e x p e n d itu re s had s e t in lo n g b e f o r e 193 The p i c t u r e h a s n o t s u b s t a n t i a l l y changed s in c e th e end o f World War I I . Between 195® nnd 195b N a tio n a l ^ M a r g a r e t E. S c h n e id e r, More S e c u r i t y f o r Old Age, R ep o rt and Program f o r A ctio n by th e Com m ittee on Old-Age S e c u r ity (New Y ork: T w e n tie th C entury Fund, 1 9 3 7 ), p . 150 -^ P a rk er, o p . c l t . , p. 2 0 1 . | 129 D efense h as a c c o u n te d f o r a t l e a s t 7^*5 p e r c e n t of th e F e d e ra l G ov ern m en t's b u d g e t. D uring t h e Korean a c t i o n e x p e n d itu r e s f o r n a t io n a l d e fe n s e ro s e t o 87 p e r c e n t o f th e t o t a l b u d g e t. From 195© to 1953 F e d e r a l e x p e n d itu re s i | f o r h e a l t h , e d u c a tio n , and w e lf a r e d e c re a s e d from 6 p e r i \ c e n t t o 3 .8 p e r c e n t o f th e t o t a l . (S in c e 1953 th e s e w e lf a r e e x p e n d itu r e s have g r a d u a l ly I n c r e a s e d as a p e r c e n t age o f th e t o t a l governm ent b u d g e t, b u t i n 1955 th e y w ere s t i l l below t h e i r 1951 l e v e l ) . ^ 3 C o n s id e rin g th e many an d v a r i e d p r e s s u r e s p la c e d upon th e F e d e ra l Government f o r in c r e a s e d e x p e n d itu r e s , i t seems r e a s o n a b le to co n clu d e t h a t th e R e se rv e has n o t y e t l e d t o any g r e a t demand f o r F e d e ra l e x tra v a g a n c e . T h is v ie w p o in t i s s tr e n g th e n e d by th e f a c t t h a t a p p r o p r ia ti o n s to t h e R eserve a r e d ed u c ted from th e n e t r e c e i p t s o f th e F e d e ra l Government in d e te rm in in g th e n e t b u dget s u r p lu s and d e f i c i t . P r l v a t e In s u ra n c e Analogy A nother c r i t i c i s m o f t h e O ld Age and S u rv iv o r s ' In s u ra n c e R eserv e i s th e argum ent t h a t th e R eserve p r i n c i p l e h as b een ta k e n from p r i v a t e in s u ra n c e and -^ P e rc e n ta g e s com puted from f i g u r e s p r e s e n te d in N a tio n a l I n d u s t r i a l C onference Board, The Economic Almanac 1956 (New York: Thomas Y. C row ell Company, 1956)'» P • ^58. 130 i w ro n g ly a p p lie d to com pulsory s c h e m e s .^ The e x p o n e n ts o f ; t h i s v ie w p o in t s t a r t by show ing t h a t a p r i v a t e in s u ra n c e company must l a y a s id e r e s e r v e s f o r t h r e e r e a s o n s . F i r s t , j a r e s e r v e i s n e c e s s a r y a s a p r o t e c t i o n a g a i n s t f u t u r e l o s s j j o f re v e n u e due to a drop in new a c c o u n ts and a d l s c o n t I n i ' uance o f c u r r e n t premium p ay m en ts. Second, th ro u g h th e j in v e stm e n t o f s u r p lu s funds in o u ts id e i n t e r e s t - b e a r i n g s e c u r i t i e s th e c o s t s t o th e p o l i c y h o ld e r s can to some i e x te n t be re d u c e d . T h ird , a p r i v a t e in s u r a n c e company f u l f i l l s i t s f u n c tio n when t h e r e s e r v e s a r e s u f f i c i e n t to m eet a l l th e com pany’ s o b l i g a t i o n s a s th e y m a tu re . Even i f th e paym ent i s w o r th le s s i n t e r n s o f r e a l income, th e b e n e f i c i a r y h a s no f u r t h e r c la im upon th e company when th e I f a c e v a lu e o f th e p o lic y i s p a i d . Such e r i t l c s o f th e R eserv e program , a s Mr. E p s te in , n e x t p ro c e e d t o show t h a t th e v e ry b a s i s o f a g o v ern m e n tal com pulsory In s u ra n c e program i s e n t i r e l y d i f f e r e n t . The in s u r e d h e re do n o t buy premium s v o l u n t a r i l y . T h e ir e o n t r i b u t i o n s a r e i n th e form o f ta x e s . They n o t o n ly c a n n o t choose th e ty p e and amount of p r o t e c t i o n b u t th e y can n o t w ith d raw from t h e fu n d o r d is c o n tin u e t h e i r prem ium s. A lso , u n lik e a p r i v a t e company, a governm ent c a n n o t p r o t e c t i t s f u t u r e by s a v in g money in th e form o f i t s own r e s e r v e s f o r , . . . such g o v ern m en tal r e s e r v e s a r e l i a b i l i t i e s r a t h e r th a n a s s e t s . In th e f i n a l a n a l y s i s a governm ent depends n o t on r e s e r v e s b u t on i t s c r e d i t , w hich in Lewis M eriam, K a rl S c h lo tte r b e c k , and M ild re d M aro n ly , The Coat and F in a n c in g o f S o c ia l S e c u r ity (W ashington, D .C .: The B ro o k in g s I n s t i t u t i o n , 1 9 5 0 ), p . 1 5 5 . j tu r n I s b a s e d upon i t s a b i l i t y to t a x th e p e o p le &ecc 1 j th e needs a r i s e o r on i t s c a p a c ity t o borrow m o n e y .55 I t i s t r u e t h a t t h e r e a r e s i g n i f i c a n t d i f f e r e n c e s betw een s o c i a l and p r i v a t e in s u r a n c e . Y et Mr. E p s te in n e g l e c t s t o m e n tio n t h a t th e R eserve Fund s e rv e s a u s e f u l j p u rp o se under s o c i a l in s u ra n c e even th o u g h th e r o l e t h a t th e R eserve Fund p la y s i s q u i t e d i f f e r e n t . The O ld Age and S u r v iv o r s ' In s u ra n c e R eserve Fund re d u c e s th e d e b t in p r i v a t e hands and th u s e n a b le s th e governm ent to re d u c e i t s i n t e r e s t e x p e n d itu r e s to th e p r i v a t e s e c t o r o f th e economy. The R eserve a ls o h e lp s t o m a in ta in some r e l a t i o n s h i p b etw een p a y r o l l ta x e s and b e n e f i t p ay m en ts, w hich, i n t u r n , g iv e s th e b e n e f i c i a r i e s and ta x p a y e rs a s e n s e o f r e s p o n s i b i l i t y . ®ien, to o , th e Fund p r e s e n ts on a T re a su ry b a la n c e s h e e t th e c u r r e n t a s s e t s and f u t u r e l i a b i l i t i e s u n d e r th e A ct. A nother f u n c tio n of th e R eserve i s t h a t i t te n d s to s t a b i l i z e th e t a x r a t e . F i n a l l y , th e R eserv e i s a u s e f u l weapon in M onetary p’ o l l e y . Heavy Burden on th e Poor and Thus D e f la t io n a r y in E f f e c t Maxwell St e w a r t, in h i s book S o c ia l S e c u r i t y , p u b lis h e d in 1939» p r e s e n ts th e v ie w p o in t t h a t th e R eserve f o r c e s a heavy b u rd e n on th o s e l e a s t a b le to p a y . W e have a l r e a d y n o tic e d t h a t th e fu n d s a re t o be in v e s te d i n governm ent b o n d s, e i t h e r by b u y in g them -^Abraham E p s te in , I n s e c u r i t y —A C h a lle n g e to A m erica (Hew York: Random House, 1 9 3 8 ), p . 79^- 132 on th e m a rk e t o r th ro u g h th e I s s u e o f new ones by th e governm ent. In e i t h e r c a s e th e r e s u l t I s t h e same. The money g o es to th e w e a l t h i e r g ro u p s In th e c o u n try — e i t h e r a s a premium on t h e i r p r e s e n t in v e stm e n ts In governm ent bonds o r a s s a v in g s on t a x e s . ! In o t h e r w o rd s, th e p o o r a r e t o be f o r c e d to sa v e . j . . . S in ce th e ©mount o f sa v in g s n eed ed f o r i n v e s t - I m ent in new f a c t o r i e s , m a c h in e ry , h o u s in g and th e l i k e ! I s d e f i n i t e l y li m i t e d by consum er demand, i t fo llo w s t h a t th e money w i l l e i t h e r l i e I d l e , and th u s p r e c i p i t a t e a d e p r e s s io n , o r be sp e n t by th e w e a l t h i e r g ro u p s ; f o r lu x u r y g o o d s. S ince th e w e a lth y w i l l f i n d t h e i r incom es r e l a t i v e l y h ig h e r , th e ch a n c e s a r e t h a t a t l e a s t p a r t o f t h i s money w i l l f in d i t s way in to th e lu x u r y m a rk e ts . Thus, th e I n d i r e c t e f f e c t o f a s o c i a l in s u ra n c e w hich i s s u p p o rte d by wage and p a y r o l l ta x e s i s th e o p p o s ite o f w hat was o r i g i n a l l y in te n d e d . I n s te a d o f b e in g an agency f o r r e d i s t r i b u t i n g w e a lth to th e n ee d y , I t may a c t u a l l y d e p r iv e th e po o r o f b re a d and d e e e n t h o u sin g so t h a t th e r i c h may en jo y c a v i a r and y a c h ts . T h is i s i n e v i t a b l e in any s e c u r i t y p la n w hich I s b a s e d on th e a c c u m u la tio n p r i n c i p l e , i f o n ly b e c a u se i t f o r c e s th e p o o r t o save w here th e y have n e v e r sav ed b e f o r e . There can be no e scap e from t h i s dilemma a s lo n g a s s o c i a l in s u ra n c e I s r e q u ir e d t o be a c t u a r i a l l y ' s o u n d .'5b S e n a to r D o u g las, in h i s w r i t i n g s on S o c ia l S e c u r ity in 1936, em phasized th e d e f l a t i o n a r y a s p e c t s of th e R eserve p ro g ra m : The a c c u m u la tio n o f th e s e r e s e r v e s w i l l beyond doubt g r e a t l y d e c re a s e th e amount o f p u r c h a s in g power w hich o th e rw is e w ould be sp e n t upon consum ers goods. . . . S in ce o u r s o c i e t y seems t o have s u f f e r e d d u rin g t h e tw e n tie s from to o l a r g e a p r o p o r tio n of th e n a t i o n a l income b e in g r e i n v e s t e d and to o sm a ll a p r o p o r tio n b e in g u sed f o r consum ers g o o d s, th e w ith d ra w a l o f such l a r g e am ounts from c u r r e n t consum ption may w e ll h e lp to c r e a t e a f u r t h e r s t a t e o f u n b alan ce i n th e f u t u r e . 57 ■ ^ S te w a rt, ©p. c l t . , p , 313* -*^Paul H. D ouglas, S o c ia l S e c u r ity i n th e U n ite d S t a t e s (Mew York: Mc&raw-Hill Book Company, 1 9 3 6 ), p . 168. In r e a l i t y th e b a s ic d i f f e r e n c e betw een th e v ie w - p o i n t s p r e s e n te d by D ouglas and S te w a rt on th e one h an d , and t h e a u th o r o f t h i s r e p o r t on th e o t h e r , i s ca u se d by a . | i I d i f f e r e n t tim e p e r io d o u tlo o k . , i i | The u n f o r tu n a te f a c t t h a t th e S o c ia l S e c u r ity i j * program was s t a r t e d d u rin g th e m ost s e v e re d e p r e s s io n in j i th e h i s t o r y of th e n a tio n p ro b a b ly a c c o u n ts f o r t h i s s h o r t { * ru n r e c e s s io n a r y v ie w p o in t p r e s e n te d by many c r i t i c s o f the) R e serv e p r o g r a m . The S o c ia l S e c u r ity program was | < r e l a t i v e l y d e f l a t i o n a r y d u r in g th e d e p r e s s io n , e s p e c i a l l y j in t h e t h r e e y e a r s b e fo re m o n th ly b e n e f i t s w ere p a i d , due ! to th e f a c t t h a t governm ent b o rro w in g w ould have b e e n u se d i n s t e a d o f a p a y r o l l t a x to f in a n c e th e amount of g o v e rn ment e x p e n d itu r e s s u p p o rte d by th e p a y r o l l ta x . However, even d u rin g a r e c e s s io n a r y p e r io d t h e r e a r e many f a c t o r s w hich te n d to m i t i g a t e th e D ouglas an d S tew art v ie w p o in ts . T h e re f o re , th e d e f l a t i o n a r y e f f e c t s may n o t be a s s tr o n g a s th e y o th e rw is e w ould have b ee n . F i r s t , i t m ust be remem bered t h a t one o f th e fu n d a m e n ta l p r i n c i p l e s upon w hich O ld Age In s u ra n c e i s b a s e d i s th e b e n e f i t s - r e c e l v e d th e o ry o f t a x a t i o n . T his th e o r y r e q u i r e s th e im p o s itio n o f a p a y r o l l t a x . However, i f i t w ere deemed d e s i r a b l e , i t w ould be p o s s i b l e to b u i l d up th e -^D en zel C. C lin e , "P a y -R o ll Taxes and S o c ia l S e c u r i t y ," A nnals o f th e A m erican Academy o f P o l i t i c a l and S o c ia l S c ie n c e . 2657131, November, 19^9• I 13** R eserv e from p r o g r e s s iv e incom e ta x e s r a t h e r th a n from p a y r o l l ta x e s . Second, o t h e r g o v ern m e n tal p o l i c i e s can he s e t up to ■ |c o u n te r b a la n c e an y d e f l a t i o n a r y e f f e c t s o f th e Old Age and |S u r v iv o r s ' In s u ra n c e sy stem . T h ird , i f one c o n s id e r s th e f a c t t h a t th e F e d e ra l d e b t h a s I n c r e a s e d more r a p i d l y th a n th e R e se rv e , th e n e t e f f e c t o f th e Fund, even i f i t i s d e f l a t i o n a r y , w ould be to d im in is h th e i n f l a t i o n a r y e f f e c t s o f d e f i c i t f i n a n c i n g . ^9 t I f g r e a t e r i n f l a t i o n i s d e s i r e d , th e Government h a s th e power to in c r e a s e i t s e x p e n d itu re s and th u s make up f o r any d e f l a t i o n a r y e f f e c t s ca u sed by th e S o c ia l S e c u r ity program . The e n t i r e t r a n s a c t i o n m ust be c o n s id e r e d in e v a lu a t i n g th e d e f l a t i o n a r y e f f e c t s o f th e R e se rv e . Money i s c o l l e c t e d by th e T re a su ry from th e lo w er income g ro u p s and from th e em ployer th ro u g h th e p a y r o l l t a x . Bonds a r e p u rc h a s e d f o r th e Fund by t h e S e c r e ta r y o f th e T re a s u ry as M anaging T ru s te e . Except f o r th e bonds t h a t a r e p u rc h a s e d on th e open m a rk e t, th e T re a su ry s e l l s new bond i s s u e s to th e R eserve and u s e s th e money r e c e iv e d t o pay th e g e n e r a l e x p e n d itu r e s o f th e g o vernm ent. The n e t e f f e c t of t h e t r a n s a c t i o n i s a t r a n s f e r payment from th e ta x p a y e r to th e r e c i p i e n t o f governm ent e x p e n d itu r e s . As th e s t a t i s t i c s to -^ W illiam J . S h u ltz an d C. L ow ell H a r r i s s , A m erican P u b lic F in an ce ( s i x t h e d i t i o n ; New York: P r e n t i c e - H a l l , 195*0, PP. 3 2 2 -3 2 3 . be p r e s e n te d In C h a p te r V show, governm ent e x p e n d itu r e s a r e j p r o g r e s s iv e in e f f e c t and t h e r e f o r e e x e r t a b a la n c in g f o r c e on th e p a y r o l l t a x which i s r e g r e s s i v e i n n a tu r e . B a rin g su b se q u en t d e p r e s s io n s b e n e f i t paym ents w i l l , i I n c r e a s e a s aged w o rk ers r e t i r e from th e work f o r c e . At j ! th e same tim e c o n t r i b u t i o n s t o th e Fund w i l l d e c re a s e a s wage r a t e s a r e re d u c e d . T his w i l l be i n f l a t i o n a r y . The p roblem d u rin g th e 1930’ s was t h a t o n ly lum p sum b e n e f i t paym ents w ere m ade. T h e re fo re , th e e f f e c t o f O ld Age and S u r v iv o r s ' In s u ra n c e d u rin g th e 1 9 3 0 's was c o n tr a r y t o th e j way th e system w ould n o rm a lly o p e r a t e . I n f l a t lonar.v E f f e c t s o f R eserve I Some c r i t i c s have c la im e d t h a t th e R eserve Fund i s i n f l a t i o n a r y . F o r exam ple, W illiam W ith e rs a g re e s t h a t The p r e s e n t s e c u r i t y program h a s w ith in i t e le m e n ts o f i n f l a t i o n * In th e f i r s t p la c e , r e tir e m e n t o f th e a lr e a d y l a r g e and p o s s i b l y i n f l a t i o n a r y d e b t may n o t o c c u r. . . . A second ele m e n t i s th e te m p ta tio n s e t up by added t a x r e s o u r c e s p r o v id e d by th e S o c ia l S e c u r ity Act t o p e r p e t u a t e an u n b a la n c e d b u d g e t. I f th e F e d e ra l Government can count on a s te a d y m a rk e t f o r an a n n u a l in c re m e n t o f i t s bonds o f more th a n a b i l l i o n d o l l a r s w i l l i t rem ain c a u tio u s ab o u t in c re m e n ts o f two o r t h r e e b i l l i o n when n o t a l l o f th e s e c u r i t i e s need be s o ld to th e b anks and th e g e n e r a l p u b lic ? The h i s t o r y o f d e b t r e t i r e m e n t s i s one o f g r e a t d i s i l l u s i o n m e n t . Only th e U n ite d S ta te s h a s e v e r engaged in a th o ro u g h g o in g g en u in e d e b t r e tir e m e n t a c h ie v e d th ro u g h t a x s u r p lu s e s and s u s ta in e d o v e r a number o f y e a r s . A fte r e m e rg e n c ie s, new p l a t e a u s o f d e b t a r e re a c h e d from w hich th e i n c r e a s e s go on t o u n p re c e d e n te d h e i g h t s . These e m erg en cies have in th e p a s t b e e n c h i e f l y w a rs , b u t now d e p r e s s io n s seem e q u a lly p r o d u c tiv e o f d e b t and 136 make g en u in e r e tir e m e n t much l e s s l i k e l y .6° W ithers c o n te n d s f i r s t t h a t th e T re a s u ry w i l l n o t i use Income r e c e iv e d from p a y r o l l ta x e s to r e t i r e d e b t. j i I n s te a d , th e T re a su ry w i l l is s u e s p e c i a l bonds d i r e c t l y to i th e R eserv e Fund and u se th e c a sh to pay th e g e n e r a l j ex p e n ses o f th e governm ent ( th e p r e s e n t T re a s u ry p o lic y ,d u e ! \ to a lr e a d y e x i s t i n g d e f i c i t s ) . The second assu m p tio n I s t h a t th e governm ent w i l l be te m p te d to in c r e a s e i t s b u d g e t b e c a u se of t h i s new -found s o u rc e o f re v e n u e . Thus, th ro u g h i th e p o s s i b i l i t y of in c r e a s e d governm ent e x p e n d itu r e s th e \ R eserv e becomes p o t e n t i a l l y i n f l a t i o n a r y . A t h i r d assum p t i o n i s t h a t th e in c r e a s e d governm ent e x p e n d itu r e s w i l l r a i s e p r i c e s i n s t e a d o f p u t t i n g la b o r to w ork. B e fo re I n f l a t i o n w ould o c c u r a s a r e s u l t o f governm ent e x p e n d i t u r e s , i t would be n e c e s s a r y to have such b o t t l e n e c k s in th e economy a s t o cause in c r e a s e d p r i c e s w h ile unemployment s t i l l e x i s t s , o r to be o p e r a tin g under a f u l l employment e c o n o m y .^ 6°W illiam W ith e rs, F in a n c in g Economic S e c u r ity In th e U n ite d S t a t e s (Mew York: Colum bia U n iv e r s ity P r e s s , 1 9 3 9 7 , p . 136. 6 1 j. M. K eynes, i n showing t h a t governm ent e x p e n d i t u r e s le a d t o f u l l employment d u r in g d e p re s s e d p e r io d s c o n c lu d e s t h a t “S in c e each group o f w o rk e rs w i l l g a in , . . . by a r i s e in i t s own w ages, th e r e i s n a t u r a l l y f o r a l l g ro u p s a p r e s s u r e in t h i s d i r e c t i o n , w hich e n t r e p r e n e u r s w i l l be more re a d y t o m eet when th e y a r e d o in g b e t t e r b u s in e s s ." John M aynard K eynes, The G en eral Theory o f Employment I n t e r e s t and Money (New York: H a r c o u r t, B race and Company, 1 9 3 6 ) , p . 301- 137 As h as b een s t a t e d , t h e r e I s no e v id e n c e t h a t governm ent e x p e n d itu r e s have been in c r e a s e d a s a r e s u l t o f ; I th e Old Age and S u rv iv o rs* In su ra n c e Program . T h e re fo re , | I t i ithe r e s u l t had n o t p ro v e d i n f l a t i o n a r y d u r in g th e l a t e r j j I il9 3 0 * s when W ith e rs w ro te h i s book. However, th e p o t e n t i a l j re m a in s. , i I f th e R e se rv e i s u se d to r e t i r e d e b t d u rin g t h e ; p r o s p e r i t y p h ase o f th e b u s in e s s c y c le , th e r e s u l t i s I in d e te r m in a te . I f , f o r exam ple, d u rin g p r o s p e r i t y th e ! fu n d s a r e i n v e s te d by th e r e c i p i e n t s , e f f e c t i v e demand w l l l | i be in c r e a s e d . T h is w i l l be I n f l a t i o n a r y i f i t e i t h e r in c r e a s e s bank r e s e r v e s o r le a d s to b id s f o r s c a rc e ■ I r e s o u r c e s . Y et t h e r e d u c tio n in consum ption e x p e n d itu re s th ro u g h th e p a y r o l l ta x w ould o f f s e t th e i n f l a t i o n a r y e f f e c t s on th e economy c a u se d by In v e stm e n t e x p e n d i t u r e s .62 What i s m ore, governm ent rev en u e from th e p a y r o l l t a x w i l l I n c r e a s e d u rin g p r o s p e r i t y p e r io d s due to th e in c r e a s e in wage r a t e s . P r ic e L evel Changes The fo llo w in g comment on th e S o c ia l S e c u r ity Program c o n t a in s c o n s id e r a b le m e r it: I t may p ro v e to be a c r u e l and p i t i f u l J e s t to 62R e tire m e n t o f th e d e b t by I t s e l f w orks l i k e an open m ark et p u rc h a s e o p e r a tio n and i s i n f l a t i o n a r y . How e v e r , I t i s a co m b in atio n o f p a y r o l l t a x r e c e i p t s and d eb t r e t i r e m e n t w hich i s h e re c o n s id e re d . 138 com pel by la w th e g r e a t body o f o u r w o rk in g p e o p le to sa v e f o r t h e i r o ld age d o l l a r s w hich o u r e x i s t i n g p u b l i c p o l i c i e s c o u ld so e a s i l y ro b o f m ost o f t h e i r v a l u e lo n g b e f o r e th e tim e came when th e w o rk e r was t o i g e t them b a c k . "W hen we have a tw e n ty -f o u r h o u r p o l i c y j w i t h r e s p e c t to o u r money, i t i s s u r e l y b e s t to have a : c u r r e n t c o s t p o lic y w ith r e s p e c t t o p e n s io n s f o r o u r ! a g e d .63 j S ince th e g e n e r a l tr e n d i s to w ard a s e c u la r i n c r e a s e | in p r i c e s , 6’* * ' i t i s l o g i c a l to assume t h a t in th e f u t u r e a j d e c re a s e in r e a l b e n e f i t paym ents w i l l ta k e p la c e ( i n t e r m s , o f goods and s e r v i c e s ) . T his problem o f lo n g - ru n i n f l a t i o n a ls o e x i s t s f o r w o rk e rs who keep t h e i r s a v in g s in v e s te d in governm ent o r com m ercial b onds, sa v in g s a c c o u n ts , l i f e in s u r a n c e , o r any f i x e d income in v e s tm e n t. In c re a s e d p r i c e l e v e l s a r e a s ig n o f m o n etary m is management and n o t a c o n s c io u s b re a c h o f f a i t h . However, s in c e th e g e n e r a l t r e n d i s to w a rd a d e c re a s e in th e v a lu e o f money, i t may be w ise to c o n tin u e th e c u r r e n t upw ard r e v i s i o n o f b e n e f i t sc h e d u le s to meet i n f l a t i o n . A nother o f f s e t t i n g f a c t o r i s th e u s e o f th e s te p premium i n s t e a d o f a l e v e l premium ta x sy stem . Thus th e m a rg in a l d i s u t i l i t y o f th e d o l l a r s c o l l e c t e d by th e governm ent may be e q u a liz e d th ro u g h c h a rg in g h ig h e r r a t e s . ^ A l d r i c h , o p . c l t . , p . 686. S. W bytinsky and A s s o c ia te s , Employment and Wages i n th e U n ited S ta te s (New York: The T w en tieth C en tu ry Fund, 195377 p p . 4 9 -5 0 . I t must be rem em bered, a s p o in te d o u t in C h a p te r I I , t h a t e v e ry tim e an in c r e a s e d b e n e f i t sc h e d u le h as gone in to e f f e c t th o s e who had p r e v io u s l y r e t i r e d a ls o r e c e iv e d th e i added b e n e f i t . Of c o u rs e , c o n tin u a l in c r e a s e s in b e n e f i t s J i ? I p a r t i a l l y d e s tr o y th e p r o p o r t i o n a l i t y betw een c o n t r i b u t i o n s ; | •and b e n e f i t p ay m en ts. N e v e rth e le s s , th e c o n s ta n t r e v i s i o n in th e b e n e f i t s c h e d u le h as h e lp e d a l l e v i a t e many h a r d s h ip s t h a t w ould have r e s u l t e d from i n f l a t i o n a r y f o r c e s i n l i g h t o f th e f a c t t h a t th e w o rk er was c o n t r i b u t i n g to th e Fund d u r in g p e r io d s in w hich th e v a lu e o f money was r e l a t i v e l y h ig h . IV. FISCAL POLICY D uring th e y e a rs from 1937 to 1939 th e c o u n try was e x p e rie n c in g r e c e s s io n a r y c o n d i tio n s . At t h a t tim e th e i n t r o d u c t i o n o f a p a y r o l l t a x was d e f l a t i o n a r y . The fu n d s d e r iv e d from t h i s t a x w ere t r a n s f e r r e d from th e R e serv e t o th e T re a s u ry , and th e T re a su ry f in a n c e d g e n e r a l governm ent e x p e n d itu r e s w ith th e fu n d s . S in ce th e g e n e r a l governm ent b u d g e t a t t h a t tim e fa v o re d th e lo w er income g ro u p s, th e d e f l a t i o n a r y a s p e c t s o f th e p a y r o l l t a x w ere o f f s e t . T h e re fo re , th e e f f e c t on consum ption and s a v in g s was n e u t r a l i z e d . However, a s tu d y co n d u cted in 19^1 ( r e s u l t s o f w hich w i l l be p r e s e n te d in C h a p ter VI) shows t h a t th e two lo w e r income g ro u p s and th e h ig h e s t Income group b e n e f i t e d from th e R eserve Program . Consum ption b e n e f i t e d iko in 19^*1 b a t to su ch a sm all e x t e n t a s to be h a r d ly n o t i c e d . However, in th e a b se n c e o f th e p a y r o l l t a x , governm ent bonds would have been u se d , and th e r e s u l t w ould have been I n f l a t i o n a r y . T h e re fo re , th e R eserve Program c o u ld be c o n s id e r e d d e f l a t i o n a r y in a r e l a t i v e s e n s e d u rin g t h i s p e r i o d . T here w as, how ever, one o f f s e t t i n g f a c t o r — th e a b i l i t y o f th e R eserv e to k ee p i n t e r e s t r a t e s on governm ent bonds a t a low l e v e l . ^5 P r o f e s s o r A lv in Hansen s a id in r e f e r r i n g to th e R eserv e, i By draw ing i n ta x fu n d s in a p e r i o d o f r e c e s s io n j d e f l a t i o n i s a c c e n tu a te d , th e re b y c a l l i n g f o r s t i l l h e a v i e r g o v ern m e n tal e x p e n d itu re s to check th e downward movement. I f th e c o u n try i s a lr e a d y f a c in g r e c e s s io n d i f f i c u l t i e s , th e p r e s e n t p la n u n n e c e s s a r ily adds to o u r t r o u b le s by d r a in in g o f f a p a r t o f th e consum ption e x p e n d itu r e s w hich w ould o th e rw is e h av e been m ad e.66 Even th o u g h th e T re a su ry c o u ld u se th e R eserv e to k eep I n t e r e s t r a t e s low , th e Fund h as in a r e l a t i v e s e n s e a c t e d a s an a n t i - i n f l a t i o n a r y d e v ic e s in c e 19*+©* T h is has been p a r t i c u l a r l y t r u e d u r in g th e y e a rs when th e b u d g et was n o t i n b a la n c e , b e c a u se o f th e r e g r e s s i v e n a tu r e o f th e p a y r o l l ta x . Such an a n a l y s i s assum es t h a t governm ent bonds w ould have been used to fin a n c e governm ent d e f i c i t s ^ T h e a f f e c t on i n t e r e s t r a t e s i s d is c u s s e d in C h a p te r V I I I on p ag es 262-265. 66A lvin H. H ansen, F u l l Recovery o r S ta g n a tio n ? (New York: W . W . N orton and Company, 1938/* P* 192* I Ikl . j iln th e ab sen ce o f th e p a y r o l l ta x .® ' i S ince W orld War I I , d a r in g th e y e a rs in w hich th e b u d g e t was in b a la n c e , th e am ounts r e c e iv e d by th e T re a su ry j I from th e p a y r o l l t a x in e x c e ss o f b e n e f i t paym ents have ! ; i jbeen u se d t o p u rc h a s e governm ent b o n d s. j * The fu n d s r e c e iv e d by p r i v a t e ow ners from th e s a l e j o f bonds have i n l a r g e p a r t flo w ed in to in v e stm e n t ex p e n - | d l t u r e s . F or exam ple, I f th e m onies a r e d e p o s ite d in j i com m ercial b a n k s , th e fu n d s a r e made a v a i l a b l e f o r lo a n s ! I and th u s s ti m u la te in v e stm e n t e x p e n d itu re s e i t h e r th ro u g h j I a r e d u c t i o n in i n t e r e s t r a t e s o r a r e d u c t io n in le n d in g f r e q u ir e m e n ts . However, th e f i n a l r e s u l t w ould be l n d e t e r - < m ln a te s in c e a r e d u c tio n i n consum er p u r c h a s in g c a u s e d by j th e p a y r o l l t a x w ould re d u c e e f f e c t i v e demand. i V. CONCLUDING- OBSERVATIONS A R eserve does n o t p e rfo rm t h e same f u n c tio n u n d e r S o c ia l In su ra n c e a s i t does u n d e r p r i v a t e incom e. The Old Age and S u r v iv o r s ' In su ra n c e R eserv e Fund, how ever, s e rv e s s e v e r a l p u rp o s e s . I t l i n k s th e p a y r o l l t a x to b e n e f i t paym ents and th e r e b y g iv e s th e wage e a r n e r a se n se o f 6 7 T o ta l governm ent re v e n u e m inus t r a n s f e r s to th e R e se rv e Fund i s c a l c u l a t e d by th e F e d e ra l Government in d e te rm in in g th e r e l a t i o n s h i p betw een t o t a l revenue a n d t o t a l governm ent e x p e n d itu r e s . T h e re fo re , in th e ab se n c e o f a p a y r o l l ta x governm ent bonds w ould be u sed t o f in a n c e th e d e f i c i t . 142 ; i J r e s p o n s i b i l i t y . By r e q u i r i n g a t a x r a t e h i g h e r th an n e c e s s a r y to m eet c u r r e n t paym ents d u rin g th e e a r l y y e a rs o f th e program , i t a llo w s lo w e r ta x r a t e s a f t e r th e system m a tu re s , s in c e th e d eb t in t h e hands o f t h e p r i v a t e s e c t o r ; i ' o f th e economy i s re d u c e d . The Fund i s t h e r e f o r e r e a l and j 1 n o t f i c t i t i o u s e x c e p t in th e se n se t h a t money, l i k e th e i r e s e r v e o f e v e ry f i n a n c i a l i n s t i t u t i o n , i s n o t a c t u a l l y h e ld i n th e R e se rv e . In a d d i t i o n , c u r r e n t a s s e t s and f u t u r e l i a b i l i t i e s a r e p r e s e n te d on a T re a s u ry b a la n c e i s h e e t . However, due to th e number o f u n p r e d ic ta b le | i v a r i a b l e s , i t i s im p o s s ib le to d e te rm in e th e f u t u r e s i z e o fj th e R e se rv e . f The R eserv e i s a l s o a p o t e n t i a l in s tru m e n t f o r j i r e g u l a t i n g th e money and in v e stm e n t m a rk e ts . The p u rc h a s e and s a l e o f governm ent bonds on th e open m a rk e t m ust be c o o r d in a te d w ith th e p o l i c i e s o f th e T re a s u ry and th e F e d e r a l R eserve System in o r d e r f o r th e R e serv e Fund to be managed e f f i c i e n t l y . Those w r i t e r s who h e ld t h a t th e R e serv e was d e f l a t i o n a r y i n e f f e c t d u rin g t h e d e p r e s s io n o f th e 1 9 3 0 *s w ere c o r r e c t in th e o r y . Government bonds w ould have been u se d to f in a n c e governm ent d e f i c i t s i f th e R e se rv e had n o t e x i s t e d . However, th e R eserv e h as been an a n t i - i n f l a t i o n a r y d e v ic e s in c e th e in c e p tio n o f p r o s p e r i t y , e s p e c i a l l y d u rin g th e y e a rs inwhM i th e f e d e r a l b u d g et was n o t i n b a la n c e . I t was fo u n d , how ever, t h a t t h e R e serv e d id n o t en c o u ra g e f e d e r a l e x tra v a g a n c e , and t h e r e f o r e was n o t i n f l a t i o n a r y d a r in g th e p e r i o d u n d e r re v ie w . | The r e d a c t i o n in th e p u r c h a s in g pow er o f th e d o l l a r jwhieh h a s ta k e n p la c e s in c e 1937 h a s n o t c a u se d a d e c re a s e i !in r e a l b e n e f i t pay m en ts, a s th e b e n e f i t sc h e d u le s have been p e r i o d i c a l l y r e v is e d upw ard. The p o s s i b i l i t y o f mismanagement th ro u g h governm ent I n e f f i c i e n c y and la c k o f c o o r d in a tio n s t i l l e x i s t s . J e t from i t s in c e p tio n th e r e h as been no c r i t i c i s m o f th e management o f th e R eserve Fund. PART I I I EFFECT OF OLD AGE A M D SURVIVORS' INSURANCE ON SELECTED VARIABLES CHAPTER V j INCOME TRANSFERS WHICH RESULT FROM THE SOCIAL SECURITY ACT | I t I s th e p u rp o se o f t h i s c h a p te r t o e x p lo re th e \ ! | t r a n s f e r o f Income t h a t ta k e s p la c e a s a r e s u l t o f th e Old j 1 Age and S u r v iv o r s ’ In su ra n c e System and th e e f f e c t o f t h i s : t r a n s f e r dn t h e d i s t r i b u t i o n o f incom e.1 I I I . BASIC CLASSIFICATION OF GOVERNMENT EXPENDITURES In o r d e r t o a n a ly z e t h e e f f e c t s o f any governm ent e x p e n d itu r e , I t i s f i r s t n e c e s s a r y t o d e te rm in e i t s n a t u r e . Any p a r t i c u l a r e x p e n d itu re may he e i t h e r a f a c t o r - p u r c h a s e ; o r a t r a n s f e r e x p e n d itu r e .^ F a c to r -P u rc h a s e E x p e n d itu re A f a c t o r p u rc h a s e e x p e n d itu r e ta k e s p la c e when a governm ent p u rc h a s e s goods o r p e rfo rm s any ’ ’r e s o u r c e - u s in g " a c t i v i t y w hich r e s u l t s in th e p ro d u c tio n o f goods o r s e r v i c e s t h a t s a t i s f y w a n ts . Thus, when th e governm ent Thus th e c h a p te r d e a l s w ith th e d i r e c t e f f e c t s of t h e S o c ia l S e c u r i t y sy stem . L a te r c h a p te r s c o n s id e r th e se c o n d a ry e f f e c t s o f t h i s program . ^F or a com p reh en siv e and th o ro u g h a n a l y s i s of t h i s s u b j e c t se e : John F . Due, "Government E x p e n d itu re s and T h e ir S ig n if ic a n c e f o r th e Economy," F i s c a l P o l i c i e s and th e A m erican Economy, Kenyon E. P oole"T ed7) (New York: P r e n t i c e - H a l l , 1951)* PP* 2 02-207. . . . h i r e s w o rk e rs , r e n t s o r h ay s la n d , o r b a y s j s u p p l i e s , m a t e r i a l s , and m a c h in e ry , I t I s p e rfo rm in g ' an a c t i v i t y com parable t o t h a t o f a b u s in e s s firm when ! th e l a t t e r o b t a i n s u n i t s o f th e f a c t o r s in o r d e r to c a r r y on p r o d u c t i o n .3 j |The v a lu e o f th e goods o r s e r v i c e s p ro d u c e d c o n s t i t u t e s a p o r t i o n o f g r o s s n a t i o n a l p r o d u c t. S in ce f a c t o r - p u r c h a s e e x p e n d itu r e s in v o lv e th e u se o f s c a r c e f a c t o r s o f p r o d u c tio n , th e r e i s c o m p e titio n w ith p r i v a t e i n d u s t r y f o r t h e i r u s e . T h is i s e s p e c i a l l y t r u e d u rin g p r o s p e r i t y when i d l e r e s o u r c e s a r e a t a minimum. At such tim e s th e c o m p e titio n o f th e governm ent f o r th e J f a c t o r s re d u c e s p r i v a t e p r o d u c tio n and th u s a f f e c t s th e J norm al a l l o c a t i o n o f r e s o u r c e s . T ra n s f e r E x p e n d itu re s A ccording t o Due, t r a n s f e r e x p e n d itu r e s a re ’ ’th o s e in v o lv in g m erely a t r a n s f e r o f p u rc h a s in g pow er w ith o u t th e r e c i p i e n t s p r o v id in g goods o r s e r v i c e s to th e g o v e rn ment i n e x c h a n g e . T r a n s f e r - p a y m e n t s , t h e r e f o r e , in v o lv e no p r o d u c tio n o f goods o r s e r v i c e s on th e p a r t o f th e governm ent. However, th e y a f f e c t g r o s s n a t i o n a l p ro d u c t where th e y s h i f t p u rc h a s in g pow er from s a v e r s to s p e n d e rs . The paym ents th e m se lv e s a r e e s s e n t i a l l y g i f t s , a lth o u g h th e r e may be some r e l a t i o n s h i p betw een th e r e c e i p t and 3 I b i d . , p . 203 • ^I b i a . , p . 202. Ik7 d is b u rs e m e n t o f fu n d s by th e governm ent, a s In th e c a s e o f th e S o c ia l S e c u r ity system . XI. GROUP TRANSFER PAYMENTS AND \ REDISTRIBUTION OF INCOME 4 ! J i ■ Once i t h a s been e s t a b l i s h e d t h a t th e Old Age and S u r v iv o r s ' I n s u ra n c e program i s a t r a n s f e r e x p e n d itu r e , th e n e x t problem i s to d e te rm in e w h e th e r any a c t u a l t r a n s f e r o f incom e o c c u rs among th e d i f f e r e n t income c l a s s e s . I g n o rin g f o r th e moment th e R eserve Fund a d m in is t r a t i v e e x p e n se s, t h e Old Age and S u r v iv o r s ' In s u ra n c e program t r a n s f e r s Income a t any g iv e n p e r io d o f tim e from th o s e who p ro d u c e goods and s e r v ic e s t o th o s e who h av e r e t i r e d , o r to t h e i r d e p e n d e n ts o r s u r v iv o r s . Thus a s h a re o f th e p ro d u c t i v i t y o f th e community i s t r a n s f e r r e d from p ro d u c e rs to n o n p ro d u c e rs ,^ As a r e s u l t , i t w ould seem t h a t a n e t r e d i s t r i b u t i o n o f income m ust ta k e p la c e i n th e economy s in c e i t i s u s u a l l y a g re e d t h a t p ro d u c e rs r e c e iv e a l a r g e r p r o p o r tio n o f th e n e t p r o d u c t i v i t y o f th e economy th a n do n o n p ro d u c e rs . The e x t e n t o f th e t r a n s f e r i s in c r e a s e d by th e f a c t t h a t b e n e f i t s a r e p r o p o r t i o n a t e l y h ig h e r f o r low incom e e a rn e rs th a n f o r h ig h . ^ Id a C. M erriam , S o c ia l S e c u r ity F in a n c in g , Bureau R eport No. 17 (W ashington: F e d e ra l S e c u r ity Agency, S o c ia l S e c u r ity A d m in is tra tio n , D iv is io n o f R esea rc h and S t a t i s t i c s , 1 9 5 2 ), p . I However, t h e r e i s one e x c e p tio n t o th e p r o p o s i t i o n t h a t a t r a n s f e r ta k e s p la c e from th e w o rk in g e le m e n ts o f s o c i e t y to th e r e t i r e d i n d i v i d u a l s . S in c e J a n u a ry 1 , 1955» b e n e f i c i a r i e s a r e p r i v i l e g e d t o e a rn a minimum s u b s is te n e e j l jo f a s much a s tw e lv e hundred d o l l a r s a y e a r , and s t i l l ! ! q u a l i f y . B e n e f i c i a r i e s o v e r se v e n ty -tw o y e a rs o f age a r e e n t i r e l y exempt from th e r e tir e m e n t t e s t . A ccording to a n a t i o n a l su rv e y co n d u c ted in 1951 by th e B ureau o f Old-Age and S u r v iv o r s 1 In s u ra n c e , J k . l p e r e e n t o f th e men and 26.51 p e r c e n t o f th e women who w ere r e c e iv in g b e n e f i t s a t t h a t : i tim e w ere em ployed d u rin g 1951 Ever s in c e th e in c e p tio n o f th e S o c ia l S e c u r ity p ro g ram , a g g r e g a te b e n e f i t s p a i d have b ee n l e s s th a n a g g re g a te c o n t r i b u t i o n s . The n e t e f f e c t on Income d i s t r i b u tio n w i l l , t h e r e f o r e , be in f lu e n c e d by w hat th e T re a s u ry does w ith th e e x c e s s money r e c e iv e d . In an e f f o r t t o d e te rm in e j u s t how much r e d i s t r i b u t i o n o f income a c t u a l l y ta k e s p la c e In an y g iv e n p e r io d of tim e , one m ust r e l y on r a t h e r cru d e s t a t i s t i c a l c o m p u ta tio n s s in c e a l l th e f i g u r e s a v a i l a b l e a r e s u b je c t to e v e ry p o s s i b le ty p e o f e r r o r . However, by a n a ly z in g a p r e v io u s s tu d y c o n d u c te d in 19^6 f o r a p re w a r y e a r (19^1) and by tr y in g an in d e p e n d e n t co m p u tatio n f o r a p o stw a r Warren J . B ak er, "P art-T im e Employment o f th e A ged," S o c ia l S e c u r ity B u l l e t i n , 1 8 :8 , M arch, 1955* .... 149: i y e a r (1951) b a s e d on a v a i l a b l e f i g u r e s , I t I s p o s s i b l e to j t make a rough a n a l y s i s . j Case Study 1941 I ! The m ost r e l i a b l e q u a n t i t a t i v e s tu d y o f th e e f f e c t s t o f S o c ia l In s u ra n c e on income d i s t r i b u t i o n b e f o r e W orld War f I I was co n d u c ted i n 1945 and 1946 by th e Bureau o f R e se a rc h and S t a t i s t i c s o f th e S o c ia l S e c u r ity B o a rd .? In t h i s s tu d y e s tim a te s w ere made o f a c t u a l c o n t r i b u t i o n s and i b e n e f i t s p a i d in 1941 and u n d e r d i f f e r e n t a s s u m p tio n s , in a! p o s tw a r y e a r c a l l e d 195X. ! The f i g u r e s p r e s e n te d i n T ab le I I on t o t a l money incom e, by income c l a s s , w ere ta k e n d i r e c t l y from th e M ushkin stu d y . S aployee and em ployer c o n t r i b u t i o n s and b e n e f i t paym ents by income c l a s s w ere com puted by a d j u s t i n g th e f i g u r e s p r e s e n te d in th e Mushkin stu d y by th e t o t a l s a p p e a r in g In th e S o c ia l S e c u r ity Yearbook 1942 and “The A nnual S t a t i s t i c a l Supplem ent 1955” o f th e S o c ia l S e c u r ity B u l l e t i n .^ 7 f S. J . M ushkin, Anne S e ito v s z k y , and L e i l a N. S m all, S o c ia l In s u ra n c e F in a n c in g i n R e la tio n to Consumer Income and E x p e n d itu r e s . F e d e ra l S e c u r ity Agency, S o c ia l S e c u r i t y B o ard , Bureau o f R esea rc h and S t a t i s t i c s , Bureau Memorandsam No. 63 (Washington-: Government P r i n t i n g O f f ic e , 1 9 4 6 ), p p . 3 3 -3 8 . ^ F e d e ra l S e c u r ity A gency, S o c ia l S e c u r ity B o a rd , S o c ia l S e c u r ity Y earbook 1 9 4 2 , Annual Supplem ent to t h e S o c ia l S e c u r ity B u l l e t i n (W ashington: Government P r i n t i n g TABLE I I CONTRIBUTION AND BENEFITS UNDER TIE OLD AGE A N D SURVIVORS' INSURANCE ACT, BY INCOM E CLASS FOR 19 M (In M illio n s of D o lla rs) C o n trib u tio n s B e n efits Money T otal Income Money P er cent o f P e r cent o f C lass Income Employee Employer T otal T o tal Money B e n e fits T otal Money Income Income Less th a n |1 ,0 0 0 6,323 8 36 44 .7 36 .6 11,000 - 1,*499 8,378 31 42 73 .9 16 .2 1,500 - 1,999 11,323 57 54 111 1.0 11 .1 2,000 - 2,999 21, *420 130 101 231 1.1 1*4 .1 3,000 - if,999 20,218 132 91 223 1.1 9 .1 5,000 and over 19.371 J 22 JZ1 108 .6 _2 X T otal 86,942 395 395 790 88 x » Less than .05 p© ** c e n t. SOURCES of T otal Money Income, T o tal B e n e fits and T o tal C o n trib u tio n s, J . S. Mushkin, Anne S eito v szk y , and Lleba N. Sm all, S o cial Insurance F inancing in R e latio n to Consumer Income and E x p e n d itu re s, F ed eral S e c u rity Agency, S o c ia l S e c u rity Board, Bureau of R esearch and S t a t i s t i c s , Bureau Memorandum No. 63 (Washington: Government P r in tin g O ffic e , 19*4-6), pp. 34— 35• F ederal S e c u rity Agency, S ocial S e c u rity Board, S o cial S e c u rity Yearbook 19* 42, Annual Supplement to th e S o c ia l S ecu rity B u lle tin (Washington: Government P rin tin g u f f l c e , 19*4-2), p . 93* U nited S ta te s Department o f H ealth, Education and W elfare, S o cial S e c u rity A d m in istra tio n , "Annual S t a t i s t i c a l Supplement 1 9 5 5 ,” S ocial S e c u rity B u lle tin , 1 9 :1 2 , 1956. T 150 I T o ta l money income by income c l a s s was com piled by j M ushkin, S c ito v s z k y , and S m a ll, on th e b a s i s o f d a t a g a th e r e d by th e B ureau o f L abor S t a t i s t i c s and th e B ureau | j o f Home Economics in s e p a r a te su rv e y s c o n d u c te d in 1941 andj 1942 on th e incom e, sp e n d in g , and s a v in g h a b i t s o f e l t y andj r u r a l f a m i l i e s . ^ The B ureau o f L abor S t a t i s t i c s su rv ey e d j i I one th o u sa n d t h r e e hundred f a m i l i e s and s i n g l e consum ers in s ix ty -tw o c i t i e s s c a t t e r e d th ro u g h o u t th e c o u n t r y .10 The sam ple o f th e B ureau o f Home Economics In c lu d e d one } | th o u sa n d consum er g ro u p s in r u r a l nonfarm a r e a s and seven h u n d red and s i x t y consumer g ro u p s l i v i n g on farm s in f o r t y - O f f ic e , 1 9 4 2 ), p . 93; U n ite d S ta te s D epartm ent of H e a lth , E d u c a tio n and W e lfa re , S o c ia l S e c u r ity A d m in is tr a tio n , “Annual S t a t 1 s t l e a l Supplem ent 1955»" S o c ia l S e c u r ity B u l l e t i n . 1 9 :1 2 , 1956. ^F or a d e t a i l e d a n a l y s i s o f th e B ureau o f L abor S t a t i s t i c s su rv e y se e : U n ite d S ta te s D epartm ent o f L ab o r, B ureau o f L abor S t a t i s t i c s , Income and S pending and S aving o f Q ltv F a m ilie s in W artim e. B u l l e t i n No. 724 (W ashington: Government P r i n t i n g O f f ic e , 1 9 4 2 ), 31 p p . F o r a d e t a i l e d a n a l y s i s o f th e B ureau o f Home Economics su rv e y se e : U n ite d S ta te s D epartm ent o f A g r i c u ltu r e , B ureau o f Home N u t r i t i o n and Home Econom ics, R u ra l F am ily Spending an d S aving in W artim e. M is c e lla n e o u s P u b l i c a t i o n s No. 520 (W ashington: Government P r i n t i n g O f f ic e , 1 9 4 3 ), 163 p p . 1 0 " The c i t i e s w ere so s e l e c t e d a s t o g iv e p r o p e r r e p r e s e n t a t i o n t o ( l ) each c i t y - s l z e g ro u p , (2) p ro x im ity to a m e tro p o lis ( f o r c i t i e s u n d e r f i f t y th o u s a n d ), (3) each re g io n and s t a t e , (4) lo w , medium, and h ig h - r e n t c i t i e s , (5) c i t i e s o f d i f f e r i n g r a c i a l c o m p o s itio n ." U n ite d S ta te s D epartm ent o f L ab o r, B ureau o f L abor S t a t i s t i c s , Fam ily S pending and S aving in W artim e. B u l l e t i n No. 822 (W ashington: Government P r i n t i n g O f f ic e , 1 9 4 5 ), p p . 2^6 • 152 f i v e s e le c te d c o u n t i e s . 1!* The d e f i n i t i o n o f "fa m ily " u sed in t h e su rv e y i s "a group o f p e rs o n s d ep en d en t on a common o r p o o le d Income f o r th e m a jo r Item s o f expense and usu ally - l i v i n g in th e same h o u s e h o ld ." The s i n g l e consum er i s d e fin e d a s "a p e rso n who lliv .es a s an in d e p e n d e n t sp e n d in g u n i t e i t h e r i n a s e p a r a t e h o u se h o ld o r a s a room er in a p r i v a t e home, lo d g in g h o u se , j o r hotel.'**-2 Those p e o p le in i n s t i t u t i o n s and l i v i n g on ! m i l i t a r y i n s t a l l a t i o n s w ere ex c lu d ed from th e s u rv e y . ! ! I The d i s t r i b u t i o n of b e n e f i t s by money income c l a s s p r e s e n te d in th e Mushkin s tu d y was b a s e d on th e d i s t r i b u t i o n o b ta in e d f o r 1941 by th e Bureau o f O ld Age and S u r v iv o r s ' In s u ra n c e in t h e i r sample s tu d y o f r e s o u r c e s o f th e b e n e f i c i a r i e s o f th e Old Age an d S u r v iv o r s ' In s u ra n c e p r o g r a m .^ The su rv e y was co n d u c ted i n seven c i t i e s from May, 1941 to J u l y , 19*4-2. The su rv ey c o v e re d 32 p e r ce n t o f th e b e n e f i c i a r i e s in th e s t a t i s t i c a l u n iv e r s e in P h ila d e lp h ia and B a ltim o re com bined, 46 p e r cen t in S t . L o u is , 40 p e r c e n t in Lob A n g e le s, and 53 P® ** ®®nt in ^ I b i d . , p p . 7 -8 • 1 2 I b i d . , p . 11. !*^See Edna 0 . W entw orth, "Economic and S o c ia l S ta tu s o f B e n e f i c i a r i e s o f Old-Age an d S u r v iv o r s ' I n s u ra n c e ," S o c ia l S e c u r ity B u l l e t i n . 6 :3 - 2 0 , J u l y , 194-3; a ls o M arie C o n n e ll M a tits k y , "R esources o f Old-Age an d S u r v iv o r s ' In s u ra n c e B e n e f i e i a r l e s in T hree S o u th ern C i t i e s ," S o c ia l S e c u r ity B u l l e t i n , 6:3-17* S eptem ber, 1943* A t l a n t a , Birm ingham , and Memphis. The s t a t i s t i c a l u n iv e r s e I c o n s i s t e d o f a l l p e rs o n s who w ere aw arded b e n e f i t s u n d e r | i (the Old Age and S u r v iv o r s ' In s u ra n c e program i n 19* 1 - 0 , i i ; a lth o u g h in P h i l a d e l p h i a and B a ltim o re o n ly th o s e who | I e a rn e d b e n e f i t s d u rin g th e f i r s t h a l f of 19*K) w ere j j in c lu d e d . The sam ple was s t r a t i f i e d a c c o rd in g t o th e j i p rim a ry b e n e f i t amount and ty p e o f c la im . R e s u lts o f th e 19^1 s t u d y . — As T ab le I I show s, th e l a r g e s t s h a re o f th e t o t a l c o n t r i b u t i o n s w ere p a id by th o s e who e a rn e d betw een two th o u sa n d and f iv e th o u sa n d d o l l a r s aj I I |y e a r . Only a sm a ll p r o p o r tio n was p a i d by th e lo w e s t ’ I Income group s in c e I t s income was d e riv e d l a r g e l y from ; i I a n n u i t i e s , o ld age b e n e f i t s , r e l i e f and a s s i s t a n c e p a y m e n ts . A lso , many o f th e t r a d i t i o n a l l y low income o c c u p a tio n s w ere ex c lu d ed from co v erag e In 19*0.♦ The s t a t u t o r y b e n e f i t p r o v i s i o n s , on th e o t h e r hand, fa v o re d th o s e who e a rn e d b elo w two th o u sa n d d o l l a r s , e s p e c i a l l y th o s e i n th e lo w e s t income b r a c k e t (below one th o u sa n d d o l l a r s ) . T his I s l o g i c a l when one c o n s id e r s t h a t in 19*0. a r e t i r e d w o rk er c o u ld e a rn o n ly up t o f i f t e e n d o l l a r s a month and s t i l l r e c e iv e a m o n th ly b e n e f i t . M ajor w eak n esses o f th e Mushkin s t u d y . — The v a lu e o f th e Mushkin s tu d y from w h ich th e f i g u r e s a p p e a rin g i n T a b le I I w ere com puted was im p a ire d by th e u n r e a l i s t i c assu m p tio n t h a t th e e m p lo y e r's e n t i r e c o n t r i b u t i o n was r e f l e c t e d In h ig h e r p r i c e s . The b u rd en o f th e p a y r o l l ta x on th e lo w e s t and h i g h e s t income g ro u p s i s h e a v i e r u n d er th e assu m p tio n o f jco m p lete s h i f t i n g to th e consum er th a n i f th e ta x w ere 1 s h i f t e d i n p a r t o n ly to th e consum er. The stu d y le a d s t o f a u l t y a n a l y s i s i f one m akes th e ia ssu m p tio n t h a t th e d i f f e r e n c e betw een ta x e s c o l l e c t e d and b e n e f i t s p a id r e s u l t e d in a r e d u c tio n o f consum er income i f o r ea ch income c l a s s . Thus M erriam a p p e a rs t o assum e th a tj t h e money t r a n s f e r r e d from th e R eserve Fund t o th e T re a su ry j i s s t o r e d in a s a f e d e p o s it b o x .* ^ In r e a l i t y , a s p o in te d |o u t i n C h ap ter IV, th e T re a s u ry e i t h e r sp e n d s th e c a sh 1 r e c e iv e d from th e Fund f o r g e n e r a l e x p e n d itu r e s (and th u s I re d u c e s th e need f o r s e l l i n g bonds to t h e g e n e r a l p u b l i c ) o r r e t i r e s governm ent d e b t. In e i t h e r c a s e , money i s t r a n s f e r r e d from t h e governm ent t o th e p r i v a t e s e c t o r o f t h e economy. I t I s e x tre m e ly d i f f i c u l t to d e te rm in e how t h i s t r a n s f e r payment from th e T re a su ry to th e g e n e r a l p u b lic i s d i s t r i b u t e d by Income g ro u p s . However, an approxim a t i o n b a s e d on s i m p l i f i e d a ssu m p tio n s can a t l e a s t d e m o n s tra te t h a t th e fu n d s r e c e iv e d by th e T re a su ry from t h e R eserve a r e n o t s t o r e d by a governm ent ag en cy b u t, l i k e a l l o t h e r governm ent r e c e i p t s , flo w back in to c i r c u l a t i o n . 1 /4 , M errlam, o p . c l t . . p. 1 3 8. 155 1 I S in ce th e governm ent d e f i c i t was g r e a t e r th a n th e | I n e t Fund a c c u m u la tio n f o r 19^1. i t i s s a f e t o assume t h a t j th e n e t amount o f cash r e c e iv e d by th e T re a s u ry from th e R e serv e was needed to pay g e n e r a l governm ent e x p e n d itu r e s a t t h a t tim e . Thus i t becomes n e c e s s a r y , in o r d e r to a n a ly z e income r e d i s t r i b u t i o n to d i s t r i b u t e th e n e t c o n t r i b u t i o n o f th e R eserve Fund t o th e d i f f e r e n t income g ro u p s on th e b a s i s o f t h e i r r e c e i p t s o f t h e b e n e f i t s from F e d e ra l Government e x p e n d itu r e s . A llo c a tio n o f F e d e ra l Government e x p e n d itu re s by income g ro u p s . — In o rd e r to a l l o c a t e th e n e t c o n t r i b u t i o n o f th e R eserve Fund t o th e d i f f e r e n t Income g ro u p s, i t was i f i r s t n e c e s s a r y to b re a k down th e F e d e ra l Government ! ! e x p e n d itu r e s a c c o r d in g to income g ro u p s. T his breakdown f o r a l l F e d e ra l Government e x p e n d itu r e s , e x c lu d in g e a r - j i m arked funds f o r th e f i s c a l y e a r o f 19^1» I s a tte m p te d in T able I I I . The breakdow n of governm ent e x p e n d itu r e s i s a d m it t e d l y rough and i s , t h e r e f o r e , u s e f u l o n ly f o r th e b ro a d e s t a n a l y s i s . C o n s tru c tio n e x p e n d itu r e s , f o r exam ple, w ere n o t d e p r e c ia t e d , th u s o v e r e s tim a tin g e x p e n d itu r e s d u rin g p e r io d s o f c o n s t r u c t i o n and u n d e r e s tim a tin g them in l a t e r i p e r i o d s . The a l l o c a t i o n te c h n iq u e u se d in T ab le I I I i s based on th e th e o ry o f b e n e f i t flow a s c o n t r a s t e d t o th e th e o ry TABLE I I I ESTIMATED DISTRIBUTION OF ALL MAJOR FEDERAL GOVERNM ENT EXPENDITURES BY INCOME CLASS FOR FISCAL YEAR 1941 (In M illio n s of D o llars) Money Income Class V eterans B e n efits Housing Education S ocial W elfare I n te r e s t Payments A g ric u ltu re Less than |l,0 0 0 178 81 17 1,4G0 65 296 |1 ,0 0 0 - 1,1*99 118 5k 11 700 51 203 1,500 - 1,999 112 51 11 350 70 205 2,000 - 2,999 156 70 15 174 145 242 3,000 ~ 4,999 — — 9 — 256 245 5,000 and over — — 3 — 524 124 T otal 564 256 66 2,624 1,111 1,315 I i H V J \ I TABLE I I I (Chntinued) j ESTIMATED DISTRIBUTION OF ALL M AJOR FEDERAL GOVERNM ENT ~ EXPENDITURES BY INCOME CLASS FOR FISCAL YEAR 19^1 (in M illio n s of D o lla rs) Money Income C lass N atu ral R esources, T ra n sp o rtatio n and Communication F oreign A ffa irs and N ational Defense M isc. and G eneral G ovt. T o tal Per cent of T otal Lees than |1 ,0 0 0 61 w 33 2,607 18.9 $1,000 - 1,^99 82 631 b6 1,896 13.8 1,500 - 1,999 110 8Ll 61 1,811 13.1 2,000 - 2,999 210 1,611 117 2,7^0 19.9 3,000 - if,9 99 197 i , 5 i o 111 2,328 16.9 5,000 and over 190 l.ifiio 106 2,387 17.if T otal 850 6,50b 13,769 SOURCE: The Tax Foundation, F a c ts and F ig u res on Government Finance 19L8-19L9 (New York: The Tax Foundation, 19^9), p . 20. 158 ! o f money f lo w .1^ Y e te r a n s 1 s e r v ic e s and h o u sin g a r e a l l o c a t e d e v e n ly t o a l l consum er u n i t s below th r e e th o u sa n d d o l l a r s . The assu m p tio n i s made t h a t o n ly th e lo w er and I m id d le Income g ro u p s b e n e f i t from th e s e e x p e n d itu re s and j t h a t th e y do so on a p e r f a m ily b a s i s . S o c ia l w e lf a r e < e x p e n d itu re s w ere a ls o a l l o c a t e d t o th o s e who e a rn e d below ; th r e e th o u sa n d d o l l a r s . * ^ However, in th e ca se o f e o c i a l w e lf a r e e x p e n d itu r e s , i t was assum ed t h a t m ost of th e i I b e n e f i t s go to th e lo w e r Income g ro u p s. T h e re fo re , th e : t o t a l expense was p r o r a te d on an in v e r s e g e o m e tric p r o g r e s s io n f o r th e f o u r income g ro u p s below t h r e e th o u san d d o l l a r s . I n t e r e s t paym ents a r e d i s t r i b u t e d a c c o rd in g t o th e ■^Under th e th e o r y o f b e n e f i t flo w governm ent e x p e n d itu re s a r e d i s t r i b u t e d to th e g e n e r a l p u b lic on th e b a s i s o f s e r v ic e from th e b e n e f i t i r r e s p e c t i v e o f who r e c e i v e d th e fu n d s . Under th e money flo w th e o ry governm ent e x p e n d itu r e s a r e d i s t r i b u t e d to th e f a c t o r s who a c t u a l l y r e c e iv e th e Income from th e g o v ern m e n t, su eh a s governm ent em ployees, s e l l e r s o f goods to th e g overnm ent, and r e c i p i e n ts o f s u b s i d i e s . See John H. A d le r, "The F is c a l System , th e D i s t r i b u t i o n o f Income, and th e P u b lic W e lf a r e ,” F i s c a l P o l i c i e s and th e Am erican Economy, Kenyon E. P oole TidTT (New York: P r e n t i c e - H a l l , 1951)* PP* 360-362. 1 6 A d ler, i n h i s s tu d y o f th e d i s t r i b u t i o n o f b e n e f i t s from governm ent s e r v ic e s a l l o c a t e d v e t e r a n s ' b e n e f i t s to a l l consum er u n i t s below two th o u sa n d d o l l a r s in th e f i s c a l y e a r o f 1939 and below f i v e th o u s a n d d o l l a r s i n th e f i s c a l y e a r o f 19^-7. The b e n e f i t s o f s o c i a l s e c u r i t y and h o u sin g e x p e n d itu r e s w ere a l l o c a t e d t o t h e consumer u n i t e w ith incom es below f o u r th o u sa n d d o l l a r s i n th e f i s c a l y e a r o f 1 9 ^7 . A d l e r 's a l l o c a t i o n f o r 19^7 was fo llo w e d in p r o r a t i n g th e s e e x p e n d itu r e s in 1951- Y ete ra n s* s e r v i c e s , h o u sin g and s o c i a l w e lf a r e w ere a l l o c a t e d to consum er u n i t s whose incomes w ere below t h r e e th o u sa n d d o l l a r s in 19^1* A d le r, o p . c l t . , p . 385- ~ ~159 i d i s t r i b u t i o n o f l i q u i d a s s e t s . ^ T h is r e s u l t e d in a i c o n c e n tr a tio n o f b e n e f i t s in th e u p p er income g ro u p s . , B e n e f i t s to a g r i c u l t u r e a r e d i s t r i b u t e d on th e b a s i s o f farm incom e.1® T h is i s a l o g i c a l b a s i s f o r a l l o c a t i o n , s in c e th e p a r i t y program and th e o t h e r governm ent e x p e n d i t u r e s a c c ru e to t h e fa rm e r on an income b a s i s . E d u c a tio n i s d i s t r i b u t e d e v e n ly to a l l consum er u n i t s on th e th e o ry i t h a t a l l c i t i z e n s have an e q u a l o p p o r tu n ity t o b e n e f i t fromj t h i s e x p e n d itu r e . J The o t h e r e x p e n d itu re s ( n a t u r a l r e s o u r c e s , t r a n s p o r - ' i • , I t a t i o n and com m unication, I n t e r n a t i o n a l a f f a i r s , n a t i o n a l ! | j 'd e f e n s e , and m is c e lla n e o u s and g e n e ra l a d m i n i s t r a t i v e j i | I e x p e n se s o f governm ent) a r e a l l o c a t e d p r o p o r t i o n a t e l y to i incom e. T h is a d m itte d ly i s a com prom ise, u se d m a in ly 1 b e c a u se i t le a v e s th e d i s t r i b u t i o n o f income unchanged. ^ T h e co m p u tatio n was made by ta k in g i n t e r e s t paym ents by income g ro u p s f o r th e f i s c a l y e a r o f 1939 > as com puted by A d le r, an d p la c in g th e f i g u r e s in p e r c e n ta g e form . The p e r c e n ta g e com puted f o r th e f i s c a l y e a r was a p p l i e d t o th e t o t a l i n t e r e s t paym ents in 19*H. I b i d . . p . k 2 0 . 1®Income o f fa rm e rs f o r 19^1 was com puted from th e 19^1 su rv e y p r e v io u s ly m e n tio n e d . The m ethod u sed was t o m u l t i p l y th e number o f fa rm e rs in each incom e group by th e a v e ra g e farm e a rn in g s in each income g ro u p and to f i n d th e p e r c e n ta g e o f th e t o t a l w hich r e s u l t e d . The p e r c e n ta g e was th e n m u l t i p l i e d by th e t o t a l a g r i c u l t u r a l e x p e n d itu r e s f o r th e y e a r . The o r i g i n a l f i g u r e s t h a t w ent i n t o th e com puta t i o n w ere g a th e r e d from U n ite d S ta te s D epartm ent o f L ab o r, B ureau o f Labor S t a t i s t i c s , Spending and S av in g o f th e N a tio n 1s F a m ilie s in W artim e. B u l l e t i n No. 723 (W ashington: Government P r i n t i n g O f f ic e , 1 9 ^ 2 ), p p . 5* 16; U n ite d S t a t e s D epartm ent o f L ab o r, B u l l e t i n No. 822, op. c i t . , p . 6 8 . A n o th er p o s s i b i l i t y would be t o a l l o c a t e t h e s e g e n e r a l ' 5 e x p e n d itu re s on a p e r c a p i t a b a s i s . T h is w ould te n d to f make th e in c id e n c e o f th e b e n e f i t s more r e g r e s s i v e . How- j e v e r , t o do so w ould have c o rre sp o n d e d to th e th e o r y t h a t j \ governm ent s e r v e s a l l in d i v i d u a l s a l i k e . These s e r v i c e s j ( e o u ld a ls o have b ee n d i s t r i b u t e d on th e b a s i s o f c o n t r lb u - j t t l o n s . However, su c h a d i s t r i b u t i o n w ould have r e s u l t e d in a p r o g r e s s iv e b e n e f i t a l l o c a t i o n above t h e m id d le income j g ro u p s . | S in ce th e breakdown te c h n iq u e in t h i s stu d y fo llo w s ! ! I | q u i t e c l o s e l y th e one o r i g i n a l l y u se d by A d le r f o r th e i j f i s c a l y e a rs o f 1939 and 19^7# h i s s ta te m e n t c o n c e rn in g t h e 1 r e l i a b i l i t y o f th e stu d y a ls o a p p l i e s . I t i s r e a d i l y a d m itte d t h a t th e a l l o c a t i o n o f b ene f i t s i s h ig h ly s p e c u la tiv e in th e s e n s e t h a t a w hole ra n g e o f a l t e r n a t i v e a l l o c a t i n g schem es i s c o n c e iv a b le and t h a t th e s o l u t i o n o f th e p ro p o se d scheme i s n e c e s s a r i l y b a s e d in p a r t on a r b i t r a r y d e c i s i o n s . . . . In p a r t i t i s d i c t a t e d by th e l i m i t a t i o n s o f a v a i l a b l e d a t a . 19 T o ta l r e d l s t r l b u t i o n . — T able IV shows th e n e t r e d i s t r i b u t i o n o f Income f o r 19*H* The n e t d i f f e r e n c e betw een c o n t r i b u t i o n s r e c e iv e d by th e Fund and b e n e f i t s p a i d o u t by i t a f t e r c o n s id e r in g a d m i n i s t r a t i v e e x p e n se s2® ■ ^A dler, o n . c i t . , p . 3®9« 2®Net a d m i n i s t r a t i v e ex p en ses f o r 19^1 w ere p r o r a t e d on th e b a s i s o f t h e b e n e f i t flo w th e o ry t o th e d i f f e r e n t income groups in p r o p o r ti o n t o th e b e n e f i t s d e r iv e d from th e Old Age and S u r v iv o r s ' In s u ra n c e P rogram . TABLE IV THE REDISTRIBUTION OF INCOM E RESULTING- FRO M THE OLD AGE AND SURVIVORS' INSURANCE PROGRAM IN 1941 UNDER T W O DIFFERENT ASSUMPTIONS (In M illio n s o f D o lla rs) Money Income C lass T otal Money Income T otal C o n trib u tio n s B e n e fits Plus A d m in istra tiv e Expense Surplus Used to Pay Government E xpenditures B e n e fits Adminis t r a t i v e Expense T otal Pro Rated G eneral Budget Less than |l,0 0 0 6,323 44 36 10 46 128 #1,000 « * 1,499 8,378 73 16 5 21 93 1,500 - 1,999 11,232 111 11 3 14 88 2,000 - 2,999 21,420 231 14 4 18 123 3,000 - 4-,999 20,218 223 9 3 12 114 5,000 and o ver 19,371 108 2 1 3 118 T o tal 86,942 790 88 26 114 676 TABLE IV (Continued) THE REDISTRIBUTION OF INCOM E RESULTING- FROM THE OLD AGE AND SURVIVORS' INSURANCE PROGRAM IN 1941 UNDER T W O DIFFERENT ASSUMPTIONS (In M illio n s of D o lla rs) Money Income C lass Surplus Used to Pay Government E xpenditures Surplus Used to R e tire Debt Income A fter R e d is trib u tio n Per cent of O rig in a l Income Pro Rated Debt R etirem ent Income A fter R e d is trib u tio n Per cent of O rig in a l Income Less than |1 ,0 0 0 6,543 102.1 40 6,365 100.7 $1,000 ~ 1,499 8,419 100.5 32 8,358 99.8 1,500 - 1,999 11,223 99.9 43 11,178 99.5 2,000 - 2,999 21,342 99.6 88 21,295 99.4 3,000 - 4,999 20,121 99.5 155 20,162 99.7 5,000 and over 19,384 100.1 318 19,584 101.1 T o tal 86,942 676 86,942 SOURCE T o ta l A d m in istrativ e Expense. U nited S ta te s Department of H ealth , E du catio n , and W elfare, S o cia l S e c u rity A d m in istra tio n , "Annual S t a t i s t i c a l Supplement, 1955," S ocial S e c u rity B u l l e t i n . 19:12, 1956* 163 I s p r o r a t e d on th e b a s i s o f th e d i s t r i b u t i o n o f g e n e r a l governm ent e x p e n d itu r e s . I t a p p e a rs t h a t o n ly a s l i g h t ! ! r e d i s t r i b u t i o n o f income to o k p la c e in 1 9 ^1 . The amount ofj r e d i s t r i b u t i o n of income t h a t d id ta k e p l a c e was m o s tly t o th e ad v a n ta g e o f th o s e who e a rn e d l e s s th a n one th o u sa n d f i v e hundred d o l l a r s , and was a t th e ex p en se o f th o s e who e a rn e d betw een two th o u sa n d and f i v e th o u s a n d d o l l a r s . However, th e f i g u r e s te n d to d i s t o r t somewhat th e t r u e r e d i s t r i b u t i o n f o r 19^1 s in c e th e f e d e r a l b u d g e ta ry I f i g u r e s a re on a f i s c a l y e a r b a s i s , w h erea s th e r e d i s t r i b u t i o n o f b e n e f i t s and c o n t r i b u t i o n s i s on a c a le n d a r y e a r b a s i s . The r e a s o n f o r u s in g th e f i s c a l y e a r f i g u r e s f o r 19^1 r a t h e r th a n th e c a le n d a r y e a r f i g u r e s was to a v o id ! u se o f th e d i s t o r t e d World War I I governm ent b u d g e t. The f i n a l r e s u l t s , how ever, w ould h ave been s l i g h t l y d i f f e r e n t i f in 19^1 th e b u d g e t had been b a la n c e d . In t h a t c a s e th e T re a s u ry w ould have r e t i r e d o u ts ta n d in g governm ent d e b t . I f th e T re a s u ry had u s e d th e fu n d s to r e t i r e p u b lic d e b t, th e r e w ould have a p p e a re d a s l i g h t l y g r e a t e r income r e d i s t r i b u t i o n i n f a v o r of t h e consum er g ro u p above f i v e th o u s a n d d o l l a r s a t th e ex p en se o f th o s e who e a rn e d betw een 21 one th o u sa n d d o l l a r s and f i v e th o u sa n d d o l l a r s . A lso ^ S e e T a b le IV. In com puting p r o r a t e d d eb t r e t i r e ment by income g ro u p th e assu m p tio n was made t h a t th e bonds w ould be r e t i r e d on a b a s i s t h a t com pared w ith th e l i q u i d a s s e t h o ld in g s f o r th e r e s p e c t i v e y e a r. th o s e e a rn in g below- one th o u sa n d d o l l a r s w ould n o t h av e j been a s f o r t u n a t e l y s i t u a t e d a s u nder th e p re v io u s assum p t i o n . However, due t o th e sm a ll e x te n t o f th e Old Age and S u r v iv o r s ' In s u ra n c e program th e t o t a l amount o f r e d i s t r i b u tio n would n o t have been r e a l l y s i g n i f i c a n t . The co m p u tatio n in T a b le IV i s b a s e d on th e i a ssu m p tio n t h a t governm ent bonds w ould be r e t i r e d by th e T re a s u ry t o a l l income g ro u p s in p r o p o r tio n t o l i q u i d a s s e t h o ld in g s . T h is assu m p tio n d i s t o r t s th e t r u e income r e d i s t r i b u t i o n . Most o f th e bonds h e ld by th o s e in th e lo w er income g ro u p s a r e o f th e s e r i e s E ty p e and can be | redeem ed a t any tim e . 1 j ) !Case Study 1951 I i A lthough no in d e p e n d e n t stu d y h as been p u b lis h e d s in c e 19*1-6 c o n c e rn in g th e d i s t r i b u t i o n a l e f f e e t s o f th e S o c ia l S e c u r ity P rogram , i t I s p o s s i b l e t o e s tim a te from a v a i l a b l e d a ta w hat th e s e e f f e c t s have been in any s i n g l e y e a r . The y e a r 1951 has b ee n s e l e c t e d a s a r e p r e s e n t a t i v e y e a r b e c a u se th e Bureau o f Old Age and S u r v iv o r s ' In s u ra n c e made a d e t a i l e d s u rv e y o f t h e Income o f O ld Age and S u r v iv o r s ' r e c i p i e n t s a t th e end o f 1951 • The r e s u l t s o f t h a t su rv e y a r e in c o r p o r a te d i n t o t h i s p r e s e n t s tu d y . The sp e n d in g u n i t s . — In d e te rm in in g th e t o t a l breakdow n o f b e n e f i t s and c o n t r i b u t i o n s among th e d i f f e r e n t Income g ro u p s, I t was f i r s t n e c e s s a r y to d e te rm in e th e sp e n d in g u n i t s and th e t o t a l money income by sp en d in g u n i t s . I t was f e l t t h a t th e m ost r e l i a b l e economic b r e a k down o f sp en d in g u n i t s and money income a v a i l a b l e was th e d a ta g a th e r e d b y th e Survey o f Consumer F in a n c e s co n d u c ted J o i n t l y by th e F e d e r a l R eserv e Board and th e Survey R esearch C e n te r o f th e U n iv e r s it y o f M ic h ig a n . The f i n d in g s o f th e Survey o f Consumer F in a n c e s f o r 1951 w ere b ased on tw e n ty -e ig h t hundred in te r v ie w s in s i x t y sam pling a r e a s d i s t r i b u t e d th ro u g h o u t th e c o u n try d u rin g th e f i r s t two m onths o f 1 9 5 2 .22 The i n te r v i e w u n i t sam pled was th e consum er sp e n d in g 22The sa m p lin g m ethods u se d by th e Survey o f Consumer F in a n c e s w ere s i m i l a r to th e m ethods u se d by th e B ureau o f Labor S t a t i s t i c s and th e B ureau o f Human N u t r i t i o n and Home Economics co v e re d in e a r l i e r f o o tn o te s o f t h i s c h a p te r . However, some im p o rta n t d i f f e r e n c e s may be n o te d . F i r s t , t h e r e i s an e f f o r t to in c r e a s e th e number o f in te r v ie w s w ith p e o p le a t h ig h e r incom e l e v e l s . T h is I s a c h ie v e d f o r c i t i e s w here a v e ra g e r e n t p e r b lo c k i s known by sam pling d w e llin g s r a t e d a s medium a t tw ic e th e r a t e of low d w e llin g s and d w e llin g s r a t e d a s h ig h as s i x tim e s th e r a t e . However, th e l a r g e r number o f in te r v ie w s o f th o s e in th e u pper income b r a c k e ts does n o t a f f e c t th e r e p r e s e n t a t i v e incomes o f th e sam ple, due to a system o f w e ig h ts . Each one o f th e cho sen a r e a s i s d iv id e d i n t o s e v e r a l sub g ro u p s . In th e c a s e o f c i t i e s and to w n s, one i s s e l e c t e d from each su b -g ro u p and d iv id e d in to b lo c k s . Then a random sam ple o f th e b lo c k s i s made, a f t e r w hich a sam ple of d w e llin g u n i t s i s s e l e c t e d f o r each b lo c k . In th e c a se o f s p a r s e l y p o p u la te d a r e a s th e y a r e d iv id e d i n t o sm a ll segm ents and a random sam ple i s ta k e n . Then e v e ry d w e llin g i n s i d e th e segm ent i s in te r v ie w e d . The su rv e y a l s o g iv e s each a r e a a p r o b a b i l i t y o f b e in g s e l e c t e d p r o p o r ti o n a te to th e number o f p e o p le i t c o n t a in s . F o r a m ore th o ro u g h d is c u s s io n o f th e m ethods u se d by th e Survey o f Consumer F in a n c e s se e : “M ethods o f th e Survey o f Consumer F i n a n c e s ,” F e d e r a l R eserve B u l l e t i n , 36:795-809* J u l y , 1950. m nit d e f in e d a s “a l l p e rs o n s l i v i n g in t h e same d w e llin g j and r e l a t e d by b lo o d , m a rr ia g e , o r a d o p tio n , who p o o le d ' t h e i r incom es f o r t h e i r m a jo r ite m s o f e x p e n s e ." 23 j i The D epartm ent o f Commerce a ls o d i s t r i b u t e s p e r s o n a l! i incom e t o d i f f e r e n t Income c a t e g o r i e s , b u t th e D epartm ent | «aed a r e l a t i o n ^ c r i t e W * i a e t e a d o f an j ! incom e c r i t e r i o n in d e te rm in in g th e number o f u n i t s . j T h e r e f o re , th e D epartm ent o f Commerce e s tim a te s a r e n o t as a c c e p ta b le f o r econom ic a n a ly s e s a s th e S urvey o f Consumer F in a n c e s . ! However, th e t o t a l money income o f 202 b i l l i o n t j | [ d o l l a r s w as, a c c o rd in g to th e Survey o f Consumer F in a n c e s , [ i j f i f t y - t h r e e b i l l i o n d o l l a r s l e s s th a n t h e Departm ent of Commerce e s tim a te o f p e r s o n a l income f o r 1951 and f o r t y I b i l l i o n d o l l a r s l e s s th a n t h e a g g re g a te fa m ily p e r s o n a l | income a s com puted by th e D epartm ent o f Commerce.2^ 2 3 "1952 S urvey o f Consumer F in a n c e s , P a r t X, Consumer E x p e c ta tio n s a s to Economic T rends and Consumer In v e stm e n t P r e f e r e n c e s ," F e d e r a l R eserve B u l l e t i n , 3 8 :7 ^ 0 , J u l y , 1952. 2**The D epartm ent o f Commerce Concept o f fa m ily u n i t " i s d e f in e d to in c lu d e a l l p e r s o n s r e l a t e d to each o t h e r who l i v e i n th e same h o u se h o ld . The s i n g l e i n d iv i d u a l i s th e p e rs o n l i v i n g w ith o u t r e l a t i v e s in h i s own d w e llin g u n i t , room ing w ith a p r i v a t e f a m ily , o r lo d g in g in a h o t e l o r room ing h o u s e ." Selam G o ld sm ith , " S t a t i s t i c a l Inform a t i o n on th e D i s t r i b u t i o n o f Income by S iz e in th e U n ite d S t a t e s , " P ro c e e d in g s S upplem ent, American Economic R eview , ^ 0 :3 2 3 , May, 1950. 2-^The d i f f e r e n c e b etw een th e D epartm ent o f Commerce e s tim a te s o f p e r s o n a l income and a g g r e g a te fa m ily p e r s o n a l 167 : P a r t of t h e d is c re p a n c y betw een t h e a g g re g a te fa m ily I p e r s o n a l Income co m p u tatio n o f th e D epartm ent o f Commerce ; i and th e t o t a l money Income f i g u r e o f th e Survey o f Consumer] I F in a n c e s I s c a u se d by th e f a c t t h a t th e l a t t e r does n o t c o u n t Income r e c e i v e d In k in d , o r income g o in g to p e o p le in j I n s t i t u t i o n s . T hese f a c t o r s , how ever, w ould ac co u n t f o r ; o n ly 50 p e r c e n t o f th e d is c re p a n c y b etw een th e two ! % e r i e s , 2^ The r e s t m ust be c a u se d by s t a t i s t i c a l e r r o r s . C o n t r i b u t i o n s In T a b le V th e t o t a l c o n t r i b u t i o n s from th e Old Age and S u rv iv o rs* In su ra n c e p a y r o l l t a x a re a l l o c a t e d to th e d i f f e r e n t sp e n d in g u n i t s . In o r d e r to make t h i s a l l o c a t i o n , i t was f i r s t n e c e s s a r y to d e te rm in e t o t a l wage income f o r each income g ro u p . T h is was done by assu m in g t h a t 8 7 .5 p e r c e n t o f income up t o f i v e th o u s a n d I incom e, a ls o com puted by th e D epartm ent o f Commerce, l b 1 t h a t th e l a t t e r e x c lu d e s incom e g o in g to n o n - p r o f i t ] i n s t i t u t i o n s , p e n s io n and w e lf a r e fu n d s , i n s t i t u t i o n a l p o p u la tio n and m i l i t a r y p e r s o n a l w h ile i n c lu d in g im puted r e n t t o fa rm e rs an d wages in k in d . Selma G o ld sm ith , George J a z z l , Hyman K a itz , and M aurice L ie b e n b e rg , "S ize D i s t r i b u t i o n o f Income S in c e th e M i d - T h i r t i e s , " The Review o f Econom ics and S t a t i s t i c s . 3 6 :2 , F e b ru a ry , 1 9 5 ^ ^ T h e u se th e Survey o f Consumer F in a n c e s incom e f i g u r e s makes t a x t o income r a t i o s h ig h e r th a n i f th e D epartm ent o f Commerce f i g u r e s were u s e d . T h e re fo re , th e b u rd en o f th e lo w e r income g ro u p s i s e x a g g e ra te d . However, i n c o n s id e r in g th e e f f e c t s o f c o n t r i b u t i o n s and b e n e f i t s , th e b i a s e s n e u t r a l i z e each o t h e r s in c e th e r e l a t i o n s h i p betw een b e n e f i t s and income w i l l e x a g g e ra te th e r e c e i p t s o f th e lo w e r income g ro u p s. A lso , b y u s in g th e su rv e y f i g u r e s a b e t t e r com parison can be made betw een th e 1951 s tu d y and th e one co n d u c ted in 19^1 by M ushkin, s in c e th e s o u rc e m a t e r i a l o f th e Mushkin s tu d y alBO e x c lu d e d i n s t i t u t i o n a l incom e and income i n k in d . .TABLE V •CONTRIBUTIONS AND BENEFITS UNDER THE OLD AOE AND SURVIVORS' INSURANCE ACT, BY INCOME CLASS FOR 1951 (In M illio n s o f D o lla r s ) Money Income C la s s T o ta l Money Income Wages and S a l a r i e s Covered by P a y r o ll Tax Employee Em ployer L ess th a n 11,000 2,000 800 12 49 $1,000 * • 1 ,999 12,100 8,800 132 134 2,000 - 2 ,9 9 9 24,200 21,100 317 296 3,000 - 3 ,9 9 9 32,300 27,400 411 394 A, 000 - 4,999 34,300 28,000 420 341 5,000 - 7,499 44,500 20,000 300 301 7,500 and o v e r 52,600 6,000 90 167 T o ta l 202,000 112,100 1 ,6 8 2 1 ,6 8 2 169 TABLE V (C ontinued) CONTRIBUTIONS A M D BENEFITS UNDER THE OLD AGE AND SURVIVORS1 INSURANCE ACT, BY INCOME CLASS FOR 1951 (In M il lio n s o f D o lla r s ) Money Income C la s s T o ta l P e r c e n t o f T o ta l Money Income B e n e f its P e r c e n t o f T o ta l money’ Income 1 L ess th a n $1,000 61 3 .0 844 4 2 .2 $1,000 - 1,999 266 2 .2 683 5 .6 2 ,0 0 0 - 2,999 613 2.5 218 .9 3 ,0 0 0 - 3 ,9 9 9 805 2 .5 56 .2 4 ,0 0 0 - ^ ,999 761 2 .2 44 .1 5 ,0 0 0 - 7,499 601 1 .4 20 X 7 ,5 0 0 and o v e r 257 .5 20 X 1 ] 3 ,3 64 1 ,8 8 5 1 1 1 x = L ess th a n .05 p e r cen t SOURCES f o r T o ta l C o n tr ib u tio n s , T o ta l B e n e f i t s , and # , --- ! T o ta l Money Income: U n ite d S t a t e s D epartm ent of H e a lth , |E d u c a tio n and W e lfa re , S o c ia l S e c u r ity A d m i n i s t r a t i o n ,” jA nnual S t a t i s t i c a l S upplem ent, 1953» S o c ia l S e c u r ity : B u l l e t i n , 1 7 :3 9 , 42, S eptem ber, 1954. "1952 S urvey o f Consumer F in a n c e s : P a r t I I I Incom e, S e le c te d In v e s tm e n ts , and S h o rt Term Debt o f C o n su m ers,” ■ F e d e r a l R eserve B u l l e t i n , 38: 975» S eptem ber, 1952. d o lla r B c o n s is te d o f w ages, t h a t 67 p e r c e n t o f th e income betw een f i v e th o u s a n d and seven th o u sa n d f i v e h u n d red ' d o l l a r s c o n s t i t u t e d wages and t h a t 37 p e r c e n t o f th e Income o v e r seven th o u san d f i v e hundred d o l l a r s was composed o f w a g e s .2? Wages and s a l a r i e s co v e re d by p a y r o l l I taxes were: a r r i v e d a t by a d j u s t i n g wages an d s a l a r i e s f o r j n o n -c o v e re d o c c u p a tio n s and exem pted incom e. I Em ployees’ c o n t r i b u t i o n s w ere th e n c a l c u l a t e d by | t a k i n g 1 1 /2 p e r c e n t o f c o v e re d wages an d s a l a r i e s . In c a l c u l a t i n g th e e m p lo y e rs1 c o n t r i b u t i o n s t h e assu m p tio n was made t h a t t w o - t h i r d s o f th e t a x was s h i f t e d j to consum ers2® and t h a t th e re m a in in g o n e - t h i r d was s h i f t e d ; 2?F or th e a u t h o r i t y o f theB e a ssu m p tio n s s e e : R. A. i M usgrove, J . J . C a r r o l l , L. D. Cook, and L. Frome, " D i s t r i b u t i o n of Tax Paym ents by Income Croup: A Case Study f o r 1 9 ^ 8 ," n a t i o n a l Tax J o u r n a l . 4 :1 1 -1 ^ , M arch, 1951; f o r a c r i t i c i s m o f th e s e a ssu m p tio n s on th e g ro u n d s t h a t th e wage Income o f th e lo w e s t g ro u p i s e x a g g e ra te d and th e to p b r a c k e t i s u n d e r s t a t e d se e : R ufus S. T u ck e r, " D i s t r i b u t i o n o f th e Tax B urdens i n 1 9 ^ 8 ," R a tio n a l Tax J o u r n a l . A :272, S eptem ber, 1951- 2®The p r o p o r ti o n o f th e t a x s h i f t e d t o consum ers was d i s t r i b u t e d among th e Income g ro u p s , a c c o rd in g to t h e d i s t r i b u t i o n o f consum er e x p e n d itu r e s . Consumer e x p e n d i t u r e s w ere c a l c u l a t e d by t a k i n g d is p o s a b le Income f i g u r e s f o r 1951 and a d j u s t i n g them f o r n e t s a v in g s o f 1950 s in c e s a v in g s f i g u r e s by Income g ro u p s w ere n o t a v a i l a b l e f o r 1951; se e : "1952 Survey o f Consumer F in a n c e s : P a r t I I I . Incom e, S e le c te d In v e s tm e n ts , and S h o rt Term Debt o f C onsum ers," F e d e r a l R eserv e B u l l e t i n , 3 8 :9 7 8 , S eptem ber, 1952; "1951 S urvey o f Consumer F in a n c e s: P a r t I f . D i s t r i b u tio n o f Consumer S avings in 1950," F e d e ra l R eserve B u l l e t i n . 37:1067* S eptem ber, 1951- T h is p ro c e d u re o f c a l c u l a t i n g consum er e x p e n d itu r e s p o s s i b l y o v e r s t a t e s th e s e e x p e n d itu r e s in th e u pper income b r a c k e ts s in c e su ch 171 to wage e a r n e r s . T h is assu m p tio n seemed more l o g i c a l , a c c o rd in g to th e a n a l y s i s p r e s e n te d in C h a p te r I I I , th a n th e assu m p tio n t h a t th e e n t i r e em p lo y er’ s c o n t r i b u t i o n was j t ( s h i f t e d to th e consum er. ! In T able VI th e com bined c o n t r i b u t i o n s o f th e j em p lo y er and em ployee a r e p r e s e n te d a s a p e r c e n ta g e o f j i t o t a l money Income under t h r e e d i f f e r e n t a s s u m p tio n s . In th e f i r s t column th e l o g i c a l assu m p tio n i s made t h a t o n ly t w o - th ir d s o f th e e m p lo y e r's c o n t r i b u t i o n i s p a s s e d on to th e consum er. In column 3 I s p r e s e n te d t h e extrem e assum p-j t l o n t h a t th e e n t i r e e m p lo y e r's c o n t r i b u t i o n I s s h i f t e d j backw ard to l a b o r . Column 3 was com puted by d i s t r i b u t i n g j i th e e m p lo y e r's c o n t r i b u t i o n to th e v a r io u s income g ro u p s on (th e same b a s i s a s t h a t o f th e em ployees. Column 5 p r e s e n ts th e e q u a lly ex trem e a ssu m p tio n th a t t h e e n t i r e e m p lo y e r's c o n t r i b u t i o n i s s h i f t e d fo rw a rd to co n su m ers. Column 5 was com puted by d i s t r i b u t i n g t h e e n t i r e e m p lo y e r's c o n t r i b u t i o n to t h e d i f f e r e n t income g ro u p s on th e b a s i s o f consum er e x p e n d itu r e s . Under th e l a t t e r a ssu m p tio n , t h e lo w e s t and th e h i g h e s t Income g ro u p s w ould b e a r a h ig h e r p r o p o r tio n o f th e t a x th a n u n d e r e i t h e r one o f th e f i r s t two a s su m p tio n s . A lso , th e s e ex trem e income g ro u p s w ould c o n t r i b u t e a f a c t o r s a s g i f t s and p e r s o n a l ta x e s o t h e r th a n th e income ta x a r e n o t d e d u c te d from incom e, a s th e f i g u r e s a r e n o t a v a i l a b l e . See T ucker, op. c l t . , p . 271. .T A B L E VI PAYROLL TAX PERCENTAGE OF TOTAL M O N EY INCOME FOR 1951 COM PARED ' WITH M USG RA VE* S STUDY FOR 1948 UNDER ALTERNATIVE ASSUMPTIONS Money Income C lass Assuming tw o -th ird s of Employers C o n trib u tio n i s S h ifte d to th e Consumer Assuming a l l o f Employers C o n trib u tio n i s S h ifte d to Labor Assuming a l l of Employers C o n trib u tio n i s S h ifte d to th e Consumer 1951 1948 1951 1948 1951 1948 Less th a n |1 ,0 0 0 3.0 3.0 1.2 2.2 4.0 4.6 $1,000 - 1,999 2.2 2 .5 2.2 2.6 2.3 2.7 2,000 - 2,999 2 .5 3.9 2 .5 4 .4 2 .5 2.5 3,000 - 3,999 2 .5 3.0 2 .5 3*6 2 .5 2 .4 4 , ooo - 4,999 2.2 2.3 2 .5 2 .4 2.1 2.2 5,000 - 7,499 1 .4 1 .4 1 .3 1.1 1 .4 2.0 7,500 and over -5 .5 .3 .1 .6 1.2 Source f o r 1948 Study: R. A. Musgrave, J . J . C a rr o ll, L. D. Cook, and L. Frame, " D is trib u tio n of Tax Payments by Income Groups: A Case Study f o r 1948," N a tio n a l Tax J o u r n a l, 4:44, March, 1951* 172 i ? 3 . i minimum o f ta x tin d e r th e assu m p tio n t h a t t h e e n t i r e t a x was; i I p a s s e d backw ard t o l a b o r . T h e, re a s o n I s t h a t t h e lo w e s t and h ig h e s t income groups r e c e iv e a s m a lle r p r o p o r tio n o f t h e i r t o t a l income in wages and s a l a r i e s th a n do th e o th e r incom e g ro u p s. The f i n a l r e s u l t i s t h a t u n d e r any assu m p tio n e x c e p t' l t o t a l backw ard s h i f t i n g to l a b o r th e p a y r o l l ta x was r e g r e s s i v e in 1951* T able VI a l s o com pares th e r e s u l t s o f th e 1951 studyj w ith a s im i l a r s tu d y co n d u c ted by M usgrave and o t h e r s c o v e rin g th e y e a r 1 9 * 4 - 8 . The r e s u l t s o f th e two s t u d i e s u n d e r th e th r e e d i f f e r e n t assu m p tio n s a r e a lm o st i d e n t i c a l f o r many o f th e income g ro u p s . However, some of th e 4 d i f f e r e n c e s , p a r t i c u l a r l y In th e income g ro u p s from two i th o u s a n d to f o u r th o u sa n d d o l l a r s , may be c a u se d by an i n c r e a s e o f Income f o r many o f th e s p e n d in g u n i t s betw een 19*1-8 and 1951- A lso , th e in c r e a s e d r a t e o f c o n t r i b u t i o n and th e ex te n d e d c o v e ra g e a f t e r 1950 may a c c o u n t f o r some o f th e d i f f e r e n c e s . B e n e f it p a y m e n ts. — In T able V th e t o t a l b e n e f i t s p a id o u t u n d er t h e Old Age and S u r v iv o r s ' In su ra n c e program d u r in g 1951 a r e a l l o c a t e d to th e d i f f e r e n t Income g ro u p s. The a l l o c a t i o n i s in c o n fo rm ity w ith th e r e s u l t s o f a n a t i o n a l su rv ey co n d u c ted i n th e l a t t e r p a r t o f 1951 by th e 2^Musgrave and o t h e r s , op . c l t . . p . *44. Bureau, o f Old-Age and S u r v iv o r s ' I n s u ra n c e . The su rv e y c o v e re d "about 1 8 ,0 0 0 aged b e n e f i c i a r i e s , r e p r e s e n tin g n e a r l y 1 p e r c e n t o f th e two and o n e - q u a r te r m i l l i o n o ld - age and aged-w idow b e n e f i c i a r i e s on th e r o l l s a t th e end of 1950, . . ." 3 ° The re c o rd e d r e s u l t s in c lu d e o n ly b e n e f i - I c i a r i e s whose b e n e f i t s had n o t been su sp en d ed d u r in g th e su rv e y y e a r ( n i n e - t e n t h s o f th e sam ple) and e x c lu d ed non r e c u r r i n g lump-sum paym ents made d u rin g th e y e a r . A lso , w idow ers u n d er s i x t y - f i v e y e a r s o f age and c h ild r e n 31 b e n e f i c i a r i e s a r e n o t in c lu d e d in th e s u rv e y . 1 The f i n a l r e s u l t o f th e 1951 s u rv e y was t h a t 81 p e r , I c e n t o f th e b e n e f i t s a c c ru e d to th o s e who e a rn e d below i |two th o u sa n d d o l l a r s . T o ta l r e d i s t r i b u t i o n in 1 9 5 1 . — G en eral governm ent j e x p e n d itu re s by income g ro u p s f o r 1951 a r e p r o r a te d on t h e j same a l l o c a t i o n system in T a b le V II a s was u sed in T able IIj f o r 1 9 ^ 1 .32 3®Edna G. W entworth, "R eso u rces o f Aged I n s u ra n c e B e n e f i c i a r i e s : 1951 R a tio n a l S u rv e y ," S o c ia l S e c u r ity B u l l e t i n . 15*3» A u g u st, 1952. 3 lM a rg a re t L. S te e k e r , "Old-Age and S u rv iv o r s ' In s u ra n c e B e n e f i c i a r i e s : Income in 1 9 5 1 » M S o c ia l S e c u r ity B u l l e t i n . 1 6 :1 1 , J u n e , 1953* 32Vet e r a n s ' b e n e f i t s and h o u sin g a r e d i s t r i b u t e d a c c o rd in g t o sp e n d in g u n i t s , th e l a t t e r o n ly up to th e f o u r th o u sa n d d o l l a r income c l a s s . S o c ia l w e lf a r e i s a l l o c a t e d on an in v e r s e g e o m e tric p r o g r e s s io n below f o u r th o u s a n d d o l l a r s . I n t e r e s t paym ents a r e a l l o c a t e d a c c o rd in g to th e d i s t r i b u t i o n o f l i q u i d a s s e t s , a g r i c u l t u r a l e x p e n d itu r e s a r e d i s t r i b u t e d a c c o rd in g t o farm incom e. TABLE VII ESTIMATED DISTRIBUTION OF A ll MAJOR FEDERAL GOVERNM ENT EXPENDITURES BE INCOME CLASS FOR FISCAL XEAR 1951 (In M illio n s of D o lla rs) Money Income C lass V eterans B en efits Housing S o cial W elfare I n t e r e s t Payments A g ric u ltu re Education Less than |l,0 0 0 888 120 917 3^3 A4 15 $1,000 - 1,999 1,020 140 A59 457 81 17 2,000 - 2,999 1,207 169 230 628 80 21 3,000 ~ 3,999 1,207 169 115 686 146 21 M OO - 4,999 1,020 — — 686 78 17 5,000 - 7,499 -------- — — 1,314 98 16 7,500 and over -------- — 1,600 123 8 5,342 602 1,798 5,714 650 115 I 175 j TABLE VII.- (Continued) i i ! ESTIMATED DISTRIBUTION OF ALL MAJOR FEDERAL GOVERNM ENT - EXPENDITURES BY INCOME CLASS FOR FISCAL YEAR 1951 (In M illio n s of D o lla rs) i i Money Income C lass N atural R esources, T ra n sp o rtat ion and Communication Foreign A ff a irs and N ational Defense Misc. and G eneral G ovt. T otal Per cent of T otal Less than f l ,000 30 260 17 2,634 5*9 < f> l, 00 0 — 1,999 173 1,563 101 4,015 9.0 2,000 - 2,999 346 3,125 203 6,009 13*4 3,000 — 3,999 462 4,167 270 7,243 16.2 4,000 - 4,999 491 4,427 287 7,006 15.7 5,000 - 7,499 635 5,729 372 8,164 18.2 7,500 and over 750 6,771 439 9,691 21.6 2,887 26,042 1,689 44,762 100. SOURCE of Government E xpenditures: U nited S ta te s Department of Commerce, Bureau o f th e Census, S t a t i s t i c a l A b strac t of the U nited S ta te s 1955 (Washington: Government P r in tin g O ffic e, 1955), PP. 352-353* 176 | A g a in ,, a s In 19*H» governm ent e x p e n d itu r e s f o r th e J i f i s c a l y e a r w ere chosen I n s t e a d o f t h e c a le n d a r y e a r. The r a t i o n a l e f o r th e u s e of th e f i s c a l y e a r was a p p ro x im a te ly th e same In 1951 in 19^1♦ M ain ly , t h a t th e I n c r e a s e d m i l i t a r y e x p e n d itu re s o c c u rr in g a f t e r th e m iddle o f 1951# due to th e Korean p o l i c e a c t i o n , te n d e d t o d i s t o r t a norm alI b u d g e t. The t o t a l r e d i s t r i b u t i o n o f income f o r 1951# assum in g t h a t th e T re a su ry u s e s t h e b a la n c e betw een re v e n u e and e x p e n d itu r e s t o p ay g e n e r a l governm ent e x p e n d itu r e s , i s j p r e s e n te d in T ab le V I I I . 33 The n e t r e s u l t I s t h a t a s u b s t a n t i a l r e d i s t r i b u t i o n o c c u rs to th e b e n e f i t o f th o s e whose t o t a l money income i s below two th o u sa n d d o l l a r s a t th e ex p en se o f th o s e who e a rn betw een two th o u sa n d and seven th o u sa n d f i v e hundred d o l l a r s . The u p p er income gro u p a ls o p r o f i t from th e O ld Age p ro g ram . However, t h i s 1 h ig h e r income c l a s s i s o n ly a sm a ll f r a c t i o n of a p e r c e n ta g e p o i n t more f o r t u n a t e l y s i t u a t e d a f t e r c o n s id e r a ti o n Farm income was c a l c u l a t e d by talcin g th e p e r c e n ta g e o f fa rm e rs in each income group and m u ltip ly in g I t by th e a v e ra g e income In each g ro u p . E d u catio n I s a l l o c a t e d e v e n ly t o a l l consum er u n i t s . A ll o th e r e x p e n d itu re s a r e d i s t r i b u t e d a c c o rd in g to t o t a l money Incom e. F or th e f i g u r e s on sp e n d in g u n i t s , money incom e, l i q u i d a s s e t s h o ld in g s and th e number of fa rm e rs se e : "1952 Survey o f Consumer F in a n c e s : P a r t I I I , " o p . c l t . , pp* 975* 99 999 * 3 3 in T able V III a d m i n i s t r a t i v e e x p e n se s a r e p r o r a t e d on a b e n e f i t s r e c e iv e d b a s i s t o each Income g ro u p . I TABLE VIII THE REDISTRIBUTION OP INCOM E RESULTING FROM THE OLD AGE A N D SURVIVORS' INSURANCE PROGRAM IN 1951 UNDER T W O DIFFERENT ASSUMPTIONS (In M illio n s o f D o lla rs) Money Income C lass T otal Money Income T otal C o n trib u tio n s B e n e fits Plus A d m in istra tiv e Expense S urplus Used to Pay Government E xpenditures B e n e fits Adminis t r a t i v e Expense T o tal Pro Rated G eneral Budget Less th an fl,0 0 0 2,000 61 8 * * * * 36 880 83 |1 ,0 0 0 ~ 1,999 12,100 266 683 29 712 126 2,000 * 2,999 2**,200 613 218 10 228 187 3,000 - 3,999 32,300 805 56 2 58 226 **,000 - **,999 3**.300 761 * * * * 2 *6 220 5,000 - 7,**99 ****,500 601 20 1 21 25** 7,500 and over 52,600 257 20 1 21 302 T o tal 202,000 3,36** 1,885 81 1,966 1,398 178 '"1 TABLE V III(C ontinued) THE REDISTRIBUTION OF INCOM E RESULTING FRO M THE OLD AGE A N D SURVIVORS' INSURANCE PROGRAM IN 1951 UNDER T W O DIFFERENT ASSUMPTIONS (In M illio n s of D o lla rs) Money Income C lass S urplus Used to Pay Government E xpenditures Surplus Used to R e tire Debt Income A fte r Per cen t of R e d is tr ib u tio n ,, O rig in a l Income Pro Rated Debt R etirem ent Income A fter R e d is trib u tio n P er cent of O rig in a l Income Less than f 1,000 2,902 145.1 83 2,902 145.1 |1 ,0 0 0 « 1,999 12,672 104.7 112 12,658 104.6 2,000 - 2,999 24,002 99.2 153 23,968 99.0 3*000 - 3*999 31,779 9 8 .4 168 31,721 98.2 4,000 * - » 4,999 33,805 98.6 168 33,753 98.4 5,000 - 7,499 44,174 99*3 322 44,242 9 9 .4 7,500 and over 52,666 100.1 392 52,756 100.3 T o ta l 202,000 1,398 202,000 SOURCE f o r T otal A d m in istra tiv e E xpenditures: U nited S ta te s Department of H ealth , E ducation, and W elfare, S o cial S e c u rity A d m in istra tio n , "Annual S t a t i s t i c a l Supplement, 1955," S o cial S e c u rity B u l l e t i n , 19:12, 1956 179 o f th e S o c ia l In s u ra n c e p ro g ram . I i Under th e assu m p tio n t h a t th e T re a s u ry r e t i r e s governm ent d eb t w ith th e d i f f e r e n c e betw een c o n t r i b u t i o n s j i and b e n e f i t s , a p p ro x im a te ly th e same r e d i s t r i b u t i o n p a t t e r n j a p p e a rs (s e e T a b le V I I I ) . However, th o s e who e a rn above j j f i v e th o u sa n d d o l l a r s a r e s l i g h t l y b e t t e r o f f a t th e expense o f th o s e who e a rn betw een one th o u s a n d and f i v e th o u sa n d d o l l a r s u n d er th e l a t t e r a ssu m p tio n . I I I . CONCLUDING OBSERVATIONS Under th e Old Age and S u r v iv o r s ' In su ra n c e ta x system th e r e i s a t r a n s f e r from th o s e who a r e s u b je c t to j th e p a y r o l l t a x to th o s e who a r e r e c i p i e n t s o f governm ent b e n e f i t s . I g n o rin g th e a d m i n i s t r a t i v e ex p e n se s and th e R e se rv e Fund, and w ith th e e x c e p tio n o f some i n d i v i d u a l s o v e r se v e n ty -tw o y e a rs o f a g e , income i s t r a n s f e r r e d from p r o d u c e r s to n o n -p ro d u c e rs . U sing 19^1 and 1951 a s r e s p e c t i v e exam ples o f a p re w a r and p o s tw a r y e a r i n w hich b e n e f i t s w ere p a i d , i t wbb o b se rv e d t h a t th o s e who e a rn e d below one th o u sa n d f i v e h u n d red d o l l a r s i n 19&L and below two th o u sa n d d o l l a r s in 1951 r e c e iv e d l a r g e r s h a re s o f th e n a t i o n a l income a s a r e s u l t o f t h i s s o c i a l in s u r a n c e program . The to p income b r a c k e t in b o th y e a rs g a in e d th ro u g h t h i s t r a n s f e r p ay m en t. The l o s s e s o c c u rr e d to th o s e sp en d in g u n i t s e a rn in g betw een ione th o u sa n d f i v e hun d red d o l l a r s and f i v e th o u sa n d d o l l a r s |in 19^1 and "between two th o u sa n d and se v en th o u sa n d f i v e h u n d red d o l l a r s In 1951* I f in each y e a r th e assu m p tio n was made t h a t th e F e d e ra l buclget was in b a la n c e and t h a t th e T re a su ry r e t i r e d o u ts ta n d in g governm ent d e b t w ith th e c o n t r i b u t i o n s to th e Fund in e x c e ss o f b e n e f i t paym ents, th e same g e n e r a l p a t t e r n o f income r e d i s t r i b u t i o n w ould have o c c u rre d . However, i n b o th 19kl and 1951 th e t r a n s f e r o f income in f a v o r o f th e lo w e r income b r a c k e t s would n o t have been a s g r e a t , w h ile th e t r a n s f e r o f income in f a v o r o f th e to p income b r a c k e t w ould have I n c r e a s e d . The m ost s i g n i f i c a n t d i f f e r e n c e betw een th e two s t u d i e s was t h a t i n 1951 t h e r e was a g r e a t e r income t r a n s f e r i n f a v o r of th e lo w e s t income g ro u p . T his g r e a t e r r e d i s t r i b u t i o n o f in c a s e was c a u se d by a s m a lle r p e r c e n ta g e o f sp e n d in g u n i t s in th e lo w e s t income b r a c k e t in 1951 and by a g r e a t e r a g g r e g a te o f b e n e f i t paym ents d i s t r i b u t e d to b e n e f i c i a r i e s in 1951* CHAPTER V I THE EFFECT OF OLD ACE AMD SURVIVORS' INSURANCE ON PERSONAL SAVINGS AND CONSUMPTION EXPENDITURES The transfer payment from those who are gainfully employed to those who are retired or who are survivors of former employed workers is hound to have important secondary effects. This follows from the fact that the beneficiaries will use their money in different ways than the original contributors would have done. I. CONCEPT OF PERSONAL SAVINGS The lack of a universally acceptable definition of savings has led to the inclination on the part of statisti cians "to add up a lot of unaddable statistics and to present in the end an Inedible product. The late Dr. Goldenweiser stated: One thing that must be reconsidered is the defini tion of saving. We must devise one that does not conflict with common understanding and usage as much as the current one is likely to, one that Is helpful in economic analysis rather than confusing as current savings semantics are. Individual saving is an excess of income over spending; this I think is clear. ■hs. A. Goldenweiser, "Concept of Savings," Savings for the Modern Economy, Walter W. Hillery, Frances M. Boddy, and Carl L. Nelson (eds.) (Minneapolis: University of Minnesota Press, 1953)» p« 60. C o rp o ra te s a v in g I s a v e r y complex p ro b le m . I t i s a ! q u e s tio n w h e th e r I t I s p o s s i b l e e i t h e r to d e f in e i t o r j m easure I t . I t i s m ixed up w ith so many a c c o u n tin g a n d 1 b ookkeeping p r a c t i c e s t h a t what i s f r e q u e n t l y u se d in th e m easurem ent o f s a v in g I s an a r i t h m e t i c a l t o t a l j r a t h e r th a n an economic r e a l i t y . 2 As to governm ent s a v in g s , Dr. G o ld en w eiser p o in te d o u t t h a t F u n d am en tally governm ent s a v in g i s an a b s u r d i t y . The governm ent I s not supposed to s a v e . The governm ent i s supposed t o r a i s e enough money t o m eet i t s ex p e n d i t u r e s , and i f i t h as more money th a n n e c e s s a r y to co v er i t s n e e d s, to red u ce th e d e b t . 3 P r o f e s s o r K le in goes so f a r a s t o s t a t e t h a t t h e r e i s no c o r r e c t o r t r u e d e f i n i t i o n o f s a v in g s b u t o n ly u s e f u l and u n f r u i t f u l d e f i n i t i o n s . ^ F o llo w in g P r o f e s s o r K l e i n 's and D r. G o ld e n w e is e r's i v ie w p o in ts , i t seem s l o g i c a l t o r e s t r i c t t h i s stu d y to p e r s o n a l s a v in g s , s in c e p e r s o n a l sa v in g s a r e more a p t t o be a f f e c t e d by th e S o c ia l S e c u r ity program th a n e i t h e r g o v ern ment o r b u s in e s s s a v in g s , and a re e a s i e r to d e f i n e . D e f i n i t i o n o f P e r s o n a l S avings Under common u sag e th e d e f i n i t i o n o f p e r s o n a l s a v in g s o r consum er s a v in g s i s th e " d i f f e r e n c e betw een 2 - Loo, c l t . ^ Loc. c l t . ^Lawrence R. K le in , "S avings C oncepts and D ate: The Needs o f Economic A n aly ses and P o l i c y , " S av in g s in th e Modern Economy. W a lte r W . H i l l e r , F ra n c e s M. Boddy, and C arl L. N elson ( e d s .) (M in n ea p o lis: U n iv e r s it y o f M in n e so ta P r e s s , 1953)* p» 1 0 ^. 18A " c u r r e n t income an d th e sum o f c u r r e n t e x p e n d itu re f o r j consum ption and t a x p a y m e n ts .”5 T his d e f i n i t i o n i s e q u iv a le n t to th e change i n n e t w o rth o f th e sp e n d in g u n i t ( t o t a l a s s e t s m inus t o t a l l i a b i l i t i e s ) , e x c lu d in g c a p i t a l g a in s and l o s s e s a s th e y a r e n o t n o rm a lly c o n s id e re d a p a r t o f incom e. j The S t a t i s t i c a l Problem A lthough th e d e f i n i t i o n of p e r s o n a l sa v in g s i s r e a d i l y a g re e d upon th e r e i s , u n f o r t u n a t e l y , no u n i v e r s a l agreem ent a s t o w hat ite m s sh o u ld be in c lu d e d under th e d e f i n i t i o n . The sa v in g s f i g u r e s o f th e two s t a t i s t i c a l s t u d i e s r e l i e d upon in th e l a s t c h a p te r w i l l be a n a ly z e d in t h i s c h a p te r in o rd e r to d e te rm in e th e e f f e c t s o f S o c ia l; S e c u r ity upon p e r s o n a l s a v in g s and consum ption e x p e n d itu r e s f o r t h e y e a rs 19^1 and 1951* Survey o f Consumer F in an c e f i g u r e s on consum er s a v i n g s . — The S urvey of Consumer F in an ce h a s made a stu d y on th e d i s t r i b u t i o n o f consum er s a v in g s from 19^5 t o 1 9 5 0 . However, th e a g g r e g a te consum er s a v in g s f i g u r e s o f t h e Survey d i f f e r to a l a r g e e x te n t from th e D epartm ent o f Commerce f i g u r e s d u rin g th e same span o f y e a rs f o r s e v e r a l r e a s o n s w hich have been s t a t e d c l e a r l y by th e Survey i n th e 5 ”1951 S urvey o f Consumer F in a n c e s : P a r t IT , D i s t r i b u t i o n o f Consumer S av in g s i n 1 9 5 0 ," F e d e ra l R eserve B u l l e t i n . 3711061, Septem ber, 1951* 185 : f o llo w in g p a ra g ra p h : i The u n iv e r s e o f th e su rv e y i s somewhat n a rro w e r th a n t h a t o f th e commerce s a v in g a g g re g a te in t h a t th e su rv e y e x c lu d e s non p r o f i t i n s t i t u t i o n s , c i t i z e n s l i v i n g o u t s i d e c o n t i n e n t a l U n ite d S t a t e s , members of t h e armed f o r c e s l i v i n g on m i l i t a r y r e s e r v a t i o n s , r e s i d e n t s o f h o s p i t a l s and o th e r I n s t i t u t i o n s , and t r a n s i e n t p o p u la tio n . Among th e c h i e f d i f f e r e n c e s w ith ; r e s p e c t to d e f i n i t i o n a r e th e i n c lu s io n by th e su rv e y f o f paym ents to governm ent l i f e In s u ra n c e and r e t i r e m e n t fu n d s o th e r th a n s o c i a l s e c u r i t y paym ents and a l l paym ents made in c o n n e c tio n w ith p r i v a t e l i f e in s u r a n c e j and r e tir e m e n t sy stem s; th e D epartm ent o f Commerce in c lu d e s o n ly th e in c r e a s e in r e s e r v e s o f l i f e i n s u r an ce and r e t i r e m e n t fu n d s . F u rth e rm o re , th e p e r s o n a l I s a v in g co n c ep t o f th e D epartm ent o f Commerce in c lu d e s j th e fo llo w in g Item s n o t in e lu d e d , o r in c lu d e d o n ly in j p a r t , in th e e s tim a te o f sa v in g o b ta in e d by th e S urvey i o f Consumer F in a n c e s: d e p r e c i a t i o n on farm and nonfarm h o u s e s , changes in t h e a s s e t s of p r i v a t e t r u s t fu n d s , changes in farm i n v e n t o r i e s , and changes in p e r s o n a l c u rre n c y h o l d i n g s . 6 Fam ily sp e n d in g and sa v in g in w a rtim e . — The s u rv e y co n d u c te d j o i n t l y by th e B ureau o f L abor S t a t i s t i c s and th e B ureau o f Human N u t r i t i o n and Home Economics f o r th e y e a r 19*5-1 c a l c u l a t e d s a v in g s by u s e o f th e b a la n c e sh e e t te c h n iq u e (n et change in a s s e t s and l i a b i l i t i e s d u r in g th e s u rv e y p e r io d on t h e p a r t o f s i n g l e and f a m ily c o n s u m e rs ). The a g g re g a te f i g u r e s w hich r e s u l t e d f o r th e y e a r 19*5-1 w ere somewhat lo w e r, a c c o rd in g to th e Bureau o f Labor S t a t i s t i c s th a n t h e sa v in g s f i g u r e s o f t h e D epartm ent of C o m m e r c e .7 ^ I b i d . , p . 1066, f o o tn o te No. 2. "^United S t a t e s D epartm ent o f L ab o r, Bureau o f L abor S t a t i s t i c s , F am ily Spending and Saving in War Tim e, B u l l e t i n No. 822 (W ashington: Government P r i n t i n g O f f ic e , 19*5-5)» p . 1*9. 186 I I . THE EFFECTS OF THE SOCIAL INSURANCE PROCRAM O N t PERSONAL SAVINGS AND CONSUMPTION EXPENDITURES The S o c ia l S e c u r ity program a f f e c t s p e r s o n a l s a v in g s and consum ption e x p e n d itu r e s th ro u g h r e d i s t r i b u t i o n o f j i incom e. I n d iv id u a l s and f a m i l i e s w ith low incomes te n d t o j I spend a l a r g e r p r o p o r tio n of t h e i r Incomes on c u r r e n t consum ption th a n i n d i v i d u a l s w ith medium and h ig h Incom es. The s u rv e y s conduoted b y th e S o c ia l S e c u r ity A d m in is tra tio n show t h a t a s u b s t a n t i a l s h a re o f th e b e n e - j f i t s o f th e S o c ia l S e c u r ity program a c c ru e to th e lo w e s t Income b r a c k e t. I t may t h e r e f o r e be assum ed, on th e b a s i s o f In fo rm a tio n c o n c e rn in g s a v in g s by Income g ro u p s, t h a t a m a jo r p o r t i o n o f paym ents a r e sp e n t f o r c u r r e n t oonsump- I t i o n . T his i s t r u e sin c e th e lo w e s t g ro u p sa v e s o n ly a sm a ll p e rc e n ta g e o f i t s money Income. However, th e m id d le income g ro u p s (who fin a n c e th e l a r g e s t s h a r e o f th e b e n e f i t s th ro u g h t h e p a y r o l l ta x ) te n d to save more in p r o p o r ti o n th a n th e lo w er income g ro u p s , who r e c e iv e m ost o f th e b e n e f i t s . Thus th e program w ould te n d to s ti m u la te consum ption a t th e expense o f s a v in g s . I f t o t a l b e n e f i t s w ere g r e a t e r th a n t o t a l c o n t r i b u t i o n s , consum ption e x p e n d itu re s w ould be s tim u la te d even m ore. On th e o t h e r hand, c o n t r i b u t i o n s have ex ceeded b e n e f i t s by a s u b s t a n t i a l amount in e v e ry y e a r s in c e th e in c e p tio n o f th e S o c ia l S e c u r ity program . In t h i s c a s e i t would seem l o g i c a l to a g re e w ith M erriam t h a t “th e n e t e f f e c t o f th e in s u r a n c e program w i l l p ro b a b ly be to d e c re a s e a g g r e g a te consum ption and t o In c re a s e t o t a l s a v in g s ( in c lu d in g t h e r e s e r v e s of th e in s u ra n c e s y s t e m ) .”® i M erriam 1s a p p ro a c h , how ever, f a i l s to c o n s id e r th e j f a c t t h a t th e money c o l l e c t e d by th e T ru s t Fund goes to th e ! T re a s u ry in r e t u r n f o r governm ent b o n d s, and th e T re a s u ry u s e s th e money e i t h e r to pay governm ent e x p e n d itu r e s o r to r e t i r e th e p u b lic d e b t. Thus th e d i f f e r e n c e betw een th e c o n t r i b u t i o n s and b e n e f i t s g o e s back to p r i v a t e h o u se h o ld s w here i t can be sp e n t f o r c u r r e n t consum ption o r sa v ed d ep e n d in g on th e i n c l i n a t i o n s of th e r e c i p i e n t . j C o n s id e ra tio n o f th e e n t i r e program , in c lu d in g th e ! T r e a s u r y 's d i s p o s i t i o n o f th e fu n d s i t r e c e i v e s from th e ■ R e s e rv e , I n d i c a t e s t h a t th e n e t e f f e c t o f t h e in s u r a n c e program h as been t o s t i m u l a t e consum ption even when c o n t r i - b u tio n s exceed b e n e f i t s . The S t a t i s t i c a l A n aly ses U sing th e s a v in g s d a t a by income c l a s s s u p p lie d by th e 1941 Survey o f F am ily S pending and S av in g in W artim e^ ®Ida C. M e rria n , S o c ia l S e c u r ity F in a n c in g , B ureau R e p o rt No. 17 (W ashington: F e d e r a l S e c u r ity A g e n c y ,“S o c ia l S e c u r i t y A d m in is tra tio n , D iv is io n of R e se a rc h and S t a t i s t i c s , 1 9 5 2 ), p . 142. ^ U n ite d S ta te d D epartm ent o f L ab o r, Bureau o f Labor S t a t i s t i c s , Spending and S av in g s of th e N a ti o n 's F a m ilie s in W artim e, B u l l e t i n No. 723 (W ashington: Government P r i n t i n g O ffic e , 1 9 4 2 ), p . 1 6 . 1 8 g and th e Survey o f Consumer F in a n c e s f o r 1 9 5 0 ,10 i t i s j i p o s s i b l e to c a l c u l a t e th e e f f e c t s o f th e Old Age and { i S u r v iv o r s ' In s u ra n c e Act on p e r s o n a l s a v in g s f o r 19^1 and j 1 9 5 1 * u nder th e assu m p tio n t h a t th e a v e ra g e p r o p e n s it y to save rem ains s t a t i o n a r y f o r each income c l a s s . The f i r s t s te p in com puting th e e f f e c t o f S o c ia l S e c u r ity on p e r s o n a l sa v in g s i s to com pute th e a v e ra g e p r o p e n s it y to sav e f o r each income c l a s s f o r 19^1 and 1 9 5 1 - The m ethod o f c o m p u ta tio n w a s, f i r s t , to compute a v e ra g e d is p o s a b le incom e. F or 19^1, t h i s was done by s u b t r a c t i n g p e r s o n a l ta x e s from av erag e n e t money income f o r e a c h j income c l a s s . A verage n e t s a v in g s was th e n d iv id e d b y | a v e ra g e d is p o s a b le income f o r each income c l a s s in o r d e r to ! compute th e a v e ra g e p r o p e n s it y t o s a v e . ^ For 1951» ■ a v e ra g e p r o p e n s ity to save was com puted by f i r s t m u l t i p l y in g t o t a l d is p o s a b le income (e q u a l to a g g r e g a te consum er income m inus F e d e r a l income ta x e s ) by th e p e r c e n ta g e s o f d is p o s a b le Income a p p e a rin g f o r each incom e c l a s s in th e 12 S urvey of Consumer F in a n c e s . Net s a v in g s f o r 1951 was 1 0 "1951 S urvey of Consumer F in a n c e s : P a r t 17, o p . c l t . , p . 1067* ^ U n i t e d S t a t e s D epartm ent of L a b o r, B ureau o f Labor S t a t i s t i c s , B u l l e t i n No. 723, lo o . c l t ♦ 12 "1952 S urvey o f Consumer F in a n c e s : P a r t I I I . Incom e, S e le c te d In v e s tm e n ts , and S h o rt Term Debt o f C onsum ers," F e d e r a l R eserve B u l l e t i n , 38:97^» 9 77-978, S eptem ber, 1952. 189 c a l c u l a t e d by m u lt ip ly in g th e p e r c e n ta g e s o f s a v in g s f o r each Income c l a s s t h a t e x i s t e d in 1950 by e s tim a te d a g g r e g a te sa v in g s f o r 1 9 5 1 Wse o f 1950 f i g u r e s was n e c e s s a r y s in c e th e sa v in g s f i g u r e s by income c l a s s f o r 1951 a r e n o t a v a i l a b l e . A g g re g ate s a v in g s , a c c o rd in g to th e S urvey o f Consumer F in a n c e s was $14- b i l l i o n in 1 9 5 0 . ^ j The D epartm ent o f Commerce f i g u r e s , p e r s o n a l s a v in g s , in c r e a s e d |6 b i l l i o n betw een 1950 and 1 9 5 1 T h e re f o re , |2 0 b i l l i o n s was u se d a s th e a g g re g a te s a v in g s f i g u r e s f o r 1951. The r e s u l t s from t h i s co m p u tatio n in d i c a t e d t h a t in b o th 19^1 and 1951 th e a v e ra g e p r o p e n s ity to save was a n e g a tiv e q u a n t i t y f o r th e two lo w e st incom e b r a c k e t s . In 19^1 > th e m id d le income g ro u p s sav ed a sm a ll p r o p o r ti o n o f t h e i r d is p o s a b le income t o 6 .0 p e r c e n t ) . In 1951> among th e m id d le income g ro u p s th e a v e ra g e p r o p e n s it y t o save ra n g e d from a low o f 0 in th e two th o u sa n d t o t h r e e th o u s a n d d o l l a r income b r a c k e t to 9 .8 in th e f o u r th o u sa fid d o l l a r income b r a c k e t . In b o th y e a rs th e u p p er income g ro u p sa v ed on th e a v e ra g e m ore th a n o n e - t h i r d o f t h e i r 1 3 « i^ 5 i S urvey o f Consumer F in a n c e s : P a r t I ¥ , w o p . c l t . , p . 1067- xl*Ibl&. . p . 1066. ^ U n i t e d S t a t e s D epartm ent o f Commerce, O ffic e o f B u s in e s s E conom ics, W ational Incom e, 1 9 5 ^ e d i t i o n . A Supplem ent t o th e Survey o f C u rre n t B u s in e s s (W ashington: Government P r i n t i n g O f f ic e , 195^)> p . 165. 190 d is p o s a b le incom e. The e f f e c t o f th e Old Age and S u rv iv o rs* Program on s a v in g s and consum ption f o r 19^1 and 1951 i s com puted i n T a b le s IX and X. The d i f f e r e n c e b etw een t o t a l money Income b e f o r e and a f t e r c o n s id e r in g th e r e d i s t r i b u t i o n a l e f f e c t s o f th e O ld Age and S u r v iv o r s ' In s u ra n c e Act i s com puted u n d er th e assu m p tio n t h a t th e d i f f e r e n c e betw een b e n e f i t s and c o n t r i b u t i o n s i s u se d by th e T re a su ry f o r paym ent o f g e n e r a l governm ent e x p e n ses. The d i f f e r e n c e b etw een money income b e f o r e and a f t e r r e d i s t r i b u t i o n i s th e n d iv id e d betw een s a v in g s and consum ption e x p e n d itu r e s a c c o rd in g to th e a v e ra g e p r o p e n s it y to sa v e and t o consume. The r e s u l t s o f th e c o m p u ta tio n show t h a t th e S o c ia l S e c u r ity program had a p o s i t i v e e f f e c t on consum ption e x p e n d itu r e s f o r th e two y e a r s s tu d ie d . In f a c t , in 19^1 and 1951 some $13 and $111 m i l l i o n s , r e s p e c t i v e l y , was s p e n t on consum ption t h a t w ould have gone to p e r s o n a l s a v in g s in th e a b sen ce of th e S o c ia l In s u ra n c e A ct. I t can r e a d i l y be e x p la in e d why t h e n e t e f f e c t of th e S o c ia l In s u ra n c e program on consum ption was so much g r e a t e r in 1951 th a n in 1941 • F i r s t o f a l l r e d i s t r i b u t i o n o f income in f a v o r o f th e lo w e r income g ro u p s was g r e a t e r due t o in c r e a s e d b e n e f i t paym ents in 1951* Then, t o o , in 1951 th e a v e ra g e p r o p e n s ity t o save was s m a lle r in t h e one th o u s a n d to f i v e th o u sa n d d o l l a r income g ro u p s th a n i t was TABLE X X THE EFFECT OF THE OLD AGE AN D SURVIVORS' INSURANCE ACT . O N SAVINGS AND CONSUMPTION IN 1941 ASSUMING EXCESS FUNDS ARE USED TO PAX GENERAL GOVERNM ENT EXPENDITURES (In M illio n s of D o lla rs) Money Income C lass Total Money Income A fte r R e d is trib u tio n T o tal Money Income Before R e d is tr ib u tio n D ifferen ce Net E ffe c t on Consumption Net E ffe c t On Savings Less than | l ,000 6,323 6,453 4-130 +130 0 | l ,000 - 1,499 8,378 8,419 4 * 41 > 39 + 2 1,500 - 1,999 11,232 11,223 - 9 - 8 - 1 2,000 - 2,999 21,420 21,342 - 78 - 73 - 5 3,000 - 4,999 20,218 20,121 - 97 - 84 -13 5,000 and over 19,371 19,384 + 13 + 9 + 4 T otal 86,942 86,942 0 + 13 -13 SOURCE OF COM PUTATION FOR AVERAGE PROPENSITY TO SAVE: U. S. Department of j Labor, Bureau o f Labor S t a t i s t i c s , Spending and Saving o f th e N a tio n 's F am ilies in W artime, B u lle tin No. 723 (Washington: Government P r in tin g O ffic e , 1942), p . 1&. i h i \o H -T A B L E X THE EFFECT OF THE OLD AGE A N D SURVIVORS' INSURANCE ACT O N SAVINGS AN D CONSUMPTION IN 1951 ASSUMING EXCESS FUNDS ARE USED TO PAY GENERAL GOVERNM ENT EXPENDITURES (In M illio n s of D o llars) Money Income C lass T otal Money Income A fte r R e d is trib u tio n T o tal Money Income Before R e d is trib u tio n D ifferen ce Net E ffe c t on Consumption Net E ffect On Savings Less than |l,0 0 0 2,902 2,000 902 902 $1,000 « 1,999 12,672 12,100 572 572 2,000 - 2,999 24,002 24,200 -198 -198 3,000 - 3,999 31,779 32,300 -521 -497 -24 4,000 - 4, 999 33,805 34,300 — 446 „A9 5,000 - 7,499 44,174 44,500 -326 — 263 -63 7,500 and over 52,666 52,600 66 41 25 T o tal 202,000 202,000 111 -111 SOURCE of Computation f o r Average P ro p e n sity to Save: "1951 Survey of Consumer } F in an ces: P a rt IV, D is trib u tio n of Consumer Saving in 1950," F ed eral Reserve B u l l e t i n , , 37:1067, September, 1951* I "1952 Survey of Consumer Finances: P a rt I I I , Income, S e le c te d Investm ents, ' and Short Term Debt o f Consumers," F ed eral Reserve B u l l e t i n . 38:978, September, 1952. 1 Hi 193; in 1 9 ^ 1 .16 I The r e s u l t s o f th e s tu d y a p p ly o n ly to 19^1 and 1951* However, 1951 i s r e p r e s e n t a t i v e o f th e p o stw a r i p e r i o d , w h ile 19^1 r e p r e s e n ts one o f th e two p rew ar y e a rs when m o n th ly b e n e f i t s were p a i d . I D uring th e f i r s t th r e e y e a rs of th e S o c ia l In s u ra n c e j program th e e f f e c t s on consum ption w ere n e g a t i v e , s i n c e m o n th ly paym ents w ere n o t begun u n t i l 1 9^ 0 , a lth o u g h t a x c o l l e c t i o n s had s t a r t e d in 1937* The f i g u r e s p r e s e n te d in T ab le s IX and X a r e l i m i t e d i by th e assu m p tio n t h a t th e d i f f e r e n c e betw een b e n e f i t s and c o n t r i b u t i o n s g o es to pay g e n e r a l governm ent e x p e n d itu r e s , j I f th e assu m p tio n w ere made t h a t th e fu n d s a r e used t o | r e t i r e governm ent d e b t, th e n an a c t u a l I n c r e a s e in s a v in g s i n s t e a d o f an in c r e a s e in consum ption w o u ld r e s u l t . The i n c r e a s e i n s a v in g s w ould r e s u l t from th e f a c t t h a t a m a jo r i ty o f th e s e l l e r s o f governm ent bonds t r a n s f e r •^B etw een 19^ 1 and 1951 th e c o s t o f l i v i n g r o s e . T h e re f o re , f a m i l i e s in th e one th o u sa n d to f i v e th o u s a n d d o l l a r income g ro u p s had l e s s money l e f t a f t e r p r o v id in g f o r t h e i r l i v i n g e x p e n se s . A lso , a r e d i s t r i b u t i o n o f income o c c u rre d betw een th e two y e a r s , p l a c i n g h a b i t u a l s a v e r s in h ig h e r Income b r a c k e t s . l? Y e t even in th e s e y e a r s n e t consum ption may have been s tim u la te d s in c e t h e r e was a governm ent d e f i c i t and th e g e n e r a l b u d g e t fa v o re d th e low er Income g ro u p s. The u p p e r income g ro u p s , how ever, w ould a ls o b e n e f i t s in c e th e y w ere r e c e iv in g more from th e g e n e r a l b u d g e t th a n th e y w ere r e q u ir e d t o pay i n t o th e S o c ia l S e c u r ity system . 19^ these funds to other saving sources. This follows because ' l some of the funds would go to natural savers. In addition,, t a larger proportion of the funds would go to the upper j I ! ineome groups than would be the case if this money were I used to pay government expenditures. Therefore, the net effect would be a transfer from active spenders to invest ors. Of course the ultimate effect on the economy will depend on how these extra savings are utilized. It could only have been the assumption that the government would use surplus Reserve Funds toward debt i j retirement which led some writers to believe that consump- i tion would be hindered by the Social Security program. However, some writers through faulty reasoning would have j { us believe that a mere transfer of funds from one low Income group to another would result in an increase in savings and a reduction In real purchasing power.-5 -® i p For example, Withers says: “Only Insofar as security funds are obtained from borrowing will any net addition to purchasing power result. Aside from borrowing, the methods of security finanee employed in the United States amount to robbing one poor man to pay another. Impoverishment Is more equitably distributed, but no net increase in purchasing power occurs. At the same time that we are increasing purchasing power among the lower income groups by security expenditures, we are reducing it by the ; type of security taxation enacted. Even borrowing as a means of security finance may raise prices and reduce real purchasing power in the long run. "The reduction in purchasing power, real wages, and employment which may result from the fiscal policies described above and the establishment of security reserve will increase savings. Any policy which leaves higher incomes untouched will promote savings, since these income The a c t u a l d i s t r i b u t i o n betw een s a v in g s and co n su m p tio n , how ever, i s im p o s s ib le t o com pute u n d er th e assu m p tio n o f a b a la n c e d b u d g e t s in c e t h e r e i s no way o f know ing e x a c tly w hat p r o p o r ti o n of th e fu n d s r e c e iv e d by th e fo rm e r b o n d h o ld e rs w ould be sp e n t and what p r o p o r ti o n j w ould be sa v ed , even assum ing t h a t th e T re a su ry b o u g h t j bonds in p r o p o r ti o n to l i q u i d a s s e t h o ld in g s . Our f i r s t assum ption o f an u n b a la n c e d b u d g et i s th e m ost r e a l i s t i c one to make s in c e th e r e was a n e t d e f i c i t of- 6 ,1 5 9 m i l l i o n d o l l a r s f o r t h e f i s c a l y e a r o f 19k l , and a I d e f i c i t o f 2 1 ,^9 0 m i l l i o n d o l l a r s a t th e end of th e f i s c a l y e a r o f 191^ 2 . ^ I t i s m ore r e a l i s t i c to assume t h a t th e fu n d s w ere . u sed t o pay o f f th e governm ent d e b t in th e c a le n d a r y e a r 1951 th a n in 1 9 ^1 , s in c e t h e r e e x i s t e d a b u d g e ta ry s u r p lu s of 3 ,5 1 0 m lllo n d o l l a r s a t th e end o f th e f i s c a l y e a r o f 1951* However, a d e f i c i t o f &,Q1? m i l l i o n d o l l a r s e x i s t e d a t th e end o f th e f i s c a l y e a r o f 1952, w hich in c lu d e d th e l a s t s i x m onths o f 1951 g ro u p s save a l a r g e r p r o p o r tio n o f t h e i r incom es th a n do lo w e r income g r o u p s ." W illiam W ith e rs, F in a n c in g Economic S e c u r i t y in th e U n ite d S t a t e s (Hew York: Columbia U n iv e r s it y P r e s s , 1939)* p p . 127-128. ■ ^ H a tio n sl I n d u s t r i a l C onference B oard, The Economic Almanac 1956 (Mew York: Thomas Y. C row ell Company, 1956) , p . ^ 5^ . 2 0 L o c . c l t . 196 I I I . THE EFFECT OF THE RESERVE FUND ON PERSONAL SAVIN&S AND CONSUMPTION EXPENDITURES In T ab les X I and X II th e e f f e c t o f th e R eserve Fund j ! on s a v in g s and consum ption i n 19*0. and 1951 i s c a l c u l a t e d ; * on th e assu m p tio n t h a t e x c e ss fu n d s a r e u s e d t o p ay g e n e r a l governm ent e x p e n d i t u r e s .21 The e f f e c t o f t h i s t r a n s f e r paym ent from p a y r o l l t a x w ith h o ld in g s to r e c i p i e n t s o f governm ent e x p e n d itu r e s depends on t h e r e d i s t r i b u t i o n a l e f f e c t s o f th e e n t i r e t r a n s a c t i o n . The n e t r e s u l t o f th e co m p u tatio n was t h a t consump t i o n e x p e n d itu r e s b e n e f i t e d by a sm all amount from th e R eserv e in 19^1* w h ile s a v in g s b e n e f i t e d in 1951* T h ere f o r e , th e R eserve in 1951 to o k fu n d s o u t o f th e hands o f ! i th e consum ing p u b l i c , and th e r e b y e x e r c is e d a n e g a tiv e e f f e c t on th e m a rg in a l e f f i c i e n c y o f c a p i t a l . j In th e a b s e n c e o f t h e R eserve Fund i t i s l o g i c a l to assume t h a t governm ent b o rro w in g w ould have been u se d to f in a n c e th e p a r t o f th e g e n e r a l budget t h a t i s f in a n c e d th ro u g h th e p a y r o l l t a x . As a r e s u l t t h e R eserve Fund has 21 The c a l c u l a t i o n s i n b o th t a b l e s w ere made by p r o r a t i n g c o n t r i b u t i o n s on th e same b a s i s a s t h a t u sed in T a b le s I I and V of C hapter V and s u b t r a c t i n g th e r e s u l t by money income c l a s s from th e p r o - r a t e d g e n e r a l b u d g et f i g u r e s a p p e a rin g i n T a b le s IV and V IIE of C h a p ter V. The d i f f e r e n t column t h a t r e s u l t s from th e above co m p u tatio n i s th e n d iv id e d betw een p e r s o n a l sa v in g s and consum ption e x p e n d itu r e s a c c o rd in g to th e av e ra g e p r o p e n s i t y to sav e and consume f o r t h e r e s p e c t i v e y e a r s . TABLE XI THE EFFECT OF THE RESERVE FUND O N SAVINGS AND CONSUMPTION IN 1941 ASSUMING EXCESS FUNDS ARE USED TO PAX GENERAL GOVERNM ENT EXPENDITURES (In M illio n s o f D o lla rs) Money Income C lass Pro Rated General Budget Pro Rated C o n trib u tio n D iffe re n ce Net E ffe c t on Consumption Net E ffe c t on Savings Less than $1,000 128 37 91 91 $1,000 - 1,499 93 66 27 26 1 1,500 - 1,999 88 93 - 5 - 5 ' - 0 2,000 - 2,999 135 197 < — 62 -58 - 4 3,000 - 4,999 114 189 -75 -65 -10 5,000 and over 118 94 24 16 8 T o tal 6?6 6 76 0 5 - 5 TABLE XII * THE EFFECT OF THE RESERVE FUND O N SAVINGS A N D CONSUMPTION IN 1951 ASSUMING EXCESS FUNDS ARE USED TO PAY GENERAL GOVERNM ENT EXPENDITURES (In M illio n s of D o llars) Money Income C lass Pro Rated General Budget Pro Rated C o n trib u tio n D iffe re n ce Net E ffe c t on Consumption Net E ffect on Savings Less than |l,0 0 0 83 25 58 58 0 f l,0 0 0 - 1,999 126 111 15 15 0 2,000 - 2,999 18? 254 - 67 - 67 0 3,000 - 3,999 226 334- -108 -103 - 5 4,600 - 4,999 220 317 - 97 - 87 -10 5,000 - 7,499 254 249 5 4 1 7,500 and over 302 108 194 121 73 T o tal 1,398 1,398 -59 59 199 in a r e l a t i v e s e n s e been an a n t i - i n f l a t i o n a r y d e v ic e . IV. CONCLUDING- ANALYSIS On th e assu m p tio n t h a t th e a v e ra g e p r o p e n s it y t o consume was n o t a f f e c t e d by t h e Old Age an d S u r v iv o r s 1 In s u ra n c e A ct, and t h a t th e F e d e r a l Government u n d e rto o k d e f i c i t f in a n c in g , th e e f f e c t o f th e program was to i n c r e a s e consum ption e x p e n d itu re s in b o th y e a rs s tu d i e d . However, due to a change in t h e a v e ra g e p r o p e n s it y to consume and an in c r e a s e in b e n e f i t p ay m en ts, a g r e a t e r i n c r e a s e in consum ption e x p e n d itu re s to o k p la c e in 1951 th a n in 19^1* I f , how ever, th e assu m p tio n o f a b a la n c e d b u d g e t w ere made, th e n th e program w ould have s ti m u la te d s a v in g s a s a m a jo r i ty o f t h e s e l l e r s o f governm ent bonds would have t r a n s f e r r e d th e fu n d s to o t h e r sa v in g s s o u r c e s . CHAPTER V II THE METHODS BY WHICH SOCIAL SECURITY I i AFFECTS SAVINGS MOTIVES ! In C h ap ter VI th e a ssu m p tio n was made t h a t th e S o c ia l S e c u r ity Program d id n o t a f f e c t t h e p r o p e n s ity to sav e o r to consume- In th e c u r r e n t c h a p te r t h i s assu m p tio n i s re v ie w e d . At th e o u t s e t i t may seem l o g i c a l to s t a t e t h a t i t i s o b v io u s t h a t p e o p l e 's a t t i t u d e s to w a rd th e need f o r s a v in g s w i l l be a f f e c t e d by th e g o v e rn m e n t's S o c ia l j In s u ra n c e P rogram . I t i s , how ever, n o t e n t i r e l y c l e a r how l a r g e th e n e t e f f e c t w i l l be n o r w hat d i r e c t i o n i t w i l l l a k e . M erriam p o i n t s o u t th e c o n f l i c t i n g te n d e n c ie s in h e r e n t in th e e n t i r e S o c ia l S e c u r ity system : i On th e one hand, i n d i v i d u a l s h a v in g th e p r o t e c t i o n s ! o f a com prehensive s o c i a l in s u r a n c e program no lo n g e r h ave th e same i n t e n s i t y o f n eed to save i n d i v i d u a l l y in o r d e r to have some income t o c a r r y them th ro u g h p e r io d s o f s ic k n e s s , unem ploym ent, d i s a b i l i t y , o r o ld a g e . On t h e o th e r h a n d , b e in g a s s u re d of some minimum s e c u r i t y , th e y may f e e l t h a t i t i s w o rth w h ile to save f o r o t h e r c o n tin g e n c ie s o r in o r d e r to have an a d d i t i o n a l incom e, b eyond w hat th e s o c i a l in s u ra n c e sy stem p ro m ise s them , when one o f th e in s u r e d r i s k s o c c u r s .1 I t i s e a s y to d e te rm in e from e x i s t i n g s t a t i s t i c s w h e th e r o r n o t t h e sa v in g s-in c o m e r a t i o h a s been ■^Ida C. M erriam , S o c ia l S e c u r ity F in a n c in g . B ureau R ep o rt No. 17 (W ashington: F e d e r a l S e c u r ity Agency, S o c ia l S e c u r ity A d m in is tra tio n , D iv is io n of R e se a rc h and S t a t i s t i c s , 1 9 5 2 ), p . 1^2. 201 strengthened or weakened since the passage of the Social Security Act. The unsolvable problem, however, of evalu ating conflicting motives remains. The problem is that the effects of each separate institution on savings habits j t cannot be measured individually. After all, the mere fact ! | that the savings-income ratio was increased or decreased i does not necessarily indicate anything conclusive about the role played by Gia Age and Survivors' Insurance. There fore, the only conclusion that can be drawn through the use of statistics and economic analyses is a refutable presumption as to how the savings motive is affected by the Social Insurance Program under discussion. I. MOTIVES FOE SAVING- AND CONSUMING Given a constant amount of income, there are many psychological motives which cause individuals to refrain from spending their incomes on consumption expenditures. Kevnes1 Analysis The late J. M. Keynes believed that there were eight subjective or social incentives which determine how much is saved. These motives he called "the motives of Precaution, Foresight, Calculation, Improvement, Independence, Enter prise, Pride and Avarice."2 He then pointed out that "we 2 Keynes' description of each of the eight subjective savings motives is as follows: 202, c o u ld a ls o draw up a c o rre s p o n d in g l i s t o f m o tiv e s to con- 1 sum ption such a s E njoym ent, S h o r ts ig h te d n e s s , G e n e ro s ity , J ^ i M is c a lc u la tio n , O s te n ta tio n and E x tra v a g a n c e."J i O s te n ta tio n as a Consum ption M otive | A re c e n t th e o ry o f why p e o p le sa v e and consume i 1 em p h asizes o s t e n t a t i o n as th e b a s i c c a u se o f h ig h consump t i o n th ro u g h i t s r o l e i n i n c r e a s i n g s o c i a l s t a t u s . ^ M l) To b u i l d up a r e s e r v e a g a i n s t u n fo re s e e n c o n tin g e n c ie s : (11) To p r o v id e f o r an a n t i c i p a t e d f u t u r e r e l a t i o n b etw een th e income and th e n e e d s o f th e I n d iv id u a l o r h i s f a m ily d i f f e r e n t from t h a t w hich e x i s t s i n th e p r e s e n t , a s , ‘f o r exam ple, in r e l a t i o n to o ld a g e , fa m ily e d u c a tio n , o r !th e m a in te n an ce o f d e p e n d e n ts; ( i l l ) To e n jo y I n t e r e s t and a p p r e c i a t i o n , i . e . , b e c a u se a l a r g e r r e a l consum ption a t a l a t e r d a te i s p r e f e r r e d to a s m a lle r im m ediate consum ption; (iv ) To e n jo y a g r a d u a l ly i n c r e a s i n g e x p e n d itu r e , s in c e i t g r a t i f i e s a common I n s t i n c t to lo o k fo rw ard t o a g r a d u a l ly im p ro v in g s ta n d a r d o f l i f e r a t h e r th a n th e c o n t r a r y , even th o u g h th e c a p a c ity f o r enjoym ent may be d im in is h in g ; (v) To e n jo y a se n se o f in d e p en d en c e and th e power to do t h i n g s , th o u g h w ith o u t a c l e a r id e a o r d e f i n i t e i n t e n t i o n o f s p e c i f i c a c tio n ; ( v i) To s e c u re a m asse de m anoeuvre to c a r r y o u t s p e c u la tiv e o r b u s in e s s p r o j e c t s ; ( v l l ) To b e q u e a th a f o r tu n e ; ( v i i i ) To s a t i s f y p u re m i s e r l i n e s s , i . e . , u n re a s o n a b le b u t i n s i s t e n t i n h i b i t i o n s a g a in s t a c t s o f e x p e n d itu re a s s u c h .” John M aynard K eynes, The G e n e ra l T heory o f Employment I n t e r e s t and Money (Mew York: H a rc o u rt, B race and Company, 1 9 3 6 ), p p . 1 0 7 -1 0 8 . 3Loo, c l t . **This th e o r y on th e r e l a t i o n s h i p betw een consum ption and s o c i a l s t a t u s i s a s f o llo w s : " P r e s tig e goes to s u c c e s s f u l p e o p le and s u c c e s s in o u r s o c ie ty i s c l o s e l y c o r r e l a t e d t i t h incom e. Once a group o f h ig h income p e o p le a r e 203 A ccording t o D u esen b erry , th e m o tiv e s t h a t l e a d t o j h ig h e r consum ption o v e r th o s e t h a t d i r e c t l y c o n t r o l sa v in g s; i a r e th e m a jo r d e te rm in a n ts o f th e sa v in g s-in c o m e r a t i o . j i D u e se n b e rry 1s id e a s a r e b a se d d i r e c t l y on V eb le n ’s th e o r y j 1 o f co n sp ic u o u s consu m p tio n . Y eblen b e l i e v e d t h a t e v e ry | income group in s o c i e t y was t r y i n g t o I m i t a t e th e consump t i o n group Im m ed iate ly above i t , w ith th e l e i s u r e c l a s s s ta n d in g a t th e to p of th e s o c i a l p y ra m id .^ re c o g n iz e d a s a g ro u p o f s u p e r i o r s t a t u s , t h e i r consum ption s ta n d a r d i t s e l f becomes one o f th e c r i t e r i a f o r ju d g in g s u c c e s s . S in ce a lm o st any consum ption th e o r y i s c o n s i s t e n t w ith th e view t h a t h ig h -in co m e f a m i l i e s w i l l spend more on consum ption th a n low -incom e f a m i l i e s , h ig h s ta n d a rd s o f consum ption become e s t a b l i s h e d a s c r i t e r i a f o r h ig h s t a t u s . Once t h i s h as o c c u r r e d , i t becom es d i f f i c u l t f o r anyone to a t t a i n a h ig h s t a t u s p o s i t i o n u n le s s he can m a in ta in a h ig h consum ption s ta n d a r d , r e g a r d l e s s o f any o t h e r q u a l i f i c a t i o n s he may h a v e . “F u rth e r f o r c e i s g iv e n to th e d r i v e tow ard h ig h consum ption s ta n d a r d s by th e h ig h d e g re e o f s o c i a l m o b il ity p o s s i b l e in o u r s o c i e t y . In a s o c i e t y i n w hich th e c r i t e r i a f o r s t a t u s a r e in te rra s o f b i r t h i t i s im p o s s ib le f o r an I n d iv id u a l to r a i s e h i s s t a t u s . T h e re fo re , th e d r i v e to a t t a i n a h ig h s ta n d a r d o f consum ption a s a means to a t t a i n i n g h ig h s t a t u s i s b lu n te d . H 0 f n e c e s s i t y th e n , in view o f ou'r s o c i a l g o a l s , ev e ry i n d iv i d u a l r a i s e s co m p ariso n s betw een h i s own l i v i n g s ta n d a r d and th o s e o f h i s a s s o c i a t e s in h ig h e r o r lo w e r s t a t u s p o s i t i o n s . Every u n fa v o r a b le com parison o f t h i s s o r t le a d s to an im p u lse to buy goods w h ich w i l l r a i s e th e q u a l i t y o f th e l i v i n g s ta n d a r d , and e l i m i n a t e th e u n fa v o r a b le c o m p a riso n ." James S. D u ese n b erry , Incom e, S aving and th e T heory o f Consumer B e h av io r (C am bridge, M a s s a c h u s e tts : H arv ard U n iv e r s ity P r e s s , 1949)", p p . 30-31* ^"The l e i s u r e c l a s s s ta n d s a t th e head o f th e s o c i a l s t r u c t u r e i n p o i n t o f r e p u t a b i l i t y ; and i t s manner o f l i f e and i t s s ta n d a r d s o f w o rth t h e r e f o r e a f f o r d th e norm o f r e p u t a b i l i t y f o r th e com munity. The o b se rv a n c e o f th e s e s ta n d a r d s , i n some d e g re e o f a p p ro x im a tio n , becomes 20^| i An I n t e r e s t i n g s o c i a l th e o r y p r e s e n te d by D avid j R iesm an a ls o em p h asizes th e p o s i t i v e r o l e o f th e consum er. However, Riesm an, u n lik e D u e se n b e rry , s t r e s s e s th e com par- 1 is o n s made b y e v e ry i n d i v i d u a l w ith h i s p e e r s i n th e same s t a t u s p o s i t i o n . ^ T his th e o r y seems to I n d ic a te t h a t th e ! i n d i v i d u a l i s n o t t r y i n g t o i m i t a t e th e l e a d e r s o f s o c i e t y b u t th e o th e r members o f h i s own p e e r g ro u p . I f one c o n s id e r s th e com bined e f f e c t s o f consum ption such a s en jo y m en t, u n c e r t a i n t y o f th e f u t u r e , and o s t e n t a t i o n — th e n s tr o n g in c e n tiv e s to save m ust be p r e s e n t , incum bent upon a l l c l a s s e s lo w e r in th e s c a l e . In modern c i v i l i z e d com m unities th e l i n e s o f d e m a rc a tio n betw een s o c i a l c l a s s e s h av e grown vague and t r a n s i e n t , and w h e re - e v e r t h i s happens th e norm o f r e p u t a b i l i t y imposed by th e u p p e r c l a s s e x te n d s i t s c o e r c iv e in f lu e n c e w ith b u t s l i g h t h in d ra n c e down th ro u g h th e s o c i a l s t r u c t u r e to th e lo w e s t s t r a t a . The r e s u l t i s t h a t t h e members o f each s tr a tu m a c c e p t a s t h e i r i d e a l o f decency th e scheme of l i f e i n vogue in th e n e x t h ig h e r s tr a tu m , and b en d t h e i r e n e r g ie s to l i v e up to t h a t i d e a l . On p a in o f f o r f e i t i n g t h e i r good name and t h e i r s e l f - r e s p e c t i n c a s e o f f a i l u r e , th e y m ust conform t o th e a c c e p te d co d e , a t l e a s t in a p p e a ra n c e ." T h o r s te ln V eb len , The Theory o f th e L e is u r e C lass (Mew York: The Modern L ib r a r y , 193LT> p . 8L. k^Each p a r t i c u l a r p e e r - g r o u p has i t s group fan to m s and l i n g o e s . S a f e ty c o n s i s t s n o t in m a s te r in g a d i f f i c u l t c r a f t b u t in m a s te r in g a b a t t e r y o f t a s t e p r e f e r e n c e s and th e mode of t h e i r e x p r e s s io n . The p r e f e r e n c e s a r e f o r a r t i c l e s o r 'h e r o e s ' o f consum ption and f o r members o f th e group i t s e l f . The p r o p e r mode o f e x p re s s io n r e q u i r e s f e e l i n g o u t w ith s k i l l and s e n s i t i v i t y th e p ro b a b le t a s t e s o f th e o th e r s and th e n sw apping m u tu al l i k e s and d i s l i k e s to m aneuver in tim a c y ." D avid R iesm an, N athan G la z e r, Renel Denny, The L o n ely Crowd ( a b rid g e d e d i t i o n ; Carden C i ty , New York: D oubleday and Company, 1 9 5 b ), p . 9^* I 205 jin order for savings to exist.? i II. THE EFFECT OF SOCIAL SECURITY ON SAVINGS MOTIVES [ Although they are not affected directly, it is logi cal that all the consumption motives presented hy Keynes, Duesenberry, and Riesm&n are indirectly affected by the Old Age and Survivors* Insurance Law. For example, the Knowledge that one's future is provided for may encourage some people who are now released from future insecurity to try to keep up with others through Conspicuous consumption. Precaution and Foresight Two of the savings motives, however, are directly related to the Social Security Program, namely, precaution and foresight. Since the individual cannot accurately forecast the future, it is common practice to save in order to be able to handle such unforeseen contingencies as disability, sickness, and unemployment. In addition to forced retirement, the unexpected early death of the wage earner is another contingency against which Individuals must protect themselves. The desire to provide against these contingencies was strengthened in the years immedi ately preceding the passage of the Social Security Act by ^R. F. Harrod, Towards a Dynamic Economics (London: Macmillan and Company, 1952)» p . 38. I 206 / th e d e c re a s e in th e s iz e o f th e fa m ily and th e change in a t t i t u d e on th e p a r t o f c h i ld r e n to w ard t h e i r r e s p o n s i b i l - j ( i t y f o r th e s u p p o rt of t h e i r p a r e n t s . j i The p r e c a u tio n a r y m o tiv e i s w eakened by th e G overn- \ ment S o c ia l I n s u ra n c e Program th ro u g h p r o v id in g s e c u r i t y a g a in s t many o f th e c o n tin g e n c ie s th e i n d iv i d u a l i s s u b je c t; ♦ ( t o . j Assuming t h e i n t e n t i o n t o le a v e to o n e 's h e i r s a d e f i n i t e amount o f w e a lth , th e n i t i s r e a s o n a b le to assume a r e d u c t io n in fa m ily s a v in g s by th e amount of th e p r e d i c t a b l e s u r v i v o r s ' b e n e f i t s . L ik e w is e , assum ing th e i n t e n t i o n t h a t p e o p le p la n to r e t i r e when a p r e d i c t a b l e r e t i r e m e n t Income I s a t t a i n e d , i t i s l o g i c a l to assum e a r e d u c t io n in f a m ily sa v in g s by th e amount o f th e r e t i r e m e n t b e n e f i t s . T h e r e fo re , s in c e l e s s v o lu n ta r y s a v in g s w i l l b e n e c e s s a r y In o r d e r to a c c u m u la te th e d e s i r e d r e tir e m e n t Income o r le a v e t h e d e s ir e d e s t a t e to o n e 's h e i r s , t h e Old Age S e c u r ity Program w i l l re d u c e th e i n t e n s i t y of th e need f o r s a v in g s on t h e p a r t o f th e i n d i v i d u a l . The norm al p s y c h o lo g ic a l d e s i r e s to r i s e I n s o c i a l i i s t a t u s th ro u g h consum ption o r t o e n jo y p r e s e n t consum ption w i l l be r e l a t i v e l y s tr e n g th e n e d a s th e p s y c h o lo g ic a l d e s i r e s to save f o r o n e 's o ld age o r to p r o v id e f o r o n e 's d e p e n d e n ts a f t e r d e a th a r e w eakened. The c o n s ta n t d r i v e on 207 th e p a r t o f a d v e r t i s i n g and s e l l i n g to en c o u ra g e in c r e a s e o f e x p e n d itu r e s th ro u g h p l a c i n g b e f o r e th e p u b lie goods s u p e r i o r to th o s e c u r r e n t l y consumed te n d s to s tr e n g th e n o j th e m o tiv e s to consume. i I i The F a c to r s t h a t Cause I n c r e a s e d S avings There a r e , how ever, a number o f c o u n te r b a la n c in g c o n s id e r a ti o n s in a n a ly z in g t h e t o t a l e f f e e t on a g g r e g a te s a v i n g s . ' I n t e n s i f y o th e r s a v in g s m o tiv e s . — F i r s t o f a l l , once s o c i a l in s u r a n c e h as been e s t a b l i s h e d , th e i n d i v i d u a l may sav e to p r o v id e p r o t e c t i o n a g a in s t o th e r c o n tin g e n c ie s . There i s no f e d e r a l governm ent in s u r a n c e , f o r exam ple, to p r o v id e a g a in s t th e h a z a rd s o f s ic k n e s s o r d i s a b i l i t y . Then, to o , th e p r o t e c t e d i n d iv i d u a l may f i n d t h a t such s a v in g m o tiv e s a s im provem ent, in d e p e n d e n c e , e n t e r p r i s e , and c a l c u l a t i o n a r e s t r o n g e r th a n t h e consum ption m o tiv e s and th u s th e r e l e a s e d sa v in g s become f r e e to be u se d f o r some o t h e r p u rp o s e . F or exam ple, once a s s u r e d t h a t h i s o ld age and h i s d e p e n d e n ts a r e p ro v id e d f o r , a man may u s e h i s a c c u m u la te d s a v in g s t o s t a r t a b u s in e s s t h a t he o th e rw is e w ould b e a f r a i d t o engage in b e c a u s e o f th e r i s k s In v o lv e d . In c re a s e d m o tiv e f o r p e n s io n s . — T here i s , how ever, 8 D uesenberry, o p . c i t ., p. 27. 2 0 8 ' an even more l o g i c a l p o s s i b i l i t y , nam ely, t h a t th e i n d i v i d u a l w i l l w ant g r e a t e r p r o t e c t i o n f o r h i s f a m ily and h im s e lf th a n w ould be p a i d u n d er th e Old Age and S u rv iv o r s ' I In s u ra n c e A ct. The maximum b e n e f i t s p a y a b le u n d er th e Act j a r e f a r below t h e a c c e p ta b le l i v i n g s ta n d a r d s o f a m a jo r ity ! o f th e American w o rk e rs . These w o rk e rs t r y t o save s u p p le m e n ta l amounts i n o rd e r to p ro v id e f o r th e r e q u i r e d s ta n d a r d o f l i v i n g upon r e t i r e m e n t . Some u n io n s , f o r exam ple, have la u n c h e d a c o n c e r te d d r i v e f o r em p lo y e r-sp o n so re d p e n s io n s i n o r d e r to augment ] s o c i a l s e c u r i t y b e n e f i t s . M A p e n s io n of $100 a month has become th e s ta n d a r d demand o f th e u n io n s , e s p e c i a l l y in th e j jCIO g r o u p ."9 T h is d r iv e f o r p e n s io n s shows t h a t o rg a n iz e d j l a b o r b e l ie v e s t h a t Old Age and S u rv iv o r s * In s u ra n c e b en e f i t s a r e f a r below th e r e tir e m e n t needs o f American la b o r . However, b e f o r e th e m erg er th e A. F. o f L. d id n o t a c t i v e l y s u p p o rt em p lo y e r-sp o n so re d p e n s io n s and Bu rg e d more r e l i a n c e on th e F e d e ra l pro g ram , a d v o c a tin g em ployer p la n s f o r o n ly th o s e w o rk e rs whose wages p r o v id e a m argin above th e c u r r e n t n e c e s s i t i e s o f l i f e . " ^ 0 The f a c t t h a t a m a j o r i t y o f th e w o rk e rs do n o t ^ B e a tr ic e Brown, Handbook on P e n s io n s , S tu d ie s in P e rs o n n e l P o lic y Mo. 103 (New York: N a tio n a l I n d u s t r i a l C onference B oard, 1 9 5 0 ), p . 6 . ^-®Ban M. M c G ill, F undam entals o f P r i v a t e P e n sio n s (Homewood, I l l i n o i s * R ich ard B. Irw in , 1955)* PP« 2 6 -2 7 . jc o n sid e r th e b e n e f i t s d e r iv e d from S o c ia l S e c u r ity a s s u f f i c i e n t income a f t e r r e tir e m e n t was v e r i f i e d i n a su rv e y ■ c o n d u c te d in 19^0. A q u e s tio n n a i r e was s e n t to f i v e hun d red and f i f t y j j w a g e -e a rn e rs in Los A ngeles County. Of th e f o u r h u n d red j r e s p o n d e n ts , S eventy p e r c e n t . . . a d m itte d t h a t th e amount s e t a s i d e th ro u g h S o c ia l S e c u r ity paym ents i s n o t s u f f i c i e n t to ta k e c a r e of them d u rin g a n o n -w o rk in g p e r io d from th e age o f s i x t y - f i v e on, and c o n te n d e d t h a t some so u rc e o f su p p le m en tary income m ust be o b ta in e d o r , as i n th e o p in io n o f a p p ro x im a te ly 50 p e r c e n t, th e S o c ia l S e c u r ity t a x r a t e m ust be r a i s e d t o in c r e a s e th e amount, o f th e m o n th ly b e n e f i t a t s i x t y - f i v e .11 I Some w o rk e rs may even be enco u rag ed to s t a r t t o save f o r t h e i r f u t u r e b ec au se o f th e governm ent program . Thus some p e o p le who had a "w h at’ s th e use" a t t i t u d e to w a rd s a v in g f o r t h e i r f u t u r e can now see t h a t an a d d i t i o n a l e x p e n d itu r e f o r a l i f e a n n u ity w i l l w ith t h e i r b e n e f i t s m eet t h e i r f u t u r e r e tir e m e n t n e e d s . A lso , th e p u b l i c i t y a s s o c i a t e d w ith th e S o c ia l S e c u r ity Act h as s tim u la te d i n t e r e s t by th e w o rk e r i n th e e n t i r e f i e l d o f in s u r a n c e and o ld age p r o t e c t i o n . F or exam ple, a r e c e n t book on g ro u p a n n u i t i e s c o n s id e r s ( l ) th e d e p r e s s io n o f th e 1 9 3 0 ’ s , (2) L abor U nions, (3) W orld War I I , and (*0 S o c ia l S e c u r ity Dwight H. D ille y , "The W age-Earner*s O pinion o f th e S o c ia l S e c u r ity A ct and th e R e la tio n s h ip o f th e A ct to h i s S av in g H a b its and In v estm en t P o l i c i e s , " (u n p u b lis h e d M a s te r ’ s t h e s i s , The U n iv e r s ity of S o u th ern C a l i f o r n i a , Los A n g e le s, 19*H) , p . 53• L e g is la t io n a s th e f o u r b a s ic c a u ses a f f e c t i n g th e grow th o f g ro u p a n n u i t i e s . Under th e e f f e c t o f S o c ia l S e c u r ity L e g i s l a t i o n th e a u th o r t e l l s u s t h a t As a r e s u l t of th e p a s sa g e o f t h i s A ct, a tre m e n d o u s! amount of p u b l i c i t y was g iv e n th e p ro b lem o f p r o v id in g ; f o r Old Age. U ndoubtedly, t h i s s ti m u la te d i n t e r e s t in , p r i v a t e r e t i r e m e n t p la n s a s w e ll a s i n p e r s o n a l s a v in g s p ro g ram s. A nother r e s u l t of th e S o c ia l S e c u r ity Act was th e r e v i s i o n of many p r i v a t e p la n s t o ta k e ac co u n t o f th e F e d e r a l p ro g ram . At f i r s t , i t was b e l i e v e d t h a t th e o ld age b e n e f i t s p ro v id e d u n d er th e a c t w ould r e l i e v e th e em ployer of th e n e c e s s i t y of g r a n t i n g a d d i t i o n a l b e n e f i t s u n d e r a p r i v a t e p la n , b u t i t was soon r e a l i z e d t h a t th e F e d e r a l p la n w ould p ro v id e an i n s u f f i c i e n t l e v e l o f b e n e f i t s in a l l b u t a l i m i t e d number of c a s e s . The S o c ia l S e c u r ity Act d i d , how ever, f u r n i s h a b a s e on w hich a company p la n c o u ld be su p e rim p o sed , so t h a t th e r e tir e m e n t income from b o th so u rc e s c o u ld be b ro u g h t to a f a r more s a t i s f a c t o r y l e v e l . A lso , w ith th e g o v ern m ent p e n s io n a s a b a s e , th e c o s t o f p ro v id in g th e n e c e s s a ry a d d i t i o n a l b e n e f i t s was much l e s s th a n i f th e em ployer b o re th e e n t i r e expense o f an a d e q u a te p e n s io n p l a n . 12 The e f f e c t o f i n s u r a n c e , h a b i t , and C o n g re s sio n a l whim. — Many wage e a r n e r s who a r e now p a y in g 2 p e r c e n t o f t h e i r Income to th e F e d e ra l Government te n d to f o r g e t ab o u t th e p a y r o l l t a x d e d u c tio n o r f a l l t o see th e r e l a t i o n s h i p b etw een t h e d e d u c tio n and f u t u r e b e n e f i t p a y m e n t s .^ I t i s e a sy t o f o r g e t a b o u t a f u t u r e b e n e f i t ^ K e n n e th B la c k , J r . , Group A n n u itie s ( P h ila d e lp h ia : U n iv e r s ity o f P e n n s y lv a n ia P r e s s , 1 9 5 5 ), p p . 19-20. 13»'Social S e c u r ity p e n s io n s a l s o r e p r e s e n t new, or a d d i t i o n a l s a v in g among l a r g e numbers o f wage e a rn e r s who a r e f a m i l i a r w ith and te n d to f o r g e t th e S o c ia l S e c u r ity p a y r o l l ta x d e d u c tio n . They a r e I n c l i n e d to c o n s id e r th e th a t i s s u b je c t t o change a t any moment due to C ongres- i |s i o n a l whim. A ls o , th e w o rk e r may be in f lu e n c e d by ! i !a r t i c l e s in p o p u la r m agazines t h a t em phasize th e f a c t t h a t j f i | th e w o rk e r h as no v e s te d i n t e r e s t in th e b e n e f i t p r o v is io n j I | j o f th e l a w . ^ As p ro v ed by many amendments e n a c te d s in c e j i j 1 9 3 5 » C ongress can change th e p r o v is io n s of th e a c t a t any j tim e . Many I n d iv id u a l s and f a m i l i e s c l i n g t o t h e i r o ld s a v in g s p a t t e r n s — l i f e in s u r a n c e prem ium s, h o m e -p u rc h a se s, s a v in g s a c c o u n ts — lo n g a f t e r t h e i r needs have been p ro v id e d f o r . A f te r a l l , " h a b it i s bound to be an e x tre m e ly ' im p o rta n t d e te rm in a n t o f th e r e a c t i o n t o change o f m ost s o r t s . "^-5 d e d u c tio n no p a r t o f t h e i r take-hom e income and to l e t th e b e n e f i t paym ents th e y w i l l e v e n tu a lly r e c e i v e s l i d e o u t of t h e i r m in d s." W illiam J . S h u ltz , S o c ia l S e c u r ity and th e Economics o f S a v in g , S tu d ie s in I n d iv id u a l and C o l le c tiv e S e c u r ity No. 5 (New York: N a tio n a l I n d u s t r i a l C onference B o ard , 19*+8), p . 29* - ^ " I f you a r e one o f th e k-Q m i l l i o n who w i l l q u a l i f y and a p p ly f o r b e n e f i t s , you no doubt f e e l c o n f id e n t t h a t th e Government w i l l honor w hat you t h i n k o f a s i t s c o n t r a c t w ith you— and pay up p ro m p tly . "W ell, b r o t h e r , you have a n o th e r t h i n k coming! You h a v e n 11 g o t a c o n t r a c t . Hie Law sa y s you have to pay Old Age t a x to th e Government— b u t th e r e i s a b s o lu te l y n o th in g on th e s t a t u t e books which sa y s th e Government has to pay i t b a c k !" D ennis R a n d a ll, " S o c ia l S e c u r ity — The I .o .I J . That May Never Be P a id ," C o n f i d e n t i a l , 3*62, May, 1955* •^R uth p . Mack, "Economies o f C onsum ption," A Survey o f C ontem porary E conom ics, V o l. I I , B e rn a rd P. Maley ( e d .) ' Homewood, I l l i n o i s : R ich ard D. Irw in , 1 9 5 2 ), p . 58- P ro m o tio n a l d e v ic e s n eed by I n s t i t u t i o n a l s a v e r s . — L if e In s u ra n c e com panies o p e n l y s o l i c i t b u s in e s s and seem | to have been s u c c e s s f u l in s t i m u la tin g new sa v in g s f o r j i j |p r o t e c t i o n a g a in s t o ld a g e . J j Donald Woodward, V ice P r e s id e n t o f M utual L i f e j In s u ra n c e Company o f New York, f o r exam ple, h a s s t a t e d i » t h a t S o l i c i t a t i o n s seem t o be one o f th e m ost im p o rta n t in f lu e n c e s on s a v in g m o tiv e s and th e r a p id grow th o f j th e l i f e in s u r a n c e com panies, w hich use s o l i c i t a t i o n , 1 a l s o p o i n t s t o t h a t im p o rta n c e . Id One o f t h e m ajo r p ro m o tio n a l d e v ic e s u se d to d a y by . in s u r a n c e com panies i s to e x p la in ab o u t S o c ia l S e c u r ity b e n e f i t s to a p r o s p e c tiv e c u sto m e r and th e n to show th e c u sto m er th e amount of endowment in s u ra n c e o r th e s i z e o f th e a n n u ity he w i l l need in o r d e r t o r e t i r e a t s i x t y - f i v e w ith a l i v a b l e incom e. The p r o s p e c t i s a ls o inform ed t h a t i f n e c e s s i t y f o r c e s him to work a f t e r r e t i r e m e n t , he w i l l l o s e income in th e form o f S o c ia l S e c u r ity b e n e f i t s . One b o o k le t in fo rm s t h e p r o s p e c tiv e cu sto m er t h a t on’ an a v e ra g e m onthly wage o f #250 h i s o ld age b e n e f i t w i l l be $88.50 a m onth, o r #132.80 i f he i s m a r r ie d . Then i t p ro c e e d s to p o i n t o u t t h a t a fa m ily may f in d r e tir e m e n t ^ D o n a ld Woodward, * T rends and S t r u c t u r a l Changes in th e T w en tie th C e n tu ry , Comment,w S av in g s in th e Modern Economy. W a lte r W. H i l l e r y , F ra n c e s M. Boddy, and C a rl L. N elson ( e d s .) (M in n e a p o lis: U n iv e r s ity o f M in n eso ta P r e s s , 1 9 5 3 ) , p . 1 5 2 . ! 213 I d i f f i c u l t on #132.80 a m onth. I t i s t r u e t h a t th e cu sto m er can e a rn o v e r two th o u sa n d d o l l a r s a y e a r on an i n t e r m i t - 1 t e n t b a s i s and s t i l l r e c e iv e h i s r e tir e m e n t Income. Yet • j i |t h e b o o k le t in fo rm s th e r e a d e r th a t i f he c o n tin u e s f u l l ; i j ;tim e work f o r one y e a r he w i l l f o r f e i t a n n u a l S o c ia l ! I S e c u r ity Income ch e c k s t o t a l i n g #1,593*60. In seven y e a rs th e l o s s would be # 1 1 * 1 5 5 - 2 0 The l o s s i s r e s t r i c t e d to th e above amount s in c e t h e r e i s no e a r n in g l i m i t a t i o n a f t e r th e s e v e n ty -s e c o n d b ir th d a y . The b o o k le t g o es on t o s t a t e t h a t a s in g l e premium a n n u ity a t s i x t y - f i v e f o r a l i f e t i m e j m o n th ly income of e i g h t y - e i g h t d o l l a r s f o r th e man and | f o r t y - f o u r d o l l a r s f o r h i s w if e would c o s t ab o u t #22,875* j The an sw er, o f c o u r s e , i s to buy in s u ra n c e a s a supplem ent j to S o c ia l S e c u r ity b e n e fits.^ -® In c re a s e d aw aren ess o f s e c u r i t y th ro u g h p e n s i o n s . — A cco rd in g to Dr. Dan M cG ill, R esearch D i r e c t o r o f th e P e n sio n R esearch C o u n c il, W harton School o f F in an ce and C o m m erce,^ th e in c r e a s e d p r o d u c t i v i t y o f th e em ployee g ro u p , t a x r e d u c tio n s a s in d u cem en ts t o s e t up p e n s io n p l a n s , p r e s s u r e from o r g a n iz e d la b o r ( e s p e c i a l l y a f t e r th e N a tio n a l Labor R e la t io n s B oard r u l e d in 19^8 t h a t a p e n s io n K. L a s s e r I n s t i t u t e , What th e Mew Expanded S o c ia l S e c u r ity Law Means to You ( r e v is e d and expanded; Mew York: Simon and S c h u s te r, 195**)» P* 25. *® X bid., p . 26. ^ M c G ill, op., c l t . . pp. 17-27- Zlk ag reem en t I s w i t h i n th e scope o f m an d ato ry c o l l e c t i v e f b a r g a i n i n g ) , and s o c i a l p r e s s u r e a r e th e main e a u se s o f th e I r e c e n t in c r e a s e i n p e n s io n p l a n s . However, b e h in d a l l t h e s e f a c t o r s t h e r e i s an in c r e a s e d aw a re n ess o f p e n s io n s on th e p a r t o f managem ent, la b o r u n io n s , and th e g e n e r a l p u b l i c . S o c ia l S e c u r ity i s a p rim e cau se o f t h i s I n c r e a s e d a w a re n e ss. The p u b l i c i t y su rro u n d in g th e p a s s a g e o f th e S o c ia l S e c u r ity Act b ro u g h t p e n s io n s to th e a t t e n t i o n o f l a b o r l e a d e r s , m anagem ent, and th e g e n e r a l p u b l i c . O rganized la b o r , f o r exam ple, was e i t h e r i n d i f f e r e n t o r a n t a g o n i s t i c to th e p r i v a t e p e n s io n movement b e f o r e th e a d o p tio n o f th e S o c ia l S e c u r ity A ct. Today, many u n io n s have prom oted cam paigns f o r p r i v a t e p e n s io n s f in a n c e d s o l e l y by management in o r d e r to make em ployers more r e c e p t i v e to p r o p o s a ls f o r l i b e r a l i z i n g th e F e d e ra l program O n I w hich i s j o i n t l y fin a n c e d by management an d la b o r . u I t i s t r u e , how ever, t h a t some o f th e same f a c t o r s t h a t l e d o r i g i n a l l y to th e a d o p tio n o f t h e S o c ia l S e c u r ity Act w ere a ls o p r e s e n t a t t h e tim e of a c c e l e r a t e d e x p a n sio n o f th e p r i v a t e p e n s io n m ovem ent. The d i f f i c u l t y o ld e r p e o p le have in f i n d i n g em ploym ent, th e s e e u r i t y - c o n s c io u n e s s f o s t e r e d d u rin g t h e econom ic u p h eav al o f th e e a r l y 1 9 3 0 ’ s , and t h e g e n e r a l i n a b i l i t y o r u n w illin g n e s s 20t ' Loc. c l t . 215 o f some I n d iv id u a l s to a c c u m u la te th ro u g h t h e i r own e f f o r t s th e r e q u ir e d o ld age p r o t e c t i o n have been p a r t i a l l y j i r e s p o n s i b l e f o r t h e ex p a n sio n o f i n d u s t r i a l p e n s io n s . J 4 minimum governm ent program a i d s p r i v a t e p e n s io n j ip l a n a . — The f a c t t h a t th e F e d e r a l program o n ly p r o v id e s a ! i | ' ! minimum amount o f p r o t e c t i o n h a s l e f t th e way c l e a r f o r ! I su p p le m e n ta l b e n e f i t s t o be p ro v id e d th ro u g h p r i v a t e m e a s u re s . The e x is te n c e o f th e S o c ia l S e c u r ity program has a c t u a l l y en co u rag ed t h i s p r i v a t e p e n s io n movement by p r o v id in g a f l o o r o f co v e ra g e and th u s f r e e i n g th e p r i v a t e p la n s o f p ro v id in g th e t o t a l n e c e s s a r y a n n u ity f o r r e t i r e m ent. B e a tr ic e Brown, in a s tu d y co n d u c ted f o r th e n a t i o n a l I n d u s t r i a l C o n feren ce B oard, p o in te d o u t t h a t "w ith th e governm ent p e n s io n a s a b a s e , t h e c o s t o f p r o v id in g su p p le m e n ta l b e n e f i t s i s much l e s s th an i f th e employer b o re th e e n t i r e e x p e n se . E f f e c t on r e a l e s t a t e s a v i n g s . — An i n d i r e c t in c r e a s e in s a v in g s from Old Age and S u r v iv o r s ' I n s u ra n c e may r e s u l t from t h e f a c t t h a t th e b e n e f i t paym ents a r e a p t to a llo w o ld e r p e o p le t o h o ld on to t h e i r d w e llin g s , i n s t e a d o f d o u b lin g up w ith r e l a t i v e s . T his f o r c e s th e y o u n g er g e n e r a tio n to p u rc h a s e new h o u se s. T his v ie w p o in t was e x p re s s e d by t h e N a tio n a l C ity Bank o f New York. The w id e s p re a d in c r e a s e o f p e n s io n s in i n d u s t r y h as B e a tr ic e Brown, o p . c l t ♦, p . 7. 2i6; a l s o been a f a c t o r , m aking i t p o s s i b l e f o r th e ‘o l d j fo lk s* to m a in ta in s e p a r a te homes a p a r t from t h e i r I c h i l d r e n and 'i n - l a w s - ' T h is h a s become an i n c r e a s in g ly im p o rta n t so u rc e o f new h o u se h o ld s a s o l d e r i p e o p le l i v e l o n g e r . 2 2 i S t a t i s t i c a l p ro o f f o r t h i s o b s e r v a tio n comes from a ; sam ple co n d u cted by th e B ureau o f th e C ensus. The B ureau j p o in te d o u t t h a t th e number o f h o u se h o ld s had in c r e a s e d by t h r e e m il lio n betw een M arch, 1950 and A p r i l , 1953- The i n c r e a s e was l a r g e l y due t o “a s u b s t a n t i a l in c r e a s e i n th e number o f h o u se h o ld s m a in ta in e d by o ld e r p e rs o n s w ith no r e l a t i v e s s h a r in g th e hom e."^3 j T h e re fo re , some p o r t i o n o f th e p r e s e n t h o u s in g boom may h av e been c a u se d by th e f i n a n c i a l a b i l i t y o f o l d e r f p e o p le to h o ld o n to t h e i r homes. ♦ i E f f e c t on d i s s a v i n g There i s good re a s o n to b e l i e v e t h a t Old Age B e n e f it paym ents w i l l re d u c e t h e d is s a v in g o f th e ag ed o r re d u c e th e d i s s a v i n g o f t h e i r r e l a t i v e s who o th e rw is e w ould be f o rc e d t o su p p o rt them . Roger M urray, T ic e P r e s id e n t of B ankers T ru s t Company of New Y ork, in r e f e r r i n g to p r i v a t e p e n s io n p la n s e x p r e s s e s t h i s v ie w p o in t: 22 "The Boom in Home B u ild in g ," N a tio n a l C ity M onthly L e t t e r on B u sin e ss and Economic C o n d itio n s , :91» A u g u st, 195* k 2 3 u n ite d S t a t e s D epartm ent o f Commerce, Bureau o f th e C ensus, C u rre n t P o p u la tio n R e p o r ts , P o p u la tio n C h a r a c t e r i s t i c s , S e r ie s P -2 0 , No. 53» A p r i l , 195^ (W ashington: B ureau o f t h e C ensus, 195^1 * p . 1 The c o n t r a c t u a l c h a ra c te r, o f c o n t r i b u t i o n s s u g g e s ts , t h a t th e y w i l l be more s t a b l e o v e r a p e r io d o f y e a rs ' th a n th e v o lu n ta r y s a v in g s program s o f i n d i v i d u a l s . ! The p r i n c i p a l e f f e c t may be on d i s s a v i n g , w hich a c c o u n ts f o r a la r g e p o r t i o n o f th e ch an g es in th e n e t s a v in g s ite m t h a t we u s u a l l y d i s c u s s . B ecause d i s - j s a v in g i s t r a c e a b l e in l a r g e m easure e i t h e r to p e o p le j no lo n g e r a b le t o work o r t o th o s e r e s p o n s i b le f o r { t h e i r c a r e , I t w ould a p p e a r l o g i c a l to expect t h a t over! a p e r io d o f y e a r s , a s more and more p e n s io n e r s q u a l i f y f o r f u l l b e n e f i t s , d is s a v in g from t h i s cause w i l l be r e d u c e d .2^ I t i s t h e r e f o r e p l a u s i b l e to s t a t e t h a t s a v in g s due to th e co m b in atio n o f th e s e v a r io u s m o tiv e s and p sy ch o l o g i c a l r e a c t i o n s have more th a n b a la n c e d th e r e d u c tio n In s a v in g s due t o th e s e c u r i t y p r o v is io n s o f th e S o c ia l S e c u r ity A ct. S av in g s Through F in a n c ia l I n s t i t u t i o n s The m a jo r m ethod o f sa v in g u n d e r th e p r e c a u tio n a r y and c o n tin g e n c y m o tiv e s i s th ro u g h f i n a n c i a l i n s t i t u t i o n s . T h e re fo re , i f O ld Age and S u r v iv o r s ' In s u ra n c e h as a d v e r s e ly a f f e c t e d sa v in g s m o tiv e s , r e d u c t io n in i n s t i t u t i o n a l sa v in g s sh o u ld r e s u l t , e v e ry th in g e l s e b e in g e q u a l. However, a s i n d i c a t e d by T ab le X II I , a t o t a l o f th e a n n u a l Roger M urray, "The E f f e c t o f R e tire m e n t and P e n sio n Funds on S a v in g ," S av in g s in th e Modern Economy, W a lte r W . H i l l e r y , F ra n ces M. Boddy, and C a rl L. K elson ( e d s .) (M in n e a p o lis: U n iv e r s ity o f M in n e so ta P r e s s , 1953)» p . 192. I I I . STATISTICAL EVIDENCE OF INCREASE IN SAVINGS MOTIVES 2 1 8 TABLE X I I I ANNUAL INCREMENTS OF INDIVIDUAL SAVINGS AND ITS COMPARISON WITH DISPOSABLE INCOME FOR SELECT YEARS 1933-1954 (In B i l l i o n s o f D o lla rs ) Year D isp o sa b le P e rs o n a l Income Time and Savings D e p o sits Savings And Loan A sso c ia tio n s P r iv a te In s u ra n c e U n ite d S t a t e s S avings Bonds 1933 4 5 .7 — 2.65 — *58 .57 ------ 1936 6 6 .2 1 .0 7 - .0 6 1 .6 7 .28 1939 7 0 .4 .6 4 .04 1 .7 2 . 66 1942 1 1 7 .5 .76 .26 2 .4 9 7 .9 8 1945 1 5 0 .4 8 .8 2 1 .0 6 3 .4 6 6 .8 5 1948 1 8 7 .6 .82 1 .2 1 3.75 2 .1 3 1950 206.1 . 44 1 .5 1 3 .9 2 • 55 1951 2 2 6 .1 1 .9 6 2.10 4.05 - .4 1 1952 236.9 4 .2 5 3 .0 7 4 .9 1 .32 1954 2 5 4 .8 if. 40 4.50 5.30 .80 219 TABLE X III (Continued) ANNUAL INCREMENTS OP INDIVIDUAL SAVINGS AND ITS COMPARISON WITH DISPOSABLE INCOME FOR SELECT YEARS 1933-195** (In B i l l i o n s o f D o lla rs ) Year S ta te and L ocal Government Bonds T o ta l I n s t i t u t i o n a l Savings R a tio o f I n s t i t u t i o n a l S av in g s to DI s p o s a b le Income 1933 - .6 7 -3 .3 3 ------ 1936 -.**? 2 . 1*9 0 0 • 1939 - .2 3 L.5** 6 .5 19**2 . - . 2 2 1 1 .2 7 9 .6 19**5 - .2 0 19.99 1 3 .3 19 **8 1 .0 9 9.00 L .8 1950 • .68 7.10 3.1* 1951 .1*2 8.12 3 .6 1952 .86 13.**1 5 .7 195** .70 15.70 6 .2 SOURCE: U n ite d S t a t e s D epartm ent o f Commerce, O f f ic e of B u s in e ss Econom ics, N a tio n a l Incom e, 195L e d i t i o n . A Supplem ent to th e Survey of C u rre n t B u sin e ss (W ashing!on: Government P r i n t i n g O ff ic e , 195*0 > PP- 166-167; The N a tio n a l I n d u s t r i a l C o n feren ce B oard, The Economic Almanac 1956 (New York: Thomas Y. C row ell Company, 1956T T p . **08. | 220 ) t |in c re m e n ts o f s a v in g s r e p r e s e n te d by tim e and sa v in g s I j d e p o s its , sa v in g s and lo a n a s s o c i a t i o n d e p o s i t s , p r i v a t e I in s u r a n c e , U n ite d S ta te s s a v in g s b o n d s, an d s t a t e and l o c a l . i * |governm ent bonds shows a s te a d y in c r e a s e betw een 1936 and j I i jl9^5* I n s t i t u t i o n a l sa v in g s re a c h e d a p e a k d u rin g World I War I I s in c e consum er goods w ere s c a rc e and d is p o s a b le Income was h ig h . A f te r th e w ar th e a n n u a l in c re m e n ts o f t h i s ty p e o f s a v in g s w ere re d u c e d b e c a u se th e p e n t-u p J demand from th e w ar y e a rs was s a t i s f i e d w ith p u rc h a s in g neWj consum er goods. The optim ism and th e h ig h l e v e l s o f incomej I a f t e r th e w ar may a l s o have l e d to a r e d u c t io n in th e p s y c h o lo g ic a l n ee d f o r s a v i n g s . ^5 p o stw a r p o in t in i n s t i t u t i o n a l s a v in g s was re a c h e d in 1950, a f t e r w hich a s te a d y I n c re a s e o c c u rre d . The r a t i o o f i n s t i t u t i o n a l s a v in g s t o d is p o s a b le Income i s com puted in T ab le X I I I . The p a t t e r n i s a p p r o x i m a te ly th e same a s when th e u n a d ju s te d s a v in g s f i g u r e s a r e { s t u d i e d . However, th e p o s tw a r d e c re a s e in i n s t i t u t i o n a l s a v in g s i s even more n o t i c e a b l e when th e f i g u r e s a r e r e l a t e d t o an i n c r e a s i n g d is p o s a b le incom e. The I n c r e a s e in th e r a t i o a f t e r 1951, though i t f a l l s s h o r t of th e W orld War I I boom, i s re m a rk a b le c o n s id e r in g t h e c u r r e n t ^ G e o rg e Katoma, and J a n e t A. F i s h e r , "P ostw ar Changes in th e Income o f I d e n t i c a l Consumer U n its ," C onference on R e se a rc h in Income and W ealth , S tu d ie s in Income and W e a lth . V ol. X I I I (Hew York: N a tio n a l Bureau o f Economic R e se a rc h , 1 9 5 1 ), P* 101. 221 o p t im is t ic in fla tio n a r y p h ilo so p h y th a t y e a r ly income w i l l i c o n s t a n t l y I n c r e a s e and t h a t p r o s p e r i t y w i l l e x i s t j •pf. I f o r e v e r . ^ 0 A lso , many o f th o s e who o r d i n a r i l y p la c e t h e i r i ♦ s a v in g s w ith f i n a n c i a l i n s t i t u t i o n s a r e p r e s e n t l y ! ; i [en co u rag ed e i t h e r to in c r e a s e t h e i r consum ption o r to ! in v e s t in a s s e t s t h a t a r e a s s o c i a t e d w ith c a p i t a l g a i n s due to th e p r e s e n t I n f l a t i o n a r y s p i r a l . S av in g s Through L if e In s u ra n c e Companies L if e in s u r a n c e i s th e form o f i n s t i t u t i o n a l s a v in g s m ost l i k e l y to be a f f e c t e d a d v e r s e ly by Old Age and S u r v iv o r s ' I n s u ra n c e . The r a p id advancem ent made by l i f e in s u ra n c e com p a n ie s i s t h e r e f o r e good e v id e n c e f o r th e p r o p o s itio n t h a t s a v in g s m o tiv e s have n o t been a d v e r s e ly a f f e c t e d by t h e S o c ia l S e c u r ity A c t. I n d iv id u a l sa v in g s in l i f e in s u r a n c e com panies have grown s t e a d i l y s in c e 1900, a lth o u g h th e r a t e o f g ro w th has d e c r e a s e d s in c e th e end o f W orld War I I . I t i s i n t e r e s t i n g to n o te t h a t e x c e p t f o r th e s i x y e a rs fo llo w in g t h e d e p r e s s io n o f 1873 an d th e d e p r e s s io n ^ Tlme m agazine q u o te s a $ 6 ,0 0 0 - a - y e a r d ra fts m a n who h as b o u g h t a new c a r , a home, and a l l h i s a p p lic a n c e s and f u r n i t u r e on c r e d i t a s s a y in g , "I'm n o t to o w o rrie d a b o u t i t . I e x p e c t my income t o in c r e a s e s t e a d i l y th ro u g h th e y e a r s , and I d o n 't have to w o rry about a d e p r e s s i o n . " "The B a n k e r 's B a n k er," Time, 6 8 :1 0 7 , Septem ber 10, 1956. 2?See f i g u r e 2 w here I n d iv id u a l s a v in g s i n l i f e In s u ra n c e from 1900 t o 1952 I s p l o t t e d on a se m i-lo g g ra p h . 222 F ig u r e 2 I n d i v i d u a l s ' S a v in g I n L i f e I n s u r a n c e C o m p a n ies 1 9 0 0 - 1 9 5 2 (S e m i-L o g G rap h ) M i l l i o n s o f D o l l a r s $5000 2000 1000 500 /S jT 1/ 200 100 » 1 1 1 / . 50 - ¥ y 20 10 -----------1 __ —!---------- 1 _______ I_______ L L 1 9 0 0 1 9 0 B 1 9 1 6 192k 1 9 3 2 1 9 ^ 0 19**8 1 9 5 2 Y e a r s SOURCE: C h art d raw n from f i g u r e s a p p e a r in g I n I r w in F r ie n d , a s s i s t e d b y V i t o M a t r e l l s , I n d i v i d u a l s ' S a v in g (New Y ork: J o h n W ile y an d C om pany, 195**) » P* 1 0 1 | 223 ! | y e a rs o f 1932 and 1933 th e amount o f l i f e in s u ra n c e i n f o r c e in th e U n ite d S t a t e s h as c o n tin u o u s ly i n c r e a s e d . 2® The lo n g -ru n t r e n d h as s t e a d i l y c o n tin u e d and seems t o he j l i t t l e a f f e c t e d by S o c ia l S e c u r ity . i i j As C h e s te r C. Hash, D i r e c t o r o f L if e In su ra n c e i • In fo rm a tio n o f th e I n s t i t u t e o f L if e In s u ra n c e h a s p o in te d o u t , ! The e r e a t i o n o f th e governm ent b e n e f i t programme h as n o t d i v e r t e d la r g e segm ents o f th e i n s u r in g p u b l i c away from in s u r a n c e b u t h as on th e c o n tr a r y in c r e a s e d th e j number o f p e r s o n s tu r n i n g to in s u r a n c e f o r a m p lif ic a t i o n o f th e s u s te n a n c e b a s e p ro v id e d b y th e p l a n . T h is 1 t r e n d h a s been seen w ith th e i n t r o d u c t i o n o f each new j p r o j e c t f o r mass p r o t e c t i o n . When th e S o c ia l S e c u r i t y } A ct was a d o p te d in 1935 i t was w id e ly p r e d i c t e d t h a t l i f e in s u r a n c e , e s p e c i a l l y i n d u s t r i a l l i f e in s u r a n c e , | w ould be s e r i o u s l y c u r t a i l e d . In f a c t , th e l i f e i in s u ra n c e in f o r c e has more th a n t r i p l e d in th e i n t e r - v e n in g y e a r s , and even I n d u s t r i a l in s u ra n c e h a s . in c r e a s e d to tw o - a n d - a - h a lf tim e s th e 1935 a g g r e g a t e .2“ A n n u itie s (which a r e g e n e r a lly p u rc h a s e d to m eet th e p o s s i b i l i t y t h a t th e b u y er w i l l need a s te a d y income a f t e r r e tir e m e n t) have a ls o I n c r e a s e d in p o p u l a r i t y . The number o f a n n u i t i e s in f o r c e in U n ite d S ta te s l i f e in s u ra n c e com panies in c r e a s e d from 970,000 in 1935 t o 2,423 *000 b y 1945 and to 5*045,000 by 1955*^® T his am ounted to O Q Shephard B. C lough, A C en tu ry o f American L if e I n s u ra n c e (New York: Colum bia U n iv e r s ity P r e s s , 1 9 4 6 ), p . 6. 2^ C h e s te r A. Nash, ttThe C o n trib u tio n o f L if e I n s u r a n ce to S o c ia l S e c u r ity in t h e U n ite d S t a t e s , ” In t e m a il anal L abour R eview . 72:24-25* J u l y , 1955* •^°1956 L if e In su ra n c e F a c t Book (New York: I n s t i t u t e o f L if e I n s u r a n c e , 1 9 5 6 ), p . 30. z z h 1 i n c r e a s e s o f 15© p e r c e n t and 108 p e r c e n t , r e s p e c t i v e l y . I T rends in I n d u s t r i a l P e n sio n s A lthough no c o m p le te ly a c c u r a te f i g u r e s a re a v a i l a b le a s to th e a c t u a l grow th in i n d u s t r i a l p e n s i o n s ,31 a c c o rd in g to th e J o i n t C o n g re s s io n a l Committee on R a ilr o a d R e tir e m e n t, th e g ro w th h as been s p e c t a c u l a r . 32 The P u b lic A f f a i r s I n s t i t u t e 3 3 e s tim a te s t h a t from a s few a s seven h u n d red and tw e n ty company p la n s in 193© and one th o u sa n d n i n e t y i n 1935 c o v e rin g two m i l l i o n fo u r h u n d red th o u sa n d w o rk e rs and two m i l l i o n s i x hun d red th o u s a n d w o rk e rs r e s p e c t i v e l y , th e number in c r e a s e d to s e v e n te e n th o u sa n d p la n s c o v e rin g tw e lv e m i l l i o n w o rk ers by 1 9 5 3 .3*4- T h is am ounts t o an I n c r e a s e o f kQQ p e r c e n t In th e number o f w o rk e rs co v ered over th e e n t i r e tw enty y e a r p e r io d . D uring' I th e d e c ad e from 19*4-0 t o 1950, th e number o f company p la n s 1 in c r e a s e d from 1 ,9 6 5 to 1^,33© o r 629 p e r c e n t a s com pared I I ^ M c C -ill, o n . o l t . . p . 28. 3^see F ig u re 3 f o r th e e s tim a te s o f th e J o i n t C o n g re s s io n a l Com mittee on R a ilr o a d R e tire m e n t. 33step h en Raushenbush, P en sio n s in Our Economy (W ashington: The P u b lic A f f a i r s I n s t i t u t e , 1 9 5 5 ), p . 55* 3% jatim er and T u fe l e s tim a te t h a t t h e r e w ere o n ly 43** p e n s io n p la n s in o p e r a tio n in 1932 and o n ly 515 p la n s o p e r a tin g in 1938. M urray Webb L a tim e r, and K arl T u fe l, T ren d 8 in I n d u s t r i a l P e n s io n s , I n d u s t r i a l R e la tio n s Monograph No. 5 (New York: I n d u s t r i a l R e la tio n s C o u n se lo rs I n c o r p o r a te d , 19*4-0), p p . 7 -9 . 225 F i g u r e 3 T h e G ro w th o f P r i v a t e I n d u s t r i a l P e n s i o n P l a n e , 1 9 3 0 - 1 9 5 1 T h o u s a n d s o f M i l l i o n s o f P e n s i o n P l a n s 16 ----------- E m p lo y e e s C o v e r e d 1 6 12 12 10 1 0 8 6 2 0 1 9 3 0 1 9 3 5 1 9 ^ 0 1 9 * 5 1 9 5 0 Y e a r Employers Pension Plans Covered SOURCE: J o i n t C o m m itte e on R a i l r o a d R e t i r e m e n t L e g i s l a t i o n . R e t i r eme n t P o l i c i e s a n d t h e R a i l r o a d R e t i r e m e n t S y s t e m , P a r t I I , E c o n o m ic P r o b le m s o f a n A g in g P o p u l a t i o n , P u r s u a n t t o S . C o n . R e e . 51 a n d 5 6 , 8 3 d C o n g r e s s , 1 s t s e s s i o n ( W a s h in g to n : G o v e rn m e n t P r i n t i n g O f f i c e , 1 9 5 3 ) , P* 9 8 . to 173 p e r c e n t f o r th e d ecad e from 1930 to 19* + 0 .3 5 Thus th e g r e a t e s t I n c r e a s e in I n d u s t r i a l p e n s io n s h as o c c u rre d s in c e th e Old Age b e n e f i t s have been p a i d u n d er th e S o c ia l • S e c u r ity A c t. * i I IV. THE SAVINGS-INCOME RATIO { i | The h y p o th e s is t h a t th e m o tiv es b e h in d a g g re g a te j i p e r s o n a l sa v in g s a r e n o t a f f e c t e d a d v e r s e ly by th e Old Age < and S u rv iv o r s ' In s u ra n c e Act can be ro u g h ly t e s t e d by s tu d y in g th e sa v in g s-in co m e r a t i o . I i L ong-run P a tte r n 1 | The o n ly d a t a on lo n g - p e r io d v a r i a t i o n s o f income j 1 an d s a v in g s a r e s u p p lie d by K uznets and G oldsm ith in t h e i r | I r e s p e c t i v e s t u d i e s . K uznets * s tu d y o f sav in g a . — K uznets h as com puted th e r e l a t i o n s h i p betw een n e t c a p i t a l fo rm a tio n and 1 n a t i o n a l income by d ecad es f o r th e p e r i o d 1869 to 1938. j The r e s u l t s a r e shown in T a b le XIV. Ig n o rin g th e l a s t two d e c a d e s, K u z n e ts' d a ta show a g r a d u a l l y d e c r e a s in g t r e n d in th e r a t i o betw een n e t c a p i t a l fo rm a tio n and Income up to 1928, from th e peak in n e t c a p i t a l fo rm a tio n w hich was re a c h e d d u r in g th e f i f t e e n y e a r p e r io d from 188*+ to 1 8 9 8 . U n f o r tu n a te ly , how ever, -^Raushenbush, l o c . c l t . TABLE XIV NATIONAL INCOME, PERCENTAGE DISTRIBUTION BETWEEN FLOW OF GOODS TO CONSUMERS AND NET CAPITAL FORMATION FOR OVER-LAPPING DECADES 1869-1938 (P e r c e n t o f T o ta l) Decade Flow o f Goods to Consumers Net C a p ita l F o rm atio n 1869-78 87.9 1 2 .1 187*4— 83 87.0 1 3 .0 1879-88 8 6 .8 1 3 .2 188*4— 93 85-9 1*4.1 1889-98 8 5 .9 1*4.1 189*W03 8 6 .A 1 3 .6 1899-08 87.*4 1 2 .6 190*4-13 8 7 .9 1 2 .1 1909-18 8 7 .5 1 2 .5 191* 4 — 23 8 7.6 1 2. A 1919-28 89.1 1 0 .9 192* 4-33 93.3 6 .7 1929-38 9 8 .0 2 .0 SOURCE: Simon K u z n e ts, N a tio n a l Incom e: A Summary o f F in d in g s (New York: N a tio n a l Bureau o f Economic R e se a rc h , 194-6) , p . 53* 228 f K u z n e ts' d a ta do n o t b re a k down c a p i t a l fo rm a tio n i n t o i t s i com ponent p a r t s ( p r i v a t e s a v in g s , c o r p o r a tio n s a v in g s , and J governm ent s a v in g s ) . ! | j The d a ta a l s o a r e a sse m b le d on th e b a s i s o f n e t n a t i o n a l p ro d u c t r a t h e r th a n on a d is p o s a b le income b a s i s . As a r e s u l t th e sa v ln g s-in e o m e r a t i o can o n ly be a p p r o x i m ated from K u z n e ts ’ f i g u r e s . I In an e a r l i e r s tu d y , K uznets has e x p re s s e d th e b e l i e f t h a t th e t r e n d o f lo n g -ru n sa v in g s was tow ard j s e c u l a r s t a b i l i t y . 37 By d is c o u n tin g th e l a s t t h r e e o v e r- ; i l a p p in g d ecad es a s ab n o rm al, i t can be o b s e rv e d from T able j XIV t h a t th e d ecad e a v e ra g e s o f th e p e r c e n ta g e o f n a t i o n a l income r e p r e s e n te d by n e t c a p i t a l fo rm a tio n v a r ie d o n ly 2 p e r c e n ta g e p o i n t s from 186*f- to 1923. K uznets a t t h a t tim e e x p la in e d t h a t th e re d u c e d p r o p o r ti o n o f n a t i o n a l income flo w in g in to n e t c a p i t a l f o rm a tio n was c a u se d by abnorm a l i t i e s . The g r e a t e r d e s i r e f o r consum ers' goods d u r in g th e 1 9 2 0 ’ s was due t o te c h n o lo g i c a l change; f o r exam ple, th e developm ent of th e a u to m o b ile . The d e p r e s s io n o f th e 1 9 3 0 ’ s augm ented consum ption a s p e o p le t r i e d d e s p e r a t e l y ^ Simon K u z n e ts, “P ro p o r tio n o f C a p ita l F o rm atio n to N a tio n a l P r o d u c t ,1 1 American Economic R eview , k2:510, May, 1952. 3?Slmon K u z n e ts, b s e s o f N a tio n a l Income in P eace and War, N a tio n a l B ureau o f Economic R e se a rc h , O c c a sio n a l P a p e r No. 5 (New York: N a tio n a l Bureau o f Economic R e se a rc h , 1 9 ^ 2 ), p . 12. 229 1 t I to r e t a i n t h e i r cu sto m ary s ta n d a r d o f l i v i n g . | j U n f o r tu n a te ly , K u z n e ts 1 d a ta go o n ly up to 1938. jT h e re fo re , i t was n e c e s s a r y t o use a v a i l a b l e s t a t i s t i c s in i J jo rd e r to "bring th e sa v in g s ineome r a t i o up t o d a t e . The j j r a t i o o f p e r s o n a l sa v in g s t o d is p o s a b le ineom e, u s in g th e j f i g u r e s o f th e D epartm ent o f Commerce i s p r e s e n te d in T able; XV. | I t i s d i f f i c u l t to I n t e r p r e t th e t r e n d s a p p e a rin g j i d u r in g th e y e a rs s in c e 1928 a s none o f t h e d ecades a p p ro a c h e s a norm al p e r io d . Yet th e f a c t t h a t th e s a v in g s - , income r a t i o was o n ly 9*3 p e r c e n t in th e y e a rs from 1 9 ^ to 1953* w hich in c lu d e d two y e a r s of W orld War I I and th e Korean War p e r i o d , and o n ly 6 .2 p e r c e n t f o r th e m ost t r e c e n t decade i n d i c a t e s t h a t th e lo n g ru n p e r s o n a l s a v ln g s - ineome r a t i o i s on th e d e c r e a s e . G o ld sm ith * s s tu d y o f s a v in g s G o ld sm ith , on th e o th e r h an d , In h i s more r e c e n t s tu d y c o v e rin g th e p e r io d from 1897 th ro u g h 19^9* c o n c lu d e s t h a t The p e r s o n a l s a v in g r a t i o in c lu d in g consum er d u r a b le s h a s f a i l e d t o show a m arked upw ard o r downward tr e n d d u rin g th e p a s t h a l f c e n tu r y . In p a r t i c u l a r , th e a v e ra g e l e v e l o f th e p e r s o n a l s a v in g r a t i o has been a p p ro x im a te ly th e same in th e f o u r to seven y e a rs a f t e r W orld War I I a s d u rin g th e tw e n tie s an d d u rin g t h e two * 3 0 " D uring W orld War I I and th e K orean War I n d iv id u a l s a v in g s r a t e in c r e a s e d g r e a t l y due to I n c r e a s e d demand f o r l a b o r (as i n p r o d u c tio n ) accom panied by a d e c re a s e in th e l a b o r su p p ly Im filt& ry f o r c e s ) and a r e d u c t io n in consum er g o o d s . TABLE XV RATIO OF BOTH CONSUMPTION EXPENDITURES AND PERSONAL SAVINGS TO DISPOSABLE INCOME BY DECADES 1929-1955 (Per cent of Total) i I ____________________________________________________________________________________ I Decade P ro p o rtio n o f D isp o sa b le Income Going to Consum ption P ro p o rtio n o f D isp o sa b le Income j Going to P e r s o n a l i S avings 1 1929-38 9 7 .4 2 .6 1 9 3 ^ 3 9 1 .4 8 .6 1939-48 87.0 1 3 .0 19^4-53 9 0 .7 9 .3 j 1946^55 9 3 .8 6 .2 j SOURCE: U n ite d S ta te s D epartm ent o f Commerce, O ff ic e o f B u s in e s s E conom ics, N a tio n a l Income 1954 e d i t i o n , A Supplem ent to th e Survey o f C u rr e c t B u s in e s s (W ashington: Government P r i n t i n g O ffic e , 1 9 5 4 ), PP. 164-.165- N a tio n a l I n d u s t r i a l C o n feren ce B o ard , The Economic Almanac 1956 (New York: Thomas Y. C row ell Company, 1956)» p . 441 231 j d ecad es b e f o r e World War I . A lthough th e ev id e n c e i s much l e s s s a t i s f a c t o r y f o r th e n i n e t e e n t h c e n tu ry th e av e ra g e l e v e l o f th e p e r s o n a l sa v in g r a t i o from th e ! G iv ll War to th e end o f th e c e n tu r y does n o t seem to have d i f f e r e d c o n s id e r a b ly from th e l e v e l o f th e p a s t I f i f t y y e a r s . 39 ! j I j In o r d e r to p ro v e h i s p o in t G o ld sm ith p r e s e n ts a j i 1 | s c a t t e r diagram showing th e r e l a t i o n s h i p betw een p e r s o n a l 1 s a v in g s and d is p o s a b le income from 1897 to 1952. The r e g r e s s i o n l i n e ( t r e n d l i n e ) f o r th e p e r i o d (e x c lu d in g th e y e a rs 1917-1918, 1930-1933, W 2 - 1 9 ^ 5 , and 1950-1952) i s a lm o st p r o p o r t i o n a l T h u s a s Income g o e s u p , s a v in g s go I up p r o p o r t i o n a t e l y . However, when he e x c lu d e s consum er d u r a b le s f o r h is e s tim a te s o f p e r s o n a l s a v in g s , G o ld sm ith , though he h e d g e s, comes to th e same c o n c lu s io n a s K u zn ets, nam ely t h a t th e . . . r a t i o p ro b a b ly h as undergone a v e ry slow s e c u l a r d e c lin e d u rin g th e p a s t 50 t o 100 y e a r s . In p a r t i c u l a r th e r a t i o i s s l i g h t l y lo w e r a f t e r W orld War I I th a n d u r in g th e th r e e d ecad es p r i o r t o 1930.^1 In summary, th e two s t a t i s t i c a l s t u d i e s co n clu d e t h a t a g ra d u a l s e c u l a r d e c lin e in th e s a v in g s income r a t i o h as ta k e n p la c e , th o u g h th e d a t a a r e n o t e n t i r e l y r e l i a b l e from a s t a t i s t i c a l v ie w p o in t. A few more d ecad es must p a s s •^Raymond W. G o ld sm ith , A Study o f Saving in th e U n ite d S t a t e s . V o l. I ( P r in c e to n , New J e r s e y : P r in c e to n U n iv e r s it y P r e s s , 1 9 5 5 ), p» 7- ^ S e e F ig u re k f o r a re p r o d u c tio n o f th e S c a t t e r Diagram p r e s e n te d by G o ld sm ith . ^ G o ld sm ith , l o c . c i t . 232 F i g u r e k R e g r e s s i o n L in e * a n d A S c a t t e r D ia g r a m S h o w in g R e l a t i o n s h i p B e tw e e n P e r s o n a l S a v i n g a n d P e r s o n a l D i s p o s a b l e In c o m e 1 8 9 7 t o 1 9 5 2 S t a n d a r d S o c i a l A c c o u n tin g C o n c e p t: 1 9 2 9 V a lu e e P e r H ead P e r s o n a l S a v i n g s ( I n D o l l a r s ) 25 0 200 100 50 0 - 5 0 3 0 0 1*00 500 6 0 0 7 0 0 8 0 0 9 0 0 1 0 0 0 P e r s o n a l D i s p o s a b l e In c o m e ( I n D o l l a r s ) ♦ R e g r e s s i o n L in e 1 8 9 7 -1 9 5 2 ( e x c l u d i n g 1 9 1 7 - 1 8 , 1 9 3 0 - 3 1 . 1 9 5 2 -1 * 5 . 1 9 5 0 - 5 2 ) . SOURCE: R aym ond W. G o l d s m i t h , A S t u d y o f S a v in g I n t h e U n i t e d S t a t e s , V o l . I ( P r i n c e t o n , New J e r s e y : P r i n c e t o n U n i v e r s i t y P r e s s , 1 9 5 5 ) . P« 1 3 . 233 b e f o r e any d e g re e of c e r t a i n t y as to th e sa v in g s-ln e o m e j i r a t i o can be a s c e r t a i n e d . I t i s a t l e a s t c e r t a i n t h a t th e I i sa v in g s-in c o m e r a t i o has n o t in c re a s e d d u r in g r e c e n t d e c a d e s . C auses of th e S e c u la r D ec lin e o r S t a b i l i t y o f th e S a v ln g s- Income R atio K uznets in fo rm s us t h a t th e m a jo r re a s o n s f o r t h i s d e c l i n e o r s t a b i l i t y o f s a y in g s in r e l a t i o n s h i p to income a r e a s fo llo w s : ( l ) th e s h i f t in p o p u la tio n from th e c o u n try to th e c i t y , and w ith in th e u rb an p o p u la tio n from th e s m a lle r tow ns t o th e l a r g e r c i t i e s , (2) th e Im pact of new consum er g o o d s, (3) s h i f t in th e e c o n o m ic a lly a c t i v e p o p u la tio n from e n tr e p r e n e u r t o employee s t a t u s , (4) change In th e d i s t r i b u t i o n o f d is p o s a b le Income by s i z e , I | and (5 ) s h i f t from l a r g e to sm a ll f a m i l i e s . I f th e s e f a c t o r s p ro v e s i g n i f i c a n t , i t I s sound to assum e t h a t S o c ia l S e c u r ity h a s n o t h in d e r e d th e m o tiv e s f o r s a v in g s . In o rd e r to t e s t t h i s h y p o th e s is an a n a l y s i s of ea ch o f th e f a c t o r s m e n tio n e d by K uznets i s now in o r d e r . I f th e s e f a c t o r s a r e shown to be s tr o n g , th e n i t i s l o g i c a l t h a t S o c ia l S e c u r ity h as n o t s i g n i f i c a n t l y re d u c e d th e lo n g run m o tiv e s f o r s a v in g . ^ K u z n e t s , " P ro p o rtio n o f C apital. F o im atlo n to N atio n al. P r o d u c t ,1 1 o p . c l t . , p . 521. 234 S h i f t t o u rb an l i v i n g *— The s h i f t to urban liv in g * ^ i b ro u g h t w ith I t d is c o m f o rts t h a t c o u ld be le s s e n e d o n ly by a d d i t i o n a l e x p e n d itu r e f o r consum er g o o d s. At th e same j I tim e I t I s a d e m o n s tra te d f a c t t h a t fa rm e rs save a l a r g e r j i i p r o p o r tio n o f t h e i r Income th a n do c i t y o r v i l l a g e j w o r k e r s . ^ ! Im pact o f new consum er g o o d s. — A lthough I t I s j im p o s s ib le t o m easure th e e f f e c t s o f new o r im proved J consum er goods, i t i s r e a s o n a b le to su p p o se t h a t th e ! c o n s ta n t p r e s s u r e from p s y c h o lo g ic a l d e s i r e s f o r maximum j I s a t i s f a c t i o n s w ould te n d to a f f e c t s a v in g s a d v e r s e ly . \ •^The ch an g es a re v e ry im p re s s iv e . "From 1850 to 1950, th e p e r c e n ta g e o f th e p o p u la tio n l i v i n g in r u r a l a r e a s has d e c re a s e d from a b o u t 83 p e r c e n t to about 35» a d e c re a s e o f a lm o st 60 p e r c e n t. On th e o t h e r hand, th e u rb a n a r e a s have been g ro w in g . A s t r i k i n g exam ple o f t h i s may be seen in t h e f a c t t h a t t h e r e w ere no c i t i e s o f a m i l l i o n in 1850; b u t in 1950* 12 p e r c e n t o f th e p o p u la tio n l i v e d in such c e n t e r s . " M ichael J . J u c i u s , P e rso n n e l Management ( t h i r d e d i t i o n ; Homewood, I l l i n o i s : R ic h a rd D. Irw in , 1 9 5 5 ), p . 1 4 . ^ T a b l e XVI shows t h a t farm o p e r a t o r s saved a h ig h e r p e r c e n ta g e o f t h e i r income th a n any o t h e r o c c u p a tio n a l group ex cep t t h e m a n a g e ria l and s e lf-e m p lo y e d g ro u p . Mean s a v in g s in T able XVI was com puted by d i v i d i n g a g g re g a te s a v in g s by number o f sp e n d in g u n i t s in e a c h o c c u p a tio n a l g ro u p . A ggregate s a v in g s was computed by m u ltip ly in g t o t a l a g g r e g a te s a v in g s by th e p e rc e n ta g e o f s a v in g s f o r each o c c u p a tio n a l g ro u p . S ources f o r co m p u ta tio n : "1952 Survey o f Consumer F in a n c e s , P a rt I I I , Income, S e le c te d I n v e s t m e n ts , and S hort-T erm Debt o f C onsum ers," F e d e ra l R eserve B u l l e t i n , 3 8 :975» Septem ber, 1952; "1951 Survey o f Consumer F in a n c e s , P a r t IV, D i s t r i b u t i o n of Consumer S avings in 1 9 5 0 ," F e d e ra l R e serv e B u l l e t i n , 3 ? :1 0 6 6 , 1074, Septem ber, 1951. TABLE X V I M EAN INCOME, MEM SAVINGS AND SAVINGS INCOME RATIO BY OCCUPATIONAL CROUP FOR 1950 O c c u p a tio n a l Croup Mean Income Mean S avings S a v in g s- Income R a tlo - P e r c e n t A ll sp en d in g u n i t s 13,520 $ 270 7 .7 P r o f e s s i o n a l and sem i- p r o f e s s i o n a l 5,630 400 7 .1 M a n a g e ria l and s e lf-e m p lo y e d 5,790 1 ,1 2 0 1 9 .4 C l e r i c a l and s a l e s 3,910 270 6 .9 S k i l l e d and s e m i - s k i l l e d 3,530 180 5 .1 U n s k ille d and s e r v ic e 2,350 90 3 .8 Farm o p e r a to r 2,480 270 1 0 .9 O ther* 2,020 -110 - 5 . 4 * I n c lu d e s u n i t s headed by h o u se w iv es, s e r v ic e w o rk e rs , unem ployed p e r s o n s , and s tu d e n t s . SOURCES f o r C om putations: "1952 Survey o f Consumer F in a n c e s , P a r t I I I , Income, S e le c te d In v e s tm e n ts , and S hort-T erm Debt o f C onsum ers," F e d e ra l R eserv e B u l l e t i n , 38:975* Septem ber, 1952. "1951 Survey o f Consumer F in a n c e s , P a r t IV, D i s t r i b u t i o n o f Consumer S av in g s in 1 9 5 0 ," F e d e r a l R eserve B u l l e t i n . 3 7 :1 0 6 6 , 1074, S eptem ber, 1951* 236 ' I f one com pares th e consum ption o f a fa m ily w ith a c e r t a i n Income In 19^0 w ith t h a t o f a fa m ily w ith th e same ( r e a l ) income in 1870, he would e x p e c t t o f i n d t h a t th e a d d i t i o n a l sp e n d in g o f th e 19^0 fa m ily was a b so rb e d by th e p u rc h a s e o f com m odities t h a t d id n o t e x i s t in t h e e a r l i e r p e r i o d . ^5 The d e c l i n i n g p o s i t i o n of th e s e lf- e m p lo y e d . — The ; \ i t I ■number o f a c t i v e p r o p r i e t o r s o f u n in c o r p o r a te d e n t e r p r i s e s i , in c lu d in g f a n s d e c re a s e d from 1 0 .3 m i l l i o n in 1929 t o 9 .^ ; l&fi i m i l l i o n in 195^* D uring th e same span o f y e a rs th e la b o r, f o r c e h as s t e a d i l y in c re a s e d from a low o f ^ 9 .4 m i l l i o n in : 1929 t o 67.8 m i l l i o n in 1 9 5 ^ . ! T h is r e l a t i v e and a b s o lu te in c r e a s e in th e t o t a l number o f i n d i v i d u a l s in th e l a b o r f o r c e a s com pared w ith th e r e d u c tio n o f in d e p en d en t p r o p r i e t o r s s in c e 1929 h a s had a n e g a tiv e e f f e c t on p e r s o n a l s a v in g s . As th e f i g u r e s p r e s e n te d in T able XVI d e m o n s tra te , th e members o f th e se lf-e m p lo y e d an d m a n a g e ria l g ro u p s save a l a r g e r p e r c e n ta g e o f t h e i r incom e th a n do any o th e r o c c u p a tio n a l g ro u p s, and th e farm o p e r a t o r s ran k seco n d . P r o p r i e t o r s a,s a c l a s s save f o r a l l th e same l± ,< F ranco M o d ig lia n i, " F lu c tu a tio n s in th e S av in g - Ineome R a tio : A Problem in Economic F o r e c a s t i n g ," C o n feren c e on R e se a rc h in Income and W ealth , S tu d ie s in Income and W e a lth , V ol. XI (New York: N a tio n a l B ureau of Economic R e se a rc h , 19^9)» p« 3 S e n s a t i o n a l I n d u s t r i a l C onference B oard, The Economic A lm an ac 1966 (New York: Thomas Y. C row ell Company, 1 9 5 6 ), p . 3 2 2 . * * 7l b l d . , p . 351- r e a s o n s a s do th e o th e r o c c u p a tio n a l g ro u p s . In a d d i t i o n , th e e n t e r p r i s e m o tiv e le a d s to th e a d d i t i o n a l s a v in g s w h ic h , a r e c h a r a c t e r i s t i c o f t h i s g ro u p . B u s in e s s p r o j e c t s I .p e r i o d i c a l l y r e q u i r e new c a p i t a l in v e s tm e n ts , and i t i s to j th e i n t e r e s t o f t h e p r o p r i e t o r to I n v e s t a s much c a p i t a l a s j p o s s i b l e in to h i s own b u s in e s s , th u s r e d u c in g th e ex p en se ' o f I n t e r e s t paym ents and th e d a n g e r o f b e in g a p o o r c r e d i t j r i s k . P r o p r i e t o r s a r e a ls o more a p t to be in f lu e n c e d by j i th e In d ep en d e n t and c a l c u l a t i o n m o tiv e s th a n a r e th e o t h e r ; o c c u p a tio n a l g ro u p s . U s u a lly th e same p e r s o n a l i t y w h ich would go in to an in d e p en d en t b u s in e s s w ould a ls o d e s i r e independence and f u t u r e p r o t e c t i o n t o a g r e a t e r d e g re e th a n |w ould th e a v e ra g e i n d i v i d u a l . [ R e d i s t r i b u t i o n o f Incom e. — One o f Kuznets* l a t e s t ! s t u d i e s p r e s e n ts th e changes in income s h a r e s of th e u p p er income group from 1913 to 1 9 ^8 . K uznets f in d s t h a t th e p e r c e n ta g e o f Income o f th e to p 1 p e r c e n t of th e p o p u la ti o n shows a lo n g term downward tr e n d , w i t h m ajor a c c e l e r a t i o n a f t e r 1 9 3 9*^® S ince a m a j o r i t y o f s a v in g s i s a t t r i b u t a b l e to th e u p p e r Income g ro u p s , th e r e d u c tio n in Income of t h i s group w ould u n d o u b te d ly te n d to re d u c e a g g re g a te sa v in g s ( u n le s s i*8 Simon K u zn e ts, a s s i s t e d by E liz a b e t h J e n k s , S h a re s o f Upper Income Groups in Income and S avings (New York: N a tio n a l B ureau o f Economic R e se a rc h , 1953)* PP* 32-6 2. , 238 ' | ! jth e re was an in c r e a s e in th e r a t e o f s a v in g s by th e o t h e r ! Sincome g r o u p s ) . • i i | An a tte m p t i s made t o a s c e r t a i n th e s a v in g s - in come : i ' i I r a t i o by income g ro u p s f o r s e l e c t y e a rs s in c e 1929 in T able; i - ! {XVII. In t h i s t a b l e sp e n d in g u n i t s , money Income, n e t is a v in g s , and th e sa v in g s-In c o m e r a t i o a r e ran k ed by s i z e o f ! i incom e. The p r o p o r tio n o f money income and n e t s a v in g s j i a t t r i b u t a b l e t o each te n th o f th e n a t i o n ’ s income g ro u p s is ! i p r e s e n te d f o r f i v e y e a r s . The f i g u r e s f o r 19**6, 1 9^8, and I 1950 a r e ta k e n from th e S u rv ey o f Consumer F i n a n c e s . ^ The! f i g u r e s f o r 19H-1 a r e a ls o com puted by th e Survey o f j Consumer F in a n c e s from th e f i g u r e s g a th e r e d by th e B ureau J o f L abor S t a t i s t i c s and th e B ureau o f Home Economics (F am ily Spending and Saving i n W artim e).^® The f i g u r e s f o r 1929 a r e ta k en from a B rookings I n s t i t u t i o n s tu d y .-51 In com puting th e sa v in g s-in c o m e r a t i o f o r ea ch o f th e f i v e y e a r s , th e a g g re g a te sa v in g s-in c o m e r a t i o o f th e "1951 S urvey of Consumer F in a n c e s : P a r t IV. D i s t r i b u t i o n o f Consumer S av in g s in 1 9 5 0 ," F e d e ra l R eserv e B u l l e t i n . 3 ? :1 0 6 ? , Septem ber, 1951; "1950 S urvey o f Consumer F in a n c e s: P a r t IV. D i s t r i b u t i o n of Consumer S a v in g s i n 1950,*1 F e d e ra l R eserv e B u l l e t i n , 3 6 :lk k 2 , November, 1950. 5 0 "19A9 S urvey o f Consumer F in a n c e s : P a r t V I I I . D i s t r i b u t i o n o f Consumer S av in g s in 1 9 ^ 8 ," F e d e ra l R eserve B u l l e t i n . 36:23* J a n u a ry , 1950. ^ M a u ric e L e v in , H aro ld C. M oulton, and C la rk W arburton, A m erica1s C a p a c ity t o Consume (W ashington: The B rookings I n s t i t u t i o n , 1935T* P* 96. 239 1 i TABLE XVII | PROPORTION OF TOTAL MONET INCOME, PROPORTION I OF SAVINGS AND THE SAVINGS INCOME RATIO OF j EACH TENTH OF THE NATION'S SPENDING UNITS FOR SELECTED TEARS 1929-1950 P e rc e n ta g e o f T o ta l Money Income P e rc e n ta g e of Net S av in g s S pending U n its Ranked "by S iz e of Income 1950 1948 1946 1941 1929 1950 1948 1946 H ig h e st T enth 29 31 32 34 45 73 78 63 Second 15 15 15 16 13 20 19 16 T h ird 13 12 12 12 10 11 15 14 F o u rth 11 10 10 10 8 10 6 7 F i f t h 9 9 9 9 6 4 6 4 S ix th 8 8 7 7 6 -1 2 1 S eventh 6 6 6 5 5 1 - 1 2 E ig h th 5 5 5 4 4 X -3 1 N in th 3 3 3 2 3 — 2 — 5 -3 Lowest T en th 1 1 1 1 X -1 6 -1 7 — 5 A ll c a s e s 100 100 100 100 100 100 100 100 x L ess th a n o n e - h a l f o f 1 p e r c e n t. j 240 TABLE -XVII (Continued) PROPORTION OF TOTAL MONEY INCOME, PROPORTION OF SAVING-S AND THE SAVINGS INCOME RATIO OF EACH TENTH OF THE NATION'S SPENDING . UNITS FOR SELECTED YEARS 1929-1950 P e rc e n ta g e o f Net S av in g s Savings--Income R a tio S pending U n its Ranked by S iz e o f Income 1941 1929 1950 1948 1946 1941 1929 H ig h e s t T e n th 73 86 13 13 14 24 10 Second 15 12 7 6 7 10 5 T h ird 6 7 4 6 8 6 3 F o u rth 5 4 5 3 5 6 3 F i f t h 5 3 2 3 3 6 2 S ix th 3 1 - 1 1 1 5 1 S ev en th 1 1 1 - 1 2 2 1 1 E ig h th - 1 0 0 - 3 1 -3 0 i i N in th — 3 - l - 3 - 8 -1 7 * -* 1 \ Lowest Tenth - 4 -1 3 -8 0 -8 5 -3 5 — 44 1 i -1 6 7 A ll c a s e s 100 100 5 5 7 11 5 D epartm ent o f Commerce was u se d a s th e b a s e *52 j D isc o u n tin g 19^1* when th e o v e r - a l l sa v in g s-in c o m e | i ra ti© was s i g n i f i c a n t l y h ig h e r th a n in th e f o u r o t h e r y e a rs u se d in t h i s co m p ariso n , no a p p r e c ia b le t r e n d i s n o t i c e a b l e e i t h e r in th e sa v in g s-in c o m e r a t i o o r in th e n e t s a v in g s f i g u r e s a s a p e r c e n ta g e t o t a l . A lthough th e r e s u l t s o f t h i s stu d y a r e s u b je c t to s e v e r e l i m i t a t i o n s , i t seems r e a s o n a b le to co n c lu d e t h a t th e r a t e o f s a v in g s f o r each t e n t h o f th e n a t i o n 's p o p u la tio n h a s rem a in ed r e l a t i v e l y c o n s ta n t o v e r th e lo n g p e r i o d . T h e re fo re , th e g r a d u a l r e d i s t r i b u t i o n o f income w h ich h a s ta k e n p la c e s in c e th e e a r l y 1 9 0 0 's w ould a f f e c t p e r s o n a l s a v in g s a d v e rs e ly th ro u g h re d u c in g th e p e rc e n ta g e o f income r e c e iv e d b y th e u p p e r income b r a c k e t s who a r e r e s p o n s i b le f o r a m a jo r i ty o f th e s a v in g s . As a c o r o l l a r y , th e s t a t i s t i c s seem t o u p h o ld th e view t h a t S o c ia l S e c u r ity l e g i s l a t i o n d i d n o t a d v e r s e ly a f f e c t sa v in g s m o tiv e s . S in c e a m a jo r i ty o f th e t a x e s a r e ta k e n from th e m id d le income g ro u p s , who a r e e v e n tu a lly supposed t o r e c e i v e b e n e f i t s , i t w ould be e x p e c te d t h a t e x a c t co m p u tatio n was to m u lt ip ly th e b a s i c sa v in g s-in c o m e r a t i o f o r each y e a r by th e p e rc e n ta g e o f n e t s a v in g s f o r each t e n t h of th e n a t i o n 's sp e n d in g u n i t s and th e n d i v i d i n g th e r e s u l t s by th e c o rre s p o n d in g t o t a l money income f i g u r e . In com puting th e b a s ic sa v in g s-in c o m e r a t i o th e D epartm ent o f Commerce f i g u r e s w ere u s e d in o r d e r to p la c e th e th r e e d i f f e r e n t s t u d i e s on a c o m p a ra tiv e b a s e s . U n ite d S ta te s D epartm ent o f Commerce, G ffie e o f B u s in e s s Econom ics, N a tio n a l Income, 195h E d i t i o n . A Supplem ent to The S urvey o f C u rre n t B u sin e ss (W ash ln g to n : Government P r i n t i n g O f f ic e , 195**-)» PP» 1 6 ^-1 6 5 . ! 2hZ th e sa v in g s-In c o m e r a t i o s o f th e s e m id d le Income g ro u p s w ould be s u b s t a n t i a l l y re d u c e d a f t e r th e I n tr o d u c tio n o f th e S o c ia l S e c u r ity program . Yet th e r e seems to be no such 1 tr e n d a c c o rd in g to th e f i g u r e s f o r th e f i v e y e a rs s t u d i e d , j I The s h i f t to w ard a s m a lle r f a m ily . — I t can be I ■ re a d ily shown t h a t th e age d i s t r i b u t i o n can a f f e c t th e sa v in g s-in c o m e r a t i o . A number o f e le m e n ts a r e in v o lv e d . j i F i r s t , a r e d u c tio n in th e number o f c h i ld r e n u nder f i f t e e n y e a rs o f age w ould te n d t o make g r e a t e r , n o t l e s s , s a v in g s ' a p o s s i b i l i t y , w h ile an i n c r e a s e would r e v e r s e th e tendency, f Though c h ild r e n u n d e r f i f t e e n form ed a d e c re a s in g p r o p o r t i o n o f th e p o p u la tio n up th ro u g h 19*40, th e tr e n d h as r e c e n t l y been r e v e r s e d .53 T h e re fo re , th e r e c e n t in c r e a s e in t h e number o f c h ild r e n u n d e r f i f t e e n y e a rs o f age s h o u ld le a d to re d u c e d s a v in g s . There i s a ls o a n o th e r a s p e c t to change in age d i s t r i b u t i o n . F a m ilie s w here th e w ife was s i x t y y e a rs of age o r above saved more th a n th o s e f a m i l i e s w here th e w ife was u n d e r t h i r t y y e a rs of ag e , a s shown in a s tu d y of f o r t y - s i x v i l l a g e s i n th e m id d le A t l a n t i c and n o r th c e n t r a l r e g io n o f th e U n ite d S t a t e s , conducted in 1935 and 1936. F or -^ U n ite d S t a t e s D epartm ent o f Commerce, B ureau o f t h e C ensus, S t a t i s t i c a l A b s tr a c t o f th e U n ite d S t a t e s 1955 (W ashington: Government P r i n t i n g O ff ic e , 1955) » P» 2*4-; see a l s o , U n ite d S t a t e s D epartm ent o f Commerce, Bureau o f th e C ensus, H i s t o r i c S t a t i s t i c s o f th e U n ite d S t a t e s , 1789- 19*45 (W ashington: Government P r i n t i n g O f f ic e , 19^-5)» P* 26. ! 2^3 ; ex am p le, in th e c a s e o f th o s e f a m il ie s whose incomes in th e ; a g g r e g a te ran g ed from one th o u s a n d to one th o u sa n d f o u r h u n d red and n i n e ty - n i n e d o l l a r s th e young f a m i l i e s b ro k e even w h ile th e o l d e r f a m il ie s saved on t h e a v e ra g e one h u n d red and tw e n ty - f iv e d o l l a r s p e r f a m ily . The b re a k -e v e n ipoint. f o r o ld e r f a m i l i e s was seven h u n d red and s e v e n ty - f i v e i d o l l a r s a s com pared w ith one th o u sa n d t h r e e hundred and f i f t y d o l l a r s f o r th e younger f a m i l i e s . 5** These f i g u r e s le a d t o th e c o n c lu s io n th a t a g e n e r a l ! ! I in c r e a s e in th e ag e d i s t r i b u t i o n o f th e p o p u la tio n w i l l ! le a d to an in c r e a s e in s a v in g s . j I i | The n e t e f f e c t o f th e change in t h e age d i s t r i b u t i o n I o f th e p o p u la tio n i s d i f f i c u l t t o d e te rm in e s in c e t h e r e are I o f f s e t t i n g f a c t o r s in v o lv e d . V. CONCLUDING OBSERVATIONS The te n d e n c y on th e p a r t o f th o s e p e o p le who a r e c o v e re d by S o c ia l S e c u r ity to re d u c e t h e i r sa v in g s b e c a u se of a r e d u c tio n i n p r e c a tio n and f o r e s i g h t I s b a la n c e d by an I n c r e a s e in o t h e r sa v in g s m o tiv e s , a lo n g w ith t h e norm al h a b i t o f sa v in g s and a d e s i r e f o r co m p lete s e c u r i t y . In f a c t , t h e Old Age an d S u r v iv o r s ' In su ra n c e 54 U n ite d S t a t e s D epartm ent o f A g r i c u ltu r e , B ureau of Home Econom ics, "Fam ily S pending and S av in g s a s R e la te d to Age o f Wife and Number o f C h ild r e n ," M isc . P u b lic a tio n 489 (W ashington: Government P r i n t i n g O f f ic e , 1 9 4 2 ), p . 4* Program h as had a fa v o r a b le e f f e c t on th e p r o p e n s ity to sa v e , a lth o u g h i t I s Im p o s s ib le to m easure th e e x t e n t . j T his in c r e a s e in s a v in g s m o tiv e s i s th e d i r e c t r e s u l t of j in c r e a s e d aw a re n ess f o r Old Age and S u r v iv o r s ' In s u ra n c e ! i p r o t e c t i o n . The p u b l i c i t y su rro u n d in g th e S o c ia l S e c u r ity ■ Act h a s b ro u g h t t h e whole p e n s io n movement to th e a t t e n t i o n ! I o f l a b o r l e a d e r s , b u s in e s s g ro u p s , and t h e consuming j p u b l i c . B ecause th e program p r o v id e s o n ly a minimum o f 1 j p r o t e c t i o n , p r i v a t e p e n sio n p la n s have b een sp o n so re d by l a b o r u n io n s a s a supplem ent to S o c ia l In s u ra n c e . The c o s t o f p r o v id in g f u l l p r o t e c t i o n i s red u ce d when S o c ia l S e c u r ity i s u se d a s a b a s e . In su ra n c e com panies have b een s u c c e s s f u l In t h e i r p ro m o tio n cam paigns to s e l l l i f e In s u ra n c e and a n n u i t i e s a s a su p p lem en t. B e s id e s , a g r e a t e r demand f o r sa v in g s in th e form o f r e a l e s t a t e h a s r e s u l t e d from income s e c u r i t y t o th e a g e d . Then, t o o , w ith I n c re a s e d In dependence on th e p a r t o f th e ag ed , t h e i r c h i ld r e n a r e r e l i e v e d from a t l e a s t p a r t o f th e burd en of s u p p o r t. T h is e n a b le s th e younger g e n e r a tio n to u se a h ig h e r p r o p o r tio n o f t h e i r income f o r e i t h e r sa v in g s o r consum ption. The a v a i l a b l e f i g u r e s s u b s t a n t i a t e th e view t h a t S o c ia l In su ra n c e h a s enhanced th e m o tiv e t o sa v e , a lth o u g h i t i s Im p o ssib le to d e te rm in e th e r e l a t i v e im p o rta n ce o f any p a r t i c u l a r c a u s e . S t a t i s t i c a l ev id en ce shows t h a t t o t a l i n s t i t u t i o n a l s a v in g s have g r a d u a lly in c r e a s e d s in c e 1936. The r a t i o of I n s t i t u t i o n a l s a v in g s to d is p o s a b le income shows a s i m i l a r p a t t e r n . The grow th of s a v in g s th ro u g h l i f e in s u r a n c e com panies ( th e m ain form o f i n s t i t u t i o n a l sa v in g s w h ich in th e o r y i s a p t to be a d v e rs e ly a f f e c t e d by S o c ia l S e c u r ity ) h a s been s t e a d i l y upward s in c e 1900, a lth o u g h th e r a t e of in c r e a s e h as slow ed s in c e th e end o f W orld War I I . Yet b o th a n n u i t i e s and endowments have in c r e a s e d in p o p u l a r i t y . B e s id e s , th e grow th in i n d u s t r i a l p e n s io n s h as been s p e c t a c u l a r . On th e o t h e r hand, th e r e h as been a g r a d u a lly d e c r e a s in g lo n g ru n t r e n d i n t h e sa v in g s-in c o m e r a t i o . Yet th e f i g u r e s p r e s e n te d by K uznets and G oldsm ith a r e n o t c o n c lu s iv e . M oreover, th e s e c u l a r d e c l i n e o f th e s a v in g s - income r a t i o can be e x p la in e d by p o p u la tio n s h i f t s , mass consum er goods, changes In t h e p r o p o r tio n s o f em ployers to em p lo y ees, and r e d i s t r i b u t i o n of incom e. In f a c t , in a s tu d y o f th e breakdow n o f th e sa v in g s-in c o m e r a t i o by sp e n d in g u n i t s f o r s e l e c t y e a r s , i t was fo u n d t h a t from 1929 t o 1950 th e r e was no a p p r e c ia b le change in th e r a t i o by Income g ro u p s. However, a r e d i s t r i b u t i o n o f income in f a v o r of th e h ig h e r consum ing groups in th e economy i s n o t i c e a b l e o v e r t h i s p e r io d . CHAPTER V III THE RELATIONSHIP OF OLD AGE AND SURVIVORS1 I | INSURANCE TO INVESTMENT [ ! j The l a s t two c h a p te r s a n a ly z e d th e e f f e c t o f S o c ia l i t |In s u ra n c e on s a v in g s and consum ption. The c u r r e n t c h a p te r t e x p lo re s th e r e l a t i o n s h i p betw een Old Age and S u rv iv o r s ' In s u ra n c e and in v e stm e n t e x p e n d itu r e s . T his c h a p te r i s i jn e c e s s a ry s in c e a l l p e r s o n a l sa v in g s do n o t a u to m a tic a lly | i j |flo w i n t o in v e s tm e n ts . S a v in g s, f o r exam ple, may be f j 1 {horded. On th e o t h e r hand, a l l in v e stm e n t does n o t come | i i ;o u t o f p e r s o n a l s a v in g s . B u s in e ss f irm s can borrow c r e a te d ! bank c r e d i t , o r th e y can use p a s t e a r n in g s f o r in v e stm e n t | e x p e n d itu r e s . I . DEFINITION OF INVESTMENT EXPENDITURES Keynes d e f in e d c u r r e n t In v estm en t a s th e " c u r r e n t a d d i t i o n to th e v a lu e o f th e c a p i t a l equipm ent w hich h as r e s u l t e d from th e p r o d u c tiv e a c t i v i t y o f th e p e r io d . Keynes a l s o s t a t e d t h a t In v e s tm e n t, th u s d e f in e d , in c l u d e s , t h e r e f o r e , th e Increm ent o f c a p i t a l equ ip m en t, w h e th e r i t c o n s i s t s o f f i x e d c a p i t a l , w orking c a p i t a l o r l i q u i d c a p i t a l ; and th e s i g n i f i c a n t d i f f e r e n c e s o f d e f i n i t i o n . . . a r e due t o th e e x c lu s io n from in v e stm e n t o f one o r more o f •^John Maynard K eynes, The G en eral Theory of Employment I n t e r e s t and M o n e y (New York: H a r c o u r t, B race and Company 7 1935 f » " P» 62. 247] i th e s e c a t e g o r i e s . ^ F o r o u r p u rp o s e s in v e s tm e n t in l i q u i d c a p i t a l w i l l n o t b e In c lu d e d a s p a r t o f In v e stm e n t e x p e n d itu r e s . The e l im in a tio n o f l i q u i d c a p i t a l i s c o n s i s t e n t w ith many o f th e te x tb o o k d e f i n i t i o n s o f in v e s tm e n t. F o r exam ple, j Morgan d e f in e s n e t in v e stm e n t a s “th e n e t a d d itio n to th e [ economy’ s su p p ly o f In v estm en t goods r e s u l t i n g from t h e y e a r ’ s p r o d u c tio n ."3 In v e stm e n t goods, a c c o rd in g to M organ, c o n s i s t o n ly o f f i x e d c a p i t a l , a d d i t i o n to in v e n t o r i e s , and e x p o rt s . ^ L iq u id a s s e t s a r e n o t m e n tio n e d by M organ. M eyers c o n s id e r s in v e stm e n t to be th e p r o c e s s o f sp e n d in g money c a p i t a l in o r d e r to g a in c o n t r o l o v e r th e s e r v i c e s o f th e o r i g i n a l means o f p r o d u c t i o n .5 T h e re fo re t h e f i x e d o r w o rk in g c a p i t a l p u rc h a s e d w ith th e money c a p i t a l i s th e in v e stm e n t and n o t th e money c a p i t a l i t s e l f . Bach’ s c o n c e p t o f in v e s tm e n t i s s i m i l a r to M organ’s: "The p u rc h a s e of r e a l in v e s tm e n t goods ( b u i l d i n g s , m achin e r y , and so on) p u rc h a s e d d u r in g th e y e a r . ” In v estm en t 2 I b i d . , p . 75- ^Theodore Morgan, I n tr o d u c tio n to Economies (seco n d e d i t i o n ; Englewood C l i f f s , New J e r s e y : P r e n t i c e - H a l l , 1 9 5 6 ), p . 396. * * I b l d . , p . 395- 5A lb e rt L. M eyers, E lem en ts o f Modem Economics (fo u rth e d i t i o n ; Englewood C l i f f s , New J e r s e y : P r e n t i c e - H a ll, .1 9 5 6 ), p . 21. 21*8 i goods in c lu d e a l l “goods u sed i n th e p r o d u c tio n o f f u r t h e r j goods o r s e r v i c e s . . . T h e re fo re , ig n o rin g n e t f o r e ig n in v e s tm e n t, i n v e s t ment e x p e n d itu r e s a r e th o s e e x p e n d itu re s w hich r e s u l t in an a d d i tio n to th e v a lu e of c a p i t a l eq u ip m en t. j E xcept f o r r e s i d e n t i a l c o n s tr u c tio n and governm ent in v e s tm e n t, a l l in v e stm e n t e x p e n d itu re s a r e made by j b u s in e s s e n t e r p r i s e s . R e s id e n tia l c o n s t r u c t i o n was d e a l t 1 w ith in C h ap ter V II s in c e i t i s s im u lta n e o u s ly a s a v in g s j I ty f and an in v e stm e n t t r a n s a c t i o n . ' Government in v e stm e n t i s ' i i t e lim in a te d from c o n s id e r a ti o n a s t h i s c h a p te r i s co n c ern ed o n ly w ith p r i v a t e in v e s tm e n t. In v e n to ry a c c u m u la tio n i s a l s o e lim in a te d from c o n s id e r a tio n a s i t i s p r i m a r i l y a s h o r t ru n f a c t o r . I I . MOTIVES AND DETERMINANTS OF INVESTMENT EXPENDITURES E x p e c ta tio n s o f P r o f i t A ccording to K eynes, in v e stm e n t e x p e n d itu re s f o r b u s in e s s e n t e r p r i s e s a re d e te rm in e d by (1) th e m a rg in a l e f f i c i e n c y o f c a p i t a l , and (2) th e c o s t o f c a p i t a l as m easu red by th e c u r r e n t i n t e r e s t r a t e . The r e l a t i o n s h i p fs G-eorge L e la n d Bach, Economics an I n tr o d u c tio n to A n a ly s is and P o lic y (New York: P r e n t i e e - H a l l , 1 9 5 ^ ), p p . ? 0 -7 1 . ^See C h a p te r V II, p p . 215-216. 249! betw een th e s e two f a c t o r s I s e x p la in e d by Keynes in th e i fo llo w in g q u o ta tio n : There w i l l be an inducem ent to p u sh th e r a t e o f new j in v e stm e n t to th e p o in t w hich f o r c e s th e s u p p ly - p r ic e j o f each ty p e o f c a p i t a l - a s s e t to a f i g u r e w hich, ta k e n in c o n ju n c tio n w ith i t s p r o s p e c tiv e y i e l d , b r in g s th e m a rg in a l e f f i c i e n c y o f c a p i t a l i n g e n e r a l t o a p p r o x i m ate e q u a l i t y w ith th e r a t e o f i n t e r e s t . 6 In v estm en t e x p e n d itu r e s , t h e r e f o r e , v a ry d i r e c t l y w ith th e m a rg in a l e f f i c i e n c y o f c a p i t a l and i n d i r e c t l y w ith th e c o s t o f o b ta in in g e a p i t a l . 9 j i The m a rg in a l e f f i c i e n c y of c a p i t a l i s d e f in e d by 1 J ; 1 Keynes as J . . . b e in g e q u a l t o t h a t r a t e of d is c o u n t w hich w ould make th e p r e s e n t v a lu e o f th e s e r i e s of a n n u i t i e s i ! g iv e n by th e r e t u r n s e x p e c te d from th e c a p i t a l - a s s e t j d u r in g i t s l i f e J u s t e q u a l t o i t s s u p p ly p r i c e . 10 j By su p p ly p r i c e Keynes means " th e p r i c e w hich w ould f i r s t | in d u c e a m a n u fa c tu re r newly t o p ro d u ce an a d d i t i o n a l u n it o f su ch a s s e t s , . . . ”11 S h u ltz s t a t e s t h a t th e m a rg in a l e f f i c i e n c y o f c a p i t a l in v o lv e s t h r e e c a l c u l a t i o n s : ( l ) " th e a n t i c i p a t e d ^Keynes, o p. c l t . . p . 248. ^R ein v estm en t o f th e com pany's own funds i s a l s o t i e d to th e i n t e r e s t r a t e th ro u g h th e p o s s i b i l i t y o f a l t e r n a t e u se of r e s o u r c e s . T h e re fo re , a company w i l l n o t r e i n v e s t i t s accu m u late d s u r p lu s in c a p i t a l equipm ent u n le s s th e e x p e c te d r a t e o f r e t u r n i s a t l e a s t e q u a l to th e p r e v a i l i n g r a t e p a id by f i n a n c i a l I n s t i t u t i o n s o r governm ent bon d s. l^K eynes, op. c l t . , p . 135* 11Lojc. c i t . 250 ■ I g r o s s p r o f i t on t h e a d d i t i o n a l p ro d u c tio n and s a l e s t h a t w i l l be made p o s s i b l e by th e new e q u ip m e n t," (2) " th e I e x p e c te d l i f e o f th e equipm ent u nder c o n s id e r a ti o n and j a llo w a n c e f o r d e p r e c i a t i o n ," and (3) " th e r i s k t h a t th e two| p r e c e d in g c a l c u l a t i o n s , p a r t i c u l a r l y th e f i r s t , may n o t be | I r e l i a b l e f o r th e lo n g r u n . " 12 j . t The f o r e c a s t i n g o f a n t i c i p a t e d g r o s s p r o f i t from new p l a n t and equipm ent i s m o stly g uessw ork. T h e re fo re , b u s in e s s m anagem ent's p s y c h o lo g ic a l r e a c t i o n to g e n e r a l ' j ;b u s in e s s c o n d itio n s s tr o n g ly in f lu e n c e s t h i s c o m p u ta tio n . i i |T h u s, d u rin g a d e p r e s s io n , a n t i c i p a t e d g r o s s p r o f i t s te n d 1 i !to b e low . D uring p r o s p e r i t y th e p r e v a i l i n g p h ilo s o p h y i s , t h e r e f o r e , one o f o p tim ism . F a c to r s such a s p o l i t i c a l ! e v e n ts , t a x in c r e a s e s o r d e c r e a s e s , governm ent e x p e n d i t u r e s , repaym ent o f n a t i o n a l d e b t , and in n o v a tio n s a ls o c r e a t e s p e c ia l p s y c h o lo g ic a l re sp o n se s The e x p e c te d l i f e o f equipm ent, and t h e r e f o r e th e p r o p e r d e p r e c i a t i o n a llo w a n c e , can be d e te rm in e d w ith a h ig h d e g re e o f a c c u ra c y by e n g in e e rs and a c c o u n ta n ts . Yet th e p o s s i b i l i t y o f o b so le sc e n c e due t o new te c h n o lo g ic a l d i s c o v e r i e s I n tr o d u c e s u n c e r t a i n t y i n to t h e c a l c u l a t i o n s of a c c o u n ta n ts and e n g in e e r s . ^ W illia m J . S h u ltz , S o c ia l S e c u r ity and th e Economics o f S a v in g #.S tu d ie s in I n d iv id u a l end C o l le c tiv e S e c u r ity No. 5 (New York: N a tio n a l I n d u s t r i a l C onference Bosnd, 1 9 ^ 8 ), p . i*Q. Non P r o f i t M o tiv a tio n s i The m o tiv e to In c r e a s e power and p r e s t i g e th ro u g h j e x p a n sio n I s a s u b s t a n t i a l f a c t o r In in v e stm e n t d e c is io n s j s o f many f ir m s . I ! ! } A ltru ism I s a l s o a m o tiv e b eh in d t h e a c tio n s of somej f ■ ) In v e stm e n t d e c i s i o n s . As S h u ltz p o i n t s o u t, th e r e a r e such; m inor non p r o f i t re a s o n s a s th e d e s i r e t o p ro d u ce u s e f u l com m odities, th e d e s i r e t o p ro v id e em ploym ent, and th e d e s i r e to e s t a b l i s h a b u s in e s s f o r o n e ’ s h e i r s . ! ! i I I I . PAYROLL TAXES AND CAPITAL EXPANSION | i ; The D e p ressio n P e r io d i | There I s l i t t l e d o u b t t h a t th e p a y r o l l ta x c o n s t i t u t e d a d e t e r r e n t t o c a p i t a l ex p an sio n d u r in g t h e p e r io d of; I I t s o p e r a tio n b e f o r e World War I I . D ire c t e f f e c t s . — M onthly b e n e f i t paym ents d id n o t s t a r t u n t i l 19*1-0• T h e re fo re , t h e r e d i s t r i b u t i o n a l e f f e c t s I o f th e S o c ia l S e c u r ity Program to w ard th e lo w e r income g ro u p s w ere a t a minimum o r n e g a tiv e d u r in g t h i s p e r io d . B e sid e s, t h e em ployee’ s s h a re o f th e p a y r o l l ta x re d u c e d h i s take-hom e p ay . The em ployer a t th e seme tim e — u n le s s he c o u ld im m ed iately c u t w ages— fa c e d an in c r e a s e in c o s t a s s o c i a t e d w ith l a b o r . I f th e em ployer c u t w ages, a f u r t h e r r e d u c tio n in take-hom e pay r e s u l t e d . In th e 1 3 Ib id . , pp. *f2-L3 • 252 ' a b s e n c e o f wage r e d u c tio n s th e em ployer c o u ld e i t h e r I n c r e a s e p r i c e s , a p o s s i b i l i t y in i n d u s t r i e s n o t p e r f e c t l y c o m p e titiv e (w ith re d u c e d o u tp u t a s th e r e s u l t ) , o r a b s o rb th e c o s t u n t i l tim e e n a b le d him to s h i f t th e burd en e i t h e r to th e consum er o r t o th e w o rk e r. S in ce th e p e r io d was c h a r a c t e r i z e d by a d e a r th o f consum er p u rc h a s in g pow er, i t i s l o g i c a l t o b e l i e v e t h a t m ost com panies w ere f o r c e d to a b so rb th e c o s t in th e s h o r t ru n . P s y c h o lo g ic a l e f f e c t s . — The p a y r o l l ta x c o n tr ib u te d ! I ; to th e p e s s i m i s t i c b u s in e s s p sy c h o lo g y o f th e p e r io d . The b u s in e s s man was d i s t r u s t f u l o f a l l s o c i a l l e g i s l a t i o n a t t h a t tim e . The in c r e a s e d c o s t s o f la b o r w ere o b v io u s , w h ile th e i n d i r e c t r e t u r n of fu n d s to t h e income strea m th ro u g h governm ent e x p e n d itu r e s was n o t f u l l y u n d e rs to o d . T here was w id e s p re a d b e l i e f t h a t any e x c e s s o f c o l l e c t i o n s o v e r paym ents w ould be b o t t l e d up in th e T re a su ry and r e t a i n e d i n d e f i n i t e l y . To t h e b u s in e s s man, th e p a y r o l l ta x r e p r e s e n te d a n o th e r b u rd en p la c e d on to p o f a l l th e o t h e r b u rd en s he had to b e a r . T h e re fo re , p r o f i t e x p e c ta t i o n s w ere g iv e n a d e f i n i t e blow by th e p a y r o l l t a x , w ith th e r e s u l t t h a t c a p i t a l e x p a n sio n s u f f e r e d . W ith th e p a s s a g e o f t h e S o c ia l S e c u r ity A ct, t h e p o s s i b i l i t y t h a t f u t u r e p r o f i t c a l c u l a t i o n s w ould n o t be r e l i a b l e f u r t h e r d e p re s s e d th e m a rg in a l e f f i c i e n c y o f c a p i t a l . B u s in e ss men w ondered what k in d o f b u rd en a h o s t i l e a d m in is t r a tio n w ould n e x t p la c e on them. | The S o c ia l S e c u r ity Act a ls o r e q u i r e d th e em ployer to p ay f o r a g r e a t d e a l of a d m i n i s t r a t i v e ex p en se. R ecords had t o be k e p t and a c c u r a te r e p o r t s t r a n s m i t t e d to th e governm ent. These r e p o r t s had to be check ed by ac c o u n - j t a n t s . One c e r t i f i e d p u b l i c a c c o u n ta n t e s tim a te s t h a t a t 1 i ) |th e p r e s e n t tim e a d m i n i s t r a t i v e expense c o s t s th e em ployer . betw een two and t e n d o l l a r s a y e a r p e r em ployee. ; i D uring th e War and P o s t War P e r io d s S t a r t i n g w ith World War I I th e e f f e c t o f th e Old Age and S u rv iv o rs* I n s u ra n c e Program on B u s in e s s In v estm en t changed. C o n tin u ed p r o s p e r i t y b ro u g h t t o th e b u s in e s s man o p t i m i s t i c p r o f i t a n t i c i p a t i o n s . P u rc h a s in g power k e p t re a c h in g e v e r h ig h e r l e v e l s . With th e e x c e p tio n o f t h e r e c e s s i o n s in 19^9 and 1953 and th e p o s t World War I I a d ju s tm e n ts , p r o s p e r i t y a s e v id e n c e d by g r o s s n a t i o n a l p r o d u c t and d is p o s a b le p e r s o n a l income (in c o n s ta n t 1955 p r i c e s ) h as r e a c h e d e v e r h ig h e r l e v e l s . S in ce th e rs /tio o f s a v in g s t o d is p o s a b le income h as rem ain ed r e l a t i v e l y s t a b l e o r d e c re a s e d s l i g h t l y (w ith th e e x c e p tio n of th e World War I I e x p e n d itu r e s ) t h e r e has been a c o n tin u e d in c r e a s e in p e r s o n a l consum ption.-1 -^ ■ ^ P erso n al in te r v ie w w ith R obert B. M adison, C e r t i f i e d P u b lic A ccountant and P r o f e s s o r o f A cc o u n tin g a t Woodbury C o lle g e , Los A n g eles, C a l i f o r n i a . ^ Economic R eport o f th e P r e s i d e n t . t r a n s m i t t e d to th e C ongress J a n u a r y 23, 1957 (W ashington: Government P r i n t i n g O f f ic e , 1 9 5 7 ), p* 136. W in d fa ll p r o f i t s . — I n f l a t i o n h a s meant w in d f a ll i p r o f i t s to th e b u s in e s s man th ro u g h th e tim e l a g betw een ! I In v e n to ry a c c u m u la tio n and s a l e s . T h e s e w in d f a ll p r o f i t s | 1 and t h e i r e x p e c ta tio n more th a n b a la n c e d any dam pening i { j e f f e c t th e p a y r o l l ta x may have c a u sed . Tax i n c r e a s e s . — Wartime in c r e a s e s in th e c o r p o r a te income t a x , th e s t e e p e x c e ss p r o f i t l e v i e s , and th e s t e e p l y p r o g r e s s iv e p e r s o n a l income t a x p la c e d t h e p a y r o l l t a x in a r e l a t i v e l y low p o s i t i o n com pared to i t s p rew ar s t a t u s a s j i ! ja m a jo r b u s in e s s t a x . | Even th e t h r e e p a y r o l l ta x r a t e in c r e a s e s t h a t have ja c c ru e d s in c e 1950 d id n o t have a m a jo r e f f e c t on i n v e s t - i i iment e x p e n d itu r e s . The r a t e in c r e a s e s r e p r e s e n t e d ta x I l e v i e s w hich u n d e r th e o r i g i n a l p la n w ould have become e f f e c t i v e in 1940, 1943* and 1945-^ T h e r e f o re , t h e s e r a t e I i n c r e a s e s had b een c o n s id e re d by b u s in e s s men in t h e i r j c a l c u l a t i o n o f p r o f i t a n t i c i p a t i o n s f o r some tim e p r e v io u s t o t h e i r a d o p tio n . Then, to o , th e g e n e r a l l y f a v o r a b le econom ic c o n d itio n s t h a t p r e v a i l e d from 1950 to 1952 m ust have ca u sed a minimum o f a d ju stm e n t a s th e b u s in e s s community was o p t i m i s t i c th ro u g h o u t t h i s p e r io d . R e d i s t r i b u t i o n o f Incom e. — As th e s t a t i s t i c a l s tu d y T M eyers, op., c i t . , p . 281. ^ S e c t i o n 801, T i t l e T i l l , S o c ia l S e c u r ity A ct, P u b lic Law No. 271 (H.R. 7 2 6 0 ), 7 4 th C o n g re ss, 2d s e s s i o n , August 14, 1935* p* 19* | 255 in C h a p te r V d e m o n s tr a te s , t h e r e i s re a s o n to "believe th a t O ld Age and S u r v iv o r s ' In s u ra n c e r e d i s t r i b u t e s Income in f a v o r o f th e lo w e r income g ro u p s a t th e expense o f th e m id d le income g ro u p s . T h is le a d s t o a n e t in c r e a s e o f consum ption e x p e n d itu r e s a s p o in te d o u t in C h a p ter V I. Even c o n s id e r in g th e f a v o r a b le e f f e c t s on sa v in g s m o tiv e s c a u se d by th e S o c ia l S e c u r ity Program a s d is c u s s e d in C h a p te r V II, th e n e t e f f e c t o f th e program h as been to i n c r e a s e consum ption s in c e th e end of W orld War I I . An in c r e a s e in consum ption e x p e n d itu r e s i n c r e a s e s t Jth e demand f o r d o m e stic p r o d u c ts and a s a r e s u l t s t i m u l a t e s ith e m a rg in a l e f f i c i e n c y o f c a p i t a l . 3-8 However, i f t h e I in c r e a s e in s a v in g s m o tiv e s due to S o c ia l In su ra n c e i s s t r o n g e r th a n i s h e r e supposed and b a la n c e s th e in c r e a s e d consum ption r e s u l t i n g from th e program , th e n th e e x p e c te d s t i m u l a t i n g e f f e c t to th e m a rg in a l e f f i c i e n c y o f c a p i t a l w i l l n o t r e s u l t . The te n d e n c ie s to I n c r e a s e in v e stm e n t e x p e n d itu r e s ®It m ust a ls o be r e a l i z e d t h a t a lth o u g h th e n e t e f f e c t of th e program i s to in c r e a s e co n su m p tio n , t h e s e e x p e n d itu r e s w ould have been in c r e a s e d to an even g r e a t e r e x te n t i f governm ent bonds w ere used to f in a n c e th e d e f i c i t . I t can even be s a i d t h a t th e p a y r o l l ta x i s d e f l a t i o n a r y in t h i s s e n s e , d u r in g th e p e r io d o f r e s e r v e a c c u m u la tio n . T h e re fo re , to th e e x te n t t h a t th e p a y r o l l ta x was a s u b s t i t u t e f o r governm ent b o n d s, i t re d u c e d consum ption e x p e n d itu r e s below what th e y o th e rw is e w ould have b e e n . In t h i s se n se th e p a y r o l l t a x d is c o u ra g e d in v e s tm e n t d u rin g th e l a t t e r 1930*3. 256 | th ro u g h th e p s y c h o lo g ic a l e f f e c t o f in c r e a s e d consum ption e x p e n d itu re s sh o u ld more th a n b a la n c e th e dam pening e f f e c t ! c a u se d by th e im m ediate in c r e a s e in th e c o s t o f l a b o r and j th e a d m i n i s t r a t i v e expense o f th e p a y r o l l ta x d u r in g j p r o s p e r ity .* 1 -^ j Since th e p a y r o l l ta x d o es n o t s ti u m la te a s much j » consum ption e x p e n d itu r e s a s governm ent d e f i c i t s w ould, in aj i p e r io d o f p r o s p e r i t y (w ith an u n b alan ced b u d g e t) , th e ta x j i n d i r e c t l y re d u c e s i n f l a t i o n . F u rth e r consum ption and ! i i In v e stm e n t e x p e n d itu r e s can o n ly le a d to i n f l a t i o n once f u l l employment i s re a c h e d . T h is was t r u e d u r in g W orld Warj i l l and in th e p ro s p e ro u s y e a rs t h a t have fo llo w e d . Thus, ! t Economies o f consu m p tio n , i f th e y a r e to be in ; s i g n i f i c a n t am ounts, m ust come in p a r t from th e m a sses.; ! S hould u nder t h e p r e s s u r e o f e x c e s s iv e s u p p lie s o f j money and s tr o n g demand f o r th e f a c t o r s , a c u r ta ilm e n t ! o f consum ption be r e q u i r e d , th e n in th e o v er consump- ! t i o n e r a o f t h e f o r t i e s th e p a y - r o l l ta x e s may become a b l e s s i n g J u s t as in th e t h i r t i e s th e y w ere a s o u rc e o f annoyance t o th e u n d er consum ption s c h o o l . 20 P s y c h o lo g ic a l a s p e c t s . — The b u s in e s s man h a s become aw are o f th e i n d i r e c t e f f e c t s o f th e S o c ia l S e c u r ity P rogram . He now r e a l i z e s t h a t th e g r e a t e r s h a re o f th e ^The dam pening e f f e c t s w i l l m ost l i k e l y be m in o r s in c e i t i s re a s o n a b ly c e r t a i n t h a t in th e lo n g ru n a m a jo r i ty o f th e t a x i s s h i f t e d e i t h e r to th e consum er or to l a b o r . See C h a p te r I I I , pp. 91-93. ^QSeyraour E. H a r r i s , Economics of S o c ia l S e c u r ity (New Xork: M cGraw-Hill Book Company, 1 9 ^ 1 ), p . 257; burd en i s b o rn e by th e consum er and th e w o rk e r .21 The ! b u s in e s s man a l s o r e a l i z e s t h a t i t i s b e t t e r to expand th e Old Age and S u r v iv o r s ' In s u ra n c e Program th a n th e p u b lic j i a s s i s t a n c e program a s th e l a t t e r i s a p u r e ly w e lf a re j program w hich w ould be f in a n c e d from th e g e n e r a l f u n d .22 | 21 In th e B ro o k in g s I n s t i t u t i o n s tu d y b a se d on r e p l i e s o f 190 com panies, tw o - th ir d s o f th e com panies were of th e o p in io n t h a t th e y had reco u p ed th e e m p lo y e r's p a y r o l l ta x th ro u g h h ig h e r p r i c e s . Lewis H. Klmmel, Taxes and Economic I n c e n tiv e s (W ashington: The B rookings I n s t i t u t i o n , 1 9 5 0 ), p . 181. i | 22F or exam ple, in th e 195^ H e a rin g s on H.R. 7199 1 E lto n K ile , P r e s id e n t o f th e N a tio n a l A s s o c ia te d B u sin e ss 'Men, s t a t e d t h a t , "In exam ining th e r e a s o n s advanced by th e ; S e c r e ta r y o f H e a lth , E d u catio n and W e lfare f o r th e p ro p o se d |b e n e f i t l i b e r a l i z a t i o n s , th e o n ly one t h a t ap p ro ac h es i j u s t i f i c a t i o n i s on page 29 o f h i s s ta te m e n t: 'a f u r t h e r c o n s id e r a tio n in f i x i n g b e n e f i t l e v e l s i s t h a t low o ld -a g e and s u r v i v o r s ' in s u ra n c e b e n e f i t s r e s u l t in a need f o r j s u b s t a n t i a l s u p p le m e n ta tio n th ro u g h p u b l i c a s s i s t a n c e 1 p a y m e n ts .'" E lto n K ile , S tate m e n t o f , H e a rin g s B e fo re th e Com mittee on Wavs and M eans, House o f R e p r e s e n t a t i v e s . E jg h t.v - th ir d C o n g re s s , 2d s e s s io n on H7R. 7199 (W ashington: G-overnment P r i n t i n g O f f ic e , 1 9 5&) > p . 516. At th e same h e a r in g Be W itt Emery, P r e s id e n t of th e N a tio n a l S m all- B u s in e ss M en's A s s o c ia tio n , in h is p r e p a r e d s ta te m e n t, a s s e r t e d t h a t th e sm all in c r e a s e in minimum b e n e f i t s p ro p o se d u n d e r H.Pr. 7199 w ould n o t keep o ld c o u p le s o r widows o f f p u b lic a s s i s t a n c e . "We b e l i e v e , t h e r e f o r e , t h a t in d e te rm in in g p r e s e n t p o l i c i e s I t sh o u ld b e re -e m p h a siz e d t h a t th e main g o a l of s o c i a l s e c u r i t y Is t o e x te n d i t s minimum b e n e f i t s t o a s many a s p o s s i b le a s opposed to e n la r g in g i t s maximum b e n e f i t s w h ile l a r g e p a r t s o f th e p o p u la tio n a r e s t i l l u n p r o te c te d ." De W itt Emery, S t a t e ment o f , H earin g s B efo re th e Committee on Ways and M eans, House o f R e p r e s e n t a tiv e s , E i g h t y - t h i r d C o n g re s s , 2d s e s s io n on H.R. 7199 (W ashington: Government P r i n t i n g O f f ic e , 195*0# p* ^83- A s ta te m e n t o f th e c o n fe re n c e o f S t a t e M a n u fa c tu re rs A s s o c ia tio n o f H.R. 9366 s u b m itte d to th e S e n a te Finance Committee opposed to i n c r e a s i n g th e b e n e f i t b a s e from th r e e th o u sa n d s i x hundred to f o u r th o u sa n d two hun d red d o l l a r s on th e g ro u n d s t h a t "O A SI's p u rp o se o f m in im iz in g th e s o c i a l problem o f d i s t r i b u t i o n does n o t The b u s in e s s man’s a t t i t u d e tow ard w e lf a r e l e g i s l a ti o n in g e n e ra l h as a ls o been s u b je c te d t o change. He i s no lo n g e r a f r a i d o f w e lfa r e program s a s su c h , a lth o u g h he s t i l l opposes some o f them on economic and b u s in e s s g ro u n d s w a r ra n t i t s p r o v is io n o f more th a n a minimum f l o o r o f j p r o t e c t i o n t o anyone. Our p o s i t i o n i s t h a t OASl’ s maximum ! p r o t e c t i o n sh o u ld be d e te rm in e d on th e b a s i s of i t s p u b lic I p u rp o s e , and t h a t th e maximum l e v e l s h o u ld be no h ig h e r j th a n n e c e s s a r y t o m inim ize th e number who w ould o th e rw is e I n eed p u b lic a s s i s t a n c e . " C onference o f S t a t e M a n u fa c tu re rs A s s o c ia tio n , S ta te m e n t o f , H e a rin g s B e fo re th e Com mittee on F in a n c e . U n ite d S ta te s S e n a te . E i g h t y - t h i r d C o n g re s s. 2d s e s s io n on H.R. 9366 (W ashington: Government P r i n t i n g u f f i c e , 195*0* PP* 735* 737- A. D. M a rs h a ll, r e p r e s e n t i n g th e Chamber of Commerce o f th e U n ite d S t a t e s in th e above h e a r i n g , p o in ts o u t t h a t ’ ’em p h asis sh o u ld be p la c e d on i n c r e a s i n g lo w er b e n e f i t l e v e l s r a t h e r th a n c r e a t i n g e x t r a 'b e n e f i t s f o r th e h ig h e r wage e a r n e r s e s p e c i a l l y i f th e |sy ste m i s to f u l f i l l i t s o b j e c t i v e of a minimum l e v e l o f ; p r o t e c t i o n f o r a l l . ” A lso , t h e o r g a n iz a tio n b e l i e v e s in j u n iv e r s a l co v erag e and th e im m ediate e lim in a tio n o f th e j Old Age A s s is ta n c e Program . " B la n k e tin g in th e u n p r o te c te d aged w ould, m o reo v er, p e rm it th e te r m in a tio n of te m p o ra ry F e d e r a l g r a n ts f o r o ld age a s s i s t a n c e . . . . C e r t a i n l y , a lm o st 20 y e a rs a f t e r th e te m p o ra ry Old Age A s s is ta n c e Program began we sh o u ld be a b le to have th e F e d e ra l Government w ith d raw in f a v o r of a s in g le F e d e ra l program f o r th e c a re o f th e a g e d ." A. D. M a rs h a ll, S tatem ent o f , H e a rin g s B e fo re th e Committee on F in a n c e , U n ited S t a t e s S e n a te , E lg h ty -th lrd ~ ~ 5 6 n g re 8 s, 2d s e s s io n on H.R. 9366 (W ashington: Government P r i n t i n g O f f ic e , 195*0 » PP* **92, **95- 2^ In th e 195** h e a rin g s on H.R. 7199* W illiam C. C a p le s , V ice P r e s id e n t of th e In la n d S t e e l Company, r e p r e s e n t i n g th e R a tio n a l A s s o c ia tio n o f M a n u fa c tu re rs , p o in te d out t h a t th e program sh o u ld n o t be m o d ifie d s in c e " th e r e s t i l l i s n o t s u f f i c i e n t In fo rm a tio n to d e te rm in e th e u l t i m a t e f e a s i b i l i t y of th e program . . . . B ecause OASI I s an unproven s o c i a l e x p e rim e n t, th e p e o p le m ust be in a p o s i t i o n to e v a lu a te th e w hole p i c t u r e b e f o r e re a c h in g h a r d - a n d - f a s t c o n c lu s io n s a b o u t i t s r e t e n t i o n , e x p a n sio n , c o n t r a c t i o n , o r c a n c e l l a t i o n . " Thus th e N.A.M. have L a b o r-s a v in g d e v i c e s P a y r o ll ta x e s may en c o u ra g e 1 i th e in tr o d u c tio n o f la b o r - s a v i n g d e v ic e s i n o rd e r to 1 m in im ize th e expense o f l a b o r . To th e e x t e n t t h a t l a b o r - sa v in g d e v ic e s a r e I n s t a l l e d , in v e stm e n t e x p e n d itu r e s a re in c r e a s e d . The s u b s t i t u t i o n o f th e cheap f a c t o r f o r th e I | e x p e n siv e f a c t o r i s one o f th e b a s ic p r i n c i p l e s o f econom ics2* * ' and sh o u ld n o t be m inim ized in c o n s id e r in g th e a d o p te d a "w ait and see a t t i t u d e ” to w ard OASI. W illiam C. j C a p le s , S tate m e n t o f , H e a rin g s B efo re th e Committee on Wavs! and M eans, House o f R e p r e s e n t a t i v e s , E i g h t y - t h l r d C o n g re s s .j 2d s e s s io n on H.R. 7199 (W ashington: Government P r i n t i n g j u f f i c e , 195^)» P» 780. In t h e S enate h e a r in g s on H.R. 9366 John W . J o a n l s , r e p r e s e n t i n g th e C o u n c il o f S t a t e i j Chambers o f Commerce, a g re e d to th e f o llo w in g changes in | j OASI: ex te n d in g c o v e ra g e , m aking th e r e tir e m e n t t e s t more 1 e d u i t a b l e , I n c r e a s in g minimum b e n e f i t s , and b r in g in g in the: f i v e - y e a r d ro p o u t p r o v is io n . "We th in k t h a t th e s e p ro p o - J s a l s fo llo w g e n e r a l l y in th e b a s ic id e a o f p r o v id in g a minimum l a y e r o f p r o t e c t i o n f o r th e aged o f o u r c o u n try and d o in g i t a t th e minimum c o s t to th e g e n e r a l p u b l i c ." John W . J o a n i s , S ta te m e n t o f , H e a rin g s B efore th e Committee on F in a n c e . U n ited S t a t e s S e n a t e . E i g h t y - t h i r d C o n g re s s. 2d s e s s io n on H.R. 9366 (W ashington: Government P r i n t i n g O f f le e , 1 9 5 ^ ), P» 513- I t I s a ls o i n t e r e s t i n g to n o te t h a t in th e 19^9 h e a r in g s b e f o r e th e Committee on Ways and Means o f th e House o f R e p r e s e n ta tiv e s th e U n ite d S ta te s Chamber o f Commerce, r e p r e s e n te d by John B. S t. Jo h n , recommended e x te n s io n o f co v e ra g e ( in c lu d in g F e d e ra l and S ta te e m p lo y e e s), l i b e r a l i z a t i o n in th e b e n e f i t fo rm u la , j in c r e a s e s in th e c o n t r ib u t io n r a t e s , and th e e l im in a tio n of " d u p lic a tio n o f b e n e f i t paym ents under th e many g o v e rn m e n ta l In su ra n c e and b e n e f i t p ro g ra m s." John B. S t. Jo h n , S ta te m e n t o f , H e a rin g s B e fo re th e Committee on Ways and M eans, House of R e p r e s e n t a t i v e s , E i g h t y - f i r a t C o n g re s s , 1 s t s e s s io n on H.R. 2893 (W ashington: Government P r i n t i n g u f fic e 7 'l9 L 9 T 7 p . 7L652k oh. M a rsh a ll d e f in e s th e p r i n c i p l e o f s u b s t i t u t i o n as f o llo w s : "As f a r a s th e know ledge and b u s in e s s e n t e r p r i s e o f th e p ro d u c e rs r e a c h , th e y in each c a se choose th o s e f a c t o r s o f p r o d u c tio n w hich a r e b e s t f o r t h e i r p u rp o s e ; th e sum o f th e su p p ly p r i c e s o f th o s e f a c t o r s w hleh a r e e f f e c t s o f th e p a y r o l l ta x on in v e stm e n t e x p e n d itu r e s . j i N o n -p ro fit, m o tiv e s . — To th e e x te n t th a t n o n - p r o f i t t m o tiv e s le a d t o in v e stm e n t e x p e n d itu r e s , th e p a y r o l l ta x j w i l l have no e f f e c t on in v e stm e n t e x p e n d itu r e s . A lth o u g h j th e s e m o tiv e s a r e p r e s e n t , i t i s im p o s s ib le t o m easu re j i t h e i r i n t e n s i t y in e f f e c t i n g in v e stm e n t d e c i s i o n s . ! In v e stm e n t E x p e n d itu re s i n an Open Economy One a s p e c t o f th e s u b je c t w hich i s g e n e r a lly o v e r- i jlo o k e d i s t h a t p a y r o l l ta x e s c o u ld a d v e r s e ly a f f e c t p r e s e n t ! o r f u t u r e s a l e s t o f o r e ig n c o u n t r ie s and th e re b y l e a d to a J i r e d u c t io n o f in v e s tm e n ts i n c a p i t a l g o o d s. The r e d u c tio n ^ o f a n t i c i p a t e d p r o f i t s in th e e x p o rt i n d u s t r i e s w ould ! i n a t u r a l l y le a d to a r e d u c tio n In in v e stm e n t e x p e n d itu r e s . I The a d v e rs e a f f e c t on s a l e s i s due t o th e I n c r e a s e d p r i c e s o f f i n i s h e d goods c a u se d by s h i f t i n g a m a jo r p o r t i o n o f th e p a y r o l l t a x in t h a t fo rm . I f , how ever, th e b u s in e s s man’ s s h a re o f th e p a y r o l l t a x w ere s h i f t e d e n t i r e l y to l a b o r , la n d , o r c a p i t a l (w hich i s u n l i k e l y ) , th en t h e r e w ould n o t be any a d v e rs e e f f e c t on e x p o rt s a l e s . Assuming t h a t a t l e a s t o n e - h a lf t o t h r e e - f o u r t h s o f u se d I s , as a r u l e , l e s s th a n th e sum o f th e su p p ly p r i c e s o f any o th e r s e t o f f a c t o r s w hich c o u ld b e s u b s t i t u t e d f o r them; and w henever I t a p p e a rs t o th e p r o d u c e rs t h a t t h i s i s n o t th e c a s e , th e y w i l l , a s a r u l e , s e t to work to s u b s t i t u t e th e l e s s e x p e n siv e m e th o d .” A lf re d M a rs h a ll, P r i n c i p l e s o f Economics ( e ig h th e d i t i o n ; New York: The M acm illan Company, 1 9 2 0 ), p . 3^1- th e t a x im posed on th e em ployer i s s h i f t e d to th e consum er,j i t i s a more s e r i o u s m a tte r in i n t e r n a t i o n a l th a n in d o m e stic t r a d e . As Seymour H a r r is in fo rm s u s , The demand f o r th e p r o d u c ts o f any one c o u n try , e x c e p t f o r th o s e w hich th e c o u n try h a s a v i r t u a l m onopoly, i s h ig h ly e l a s t i c , a r i s e o f p r i c e s b e in g fo llo w e d by l o s s e s o f m a rk e ts to c o m p e tito r s . On t h i s s c o re G reat B r i t a i n 's e x p e rim e n ta tio n w ith s o c i a l l e g i s l a t i o n h a s , t h e r e f o r e , been a m a t t e r o f co n cern t o many. . . .25 T h e re fo re , a g e n e ra l d e c l i n e o f e x p o r ts may be i e x p e c te d to f o llo w th e r i s e o f p r i c e s . T h is , how ever, may n o t n e c e s s a r i l y mean a r e d u c tio n in in v e s tm e n t e x p e n d itu r e s 1 a s an a l t e r n a t e p o s s i b i l i t y i s a v a i l a b l e ; nam ely, t h a t an in c r e a s e in p r i c e s to f o r e ig n consum ers w i l l be r e f l e c t e d in in c r e a s e d consum ption in t h i s c o u n try . Thus an in c r e a s e in d o m e stic demand f o r goods and s e r v ic e s th ro u g h soela.1 J s e c u r i t y b e n e f i t paym ents c o u ld b a la n c e th e l o s s o f fo re ig n j i I m ark et s . Where p u re and p e r f e c t c o m p e titio n does n o t e x i s t in i n d u s t r i e s , p r i c e d i f f e r e n t i a l s a r e p o s s i b l e . A la r g e p a r t o f th e t a x b u rd en may be s h i f t e d to consum ers in t h i s c o u n try in o r d e r to h o ld p r i c e s down in t h e f o r e ig n m a rk e ts . U nless th e s e p r i c e d i f f e r e n t i a l s a r e u se d , t h e r e w ould be a n e t l o s s o f f o r e ig n s a le s and t h e r e f o r e lo w er p r o f i t e x p e c ta tio n s and l e s s in v e stm e n t e x p e n d itu r e s would 2 1 ? H arris, op . c i t . , p . k 2 7 • 262 r e s u l t from th e p a y r o l l t a x . 1 The m a jo r com pensating p o i n t s t o th e r e d u c tio n in > f o r e ig n s a le s a r e , f i r s t , t h a t f o r e ig n s a l e s a re n o rm a lly aj v e ry sm a ll p e r c e n ta g e o f t o t a l s a l e s . B e fo re th e d e p r e s s io n o f th e 1 9 3 0 ’ s , e x p o rts from th e U n ite d S t a t e s a v e ra g e d 10 p e r c e n t of t o t a l p ro d u c tio n o f m ovable goods. Second, t h a t th e e m p lo y e r's s h a re o f th e p a y r o l l ta x i s a v e r y 1 sm a ll p e r c e n ta g e o f h i s t o t a l ta x lo a d (2 1/A p e r c e n t o f |g r o s s p a y r o l l ) . T h ird , t h a t a t l e a s t a sm a ll p e rc e n ta g e o f ith e p a y r o l l t a x i s s h i f t e d b a c k to l a b o r , and f o u r t h , t h a t ' b e n e f i t paym ents s ti m u la te d o m e stic demand. The C ost o f C a p ita l f D uring th e p e r io d o f fund a c c u m u la tio n , w hich h a s I e x i s t e d s in c e th e in c e p tio n o f th e S o c ia l S e c u r ity A c t, em ployers and em ployees have p a i d i n t o t h e F e d e ra l O ld Age and S u r v iv o r s ' In s u ra n c e T ru s t Fund am ounts in e x c e s s o f j c u r r e n t d is b u rs e m e n ts . These ex c e ss fu n d s a r e in v e s te d in governm ent bonds w hich a r e e i t h e r p u rc h a s e d on th e open m a rk et o r from th e T re a su ry . T h e re fo re , a new m a rk et f o r governm ent bonds i s c r e a te d . The in c r e a s e in th e demand f o r governm ent bonds w ith o u t any change in th e su p p ly (assum ing no in c r e a s e in governm ent d e b t) w i l l le a d to a r e d u c tio n in t h e r a t e of i n t e r e s t on new bonds and a c o rre s p o n d in g i n c r e a s e in th e p r i c e o f o u ts ta n d in g 263 i b o n d s . 2^ ' i As few er governm ent bonds a re a v a i l a b l e f o r p r i v a t e j i p u rc h a s e , th e demand f o r o t h e r bonds s h o u ld I n c r e a s e (t o t a l j demand rem a in in g c o n s ta n t) and th u s re d u c e th e i n t e r e s t r a t e s in o th e r bond m a rk e ts . The a b i l i t y to s e l l bonds a t lo w er i n t e r e s t r a t e s re d u c e s th e c o s t o f c a p i t a l . However, even i f governm ent d e b t i s b e in g in c r e a s e d , th e R e serv e Fund can p r e v e n t th e n e c e s s i t y o f i s s u in g new m a rk e ta b le o b l i g a t i o n s . In th e ab sen ce o f th e R e se rv e Fund new o b l i g a t i o n s w ould have to be s o ld on th e open m a rk e t. T h e re f o re , by s u p p ly in g a new m arket f o r governm ent b onds, th e T re a su ry can d is p o s e o f i t s o b l i g a t i o n s w ith o u t h a v in g j • I I to in c r e a s e th e r a t e o f i n t e r e s t . C o n se q u e n tly , th e c o s t i j i j o f c a p i t a l to th e governm ent i s c h e a p e r th a n i t o th e rw is e - w ould b e . L ik e w ise , th ro u g h th e e f f e c t o f governm ent bonds on p r i v a t e money m a rk e ts th e c o s t o f e a p i t a l to th e b u s in e s s man w ould be l e s s th a n i t w ould be i f th e S o c ia l S e c u r ity law d id n o t e x i s t . However, th ro u g h i t s power to c o n t r o l i n t e r e s t r a t e s th e governm ent h as been known to f in a n c e new d e f i c i t s w ith o u t in c r e a s in g th e r a t e . 2 ? ^ C h a r l e s C o rtez A b b o tt, The F e d e r a l Debt S tr u c tu r e and Im pact (New York: The T w e n tie th d e n tu ry Fund, 1 9 5 3 ), p . 182. 2?D uring W orld War I I th e governm ent f in a n c e d th e v a s t ex p an sio n o f d e b t a t v e ry low I n t e r e s t r a t e s . “From 19*4-1 to 19*4-5 th e 90-d ay T re a su ry b i l l s w ere s o ld on a 3 /8 The b a s i c T re a su ry v ie w p o in t a f t e r World War I I was to k e e p th e i n t e r e s t expense on th e n a t i o n a l d eb t lo w . T his p o l i c y was opposed by th e Board o f G overnors o f th e F e d e r a l R eserv e System b ec a u se o f i t s i n f l a t i o n a r y c o n s e q u e n c e s .2® In th e f u tu r e th e In su ra n c e Fund p r e s e n t s to th e T re a su ry a way o f k e e p in g I n t e r e s t r a t e s low w ith o u t h a v in g t o r e s o r t t o o th e r m o n e tary p o l i c i e s . I f th e p r o v is io n of new m a rk e ts f o r governm ent bonds i s o n ly a f s u b s t i t u t e f o r e a s in g r a t e s th ro u g h m o n e tary p o l i c y , t h e { j r e a l e f f e c t s o f t h e R eserve Fund on th e c o s t of c a p i t a l may n o t be a t a l l s i g n i f i c a n t . I f , how ever, an a g g r e s s iv e B oard of G overnors o f th e F e d e ra l R eserve System sh o u ld t r y t o r a i s e r e d is c o u n t r a t e s in o r d e r t o c o n t r o l i n f l a t i o n , th e n th e p re s e n c e o f t h i s m a rk e t f o r governm ent b o n d s, a t l e a s t p a r t i a l l y in th e hands o f th e T re a s u ry , would be s i g n i f i c a n t . 29 o f one p e r c e n t y i e l d b a s i s ; th e v e r y p o p u la r o n e -y e a r c e r t i f i c a t e o f in d e b te d n e s s b ro u g h t 7 /8 o f one p e r c e n t; and t h e lo n g e s t 2 5 -y e a r m a rk e ta b le bond b ro u g h t 2 1 /2 p e r c e n t . '1 As to t h i s r e v e r s a l of th e law o f su p p ly and demand, A bbott p o i n t s o u t t h a t th e "low i n t e r e s t p a t t e r n c o u ld be m a in ta in e d o n ly by i n f l a t i n g th e money s u p p ly and c o n s t a n t l y d r i v i n g p r i c e s h ig h e r and h i g h e r ." I b i d . , p . 20 2. 2® F o r a good a n a ly s is of th e b a s ic c o n f l i c t betw een th e B oard of G overnors and th e T re a su ry s e e : George L elan d Bach, F e d e ra l R eserv e P o licy -M ak in g (Mew York: A lf re d A. K nopf, 1 9 5 0 ), p p . *+6-50. 2^At p r e s e n t th e B oard of T ru s te e s of th e F e d e ra l u id Age and S u r v iv o r s ’ In su ra n c e T ru s t Fund i s made up of th e S e c r e ta r y o f t h e T re a s u ry , th e S e c r e ta r y o f L ab o r, th e 2651 F i n a l l y , th e c o s t o f c a p i t a l w i l l he a f f e c t e d by anyi f g e n e r a l I n f l a t i o n a r y o r d e f l a t i o n a r y e f f e c t s o f th e S o c ia l i > S e c u r ity A ct. In c o n c lu s io n , th e b u s in e s s man u n d o u b te d ly g a in s from th e R eserve program th ro u g h a r e d u c tio n in th e c o s t o f c a p i t a l . 1 B rookings I n s t i t u t i o n Study In o r d e r to gauge th e view s o f b u s in e s s w ith r e s p e c t to th e e f f e c t s o f th e p a y r o l l ta x e s on e x p a n sio n , th e one j I th o u sa n d m a n u fa c tu rin g firm s who were su rv e y e d by th e ! i n s t i t u t i o n in Ju n e o f 19^8 w ere asked th e fo llo w in g j j ! j q u e s tio n : "In y o u r o p in io n h av e th e p a y r o l l ta x e s p a id by I I jy o u r company had any s i g n i f i c a n t in f lu e n c e on d e c is io n s . ifrith r e s p e c t to p la n n e d e x p a n sio n and a d d i t i o n s to e q u ip m en t?"^ 0 Only t h i r t e e n , o r 6 /5 p e r c e n t, o f th e one h u n d red n i n e t y - n i n e com panies an sw erin g t h i s q u e s tio n j r e p l i e d in th e a f f i r m a t i v e . ^ 1 Thus th e B rookings I n s t i t u t i o n found t h a t o f th o se r e p l y i n g o n ly one company in S e c r e t a r y of H e a lth , E d u catio n and W e lfa re , and th e Com m issioner o f S o c ia l S e c u r i t y . I t i s o f i n t e r e s t to n o te t h a t th e S e c r e ta r y o f th e T re a su ry i s t h e Managing T ru s te e o f th e T ru st Fund. F o u r te e n th Annual R e p o rt of th e Board o f T ru s te e s o f th e F e d e ra l Old-Age and S u r v iv o r s 1 In su ra n c e T ru s t Fund (W ashington: Government P r i n t i n g Office"! 1954) » p . 1 . 3 ° L e w l s h . Klmmel, Taxes and Economic I n c e n tiv e s (W ashington: The B rookings I n s t i t u t i o n , 1950)» P* 18^. -^ 1Loc. c l t . 266 j f i f t e e n r e g a r d s th e s e ta x e s a s an im p o rta n t in f lu e n c e on in v e stm e n t d e c i s i o n s . A few o f th e com panies r e p o r te d t o th e B ro o k in g s I n s t i t u t i o n t h a t th e p a y r o l l t a x was a f a c t o r in d e c is io n s to p u rc h a s e la b o r - s a v i n g e q u ip m e n t.32 To th e e x te n t t h a t i 1 ith e p a y r o l l t a x h as l e d to t h e p u rc h a se o f new equipm ent ! ' i t h a s s tim u la te d in v e stm e n t e x p e n d itu r e s . The one th o u sa n d f ir m s w ere a ls o a sk e d : "In y o u r o p in io n have th e p a y r o l l ta x e s l e v i e d upon your company had any s i g n i f i c a n t I n flu e n c e on d e c is io n s a s to th e l e v e l of o p e r a t i o n s o f e x i s t i n g p l a n t an d eq u ip m en t?"33 Only e ig h te e n , o r 9 .3 p e r c e n t, o f th e one hun d red n i n e t y - f o u r com panies a n sw e rin g t h i s q u e s tio n r e p l i e d in th e a f f i r m a t i v e . The l a r g e r number o f a f f i r m a t i v e r e p l i e s i s e x p la in e d m a in ly by th e e x p e rie n c e r a t i n g c la u s e o f i S ta te Unemployment Com pensation Laws. Kimmel p o i n t s o u t t h a t A number o f com panies m en tio n ed t h a t th e y had a tte m p te d t o m a in ta in o p e r a tio n s a t a s u niform a r a t e a s p o s s i b l e , o r t h a t e x p e rie n c e r a t i n g enco u rag ed s t a b l e employment p r a c t i c e s .3 ^ The i m p l ic a tio n s a r e t h a t i f th e s tu d y w ere l i m i t e d to o n ly th e O ld Age and S u rv iv o rs* In su ra n c e Program , th e 3 2 I b i a . , p . 185- 3 3 I b i d . . p . 186. 3**i b i a . , p . 187. 26? percentage of firms whose operating decisions were affected by the payroll tax would be the same as the percentage of firms whose investment expenditures were affected by the tax. that most firms, during the current prosperity phase of the business cycle, regard the payroll tax as only a minor factor in determining operating decisions and investment expenditures. Economic progress is dependent not only on the quantity of new investment but also on its quality. Investments in new fields which yield exceptionally high returns if successful, but in which the risk of loss is exceptionally high, are particularly advantageous to the economy. New industry is made possible by the Innovation investment that develops some new product for which popular demand eventually becomes great. This new Industry in turn stimulates all other aspects of the economy.^ •a 5 Joseph A. Schumpeter, Business Cycles, Vol. I, (New York: McGraw-Hill Book Company, 1 9 3 9 )» pp- 84-91« The result of the Brookings Institution study is IV. SOCIAL SECURITY AND THE SUPPLY OF “VENTURE1 1 CAPITAL i The Role of Venture Capital In c o n t r a s t , in v e s tm e n ts i n s t a b i l i z e d f i e l d s , whosei p o t e n t i a l i t i e s a r e w e ll known, can e x p l o i t o n ly a r e a s o f jle e s i n t e n s i v e p o t e n t i a l demand and t h e r e f o r e make o n ly a {m arginal c o n t r i b u t i o n to th e n a t i o n ’ s economy. The r i s k o f new in v e s tm e n t i n th e s e w e l l - e s t a b l i s h e d f i e l d s i s lo w , b u tj r e t u r n s on sueh an in v e stm e n t a r e a ls o low . 1 V e n tu re C a p ita l by Income Group j The em p lo y ees' s h a re o f t h e p a y r o l l t a x d i v e r t s o n ly a sm a ll amount o f fu n d s t h a t o th e rw is e w ould be used f o r v e n tu r e c a p i t a l . A s tu d y co n d u c ted by D r. B u tte r s an d o t h e r s ^ 6' e s tim a te s t h a t in 19^9 sp e n d in g u n i t s w ith Incomes o f te n th o u sa n d d o l l a r s and o v e r h e ld a b o u t 75 p e r c e n t o f ) a l l m a rk e ta b le s to c k owned b y p r i v a t e I n v e s t o r s , and t h a t : I th o s e w ith incom es o f tw e n ty - f iv e th o u s a n d d o l l a r s and 3&The s o u r c e s o f t h e d a t a p r e s e n te d in th e s tu d y c o n d u c te d by B u t t e r s and o t h e r s i s a s fo llo w s : "The s o u rc e m a t e r i a l f o r o u r s tu d y c o n s i s t s m a in ly o f th r e e setB o f sam ple d a t a . The f i r s t i s t h e a n n u a l s u rv e y s co n d u c ted in p o s tw a r y e a rs by th e Survey R e se a rc h C e n te r o f th e U n i v e r s i t y o f M ichigan under th e s p o n s o rs h ip o f th e F ederal. R e serv e B oard. The second i s a sam ple o f ’ a c tiv e i n v e s t o r s ' b a se d on in te r v ie w w ith 7^6 i n d i v i d u a l s w hich we have co n d u c ted a s p a r t o f th e r e s e a r c h u n d e r ly in g t h i s s tu d y . F i n a l l y , th e S urvey R esearch C e n te r (SRC) in c lu d e d q u e s tio n s d e s ig n e d f o r o u r s tu d y in two s p e c i a l s u rv e y s made d u rin g th e summer and autumn o f 19^9* B e sid e s th e s e t h r e e s e t s o f sam ple d a t a , we have made u s e o f r e le v a n t a g g r e g a te d a t a and o f in f o rm a tio n t a b u l a t e d from ta x r e t u r n s w henever i t has a p p e a re d d e s i r a b l e to do s o , b u t th e s e s ta n d a r d s o u r c e s r e q u i r e no s p e c i a l d e s c r i p t i o n ." J . K e ith B u t t e r s , Lawrence E. Thompson, and Lynn L. B o l l i n g e r , E f f e c t o f T a x a tio n on In v e s tm e n ts by I n d iv id u a l s (B oston: G raduate School o f B u s in e ss A d m in is tra tio n H arv ard U n i v e r s i t y , 1953)» P« 10. o v e r , h e l d more th a n h a l f of a l l m a rk e ta b le s to c k . From t h e i r f i e l d su rv e y s on th e a t t i t u d e o f i n v e s t o r s to w ard new v e n tu r e s and p u rc h a s e s o f new i s s u e s , th e B u tte r s s tu d y c o n c lu d e s t h a t t h e i r d a ta c l e a r l y shows t h a t ! A w i l l i n g n e s s to I n v e s t in new v e n t u r e s o r to buy s to c k in a company n o t p r e v io u s ly owned by th e p u b l i c i s h ig h ly c o n c e n tr a te d among i n d i v i d u a l s w ith l a r g e Incom es. In a d d i t i o n , su ch l i m i t e d ev id en ce a s i s a v a i l a b l e i n d i c a t e s t h a t th e o w n ersh ip o f p r i v a t e com panies, a s c o n t r a s te d w ith t h a t o f m a rk e ta b le s to c k , i s a l s o h ig h ly c o n c e n tr a te d in th e u p p er Income and w e a lth c l a s s e s . 3? However, th e maximum c o n t r i b u t i o n w hich any p e rs o n p r e s e n t l y p ay s u n d e r th e p a y r o l l ta x i s #9^*50 a y e a r . T his w ould r e p r e s e n t l e s s th a n 1 p e r c e n t (.9 ^ 5 o f 1 p e r c e n t) o f th e income o f a man e a rn in g te n th o u sa n d d o l l a r s ! a y e a r . For a l l p r a c t i c a l p u rp o s e s an amount r e p r e s e n t i n g j i I 1 such a sm all p r o p o r tio n o f o n e 's income w ould n o t be s i g n i f i c a n t in in v e stm e n t d e c i s i o n s . The P r o g r e s s iv e Income Tax and th e Upper Income G roup. As a m a t t e r o f f a c t , th e r e i s re a so n t o b e l i e v e t h a t th e p r o g r e s s iv e income ta x w hich d o es cu t i n t o v e n tu r e c a p i t a l d o es n o t do as much damage a s i s c u s to m a r ily a s s u m e d .38 37Ibia., p. 26. 38A c l e a r s ta te m e n t o f th e cu sto m ary v ie w p o in t f o llo w s : "On th e assu m p tio n t h a t p e rso n s a s a r u l e a r e n o t i n c l i n e d to assume I n c r e a s in g r i s k f o r a d im in is h in g r e t u r n , i t i s r e a s o n a b le to th in k t h a t p e r s o n a l t a x a t i o n w ith s t e e p l y p r o g r e s s i v e r a t e s te n d s to re d u c e th e w i l l i n g n e s s o f i n d i v i d u a l s to u n d e rta k e economic v e n tu r e s o f t h e i r own i n th e hope o f l a r g e re w a rd s . T h is d isc o u ra g e m e n t to In th e stu d y p r e v io u s l y m e n tio n e d , B u t te r s and o th e r s foundj i t h a t th e ta x I n c r e a s e s o f r e e e n t y e a rs have n o t a f f e c t e d s a v in g s and In v e stm e n ts of th e upper Income groups to th e d e g re e eommonly su p p o sed . The In v e stm e n t c a p a c ity o f th e s e u p p e r Income p e o p le I s s t i l l v e ry l a r g e , i n s p i t e o f th e s u b s t a n t i a l r e d u c tio n ca u sed by changes in th e t a x s t r u c t u r e . The s tu d y p o i n t s o u t th a t The h a b i t o f sa v in g a p p e a rs to be d e e p ly in g r a in e d i n m ost i n d i v i d u a l s o f m o d erate t o l a r g e incom es. A ll a v a i l a b l e e v id e n c e i n d i c a t e s t h a t th e overw helm ing m a jo r i ty o f I n d iv id u a l s in th e to p 1 p e r c e n t o f th e p o p u la tio n — ra n k e d by s i z e of incom e— a r e s t i l l accumu l a t i n g p o s i t i v e s a v in g s , and t h a t th e s a v in g s o f a t l e a s t h a l f o f th e i n d i v i d u a l s amount to a f a i r l y s i z a b l e f r a c t i o n o f t h e i r incom es b e f o r e t a x e s , sa y , t o a f i f t h o r m o r e .39 P a r t o f th e e x p la n a tio n of t h i s phenomenon i s th a t th e younger e x e c u ti v e s , a s th e y r i s e i n t o h ig h e r income c l a s s e s , a r e w i l l i n g to a c c e p t l e s s lu x u r io u s l i v i n g th a n t h e i r p r e d e c e s s o r s . j A second m a jo r f a c t o r m entioned by B u tte r s and | o th e r s i s t h a t t h e r e a re many ways i n v e s t a b l e funds and r i s k - t a k i n g a c c o u n ts in p a r t f o r th e f a c t t h a t d u rin g th e p a s t th r e e d e c a d e s we have d ev elo p ed l e s s and l e s s tr a d e and m onetary incom e in o u r own economy r e l a t i v e t o th e money su p p ly . . . . "A second i n d i c a t i o n o f th e c u r r e n t r e lu c ta n c e o f in d i v i d u a l s to engage in new v e n tu re s i s th e a p p a re n t f a c t t h a t many p e rs o n s o f w e a lth have n o t c o n s id e r e d i t w o rth w h ile to in v e s t t h e i r fu n d s in in co m e-p ro d u cin g p r o p e r ty d u rin g r e c e n t y e a r s ." H. ¥ . P r e n tie e , J r . , "T ax a tio n and B u s in e ss I n i t i a t i v e , " A nnals o f th e -American Academy o f P o l i t i c a l and S o c ia l S c ie n c e . 266:71, November, 19^9* ^ B u t t e r s , Thompson, and B o llin g e r , op. c l t . , p . 2 8 . 271: s a v in g s can be ac cu m u lated w ith o u t h a v in g them s u b je c te d to ! th e f u l l im pact o f th e income ta x . The f a v o r a b le ta x ! tr e a tm e n t to o i l p r o p e r t i e s , and th e f a c t t h a t c o r p o r a tio n I j e a r n in g s can be r e i n v e s t e d w ith o u t f i r s t becom ing p a r t of j i p r i v a t e incom e, and th e lo w e r ta x r a t e s on c a p i t a l g a in s * a r e g iv e n a s m a jo r exam ples Not o n ly i s th e in v e stm e n t c a p a c ity o f th e u p p er income groups s t i l l h ig h , b u t th e te n d e n c y to in v e s t i n e q u i t i e s s t i l l rem a in s s i g n i f i c a n t . B u t t e r s found t h a t as many a s o n e - te n th to o n e - f i f t h o f th e I n d iv id u a l s w ith v e ry i l a r g e incom es and a s s e t h o ld in g s r e p o r te d t h a t ta x e s d id j n o t a f f e c t t h e i r in v e stm e n t d e c i s i o n s . ^ I b l d . , p p . 130-131. ^ H o w e v e r, a n o th e r H arv ard s tu d y , co n d u cted by th e I in te r v i e w m ethod in 19^9 by Thomas H. S a n d e rs, re a c h e d a j d i f f e r e n t c o n c lu s io n . :nI t seems c l e a r t h a t th e l a r g e r and l a r g e r s h a re s ! o f g r o s s income p a id out in ta x e s have been more and more l e v i e d o u t o f w hat have been fo rm e rly a f r e e , o r o p t i o n a l , o r v e n tu r e p a r t o f th e e x e c u tiv e incom e, le a v in g th e d im in is h in g r e s i d u e more and more earm arked f o r p e r s o n a l and f a m ily o b l i g a t i o n s re g a rd e d a s ’m u s ts .* In th e f o r e f r o n t o f th e s e a r e th e e s s e n t i a l s of f a m ily p r o t e c t i o n , a s u i t a b l e home, an ad e q u a te in s u r a n c e pro g ram , p e n s io n o r a n n u ity p r o v i s i o n s , a.nd~a minimum o f in v e s tm e n ts o f p r a c t i c a l l y a re a d y cash ty p e , a v a i l a b l e f o r e i t h e r c u r r e n t o r em ergency n e e d s . ’ ’The mere s ta te m e n t o f th e s e p r o v is io n s w i l l s a t i s f y m ost p e o p le of t h e i r urgeney and of th e f a c t t h a t t h e i r p r i o r i t i e s do n o t depend on any view s of d i s t a n t i n f l a t i o n o r d e f l a t i o n ; th e y a r e o b l i g a t i o n s i n h e r e n t in b e in g a r e s p o n s i b l e fa m ily man and member o f s o c i e t y . M oreover, i t seems t o be an u n q u e s tio n a b le f a c t t h a t th e s e o b l i g a t i o n s a r e b e in g p ro v id e d f o r by e x e c u tiv e s i n a s u b s t a n t i a l way. I t i s b ecau se t h e s e th in g s a r e b e in g so w e ll c a re d f o r , and 2?2 The E m ployer1s C o n trib u tio n The e f f e c t o f th e p a y r o l l ta x on p r o f i t s o f l a r g e e n t e r p r i s e s w hich may toe u se d f o r " v e n tu re c a p i t a l " depends j l a r g e l y on th e r e l a t i o n o f th e ta x to "business e x p e c t a t i o n s ; I and on th e s h i f t a b i l i t y o f th e t a x to th e consumer o r th e I I w o rk e r. Thus, d u r in g p e r io d s o f o p t i m i s t i c p r o f i t a n t i c i - I p a t i o n s a minimum amount o f " v e n tu re c a p i t a l " w ould toe l o s t , w h ile d u rin g p e r io d s of b u s in e s s pessim ism th e e f f e c t s o f th e p a y r o l l ta x in re d u c in g v e n tu r e c a p i t a l would toe a c c e l e r a t e d . S h u ltz b e l ie v e s t h a t th e r e i s a | s tr o n g p o s s i b i l i t y t h a t some b u s in e s s s a v in g s a r e t r a n s - i f e r r e d from v e n tu r e c a p i t a l to governm ent b o n d s.' T his may j toe s o , even u n d e r o p t i m i s t i c b u s in e s s c o n d i tio n s , i f th e assu m p tio n i s made t h a t th e em ployer b e a r s th e p a y r o l l ta x . I t i s s u r p r i s i n g , how ever, t h a t S h u ltz , whose th e o ry o f th e s h i f t i n g o f th e p a y r o l l ta x i s o u t l i n e d in C h ap ter I I I , I w ould claim t h a t th e f u l l im p act o f th e em p lo y e r’ s p a y r o l l ta x f a l l s d i r e c t l y on p r o f i t m a r g i n s . ^2 But th e s e em ployer p a y r o l l ta x e s do reduce th e p r o f i t s o f l a r g e e n t e r p r i s e s w hich a r e r e s p o n s ib le f o r b e c a u se th e y ta k e so la r g e a sh a re o f a m an’ s reduced r e s o u r c e s , e s p e c i a l l y in th e e a r l y y e a rs of h is l i f e , t h a t th e r e i s so l i t t l e l e f t f o r o t h e r p u r p o s e s , and t h a t we have so many a s s e r t i o n s , t h a t n o th in g i s l e f t f o r i n v e s t m e n t." Thomas A. g a n d e rs , E f f e c t s o f T a x a tio n on E x e c u tiv e s (B oston: G rad u ate School o f B u s in e s s A dm inis t r a t i o n , H arvard U n iv e r s ity , 1951)* P« 1 9 0 . ^2 See C hapter I I I , pp. 8 ^ 4 — 8 6 . 273 a m ajo r s h a re o f c u r r e n t 'v e n t u r e ' in v e s tm e n t; in some 1 c a s e s th e r e d u c tio n i s s u b s t a n t i a l . The 'v e n t u r e ' in v e s tm e n ts o f th e s e l a r g e e n t e r p r i s e s a r e d i r e c t l y ; r e l a t e d to th e p r o f i t m a rg in s re m a in in g to them a f t e r i 'r e g u l a r ' d i s t r i b u t i o n s to t h e i r s h a r e h o ld e r s o r ; ow ners, and a f t e r f u l l p r o v is io n f o r t h e i r more s t a b l e j in v e s tm e n ts . The f u l l im pact o f th e em ployer p a y r o l l j ta x e s f a l l s d i r e c t l y on th e s e p r o f i t m a rg in s . T here ! i s a s tro n g p o s s i b i l i t y , t h e r e f o r e , t h a t S o c ia l j S e c u r ity f in a n c in g c h a n n e ls some b u s in e s s sa v in g away ! from 'v e n t u r e ' in v e stm e n t and, th ro u g h th e medium o f S th e S o c ia l S e c u r ity T ru s t Fund, to p lacem en t in f e d e r a l 1 d e b t o b l i g a t i o n s . ^3 I t seems l o g i c a l t h a t in th e s h o rt ru n and p a r t i c u l a r l y u n d er th e d e p re s s e d c o n d itio n s t h a t e x i s te d d u rin g th e 1 9 3 0 ' s , S h u ltz ' a n a l y s i s w ould a p p ly . However, w ith 1 i th e lo n g run a b i l i t y to s h i f t th e p a y r o l l ta x , c o u p le d w ith j th e o p t i m i s t i c p r o f i t a n t i c i p a t i o n s of th e 19A 0's and j I 1 9 5 0 's , i t i s d i f f i c u l t to b e l i e v e t h a t th e Old Age an d 1 I S u r v iv o r s ' In s u ra n c e Act has h u r t v e n tu re c a p i t a l by r e d u c in g th e r e t a i n e d e a rn in g s o f c o r p o r a tio n s V. CONCLUDING OBSERVATIONS The p a y r o l l ta x e x e r c is e d a dam pening e f f e c t on In v e stm e n t e x p e n d itu r e s d u rin g th e p e r io d of d e p r e s s io n w hich e x i s te d b e f o r e World War I I . The em ployer f a c e d an im m ediate in c r e a s e in b o th l a b o r c o s ts and a d m in is t r a tio n c o s t . B e s id e s , th e w hole S o c ia l S e c u r ity Program r e p r e s e n te d an a d d i t i o n a l w e lf a r e o b l i g a t i o n im posed by a h o s t i l e a d m i n i s t r a t i o n . Thus th e m a rg in a l e f f i c i e n c y of A3 ~ S h u ltz , op . o l t . , p . 59* 2?k c a p i t a l was re d u c e d d u rin g t h i s p e r io d . At th e same tim e J i th e p a y r o l l ta x was r e g r e s s i v e in n a tu r e and t h e r e f o r e d id j i n o t s tim u la te consum ption e x p e n d itu re s a s in c r e a s e d | governm ent d eb t w ould have done. B e s id e s , even i f p r i c e s I c o u ld have been I n c r e a s e d d u r in g t h i s s h o r t- r u n p e r i o d , th e j l o s s o f f o r e ig n m a rk e ts w ould have r e s u l t e d . I t was -ferae j t h a t th e T re asu ry o b ta in e d a new m arket f o r governm ent b o n d s. Yet th e th e n b a s ic p o l i c y o f th e governm ent o f k e e p in g th e c o s t o f c a p i t a l low c o u ld h ave been j u s t a s e a s i l y p u t in t o e f f e c t th ro u g h o th e r m eans. S ince th e b e g in n in g o f World War I I th e p a y r o l l ta x h a s had l i t t l e e f f e c t upon in v e stm e n t e x p e n d itu r e s . The w artim e I n c r e a s e s in th e c o r p o r a te Income t a x and th e p e r s o n a l income t a x , b e s id e s th e i n t r o d u c t i o n of th e e x c e s s j * p r o f i t s ta x , has p la c e d th e p a y r o l l t a x in a r e l a t i v e l y lowj p o s i t i o n . The s m a ll r a t e in c r e a s e s t h a t have ta k e n p la c e ! s in c e 1950 r e p r e s e n te d t a x l e v i e s t h a t w ere a n t i c i p a t e d as e a r l y as 19^5 u n d e r th e o r i g i n a l a e t . O th e r f a c t o r s which have c o u n te r a c te d any a d v e rs e e f f e c t s o f th e p a y r o l l t a x on in v e s tm e n ts a r e th e h ig h m a rg in a l e f f i c i e n c y o f c a p i t a l i t h a t h a s been in e v id e n c e s in c e World War I I , th e a c c e p ta n c e o f S o c ia l S e c u r ity by th e b u s in e s s community, and th e a b i l i t y over tim e to s h i f t t h e burden of th e p a y r o l l ta x . Then, to o , th e e n t i r e S o c ia l S e c u r ity Program h as I n c r e a s e d (th o u g h to a v e ry sm all d e g re e ) s in c e th e end of W orld War I I . There i s , how ever, a r e d u c tio n In f o r e ig n s a l e s t o th e 275 e x te n t t h a t th e em ployer s h i f t s t h e p a y r o l l ta x to th e , consum er. T his f a c t o r h as n o t been s i g n i f i c a n t s in c e th e | end o f World War I I , b ec au se o f th e g r e a t demand f o r J A m erican goods a b ro a d , p lu s th e in c r e a s e d consum ption a t home and th e p o s s i b i l i t i e s o f p r i c e d is c r i m in a tio n by A m erican p r o d u c e r s . M oreover, a s tu d y co n d u c ted by th e B ro o k in g s I n s t i t u t i o n found t h a t a m a jo r i ty o f firm s do n o t c o n s id e r th e p a y r o l l ta x as a s i g n i f i c a n t in f lu e n c e on t h e i r in v e stm e n t d e c is io n s . V enture c a p i t a l h as n o t been a f f e c t e d by th e p a y r o l l t a x s in c e i t i s s u p p lie d m a in ly by I n d i v i d u a l s who e a rn o v e r te n th o u sa n d d o l l a r s from la r g e c o r p o r a tio n s . Those who a r e in th e u p p er income b r a c k e t p ay l e s s th a n one p e r c e n t of t h e i r g r o s s e a rn in g s th ro u g h th e p a y r o l l ta x . B e s id e s , B u tte r s and o th e r s show t h a t even th e p r o g r e s s iv e iincom e ta x does n o t c u t in to v e n tu re c a p i t a l to th e e x te n t th a t i s c u s to m a r ily assum ed. In th e lo n g run th e r e d i s t r i - j b u tto n o f income ( in f a v o r o f th e upper income group) th a t r e s u l t s from th e b e n e f i t paym ents w ould b a la n c e any r e p r e s s i v e e f f e c t th e p a y r o l l t a x m ight h av e on v e n tu re c a p i t a l . Due t o th e f a v o r a b le b u s in e s s e x p e c ta tio n s and th e s h l f t a b i l l t y of th e ta x , th e v e n tu re c a p i t a l a t t r i b u t a b l e to plow ed back e a r n in g s of l a r g e c o r p o r a tio n s was n o t a f f e c t e d a d v e r s e ly by th e p a y r o ll ta x d u r in g th e p ro s p e ro u s c o n d itio n s s in c e W orld War I I . However, d u rin g th e d e p r e s s io n o f th e 1 9 3 0 's , some v e n tu r e c a p i t a l was l o s t th ro u g h th e p a y r o l l t a x . CHAPTER IX THE ASSOCIATION BETWEEN SOCIAL INSURANCE AND RETIREMENT OF THE A G -ED I Old Age an d S u r v iv o r s 1 In s u ra n c e , l i k e o th e r | I t r a n s f e r paym ents, does n o t d i r e c t l y a f f e c t th e l e v e l of th e n a t i o n a l Incom e. However, t h i s law may a f f e c t th e q u a n t i t y and q u a l i t y o f l a b o r a v a i l a b l e f o r u se in p ro d u c t i o n . I t may, a s one w r i t e r c la im s , M re d u c e th e t o t a l a v a i l a b l e l a b o r su p p ly ."-1 - The r e d u c tio n i n la b o r su p p ly w ould o ccu r th ro u g h re d u c in g th e n eed f o r o ld e r p e o p le to seek jo b s b e c a u se o f th e b e n e f i t pay m en ts. In C h a p te rs V th ro u g h V III th e im p lie d assu m p tio n i was made t h a t O ld Age and S u r v iv o r s ' In s u ra n c e d id n o t i I a d v e r s e ly a f f e c t th e la b o r s u p p ly and t h e r e f o r e th e l e v e l ! o f th e n a t i o n a l incom e. T h is c h a p te r w i l l stu d y th e m e r its o f t h i s a ssu m p tio n . I . EMPLOIMENT AND THE LABOR FORCE O r i g i n a l l y , one o f th e m ajo r p u rp o s e s o f th e S o c ia l S e c u r ity Act was to e lim in a te o ld e r w o rk e rs from th e l a b o r ^■John F . Due, "Government E x p e n d itu re s and T h e ir S ig n if ic a n c e f o r th e Economy," F i s c a l P o l i c i e s and th e Am erican Economy. Kenyon E. P oole Ted.) (New York: P r e n t i c e - H a l l , 1951)> P- 226 ! 2?8 | P |f o r c e . As l a t e a s 19*K>, 1L.S p e r c e n t o f th e la b o r f o rc e I Iwas unem ployed. Even in 19^1* th e y e a r t h a t P e a rl H arb o r was a t ta c k e d , unemployment re a c h e d 9*9 p e r c e n t . 3 A f te r A m e ric a 's e n tra n c e in to W orld War I I th e p i c t u r e changed. Two and o n e - h a lf m i l l i o n men e n te r e d th e l a b o r f o r c e : o l d e r men beyond r e tir e m e n t a g e , young men who i n t e r r u p t e d t h e i r e d u c a tio n , and th o se n o rm a lly unem ploy a b le . In a d d i t i o n , th r e e and o n e - h a lf m i l l i o n women who w ere p r im a r il y c l a s s i f i e d a s housew ives became g a i n f u l l y em ployed. To f u r t h e r augment t h i s f o r c e , in d u s t r y was a b le to draw upon th e n in e m i l l i o n who w ere unem ployed in 19*K>. To o f f s e t t h i s g a in o f f i f t e e n m i l l i o n to th e la b o r f o r c e , th e r e was a l o s s of te n m i l l i o n t o th e Aimed F o rc e s. The n e t in c r e a s e o f f i v e m il lio n In th e l a b o r f o rc e e n a b le d i n d u s t r y to a c h ie v e w artim e p eak o u t p u t .^ The unemployment r a t e f o r th o s e o v e r s i x t y - f i v e y e a rs o f age i s p ro b a b ly u n d e r s ta te d d u rin g peace tim e s as 2 "An i n d i v i d u a l I s c o u n te d a s b e in g In th e l a b o r f o r c e i f he i s a b le to work an d e i t h e r h a s a Job o r i s ’a c t i v e l y s e e k in g ' w o rk ." L loyd G -. R ey n o ld s, Labor Economics and L abor R e la tio n s (seco n d e d i t i o n ; New York: P r e n t i c e - H a l l , 195^)» p« 4-26. •^Committee S t a f f o f th e J o i n t Committee on th e Economic R eport and th e o f f i c e o f S t a t i s t i c a l S ta n d a rd s , Bureau of th e B u d g et, 1955 H i s t o r i c a l and D e s c rip tiv e Supplem ent t o Economic I n d i c a t o r s . E ig h ty - f o u r th C o n g ress, 1 s t s e s s io n (W ashington: Government P r i n t i n g O ff ic e , 1 9 5 5 ), p . 23- ^ R eyn old s, ojd. c l t . , p . kJO. 279 a l a c k o f Job o p p o r t u n i t i e s h a s l e d many o ld e r w o rk e rs to abandon th e s e a rc h f o r work an d w ithdraw from th e l a b o r f o r c e . The B ureau o f th e C ensus h as p o in te d o u t t h a t In th e s e age c l a s s e s i t i s d i f f i c u l t to draw th e l i n e betw een a b le - b o d ie d p e rs o n s s e e k in g work and d is a b l e d and r e t i r e d p e r s o n s no lo n g e r in th e la b o r f o r c e . M oreover, many men in th e s e age groups a t th e ; tim e o f th e c e n su s had b ee n fo rc e d in t o r e tir e m e n t b e c a u se o f t h e i r i n a b i l i t y to com pete w ith younger ! w o rk e rs , a lth o u g h th e y w ere s t i l l a b le and w i l l i n g to w ork. Many of th e s e p re m a tu re ly r e t i r e d w o rk ers sh o u ld be c o n s id e re d a s p a r t o f th e n a t i o n 's p o t e n t i a l l a b o r su p p ly in p e r io d s of l a b o r s h o r ta g e , a lth o u g h th e y w ere n o t a c t i v e l y se e k in g work a t th e tim e o f th e 1940 c e n s u s .5 i D uring t h e d e p re s s io n o f th e 1 9 3 0 's when e f f e c t i v e demand was c o n s id e r a b ly below p ro d u c tiv e c a p a c ity o f th e economy, a r e d u c tio n in t h e s i z e of th e l a b o r fo rc e d e c re a s e d th e unemployment r a t e w ith o u t any a d v e rse e f f e c t on th e l e v e l o f th e n a t i o n a l incom e. T h e r e fo re , th e r e f u s a l o f em ployers to h i r e o ld e r w o rk e rs d id n o t a d v e r s e ly e f f e c t th e e c o n o m y .^ L ik e w ise , a good c a s e c o u ld be made f o r th e e lim in a tio n o f o ld e r w o rk e rs from th e la b o r f o r c e th ro u g h p e n s io n paym ents a t t h a t tim e . S in ce th e b e g in n in g o f World War I I , u nder -’U n ited S t a t e s D epartm ent o f Commerce, Bureau o f th e C ensus, S ix te e n th Census o f th e U n ite d S t a t e s , 1940 P o p u la tio n , V ol. 3 , The Labor F o rc e , P a r t I (W ashington: Government P r i n t i n g O ff ic e , 1 9 4 3 ), p . 4 . ^Glenn W . M i l l e r , "The E f f e c t of S o c ia l S e c u r ity on Manpower R e s o u r c e s ," Manpower in th e U n ite d S t a t e s , W illiam H aber, F r e d rlc h H. H arb lso n , Lawrence R. K le in and G ladys L. P alm er ( e d s .) (Hew York: H arp er and B r o th e r s , 1 9 5 4 ), p . 59. c o n d itio n s o f f u l l employment w ith e f f e c t i v e demand ex ceed -, in g p r o d u c tiv e c a p a c ity , th e l o s e o f r e a l n a t i o n a l income • i I due t o p re m a tu re r e tir e m e n t h a s become one o f th e p r i n c i p a l j w a s te s to th e economy. Sumner H. S l i c h t e r e s tim a te s i I . . . t h a t th e l a b o r f o r c e i s n e a r l y 1 .5 m i l l i o n j s m a lle r th a n i t would be i f th e w o rk e rs r a t h e r th a n thes em ployers u s u a l l y d e te rm in e d th e tim e o f r e tir e m e n t and! t h a t th e l o s s o f o u tp u t from p re m a tu re r e tir e m e n t i s o v e r | 5 b i l l i o n a y e a r. In d eed , th e l o s s of p ro d u c tio n from p re m a tu re r e t i r e m e n t s i s u n d o u b te d ly f a r g r e a t e r th a n th e l o s s from a l l th e f e a th e rb e d d in g r u l e s o f a l l th e u n io n s in th e c o u n tr y . 7 I I . PARTICIPATION IN THE LABOR FORCE T able X V III c o n ta in s a d e s c r i p t i o n o f th e t r e n d in la b o r f o rc e p a r t i c i p a t i o n o f p e rs o n s aged s i x t y - f i v e and o v e r from 1890 th ro u g h 1952. The f i r s t column shows th e p e r c e n ta g e o f th e e n t i r e p o p u la tio n aged s i x t y - f i v e and o v er f o r th e y e a rs s e l e c t e d . The t h i r d column shows th e p e r c e n ta g e o f th o s e aged s i x t y - f i v e and o v e r in th e l a b o r f o r c e . T his was computed by d iv id in g th e t o t a l number of aged i n th e la b o r f o r c e by th e t o t a l number o f p e r s o n s who w ere s i x t y - f i v e y e a rs o f age o r o v er f o r a g iv e n y e a r . The l a s t column shows th e p e r c e n ta g e o f th e t o t a l l a b o r f o r c e who w ere s i x t y - f i v e y e a rs o f age o r o v e r. T his column was ^Sumner H. S l i c h t e r , "R etirem en t Age and S o c ia l P o l i c y ," The Aged and S o c i e t y , a Symposium on th e Problem s o f an Aging P o p u la tio n , M ilto n D erber ( e d . ) , E d i t o r i a l B oard, J . D ouglas Brown, C la rk K e rr, and Edwin E. W itte (Champaign, I l l i n o i s : I n d u s t r i a l R e la tio n s R e sea rc h A s s o c ia tio n , 1 9 5 0 ), p . 106. 281 TABLE XVIII LABOR FORCE TRENDS FOR PERSONS 65 YEARS OF AGE AND OVER FOR SELECTED YEARS: 1890-1952 Year P e rc e n ta g e o f T o ta l P o p u la tio n Age 65 and Over Number in L abor F o rce 65 and o v e r (in th o u sa n d s) P e rc e n ta g e o f th o s e 65 and Over in th e Labor F orce P e rc e n ta g e of T o ta l L abor F orce Age 65 and Over 1890 3 .8 970 39*9 4 .3 1900 4 .1 1 ,1 5 7 3 7 .4 4 .1 1920 4 . 7 1 ,6 2 2 3 2 .8 3 .9 1930 5 .5 2 ,1 1 6 3 1 .4 4 .3 1940 6 .9 2 ,2 2 1 2 2 . 4 4 .1 ! 1945 7 .2 2 ,9 0 1 2 8 .9 4 .4 1950 7 .6 3 ,0 3 5 2 6 .3 4 .8 ; 1952 7 .8 2 ,8 7 8 23 • 4 4 .4 i 282 com puted by d iv id i n g th e t o t a l number o f aged in th e la b o r f o r c e by th e t o t a l number in th e la b o r fo rc e .® I Prom th e t a b l e i t can be o b se rv e d t h a t th e p e r c e n t - i J age o f th e t o t a l p o p u la tio n aged s i x t y - f i v e and o v e r h as j ! b een s t e a d i l y in c r e a s in g . Xet th e p a r t i c i p a t i o n o f t h i s \ I gro u p in th e l a b o r fo rc e showed a lo n g -ru n d e c re a s e even j b e f o r e th e i n tr o d u c t io n of th e S o c ia l S e c u r ity A ct. By 1950 th e p e rc e n ta g e o f th e t o t a l p o p u la tio n aged s i x t y - f i v e and o v e r had d o u b le d , th e p e r c e n ta g e o f th e t o t a l la b o r f o r c e aged s i x t y - f i v e and o v e r had in c r e a s e d o n ly 0 .5 p e r c e n t, and th e p e r c e n ta g e o f th o s e s i x t y - f i v e y e a rs and o v e r in t h e l a b o r f o r c e had d e c re a s e d 1 6 .5 p e r c e n t. The t a b l e shows t h a t a t no tim e from 1930 to 1952 w ere th e r e more th a n 3 1 »^ p e r c e n t o f th o s e s i x t y - f i v e y e a rs o f age and o v e r in th e work f o r c e . From 1930 to 19^*0, th e p e r io d a s s o c i a t e d w ith th e in tr o d u c t io n o f th e S o c ia l S e c u r ity A c t, la b o r f o r c e p a r t i c i p a t i o n by th e aged d ro p p ed 9 p e r c e n t . However, in 19^5* "the demand f o r l a b o r was so g r e a t , due to th e w ar e f f o r t , t h a t la b o r f o r c e p a r t i c i p a t i o n exceeded th e 19^0 f ig u r e by 6 .5 p e r c e n t. T ab le X V III was ta k e n from: J o i n t Committee on R a ilr o a d R e tire m e n t L e g i s l a t i o n , R e tirem en t P o l i c i e s and The R a ilr o a d R e tire m e n t S ystem , R eport No. V I, P a r t I I . Economic Problem s o f an Aging P o p u la tio n , P u rsu a n t t o S. Con. R es. 51 &nd 56, 83rd C o n g ress, 1 s t s e s s io n (W ashington: Government P r i n t i n g O f f ic e , 1953)* p . ^3* I I I . THE CAUSES OF RETIREMENT A number o f s t a t i s t i c a l s t u d i e s have been co n d u c ted on th e b a s ic c a u s e s o f r e tir e m e n t and th e problem s o f unem ploym ent. In t h i s s e c tio n some o f th e more im p o rta n t s t u d i e s a r e a n a ly z e d in o r d e r to d e te rm in e th e e f f e c t o f Old Age and S u r v iv o r s ’ In s u ra n c e upon r e t i r e m e n t . Com prehensive S tu d ie s Between 19^-0 and 1951 th e S o c ia l S e c u r ity A dm inis t r a t i o n co n d u cted f i v e su rv e y s in an a tte m p t to d e te rm in e th e c a u s e s o f r e tir e m e n t among m ale O ld Age In su ra n c e b e n e f i c i a r i e s . The su rv ey s co n d u c ted b e f o r e 1951 w ere ham pered In t h a t th e y were r e s t r i c t e d to c e r t a i n c i t i e s , w h ile th e 1951 su rv e y was n a t i o n a l . The r e s u l t s o f th e s e su rv e y s a r e p r e s e n te d in T ab le XIX. I t can be o b se rv e d from th e t a b l e t h a t th e l a r g e m a jo r i ty o f ’ ’r e t i r e m e n t s 1 ’ o r te r m in a tio n o f p re v io u s employment f o r t h e aged w ere I n v o lu n ta r y . Thus a p e r c e n t age o f th e aged ra n g in g from 8 6 .3 to 9 0 .3 f o r th e f i v e s t u d i e s claim ed t h a t th e y e i t h e r l o s t t h e i r Job o r q u i t v o l u n t a r i l y b e c a u se o f i l l h e a l t h . T h e re f o re , most o f th e men an d women who v o l u n t a r i l y q u it co v ered employment In o r d e r to r e c e iv e o ld -a g e b e n e f i t s a r e e i t h e r "boo o ld , to o weak, to o t i r e d , o r o th e rw is e to o i n c a p a c i t a t e d to k ee p on i ! TABLE XIX REASONS FOR TERMINATION OF LAST COVERED EM PLOYM ENT BEFORE ENTITLEMENT, M ALE - OLD-AG-E INSURANCE BENEFICIARIES 1940-1951 AND FEM ALE BENEFICIARIES 1951 (Per cen t of T otal) Reason f o r Job Term ination 1940 7 Large C itie s 1941-42 12 Middle Sized C itie s 1944 Boston 1946-47 P h ila d e lp h ia B altim ore 1951 N ational Survey Men 1951 N atio n al Survey Women Lost job 55.7 46.2 25.5 53.2 44.8 34.8 Quit job 44.3 53.8 74.5 46.8 55.2 65.2 H ealth 33*8 41.1 64.8 34.9 41.5 46.9 Wished to r e t i r e 4.7 5.6 4.1 5.5 3.9 4.0 For o th e r kind of job 4.1 3.0 Other reasons 5.8 7.1 5.6 6 .4 5.8 11.4 T otal 100 100 100 100 100 100 Number 2,380 567 341 218 12,035 2,678 SOURCES: M argaret L. S teck er, "Why do B e n e fic ia rie s R e tire ? W ho Among Them Return to Work?" S o cia l S e c u rity B u l l e t i n , 18:6, May, 1955* M argaret L. S teck er, " B e n e fic ia rie s P re fe r to Work," S o cia l S e c u rity B u l l e t i n , 14:16, January, 1951 284 285 w o r k in g ."9 The s u rv e y s , how ever, v a ry a s to w hich o f th e s e two f a c t o r s i s o f g r e a t e r im p o rta n c e . F our o f th e f i v e su rv e y s found t h a t a g r e a t e r p r o p o r tio n o f th e aged l o s t t h e i r jo b s th a n v o l u n t a r i l y q u i t f o r h e a l t h r e a s o n s . On th e o t h e r hand, th e 1951 su rv ey found t h a t o nly 8 1 .7 p e r c e n t o f th e women b e n e f i c i a r i e s l o s t t h e i r Jo b s o r r e t i r e d b ec au se o f p o o r h e a l t h . A l a r g e p e rc e n ta g e o f th e aged women w ere r e t i r e d from th e work f o r c e f o r o th e r r e a s o n s , and many r e t i r e d in o rd e r to ta k e c a re o f t h e i r d o m e stic a f f a i r s . I t i s d i f f i c u l t to t e l l w h eth e r t h i s g ro u p w ould have been a b le to r e t i r e i f i t were n o t f o r o ld age b e n e f i t s . However, th e 1951 su rv e y a ls o fo u n d t h a t a few a d d i t i o n a l men and women fo u n d s a t i s f a c t i o n in r e tir e m e n t who had sto p p e d work f o r o t h e r r e a s o n s . Thus, a t th e tim e o f th e in te r v ie w 8 p e r c e n t o f th e m ale o ld age b e n e f i c i a r i e s and 9 p e r c e n t o f th e fem ale b e n e f i c i a r i e s who w ere a b le to work s t a t e d t h a t th e y were n o t i n t e r e s t e d in w o rk in g .10 The 1951 su rv e y a ls o s tu d i e d th e reem ploym ent re c o rd o f t h e m ale b e n e f i c i a r i e s a t th e end o f 1951* F ig u re 5 ^M argaret L. S tr e c k e r , "Why do B e n e f i c i a r i e s R e tir e ? Who Among Them R etu rn to Work?" S o c ia l S e c u r ity B u l l e t i n . 1 8 :1 2 , May, 1955* 10Edna C. W entworth, "R esources of Aged In s u ra n c e B e n e f i c i a r i e s : 1951 H a tio n a l S urvey," S o c ia l S e c u r ity B u l l e t i n , 1 5 :5 , A ugust, 1952. 286 F i g u r e 5 P e r c e n t o f R e t i r e d Men W o rk e rs a t E n d o f Y ear 1 9 5 1 E v e r R e e m p lo y e d F u l l Time A f t e r R e c e i v i n g T e r m i n a t i o n o f L e e t C o v e r e d E m ploym ent B e f o r e B e n e f i t P a y m e n ts , b y R e a s o n f o r T e r m i n a t i o n a n d Y e a r o f F i r s t B e n e f i t * P e r c e n t U O \ 20 10 1 9 ^ 0 - l t l 4 2 - 4 3 U6-U? U6-U9 50 Key Y e a r o f f i r s t q u i t a l l o t h e r r e a s o n s b e n e f i t p a y m e n t _ • _ l o s t J o b q u i t n o t a b l e t o w o rk t o t a l ♦ E x c l u d e s b e n e f i c i a r i e s e n t i t l e d u n d e r t h e 1950 a m e n d m e n t. SOURCE: M a r g a r e t L . S t e c k e r , "Why do B e n e f i c i a r i e s R e t i r e ? Who Among Them R e t u r n t o W ork?" S o c i a l S e c u r i t y B u l l e t i n , 1 8 : 1 0 , May, 1 9 5 5 - I 287 i ! shows t h a t a l a r g e r p e rc e n ta g e o f r e t i r e d w o rk e rs who r e c e iv e d t h e i r f i r s t b e n e f i t paym ents b e f o r e 1 9 ^ w ent back to f u l l - t i m e work th a n had su b s e q u e n tly o c c u rre d . The i w artim e demand f o r an in c r e a s e d la b o r f o r c e c a l l e d t h e j r e t i r e d w orkers b ack to em ploym ent. Reemployment became more d i f f i c u l t a f t e r th e em ergency was o v e r . I t i s of j 1 i n t e r e s t to n o te t h a t th e men who had l e f t employment o f t h e i r own a c c o rd w ere more f r e q u e n tly reem ployed th a n th o se who l o s t t h e i r jo b s o r th o s e who were n o t a b le to w ork. Many o f th e b e n e f i c i a r i e s who q u it t h e i r jo b s d id so in t h e ' e x p e c ta tio n o f f in d in g o t h e r jo b s ( p a r t i c u l a r l y jo b s t h a t w ere exempt from th e r e tir e m e n t t e s t ) . Only 22 p e r c e n t o f th e m ales who r e c e iv e d t h e i r f i r s t b e n e f i t paym ents i n 1950 fo u n d f u l l - t i m e work by th e end o f 1951* i F u ll- tim e work i s d e f in e d a s a minimum o f t h i r t y - f i v e h o u rs a week f o r a t l e a s t s ix c o n s e c u tiv e m onths. A nother n a t i o n a l s u rv e y c o v e rin g t h r e e th o u sa n d : h o u se h o ld s t h a t in c lu d e d one o r more p e r s o n s s i x t y - f i v e y e a rs o f age o r o l d e r was co n d u c ted in A p r i l , 1952, by th e B ureau of th e Census f o r th e I n s t i t u t e o f I n d u s t r i a l R e la tio n s o f th e U n iv e r s ity o f C a l i f o r n i a a t B e rk e le y . W ith r e g a r d to l a b o r f o r c e a v a i l a b i l i t y , t h i s stu d y found t h a t ^5 p e r c e n t o f th e aged w ere n o t w e ll enough to w ork, w h ile k l p e r c e n t were in th e la b o r f o r c e . I t a l s o found t h a t o f th e 12 p e r c e n t who w ere n o t in th e la b o r f o r c e and w e ll enough to w ork, o n ly 8 p e r c e n t w ere n o t i n t e r e s t e d in 288 se c u r in g employment T his l a t t e r f i g u r e i s i d e n t i c a l to th e one p r e v i - J o u s ly m entioned w hich was a r r i v e d a t by th e 1951 su rv e y I c o n d u c te d by th e S o c ia l S e c u r ity A d m in is tra tio n . j In a s tu d y co n d u cted by th e T w e n tie th C entury Fund j i c o v e rin g 1 ,7 5 5 b e n e f i c i a r i e s r e c e iv in g r e tir e m e n t income u n d er s ix te e n p r i v a t e , two s t a t e , and one union p e n s io n p l a n s , i t was fo u n d th a t 5 6 .3 p e r c e n t o f th e b e n e f i c i a r i e s w ere r e t i r e d by t h e i r em ployer. 25*6 p e r c e n t o f th e b e n e f i c i a r i e s e i t h e r r e t i r e d v o l u n t a r i l y o r were f o r c e d to r e t i r e b ecau se o f p o o r h e a l t h . k .3 p e r c e n t r e t i r e d b ec a u se th e jo b was d is c o n tin u e d . i 8*8 p e r c e n t o f th e w o rk e rs r e t i r e d v o l u n t a r i l y in o r d e r to have more tim e to th e m s e lv e s , and 5 .0 p e r c e n t r e t i r e d f o r m is c e lla n e o u s r e a s o n s .12 The T w e n tie th C entury Fund a l s o fo u n d t h a t among th e r e t i r e d aged whose an n u al fa m ily income a f t e r r e t i r e m e n t ( was l e s s th a n one th o u sa n d d o l l a r s , 3«6 p e r cen t r e t i r e d in o r d e r to have more tim e f o r th e m s e lv e s . On th e o th e r hand, th e su rv e y d is c o v e r e d t h a t among th e aged whose f a m ily ^•Robert Dorfman, "The Labor F orce S ta tu s of P e rso n s Aged S i x t y - f i v e and O ver," P ro c e e d in g Supplem ent, Am erican Economic R eview . ^ 5 :6 3 8 , May, 195^* ■^John J . Corson and John W . M cC onnell, Economic Meeds of O lder P e o p le (Mew York: The T w e n tie th C en tu ry Fund, 1 9 5 6 ), p . 74. 1 289 , I incom es were betw een one th o u sa n d and one th o u sa n d n in e 1 hundred and n i n e t y - n i n e d o l l a r s , 8 .0 p e r c e n t r e t i r e d in ■ » o r d e r to e n jo y t h e i r l e i s u r e tim e . F u rth e rm o re , among th e ; * r e t i r e d aged whose a n n u a l fa m ily r e tir e m e n t income was o v er, two th o u sa n d d o l l a r s , 1 2 .5 p e r c e n t r e t i r e d in o r d e r to 1 I 1 have more tim e f o r th e m s e lv e s . However, t h i s p e rc e n ta g e I h o ld s even f o r th o s e whose a n n u a l fa m ily income i s o v e r f i v e th o u sa n d d o l l a r s a f t e r r e tir e m e n t T h e re fo re , i t w ould seem t h a t t h e r e i s a d i r e c t r e l a t i o n s h i p betw een fa m ily Income from p e n s io n s and j r e tir e m e n t up to an an n u a l Income o f two th o u san d d o l l a r s . Beyond t h a t p o i n t a d d i t i o n a l Income does n o t a f f e c t r e t i r e m e n t . The h ig h e r b e n e f i t s o f a p r i v a t e p e n s io n system ac co u n t f o r th e f a c t t h a t a l a r g e r p e r c e n t o f th o s e su rv e y e d by th e T w en tieth C en tu ry Fund r e t i r e d v o l u n t a r i l y in good h e a l t h th a n th o s e su rv ey e d by th e S o c ia l S e c u r ity A d m in is tr a tio n . The H ir in g P r a c t i c e s o f Em plovers A ll th e a v a i l a b l e s t a t i s t i c s show t h a t many em ployers r e f u s e to h i r e w o rk e rs above a c e r t a i n a g e . A cco rd in g t o e s tim a te s of th e Bureau o f L abor S t a t i s t i c s , p r e s e n te d in T ab le XX, unemployment r a t e s a r e h ig h e r f o r 1 3 I b id . . p . 7 5 . TABLE XX UW EM PLOYM EM T BATES FOR W AGE A M D SALARY WORKERS, BY AGE GROUPS, FIRST QUARTER: 1948-19521 (P er c e n t o f T o ta l) Age Group 1948 1949 1950 1951 1952 14 - 24 8 .8 1 0 .0 1 3 .5 6 .5 6 .7 2 5 -4 4 3 .6 4 .9 7 .0 3 .8 3 .1 45 and over 4 .3 5 -7 8 .5 4 .8 3 .5 45-64 4 .0 5 .5 8 .3 4 .4 3 .4 65 an d over 6 .0 7 .9 9 .8 8 .1 5 .0 14 an d o v e r 5 .0 6 .2 8 .9 4 .6 3 .9 lE e tlm a te d by th e B ureau o f Labor S t a t i s t i c s from c e n su s d a t a . SOURCE: U n ite d S t a t e s D epartm ent o f L abor, B ureau o f L ab o r S t a t i s t i c s , Employment and Economic S ta tu s o f O ld e r Men and Women, B u l l e t i n Mo. 1092, May 1952 (W ashington: Government P r i n t i n g O f f ic e , 1 9 5 2 ), p . 31• 293- wage and s a l a r y w o rk ers in th e s l x t y - f l v e - a n d - o v e r age b r a c k e t th a n f o r a l l o th e r age g ro u p s, w ith th e e x c e p tio n o f th e y o u n g est age g ro u p . F or exam ple, in 1952 th e a v e ra g e unemployment r a t e f o r a l l wage and s a l a r y w o rk ers f o u r te e n y e a rs o f age and o l d e r was 3«9 p e r cen t as com pared w ith 5*0 p e r c e n t f o r th o s e aged s i x t y - f i v e and o l d e r . S tu d ie s co n d u cted by th e Bureau o f Saploym ent S e c u r ity in th e D epartm ent o f Labor r e s u l t e d in s i m i l a r f i n d i n g s . For exam ple, a su rv e y co n d u c ted by t h i s B ureau of Employment S e c u r ity o f s t a t e employment s e c u r i t y a g e n c ie s in November, 195** > r e v e a le d t h a t o n ly 17 p e r c e n t | ! o f th e p la c e m e n ts made by th e employment o f f i c e d u rin g November o f 195** In v o lv e d w o rk e rs o v er f o r t y - f i v e y e a rs o f ■ a g e . Yet w o rk e rs o v er f o r t y - f i v e y e a rs o f age c o n s t i t u t e d 2 8 .8 p e r c e n t o f a l l w o rk ers in th e a c t i v e f i l e d u r in g t h a t m onth. l b In a su rv e y conducted o v e r a fo u r-m o n th p e r io d in f o u r m a jo r c i t i e s (Columbus, Ohio; H ouston, T exas; L a n c a s te r , P e n n s y lv a n ia ; and New York C i ty , New Y ork), th e Bureau o f Employment S e c u r ity found t h a t in a l l th e c i t i e s th o s e w o rk ers who w ere s i x t y - f i v e y e a rs o f age o r o ld e r 1** U n ite d S t a t e s D epartm ent o f L a b o r, Bureau o f Employment, F a c ts About O lder W orkers, M arch 21, 1955 (W ashington: B ureau o f Eaploym ent S e c u r i t y , 1955)> p . 2. 292 te n d e d to “rem ain o u t o f work f o r lo n g e r p e r io d s th a n y ounger w o r k e r s .u l 5 P a r t o f th e problem o f unemployment among th e aged i s due to b a r r i e r s e r e c te d by th e o ld e r Jo b s e e k e rs them s e l v e s . They a r e o f te n s e t i n t h e i r ways and r e f u s e to a d j u s t to new s i t u a t i o n s su ch as m in o r h a n d ic a p s due to a g e .*-6 Among th e b a r r i e r s to employment f o r o ld e r w o rk e rs a r e th e fo rm al and in fo rm a l p e r s o n a l p o l i c i e s a g a in s t h i r i n g o ld e r w o rk e rs . I t i s im p o s s ib le t o e s tim a te th e e x t e n t o f in fo rm a l b a r r i e r s t o th e employment o f o l d e r w o rk e rs . E x te n t o f th e s e b a r r i e r s . — A number o f s t u d i e s have been co n d u cted w h ich h e lp in e v a lu a tin g th e e x te n t o f fo rm a l company p o l i c y a g a in s t h i r i n g th e ag ed . A ccording to a s tu d y o f Job o r d e r s f i l e d w ith p u b lic employment a g e n c ie s co n d u cted by th e B ureau o f Employment S e c u r ity o v e r a fo u r-m o n th p e r io d in 1950 in f o u r c i t i e s , o n ly one r e p o r t e d t h a t l e s s th a n 50 p e r c e n t o f th e Job o r d e r s ■^U nited S t a t e s D epartm ent o f L a b o r, Bureau of Employment S e c u r i t y , " Employment S e rv ic e S urvey Job P ro s p e c ts o f O ld e r A p p lic a n ts ," The L abor M arket and Enployment S e c u r i t y . May, 1951 (W ashington: Government P r i n t i n g O ff ic e , 1 9 5 1 ), p . 16. 16,A lb e rt J . Abrams, " B a r r ie r s to th e Employment of O ld e r W orkers," A nnals o f th e American Academy o f P o l i t i c a l and S o c ia l S c ie n c e . 279^66-67, J a n u a ry , 1952. I 293 i I r e c e iv e d by p u b l i c employment o f f i c e s in c lu d e d age r e s t r i c t i o n s . 1 '7 O ther su rv e y s have found s i m i l a r r e s u l t s . For exam ple, in a su rv e y o f 358 f irm s th ro u g h th e in te r v ie w p r o c e s s in th e s t a t e o f P e n n s y lv a n ia , i t was found t h a t " n e a r ly 25 p e r c e n t o f a l l th e firm s in te rv ie w e d s t a t e d t h a t age r e s t r i c t i o n s o f some ty p e w ere u se d i n h i r i n g new em ployees in one o r more c l a s s i f i c a t i o n s . " 1 ® The l i m i t a t i o n s w ere found m a in ly in t h e l a r g e com panies, p a r t i c u l a r l y in m a n u fa c tu rin g . T here was a ls o re a s o n to b e l i e v e t h a t th e 25 p e r c e n t f ig u r e u n d e r s t a t e s th e t r u e f a c t s , s in c e a s many a s 35 p e r c e n t o f th e firm s in d ic a t e d t h a t th e f e a s i b i l i t y o f h i r i n g o l d e r w o rk e rs i s l i m i t e d by v a r y in g f a c t o r s . A nother m easure o f age b i a s i s th e r e s t r i c t i o n s found in h e lp w anted a d v e r tis e m e n ts . An a n a l y s i s o f 3»^7^ jo b o p p o r t u n i t i e s f o r salesm en a d v e r t is e d in th e New York ^ D e p a rtm e n t o f L ab o r, Bureau o f Employment S e c u r i t y , "Employment S e r v ic e s Survey of Job P ro s p e c ts of O ld er A p p l i c a n t s ,1 1 o p . c i t . , p . 19. ^ M i l l a r d E. G -la d fe lte r, "Age and E m p lo y a b ility in P e n n s y lv a n ia ," P ro c e e d in g s o f th e Second J o i n t C o n feren ce on th e Problem o f Making a L iv in g While Growing O ld, June **-5* 1953> Age B a r r i e r s to Employment ( P it ts b u r g h : Temple U n iv e r s ity School o f B u s in e ss and P u b lic A dm inis t r a t i o n , Bureau o f Economic and B u sin e ss R e se a rc h , and D epartm ent o f L ab o r and I n d u s tr y , Bureau o f Employment S e c u r i t y , Commonwealth o f P e n n s y lv a n ia , 1953)* P* 27. •^ L oc. c i t ♦ 291+ Times found t h a t 3 8 .2 p e r c e n t In c lu d e d age l i m i t a t i o n s . 20 Reasons g iv e n f o r employment r e s t r i c t i o n s The m a jo r re a s o n s p r e s e n te d f o r th e s e age r e s t r i c t i o n s a r e j i p o o r e r o v e r - a l l p e rfo rm a n c e , h ig h e r a b s e n te e is m , lo w e r i ! d e p e n d a b il ity , p o o re r judgm ent, lo w er w ork q u a l i t y , lo w er i i ; volum e of w ork, i n a b i l i t y to g e t a lo n g w ith o t h e r s , and h ig h e r p e n s io n , in s u ra n c e and workmen’ s com pensation c o s t s . 21 However, one w r i t e r c la im s t h a t " h e s i t a t i o n o f em ployers to h i r e o ld e r em ployees i s g e n e r a l l y tr a c e d t o j p r e j u d i c e s w hich do n o t m easure up to th e f a c t s when ; I i n v e s t i g a t e d f u r t h e r . " 22 A n o th er a u th o r s t a t e d t h a t " th e sad p a r t of i t i s t h a t th e g r e a t m a jo r i ty o f em ployers on t h i s c o n tin e n t seem to ta k e i n t o acco u n t o n ly th e s h o r t com ings o f th e o ld e r w o rk ers when d e a lin g w ith th e m .n23 Yet a s one a u th o r h as p o in te d o u t: Even w ith in th e w a g e -la b o r m a rk e t, th e r e l a t i v e 20W alter G -. O 'D o n n e ll, "The Problem o f Age B a r r i e r s in P e rs o n n e l S e l e c t i o n ," P e r s o n n e l, 27:*+65> May, 1951- 21U n lte d S ta te s D epartm ent of L ab o r, Bureau o f Employment S e c u r ity , F a c ts About O lder W orkers, o p . c i t . . , p . 3* 22Henry W . S te in h a u s , F in a n c in g O ld Age, S tu d ie s in I n d iv id u a l and C o l le c tiv e S e c u r ity No. (New York: N a tio n a l I n d u s t r i a l C onference B oard, 19*+8), p . 1+8. 2^P aul H e rb e rt C asselm an, Economics o f Employment and Unemployment (W ashington: P u b lic A f f a i r s P r e s s , 1955)* p . 130. demand f o r o ld e r w o rk ers h a s been l e s s e n e d by te c h n o l o g i c a l d ev elo p m en ts w hich have l e d to th e s u b s t i t u t i o n , of s e m i - s k i l l e d f o r s k i l l e d w orkers in many i n d u s t r i a l , p r o c e s s e s . T h is s u b s t i t u t i o n has a te n d e n c y t o re d u c e | th e premium on e x p e rie n c e and c ra fts m a n s h ip w hich ; c o n s t i t u t e s one o f th e o l d e r m en's c h i e f c o m p e titiv e j a d v a n ta g e s .2^ ! Maxwell S te w a rt in fo rm s us t h a t i ! Few o f th e p u r s u i t s w hich w ere fo rm e rly open to j o ld e r men o f f e r a means o f su p p o rt to d a y . In d ep en d en t c ra ftsm e n a r e p r a c t i c a l l y n o n - e x i s t e n t , ex cep t in l i m i t e d s p h e re . The number o f j a n i t o r s and watchmen i s s e r i o u s l y r e s t r i c t e d . Sm all shops and b u s in e s s e s w h ich fo rm e rly ab so rb e d a c o n s id e r a b le number o f o ld e r men, have g iv e n way in many c a s e s to c h a in s t o r e s and m a il- o r d e r h o u s e s .25 W hatever th e c a u se , th e f a c t re m a in s t h a t th e j employment o p p o r t u n i t i e s o f p e rs o n s aged s i x t y - f i v e and o v e r a r e d e f i n i t e l y li m i t e d by employment p o l i c i e s . Com pulsory R e tire m e n t D uring th e p a s t tw e n ty y e a rs th e r e has been a w id e s p re a d use of s i x t y - f i v e y e a rs o f age a s th e p ro p e r r e tir e m e n t ag e . Three r e c e n t s tu d i e s d e m o n stra te th e m ag n itu d e o f t h i s phenomenon. The B ureau o f L abor S t a t i s t i c s , 2^ in a s tu d y o f John D. Durand, The L abor Force i n th e U n ite d S t a t e s 1 8 9 0 - 1 9 1 0 (New York: S o c ia l S c ie n c e R esearch C o u n c il, 1 9 ^ 8 ) , p . 1 1 2 . 2^Maxwell S. S te w a rt, S o c ia l S e c u r ity ( r e v is e d e d i t i o n : New York: W . W . N orton and Company, 1939)> p . 51* 2&Unlted S t a t e s D epartm ent o f L a b o r, Bureau o f Labor S t a t i s t i c s , P e n sio n P la n s Under C o l le c tiv e B a rg a in in g , B u l l e t i n No. 11^7 CWashington: Government P r i n t i n g O f f ic e , 1 9 5 3 ), p p . 9 -1 1 . ! 296 th r e e hundred p e n s io n p la n s u n d er union c o n t r a c t s c o v e rin g , 5*857,000 w o rk e rs , found t h a t one hundred and s e v e n ty - f iv e (o r 5 8 .3 p e r c e n t) of th e p la n s p ro v id e d f o r com pulsory r e t i r e m e n t . 2? Out of th e s e one hundred and s e v e n ty - f iv e p l a n s , one hun d red and fo u r (o r 60 p e r c e n t) p ro v id e f o r r e t i r e m e n t a t age s i x t y - f i v e ; f i f t y (o r 29 p e r c e n t) f o r i r e tir e m e n t a t s i x t y - e i g h t y e a rs o f a g e , and e ig h te e n o r 10 p e r c e n t f o r r e tir e m e n t a t s e v e n ty .28 The re m a in in g th re e p la n s c a l l f o r r e tir e m e n t a t ag e s s i x t y - s i x , s i x t y - n i n e and s e v e n ty - tw o . In 1955, th e N a tio n a l I n d u s t r i a l C onference B oard s tu d ie d th r e e h u n d red and tw e n ty - s ix com panies w ith p e n s io n p la n s c o v e rin g a t o t a l o f fy.l m il lio n w o rk e rs . The s tu d y found t h a t one h u n d red and f i f t y - e i g h t (o r ^ 8 .3 p e r c e n t) o f th e com panies had m andatory r e t i r e m e n t , and o n ly e ig h ty ? I t i s , how ever, r a t h e r d i f f i c u l t to draw t h e l i n e betw een com pulsory and d i s c r e t i o n a r y r e t i r e m e n t . In an i n t e n s i v e stu d y o f f o u rte e n p e n s io n p la n s by th e I n d u s t r i a l R e la t io n s s e c tio n o f P rin c e to n U n iv e r s ity , i t was fo u n d " t h a t th e p r a c t i c e o f com pulsory r e tir e m e n t e x i s t s in f a c t more o f te n th ro u g h a d m in is t r a tiv e I n t e r p r e t a t i o n th a n th ro u g h an e x p l i c i t c la u s e . Of th e f i v e p la n s found t o be o p e r a tin g on th e b a s i s o f com pulsory r e tir e m e n t a t norm al r e t i r e m e n t a g e , f o u r in c lu d e c la u s e s s i m i l a r to th o s e in s e v e r a l p la n s o p e r a tin g on a d i s c r e t i o n a r y o r o p tio n a l b a s i s . " Helen B a k er, R e tire m e n t P ro c e d u re s under Compul so ry and F le x ib l e R e tire m e n t P o l i c i e s ( P r in c e to n , New J e r s e y : I n d u s t r i a l R e la tio n s s e c tio n ; D epartm ent of Econom ics and S o c ia l I n s t i t u t i o n s , P r in c e to n U n iv e r s ity , 1 9 5 2 ), p . 11. 2®Bureau o f Labor S t a t i s t i c s , B u l l e t i n No. 11^7, l o e . c i t . 2 9 7 ; i com panies (o r 2 4 .5 p e r c e n t) had d i s c r e t i o n a r y r e tir e m e n t j i t p l a n s . They a l s o found t h a t f i f t y o f th e com panies (15*3 p e r c e n t) had a u to m a tic r e tir e m e n t p r o v is io n s t h a t a llo w e d f o r e x c e p tio n s . The re m a in in g t h i r t y - n i n e com panies p o s s e s s e d c o m b in a tio n s o f th e d i f f e r e n t p la n s f o r v a r y in g segm ents o f t h e i r work f o r c e . Of th e m an d ato ry p l a n s , 67*2 \ p e r c e n t p ro v id e d f o r r e tir e m e n t a t s i x t y - f i v e y e a rs o f a g e , w h ile 1 4 .4 p e r cen t r e q u i r e d th e ag ed to r e t i r e a t age s i x t y - e i g h t , and o n ly 9 .7 p e r c e n t r e q u ir e d t h a t th e w orker r e t i r e a t age s e v e n ty . What i s even more s i g n i f i c a n t i s t h a t 8 2 .9 p e r c e n t o f th e t h r e e hundred an d tw e n ty -se v e n com panies c o n s id e re d age s i x t y - f i v e to be th e norm al r e tir e m e n t a g e .2^ A tw o -y e a r r e s e a r c h p r o j e c t co n d u c te d by th e In d u s t r i a l R e la tio n s C e n ter o f th e U n iv e r s ity o f M in n e so ta , c o v e rin g one h u n d red and s i x t y - e i g h t f irm s in th e M in n e a p o lis a r e a o f M in n e so ta , found th a t . . . of th e n o n -p e n sio n firm s 93 p e r c e n t k eep on m ost o r a l l h o u r ly em ployees, and 87 p e r cen t keep on m ost o r a l l s a l a r i e d em ployees a f t e r 65; h u t of th e p e n s io n f ir m s , o n ly 33 p e r cen t keep on m ost o r a l l h o u rly p a i d and o n ly 26 p e r c e n t keep on most o r a l l s a l a r i e d em ployees a f t e r 65* T his i s a l l th e more t e l l i n g when we remember t h a t p e n s io n p la n s a r e much more p r e v a l e n t among th e l a r g e r f ir m s , w hich acco u n t ^national Industrial Conference Board, Retirement o f Employees Policies, Procedures, Practices. Studies in Personal Policy, No. 14-8 (New York: National Industrial Conference Board, 1955)» PP* 809* 298 f o r th e m a jo r i ty of th e e m p l o y e e s .3® T h e re fo re , a m a jo r ity o f th e com panies w ith p e n s io n j i p la n s r e q u ir e t h e i r em ployees who a re u n d e r th e p la n s to r e t i r e a t some s p e c i f i e d a g e . Among th e com panies who ; j r e q u i r e t h a t t h e i r em ployees r e t i r e , s i x t y - f i v e i s by f a r th e m ost common r e t i r e m e n t a g e . E f f e c t o f th e R e tire m e n t T est The r e tir e m e n t t e s t d is c u s s e d on page 51 ° f C h ap ter I I m ust c e r t a i n l y have had some e f f e c t on th e le n g th o f tim e an aged p e rs o n would work and on th e s a l a r y s c a le a w o rk er would he w i l l i n g to a c c e p t. Thus, b e fo re 1955* a b e n e f i c i a r y m ight tu r n down a jo b p ay in g o v e r s e v e n ty - f i v e d o l l a r s a month an d , i f p o s s i b l e , ta k e one p ay in g l e s s th an t h i s am ount. He m ight even p r e f e r to rem ain unem ployed r a t h e r th a n lo s e h i s Old Age and S u r v iv o r s ' In su ra n c e B e n e f i t . T his w ould happen w here th e u t i l i t y of th e e a rn in g s d id n o t com pensate th e b e n e f i c i a r y f o r th e l o s s in b e n e f i t s and d i s u t i l i t y o f th e work. The f in d in g s o f th e 1951 su rv ey (m entioned in a p r e v io u s s e c tio n ) co n d u cted by th e S o c ia l S e c u r ity A dm inis t r a t i o n i n d i c a t e th e r e l a t i v e s i z e o f th e group t h a t m ight p o s s i b l y have been In flu e n c e d by th e r e t i r e m e n t t e s t . T his group was made- up l a r g e l y of ( l ) th o s e who were w orking in -^ H a rla n d Fox, " U t i l i z a t i o n o f O ld e r Man Pow er," H arv ard B u sin e ss Review, 29:^3* November, 1951* 299 ' j co v e re d employment f o r l e s s th a n th e r e tir e m e n t t e s t 1 am ount, (2 ) th o s e n o t a t work who w ere i n t e r e s t e d in ta k in g a p a r t - t i m e jo b . W illiam C. F itc h , A s s i s t a n t D ir e c to r o f th e B ureau of Old-Age and S u rv iv o r s ' I n s u ra n c e e s tim a te s - t h a t | B e n e f i c i a r i e s under s e v e n ty - f iv e y e a rs o f age in • th o s e two c a t e g o r i e s made up somewhat l e s s th a n 10 p e r 1 c e n t o f a l l o ld age and aged widow b e n e f i c i a r i e s who i w ere draw ing b e n e f i t s a t th e end o f t h e y e a r . 31 j I t I s im p o s s ib le to e s tim a te how many o f th e s e J b e n e f i c i a r i e s w ould w ish o r be a b le to w ork more th a n th e y j w ere w orking, o r how many o f th o s e who w ere se e k in g p a r t - 1 tim e work w ould be s u c c e s s f u l in f in d in g i t . The l e s s th a n 10 p e r c e n t, t h e r e f o r e , r e p r e s e n ts a maximum e s tim a te o f th o s e d is c o u ra g e d from w orking by th e p r o v is io n o f th e r e tir e m e n t t e s t . The N a tio n a l P la n n in g A s s o c ia tio n , a f t e r stu d y in g th e a v a i l a b l e f i g u r e s , co n c lu d ed t h a t There i s no ev id en ce t o I n d ic a te t h a t th e r e tir e m e n t t e s t in Old-Age and S u r v iv o r s ' In s u ra n c e has ca u se d any s i g n i f i c a n t number of p e o p le to fo re g o employment in o r d e r to s e c u r e b e n e f i t s . 32 31 " W illiam 0 . F i t c h , " R e la tio n o f Government In s u ra n c e P la n s to Employm ent," E arn in g O p p o rtu n itie s f o r O ld er W orkers. Wilma Donahue (edTl (Ann A rb o r, M ichigan: U n iv e r s ity o f M ichigan P r e s s ,, 1955)» P» 33* 3 2N a tio n a l P la n n in g A s s o c ia tio n , P e n s io n s in th e U n ite d S t a t e s , p r e p a r e d f o r th e J o in t Com m ittee on th e Economic R e p o rt, 82d C o n g ress, 2d s e s s io n (W ashington: Government P r i n t i n g O f f ic e , 1 9 5 2 ), p . 4-5. 300 IV. SAFEGUARD AGAINST PREMATURE RETIREMENT In a r e c e n t book, E v e lin e M. B urns made th e s t a t e ment t h a t nth e h ig h e r th e s ta n d a r d o f minimum adequacy i a d o p te d by th e community, th e more e v id e n t becomes t h e j q u e s tio n of th e e f f e c t of t h i s a s s u re d minimum on economic j i n c e n t i v e ."33 F in a n c ia l s a f e g u a r d s . The Old Age and S u r v iv o r s ’ In s u ra n c e Program h as met t h i s problem by l i m i t i n g t o t a l | fa m ily b e n e f i t s to a maximum o f 80 p e r c e n t o f a v e ra g e J m onthly wage o r se lf-e m p lo y m e n t incom e. However, t h i s ru le! i c a n n o t red u ce th e b e n e f i t below th e l a r g e r o f f i f t y d o l l a r s o r one and o n e - h a lf tim es th e p rim a ry in s u ra n c e b e n e f i t . The b e n e f i t t h a t goes to th e p rim a ry b e n e f i c i a r y i s l i m i t e d by th e fo rm u la t o 55 p e r c e n t o f th e f i r s t one hundred and te n d o l l a r s e a rn e d , and 20 p e r c e n t t h e r e a f t e r Thus th e b e n e f i t t h a t goes to a s i n g l e b e n e f i c i a r y v a r i e s betw een 33-9 and 55 p e r c e n t o f h i s av erag e m onthly wage u nder th e p r e s e n t l a w . 35 The p e rc e n ta g e i s much lo w er 3 3 E v elin e M, B urns, S o c ia l S e c u r ity and P u b lic P o lic y (New York: M cGraw-Hill Book Gompany, 1956), p . 59* 3 ^ S e c tio n 102, T i t l e I , S o c ia l S e c u r ity Act Amendment o f 195^> P u b lic Law No. 761 (H.R. 9366) 83d C o n g ress, 2d s e s s i o n , Septem ber 1 , 195L, p . 11. The 3 3 .9 p e r c e n t was computed by d iv id in g th e maximum m onthly b e n e f i t f o r a r e t i r e d w o rk e r r e c e iv in g $108.50 by th e maximum a v e ra g e m onthly wage o f | 350. 301 i f o r th o s e whose m onthly e a rn in g s a v e ra g e o v e r t h r e e hundred; and f i f t y d o l l a r s . W hether th e in c e n ti v e o f r e c e iv in g 55 p e r c e n t o f wages w ith o u t h a v in g to work i s s u f f i c i e n t to j en c o u ra g e an aged p e rso n to q u i t h i s p r e s e n t o c c u p a tio n i s j h ig h ly q u e s tio n a b le . In th e c a se o f a r e t i r e d w o rk er and j h i s aged w ife th e b e n e f i t may even go above th e 80 p e r cent! maximum. For exam ple, a r e t i r e d w orker whose a v e ra g e m o n th ly wage had am ounted to one hundred and te n d o l l a r s w ould r e c e iv e 160 . 5 0 , and h i s dependent w if e s i x t y - f i v e y e a rs of age o r o v e r w ould r e c e i v e #3 0 .3 0 , o r a t o t a l o f ' #90.80* This b e n e f i t i s 82 p e r c e n t o f th e a v e ra g e m onthly! I wage o f one hun d red and te n d o l l a r s . A lso , th e b e n e f i t j paym ents w i l l be even g r e a t e r th an th e a v e ra g e m o n th ly wage! i in some c a s e s , due to th e minimum b e n e f i t payment o f t h i r t y 1 d o l l a r s . Thus th e S o c ia l In s u ra n c e f e a t u r e o f th e law c o u ld encourage some o f th e aged in th e lo w e r income b r a c k e ts to r e t i r e in o r d e r to c o l l e c t t h e i r b e n e f i t paym ents. Y et, u n d er th e p r e s e n t law , a b e n e f i c i a r y can e a rn at tleaiecfc tw elv e h u n d red d o l l a r s a y e a r w ith o u t any l o s s o f b e n e f i t s . T h e re fo re , th e aged b e n e f i c i a r y whose a v e ra g e m o n th ly wage i s one hundred d o l l a r s o r below can rem ain a t h i s jo b in o r d e r to r a i s e h is s ta n d a rd o f l i v i n g i n s t e a d o f r e t i r i n g a f t e r he becomes s i x t y - f i v e y e a rs o f ag e . F u rth e rm o re , th e wage earn ed by a w orker a t th e tim e th e r e tir e m e n t age i s re a c h e d i s a p t to be l a r g e r th a n h is a v e ra g e m onthly w age, due to lo n g e v ity in c re m e n ts , promo- * i t i o n s , e a rn in g s in n o n -c o v e re d o c c u p a tio n s , and g e n e ra l wage r a i s e s . (The l a t t e r elem en t h as been v e ry common in j i th e i n f l a t i o n a r y environm ent e x i s t i n g s in c e 19^0)- A lso , \ I th e u n io n s have fo u g h t f o r a uniform wage f o r each jo b j c l a s s i f i c a t i o n and have t h e r e f o r e r e s i s t e d wages b ased on speed o f p e rfo rm a n c e . T his u n io n a t t i t u d e h as u n d o u b ted ly p re v e n te d firm s from re d u c in g wages o f w o rk e rs who have slow ed d o w n . 36 f Average m o n th ly wages have la g g e d b e h in d c u r r e n t | i e a r n in g s in a l a r g e number o f c a s e s . Thus av e ra g e m onthly | i b e n e f i t s have te n d e d to be r e l a t i v e l y low , e s p e c i a l l y J b e f o r e 1950. I t i s h a rd to im agine many o l d e r w o rk ers q u i t t i n g th e l a b o r f o rc e d u rin g a p e r io d o f c o n s ta n t wage i n c r e a s e s and h eav y l a b o r demand in o r d e r t o r e c e iv e a b e n e f i t payment o f #2 3 *73 a m o n t h . 37 j n 1950 , how ever, due to th e new s t a r t i n g d a t e , p lu s th e r e v i s e d b e n e f i t fo rm u la , th e a v e ra g e m o n th ly b e n e f i t I n c r e a s e d s u b s t a n t i a l l y . N e v e r th e le s s , th e 1951 su rv ey o f o l d age b e n e f i c i a r i e s conducted by th e Bureau o f Old Age and S u r v iv o r s 1 ■^Sumner H. S l i c h t e r , B a sic C r i t e r i a Used i n Wage N e g o tia tio n s (C hicago: The Chicago A s s o c ia tio n of Commerce and I n d u s tr y , 1 9 ^ 7)1 p p . 2 8 -2 9 . 37The a v e ra g e m onthly b e n e f i t paym ent f o r a r e t i r e d 1 w o rk e r in 1 9 ^ . U n ite d S ta te s D epartm ent o f H e a lth , E d u c a tio n and W e lfa re , S o c ia l S e c u r ity A d m in is tr a tio n , "Annual S t a t i s t i c a l Supplem ent, 1955>" S o c ia l S e c u r ity B u l l e t in , 1 9 :3 0 , 1956. | 303 I n s u ra n c e , and p r e s e n te d in T able XXI, r e p e a le d t h a t t h e t o t a l income o f b e n e f i c i a r i e s was f a r below th e n a t i o n a l a v e ra g e a s r e v e a le d by th e S urvey o f Consumer F in a n c e s . Thus, 62 p e r c e n t o f n o n -m a rrie d m a le s, 7 2 .1 p e r c e n t o f n o n -m a rrle d fe m a le s , and 22.5 p e r c e n t o f aged m a rr ie d j c o u p le s ea rn e d l e s s th an one th o u sa n d d o l l a r s in 1951- The' m edian income o f aged m a rr ie d c o u p les was $1,506 in t h a t y e a r a s compared w ith f>3,200 f o r a l l sp e n d in g u n i t s . The m edian income f o r n o n -m a rrie d m ale b e n e f i c i a r i e s and non m a rr ie d fem ale b e n e f i c i a r i e s ( in c lu d in g widows o f b e n e f i c i a r i e s ) was $848 and $693 r e s p e c t i v e l y . T h e re f o re , th e m edian income o f a l l sp e n d in g u n i t s was 415’ . p e r c e n t h ig h e r th a n th e m edian income o f n o n -m a rrie d b e n e f i c i a r i e s . These f i g u r e s and th e o th e r s p r e s e n te d in th e t a b l e r e v e a l | t h a t th e income o f Old Age an d S u rv iv o rs ' b e n e f i e i a r l e s was s u f f i c i e n t l y below th e n a t i o n a l a v e ra g e i n 1951 to en c o u ra g e b e n e f i c i a r i e s , e s p e c i a l l y th o s e whose c u r r e n t e a r n in g s w ere r e l a t i v e l y h ig h , to keep on w o r k i n g .3® In a l a r g e p r o p o r tio n o f c a s e s th e a l t e r n a t i v e to work in o ld a g e , even f o r th o s e who r e t i r e on a p e n s io n , i s s t i l l p a r t i a l dependence on r e l a t i v e s , o r p u b lic a s s i s ta n c e . The N a tio n a l Survey o f Old Age and S u rv iv o r s ' In s u ra n c e b e n e f i c i a r i e s co n d u c ted in 1951 found t h a t 1 7 .6 3®Margaret L. S te c k e r , "Old-Age and S u rv iv o r s ' In s u ra n c e B e n e f i c i a r i e s : Income in 1951,*’ S o c ia l S e c u r ity B u l l e t i n , 1 6 :1 7 , Ju n e , 1953- TABLE XXI J3IZE OF M ONEX INCOM E IN 1951 OF COUPLES, NON-MARRIED MEN, NON-MARRIED W O M E N AGED 65 A N D OYER W H O W ERE RECEIVING BENEFITS IN THE SURVEY YEAR (Per c e n t of T otal) T o tal Money Income A ll Spending U nits M arried Couples Non M arried Men Non M arried Women Less than $1,000 13 22.5 62.0 72.1 ♦1,000 - 1,999 15 ^3.0 26.0 22.0 2,©00 ~ 2,999 18 20.0 7 .2 k.Z 3,000 * 4-, 999 33 10.8 3*6 ( 1.2 5,000 and over 21 3 .6 1 .2 • 6 A ll incomes 100 100. 100. 100. Median Income 13,200 ♦1.506 #81^8.00 1693.00 SOURCES: *1952 Survey o f Consumer Finances, P a r t I I I , Income, S ele cte d In v estm en ts, and Short-Term Debt of Consumers,* F e d e ra l Reserve B u lle tin . 38:9 7 51 September, 1952. Lenore A. E p ste in , “Economic Resources of P ersons Aged 65 and O ver,“ S o c ia l S e c u rity B u lle tin , 18:6, Ju n e , 1955. 305 p e r c e n t o f m ale and 19-7 p e r c e n t o f fem ale b e n e f i c i a r i e s i a ls o r e c e iv e d p u b lic a s s i s t a n c e . Among th e male b e n e f i c l - 1 ! a r i e s th e f i g u r e was 23*4 p e r c e n t f o r n o n -m a rrie d m a les asi com pared to 1 3.8 p e r c e n t f o r th o se who w ere m a rr ie d . The su rv e y a ls o found t h a t 5-5 p e r c e n t o f th e m ale b e n e f i c i a r i e s , 9 .9 p e r c e n t o f th e fem ale b e n e f i c i a r i e s , and 1 0 .4 p e r c e n t o f th e aged widows w ere r e c e iv in g c o n t r i b u t i o n s from r e l a t i v e s and f r i e n d s o u ts id e th e h o u s e h o l d . 59 B e s id e s , 22 p e r c e n t o f th e b e n e f i c i a r i e s s h a re d homes w ith r e l a t i v e s and may have r e c e iv e d n o n -c a s h income in th e form o f food and s h e l t e r . ^ P s y c h o lo g ic a l s a f e g u a r d s . — There i s a ls o th e I p s y c h o lo g ic a l f a c t o r s w hich te n d to keep o l d e r em ployees on th e jo b . A s tu d y o f s e v e n ty - f iv e men and women o v e r f i f t y y e a rs o f age from v a r io u s s o c i a l and econom ic l e v e l s re v e a le d t h a t a m a jo r ity d e s i r e d to be a c t i v e r e g a r d le s s o f t h e i r economic p o s i t i o n b e c a u se o f th e s e lf - e s te e m th e y r e c e iv e d th ro u g h t h e i r w ork. Some of th e aged w anted to work in o r d e r to cope w ith i n n e r r e s t l e s s n e s s , o r to escape from m orbid s e l f - p r e o c c u p a t i o n .^ 1 B e s id e s , t h e i r s t a t u s in 5^Edna C. W entworth, "Economic S i t u a t i o n o f Aged In s u ra n c e B e n e f i c i a r i e s : An E v a lu a tio n ," S o c ia l S e c u r ity B u l l e t i n , 1 7 :1 8 -1 9 , A p r il, 1954. I b i d . , p . 17. ^ E r d l t a G. F r ie d , " A ttitu d e s o f th e Old P o p u la tio n Groups Towards A c t i v i t y and I n a c t i v i t y , 1 1 J o u r n a l o f G e ro n to lo g y , 4 :1 4 3 , A p r il, 1949. 3 0 6 ' f th e f a m ily was on a low er l e v e l th a n i t was d u rin g th e tim e j i o f t h e i r a c t i v e p a r t i c i p a t i o n in th e l a b o r f o r c e . Thus H arlan d Fox p o i n t s o u t t h a t ! | In a s o c i e t y w here th e employment r e l a t i o n s h i p i s ) fu n d am en tal work a ls o g iv e s a p e rs o n s t a t u s in th e | fa m ily and community; i t g iv e s him a w e ll- d e f in e d p la c e ; and f u n c tio n i n s o c ie ty . At th e p r e s e n t tim e th e \ in d iv i d u a l who i s f o rc e d to r e t i r e f i n d s h im s e lf s t r i p p e d o f an u n d e rs ta n d a b le s o c i a l r o l e in th e j community and pushed in to a s i t u a t i o n where th e r e i s l i t t l e o r no o rg a n iz e d means of s o c i a l p a r t i c i p a t i o n f o r h im .^2 Sumner S l i c h t e r s t a t e s t h a t i The g r e a t m a jo r ity o f men who r e t i r e o f t h e i r own ; v o l i t i o n do so b ecau se o f i l l h e a l t h . I t i s s c a r c e l y c o n c e iv a b le t h a t p e n s io n s w i l l be made so la r g e i r e l a t i v e to e a rn in g s t h a t em ployees w i l l be w i l l i n g t o j r e t i r e a t ab o u t th e same ag e s t h a t em ployers w ould lik e ] to r e t i r e them . The e x p la n a tio n i s s im p le . The se n se | o f p a r t i c i p a t i o n in th e a f f a i r s of th e town (or th e j w o rld ) t h a t men d e r iv e from w orking more th a n o f f s e t s th e l e i s u r e and freedom t h a t th e y g a in from r e t i r e - j m e n t . ^3 T h e re fo re , b ec au se of th e low b e n e f i t s compared to e a rn in g s and th e p s y c h o lo g ic a l a d v a n ta g e s o f w o rk in g , men do n o t u s u a lly r e t i r e on r e a c h in g s i x t y - f i v e y e a rs o f age a lth o u g h th e y a r e e l i g i b l e f o r O ld Age and S u r v iv o r s ’ In su ra n c e b e n e f i t s . The I n t e r n a t l o n a l L abor O f f ic e , a t th e b e g in n in g o f World War I I , ask ed tw elv e hun d red aged w o rk e rs in C a l i f o r n i a who w ere e l i g i b l e t o r e t i r e and claim s o c i a l in s u ra n c e b e n e f i t s why th e y c o n tin u e d to w ork. Most ^2Fox, o p . c i t . , p . L7. ^ s i i c h t e r , "R etirem en t Age and S o c ia l P o l i c y , ” o p . c i t . . , p p . 108— 109• iof th e aged w o rk e rs s t a t e d t h a t "th ey c o u ld n o t a f f o r d to I r e t i r e , b u t added t h a t th e y w ould n o t w ant t o s to p w o rk in g , j even If they could afford to."^ j | | V. CONCLUDING OBSERVATIONS ! [ i The Old Age and S u r v iv o r s 1 In su ra n c e Act h as a m inor e f f e c t on th e number o f aged w o rk ers in t h e la b o r f o r c e . T his o b s e rv a tio n i s b ased on th e c o n c lu s io n t h a t f o r f i n a n c i a l and p s y c h o lo g ic a l re a s o n s th e aged p r e f e r to j rem ain in a c t i v e employment. A s in g le b e n e f i c i a r y i s l i m i t e d to r e c e iv in g betw een 35 and 55 p e r c e n t o f h i s a v e ra g e m onetary wage. B e s id e s , a b e n e f i c i a r y can e a rn o^ ver tw e lv e hundred d o l l a r s a y e a r a t th e p r e s e n t tim e w ith o u t any l o s s o f b e n e f i t s . F u rth e rm o re , a w o r k e r 's e a rn in g power a t th e tim e o f r e tir e m e n t i s a p t to be above h i s av erag e m o n th ly wage due t o lo n g e v ity r a i s e s and th e p r e s e n t i n f l a t i o n a r y s p i r a l . The 1951 su rv e y co n d u c ted by th e S o c ia l S e c u r ity A d m in is tra tio n found t h a t th e t o t a l Income o f b e n e f i c i a r i e s was far* below th e n a t i o n a l a v e ra g e a s r e v e a le d by th e Survey o f Consumer F in a n c e s . A ccording to a number o f su rv ey s co n d u cted by th e S o c ia l S e c u r ity A d m in is tra tio n , o n ly 3*9 t o 5>6 p e r c e n t o f ^John J. Corson, "The Old-age and Survivors' Insurance Program," War and Post-War Social Security, W ilbur J . Cohen ( e d .) (W ashington: Am erican C ouncil on P u b lic A f f a i r s , 1 9 ^ 2 ), p . 63* 308; l the beneficiaries retired by choice in order to enjoy j j leisure time. However, a slightly higher percentage (8 peri cent) of the males and 9 per cent of the females in good jhealth were not willing to go back to work once retired. \ I j iA survey of all aged, conducted by the Institute of ! ■I i Industrial Relations of the University of California, also j found that only 8 per cent of those surveyed who were in good health were not Interested in securing employment. i The Twentieth Century Fund conducted a study of those who have retired from several, private, state, and i union pension programs and found that only 8.8 per cent of j the workers retired voluntarily in order to enjoy leisure. The latter survey also Indicated that a greater percentage retire voluntarily as the value of the pension increases up to two thousand dollars a year. However, beyond that point additional benefits do not effect retirement. The higher benefits of a private pension system account for the slightly larger percentage of voluntary retirements as compared with the Social Security Administration estimates. The retirement test also affected the employment status of those under seventy-five in 1951 who were working in covered employment for less than the allowed amount and those not at work who wanted to take only a part-time job. On the basis of figures of the Social Security Administra tion, Fitch estimates that this group constituted somewhat less than 10 per cent of all beneficiaries at that time. |The N a tio n a l P la n n in g A s s o c ia tio n , in 1952, con clu d ed t h a t ' th e r e tir e m e n t t e s t h as n o t cau sed any s i g n i f i c a n t re d u c tio n in em ployment. j The t o t a l l o s s o f employment ca u se d by S o c ia l i ! jln s u ra n c e i s , t h e r e f o r e , e s tim a te d to be betxireen 3*^ p e r 1 I 3 !c e n t and 15.6 p e r c e n t o f th e b e n e f i c i a r y g ro u p , a c c o rd in g to th e f ig u r e s p r e s e n te d by th e S o c ia l S e c u r ity A d m in is tra - 1 t i o n and th e a n a l y s i s by F i t c h . i The m ajor p r o p o r tio n o f r e tir e m e n t c a s e s and th e d e c r e a s in g p a r t i c i p a t i o n of th e aged in th e l a b o r f o r c e i s , t h e r e f o r e , n o t due to Old Age and S u rv iv o r s ' In s u ra n c e . A number o f s tu d i e s con d u cted in r e c e n t yes.ra show t h a t i t i s d i f f i c u l t f o r th e aged to a c q u ir e em ploym ent. B e s id e s , a m a jo r i ty o f th e com panies who have ad o p te d p e n s io n p la n a r e q u i r e t h e i r em ployees t o r e t i r e a t a c e r t a i n age ( u s u a ll y s i x t y - f i v e y e a r s ) . F or th a t r e a s o n many o l d e r w o rk e rs a re f o r c e d t o r e t i r e by t h e i r com panies and d ro p out o f th e work f o r c e when th e y a r e u n a b le to f in d employ ment . Then, to o , t h e s t u d i e s co nducted by th e S o c ia l S e c u r ity A d m in is tra tio n , th e T w en tieth C enturjr Fund, and th e I n s t i t u t e o f I n d u s t r i a l R e la tio n s a t th e U n iv e r s ity of C a l i f o r n i a a l l show t h a t a h ig h p e rc e n ta g e o f th o s e who r e t i r e do so b ec au se o f p o o r h e a lth . PART IV EVALUATION I CHAPTER X j I SUM M ARY AND CONCLUSIONS i T his s tu d y h as a tte m p te d t o e x p lo re th e im paet o f ! i ! iOld Age and S u r v iv o r s 1 In s u ra n c e on c e r t a i n a s p e c ts o f th e j (American economy from 1935 to 1955> i n c l u s i v e . S tu d e n ts o f| f I S o c ia l S e c u r ity b e l ie v e t h a t Old Age and S u r v iv o r s ' j In s u ra n c e w i l l p l a y an i n c r e a s i n g l y i n f l u e n t i a l r o l e in th e f u t u r e . i I . SUM M ARY OF HISTORY AND SELECTED j ! THEORETICAL PROBLEMS | A number o f f a c t o r s com bined t o c a u se th e i n i t i a l j i p a s s a g e o f th e S o c ia l S e c u r ity Act in 1935* F i r s t , was th e change in th e b a s ic p h ilo s o p h y t h a t an aged p e rso n sh o u ld be su p p o rte d by h i s fa m ily , second was th e i n c r e a s in g p r o p o r tio n o f o ld e r p e o p le in th e t o t a l p o p u la tio n , t h i r d was th e i n c r e a s in g i n a b i l i t y o f o l d e r p e o p le to o b ta in g a i n f u l em ployment, e s p e c i a l l y a f t e r th e o n s e t o f th e d e p re s s io n o f th e 1 9 3 G 's, f o u r t h was th e l o s s o f s a v in g s t h a t o c c u rre d when banks f a i l e d and th e s to c k m ark et c o lla p s e d , and f i n a l l y , th e r e was th e breakdow n in th e o ld age a s s i s t a n c e program s of th e s t a t e s . Amendments to th e Act Since i t s com plete r e v i s i o n in 1939» th e S o c ia l 312 S e c u r ity Act h a s been s i g n i f i c a n t l y amended on f i v e o c c a - i s io n s (in 19^6, 1950, 1952, 195^» and 1 9 5 6 ). The r e s u l t o f th e s e amendments h as been t o I n c r e a s e m onthly b e n e f i t 0 paym ents as p r i c e l e v e l s have I n c r e a s e d , and t o e x te n d ! co v e ra g e so t h a t 92 p e r c e n t o f th e l a b o r fo rc e and th e j J , I se lf-e m p lo y e d a r e in c lu d e d under th e pro g ram . The 195& and 1956 amendments have a ls o p ro v id e d f o r th e a d d itio n o f a j d i s a b i l i t y f r e e z e , d i s a b i l i t y b e n e f i t s , a f iv e - y e a r d r o p - o u t, r e d u c tio n in r e tir e m e n t age f o r women, and l i b e r a l i z a t i o n o f th e r e tir e m e n t t e s t . Thus, th e e n t i r e program h as been ex te n d e d and r e v i s e d , e lim in a tin g by d e g r e e s th e r e l a t i o n betw een b e n e f i t paym ents and th e p a y r o l l ta x p ro v id e d in th e 1935 A ct, th o u g h a minimum b e n e f i t payment and a w e ig h te d b e n e f i t fo rm u la were in c lu d e d in th e o r i g i n a l S o c ia l S e c u r ity A ct. F in a n c in g P r o v is io n s O r i g in a ll y a step-prem ium system was u sed , w ith th e em ployee and em ployer each assum ing h a l f th e c o s t . T h is was ehanged in 1939 when a c o n tin g e n c y r e s e r v e was a d o p te d . However, in 1950, C ongress e s t a b l i s h e d th e concept t h a t b e n e f i t paym ents a r e to be f in a n c e d e n t i r e l y th ro u g h th e p a y r o l l ta x . In o r d e r to h e lp acco m p lish t h i s o b je c ti v e th e 1956 amendment e s t a b l i s h e d a s e p a r a te r e s e r v e fu n d to fin a n c e th e d i s a b i l i t y b e n e f i t s p ro v id e d u nder th e a c t . The a c t u a r i a l a c c u ra c y o f th e f in a n c in g program , how ever, has been su b je c t to q u e s tio n . Im portant t h e o r e t i c a l p ro b lem s. — B e fo re I t s e f f e c t s ' on th e g e n e ra l economy c o u ld be m easured, I t was f i r s t J n e c e s s a r y to d e te rm in e th e f i n a l im pact o f th e p a y r o l l ta x 1 1 and th e n a tu r e o f th e R e se rv e . ; The in c id e n c e o f th e p a y r o l l t a x .- * A v a ila b le a n a ly s e s i n d i c a t e t h a t th e e n t i r e e m p lo y e e 's c o n t r ib u t io n i s b o rn e by th e em ployees w h ereas th e e m p lo y e r's c o n t r ib u - I t i o n i s in l a r g e p a r t p a s s e d on to th e consum er in th e form; of in c r e a s e d p r i c e s . In th e lo n g ru n , how ever, a sm a ll j p a r t o f th e ta x i s s h i f t e d backw ard to th e f a c t o r s o f j p r o d u c tio n , n o ta b ly la b o r , and au v e ry sm a ll p a r t i s j i a b so rb e d by th e em ployer h im s e lf . Due t o t h e i r i n a b i l i t y j t o c o n t r o l th e su p p ly o f w o rk e rs , u n o rg a n iz e d la b o r b e a rs a h ig h e r p r o p o r tio n o f th e t a x th a n o rg a n iz e d l a b o r , a lth o u g h in th e f i n a l a n a l y s i s th e w o r k e r 's a t t i t u d e tow ard th e program d e te rm in e s th e e x te n t to w hich s h i f t i n g th e b u rd en o f th e p a y r o l l ta x i s r e s i s t e d . The n a t u r e o f th e R e s e rv e . — The R eserve h a s been d e fe n d e d on th e g ro u n d s t h a t i t l i n k s th e p a y r o l l ta x to b e n e f i t paym ents, t h a t i t e n a b le s th e Government t o m eet th e b u d g e ta ry demands o f th e b e n e f i c i a r i e s , and t h a t i t g iv e s th e F e d e ra l Government a n o th e r t o o l t h a t can be used in c a r r y in g o u t m onetary p o l i c y . The R eserv e i s n o t f i c t i t i o u s s in c e e i t h e r an ab so l u t e o r a r e l a t i v e r e d u c tio n in Government d e b t ta k e s p la c e ........................ 3 W a s a r e s u l t o f th e Fund (u n le s s C ongress in c r e a s e s b e n e f i t ! p a y m e n ts). Thus, in th e a b se n c e o f th e S o c ia l S e c u r ity Program , th e i n t e r e s t w hich i s p a id on th e d e b t h e ld by th e i I R eserv e Fund w ould have been p a id t o p r i v a t e i n v e s t o r s . I i ! | However, in each i n d iv i d u a l y e a r a t r a n s f e r paym ent • ! from th e ta x p a y e r to th e b e n e f i c i a r i e s o f th e program and i to o t h e r b e n e f i c i a r i e s of governm ent e x p e n d itu re s ta k e s p l a c e . So, in e f f e c t , th e b e n e f i c i a r y c la im s m ust be met by ta x e s c o l l e c t e d in th e y ear th e c la im s a r e p a id . The | i f i s c a l im p lic a tio n o f th e R eserv e i s t h a t c u r r e n t ta x e s can be u sed to p ay I n t e r e s t on governm ent bonds to th e R eserve i n s t e a d of p ay in g th e i n t e r e s t c h a rg e s t o th e g e n e r a l p u b l i c . I f , how ever, governm ent e x p e n d itu re s sh o u ld be in c r e a s e d a s a r e s u l t of th e S o c ia l S e c u r ity Program , th e n th e R eserve becomes t r u l y f i c t i t i o u s . T here i s no ev id en ce t h a t F e d e r a l e x p e n d itu re s have been I n c r e a s e d b e c a u se of th e e x is te n c e o f th e R eserv e. I I . THE EFFECTS OF OLD AGE AND SURVIVORS1 INSURANCE ON SELECTED VARIABLES The e f f e c t s o f Old Age and S u r v iv o r s ’ In s u ra n c e on th e economy w ere s tu d ie d by a n a ly z in g how t h i s Act i n f l u e n c ed f i v e v a r i a b l e s : Income r e d i s t r i b u t i o n , p e r s o n a l s a v in g s , consu m p tio n , In v e s tm e n t, and e a r l y r e t i r e m e n t . 315' The a g g re g a te e f f e c t s on th e s e v a r i a b l e s in tu r n I n flu e n c e d ' th e b u s in e s s c y c le and econom ic grow th. The R e d i s t r i b u t i o n o f Income i U sing 19^1 and 1951 a s exam ples o f p re w a r and p o s t - j t I I |w ar r e d i s t r i b u t i o n o f income In y e a rs when m onthly b e n e f i t s w ere p a id , I t was found t h a t u nder th e c o n d itio n s o f an u n b a la n c e d b u d g e t a n e t r e d i s t r i b u t i o n o c c u rr e d In f a v o r ofj th o s e g ro u p s w hich e a rn e d f i f t e e n hundred d o l l a r s i n 19^1 i and below two th o u sa n d d o l l a r s i n 1951* T his r e d i s t r l b u - J I t l o n o f income o c c u rre d a t t h e expense o f th o s e in th e , < m id d le and u p p er m id d le income b r a c k e ts . A lso , t h e Income I g ro u p s above f i v e th o u sa n d d o l l a r s in 19^1 and seven ! ! th o u sa n d f i v e h u n d red d o l l a r s in 1951 w ere b e n e f i t e d s l i g h t l y . However, a s i g n i f i c a n t d i f f e r e n c e betw een th e two s t u d i e s was t h a t in 1951 a g r e a t e r t o t a l r e d i s t r i b u t i o n in f a v o r o f th o s e who e a rn e d below one th o u sa n d d o l l a r s o c c u rr e d . T h is was m ain ly due t o two f a c t s : a l a r g e r number o f m onthly b e n e f i t s w ere p a id In 1951 th a n in 19^1, and in 1951 a s m a lle r p e r c e n ta g e o f th e sp e n d in g u n i t s w ere in th e lo w e s t Income b r a c k e ts . P e r s o n a l S avings and Consumption E x p e n d itu re s The g e n e r a l e f f e c t . — I f i t i s assum ed t h a t th e a v e ra g e p r o p e n s ity to consume rem ain s c o n s ta n t in each income b r a c k e t and t h a t th e F e d e ra l b u d g et shows a n e t 316, d e f i c i t , th e n th e e f f e c t o f th e Old Age and S u r v iv o r s ' , In s u ra n c e Program in b o th 194-1 and 1951 was to in c r e a s e | consum ption e x p e n d itu re s a t th e expense o f p e r s o n a l s a v in g s . However, a g r e a t e r in c re a s e i n consum ption i e x p e n d itu r e s to o k p la c e in 1951 th a n in 194-1 » m a in ly I b e c a u se o f th e in c r e a s e d b e n e f i t paym ents In th e fo rm er y e a r and a change in th e a v e ra g e p r o p e n s it y to consume. The assu m p tio n o f a n e t F e d e ra l d e f i c i t i s l o g i c a l , ! s in c e a d e f i c i t e x i s t e d in f i f t e e n o f th e e ig h te e n y e a rs : betw een 1937 and 1954-.1 In th e ab sence o f a d e f i c i t , an in c r e a s e In s a v in g s a t th e expense o f consum ption w i l l r e s u l t , assum ing t h a t th e s e l l e r s o f governm ent bonds t r a n s f e r a m a j o r i t y o f th e money r e c e iv e d to o th e r form s o f s a v in g s . E lim in a tio n o f assu m p tio n t h a t th e a v e ra g e p ro p en s i t y to consume rem ain s c o n s t a n t . — The assu m p tio n t h a t th e a v e ra g e p r o p e n s it y to consume re m a in s c o n s ta n t i s n o t w a r ra n te d . The Old Age and S u rv iv o r s ' In s u ra n c e Act en co u rag ed s a v in g s on th e p a r t o f p o t e n t i a l b e n e f i c i a r i e s th ro u g h p ro m o tin g s e c u r i t y i n th e minds of th e b e n e f i c i a r i e s . F or exam ple, i n s t i t u t i o n s such a s l i f e in s u r a n c e com panies have s o l i c i t e d b u s in e s s th ro u g h em p h asizin g th e ^•United S t a t e s D epartm ent o f Commerce, Bureau o f th e C ensus, S t a t i s t i c a l A b s tr a c t of th e U n ite d S ta te s (W ashington: Government P r i n t i n g O ff ic e , 1955)» P* 34-8. 317 { low l e v e l o f b e n e f i t paym ents and p ro m o tin g th e v a lu e o f j i l i f e in s u ra n c e a s a su p p lem en t. The p r i v a t e p e n s io n move- j ment h a s been en co u rag ed th ro u g h th e f l o o r o f co v e ra g e t h a t i s s u p p lie d by S o c ia l S e c u r ity . A ls o , th e a b i l i t y o f ; \ jth e aged th ro u g h r e c e i p t o f b e n e f i t paym ents to r e t a i n i t h e i r homes h as s tim u la te d s a v in g s In th e form o f r e a l e s t a t e . A nother ad v an tag e o f th e b e n e f i t s i s th e r e d u c tio n in d is s a v in g s on th e p a r t o f th o s e no lo n g e r a b le t o work j o r th o s e r e s p o n s ib le f o r t h e i r c a r e . The s t a t i s t i c a l p a t t e r n . — The s a v in g s most l i k e l y 1 " I to be a d v e rs e ly a f f e c t e d by th e S o c ia l S e c u r ity Act a r e , s a v in g s th ro u g h f i n a n c i a l I n s t i t u t i o n s su c h a s l i f e i n s u r - j ance com panies an d p r i v a t e p e n s io n r e s e r v e s . C o n tra ry to j e x p e c ta tio n s an I n c r e a s in g t r e n d in i n s t i t u t i o n a l s a v in g s , e s p e c i a l l y l i f e in s u ra n c e and p e n s io n f u n d s , has been e v id e n t e v e r s in c e 193&. A lthough a s e c u la r d e c l i n e , o r s t a b i l i t y , In th e sa v in g s-in c o m e r a t i o e x i s t s , th e r e a r e many f a c t o r s o th e r th a n S o c ia l S e c u r ity w hich a r e r e s p o n s ib le f o r t h i s d e c l i n e , o r s t a b l e p a t t e r n . Among th e s e a r e th e s h i f t of p o p u la tio n from c o u n try to c i t y , th e im p a ct o f new consum e r s 1 goo d s, th e s h i f t in th e r e l a t i v e p r o p o r tio n o f e n tr e p r e n e u r s , th e change in th e d i s t r i b u t i o n o f d is p o s a b le incom e, and th e s h i f t from l a r g e to sm a ll f a m i l i e s . I t i s t h e r e f o r e re a s o n a b le to co n c lu d e t h a t O ld Age and S u r v iv o r s ’ In s u ra n c e has n o t a d v e rs e ly a f f e c t e d th e sa v in g s-in co m e r a t i o to any s i g n i f i c a n t d e g r e e . i E v a lu a tio n . — The in c r e a s e in s a v in g s m o tiv e s t h a t h as r e s u l t e d from th e S o c ia l S e c u r ity Act o f f s e t s in p a r t | th e te n d e n c y to in c r e a s e consum ption e x p e n d itu r e s (th ro u g h j i j b e n e f it paym ents t o th e lo w er income g r o u p s ) . 1 T h e re fo re , th e o v e r - a l l e f f e c t o f in c r e a s in g eon- j sum ption e x p e n d itu re s a t th e expense o f s a v in g s i s v e ry s m a ll. The n e t e f f e c t , how ever, v a r i e s w ith th e s i z e o f i th e a g g re g a te b e n e f i t p ay m en ts. In 19^1* f o r exam ple, when a g g r e g a te b e n e f i t s w ere sm a ll compared w ith th e rev en u e from th e p a y r o l l t a x , th e I n c r e a s e in consum ption ex p e n d i t u r e s was e x tre m e ly sm a ll com pared w ith t h a t e x p e rie n c e d in 1951. i In v e stm e n t E x p e n d itu re s B efore W orld War I I th e p a y r o l l ta x c o n s t i t u t e d a d e t e r r e n t to c a p i t a l e x p a n sio n . The p r o p o r ti o n o f th e t a x l e v i e d on th e em ployee le d t o an im m ediate r e d u c tio n in take-hom e p a y , w h ile th e p r o p o r tio n o f t h e t a x l e v i e d on th e em ployer l e d to an Im m ediate I n c r e a s e in c o s t o f p r o d u c tio n . S in c e t h i s p e r io d was c h a r a c t e r i z e d by a d e a r t h o f p u rc h a s in g pow er, m ost com panies w ere f o r c e d t o a b so rb th e e o s t in th e s h o r t ru n o r p a s s I t backw ard to em ployees in th e form of lo w e r wages o r unem ploym ent. E v e n tu a lly th e t a x was p a s s e d on to consum ers as m a rg in a l f irm s went o u t o f b u s in e s s . F u rth e rm o re , th e p a y r o l l ta x a g g ra v a te d th e p e s s i m i s t i c b u s in e s s p sy c h o lo g y o f th e p e r io d . S t a r t i n g w ith World War I I , how ever, th e p i c t u r e I i changed a s a r e s u l t o f new f a c t o r s in th e economic s i t u a t i o n : (1) th e o p t i m i s t i c p s y c h o lo g ic a l environm ent w h ich i c o n fr o n te d th e b u s in e s s man, (2) th e low r a t e o f th e i i p a y r o l l t a x a s com pared w ith o t h e r t a x e s , (3) th e te n d e n c y o f th e S o c ia l In s u ra n c e Program to in c r e a s e consum ption j e x p e n d itu r e s , (40 th e te n d e n c y o f th e program to re d u c e th e c o s t o f c a p i t a l , and (5) th e aw aren ess o f th e b u s in e s s man ! o f th e ad v a n ta g e s to him o f th e S o c ia l S e c u r ity System . These b a la n c e d t h e e x t r a c o s t s in v o lv e d and th e l o s s o f s a l e s on f o r e ig n m a rk e ts . M oreover, d u r in g p r o s p e r i t y th e i em ployer c o u ld e a s i l y s h i f t t h e t a x to t h e consum er in th e form o f h ig h e r p r i c e s . S t a t i s t i c s g a th e re d by th e B ro o k in g s I n s t i t u t i o n b e a r o u t th e above c o n c lu s io n s . T his o r g a n iz a tio n , in 194-8, found t h a t o n ly 6 .5 p e r c e n t o f th e com panies i n t e r view ed b e lie v e d t h a t th e p a y r o l l ta x had any s i g n i f i c a n t in f lu e n c e on d e c is io n s to expand. S ince v e n tu r e c a p i t a l comes m a in ly from th e u p p e r Income g ro u p s, t h e S o c ia l S e c u r ity t a x has. had l i t t l e e f f e c t in t h i s a r e a of in v e s tm e n t e x p e n d itu r e s . B e s id e s , a s tu d y co n d u cted b y B u tte r s and o th e r s fo u n d t h a t even th e p r o g r e s s iv e income ta x does n o t cause a s much damage t o v e n tu r e c a p it a l a s i s commonly assum ed, b e c a u se o f th e 320 ; s t a b i l i t y o f s a v in g h a b i t s and o p p o r t u n i t i e s f o r ta x i a v o id a n c e . j i | E a r ly R e tirem en t j The p a r t i c i p a t i o n o f th o s e s i x t y - f i v e y e a rs o f age j I ■ |o r o v e r in th e l a b o r fo rc e h a s s t e a d i l y d e c lin e d . T h is ; i d e c l i n e h a s been due m ain ly to employment b a r r i e r s s e t up by em p lo y ers, th e in c r e a s e in lo n g e v ity , and th e i n e t i t u - f t i o n a l i z a t i o n o f age s i x t y - f i v e a s a r e tir e m e n t a g e , ; e s p e c i a l l y in p r i v a t e p e n s io n p la n s . I The e f f e c t of Old Age and S u r v iv o r s ' In su ra n c e on e a r l y r e tir e m e n t i s r e l a t i v e l y m in o r. A ccording to a number o f su rv e y s con d u cted by th e Bureau o f Old Age and * i S u r v iv o r s ' I n s u ra n c e , o n ly 3*9 p e r c e n t t o 5 ,6 p e r c e n t o f j i th e b e n e f i e l a r i e s r e t i r e d by c h o ic e . However, 8 p e r c e n t o f t h e m ale and 9 p e r c e n t o f th e fem ale b e n e f i c i a r i e s (in good h e a lth ) s t a t e d t h a t th e y w ere n o t i n t e r e s t e d i n work in g a t th e tim e th e y were In te rv ie w e d . There i s a l s o a l o s s o f man h o u rs due to th e e a rn in g r e s t r i c t i o n s p la c e d upon b e n e f i c i a r i e s . T h is l o s s h a s been ro u g h ly e s tim a te d in 1951 a t som ething l e s s th an 10 p e r e e n t . Assuming th e s e f i g u r e s a p p ly t o o th e r y e a r s , t h e t o t a l l o s s o f employment due to th e Old Age and S u r v iv o r s ' In su ra n c e i s t h e r e f o r e e s tim a te d to be betw een 3*9 p e r c e n t i and 15*6 p e r c e n t . o f th e b e n e f i c i a r y g ro u p s . I 321' i | I I I . CONCLUDING OBSERVATIONS | i 1 F i s c a l P o lic y ! I B efore W orld War I I . — As th e p e r i o d "before World j i i |War I I was c h a r a c te r i z e d by governm ent d e f i c i t s , th e n e t 1 j e f f e c t f o r each y e a r was a t r a n s f e r paym ent from wage j | ! .e a r n e r s and e m p lo y ers, a lth o u g h In th e lo n g run m ost o f thej e m p lo y e rs1 c o n t r i b u t i o n s e o u ld be s h i f t e d to la b o r o r to j th e consum er. The e m p lo y ee 's c o n t r i b u t i o n , w hich was : p r o p o r ti o n a l up t o th r e e th o u sa n d d o l l a r s b e f o r e W orld War i I I , b o re no r e l a t i o n to th e w o r k e r's a b i l i t y to p ay . As to th e e m p lo y e r's c o n t r i b u t i o n , i t was b o rn e p a r t l y by th e •w orkers th ro u g h backw ard s h i f t i n g . The m a j o r i t y o f t h i s | c o n t r i b u t i o n , how ever, was e v e n tu a lly p a s s e d on to th e ' j consum er, and l i k e any s a l e s ta x was r e g r e s s i v e in e f f e e t . 2 i D uring th e f i r s t few y e a rs o f th e program (1937- 1939) in th e c o m p e titiv e i n d u s t r i e s , th e m a rg in a l f ir m s w ere fo rc e d o u t o f b u s in e s s in o rd e r t o a llo w o£her f irm s to p a s s on th e t a x . T h e re fo re , m a rg in a l em ployers w ere f o r c e d to b e a r a p o r tio n o f th e ta x a lo n g w ith th e w o rk ers in th e form of unem ploym ent. T his f a c t o r , combined w ith th e a d v e rs e e f f e c t of th e S o c ia l S e c u r ity Program on th e 2The ta x r a t e beeomes r e g r e s s i v e in e f f e c t "when th e b a se i s h y p o t h e t i c a l l y s h i f t e d to incom e." T h is i s b ec au se " th e amount o f p u rc h a s e s a p e rso n makes o f s a l e s - t a x o r e x c l s e - t a x Item s does n o t in c r e a s e a s r a p i d l y a s h i s income o r w e a lth ." W illiam H. A nderson, T a x a tio n and th e American Economy (New York: P r e n t i c e - H a l l , 1951)* P» 66. | 322 a t t i t u d e s of b u s in e s s men, p ro d u ced a n e g a tiv e e f f e c t on in v e s tm e n t d u r in g th o s e y e a r s . As a r e s u l t , th e program was d e f l a t i o n a r y , in s p i t e o f th e f a c t t h a t th e o v e r - a l l e f f e c t o f th e system was d e s ig n a te d to in c r e a s e consump t i o n . In a v e r y sm all d e g re e , t h i s was e s p e c i a l l y t r u e ! i a f t e r th e b e g in n in g o f m o n th ly b e n e f i t e x p e n d itu r e s in The d e f l a t i o n a r y e f f e c t s o f th e program d u r in g th e s e p rew ar y e a rs w ere a t l e a s t p a r t l y o f f s e t by th e a b i l i t y of th e governm ent t o keep th e i n t e r e s t r a t e low . The R eserve program h e lp e d to a c h ie v e t h i s o b j e c t i v e . The Old Age and S u rv iv o rs* In s u ra n c e was n o t d e f l a t i o n a r y a f t e r 19^0. D uring t h a t y e a r m o n th ly b e n e f i t paym ents began, and b u s in e s s c o n fid e n c e Im proved. In g e n e r a l , money i s ta k e n from a c t i v e sp e n d e rs and d is b u r s e d to a c t i v e sp e n d e rs of s l i g h t l y l e s s incom e. I t was th ro u g h th e a d v e rs e e f f e c t - on In v estm en t e x p e n d itu r e s and th ro u g h th e ab se n c e o f m o n th ly b e n e f i t paym ents t h a t th e program was c o n s id e re d d e f l a t i o n a r y d u r in g 1937-1939* However, th e program c o u ld be c o n s id e re d d e f l a t i o n a ry in a r e l a t i v e s e n s e . In th e absence o f th e p a y r o l l t a x , u n le s s o th e r form s o f re v e n u e w ere u se d , th e g e n e r a l governm ent e x p e n d itu r e s t h a t w ere f in a n c e d by t h i s t a x w ould have been f in a n c e d by governm ent bonds w ith t h e i r I n f l a t i o n a r y e f f e c t s . Yet Seymour H a r r is h a s p o in te d o u t t h a t "any f i n a n c i a l p o lic y i s d e f l a t i o n a r y r e l a t i v e to some o t h e r i more i n f l a t i o n a r y p o l i c y . "3 A f te r th e s t a r t o f World War I I , — As th e b e n e f i t l e v e l c o n tin u e d t o in c r e a s e , a g r e a t e r r e d i s t r i b u t i o n o f j income in f a v o r o f th e lo w e s t income g ro u p s o c c u rre d . T his; le d to an I n c re a s e o f consum ption e x p e n d itu r e s , though th e : n e t in c r e a s e was s t i l l r e l a t i v e l y low c o n s id e r in g th e J I a d v e rs e e f f e c t on th e p r o p e n s it y to consume and th e sm a ll s c a le o f th e pro g ram . However, b e c a u se of t h e ab sence o f any a d v e rse e f f e c t on In v e stm e n t e x p e n d itu r e s d u rin g th e war and p o s t w ar p r o s p e r i t y p e r i o d , th e e n t i r e program h a s had a s l i g h t i n f l a t i o n a r y te n d e n c y . T his p r o p e n s ity to w ard i n f l a t i o n i h as been s tr e n g th e n e d by th e sm a ll r e d u c tio n in th e la b o r f o r c e th ro u g h e a r l y r e tir e m e n t d u rin g f u l l employment y e a r s , t h a t can be tr a c e d d i r e c t l y to th e Old Age and S u rv iv o r s ' In s u ra n c e Law. The p a y r o l l ta x , c o n s id e r e d by I t s e l f , s t i l l p r e s e n t s a r e g r e s s i v e elem ent In th e f e d e r a l ta x s t r u c t u r e . Under th e p r e s e n t I n f l a t i o n a r y c o n d itio n s , t h i s ta x , a lo n g w ith th e f e d e r a l e x c is e t a x e s , a c t s a s a b a la n c e t o th e g e n e r a l l y p r o g r e s s iv e t a x s t r u c t u r e in c o u n te r in g i n f l a t i o n . D uring th e p r o s p e r i t y p h ase o f th e b u s in e s s c y c le 3 Seymour E. H a r r is , Economics of S o c ia l S e c u r ity (New York: M cGraw-Hill Book Company, 1 9 ^ 1 ), p . 70. 324- th e I n c r e a s e in p a y r o l l s a u to m a tic a lly le a d s to an in c r e a s e in re v e n u e . At th e same tim e , a s m a lle r p r o p o r tio n o f { o l d e r p e o p le w i l l r e t i r e th a n d u rin g a d e p r e s s io n . j | The b e n e f i t system c o n s id e re d by i t s e l f i s h ig h ly J I n f l a t i o n a r y , a s a m a jo r ity o f th e b e n e f i t s go to th e j lo w e s t income g ro u p , who p o s s e s s a h ig h m a rg in a l and j I and a v e ra g e p r o p e n s it y to consume. j U nlike th e f e d e r a l e x c i s e s , th e rev en u e from th e p a y r o l l ta x i s added to th e R eserve w h ich , in t u r n , i s used i t o f in a n c e o ld a g e , d e p e n d e n ts ' and s u r v i v o r s 1 b e n e f i t s . ! jHowever, C ongress c o u ld change t h i s r e l a t i o n s h i p a t any j » ‘ jtirae. For exam ple, a p r o g r e s s iv e income t a x co u ld be s u b s t i t u t e d f o r th e p a y r o ll t a x , w ith I n f l a t i o n a r y c o n se q u e n c e s, o r b e n e f i t paym ents c o u ld even be e lim in a te d w h ile r e t a i n i n g th e p a y r o l l ta x . S ince th e end of W orld War I I th e R eserve h a s a c te d a s an a n t i - i n f l a t i o n a r y d e v ic e in a r e l a t i v e se n se by f in a n c in g g e n e r a l governm ent e x p e n d itu r e s th ro u g h th e p a y r o l l ta x . I f a p r o g r e s s iv e ta x o r governm ent bonds w ere u sed in s t e a d , th e r e s u l t s w ould have been more i n f l a t i o n a r y . B e s id e s , th e n e t e f f e c t o f th e R e se rv e , a t l e a s t in 1951 » was to t r a n s f e r funds from consum ption to s a v in g s , w hich w ould be a n t i - i n f l a t i o n a r y in th e ab sen ce o f a b a la n c in g demand f o r in v e stm e n t e x p e n d itu r e s . The R e se rv e , how ever, made i t e a s i e r f o r th e T re a su ry to keep th e i n t e r e s t on th e g overnm ent d e b t low , i f i t so d e s i r e d ._____ I Eoonomlo Growth ; i W hile i t i s t r u e t h a t th e program h as cau sed a sm all r e d u c t io n in th e n a t i o n a l income th ro u g h e a r l y r e tir e m e n t on th e p a r t o f w o rk e rs s i x t y - f i v e y e a rs o f age o r o v e r in tim e s o f r e l a t i v e f u l l em ployment, th e O ld Age and ] S u r v iv o r s ' In su ra n c e law h as n o t a d v e rs e ly a f f e e t e d many o f th e c r i t e r i a o f economic g ro w th . Merriam p o i n t s out t h a t The se n se o f s e c u r i t y , th e know ledge t h a t In c a s e o f th e d e a th o f a fa m ily b re a d w in n e r t h e r e w i l l s t i l l be j some c o n tin u in g income, how ever s m a ll, p ro b a b ly makes p e o p le more p r o d u c tiv e . . . . S o c ia l S e c u r ity program sj t h a t p ro v id e b e t t e r c o n d itio n s in w hich c h ild r e n may grow h e lp l a y th e b a s i s f o r a b e t t e r f u t u r e s o c i e t y . ^ M oreover, t h i s S o c ia l In su ra n c e law p ro v id e s a so u rc e o f Income to p e o p le whose r e s o u r c e s would o th e rw is e p r o v id e them w ith a m eager and u n ste a d y l i v i n g . T h u s, th e b e n e f i t system p r o v id e s a s te a d y so u rce o f e f f e c t i v e demand f o r th e goods and s e r v ic e s p ro d u c e d by t h e economy. The I n i t i a t i v e and i n c e n ti v e of th e av e ra g e w o rk er X . a r e c e r t a i n l y n o t h in d e re d in any way. For exam ple, th e e x e c u tiv e p e n s io n program s i n i t i a t e d by many l a r g e and p r o g r e s s iv e c o r p o r a tio n s such a s G en eral M otors, have n o t underm ined i n i t i a t i v e . As Sumner H. S l i c h t e r s t a t e d ^ Id a G. M erriam , S o c ia l S e c u r ity F in a n c in g , B ureau R e p o rt Ho. 17 (W ashington: F e d e r a l S e c u r ity Agency, S o c ia l S e c u r ity A d m in is tra tio n , D iv is io n o f R esearch and S t a t i s t i c s , 1 9 5 2 ), p . 195* b e f o r e th e Com mittee on Ways and Means In 19^9 > I do n o t t h in k th e g r e a t c o r p o r a tio n s o f th e U n ite d S t a t e s a r e underm ining t h e I n i t i a t i v e and e n t e r p r i s e o f t h e i r p r e s i d e n t s by p ro v id in g th o s e p r e s i d e n t s w ith p e n s io n s , and I do n o t th in k my i n i t i a t i v e o r th e i n i t i a t i v e o f my c o lle a g u e s on th e H arv ard f a c u l t y i s \ b e in g underm ined by th e f a c t t h a t th e u n i v e r s i t y sa y s j we m ust be a p a r t o f th e p e n sio n p la n . I th in k ! i n i t i a t i v e i s a to u g h e r t h i n g , p e r h a p s , th a n you do, and i t i s n o t e a s i l y d e s tr o y e d .5 ! i j ^Sumner H. 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Survey o f Consumer F in a n c e s : P a r t V I I I . D i s t r i b u t i o n o f Consumer Saving In 194-8," F e d e ra l R eserve B u l l e t i n . : 36:14— 34, J a n u a ry , 195©• "1950 Survey o f Consumer F in a n c e s: P a rt IV. D i s t r i b u t i o n o f Consumer Saving in 1 9 4 9 ," F e d e ra l R eserve B u l l e t i n . 3 6 :1 437-1455, November, 1950. i i “1951 Survey o f Consumer F in a n c e s : P a r t IV. D i s t r i b u t i o n ' o f Consumer S aving in 1 9 5 0 ," F e d e ra l R eserve B u l l e t i n . 3 7 :1 0 6 1 -1 0 7 8 , Septem ber, 1951* j "1952 Survey o f Consumer F in a n c e s: P a rt I . Consumer E x p e c ta tio n s a s to Economic Trends an d Consumer Inv estm en t P r e f e r e n c e s ," F e d e ra l R eserv e B u l l e t i n , 3 8 :7 3 9 -7 5 5 , J u l y , 1952. "1952 Survey o f Consumer F in a n c e s : P a r t I I I . Income, S e le c te d In v e stm e n ts and S h o rt Term Debt o f Consum ers," F e d e ra l R eserv e B u l l e t i n , 3 8 :9 7 4 -1 0 0 1 , Septem ber, 1952. O 'D o n n e ll, W alter G -. "The Problem o f Age B a r r ie r s in P e rso n n e l S e le c ti o n ," P e r s o n n e l, 2 7• 461-4-71, May, 1951* o f f i c e o f th e Com m issioner, D iv is io n o f P u b lic a tio n s and Review. " S o c ia l S e c u r ity L e g is la t io n In 1947," S o c ia l S e c u r ity B u l l e t i n , 1 0 :1 3 -1 5 , S eptem ber, 1947- "Old-Age and S u r v iv o r s 1 In s u ra n c e C o n trib u tio n R a te s ," S o c ia l S e c u r ity B u l l e t i n . 8:4-7-50, December, 194-5* P a r k e r , James S. " F in a n c ia l P o lic y in Old-Age and S u rv i v o r s ' In s u ra n c e , 1 9 3 5 -5 0 ," S o c ia l S e c u r ity B u l l e t i n , 1 4 :3 -1 0 , Ju n e , 1951* P o i r o t , P a u l. "Economic A sp e c ts o f S o c ia l S e c u r ity ," F a c ts Forum, 5*23-24, Ja n u a ry , 1956* P r e n t i c e , H. W., J r . "T ax a tio n and B u sin e ss I n i t i a t i v e , " A nnals o f th e American Academy of P o l i t i c a l and S o c ia l S c ie n c e , 2 6 6 :7 0 -7 6 , November, 1949* P rib ra m , K. "The F u n c tio n s o f R eserv es in Old-Age B e n e f it P la n s ," Q u a r te r ly J o u r n a l o f E conom ics. 52:615— 640, A ugust, 1938* R a n d a ll, D ennis. " S o c ia l S e c u r ity — The I.Q .U . That May N ever Be P a id ," C o n f i d e n t i a l , 3*28, May, 1955* R obinson, George B. "Old-Age S e c u r ity and th e T re a s u ry ," J o u rn a l o f A ccountancy, 73*7-24, J a n u a ry , 1942. S c h m itte r , L yle L ., and B e t t i C. G oldw asser. "The R ev ised B e n e fit S chedule Under F e d e ra l Old-Age I n s u ra n c e ," S o c ia l S e c u r ity B u l l e t i n « 2 :3 -1 2 , S eptem ber, 1939* S c h o ttla n d , C h a rle s I . " S o c ia l S e c u r ity Amendments o f 1956: A Summary and L e g i s l a t i v e H is to r y ," S o c ia l S e c u r ity B u l l e t i n . 1 9 *3-15, S eptem ber, 1956. S e h w u lst, E. B. "Economic Problem s A r is in g from S o c ia l S e c u r ity Taxes and R e s e r v e s ," P ro c e e d in g s: American Economic R eview , 27*120-129, M arch, 1937- Shoup, C a rl.. "T axing f o r S o c ia l S e c u r ity ," A nnals o f th e American Academy o f P o l i t i c a l and S o c ia l S c ie n c e , 202 :1 6 5 -1 7 5 , M arch, 1939- S h u ltz , W illiam J . "Economic E f f e c ts of P a y r o ll T a x e s," T a x e s, 2 2 :2 -5 , Ja n u a ry , 1944. " S o c ia l and Economic D a ta ," S o c ia l S e c u r ity B u l l e t i n , 10: 3 5 -4 7 , December, 1947. S te c k e r , M argaret L. “B e n e f i c i a r i e s P r e f e r to Work," S o c ia l S e c u r ity B u l l e t i n , 1 4 :1 5 -1 7 , J a n u a r y , 1951- ___. "Old-Age and S u r v iv o r s ' In su ra n c e B e n e f i c i a r i e s : Income in 1 9 5 1 ," S o c ia l S e c u r ity B u l l e t i n , 1 6 :1 1 -1 4 , J u n e , 1953* S te c k e r , M arg aret L. "Why Do B e n e f l e i a r l e s R e tir e ? Who i Among Them R e tu rn to Work?" S o c ia l S e c u r ity B u l l e t i n , i 1 8 :3 -1 2 , May, 1955. S to k e s , D i lla r d . “Does Our S o c ia l S e c u r ity System Make Sense?" Commentary, 1 7 :5 6 6 -5 7 4 , J u n e , 1954. "The B a n k e r's B a n k er," Time, 6 8 :1 0 6 -1 1 0 , Septem ber 1 0 , 1956. "The loom in Home B u i l d i n g ," N a tio n a l C ltv M onthly L e t t e r on B u sin ess and Economic C o n d itio n s , :8 5 -9 6 , A ugust, T ucker, Rufus S. " D is t r ib u t io n on th e Tax Burdens in 1 9 4 8 ," N a tio n a l Tax J o u r n a l . 4 :2 6 9 -2 8 5 , Septem ber, 1951- U n ited S ta te s D epartm ent of H e a lth , E d u c a tio n and W e lfare, S o c ia l S e c u r ity A d m in is tra tio n . "Annual S t a t i s t i c a l Supplem ent, 1953*w S o c ia l S e c u rity B u l l e t i n , 1 7 :3 3 -8 0 , Septem ber, 1954. ________ . "Annual S t a t i s t i c a l Supplem ent, 1955»" S o c ia l S e c u r ity B u l l e t i n , 1 9 :1 -6 4 , 1956. W entworth, Edna C. "Economic and S o c ia l S ta tu s of B e n e f i c i a r i e s of Old-Age and S u r v iv o r s ' I n s u ra n c e ," S o c ia l S e c u r ity B u l l e t i n , 6 :3 -2 0 , J u l y , 1943- ________ . "R esources o f Aged In su ra n c e B e n e f i c i a r i e s : 1951 N a tio n a l S u rv e y ," S o c la l S e c u r ity B u l l e t i n . 1 5 :3 - 6 , A ugust, 1952. ________ . "Economic S itu a t io n o f Aged In su ra n c e B e n e f ic i a r i e s : An E v a lu a tio n ," S o c ia l S e o u r lty B u l l e t i n , 17: 1 3 -2 4 , A p r i l, 1954. "What th e AFL-CI0 M erger M eans," U. S. News and World R e p o r t, 3 9 :2 3 -3 0 , December 1 6 , 1955. W ilcox, Alaneon (In an u n sig n e d a r t i c l e ) . "The Old-Age R eserve A ccount— A Problem in Government F in a n c e ," * Q u a rte r ly J o u r n a l o f E conom ics, 5 1 :4 4 4 -4 6 8 , May, 1937- W itte , Edwin E. "Old Age S e c u r ity In th e S o c ia l S e c u r ity A c t," The J o u rn a l of P o l i t i c a l Economy. 4 5 :1 -4 4 , F e b ru a ry , 1937* ________ . "Twenty X ears o f S o c ia l S e c u r i t y ," S o c ia l S e c u r ity B u l l e t i n , 1 8 :1 5 -2 1 , O cto b e r, 1955* 3 45 P. ESSAYS A d le r, John H. "The F is c a l System , th e D i s t r i b u t i o n o f Incom e, and th e P u b lic W e ifa te ," F i s c a l P o l i c i e s and th e American Economy, Kenyon E. P oole ( e d . ) . Hew York: P r e n tic e H a ll, 1951* PP» 359-409- G orson, John J . “The Old-Age and S u r v iv o r s 1 In su ra n c e P rogram ," War and P o st War S o c ia l S e c u r i t y . W ilbur J . Cohen (ed.T I W ashington: American C o u n cil on P u b lic A f f a i r s , 194-2, p p . 5 8 -6 7 . D avid, Donald K. "The Danger o f D r i f t i n g ," The W elfare S t a t e and th e n a t io n a l W e lfa re , S heldon G lueek ( e d . ) . C am bridge, M a s s a c h u s e tts : A ddison-W esley P r e s s , 1952, I PP* 94-112. i ] Due, John F. "Government E x p e n d itu re s and T h eir S i g n i f i cance f o r th e Economy," F i s c a l P o l i c i e s and th e American Economy. Kenyon E. Poole ( e d . ) . New York: P r e n t i c e - H a l l , 1951, p p . 201-251. F i t c h , W illiam G. " R e la tio n s o f Government In su ra n c e P la n s t o Employm ent," E arn in g O p p o rtu n itie s f o r O lder W orkers. Wilma Donahue ( e d .) . Ann A rb o r, M ichigan: U n iv e r s ity o f M ichigan P r e s s , 1955* p p . 29-34-. G o ld en w elser, E. A. "Concept of S a v in g s ," S avings in th e Modern Economy. W alter W . H i l l e r , F ra n c e s M. Boddy, and C a rl L. N elson ( e d s . ) . M in n e a p o lis: U n iv e r s ity of M in n eso ta P r e s s , 1953* p p . 57-62. H a r r i e s , Lowell C. "P u b lic F in a n c e ," A Survey o f Contem porary Econom ics. V o l. I I , B e rn a rd F. H aley (ed.). Homewood, I l l i n o i s : R ich ard D. Irw in , 1952, p p . 261-303. K le in , Lawrence R. "S avings C oncepts and D ata: The Needs o f Economic A n a ly s is and P o lic y ," S av ln g s in th e Modern Economy» W alter W . H i l l e r , F ra n c e s M. Boddy, and C a rl L. N elson (eds.). M in n e a p o lis: U n iv e r s ity o f M innesota P r e s s , 1953, p p . 104-107. L a n d is , R. D. "Emergency Problem s o f th e Aged," R eadings i*1 S o c la l S e c u r i t y , W illiam Haber and W ilbur J . Cohen TedTH New York: P r e n t i c e - H a l l , 1948, pp. 228-238. Mack, Ruth P. "Economics o f C onsum ption," A S u rrey of C ontem porary Econom ics, V o l. I I , B e rn a rd F. Haley- l e d . ) . Homewood, I l l i n o i s : R ichard D. Irw in , 1952, PP* 39-82. M i l l e r , Glen W . "The E f f e c t o f S o c ia l S e c u r ity on Manpower R e so u rc e s ," Manpower in th e U n ited S t a t e s . W illiam H aber, F r e d r lc h H. H a rb iso n , Lawrence R. K le in , and G ladys L. P alm er (eds.). New York: H arp er and B r o th e r s , 195^» pp* 5 1 -6 6 . M urray, Roger. "The E f f e c t o f R e tire m e n t and P e n sio n Funds on S a v in g ," S avings in th e Modern Economy, W a lte r W . H l l l e r y , F ra n c e s M. Boddy, and C a rl L . N elson (eds.). M in n e a p o lis: U n iv e r s ity o f M innesota P r e s s , 1953> PP* 191-19A . S l i c h t e r , Sumner H. "R etirem en t Age and S o c ia l P o lic y ," The Aged and S o c ie ty , A Symposium on th e Problem s of an Aging P o p u la tio n , M ilto n D erber (ed.). E d i t o r i a l B oard, J . D ouglas Brown, C la rk K e rr, and Edwin E. W itte . Champaign, I l l i n o i s : I n d u s t r i a l R e la tio n s R esearch A s s o c ia tio n , 1950. pp. 105-11^* S p e n g le r, Jo se p h J . " P o p u la tio n T heory," A Survey o f C ontem porary E conom ics. V o l. I I , B e rn a rd F. H aley (ed. ) . Homewood, I l l i n o i s : R ich ard D. Irw in , 1952, p p . 83-128. j l S ta c k , M aurice. "The Meaning o f S o c ia l S e c u r ity ," R e a d in g s’ in S o c ia l S e c u r i t y . W illiam Haber and W ilbur J . Cohen Teds.). New York: P r e n t i c e - H a l l , 19^8, p p . A l-5 8 . Woodward, D onald. "Trends and S t r u c t u r a l Changes in th e T w e n tie th C en tu ry : Comment," S avings in th e Modern Economy, W a lte r W . H i l l e r y , F ra n ces M. Boddy, and C arl L. N elson (eds.). M in n e a p o lis: U n iv e r s ity o f M innesota P r e s s , 1953 > pp* 152-15^* G. UNPUBLISHED MATERIALS D i l l e y , Dwight H. "The W age-Earner*s O pinion o f th e S o c ia l S e c u r ity Act and th e R e la tio n s h ip o f th e Act to h i s S aving H a b its and In v estm en t P o l i c i e s . " U npublished M a s te r 's t h e s i s , The U n iv e r s ity o f S o u th ern C a l i f o r n i a , Los A n g eles, 19 A l. 157 pp* L in to n , M. A lb e r t. C o n tr o v e r s ia l F a c e ts o f Old Age | S e c u r i t y . R e p rin t of a p a p e r p r e s e n te d t o th e American ; P h ilo s o p h ic a l S o c ie ty , P h ila d e lp h ia , P e n n s y lv a n ia , A p r il 22, 1955* P h ila d e lp h ia : P ro v id e n t M utual L if e In su ra n c e Company, 1955* 36 p p . H. IMTERVIEW P e rs o n a l in te r v ie w w ith R o b ert B. M adison, C e r t i f i e d P u b lic A ccountant and P ro f e s s o r o f A ccounting a t Woodbury C o lle g e , Los A n g eles, C a l i f o r n i a . University of Soutnern caMtorniaiyijSSgsBV

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Creator Brunhild, Gordon (author)

Core Title An economic analysis of the Federal Old Age and Survivors' Insurance act

Contributor Digitized by ProQuest (provenance)

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest,Political Science, public administration

Language English

Advisor Garis, Roy L. (committee chair), Craig, Robert F. (committee member), Grey, Arthur L., Jr. (committee member), Hamovitch, Maurice B. (committee member), Pollard, Spencer D. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-255242

Unique identifier UC11258126

Identifier DP23267.pdf (filename),usctheses-c20-255242 (legacy record id)

Legacy Identifier DP23267.pdf

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Document Type Dissertation

Rights Brunhild, Gordon

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Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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