Social Security Old Age and Survivors Insurance

The Rate of Return

The second element of the contributory principle is that there must be a satisfactory relation between the amounts the contributors pay in and the value of their benefit rights. This requirement takes us into a complicated and, in some ways, a speculative field of discussion. The rate of return to different contributors varies widely and must vary widely, particularly in the early years of the system. How wide the variations may be depends primarily on how understandable and how reasonable they appear to the contributors. The problem involves the difficult balance between "equity" and "adequacy"—between being fair to the individual contributor, on the one hand, and meeting the minimum needs of as many beneficiaries as possible, on the other. Not only the internal relationships within the benefit structure must be considered, but also the relation between benefits and taxes; and the whole must be worked out within the limits of available financing.

The general scheme is that individual contributors should get rights worth at least as much as their own contributions to the system, with interest; and that employers' contributions should be sufficient to meet the added cost of more liberal benefits to some. Since employer contributions are nearly half the revenues of the system, there is room within this scheme for wide differences in return to individual contributors.

The benefit structure has at all times been more liberal to low-paid than to high-paid workers, and to short-term than to long-term contributors. Differences of this sort are inherent in a system designed to meet a substantial part of the problem of old-age dependency. To pay only the actuarial equivalent of the taxes of low-paid and short-time contributors would mean benefits too small to serve much social purpose, and in many cases so small as to be ridiculous. It is less the existence than the size of these differentials that raises problems. The employee who pays taxes on wages of $4,200 a year will probably not object because the $1,500 man gets a higher rate of return on his smaller contributions, but may fairly insist that there be a substantial difference in the absolute amount of benefits to reflect the difference in taxes paid. The long-term contributor may feel that he should have some advantage in benefit amount, which the amendments of 1939 gave him but later amendments eliminated, over the short-term contributor at the same rate.

The self-employed must contribute at rates half again as high as employees, but receive no more in benefits. It seems generally to be thought fair that the self-employed should bear some part of the burden which, on behalf of employees, is borne by their employers. Early contributors,

while the tax rates are low, receive the same benefit amounts as will later contributors when the rates are higher. The reasons which have dictated rates gradually ascending over a period of decades have little to do with the needs of individual contributors or individual beneficiaries, and it would not make much sense to scale down benefits in the early years on this account.

The dependents' and survivors' benefits favor the man with a family as against the bachelor. Those who are young when they enter covered employment, as nearly all will be in the future, presumably have about the same chance of having dependents, but there is perhaps an element of discrimination among those whose family patterns are set before they come into the system. These provisions also favor men as against women, because women are less likely to have dependents; on the other hand, women are apt to have lower wages and less continuous employment, and to get the relative advantage which the system accords to those circumstances.

Finally, it is sometimes said that the "work clause" discriminates in favor of the man or woman who retires at sixty-five and against the one who works on until later years. If this is a discrimination, it is a deliberate one, for the system is designed to compensate for loss of earnings and not for the mere attainment of a certain age. A system of the latter kind would be a good deal more costly.

Social insurance cannot and does not seek to treat all people exactly alike. Of the many differentiations in old-age and survivors insurance, the most controversial at the present time are those centering in the contest between equity and adequacy. The argument for adequacy—for providing a minimum of subsistence to as many people as possible—if it were pushed to its logical extreme would lead to something close to a flat benefit system, for which pay-roll tax financing would be neither appropriate nor politically feasible. Many students believe that the 1950 and 1952 amendments pressed too far in this direction. In 1954 Congress moved a little way back toward the recognition of individual equities. By increasing the tax and benefit base to $4,200 a year, it widened the range within which differences in wages are reflected in benefit amounts; by increasing the weight the formula gives to wages in the higher brackets, it enlarged both absolutely and relatively the differentials in benefit rates. It did not, however, restore to the benefit formula any affirmative recognition of length of participation in the system.