Money After Age 65

by MARION B. FOLSOM

1

IN 1920 there were 5 million persons in the United States aged 65 or over. Now there are approximately 11 million, and it is estimated that by 1975 there will be 18 million. In 1900 there was one person 65 or over to every thirteen persons of productive years; in 1948 this proportion had increased to one in every eight persons; and estimates indicate that by 1965 there will be one aged person to every five persons of productive years.

The major objective should be for the individual during his working career to save enough to provide for his own livelihood after he is no longer able to work. Many do provide for their old age; the percentage probably is higher here than in any other country. Liquid assets (mainly U.S. government bonds, cash, and bank deposits) held by individuals, now amounting to over 175 billion dollars, and total life insurance protection of over 200 billion dollars are evidence of this fact. As production increases and the standard of living improves, we would expect that a higher proportion would reach old age without being dependent on others.

The fact remains that many of the aged do not work and that many do not have sufficient means of self-support but must depend upon their families or the government. Among the causes for this dependency in old age are lack of capacity in the individual to work or to save, lack of steady employment during his lifetime, illness, effects of depressions, and poor investments.

It has become increasingly clear in recent years that the efforts of the individual alone are not enough to meet the financial problem of old age. A proper solution calls for a three-way effort by the individual, the employer, and the government. The efforts of all three can be coördinated in a way which will not interfere with our basic economic system.

Many business concerns have adopted pension plans to help their employees meet the financial problems of old age. There are now about 9000 of these company pension plans, of which about 8000 have been adopted since 1940. There are two principal reasons for this rapid growth: a larger proportion of workers is now reaching retirement age, and as management is giving more attention to industrial relations, the benefits of pension plans are being realized more fully.

As a rule, these plans provide for a retirement age of 65 but in most plans retirement is not compulsory at 65. The exact dale depends upon an individual’s work, his health, ability, and employment conditions. The benefits vary widely, but the amount of the pension is generally based on the employee’s earnings and length of service. The cost of the plans is borne sometimes entirely by the company; in other easeswell over one third of those reported -the employee contributes toward the current cost. A recent poll showed that almost two thirds of the workers interviewed favored the principle of employee contribution. The employer generally pays for the entire cost of the pension credit for service prior to the adoption of the plan. The funds accumulated under these plans are as a rule turned over to an insurance or trust company, beyond the commercial hazards of the individual company.

The financing of pensions has to be very carefully planned, because they cover a long period and total payments increase rapidly for many years. If pension plans are simply paid out of current income, the company will find that while the payments are low at first, the pension rolls will in the course of years reach a high percentage of the active payroll and it may become difficult to finance them.

The conservative policy is to “fund" the plan. Under a “funded plan a careful estimate is made of the liability which has already accrued on the service of employees to date and of the liability accruing each year. Payment is then made to an insurance or trust company to meet this liability. As the pension payments will be low during the first years, a fund will be accumulated, the interest from which will help meet higher costs later.

The Past man Kodak Company, for example, adopted a retirement annuity plan in 1928. The next year the payments to retired employees amounted to 812,000 -obviously with onlj a few employees retired. In 1938, the payments amounted to $250,000. In 1948, retired employees received over a million dollars and the payments will keep on increasing for many years. Our plan is insured, and in recent years we have been paying the insurance company over 4 million dollars a year to build up an adequate fund to meet larger retirement payments in the future. These company plans are closely integrated into the Federal Old-Age and Survivors Insurance Plan, which covers wages only up to $3000.

The objective of a good pension plan should be to provide a combined annuity from the company plan and the government plan of between 45 per cent and 50 per cent of salary for the longer-service employees. This combined annuity, together with the return on his own savings, should enable the retired person to live without much change in his standards, for with his children grown, family expenses are generally lower than in his earlier years.

Why does a business concern adopt a pension plan with the heavy cost involved? First, pension plans are an important factor in maintaining a force of able, long-service, loyal employees. Management does not think it is fair or, indeed, good business to release a long-service employee if it knows he will have to take too severe a reduction in his living standards. Second, a retired worker is replaced by a younger, abler employee; and in the case of the retirement of a supervisor, promotion may be given to several persons. The organization can thus be maintained on a more efficient basis. Third, an adequate pension plan has a stimulating effect on morale, for both younger and older workers look forward to retirement age with less worry about their economic security.

A pension plan adds to the prestige of an employer in a community and attracts more satisfactory employees, even in the younger years. Because of the great increase in pension plans, the lack of a plan is now a real handicap to companies in hiring. All these benefits should be reflected in lower labor turnover, longer service, and greater productivity at lower cost. The advantages to the worker are obvious. At the same time, these pension plans do not provide high enough annuities to diminish the incentive of the individual to accumulate savings to provide additional income upon retirement.

The adoption of private plans was greatly stimulated by the Social Security Act. Employers became conscious of the pension problem and found upon study that the Federal Old-Age Insurance Plan, while adequate at the time for an over-all government plan, did not fully meet the needs of a business organization. High tax rales during and since the war have also served as a stimulant, It is expected that the growth in private pension plans will continue, and probably at a rapid rate. It cannot be expected, however, that even as many as half of those gainfully employed could be covered under these plans. Many companies do not have available resources to finance the initial costs of a pension plan. Many companies go out of business every year. Many employees shift employment frequently and do not stay long enough with any one company to accumulate adequate credit.

2

IN SPITE of the efforts which the individual makes for his own security and the progress made by Individual companies in providing pensions, there is still need for assistance from the government. It is generally agreed that the Federal government’s role should be limited to providing a floor of protection which will aid in keeping the aged from being charges on the public or objects of private charity, and at the same time encourage men and women to make additional provisions during their working years through savings and insurance for their own old age. Too great a provision by the government is as unsound as too little provision or none.

When the depression of the 1930’s spurred Federal government action, two programs were established under the Social Security Act: the Old-Age Assistance Plan and the Federal Old-Age Insurance Flan. There are 21 million persons over 65 and in need now receiving aid under the Old-Age Assistance Plan. The Federal government provides three fourths of the first $20 in monthly payments and half of the remainder, within a maximum of $50. Thus, if a state makes a payment of $50 or more a month, the Federal government will provide $30.

At the end of 1948 the average monthly payment to those on Old-Age Assistance was about $42. But there is a wide difference in the amount of the average payments, as well as in the proportion of persons who receive assistance in the various states. The proportion of those 65 and over who received Old-Age Assistance ranges from 791 per 1000 in Louisiana to under 100 per 1000 in such states as Maryland, New York, and New Jersey. The average payment per recipient for Old-Age Assistance moves downward from $78.18 per month in Colorado to $16.38 in Mississippi.

This method of providing for the aged is simply charity relief and offers no incentive for an individual to be thrifty during his working career. Those who do save for their old age are taxed to support those who do not. The tendency is for an increasingly higher percentage of the aged to qualify. The relief type of plan lends itself to political considerations and there is apt to be a steady increase in the benefit payments. The cost is met from general tax funds and in time this plan would become an increasingly heavy burden on the finances of local, state, and Federal governments.

For these reasons, those who planned the original Social Security Act felt that a more constructive system should be developed to meet the financial problems of the aged, and the contributory Old-Age Insurance Plan was established. It was felt that while the assistance plan was necessary to provide for those already over 65 and in need and those who could not be otherwise covered, eventually the contributory plan would cover a large proportion of the population and the need for an assistance plan would gradually decline.

The Social Security Act of 1935 set up the contributory insurance plan covering those employed in commerce and industry. Nearly 44 million workers are now insured under this program and about 1.6 million aged persons are receiving benefits under it. The employer and the employee each pay 1 per cent of salary up to $3000 a year.

The plan now in effect provides retirement annuities, and also survivorship benefits to the widows and children of those who die. Allowances are given to a pensioner’s wife if she is over 65.

The original act provided for an increase in the tax rate at three-year intervals so that eventually the rate would be 3 per cent on employers and employees alike. The tax rates, however, have not been increased. But even without the increase in taxes a reserve of 10 billion dollars has already been accumulated. This amount is higher than estimated in 1939 because larger payrolls during the war and post-war years have resulted in larger collections, and the payments have been less because more persons have been working beyond retirement age.

The basis of this plan is that the worker and his employer contribute systematically over his working lifetime, and that upon retirement he receives monthly benefits for the remainder of his life. The contributions which an individual makes give him the feeling that he has earned the benefits as a right. This avoids and eliminates the need for a means test and the fear of being an object of charity. The contributions vary, depending upon the individual’s earnings, and the benefits likewise are based upon his earnings over his working lifetime. Sharing in the cost of the benefits should give the individual a better understanding of their value and of the workings of our economic system. The plan helps to offset a tendency on the part of the individual to look to the government for his support. He realizes, too, that any increase in benefits may involve an increase in contributions. This system of financing the program by equal payroll taxes on employer and employee is sound and overcomes the objections to the financing of the assistance plan.

The Advisory Council on Social Security appointed by the Senate Finance Committee, as well as others who have studied the problem, found that the present insurance plan, while basically sound, has some major deficiencies: (1) many workers are not now covered; (2) the benefits are inadequate; (3) the eligibility requirements for many workers are too restrictive. Only about 60 per cent of the present working force is covered under this system.

The Council recommended that the plan be extended to cover the 11 million or more self-employed, such as business and professional people, and farmers; the 3½ million farm workers; the 2½ million household workers; the million employees of non-profit institutions. It also advised that the plan be extended to cover Federal civilian employees and railroad employees, with the understanding that existing plans for these employees would be adjusted to supplement the basic protection given under the Old-Age and Survivors Insurance Plan. The armed forces and employees of state and local governments should also be covered, but agreement would have to be reached with these state and local governments to bring their employees in. Altogether these extensions would involve 27 million additional people.

3

IT HAS been the aim from the beginning to have the insurance plan provide universal coverage, but it was felt that the administrative difficulties were too great. The Treasury Department and the Social Security Agency now believe, and many people in business who have studied the problem agree, that these difficulties can be met. A simplified reporting system, similar to that used for income tax purposes, or a stampbook system seems feasible. Stamps purchased from the Post Office would be affixed in a book for both the employer and the employee taxes, and the book would be sent to the Social Security Agency at the end of the year.

One serious obstacle has been a practical method for covering the sell-employed. Theoretically, the self-employed should make a contribution both as an employer and as an employee, with the tax applying to the income derived from personal services but not to the income from capital investment. Because of the difficulties of making such a separation, the Advisory Council recommends that instead of paying double the employee rate, the sellemployed should pay 50 per cent more than the employee. While this might not be theoretically perfect, it does offer a feasible method for covering the several million self-employed.

Universal coverage would correct a number of inequities. At present many workers in the excluded groups have accumulated some credits under the system because of employment in covered groups, especially during the war. They are not eligible for benefits, however, because they were not in the system long enough. Others who have completed only minimum requirements will receive benefits out of proportion to their contributions. The actuaries estimate that with universal coverage the cost, as a percentage of payroll, will be considerably less than it is with the present plan of limited coverage. It is highly desirable that these workers obtain the same protection as others in the economy.

The present formula provides benefits of 40 per cent of the first $50 of average monthly wage and 10 per cent of the next $200, with an addition of 1 per cent of the benefit for each year the person has been in the system. Therefore, full benefits would not be paid for forty years or more. The Advisory Council recommended that adequate benefits be paid immediately and that the automatic annual increase be discontinued.

The chief cause of the present inadequate benefits is that the formula does not fairly reflect the increase in cost of living and wages since the war. The average primary benefit to the retired worker has increased from $22.60 per month in December, 1940, to $25.35 in December, 1948, or 12 per cent. During this same period the Old-Age Assistance average monthly payment in comparison has about doubled, from $21.08 in 1941 to $42.02 in 1948. Thus, while the Old-Age Assistance payments have increased more than the cost of living, there has been little change in benefits under the Old-Age Insurance Plan.

The present benefits are unrealistic, and in many cases persons who are receiving benefits must look to old-age assistance for additional support. To provide more adequate benefits the Council recommended that the formula be changed so that the benefit would be 50 per cent of the first $75 of the individual’s average monthly wage, plus 15 per cent of the next $275. This formula would apply to present beneficiaries as well as to those who retire in the future. If the plan is extended to cover the new groups, many new workers will come into the system at current wages. It will therefore be necessary to change the base period for determining benefits for those now covered. This will also result in increased benefits.

The present plan provides for a wife’s benefit of 50 per cent of the husband’s if she is 65 or over. The Council recommends that the minimum age for the wife be reduced to 60 years. This age reduction would apply in the case of widows and women who qualify for the primary benefit.

Another defect of the present plan is that if a retired worker earns as much as $15 a month in covered employment he no longer is eligible for benefits. While this is a severe restriction, it has not been serious because of the opportunity for work in non-covered employment. With universal coverage it would be much more serious. The Council therefore recommended that a new work test be established under which, between the minimum retirement age and 70, the worker could earn as much as $35 a month without having a reduction made in his benefits, but his benefits would be reduced by any amount which he earned in excess of $35 a month. It also recommended that persons aged 70 and over receive the benefits without any check on income from work.

A majority of the Council likewise recommended that the tax base be changed from the first $3000 to the first $4200 of annual earnings to reflect the increased wage levels. Some of the Council felt that this was not necessary because adequate benefits could be paid without changing the base and the change would only benefit those in the income group above $3000.

Under the present law the tax rate will be increased to 1½ per cent on the employer and per cent on the employee on January 1, 1950. The Council recommended that the rates be increased to these amounts when the benefits are liberalized and the coverage is extended.

It is not necessary for the government to operate a social insurance as if it were a private pension plan, because the taxing power of the government can create revenues whereas the private company cannot. The present taxes of only 2 per cent, however, are not realistic in terms of the 6 per cent required if financed on the same basis as private plans, and it would be better to increase the tax in small amounts periodically rather than to wait until a large increase is necessary. It is also highly desirable that the public realize the close relationship between the tax rate and the scale of benefits.

The Council recommended that any further increase be postponed until the collections plus interest on the trust fund are insufficient to meet the benefit payments and administrative costs. The actuaries estimate that it would not be necessary to go up to 4 per cent (2 per cent each on the employer and employee) for about ten years. When years later the 4 per cent rate becomes inadequate, the question will undoubtedly arise as to whether the payroll tax should be increased further or the additional cost be met from other revenues.

Questions have arisen regarding the investment of the Old-Age and Survivors Insurance reserve fund and the use of the money for other purposes. This reserve has been properly invested in U.S. government securities, just as life insurance companies have invested a large part of their reserve funds in government securities. The interest from the securities is credited to the fund. The cash has been used for government purposes, as have the proceeds from the sale of government bonds to the public. The investment of the old-age reserve in government securities means that fewer bonds to that extent are held by the public.