!FHD.xJ7 -MB OF THE low, ffi,,71TYOFMICH "AN NINSULA El 171[ THE SOCIAL SECURITY ACT IN OPERATION THE SOCIAL SECURITY ACT IN OPERATION A Practical Guide to the Federal and Federal-State Social Security Programs BY BIRCHARD E. WYATT, Ph.D. ACTING CHIEF TECHNICAL ADVISER, OFFICE OF THE ACTUARY, SOCIAL SECURITY BOARD AND WILLIAM H. WANDEL, Ph. D. SENIOR TECHNICAL ADVISER, BUREAU OF UNEMPLOYMENT COMPENSATION, SOCIAL SECURITY BOARD With the collaboration of WILLIAM L. SCHURZ, Ph.D., Chief of Training, Social Security Board FIRST EDITION Published by GRAPHIC ARTS PRESS, INC. WASHINGTON, D. C. 1937 COPYRIGHT, 1937 BY GRAPHIC ARTS PRESS, INC. All rights reserved-no part of this book may be reproduced in any form without permission in writing from the publisher. PRINTED IN THE UNITED STATES OF AMERICA TO WILLIAM R. WILLIAMSON FOREWORD The Social Security Act is perhaps the most significant and, in principle, the least debatable Federal statute of recent years. The elimination of poverty has long been a part of the creed of both politicians and sociallyminded citizens. This Act makes systematic Nation-wide provision for important financial steps toward that ideal and for activities designed to lessen physical suffering. It is admittedly incomplete and inadequate, but future improvements may be expected only to extend and perfect what is already accepted as basically correct. This legislation carries with it some immediate sacrifice, its benefits are somewhat remote, its basic theory is not easily understood by the "average man," and it is impeded by social concepts and political controversies. It represents change to many to whom innovations are abhorrent. So its path has not been smooth, and its terms bear evidence of compromise. The administration of the project embodied in the Act is the task of the Social Security Board. They have had to develop a vast working organization with little of precedent to guide them. They have encountered the difficulties inherent in the necessity of creating this organization in a few months, and of implementing the law by adopting procedures without time for testing them adequately in practice. In view of these difficulties, the results so far achieved are most praiseworthy. The Act and its administration affect directly a large share of the population, and indirectly the entire population of the country. It is important that knowledge of what the Act is and how it works be spread as widely as possible in order that those who are affected by it vii viii FOREWORD may understand it and may form intelligent opinions. Employers and employees who are subject to its terms are in particular need of such knowledge, that they may at once cooperate and criticize. THE SOCIAL SECURITY ACT IN OPERATION is an explanation of the Act and of its practical operation which should be of the greatest assistance in reaching an understanding of the social security policy of the Government and of the means it has adopted to carry out that policy. The authors are able, both by reason of their positions in the administration of the Act and their earlier training, to present a complete, authoritative, and well-proportioned picture of the accomplishments and problems of the social security program. They have succeeded in combining a feeling for the basic social theory of the program with a comprehension of its detailed practical application. This book answers the questions which many who have no opportunity to study the social security program in detail have asked: What is the Social Security Act? What is its purpose? What has been done to put it into effect, and what are the problems of the future? It should be read by everyone subject to the Act, and may be read with profit by anyone interested in social problems. RALPH H. BLANCHARD Columbia University October 1, 1937 ACKNOWLEDGMENTS The authors are associated with the Social Security Board, but in writing this book they have not acted in their official capacities. Instead, the work represents their points of view as independent analysts of the program. Parts I and V of the work were written jointly by B. E. Wyatt and W. L. Schurz, Part II was written by B. E. Wyatt, Part III by W. H. Wandel, and Part IV by W. L. Schurz. Although they have not been able to use every suggestion offered, the authors are very grateful to those persons within the organization who kindly reviewed all or parts of the manuscript. These persons include Arthur J. Altmeyer, Chairman of the Social Security Board; William R. Williamson, Actuarial Consultant to the Board; Martha D. Ring, of Informational Service; Merrill G. Mutray and Gladys Friedman, of the Bureau of Unemployment Compensation; Ivan Asay and Ruth 0. Blakeslee, of the Bureau of Public Assistance; and H. B. Lemon, of the Training Staff. For whatever errors and omissions appear the authors, of course, are entirely responsible. They are also greatly indebted to Alvin M. David for the very important part he played in the preparation of Parts II and V; to Benjamin B. Kendrick, Jr., for his assistance in analyzing the Treasury Regulations; and to Katherine A. Waddill for her very efficient services in proof reading and checking. The generous help given by private individuals who read and criticized parts of the work is deeply appreciated. Among those who contributed highly valued suggestions are Ralph H. Blanchard, Professor of Insurance ix X ACKNOWLEDGMENT at Columbia University; William J. Graham, Vice-President of the Equitable Life Assurance Society of the United States, and Murray W. Latimer, Chairman of the Railroad Retirement Board. The authors owe a personal debt of gratitude to S. S. Huebner, Professor of Insurance at the University of Pennsylvania, who several years ago directed their efforts into the insurance field. THE AUTHORS Washington October, 1937 CONTENTS PART I INTRODUCTION CHAPTER Page I. THE HISTORY OF THE SOCIAL SECURITY ACT.......... 1 II. ADMINISTERING THE ACT.......................... 16 The Social Security Board, 16. Other Federal Agencies, 33. PART II FEDERAL OLD-AGE BENEFITS III. THE PROGRAM AND ITS ADMINISTRATION............ 37 The Provisions of the Act, 37. The Bureau of OldAge Insurance, 39. IV. REGISTRATION OF EMPLOYERS AND EMPLOYEES...... 44 Devising a System of Accounts, 44. Applications for Identification and Account Numbers, 51. Problems in Connection with the Registration, 55. The Assignment of Account Numbers, 58. Assignment of Account Numbers to Railroad Employees, 61. The Results of the Registration Program, 62. V. COLLECTION OF TAXES AND WAGE INFORMATION...... 64 VI. COVERAGE AND TAX LIABILITY -THE DEFINITION OF "EMPLOYMENT"........................... 75 The Employment Relationship, 78. Distinction Between Employee and Independent Contractor, 80. Classes of Employees, 85. Who Are Employers, 86. VII. COVERAGE AND TAX LIABILITY -THE DEFINITION OF "EXCLUDED EMPLOYMENTS"............. 91 Agricultural Labor, 91. Domestic Service, 97. Casual Labor, 98. Employees Who Have Attained Age 65, 99. Officers and Members of Crews, 99. Government Employment, 100. Religious, Charitable and Certain Other Institutions, 102. Railxi xii CONTENTS CHAPTER Page road Employees, 105. Administrators of Estates and Receivers, 105. VIII. COVERAGE AND TAX LIABILITY-THE DEFINITION OF "WAGES"................................. 108 Included Items, 109. Excluded Items, 111. Wages in Kind, 113. Wages and Non-Wage Payments Intermixed, 114. Determination of When Wages Were Earned, 115. IX. THE WAGE RECORDS SYSTEM...................... 118 X. CLAIMS FOR BENEFITS........................... 126 Methods of Adjudication, 127. Examples of Claims Procedure, 131. XI. RESERVES FOR OLD-AGE BENEFITS................... 146 PART III UNEMPLOYMENT COMPENSATION X1I. THE SOCIAL SECURITY ACT AND STATE UNEMPLOYMENT COMPENSATION LAWS....................... 171 Provisions of the Act, 171. Effect of the Social Security Act on State Action, 175. The Provisions of State Laws, 178. XIII. FEDERAL RESPONSIBILITIES........................ 205 Bureau of Unemployment Compensation, 205. Other Bureaus of the Social Security Board, 220. The Treasury Department, 222. XIV. STATE ADMINISTRATIVE RESPONSIBILITIES......... 225 Administrative Organization, 226. Selection of Personnel, 227. Determination of Coverage, 229. Employers' Initial Statements, 232. Classification of Subject Employers, 233. Classification of Covered Employees, 235. Contribution Payments and Reports, 235. Records and Reports on Individual Employees, 238. Deposits in the Unemployed Trust Fund, 244. Benefit Payments, 245. Multi-State Workers, 252. Statistics and Reports, 254. Coordination of State Activity, 257. PART IV PUBLIC ASSISTANCE AND PUBLIC WELFARE XV. THE PUBLIC ASSISTANCE PROVISIONS OF THE ACT.... 263 The Background of the Assistance Program, 264. Analysis of the Assistance Provisions of the Act, CONTENTS xiii CHAPTER Page 269. Conditions for Approval of State Plans, 271. The Bureau of Public Assistance, 279. Financial Provisions of the Act, 283. XVI. OPERATION OF STATE PUBLIC-ASSISTANCE PROGRAMS.. 287 Number of Recipients, 288. Volume of Assistance Payments, 291. Average Assistance Payments, 293. State and Local Organizations, 294. Conditions of Eligibility, 299. Limitations of Allowances, 306. Financing the State Assistance Programs, 309. Problems of Public-Assistance Administration, 311. XVII. THE WELFARE PROVISIONS OF THE ACT.............. 318 Maternal and Child Health Services, 319. Services for Crippled Children, 324. Child-Welfare Services, 328. Vocational Rehabilitation, 330. PublicHealth Work, 334. PART V PLANNING FOR SOCIAL SECURITY XVIII. BASIC FACTORS IN ADMINISTRATION AND FUTURE DEVELOPMENT-ECONOMIC, ACTUARIAL AND TECHN ICAL..................................... 345 The Problem of Economic Insecurity, 346. Basic Factors in Provision for Social Security, 348. Technical Considerations in Administration, 357. APPENDIX I. REGIONAL OFFICES OF THE SOCIAL SECURITY BOARD.. 361 II. FIELD OFFICES, BUREAU OF OLD-AGE INSURANCE.... 363 III. UNEMPLOYMENT COMPENSATION................... 365 Table I - State Unemployment Compensation Laws, 365. Table II-Unemployment Compensation Legislation and Grants, 367. Table III-Collected Under Title IX of the Social Security Act, 368. Table IV-Unemployment Trust Fund, 369. Table V-Investment of Unemployment Trust Fund, 370. IV. STATE PUBLIC WELFARE AGENCIES................. 371 V. PUBLICATIONS OF VARIOUS RESEARCH AGENCIES...... 376 IN DEX........................................... 377 I PART I INTRODUCTION CHAPTER I THE HISTORY OF THE SOCIAL SECURITY ACT On April 19, 1935, the House of Representatives passed the Doughton Bill, or H. R. 7260, by a non-partisan majority of 372 to 33. Two months later the Senate passed the same bill by as overwhelming a vote, 77 to 6. After a series of conferences on amendments inserted by both houses, the bill was accepted in its final form on August 8 and 9. On August. 4, 1935, it was signed by the President and became law as the Social Security Act. Twenty-five years earlier such a piece of legislation would have been impossible. Congressman Victor L. Berger, of Wisconsin, introduced a bill in Congress in 1911, and again in 1924, providing for Federal old-age "pensions." Though there was much discussion, both in and out of Congress, the time was not yet ripe for a systematic and organized approach to the problem of insecurity. Meanwhile, most European countries and some of the South American republics already had in operation comprehensive programs of social insurance. In fact, that of Germany dated from 1889. France had had an old-age insurance law since 1911. It required the industrial cataclysm of the early thirties to give the necessary impetus to the movement in the United States. Under the stress of widespread destitution and suffering the old tradition that the average individual could provide of his own volition and means for the contingencies of life was thrown into the discard. The hazards which threatened the security of the working man had gotten out of hand and the time had come when ordinary thrift and foresight were no longer adequate 1 2 INTRODUCTION to protect him against the full force of their incidence. He suddenly found himself helpless before the cumulative impact of vast economic changes:-technological improvements that menaced his job; the development of gigantic corporate structures, on whose remote and impersonal will his livelihood depended; a capacity for production that had dangerously outgrown existing markets; whole industries declining because of the competition of other industries; an uncontrolled securities market that had become one of the major businesses of the country; the inordinate increase of urbanization, steadily decreasing the ratio of independent farmers to factory workers, who were dependent on others for their livelihood; the growth of national distribution that was crowding out the small manufacturer and merchant; and everywhere, from the factory assembly line to the store counter, a faster tempo that penalized the older worker. The average man had lived and worked too close to the swirling play of these processes to evaluate them clearly or to measure their possible effect on his own welfare, once the great planless machine should get out of balance. Then the system crashed about his bewildered head. Thousands of homes and millions of jobs and billions in savings were lost. The individual's reserves against insecurity were gradually depleted or altogether wiped out. When the force of the depression had spent itself and he had recovered from his first feeling of panic, he vaguely felt that something should be done to protect him and his dependents from a repetition of the experience. During those critical years far-sighted observers of social problems were studying possible plans to safeguard the population against the large-scale hazards of our economic system. The ground was ready for the social security program. Meanwhile, certain fundamental changes were taking place in the American population. Between 1860 and 1930 the percentage of persons over 65 had doubled, compris HISTORY OF THE SOCIAL SECURITY ACT 3 ing 5.4 per cent of the population, or a total of over 6,500,000 persons, in the latter year. Students of population trends estimate that by 1980, as a result of the combination of declining birth rate, restricted immigration, and increasing life expectancy, one person in every eight will be over 65. When the percentage becomes this high the cost of supporting the dependent aged will be a heavy burden on the income producers of the population. Moreover, with the shortened span of working years as contrasted with the years of life expectancy, if present trends continue, men and women of 50 and over, or 45 and over, will experience increasing difficulty in finding jobs in our highly mechanized civilization. Thus the proportion of income producers in the population will be further reduced. Not even in relatively prosperous times is the average worker able to accumulate enough to assure himself and his wife of subsistence in their old age. As a rule, he can look forward only to dependency, in one form or another, either upon his children or upon charity. A man at 65 can expect about 12 more years of life; a woman, 15 more years. To provide a monthly income of $25 for these remaining years, a man must have saved about $3,300, a woman about $3,600. Only a minority have built up even so small a reserve against the unproductive years. In the peak year of 1929 the average income of all salaried employees was estimated at about $1,500, and by 1932, for those who still worked, it was approximately $1,200. In the former year 18,000,000 persons, or 44 per cent of all non-agricultural workers, had annual earnings of less than $1,000; 28,000,000, or nearly 70 per cent of the total, were making less than $1,500 a year. With such a concentration in the low-income groups, adequate provision against old age was clearly out of the question. At their death less than 10 per cent of the aged leave enough to justify the expense of probating their estates. Dr. I. M. Rubinow has estimated that of the 6,500,000 persons 4 INTRODUCTION over 65 in 1930 only 1,000,000 had sufficient savings for their support; another 1,000,000 were still working; 2,000,000 were dependent on their children; 1,500,000 lived by begging or on the precarious returns of marginal employments; and the remaining 1,000,000-odd were inmates of institutions or dependent upon State old-age assistance or some form of relief. By 1935 nearly three quarters of a million persons in this age group were on the relief rolls of the Federal Emergency Relief Administration, or about four times as many as were then in receipt of State old-age assistance. The ideal of an independent and self-respecting old age was clearly very far from realization. No effective way had yet been found to mitigate the economic hazards of senescence for the majority of men and women. As with old age, so with childhood. Through loss of parental support by death, disability, or desertion of the family breadwinner, or from other circumstances, juvenile dependency had become a major social problem. The costs to society in material and moral values of such a condition were very high. During the depression children had suffered heavily from undernourishment, lack of medical attention, and the break-up of impoverished homes. In 1935 there were still 7,400,000 under 16 who were in families on relief rolls; an estimated 300,000 who were chronically neglected and dependent on such intermittent charity as might fall their way; from 300,000 to 500,000 who were physically handicapped from one defect or another; and 200,000 delinquents who were brought before the courts each year for offenses against the law. Though unemployment had always been with us, even in the best of times, it had never assumed such proportions as it did in the early thirties. In the relatively prosperous years from 1922 to 1929 an average of 8 per cent of all industrial workers were jobless. At the lowest the number never fell under 1,500,000. By the depth of HISTORY OF THE SOCIAL SECURITY ACT 5 the depression it had probably risen to between 15,000,000 and 16,000,000. Approximately one-third of all normally gainful workers were unemployed in 1933. In Michigan nearly half were without work and in Pennsylvania over 40 per cent. The situation was beyond any of the halting techniques ordinarily resorted to in the past and clearly demanded against its future recurrence some more permanent protection than was afforded by payment of relief. Beyond a small group of students of social problems, there had been little serious discussion in the United States of the legislative technique of social, or economic, security. Our only approach to the question had been through the rather haphazard State plans for old-age assistance; and when the 73d Congress convened in March 1933, it was shortly called on to consider the Dill-Connery Bills, which were framed to meet the problem in the traditional way. Specifically, they authorized an annual Federal grant of $10,000,000 to bear one-third of the cost of State old-age assistance programs. The size of the proposed appropriation was indicative of the failure to grasp the magnitude of the problem. Another phase of the general problem of insecurity was attacked in the second session of the same Congress, when the Wagner-Lewis Unemployment Insurance Bill was introduced in March 1934. Hearings were held on this proposal, which had the endorsement of the President. However, the bill was shelved to make way for consideration of a more comprehensive program of social insurance. Meanwhile, discussion of these two measures formed valuable groundwork for the larger plan that was already contemplated. In a special message to Congress on June 8, 1934, the President announced his desire for a wide social insurance plan that would provide against the major economic hazards to which the various elements of the population are exposed. At this time he stated some of the general 6 INTRODUCTION principles that were later to form the basic framework of the Social Security Act. "The various types of social insurance are interrelated," he said, "and I think it is difficult to attempt to solve them piecemeal. Hence I am looking for a sound means which I can recommend to provide at once security against several of the great disturbing factors in life-especially those which relate to unemployment and old age." Three weeks later he appointed a Committee on Economic Security, to which he delegated the task of studying the bases for comprehensive legislation. The Committee was composed of the Secretaries of Labor, Agriculture, and Treasury, the Attorney General, and the Federal Emergency Relief Administrator. A large advisory council was made up of leaders in various specialized fields, most of whom were actively interested in some related phase of the general problem to be studied. The council included such figures as Paul Kellogg, editor of The Survey; enlightened and public-spirited employers, like Gerard Swope, of the General Electric Company, Walter C. Teagle, of the Standard Oil Company, and M. B. Folsom, of the Eastman Kodak Company; labor leaders, like William Green and George Berry; social welfare leaders, like Grace Abbott, Helen Hall, and Monsignor John A. Ryan; and John G. Winant, Governor of New Hampshire, who was to become first Chairman of the Social Security Board. The Committee was further able to draw on the knowledge of six special advisory groups, composed of persons prominent in the fields of medicine and public health, and of various branches of public welfare. A technical board was also set up, constituted by Federal officials who were specialists in certain phases of the program under consideration. Its chairman was Arthur J. Altmeyer, then Assistant Secretary of Labor, and later to be appointed to the Social Security Board. Among other members were Walton H. Hamilton, Chairman of the Advisory Council of the HISTORY OF THE SOCIAL SECURITY ACT 7 National Recovery Administration, and Murray W. Latimer, Chairman of the Railroad Retirement Board, both of whom were later to hold important posts under the Social Security Board. Actuarial advice was supplied by a special committee of four, headed by Professor James W. Glover, of the University of Michigan, and including M. A. Linton, President of the Provident Mutual Life Insurance Company. Attached to the same committee was W. R. Williamson, of the Travelers Insurance Company, who was to become actuarial consultant to the Social Security Board. Some of the most valuable contributions to the work of the Committee on Economic Security were made by its immediate staff of specialists. Among the outstanding members of the staff were Edwin E. Witte, professor of economics at the University of Wisconsin; Bryce M. Stewart, director of research, Industrial Relations Counselors, Inc., of New York City; Mrs. Barbara Nachtrieb Armstrong, of the faculty of law at the University of California; and J. Douglas Brown, professor of economics at Princeton University. The report of the Committee on Economic Security was submitted to Congress by the President on January 17, 1935, accompanied by a short message in which the President recommended legislation to follow the outline suggested by the Committee. The report was to form the basis of three bills which were shortly introduced in Congress. As debate developed on the proposals, the initial measure took shape in the bill which was put forward by Congressman Doughton as a substitute for his original House Resolution 4120, and which, with subsequent modifications, was a few months later to become the Social Security Act. In the interval the words "social security" had been substituted for "economic security" and the terminology of the program otherwise fixed, at least for statutory purposes. As the law finally issued from Congress it was found 8 INTRODUCTION to have followed substantially the general outline offered by the Committee on Economic Security. However, it omitted any reference to "employment assurance" or work relief. The law was to be administered by an independent three-man Board instead of by a Social Insurance Board within the Department of Labor. Old-age assistance and aid to dependent children were to be administered by the Social Security Board instead of by the Federal Emergency Relief Administration, as recommended by the Committee and provided for in the original Economic Security Bill. The provision for aid to the blind, which forms the substance of Title X of the Act, was added by the Senate Finance Committee. The general principle of compulsory "contributory annuities" was accepted by Congress as the basis for its long-range program of "old-age benefits." The coverage of this part of the law was lowered by increasing the excluded classes, and the Committee's proposal for a system of voluntary "old-age annuities," which might be available to members of the excluded groups, was omitted from the law. The provision for the Old-Age Reserve Account, which has since become the subject of so much controversy, was inserted in the law on the recommendation of Secretary of the Treasury Morgenthau, as an alternative to the Committee's suggestion for a supplementary Federal contribution to the fund after 1965. The Committee had said: "We are not prepared at this time to make recommendations for a system of health insurance," and Congress concurred in its hesitation to include this feature in the larger program. The Act as passed contained a number of other departures in detail from the recommendations of the Committee, but none which affected the essential integrity of the original program. t In spite of its manifest incompleteness, the Social Security Act provides a well-rounded framework for a national program of social insurance. It makes no pretensions to completeness or finality, and assumes that subsequent HISTORY OF THE SOCIAL SECURITY ACT 9 amendment will be inevitable and necessary as experience demonstrates its inadequacies or permits a broadened scope. However, it constitutes a sound foundation for dealing with problems too urgent to await legal perfection. Meanwhile, it assumes that the future may be trusted to take care of such administrative difficulties as are certain to arise in the course of its operation. For the time being a working plan was made ready for use. Ten distinct phases of the general program are pro —" vided for in the Social Security Act. These may be grouped in four larger categories-old-age benefits, unemployment compensation, public-assistance, and publicwelfare services. The first two constitute large-scale innovations in American social legislation; the latter two represent only an extension and coordination of governmental activities already existent. The public-assistance sections of the law provide for cash allowances to the needy aged (Title I), dependent children (Title IV), and the needy blind (Title X). The so-called public-welfare features of the Social Security Act provide for Federal aid in establishing or extending State services for maternal and child health in rural areas and in areas suffering from severe economic distress (Title V, Part 1); for the care and treatment of crippled children in similar areas (Title V, Part 2); for the care and protection of homeless, dependent, and neglected children, particularly in rural areas and other areas of special need without adequate facilities for organized community child-welfare activities (Title V, Part 3); for contributing to State programs for the vocational rehabilitation of physically disabled workers (Title V, Part 4); and for extending State and local public-health services (Title VI). These five public-welfare provisions are supplementary to the recognized objectives of a social insurance system. They represent a humanitarian movement designed to give a substantial impetus to State governments in meeting cer 10 INTRODUCTION tain imperative social problems for which they may have lacked the necessary funds or concerted public action. _ While provision is made in the Social Security Act against three of the major misfortunes of life —juveInile and old-age dependency, and unemployment - certain other features common to foreign social insurance systems are omitted. Thus, in the general field of physical disability, except for the assistance provisions made for the needy blind, the approach is toward prevention or therapy. After all, the public-welfare provisions for child and maternal health, for the treatment of crippled children, and for supplementing the public-health activities of State and local authorities represent only a piecemeal and very inadequate attack on a problem, the liability of whose incidence is universal. The provision for vocational rehabilitation of disabled workers is essentially an economic measure, designed to restore some degree of earning power to the physically handicapped individual. There is nothing in the law comparable to the extensive health-insurance programs of some European countries, whereby the worker is protected against the economic losses incident to sickness. Nor does it contain any provision for invalidity insurance for workers incapacitated either temporarily or permanently by accident or other cause. Finally, it lacks a provision for maternity insurance, found in some foreign plans, by virtue of which a married woman who is employed receives a specified compensation during periods of confinement. Moreover, no attempt is made to provide income protection for survivors of workers who are covered by the old-age benefits or unemployment compensation programs. One of the major problems involved in drafting the Social Security Act was the division of administrative responsibility between the Federal and State governments. The Committee on Economic Security had studied the problem with much care and the President was deeply conscious of the necessity for a proper balance of powers HISTORY OF THE SOCIAL SECURITY ACT 11 in administering the program. On the other hand, several different factors were concerned in the problem: public sentiment against excessive centralization and the possible creation of a large political "bureaucracy"; the accepted constitutional rights of the States; the advisability of utilizing existing State welfare agencies, familiar with local conditions and experience in the administration of certain phases of social legislation; and the value of utilizing the States as experimental laboratories in a largely untried field. On the other hand, the migratory nature of American labor made it difficult to provide for its welfare on a long-range basis exclusively within State lines. In this connection, it was significant that in 1930 about one-quarter of the population were living in States other than those in which they were born. This fact explains the purely Federal character of the old-age benefits program, which was clearly not a proper subject for State legislation or administration. Also, the inequalities between States possible under State legislation could easily give one State an appreciable competitive advantage over others with more burdensome requirements on their industries. To guard against extremes of this possibility, certain minimum standards for State legislation on unemployment compensation and public assistance were incorporated in the Federal statute. Moreover, certain inducements, such as the tax-offset device in the unemployment compensation provisions, and the guarantee of State administrative expenses, were calculated to bring lagging States into line with what was designed to be a Nation-wide program. Finally, personnel standards in some State governments were so low as to threaten the effective operation of their plans. It was hoped to avoid the worst consequences of this condition by fixing minimum requirements of State administration and so indirectly encouraging States to set up civil-service standards for their administrative personnel. In actual practice the power to withhold grants-in-aid 12 INTRODUCTION for failure to conform with certain administrative criteria placed a potentially strong lever in the hands of Federal authority. Though the working arrangements devised to reconcile respective interests of the Federal and State governments apparently provided a satisfactory foundation for cooperative effort, experience alone will show whether all features of the administrative partnership are sound and practicable. For example, some persons are of the opinion that it may eventually be necessary for the Federal Government to add unemployment compensation to its direct responsibilities, along with old-age benefits. Much will depend on how successfully the States are able to manage a highly complex program, whose natural difficulties are liable to be aggravated by increased interstate migration of workers and by the chance of prolonged and widespread unemployment within their borders. It is possible that sectional depressions in certain concentrated industries might affect the financial soundness of State plans. In that eventuality the application of residual relief would have to supplement the activities of the State plans so affected. -- The Social Security Act provides for a variety of fiscal devices to finance the different phases of the program. Probably the simplest one used is the grant-inaid, by which the Federal Government contributes to the cost of designated State projects. Grants of this character have been long an accepted practice in such matters as road building, public education, and other State enterprises. The financial participation of the Federal Government in the public-assistance and publicwelfare phases of the social security program consists of similar direct appropriations made to the credit of the States for specified purposes. These funds are either to be used for meeting the administrative expenses of the State plans or, as in the case of the public-assistance provisions, for supplementing the actual payments HISTORY OF THE SOCIAL SECURITY ACT 13 made to beneficiaries of the State laws, that is, the needy aged or the blind or dependent children. Public-assistance grants of the latter category are made on a matching basis, either at an equal ratio or on a scale of one dollar to two, as in the case of aid to dependent children. To provide for an increase in Federal revenues Title VIII of the Act levies an income tax on the wage earnings of employees and an equivalent excise tax on the pay rolls of employers. A similar excise tax on pay rolls, payable by employers, is imposed under Title IX. Through a tax-offset device, State collections from employers for unemployment compensation may be credited against this tax. The amounts thus collected by the State are immediately deposited in an Unemployment Trust Fund in the Federal Treasury. At the discretion of the State, employees may also be required to contribute to the unemployment compensation fund. At present several States have such an arrangement in force. All receipts from both sources are paid into the Federal Treasury. Amounts collected under Title VIII of the Act are expected to be sufficient to offset expenditures and obligations incurred under the old-age benefits program. Like all Federal receipts, they are merged with internal revenue collections from other general sources. However, it is expected that the annual Federal appropriation to the "Old-Age Reserve Account" in the Treasury, provided for in Title II of the Act, will be about equal to the tax collections. It is from this reserve fund, which is described elsewhere in greater detail, that individual claims are paid to beneficiaries under this phase of the program. The Unemployment Trust Fund is established in the Federal Treasury for the deposit to the credit of each State of the amounts it collects under its unemployment compensation program. The Secretary of the Treasury is empowered to invest in Federal interest-bearing 14 INTRODUCTION obligations such portions of the fund as may not be required for current withdrawals. By the end of its second year, certain features of the program had become matters of controversy. Though numerous proposals for amendment were made in the session of Congress which met from January to August 1937, Congress refrained from the hasty prescription of remedies that might, in the light of future experience, prove to have been ill-considered. Among the major issues which remain for future determination are (1) extension of the coverage of the Federal old-age benefits program to some of the i classes at present excluded; (2) the inclusion of health and invalidity insurance; (3) the soundness of the oldage benefits plan, and of the Old-Age Reserve Account as a fiscal device; (4) the most suitable scales of assistance grants and benefit payments; and (5) the proper adjustment of the elaborate Federal-State relationships involved in the program. These are controversial matters which can be resolved only by Congressional action. Among the larger administrative problems which have already developed are (1) the most satisfactory methods for the collection of the Federal taxes required under the old-age benefits and unemployment compensation plans; (2) the practicability of the wage-records system used by the Bureau of Old-Age Insurance; and (3) the proper degree of administrative decentralization of the three operating Bureaus. CHAPTER II ADMINISTERING THE ACT The Social Security Board established by the Act, and three of the regular departments of the Federal Government-Treasury, Labor, and Interior-are involved in the administration of the various phases of the social security program. In this respect the Act wisely provided, wherever possible, for utilizing the services of existing agencies experienced with the particular problems concerned, rather than for setting up duplicate administrative machinery. THE SOCIAL SECURITY BOARD A Board of three members comprises the governing body of the Federal old-age benefits, unemployment compensation, and public-assistance programs of the Social Security Act. In fact, the Social Security Board and its administrative organization are legally synonymous. To administer the unemployment compensation and oldage benefits plans, the Committee on Economic Security had recommended the creation of a "social insurance board" within the Department of Labor. At the same time it recommended that the public-assistance features of the proposed law be administered by the Federal Emergency Relief Administration. However, a separate and independent agency was decided upon in the course of the Congressional discussions on the bill. In determining on this administrative form Congress followed a precedent common in the Federal Government. Thus, it had the example of such long-estab15 16 INTRODUCTION lished agencies as the Interstate Commerce Commission, the Civil Service Commission, the Federal Trade Commission, and of newer departments, like the Railroad Retirement Board. On the other hand, the plan of a single administrative head had been followed in several of the so-called "New Deal" agencies, such as the Federal Housing Administration, and the now defunct National Recovery Administration. Congress chose to forego the probability of greater operating efficiency for that of better deliberated conclusions and the conciliation of partisan views. The members of the Social Security Board are nominated by the President, with the usual reference to the Senate for confirmation or rejection. All three members may not be of the same political affiliation. Each draws a salary of $10,000 a year and is appointed for a term of six years. However, the terms of the three original members were to be staggered over two-year intervals at respectively, two, four, and six years. The President was given the right to designate one of the three as Chairman of the Board. The membership of the Board was originally made up of John G. Winant, Republican, of New Hampshire; Arthur J. Altmeyer, Democrat, of Wisconsin; and Vincent M. Miles, Democrat, of Arkansas. Mr. Winant, who was appointed the first Chairman of the Board, had a noteworthy background in the general field of social legislation. As a member of the New Hampshire Legislature and later as Governor for three terms, he had been a leader in the formulation of laws for the benefit of the workers of his State. He is also President of the National Consumers' League, and Vice-President of the American Association for Labor Legislation. In 1934 he was named Chairman of the Textile Inquiry Board by President Roosevelt, and in April 1937, he acted as Chairman of the Tripartite Technical Conference on the Textile Industry, held in Washington under the auspices ADMINISTERING THE ACT 17 of the International Labor Organization. At the time of his appointment to the Social Security Board he was Assistant Director of the International Labor Office at Geneva, Switzerland. During the national campaign of 1936, he resigned from the Social Security Board in order to make a public defense of the program against the attacks which were being made by leaders of his party. He accepted a temporary reappointment to the Board in November and resigned again in the following February. Arthur J. Altmeyer, who succeeded Mr. Winant as Chairman of the Board, has also been active in related fields of social legislation and administration. Between 1918 and 1934 he held various posts with the Wisconsin Tax Commission and the Industrial Commission of that State. He was later head of the Compliance Division of the National Recovery Administration, and then Assistant Secretary of Labor. As Chairman of the Technical Board, which assisted the President's Committee on Economic Security, he took an important part in laying the groundwork for the Social Security Act. Vincent M. Miles was a well-known attorney in Arkansas. He has been prominent in American Legion circles and was for many years Democratic National Committeeman for his State. He has also served as Regional Adviser of the Public Works Administration and Chairman of the Sixth District of the National Resources Board. On the second resignation of Mr. Winant, Murray W. Latimer was nominated for appointment to the Board to fill out the unexpired term. Mr. Latimer had taken a prominent part in the work of the Committee on Economic Security. For a while he had divided his time between the Railroad Retirement Board, of which he was Chairman, and the Social Security Board, in which he organized, and for a time directed, the Bureau of Federal Old-Age Benefits.' However, since two members 1The name of this Bureau has recently been changed to Bureau of Old-Age Insurance. 18 INTRODUCTION of the Board were listed as Democrats and he, too, was so listed, his nomination was withdrawn before it came up for confirmation by the Senate. In August 1937, George Edmund Bigge, Republican, of Rhode Island, was appointed to the place on the Board left vacant by the resignation of Mr. Winant. Mr. Bigge was professor of Political Economy at Brown University and, as a specialist in labor legislation, had taken part in organizing unemployment compensation administration in Rhode Island. Later in the same month Mary W. Dewson, Democrat, of New York, was named to the Board, to succeed Mr. Miles whose term of appointment expired on August 14. Among other related activities, Miss Dewson had been a member of the Consumers' Advisory Board of the National Recovery Administration and was later Chairman of the Labor Standards Committee of the National Consumers' League. The Report of the President's Committee on Administrative Management, which formed the basis of President Roosevelt's plan for the consolidation and reorganization of the Federal services, proposed radical changes in the organizational structure of the social security program. The Report recommended that those features of the program which are based on the right of the beneficiary, such as unemployment compensation, be administered by the Department of Labor, and that those based on need, such as the public-assistance provisions, be transferred to a new Department of Social Welfare for administration. Although bills were introduced in both Houses embodying some of these recommendations, Congress adjourned on August 21, 1937, without final action on this proposal. The duties of the Board are described in very general terms in the six lines of Section 702 of the Act. Briefly, its functions include: the superior direction and coordination of Federal participation in the program; the ADMINISTERING THE ACT 19 execution of administrative duties specifically prescribed by the Act; the determination of general policies within limits established by the terms of the Act; and the study and recommendation of legislation for the amendment of the Act. The Board is also required to make the customary report to Congress, at the beginning of each regular session, of the administration of the functions with which it is charged. In actual practice, the major part of the administrative and executive duties of the Board is handled by the Office of the Executive Director, though the Board sometimes directly concerns itself with certain operating details, such as the making of administrative appointments. The Executive Director is the administrative and executive officer of the Board, and as such is under its direct supervision. His position is, therefore, somewhat analogous to that of the general manager of a business corporation. He supervises the work of the various bureaus, and also has immediate supervision of the twelve regional offices. All lines of responsibility between executive and administrative personnel, whether departmental or field, on the one hand, and the Board on the other, pass through his office. In this connection, all official regulations, orders and bulletins, and office memoranda, applicable to more than a single bureau, are issued over the Executive Director's signature. He is, moreover, directly responsible to the Board for the conduct of administrative relationships with the States and with agencies of the Federal Government involved in the operation of the program. Frank Bane, of Virginia, was early appointed to the position of Executive Director of the Board. Mr. Bane had formerly been Director of Public Welfare in Virginia, and at the time of his appointment by the Social Security Board was Executive Director of the American Public Welfare Association. As a result of the filibuster conducted by Senator Huey 20 INTRODUCTION Long, of Louisiana, in August 1935, Congress adjourned without voting an appropriation to set up the organization provided for in the Social Security Act. Until the following February the Board operated with a small staff on a special allocation of funds from the Works Progress Administration to the Department of Labor. When Congress convened again, it voted an appropriation of $1,000,000 for administrative expenses of the Board for the remainder of the fiscal year 1935-36, of which only slightly more than half was actually disbursed. At the same time $150,000 was allocated to the Census Bureau of the Department of Commerce for special salaries and expenses, and an equal amount to the Children's Bureau of the Department of Labor, to meet administrative expenses of that Bureau's part in the program. Total disbursements made from all three funds for the first fiscal year amounted to $624,574. For the fiscal year 1936-37, a total of $30,800,000 was appropriated for administrative expenses, of which $12,400,000 was destined for use in establishing the wage records plan of the Bureau of Old-Age Insurance. By the end of the fiscal year, actual expenditures and unpaid obligations had been incurred to a total of $17,391,197. Of this figure $5,515,804 represented payments for salaries and expenses in Washington and the field, and $11,875,395 represented disbursements against the wage records appropriation of $12,400,000. Administrative appropriations for the work of the Board for the fiscal year 1937-38 were reduced to $23,000,000, of which $1,000,000 was a special fund for printing and binding. In July 1937, in accordance with instructions of the Bureau of the Budget to all independent agencies of the Federal Government, 10 per cent of the year's appropriations were impounded as an economy measure, with a resultant curtailment of certain activities for the ensuing year. For administrative purposes the Board early divided the country into twelve regions. In adopting the regional ADMINISTERING THE ACT 21 device common among Federal departments, it freed itself from a heavy burden of administrative detail, which was henceforth to be taken care of locally. Proximity to these local centers of authority has expedited the handling of all matters within the province of the regional offices. More flexibility is also possible in dealing with the intangibles of local sentiment and other variations from the national pattern. Finally, there is a definite psychological advantage in bringing the operation of the program closer to the public affected. The trend toward decentralization represented by the regional offices has grown steadily, as more and more functions have been entrusted to their authority, until they have become virtual replicas on a smaller scale of the Board itself. This has raised the problem of the proper balance between the central authority of the Board and the centrifugal tendencies embodied in the regional offices, whereby essential coordination of all field activities would be retained by Washington, while permitting a wide degree of localized administrative control. In most instances the regions represent fairly definite geographical areas, with an approximation to uniformity of economic and other conditions. Thus, the regions which coincide with New England, the southeastern States, the Pacific coast, and the Rocky Mountain States constitute quite homogeneous units for administration. Some of the other regions contain a more marked diversity of interests, though none so serious as to affect the essential soundness of the regional plan.2 Each of the twelve regional offices is in charge of a Regional Director, who is directly responsible to the Executive Director of the Board. These twelve officials were appointed by the President during May and June 1936, and shortly proceeded to establish the regional offices, as the nucleus around which the whole field organ2 Appendix I lists the regional offices with their locations and directors. 22 INTRODUCTION ization of the Board was subsequently to be built up. The Regional Director has general supervision of all the activities of the Board within his jurisdiction. These include not only the field operations of the Bureau of Old-Age Insurance but also immediate oversight of the manifold and intricate Federal-State relationships involved in the administration of the other phases of the program. The responsibilities of the Regional Director are great and varied, and the authority conferred on him by the Board is entirely commensurate with the wide range of his duties. The key man of the Regional Director's staff is his executive assistant, who, like himself, is concerned with the operation of the entire program within the region. Most of the executive assistants are former district representatives of the Department of Commerce and of the National Recovery Administration, and, as a result, have especially valuable backgrounds in field management and public contacts. Each of the operating and service bureaus of the Board maintains its own permanent representative in the regional office. These Regional Representatives, as they are known, act as technical advisers to the Regional Director in their respective spheres. On the other hand, they oversee and direct the field activities of their various bureaus within the region. In view of its large field organization, the Regional Representative of the Bureau of Old-Age Insurance holds an especially important position in the regional scheme. The field offices of that Bureau are under his immediate supervision. He is responsible for coordinating their activities in the interests of uniform procedure and in maintaining their efficiency of operation. He is the first-and, in most cases, the final-court of appeal on matters arising in the field offices. On all but certain routine questions, communications between the field and Washington pass over his desk, always with the neces ADMINISTERING THE ACT 23 sity of reference to the Regional Director, if they involve wider regional policies. Personnel-One of the major problems to face the Social Security Board from the beginning has been that of procuring an adequate supply of qualified personnel for its organization. The administration of the various titles of the Act involves a number of highly specialized functions for which there existed no pool of experienced persons. The one exception was in the field of public assistance, where there was available a large class of professional social workers trained in the technique of organized provision for the needy. To supplement this group there was the newer class of relief workers developed by the Federal Emergency Relief Administration and other similar agencies since the beginning of the depression. Both the departmental organization of the Board's Bureau of Public Assistance in Washington and the enlarged State bureaus of public welfare have been able to draw liberally on these sources of personnel. With some specialized training it has been relatively easy to adapt persons with such a background to the task of administering the public-assistance phases of the social security program. The administration of the unemployment compensation features of the Act has presented a more serious problem. Beyond a short beginning in the State of Wisconsin, we had no experience as a Nation in this form of social insurance. Consequently, we lacked altogether a class of public officials familiar with the actual operation of a system of this kind. Those persons who had made an intensive study of the general question of unemployment had not had occasion to acquire the administrative experience required for handling so specialized and complex a plan. As a result, it has been necessary, both in Washington and in the States, where the real burden of administration falls, to build up from the bottom a qualified service. 24 INTRODUCTION The Board encountered the same difficulty in staffing its vast old-age benefits program. Here also there existed no administrative precedents to follow and no specially trained personnel from which to recruit its staff. The specific problem involved staffing hundreds of field offices, as well as the departmental organization in Washington and the records operations in Baltimore. The earlier appointments were largely made by transfer from other Government departments, and particularly with a view to obtaining persons with experience in office management in the field. A special advantage here was that those transferred already possessed full-fledged civilservice status. Comparatively little use was made of the provision of the Act which authorized the employment of "experts." Of 6,422 persons employed by the Board at the end of August 1937, only 209 were classed as "experts." Of these, 30 were in the Bureau of Unemployment Compensation, 39 in the Bureau of Old-Age Insurance, 39 in the Bureau of Public Assistance, 56 in the Bureau of Research and Statistics, and 33 in Informational Service. On the same date 92 lawyers were employed in the General Counsel's Office without civil-service status, as authorized by the Act. During the period in which these experts were appointed there existed no civil-service register from which the positions involved could have been filled. It was required by Congress in the Independent Offices Appropriation Bill for the fiscal year 1937-38 that all experts and attorneys of the Board receiving salaries of $5,000 or more a year should receive confirmation by the Senate before being eligible for continued appointment. In accordance with this requirement fifty-three names were submitted to the Senate, of which all were confirmed. In order to set up a register from which sufficient administrative appointments for the Bureau of OldAge Insurance might be made, a special examination was ADMINISTERING THE ACT 25 held by the Civil Service Commission in September 1936. This examination was of the unassembled type, that is, no written test was held, but ratings were made on the basis of education and experience, weighted with the usual "veteran's preference" for those candidates with a war record. A large number of those certified as a result of this examination were persons who had formerly been employed by private insurance companies. The remainder represented a fair cross section of business and government background. The rather modest salary scales offered and improving prospects in private industry, together with the uncertainty as to the constitutionality of the Act, made it impossible at the time to attract many of the type of persons desired. However, it was hoped to compensate for some of the more evident inadequacies by a plan of training which might eventually develop an effective working force adequate to its task. Civil-service examinations were held later for positions in the Information Service and for economic analysts. One of the most successful 'experiments made in the recruitment of personnel was the appointment of a large number of junior administrative clerks who were assigned to duty in the field offices of the Bureau of OldAge Insurance. These appointments of capable young men from various junior civil-service registers represented the initiation of what might well become a real career service based on merit. All preliminary details in the employment of new personnel for the service of the Board are handled by the Personnel Division of the Bureau of Business Management, which works closely with the Civil Service Commission in the matter of certification of status. Final selection and assignment to duty are in the hands of personnel officers of the respective bureaus in consultation with the superior administrative officials. Thus, it is the rule to secure the approval of the Regional Directors for appointments within their territory. 26 INTRODUCTION On June 30, 1937, employees of the Board totaled 5,748. Of these, 1,662 were employed in the departmental offices in Washington, 1,702 in the field, and 2,384 in the recordkeeping organization in Baltimore. Subsequent increases have been largely in field personnel, as additional offices of the Bureau pf Old-Age Insurance were opened. Training Courses-At the inception of the program the Board decided on a policy of training its administrative and technical employees. It was not until March 1936, at which time appointments began to be made for the field service, that the first efforts were made in that direction. Initial training activities were then improvised under the general direction of the Bureau of Research and Statistics, aided to some extent by the Field Organization Committee. Instruction was given by officers of the several Bureaus and by individuals outside the Social Security Board who were authorities on various phases of social insurance. As the program progressed, the training efforts of the Board were better organized than was possible in the beginning. A body of operating procedure was being rapidly built up, with which it was necessary to familiarize new employees as they were appointed, and a mass of important factual information related to the program was developed. During this period the training followed two general lines. A Basic Training Course of two weeks' duration was provided for all employees of the Board above a certain category. This was conducted by the InService Studies Division of the Bureau of Research and Statistics, and emphasized the general economic background of the Act and the analysis of its various provisions. At the same time, a supplementary Technical Course was conducted by the Bureau of Old-Age Insurance for its own administrative personnel. This course stressed the various features of the Bureau's operating procedure, including the keeping of wage records, the adjudication of benefit claims, the assignment of account ADMINISTERING THE ACT 27 numbers, and such practical details of office management as personnel and procurement regulations. The Technical Course followed the Basic Course and covered three weeks of intensive instruction. Special after-hours instruction was provided for employees of lower grade and for others who had originally been unable to take the Basic Training Course. Meanwhile, a full-time training staff was being built up and adequate provisions made for the physical facilities of what was recognized at this stage as one of the major internal activities of the Board. Definite schedules of instruction were followed, though frequently changed to take account of new developments in the program, and special course materials were developed for the guidance of those in training. In March 1937, the Board decided to integrate all its training activities under one head. For this purpose a special. Training Division was created within the Bureau of Business Management. The consolidation comprised the original Basic Training Course, the specialized training given by the operating bureaus for their own employees, and such supplementary training as was already provided for or contemplated in the field. Bureau Organization-The bureau structure of the Board represents the larger division of its activities on a functional basis. In this it follows the usual organizational pattern of Federal departments. The further breakdown of the bureau scheme into divisions and sections is also in line with the customary administrative practice of the Federal Government. Each bureau is headed by a director, who is responsible to the Board, through the Executive Director's Office, for the immediate supervision of its operations. These directors are empowered to determine all matters of bureau policy, and to issue orders and regulations dealing with such matters. There are two general categories of bureaus-operating and service. The three operating bureaus correspond to the three divisions of the basic law which directly in 28 INTRODUCTION volve the Board in the administration of the social security program, that is Federal Old-Age Benefits, Unemployment Compensation, and Public Assistance. The service bureaus include those of Accounts and Audits, Business Management, Informational Service, and Research and Statistics. In addition, there is a General Counsel's Office, and an Office of the Actuary. The organization and functions of the three operating bureaus are described elsewhere, in connection with an analysis of the respective phases of the program. The function of the Bureau of Accounts and Audits is to maintain an accounting control over all phases of the Board's financial operations. The work of the Bureau falls into two general fields-(1) administrative auditing of departmental and other Federal activities of the Board, and (2) auditing of such State financial operations as are involved in the expenditure of grants-in-aid for public-assistance payments and related administrative costs. The Administrative Audit Division of the Bureau is responsible for the auditing work of the Board. This consists of the auditing of administrative accounts for purchases of supplies and equipment, payment of salaries and expense accounts of employees of the Board, rental of space, and other purely administrative expenses. After audit by the Bureau, vouchers for expenditures are certified to the General Acounting Office for post-audit and payment by the Treasury Department. The Accounting and Budget Division of the Bureau assembles the data necessary for the guidance of the Board in determining the amounts to be requested of the Bureau of the Budget and Congress for administrative and other expenses of the program. It prepares such supplementary information as is required in connection with hearings on appropriation bills in Congress and serves as adviser to the Board at such hearings. It also exercises control over the expenditures of the various ADMINISTERING THE ACT 29 bureaus, in order to insure that they keep within their allotted budgets for such administrative expenses as pay rolls, purchases, rental, and travel. A Public Assistance Finance Division audits such State accounts as pertain to the expenditure of Federal grantsin-aid for public-assistance purposes. This involves not only a review of payments from such appropriations to beneficiaries within the State, but also the auditing of administrative expenses where Federal funds are appropriated for that purpose. This is done to insure compliance with conditions set down in the Social Security Act for the receipt of Federal grants of this kind. The Unemployment Compensation Finance Division directs and supervises accounting work on grants to States for unemployment compensation administration; conducts a consulting service for the development of accounting procedure and forms in the States; initiates the preparation of accounting manuals for use in the State administration of unemployment compensation; supervises the audit of State accounts pertaining to grants for unemployment compensation; and performs other related functions in connection with the Federal-State relationship involved in the unemployment compensation program. The Bureau of Business Management, as its name implies, is charged with handling a variety of business matters for the offices of the Board. For this purpose it is divided into three Divisions-Personnel, Service, and Training. The functions of the Personnel and Training Divisions are self-explanatory. The Service Division has charge of such matters as space, procurement, printing, correspondence, files, and official travel. Since the reorganization plan of July 1937 was put into effect, certain details of the service functions, as they relate to the activities of the Bureau of Old-Age Insurance, have been transferred to the newly created Administrative Service of that Bureau. 30 INTRODUCTION The Office of the General Counsel acts as the legal department of the Board. As such, it makes administrative interpretations of the Social Security Act. The General Counsel's Office examines the State unemployment compensation laws and public-assistance plans submitted to the Board for its approval, and checks their adequacy and conformity with the requirements set down in the Act. In his capacity as legal adviser to the Board, the General Counsel reviews all procedural rules and regulations issued by the Board and the various forms used in administering the different phases of the program. This office also conducts any litigation in which the Board is concerned, including matters of disputed benefit claims. The public relations of the social security program are supervised by the Informational Service, one of the service bureaus of the Board. It was recognized from the beginning that to acquaint the public with its precise rights and obligations under the Act would require intensive and systematic effort. Except for limited experience with State "old-age pensions," the American people were unfamiliar with all the major concepts of social insurance. The very complexity of the law and its correspondingly elaborate technique of administration clearly demanded a large-scale plan of popular education as a preliminary to its operation. The first specific tests came in December 1936 with the initial registration of workers under the old-age benefits plan, and in the following January with the beginning of income and excise tax assessments. These administrative steps had to be preceded by Nation-wide informational activity. Moreover, the launching of the program coincided with the presidential campaign of 1936, during which the Social Security Act was made a partisan issue and subjected to bitter attacks by its opponents. This circumstance further aggravated the problem, for the unfamiliarity of the public with the principles involved made possible the develop ADMINISTERING THE ACT 31 ment of a great deal of misconception and hostility. At all events, the press, in spite of the highly valuable cooperation of many newspapers, could not be depended on to inform the millions of citizens affected by the law of all the implications of the program. To handle the task the Informational Service was set up on a functional basis according to the various types of media to be used. One division was charged with general press relations and prepared news releases as each new development occurred. Another dealt exclusively with the business press, and supplied information to employer organizations. A third established contacts with labor organizations and worked closely with the labor press. A Publications Division prepared and distributed a series of explanatory booklets and other descriptive literature. The Educational Division took care of requests from colleges and other educational institutions for information regarding the program. An Inquiry Division answered the thousands of written individual inquiries which poured in from all over the country. The value of motion pictures as an informational medium being realized, a Motion Picture Division was created, and has since arranged for the production of several films dramatizing different phases of the program. These have been given Nation-wide distribution and shown to millions of moviegoers. Special representatives of Informational Service were placed in the Regional Offices, where they supervised public relations activities in the surrounding States. Meanwhile, the radio was widely utilized and hundreds of public addresses were delivered by officials of the Board. Not only were the basic objectives of the law explained, but the practical aspects of its operation were clarified to the general public. The work of the Bureau of Research and Statistics and the work of the Office of the Actuary are discussed in Chapter XVIII. 32 INTRODUCTION OTHER FEDERAL AGENCIES In the case of the fiscal features of the program there was, of course, no alternative to the selection made of a collecting agency. The Bureau of Internal Revenue of the Treasury Department is charged with collection of the new Federal taxes imposed by the Act. The Treasury Department also invests the funds which constitute the Old-Age Reserve Account. In cooperation with the Social Security Board, it makes a periodic audit of the condition of the reserve and recommends to the Bureau of the Budget the amount of appropriation currently required to meet the estimated requirements of that phase of the program. After the proper certification of individual claims, it remits the necessary funds for payment of the four classes of old-age benefits provided. The United States Public Health Service, an administrative dependency of the Treasury Department, is entrusted with the apportionment of appropriations made under Title VI of the Act, for supplementing the publichealth activities of States and their political subdivisions. Two branches of the Labor Department participate in the administration of the program. The Children's Bureau is responsible for the maternal and child-welfare provisions of the Act. By reason of long familiarity with the special problems involved, that organization appeared the logical agency to handle these welfare activities on behalf of the Federal Government in its relationship with the various States. The United States Employment Service is indirectly linked by the Act with the payment of unemployment compensation. When the Act specifies (Section 303 and Section 903) as one of the conditions for the Board's approval of the State laws and certification of administrative-grant payments to a State, "Payment of unemployment compensation solely through public employment offices in the State or such other agencies as the Board may approve," reference is to the joint Federal ADMINISTERING THE ACT 33 State employment offices operated under the terms of the Wagner-Peyser Act. In accordance with this cooperative relationship, the United States Employment Service represents the Federal interest. The Act delegates to the Office of Education of the Interior Department application of the provisions in Title V relating to vocational rehabilitation of physically disabled persons. The Office of Education was already charged with carrying out the terms of the Federal vocational rehabilitation law of June 2, 1920, and it was logical that it should be designated as the agency for administering this feature of the social security program. Still another Federal agency has participated in the program, though not on a statutory basis. As a temporary administrative measure, the Post Office Department was charged with the conduct of the initial assignment of social security account numbers. In accordance with a contract made with the Social Security Board, the Post Office Department began the work of enumeration on November 16, 1936, for assignment of identification numbers to employers and on November 24, 1936, for registration of employees. On June 30, 1937, this function was turned back to the Board, whereupon it was assumed by the field offices of the Bureau of Old-Age Insurance. A correspondingly large variety of State and local bodies is concerned with administering the State programs of assistance, welfare, and unemployment compensation toward which Federal appropriations are authorized in Titles I, III, IV, V, VI, and X. In some in. stances existing departments are utilized for the purpose, particularly State departments of public welfare or their equivalent under some other name. In certain States commissions or boards have been created to handle the unemployment compensation phase of the program; in others the State department of labor or industrial commission administers this or other social security activ 34 INTRODUCTION ities. Lower in the scale, county or municipal welfare boards or authorities under State supervision have charge of the local administration of certain assistance and welfare features of the program. State and local public-health boards and other special administrative bodies are involved in the enforcement of particular provisions. Though the general practice throughout has been to make use of administrative machinery already set up for related purposes, the ultimate effect will probably be to bring about a greater degree of administrative uniformity, as the various State plans are developed and made to fit into the larger framework provided by the Social Security Act. PART II FEDERAL OLD-AGE BENEFITS I CHAPTER III THE PROGRAM AND ITS ADMINISTRATION Of all the bureaus of the Social Security Board the Bureau of Old-Age Insurance faces by far the largest task of administration. The functions of the Bureaus of Public Assistance and of Unemployment Compensation are mainly consultative and supervisory; the direct burden of administering the security measures with which these organizations are concerned falls on the States or on their component units of government. With respect to the operations of the old-age benefits plan, on the other hand, no part at all is played by the States or other units; the Federal Government, through its agency, the Bureau of Old-Age Insurance, assumes complete charge. The Bureau's field service deals directly with the public without the intervention of local authorities. The personnel is accordingly more numerous than that of any other Bureau and, in fact, comprises about 65 per cent of all employees of the Board. THE PROVISIONS OF THE ACT In order that the various phases of the work of the Bureau, to be described in the following chapters, may be seen in their appropriate setting a brief outline of the benefit provisions which the Bureau administers is given at this point. The principal type of benefit provided in Title II is a life income payable in monthly installments to individuals who have reached age 65 and have withdrawn from regular employment. The minimum requirements for 37 38 FEDERAL OLD-AGE BENEFITS eligibility for this benefit are that one must have worked in commercial or industrial employment on one day in each of five different calendar years after December 31, 1936, and before reaching age 65, and that one must have earned wages totaling $2,000 from such employment during this interval. The size of the benefits will be determined on the basis of the total amount of wages earned in covered employment within the interval just specified, not counting wages in excess of $3,000 received from any one employer in any one calendar year. The relationship between benefits and earnings is expressed in the following formula: The monthly payments will equal 1/ of 1 per cent of the first $3,000 of total earnings, plus 1/12 of 1 per cent of the next $42,000, plus 1/24 of 1 per cent of all earnings above $45,000, except that no benefit will exceed $85 per month. No monthly benefits are to be paid before January 1, 1942. A second type of benefit, a lump-sum payment, is payable to those who after December 31, 1936, and before the date of reaching age 65 have worked in commercial or industrial employment in fewer than five calendar years or have earned total wages of less than $2,000 from such employment. A third type, also a lump-sum benefit, is payable to the estates of wage earners in covered employments who die after December 31, 1936, and before reaching 65 years of age. In either of these cases the sums paid are 31/~ per cent of the total wage earnings received during the interval previously indicated. In case an individual dies after having begun to receive monthly income benefits but before the total amount thus received equals 31/ per cent of his total wages, the difference between the two amounts will be payable in a lump sum to his estate. Since the size of every payment, irrespective of what type of benefit it represents, will depend on total wage earnings, usually over a number of years, a primary function of the Bureau is that of keeping, for the millions THE PROGRAM AND ITS ADMINISTRATION 39 of employees who are covered by the old-age benefits plan, individual accounts of wages earned. The preliminary work of registering these employees and assigning to them numbers by which their accounts can be identified will be described in Chapter IV. In the following chapter will be discussed the procedures for periodically collecting the taxes levied under Title VIII of the Act and also the wage information necessary for keeping these accounts. Chapter VI, Chapter VII, and Chapter VIII will sketch some of the problems which have arisen concerning definitions of terms that are fundamentally important in the operation of the plan, the terms "employment" and "wages," and will indicate how these problems have been handled by the Bureau of Internal Revenue in connection with its work of collecting the taxes. The Board's Bureau of Old-Age Insurance itself is not called upon to deal with such problems until after they have arisen with respect to tax collection; in all probability when it does have to deal with them in determining the amounts to be paid in benefits it will follow the rulings previously made by the Bureau of Internal Revenue. Chapter IX will deal with the processes of setting up and maintaining the individual employee accounts, and in Chapter X there will be described the work of adjudicating claims, that is, of determining when, how much, and to whom benefits will be paid. THE BUREAU OF OLD-AGE INSURANCE The responsibility for carrying out the several functions which have just been listed rests with the Director and staff of the Bureau of Old-Age Insurance. Under the Director are three functional services, the heads of these being Assistant Directors of the Bureau. The three services are called the Technical and Control, the Administrative, and the Analysis Service. The Technical 40 FEDERAL OLD-AGE BENEFITS and Control Service is the one actually in charge of operations. Under its supervision are performed the tasks of assignment of account numbers, maintenance of records, and adjudication of claims. The Administrative Service handles the routine duties of administration; it has charge of personnel, mails and files, the budget, accounting, and procurement of space, supplies, and so forth. The Analysis Service, using both the statistical materials gathered in the process of keeping records of earnings and data which it collects from other sources, conducts research to guide the administration of the program. Periodically it undertakes analyses of the various indexes of progress made in accomplishing the purposes of Title II. It studies the difficulties that have hampered administration, the sources of such difficulties, and possible methods of avoiding them. Under the direction of the Technical and Control Division is the Bureau's large field organization. The chief figures in this organization are the Regional Representatives of the Bureau, one of whom is attached to each Regional Office. At the time of writing, the Executive Assistant to the Regional Director is acting in the capacity of Bureau Representative in four of the twelve regions. This representative serves in a dual positionhe is technical adviser to the Regional Director on matters pertaining to the administration of Title II, and is supervisor of the Bureau's Field Offices within the region. His authority in the latter respect being very large, he is, in effect, director of the old-age benefits program in the States comprised by his region. His authority may be limited, however, by the extent to which the Regional Director uses the wide discretionary powers of his office to exercise a direct administrative control over the Bureau's field operations. The possibility of the Director's doing so is especially strong where his Executive Assistant is the acting Regional Representative. In fact, the prevailing trend towards administrative decentralization THE PROGRAM AND ITS ADMINISTRATION 41 favors assumption of such control by the Regional Director, with a corresponding weakening of lines of authority from Washington. The Field Offices constitute the actual administrative units of the Federal old-age benefits program. Plans as to the number and interrelationships of these offices have undergone several changes, based on shifting estimates of operating requirements in the field, and on varying budgetary allowances available for the purpose at different times during the period of organization. A number of factors entered into the combination process of determining the boundaries of administrative districts and selecting the sites for the Field Offices. The fundamental considerations involved, of course, were those of making possible the maximum facility in administration, the maximum convenience to the public, and the maximum uniformity in the distribution of the work load between the various offices. The process required, then, a study of densities of population, particularly of the estimated population covered by the old-age benefits plan. Attention had to be given also to questions of the accessibility of different centers. Intervening mountain ranges or unbridged rivers in some instances made necessary the placing of a community within a district whose office, while more easily reached, was actually further from the community than was the office of some other district. Note was also taken of the existence in metropolitan areas of well-defined trading zones within whose limits people travel back and forth freely, even though they might in doing so cover relatively long distances or cross State lines. The great majority of the choices made seem essentially sound and provide an excellent geographical groundwork for the future operations, despite the fact that in some instances pressure was exerted by civic or political interests with a view to influencing the selection of sites for the offices. By the end of October 1936, only one Field Office, at 42 FEDERAL OLD-AGE BENEFITS Austin, Texas, had been opened. At the end of the year, the total had been increased to 75. In the middle of 1937, 175 offices were in operation, about half the total number contemplated. By the end of August, the total had risen to 251. Meanwhile budgetary limitations were slowing down the recruitment of personnel and consequently, the opening of additional offices.1 The Field Offices are classified into eight groups, depending on the estimated number of covered workers within their jurisdiction. The size of the personnel of each office and the salary rating of the Field Representative who serves as its manager vary accordingly. The salaries of managers range from $2,300 to $5,600. Salaries of assistant managers and administrative clerks are correspondingly lower, with a bottom level of $1,620. The Field Offices of the Bureau are concerned with administering only the provisions of Title II of the Act. However, as the average citizen will be unable for some time to differentiate clearly between the various parts of the social security program, he may be expected to consider the local field office of the Bureau of Old-Age Insurance as representing the Board in all its activities. Consequently, the field representative must be able to take care of many inquiries unrelated to his designated functions. As agent of the Bureau of Old-Age Insurance, his primary duties comprise the registration of workers eligible under Title II, the receipt of benefit claims and their transmittal for adjudication and payment, and such informational work as is needed to acquaint the public with procedural regulations affecting its interests under the program. Eventually, work pertaining to claims will greatly overshadow in importance and volume all his other activities. For most purposes a Field Representative is responsible to his regional office. Beyond submitting a weekly report 1A list of field offices appears as Appendix II. THE PROGRAM AND ITS ADMINISTRATION 43 of office activities, submitting reports on claims, and carrying on routine correspondence regarding procurement and personnel matters, he has little direct contact with Washington. In fact, there might easily be too little to permit the proper coordination of the old-age benefits program on a national scale, as was contemplated by the Act. The attainment of desired unity of action in dealing with the complex problem depends on the moderation with which the Regional Directors use their large but not precisely defined, powers, and on the degree of supervision which the departmental authorities in Washington may establish. In this connection, it is well to remember that the administrative pattern of the Bureau is by no means static. Further changes in organization and shifts in lines of authority and responsibility are likely to occur, as operating experience demonstrates their advisability. CHAPTER IV REGISTRATION OF EMPLOYERS AND EMPLOYEES Unlike the payments under old-age assistance plans, the benefits to be paid in accordance with Title II of the Social Security Act will not be computed in relation to the extent to which the individual is "needy," nor will they be the uniform amounts to all recipients that are called for by some pension proposals. Instead, each individual's old-age benefit will be figured on the basis of his total earnings in covered employment during the period between December 31, 1936, and the date he attains age 65. This keying of benefits to total wage earnings involves the maintenance of a system whereby information concerning the individual's current earnings may be recorded and preserved. Thus, for each person who engages in employment as defined in Title II it is necessary that an account be established. DEVISING A SYSTEM OF ACCOUNTS At the time the old-age benefits plan went into effect there were, according to the estimates of the Social Security Board's statisticians, about 26,000,000 workers for whom accounts had to be set up. An increase of about 2,500,000 is expected to take place each year in the number of workers who are eligible to accumulate credits under the plan. During the first year of operation a somewhat larger increase is expected on the basis of the fact that many persons are employed during certain seasons only and hence, were not covered in the original registration, 44 REGISTRATION 45 and on the basis of the probability of continuing increases in industrial employment. Partially to offset these additions there will be eliminations by death and attainment of age 65. As the population increases, the load is expected to increase until it reaches a maximum somewhere between 40,000,000 and 50,000,000 employee accounts. In order that no difficulties will arise in crediting wages, as reported, to the proper account, all possibility of confusion between one account and another must be eliminated. Because of the problem of name duplications, the use of merely the name of the person to whom an account belongs as the basis for distinguishing between accounts would result in endless perplexities. The magnitude of this problem is apparent when it is noted that in Washington, D. C., a city of about 500,000 people, 33 John Smiths and 18 Mary Joneses are listed in the telephone directory. A recent news account states that the Fred Smiths of New York City have had so much trouble in being properly identified by their creditors, the courts, and even their friends, that they have joined together in forming the "Fred Smiths, Incorporated," to serve as a clearing house for their identification problems. According to the estimates, Title II of the Social Security Act will cover approximately 294,000 Smiths, 227,000 Johnsons, 165,000 Browns, 156,000 Williamses, 147,000 Joneses, 137,000 Millers, 123,000 Davises, 115,000 Andersons, 96,000 Wilsons, and 81,000 Taylors. The best way of avoiding the difficulties involved in name duplication seemed to be the setting up of a numerical system for identifying individual accounts. The use of a system of acccount numbers in keeping records of the wages which each individual receives is not a new departure. Similar methods of identifying records have been used by savings banks and insurance companies for more than a hundred years. Such institutions issue numbered pass books or policies and keep their records accordingly. 46 FEDERAL OLD-AGE BENEFITS The identification of the individual to whom each separate account belongs is also a serious problem. The method of identification which in other connections has been used most successfully, though least widely, is that based on fingerprinting. The fingerprint has the three prerequisites for successful use in identification-permanency, positiveness, and simplicity. The permanency of the fingerprint pattern is axiomatic. The skin on the inner surface of the fingers and palms and on the soles of the feet form regular ridges. These ridge formations are permanently part of the body, remaining unchanged all through life and until putrefaction sets in after death. That no two fingerprints in the world have been or ever will be alike has also come to be taken for granted. In 1892-93, after extended investigations, Sir Francis Galton, the noted English scientist and student of heredity, established that for all practical purposes no two fingerprints are alike. Statistical studies by other investigators show that the maximum probability of two fingerprints being alike is one in a sextillion.1 The satisfactoriness of the method may be indicated by a listing of some of the agencies which use it. The United States War and Navy Departments use fingerprints wherever identification of their men is required, and so, too, does the Veterans Administration in paying pensions and the adjusted compensation certificates. The Post Office Department is using fingerprint identification for Postal Savings depositors. Other agencies which have used the method successfully have been savings banks for their illiterate depositors, and maternity hospitals to identify babies. Although the use of the method has never been widespread, it does have a history going back many years. During the early 1880's in the British periodical Nature, Sir William Herschel, a government administrative officer in India, told of having used fingerprints for 1Wentworth, B. and Wilder, H. H., Personal Identification, p. 319. REGISTRATION 47 20 years in identifying government pensioners, in preventing impersonations and repudiations, and in identifying prisoners. That fingerprinting offers the best method of identification is generally agreed. Unfortunately, the method has for so long been associated with the tracing of criminals that there seemed little likelihood of the American people's accepting it as an aid in social security identification. Another problem in connection with the operation of a social insurance plan such as the present one is that of determining the amounts each individual is entitled to have credited to his account. One method that has been common under foreign plans is based upon the use of stamps. Under this method the employers purchase stamps from a designated government agency, generally the post office, and periodically turn them over to each employee in denominations corresponding to the amount of the tax paid on that employee's wages. At certain intervals the employee hands over his stamps to the social insurance administration and it records to the employee's credit the amount of tax payments his stamps represent. The stamp method has the advantage of being simple. There are, however, the disadvantages that stamps may be easily counterfeited and traded. If the method were used in crediting wages under Title II the latter weakness might be found to be a serious one since those benefits which are based on the first $3,000 of included wages are heavily weighted. Specifically, the benefits paid on the basis of the first $3,000 are equal to the benefits paid on the basis of the next $18,000 of included wages. The stamp method can be used without substantial difficulties only where the amount of benefits is in close ratio to the contributions made by the employee. A further objection to the use of the method in connection with the old-age benefits plan would be that a new administrative organization 48 FEDERAL OLD-AGE BENEFITS would have to be established to handle and distribute the stamps. After months of careful study, the Social Security Board adopted the following procedure as the groundwork for its record system: each individual covered by Title II applies for and receives an account number; he has recorded on his account the amounts of his wage earnings, as determined from reports of taxable wages filed by his employers; and he is identified, when a claim arises, on the basis of the personal data and the signature on his application for the account number. This, it was decided, was the only procedure which would be adequate and yet satisfactory to a public which has always been fearful of anything that might suggest the loss of some personal freedom through formal records of identities. The Employee Account Number-The first task in putting the system into effect was that of devising an employee account number. One based on the following arrangement of digits was selected: 000-00-0000 Reading from left to right, the first three digits indicate the area in which the assignment of the account number takes place. Initially, the continental United States, together with Alaska and Hawaii, was divided into 580-" areas. The number of areas within each State depends upon estimates of the number of people within the State who are covered by the plan. Some small States have only one area number while the larger States such as New York, Pennsylvania, and Illinois have several. The next two digits indicate groups. The group, based on subdivision of the area, further localizes the original place of assignment; its use is also helpful in the distribution of the administrative work load. Ten group numbers were used initially. Each group includes 10,000 individual account numbers. The last four digits are serial numbers within the group. At the present time, with the use of the 580 area numbers, REGISTRATION 49 multiplied by 10 group numbers, and the product in turn multiplied by 10,000, the serial numbers in each group, the numbering scheme has a capacity of 58,000,000. This capacity can be increased by using the remaining 420 area numbers and 90 group numbers, giving a final capacity of approximately 1,000,000,000. After thorough study of the methods used by life insurance companies and various other private and public agencies to establish identification and verify ages, the following application-for-account-number form was devised: UII till li | 1 i. "SrfSm aU. S. SOCIAL SECURITY ACT m s Barm na APPLICATION FOR ACCOUNT NUMBER MP 1,1 ("m Uamm Iw) IMl ) 4. -______ -__- _ ____________ r__ *1. ~./ Wmuitv UU m-.. (OI t SE '11- L -~11 Ad vae win Ni.-) CroACH ALONO TI~ LO The Employer Identification Number-To facilitate the operations of the Treasury Department in its collection of the taxes imposed under Title VIII of the Social Security Act and to facilitate the work of the Social Security Board in the payment of benefits, esj'ally in checking individual wage information, it was considered necessary not only to assign an employee account number but to assign an employer identification number. The employer's reports are the source of the information which the two organizations will periodically require. Since regular reports will be filed by perhaps 3,500,000 employers, it is apparent that a problem of identification exists here as well as in connection with employee accounts. 50 FEDERAL OLD-AGE BENEFITS The following arrangement of digits for the employer identification number has been established: 00-0000000 The first two digits of the employer's identification number, reading from left to right, indicate the internal revenue collection district in which the employer is located. There are 64 such districts in the United States, Alaska, and Hawaii. The last seven digits indicate the serial number. This numbering system would permit identifying approximately 10,000,000 employers in each internal revenue collection district. Since the records relating to employers are to be kept in alphabetical rather than numerical order, it was considered advisable to assign every tenth serial number, thus leaving nine intermediate numbers for future assignment. To obtain the necessary data for employer identification the Treasury Department devised the following employer application-for-identification-number form: Form A84 XSIrsASR DSEPR.TMNT U. & SOCIAL SECURITY ACT No. _.......... EMPLOYER'S APPLICATION FOR IDENTIFICATION NUMBER 1. City County ___ State.._..-. —_-. ---S 2. Business nme ot.stablishment ___ _ _ -- & Address of h a n o pq __. _ _ ---— _ ------------------------- 4. Approximate number of persons now neploy "'d "~. * 5. Describe full the exact nature of your busine __ 6. (a)^nuI cone e p rdi (b)\ onm etring e state op r so pa- _ _ i yr 7. If this establishment is a branch or a subsidiary company, give name and address of headquartes. (Sined) cup Date...................... REGISTRATION 51 APPLICATION FOR IDENTIFICATION AND ACCOUNT NUMBERS After a satisfactory account number system had been devised, the next problem faced was that of assigning the numbers to the approximately 26,000,000 employees and 3,500,000 employers affected by the old-age benefits plan under Title II of the Social Security Act. This task was of a magnitude never before equalled in any Government or private undertaking, even including the United States Census, the World War draft, or the payment of the veterans' bonus. One of the first questions to arise was that of what agency or organization would be able to carry out such an undertaking. An early suggestion was that the United States Employment Service, with its Nation-wide facilities and its records of several million people, would be the proper agency to assign the account numbers. Further consideration of the matter and conferences with the officials of the Employment Service clearly indicated that it would be miscast if used for this work. The Social Security Board considered making the initial assignment of the account numbers itself. Advanced in favor of its so doing was the point that since the continuing process of assigning 2,000,000 or more numbers a year would be carried out by the Board, it could assume the initial responsibility to advantage and that through its field offices, staffed by a large temporary personnel of perhaps as many as 15,000 people, it could efficiently and economically make the initial assignment. Tentative preparations were made for it to do so. However, the inadvisability of such an undertaking on the part of a new organization no better trained or coordinated than was the Social Security Board at that time, was soon recognized. The experience of foreign countries, and the recent successful completion of the payment of the veterans' bonus seemed then to point to the Post Office Department with its total of 45,000 post offices and some 350,000 employees as the logical agency for assigning 52 FEDERAL OLD-AGE BENEFITS the account numbers. The payment of the veterans' bonus had given the postal employees very good training in the technique of correct identification. After conferences with officials of the Post Office Department, arrangements were made whereby that department would assume the responsibility of assigning the account numbers for the Social Security Board and the Board would reimburse the Post Office Department for this service. The Employer's Application-At the initiation of the registration program, on November 16, 1936, the Post Office Department distributed approximately three million applications for identification number, Form SS-4, to all known employers covered under Title VIII of the Social Security Act. Postmen delivered the application forms to the employers and requested that they return them, properly filled out, either to the postmen or to the local post offices on or before November 21, 1936. Employers with more than one business establishment were requested to authorize their representatives in each branch office, plant, warehouse, or other subsidiary establishment to furnish the information called for on the application for identification number and return the form promptly to the local postmaster in the community in which the branch was located. The reason for the return of a separate application by each establishment was merely that this procedure facilitated the distribution of applications for employee account numbers. Announcement was made that every business concern would receive only one identification number, and would be obliged to file only one tax return even though each branch or subsidiary establishment had been required to fill out a separate application form. Obviously the arrangement for one number and one tax return tended to simplify relations between the employer and both the Treasury and the Social Security Board. Each business establishment, as may be seen from the REGISTRATION 53 form, was asked to give its business name, a description of the nature of the business, the address, and the approximate number of persons employed. Manufacturing concerns were asked to state their principal products, and other concerns the principal goods or services which they sold or furnished. Each establishment was asked to state if it were a branch or a subsidiary of another company and if so, to give the name and address of the central office. The return of the employer's form gave the local postmasters throughout the country information as to the number of employees in the business establishments within their communities. Upon the basis of this information each postmaster determined the number of application blanks needed for the assignment of the employee account numbers. More than 75 per cent of the estimated number of employers filled out the application form, those who failed to do so being, in most cases, small employers. The net result was that those employing approximately 95 per cent of the employees to be covered under Titles II and VIII of the Social Security Act were registered. This initial registration of employers was considered very satisfactory. The Employee's Application-Preliminary to the assignment of the employee account numbers and the employer identification numbers, three posters explaining how the 26,000,000 workers who are eligible to build up credits for old-age benefits should make application for account numbers, were released by the Social Security Board. The posters were displayed in the post offices throughout the country and in public employment offices, public libraries, chambers of commerce, labor-union headquarters, railroad stations, and other public buildings. The purpose of these posters was to make clear, first, who was eligible to build up credits for old-age benefits, and second, how the applications for the account numbers might be returned. The titles of the posters were "Who Is 54 FEDERAL OLD-AGE BENEFITS Eligible," "A Monthly Check to You," and "Three Steps to Security in Your Old Age." On November 24 the Post Office Department distributed to all known employers the employee applications, Form SS-5. Each employer was given a number of applications corresponding to the number of employees he had reported on his own application. More were furnished if needed. The main task in which the employers were asked to cooperate was that of distributing the forms. While collection of the completed applications and their return to the post offices were accomplished in several ways, a substantial part of this work, too, was done through the employers. Instructions to employers stated that in all cases where employees preferred to file their applications through some other channel than their employer they were to be permitted to do so, even though the employer was offering to perform this service for them. Through the local postmasters facilities were arranged for those who desired to register in person. Accompanying each employee application was an informational circular which briefly explained the major provisions of Titles II and VIII of the Act. Instructions showing precisely how to fill out the forms were also furnished. The Board endeavored to make clear the necessity for legibly filling in every space on the application, and to have it understood by all employees that the official records could not be completed until legible answers were provided for each question. When the employee had filled out his application, he was permitted to return it to his local post office through any one of the five following methods, and in no case was he required to pay postage: (1) returning the application form to the employer, (2) turning it over to any labor organization of which he was a member, (3) handing it to the letter carrier, (4) taking it personally or sending it by messenger to any post office, and (5) mailing it in a sealed envelope addressed simply, "Postmaster, Local." REGISTRATION 55 In order to avoid complications in the work of the Bureau of Internal Revenue and in its own recordkeeping, the Social Security Board announced on December 4 that an employee in filling out his application for a social security account number should use the name by which he is known on the pay roll of his employer. Where there is a difference between the pay-roll name and the name shown by vital records such as birth certificates, it was suggested that a statement explaining the difference might either be attached to the application card or forwarded separately to the Board's Wage Records Office in Baltimore. PROBLEMS IN CONNECTION WITH THE REGISTRATION Announcement was also made that any employee who wished to have his account number or identification card carry a name different from that shown on his application, should attach to the application card a special request to that effect. In case the application had already been filed the instructions were to make the request for change or correction by writing directly to the Records Office of the Board. This procedure seemed necessitated by the existence of a variety of situations in which the individual is known by one or more versions of his name or by a name entirely different from his legal name. Typical of such situations are those of the actor who has a professional name differing from his legal one, of the married woman who is employed under her maiden name, and of the person who is known in business circles under a simplified or anglicized version of his name. In all these instances it is desirable that the Social Security Board's records show the employee's real name, for otherwise there would be difficulty in establishing his identity and his age at the time a claim is made. As would be expected, misunderstandings arose concerning a number of details of the process of account 56 FEDERAL OLD-AGE BENEFITS number assignment. One frequent confusion had to do with the status of an individual working for an employer who had no other than the one employee. The belief that such an individual was not covered was difficult to combat. Probably it was ascribable to a confusion of the provisions of Title IX of the Act-which levies a tax applicable to employers of eight or more-with those of Titles II and VIII which apply without regard to the number of employees in an establishment. Another question which commonly occurred was whether people who were not citizens of the United States should make applications for account numbers. The Social Security Board issued a statement on December 10, 1936, in which it pointed out that the Act does not set forth any citizenship eligibility requirement for Federal old-age benefits; those employees who are not citizens, it said, should file an application-for-accountnumber, Form SS-5, in the same manner as those who are citizens. Another type of confusion arose in cases where an employee worked for more than one employer. Since an application form reached him through each employer, the tendency was to fill out more than one form. To clear up this matter the Board issued the following release: Since an individual can have only one social security account, only one copy of the application card, Treasury Form SS-5, should be filed by an employee.... In some cases individuals who work for two or more employers at the same time have attempted to file these application cards with respect to their work for each employer. On the one card which he files the employee should give the names of all his employers on lines 4 and 5. Another misunderstanding, this one on the part of employers, was that before employment could be given to a person not having an account number, he would have to make application for and receive one. While the Board REGISTRATION 57 endeavored to make as widely known as possible the necessity that each individual in covered employments possess an account number, it also took care to point out on various occasions that current non-possession of an account number should not bar the hiring of an individual. If the prospective employee had not made application for a number, the instructions were that such application be made as soon as possible after he started work. A great many employees were naturally very anxious to know how the information on the employee's application was to be used. To allay doubts on this score and to assure correctly completed employee application forms, the Social Security Board at various times issued releases in which it stated that the information on the employee's application form was to be kept confidential and that access to such information would be given only to Government employees whose official responsibilities in connection with the administration of the Social Security Act required their having such access. The personal information which employees were called upon to furnish in connection with the applications for account numbers was the minimum deemed necessary for purposes of identification. Soon after the employee application forms had been distributed it was found that in addition to the official employee application form, some employers had circulated forms on which was requested information on such matters as nationality, religion, education, and union affiliations. A New Jersey firm went so far as to distribute among its employees a questionnaire calling for information of this character and headed "Social Security Record System. Employee History Record. Form C-53-A." In a press release on February 26, 1937, the Social Security Board warned employers against distributing unauthorized questionnaires which appeared to be required by the Social Security Board and which were intended to disclose employees' union affiliations, religion, or personal affairs. Most employers co 58 FEDERAL OLD-AGE BENEFITS operated to the fullest extent in the assignment of account numbers. THE ASSIGNMENT OF ACCOUNT NUMBERS When the completed employee-application forms were received by the local post offices they were forwarded to the "typing center" serving the particular area. The Post Office Department designated 1,072 first-class post offices as such typing centers. The function of these centers was to transcribe the information on the employee's application form to the following initial office record, Form OA-702: orrlce '.cownW WJ=r rECOR. U.S SOCIAL SECURITY ACT SOi66.03 8 10" 7M gU II SM SEX: m e COLOR: Form OA-702 was made out in duplicate, the original being forwarded to the Social Security Board's Records Office to be used as the basis for establishing the individual accounts. The carbons were retained by the post offices until June 30, 1937, in order that duplicate account number cards might conveniently be issued to employees who had lost or misplaced the original. On June 30 when the Post Office Department turned over to the Social Security Board's field offices the remainder of the job of assigning account numbers, the carbons were given to the State unemployment compensation commissions. These bodies used them as aids in setting up the records required in the administration of the unemployment compensation plans. REGISTRATION 59 The office records, Form OA-702, were numbered at the time they were printed. Each typing center had a supply numbered according to the area in which the center was located. The forms were provided in blocks of 1,000, the block carrying a group number and each form within the block having a serial number. Thus, as the data on the application form were transcribed to the office record cards, the individual who submitted the application was automatically assigned an account number. Each record card carried a detachable portion bearing the same number as the main portion. As the form was filled out in the typing center, the employee's name was typed on the detachable portion, which was then returned to him to serve as his record of the account number which he had been assigned. The account number was delivered to its owner through the same channel as he had used in sending in his application. In order to facilitate the delivery of the cards and to be sure that each employee received the right one, both the name of the employer and the home address of the employee were typed on a blank attached to the card. The detachable blank card accompanied the account number card until it was placed in the hands of the employee. He could then tear away the portion containing the name of the employer and his own home address and retain only the part showing his own name and his account number. The reason for this arrangement was that frequently more than one person of the same name was in the same firm, labor organization, or community. One large utility company in New York was found to have several employees of the same name. Without the home address of the card owner or the name of his employer attached to the card when it was issued, an employer or labor organization through whom the card eventually reached its owner, would have no means of distinguishing among several persons of the same name. It has been to the interest of both employers and employees that their respective identification numbers and 60 FEDERAL OLD-AGE BENEFITS account numbers be secured as early as possible. The account numbers are needed by employers when reporting wages on the periodic information returns required by the Bureau of Internal Revenue. In making his returns to the Bureau, the employer is required also to use his own identification number. If an employee has failed to obtain an account number by the time the employer makes his first information return with respect to that employee, it is necessary for the employer to file an application for an account number for such employee. The Post Office Department intended at first to complete its part in the assignment of employers' identification numbers in the period from November 16 to November 24 and to handle the original registration of employees between November 24 and December 5. It was found necessary, however, to extend the closing date of the initial employee registration from December 5 to December 15. At that time the Social Security Board made arrangements with the Post Office Department to continue its cooperation in the assigning of account numbers until March 31, 1937. On this date a further extension was made until June 30, 1937, at which time the assignment of account numbers was taken over by the field offices of the Board. The Post Office Department has continued to assist the Social Security Board on a limited basis. It displays posters prepared by the Social Security Board Informational Service, showing the location of Social Security Board field offices; it distributes Forms SS-4 and SS-5; and it gives over-the-counter service and assistance to employees and employers in correctly filling out applications for account numbers or identification numbers. The assignment of account numbers since July 1, 1937, has been handled by the Social Security Board field offices. These offices receive and check applications for account numbers and assign and distribute the account number cards; they also forward the original applications, Form REGISTRATION 61 SS-5, and the office record cards, Form OA-702, to the Records Office at Baltimore. ASSIGNMENT OF ACCOUNT NUMBERS TO RAILROAD EMPLOYEES In order to administer the Railroad Retirement Act it was necessary in the same way as it was under the old-age benefits plan, to assign account numbers to employees of carriers coming under that Act. After consultations between the Railroad Retirement Board and the Social Security Board, the former requested the Social Security Board to assign to railroad employees account numbers similar to the ones assigned by the Social Security Board to those coming under the provisions of Titles II and VIII of the Social Security Act. It was thought desirable that carrier employees be assigned social security account numbers for the following reasons: 1. Each year there are large shifts of workers to and from railroad employment, with the result that many railroad employees will be eligible for Federal old-age benefits. 2. The account numbers assigned may be used in connection with the recordkeeping necessitated under State unemployment compensation laws, since all such laws except two cover railroad employees. 3. The work of account number assignment and subsequent recordkeeping by both Boards is greatly simplified, and can be done much more economically, if the original registration includes railway employees as well as other wage earners. The Post Office Department performed the same functions in the railroad employee enrollment as it performed in the general enrollment. It compiled the basic records, using forms quite similar to those used for Federal oldage benefits registration. The operation involved assignment of social security account cards to some 1,400,000 62 FEDERAL OLD-AGE BENEFITS active, extra-board, or furloughed employees of carriers subject to the Railroad Retirement Act. Since both the employees, acting through their organizations, and the carriers agreed to having applications delivered and returned through pay-roll headquarters, and thus handled on a wholesale basis by experienced workers, the operation was much more simplified and concentrated than was the case in the assignment of social security account numbers. Employee account number applications for carrier employees, Form CER-1, were sent to the carriers. The home offices of the railroads distributed these forms to their employees and helped them fill in the necessary information. Form CER-1 was made out in duplicate and the carrier was allowed to keep one copy. These applications were sent to 15 central typing centers instead of to the 1,072 used for the assignment of old-age benefits account numbers. These 15 typing centers were located in important home-office centers of railroad activity. The make-up of the carrier's employee account number is the same as that of the old-age benefit account number. The area numbers used were from 700 to 719, thus making it possible to distinguish easily the account numbers assigned to carrier employees and those assigned to employees eligible for old-age benefits. THE RESULTS OF THE REGISTRATION PROGRAM Many persons of experience in work of related character predicted that the task of assigning social security account numbers to 26,000,000 employees and identification numbers to 3,000,000 employers was of such magnitude that it could not possibly be carried to a successful conclusion. Yet, on December 22, 1936, twenty-eight days after the initial distribution of employee applications, the Post Office Department reported the receipt of 22,129,617 completed applications of an expected total of REGISTRATION 63 26,000,000 applicants. On March 16, 1937, the 25th million card was punched by the Social Security Board Records Division and it was reported on the same day that 25,251,544 employee applications, Form SS-5, had been received. The State totals of employee applications for social security account numbers, received in the Wage Records Office by August 31, 1937, were as follows: FORMS SS-5 RECEIVED Total Through State Aug. 31,1937 Alabama.......... Alaska............ Arizona........... Arkansas.......... California......... Colorado........... Connecticut........ Delaware.......... District of Columbia. Florida............ Georgia............ Hawaii............ Idaho............. Illinois............ Indiana............ Iow a.............. Kansas............ Kentucky.......... Louisiana.......... M aine............. Maryland.......... Massachusetts...... Michigan.......... Minnesota......... Mississippi......... Missouri........... 421,719 12,502 106,567 212,594 2,078,440 249,294 600,334 76,420 199,026 430,025 563,913 107,262 92,900 2,482,613 919,279 420,022 330,847 430,192 398,737 224,126 471,631 1,509,338 1,615,631 558,939 210,427 882,929 M N N N N N N N N 0O 0 0O P( R S4 Si T1 To U V V W W W W wC7~ Total Through State Aug. 31, 1937 [ontana........... 109,393 ew Hampshire.... 148,144 ew Jersey........ 1,290,617 ew York......... 4,734,499 ew Mexico........ 70,483 ebraska.......... 214,252 evada............ 30,538 orth Carolina..... 663,760 orth Dakota...... 67,788 hio.............. 2,060,972 klahoma.......... 436,246 regon............ 262,508 ennsylvania.......2,998,217 hode Island....... 264,349 outh Carolina..... 335,244 outh Dakota...... 79,349 ennessee.......... 501,450 exas.......... 1,226,408 tah.............. 116,374 ermont........... 79,544 irginia........... 492,982 Washington....... 459,445 test Virginia...... 450,577 risconsin.......... 705,017 ryoming......... 48,709 Total............ 33,452,572 CHAPTER V COLLECTION OF TAXES AND WAGE INFORMATION The assignment of account numbers and identification numbers is more a preparatory step than an integral part of the operation of the old-age benefits system. Actual functioning of the system begins with the collection of the taxes levied under Title VIII of the Act. These taxes are of two varieties-there is an income tax upon employees and an excise tax upon employers. The employer is required to collect the employee's tax and to forward it together with his own tax to the Bureau of Internal Revenue. Three parties, then, are concerned in the payment of the taxes-the employee, the employer, and the Bureau of Internal Revenue. Of the three, the employee has duties which are distinctly the least burdensome. When he has obtained his account number, and has informed his employer of the number, the employee has met all his legal obligations. However, "it is advisable for each employee, beginning January 1, 1937, to keep permanent accurate records showing the name of each employer for whom he performs services as an employee, the dates of beginning and termination of such services," 1 the amount of wages received, the amount of tax deducted from wages, and other similar information. By keeping such records the employee safeguards himself in two ways. First, he protects himself against having to pay a tax twice. That payment would be demanded twice is quite unlikely; yet the possibility should not be neglected, for regulations 'U. S. Treasury Department, Regulations 91, Article 412 (b) p. 27. 64 COLLECTION OF TAXES 65 provide not only that the employer is liable but that "until collected from him the employee is also liable for the employees' tax with respect to all the wages received by him."2 The employee should, therefore, be able to prove that the collection has been made. The second way in which the keeping of records safeguards the employee is in assuring the correctness of the benefits that will later be paid to him or to his estate. As the amounts of benefits are based upon the wage earnings of the employee, it is essential that correct records of such earnings be maintained. In all probability the official records kept by the Bureau of Old-Age Insurance will be correct, but if, for any reason, these records are at fault, the records kept by the employee will aid him in discovering the fact and in establishing the correct amount of his claim. Unlike the employee, the employer has only commenced his legal duties with respect to Title VIII when he has secured his identification number. While it is merely recommended that the employee keep records, it is required that the employer do so. These records need not be kept in any particular form but they must be such as will enable the Bureau of Internal Revenue, which is entitled to access to them at all times, to ascertain whether taxes have been correctly computed and paid. The employer's records must show with respect to each employee: 1. the name and address of the employee and the account number assigned to the employee under the Act; 2. the occupation of the employee; 3. the total amount (including any sum withheld therefrom as tax or for any other reason) and date of each remuneration payment and the period of services covered by such payment; 4. the amount of such remuneration payment which constitutes wages subject to tax... and 5. the amount of employee's tax withheld or collected 2U. S. Treasury Department, Regulations 91, Article 204, p. 17. 66 FEDERAL OLD-AGE BENEFITS with respect to such payment, and, if collected at a time other than the time such payment was made, the date collected. If the total remuneration payment (paragraph 3 above) and the amount thereof which is taxable (paragraph 4 above) are not equal, the reason therefor shall be made a matter of record. Accurate records of the details of every adjustment of employee's tax or employer's tax shall also be kept, including the date and amount of each adjustment.3 The records must be kept in a convenient and safe location for at least four years. Besides having to keep records, the employer must furnish the employee at the time of each payment of wages a statement showing the amount of employee's tax deducted from wages. No form is prescribed for these statements. The only requirement is that they accomplish the purpose of providing "the employee at the time of payment with information in writing of the amount which constitutes the deduction on account of the tax... as distinguished from any other deductions." 4 The employee must be allowed to retain possession of the statement "for such reasonable period as may be necessary to enable him to determine whether the... tax... has been correctly computed and deducted." Provided these conditions are satisfied, a notation on a check issued to an employee in payment of wages, an entry on a clock card, pay envelope, or pay voucher, and similar devices, are alike adequate as forms of the statement. The requirements are not met, however, if the statement is one "which is merely signed by the employee without opportunity for him to determine the exact amount and purpose of the deduction and which is retained by the employer." 5 3 U. S. Treasury Department, Regulations 91, Article 412 (a) p. 26. 4 U. S. Treasury Department, Regulations 91, Article 206, p. 17. U. S. Treasury Department, Social Security Tax Office Decision 63, Internal Revenue Bulletin, Vol. XVI, No. 1, p. 13. In footnotes subsequent to the present one such references as this will be given in the following abbreviated form: S.S.T. 63, I.R.B. XVI-1, 13. COLLECTION OF TAXES 67 The employer may choose to pay the employee's tax himself, without making a deduction from the wages of the employee; such action does not, however, relieve him of the responsibility of furnishing the employee a written statement showing the amount of tax so paid.6 Another obligation incumbent on the employer is that of remitting his own and his employees' taxes to the Collector of Internal Revenue. Tax returns must be made monthly in triplicate7 on the Employer's Return Under Title VIII of the Social Security Act, Form SS-1. These are to be filed with the local Collector of Internal Revenue for the district in which the employer's principal place of business is located. "The return, together with remittance of taxes required to be reported thereon, must be in the hands of the Collector on or before the last day of the first month succeeding that for which the return is made." 8 TR.ASURY DEAIT OINAL RETUMa eMoNARmrmr,8sn, EMPLOYER'S RETURN UNDER TITLE VIlI OF THE SOCIAL Read Intuactine SECURITY ACT FOR THE MONTH OF..-.....193._ Cared 1. Number of employees................... 2. Taxable wages paid during month-..... $..................... em' za8 L01) & Tax (1t.j Of Z. Tl.. (oJ_...item.' --- — $ --- —-----—...-... — 9., or 7aut.. C,....- $-. Credi t or S — - Ot --- _ -l,.:.......................,.................... S. Total e ______...! mpl~_-+_ — $ --- —--- 9. a te s 6 ). _..._............. $. _._ _....... Sworn to and rbscribed before me this...... day I wear (or amnn) that all entries made hereon, and conof,193 tRed in ech schedule or statement attached and made a prt bereof, ar tre and correct, and in accordance with the appli(Wm.) or (wItM,) (si" mte ~p. t" ) M(Uto) o (mwt cable law and reulatlon. Nam (Signed) No. and Street City and State (Tib5') --- Thi form most be iled in qudruplicate The collector will return the qudruplicate copy a a receipt for taxes paid. -I In item (1) on Form SS-1 the number of employees must be given, and in item (2) the taxable wages paid during the month.9 In items (3) and (6) on the form the amount of the employer's tax and of the employees' tax, ~ S.S.T. 173, I.R.B. XVI-30, 8. Originally, a quadruplicate return was required. 8 Form SS-1, Instructions. 9 Questions concerning definition of the terms "employment" and "wages" are discussed in detail in Chapters VI, VII, and VIII. 68 FEDERAL OLD-AGE BENEFITS respectively, must be entered. The amounts entered in each item are identical because both taxes are computed as identical percentages of the taxable wages shown in item (2). The tax rates or percentages will be as follows: On wages earned in 1937, 1938, and 1939.. 1% On wages earned in 1940, 1941, and 1942...11/2% On wages earned in 1943, 1944, and 1945... 2% On wages earned in 1946, 1947, and 1948... 21/2% On wages earned in 1949 and subsequently. 3 % Item (4) and item (7) on Form SS-1 provide for adjustments on the employer's and the employees' tax, respectively. In the case of most kinds of tax an individual who has paid an amount greater than the correct one must file a formal claim for refund. Similarly, if a lesser amount than the correct one has been paid the tax collector must present a formal demand for payment of the difference. In certain instances under Title VIII this general procedure must be followed.'0 However, the Act permits that under most circumstances a more simple adjustment may be made." Such adjustment is allowable with respect to the tax in connection with subsequent wage payments to the same individual by the same employer as were involved in the erroneous payment. If an erroneous collection has been made from two or more employees, the employer must make a separate adjustment with respect to each employee; an overcollection from one employee cannot be used to offset an undercollection from another. Moreover, erroneous payments of employer's tax and employees' tax are to be adjusted separately. If an employer, having deducted an erroneous amount from the wage payment of an employee, discovers the error before a return is filed, and thus is able to file a o1 U. S. Treasury Department, Regulations 91, Article 504, p. 32, and Article 505, p. 34. Section 802(b) and Section 805. COLLECTION OF TAXES 69 correct return, no adjusting entry is necessary. Such a matter concerns only the employer and the employee. The employer must, however, refund any overcollection from an employee prior to the filing of the return. He is also required to obtain and keep a receipt for such refund. If the erroneous collection or deduction from the wages of an employee is not discovered before the return is filed, the employer will adjust, if there has been an undercollection, by deducting the amount thereof from the first remuneration payment for services made to such employee after the error is discovered. Amounts so deducted are reported as adjustments on the return on Form SS-1 for the month in which deducted. The deduction is made from the first remuneration payment even though such payment, for any reason, does not constitute "wages." If an overcollection is discovered after the return is filed, the employer will adjust it when the next payment of wages is made to the employee. If the first remuneration payment after discovery of the error does not constitute wages the adjustment is deferred until a payment of wages is made. The adjustment is made by applying the overcollection against the employees' tax which attaches to such wages. Should the overcollection be greater in amount than the employees' tax attaching to such payment of wages, the balance of the overcollection is to be applied against the employees' tax attaching to consecutive payments of wages until the adjustment is completed. No adjustment of this type, that is, of the type not involving the presentation of a formal claim for refund, may be made after the expiration of four years from the time the overcollection was paid to the collector. In the case of the employer's tax, underpayments may be adjusted through the employer's reporting the additional amount due by reason of the underpayment as additional tax on his next return on Form SS-1, and paying the amount thereof to the collector at the time such return is filed. The employer may adjust overpayments 70 FEDERAL OLD-AGE BENEFITS by applying the excess payment as a credit against the tax due at the time of his next return on Form SS-1. Such adjustment of overpayment must be made within four years. Although items (4) and (7) are intended to provide mainly for the rectification of previous errors, there is one adjustment not caused by error which will very frequently be entered in item (7). The need for this adjustment is a consequence of the provision 12 that the employer shall collect the employees' tax by deducting the amount of the tax from the wages of the employee as and when paid,13 either actually or constructively,14 and of the further provision that in each deduction "the employer shall disregard any fractional part of a cent unless it amounts to one-half cent or more in which case it shall be increased to one cent.15 Usually, of course, the monthly total of the separate deductions will not equal the amount of the employees' tax as shown in item (6) where the percentage computation is made on the basis of the sum of the earnings of the employees during the entire month. The difference between these two amounts must be entered in '2U. S. Treasury Department, Regulations 91, Article 204, p. 16. ls An exception to the rule that the deduction must be made when wages are paid occurs "where more than one payment of wages is made to an employee during a particular day for services performed that day." In such an instance "the employees' tax imposed under Title VIII of the Act must be computed on the total wages paid to the employee during such day." (S.S.T. 128, I.R.B. XVI-15, 17). Were it not for this exception an employee might never pay any tax, as the amount computed on each wage payment might always be less than one-half cent. 14 "Wages are constructively paid when they are credited to the account of or set apart for an employee so that they may be drawn upon by him at any time although not then actually reduced to possession. To constitute payment in such a case the wages must be credited or set apart to the employees without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that they may be drawn at any time, and their payment brought within his own control and disposition." (U. S. Treasury Department, Regulations 91, Article 303, p. 18). " S.S.T. 90, I.R.B. XVI-7, 12, based on U. S. Treasury Department, Regulations 91, Article 204, p. 16. COLLECTION OF TAXES 71 item (7) and if there are no other credits or adjustments, the total employees' tax, as actually deducted, will appear in item (8), which gives the amount the employer must pay to the Bureau of Internal Revenue with respect to the employees' tax. In general, all credits and adjustments reflected in items (4) and (7) must be supported by statements giving the complete details, but this provision is waived relative to item (7) when the only entry therein is the particular adjustment just described.16 The total employer's tax, item (5) on Form SS-1, is computed by combining the adjustment, if any, shown in item (4) and the gross tax shown in item (3). Similarly, the total employees' tax, item (8) is obtained from item (6) and item (7). The total amount of taxes due, item (9), is the sum of item (5) and item (8). The return must always be signed by the employer himself if he is an individual, by a responsible and duly authorized member if the employer is a partnership or other unincorporated organization, and by one of the principal officers if the employer is a corporation. Returns are to be notarized if the total amount of taxes exceeds $10. If the amount of taxes is $10 or less, acknowledgment before two witnesses may be substituted for notarization. As mentioned previously, the return must be accompanied by a remittance of the taxes; any normal method of payment, such as check, money order, or currency is acceptable. In addition to the tax return, Form SS-1, the employer must file three types of information returns. These are the Employer's Summary Information Return, Form SS-2; the Employer's Report of Wages Paid to Each Employee, Form SS-2a; and the Employer's Information Return for an Employee Who Attains Age 65 or Dies, Form SS-3. Form SS-2 is a summary report of the total taxable 16 Form SS-1, Instructions. 72 FEDERAL OLD-AGE BENEFITS wages paid all employees during the quarterly 17 period it covers. If the total wages reported for the period exceed $500 the form must be notarized; otherwise, the signatures of two disinterested witnesses will suffice. TBRAsUs DFRYaTM EMPLOYER'S SUMMARY INFORMATION RETURN ORIGINAL RETURN IMXrmAL BRtmrX e 8u Under Tite VIII of te Soal Secrity Act Read Instructions FOR PERIOD JANUARY 1, 1937, THROUGH JUNE 85. 1 Carfully L Total number of EMPLOYEES to whom taxable wagee were paid within period _______... (A _p-t PSo _- 1 =A_ he r_). Total taxable WAGES paid within eriod to mpoyees, sa npor on atod Fom. 82a......... Ja., M ar.,........ — - ------------------------- If totalo ind tbed before me thit t.....dt of.nt li.abe ttached. THIS (rr) FOR M MUST B Ia TalM.u i a WO OML er.t Dd STRIC Supplementg tis sm mary drern pind f d igled) ith it (Title) W — - - -- Sworn to and ubchribed before me thi.. day ofe..1 t8%= and l a ta nertso m a t itr THIS FORM MUST BE FILED I DUPLICATE WITH COLLECTOR OF INRNAL IEVENUE OR EMPLOYERt'S DISTRICr ON OR BEIOIIRE JULY 31, *#7 H-ea Supplementing this summary return and filed with it are individual reports, Form SS-2a, showing total taxable wages paid to each employee during the quarter. The sum of the amounts shown on these individual reports will, of course, equal the amount shown on Form SS-2. The individual reports need not be notarized. These quarterly reports of wages paid to each employee constitute the basic materials for the old-age benefits records system. Upon being received by the Collectors of Internal Revenue they are checked against the summary reports, Form SS-2, which they accompany, and are then, together with the summary reports, transmitted to field offices of the Social Security Board. Certain of the field offices are equipped to begin the process of recording the information the reports contain, and to these offices are forwarded the reports received by the offices not so equipped. After the field offices have finished with them the reports are sent on to the Board's Wage Records Office in Baltimore. 17 The first two sets of returns on Forms SS-2 and SS-2a covered the six-month periods ending June 30, 1937, and December 31, 1937. Subsequent reports are required quarterly. COLLECTION OF TAXES 73 1. PERIOD ENDED 2. EMPLOYEE'S ACCOUNT NUMBER 3. EMPLOYEE'S NAME 4. TAXABLE WAGES PAID TO EMPLOYEE 7. It lt noar eDmlBy at em o ft b ploo d Jpwo InD% 1. gvD do, o lrd nl,,, ~.......,,,............. heran -3h EMPLOYER'S REPORT OP WAGES PAID TO EACH EMPLOYEE READ INSTRUCTIONS TlBABURY DZPARTML NT StPLEMElTINC EMPLOYER'S SUMMARY INFORMATION RETURN UNDER ON FORM SS-2 IWBNAL R 8xTxV BnrT TITL VIII OF THE SOCIAL SECURITY ACT CAREFULLY One orlgnal copy d tBhlb o form etacih employe must be attached to and iled with Form SS-2 * -_eu The Employer's Information Return for an Employee Who Attains Age 65 or Dies, Form SS-3, must be filed with the Collector of Internal Revenue within fifteen days after the date of the employee's sixty-fifth birthday or his death. Besides being notification to the Bureau of Internal Revenue, and indirectly to the Social Security Board, of the age attainment or death, the form shows the taxable wages earned since the last Form SS-2a was filed, and thus it serves as a basis for completing the wage record of the employee. This form does not have to be notarized. However, in the case of an employee attaining age 65, it is necessary that either a joint affidavit by the employer and employee, or separate affidavits, as to the date and place of the employee's birth be filed with the return as substantiating evidence.18 The agency responsible for the administration of Title VIII, the Bureau of Internal Revenue, has sixtyfour district offices, with at least one in every State. A Collector of Internal Revenue is in charge of each district office. Branch offices are established in the larger towns within each district. These offices are in charge of Deputy Collectors. The latter do not receive ordinary tax payments; their main functions are to collect delinquent taxes, to provide information on tax matters, and to furnish tax forms to the public. 18 Form SS-3, Instructions. 74 FEDERAL OLD-AGE BENEFITS In searching out delinquent taxpayers under Title VIII the Bureau employs as its first recourse the income-tax returns of individuals and corporations. Resort is also had to classified telephone directories and similar listings. While there is little doubt that many employers of one or two individuals, such as rooming-house keepers, are not paying the taxes of Title VIII, primarily because of ignorance, it is equally certain that few larger employers escape the payment of these taxes. The three following chapters present a discussion of the coverage of the old-age benefits program and of the tax liability with respect to Title VIII of the Act. For those who, like business men and students of social insurance, are interested in a detailed analysis of these questions this discussion, dealing with specific cases, should be of considerable practical value. The casual reader, on the other hand, may prefer to go through some of the pages of these chapters more or less rapidly. CHAPTER VI COVERAGE AND TAX LIABILITY-THE DEFINITION OF "EMPLOYMENT" Under the old-age benefits plan, in general, benefits are not received until after a worker and his employer have been subject to taxes. For this reason questions relating to coverage under the plan arise first in connection with tax liability and only later in connection with the payment of benefits. The Bureau of Internal Revenue, agency for the administration of Title VIII of the Act, issued general regulations dealing with certain of these questions several weeks before January 1, 1937, the date on which the plan went into effect, and both before and since that time has issued a large number of rulings on particular cases. While nothing in the law requires it to do so, the Social Security Board will very likely accept the guidance of these regulations and rulings when questions relating to coverage come before it, for on this subject the provisions of Title II, which it administers, are to all practical purposes identical with those of Title VIII. The Bureau of Internal Revenue having dealt with questions of coverage from the very beginning of the operation of the old-age benefits plan, and its pronouncements with regard to these questions being available, the following discussion of coverage will be based on these pronouncements and will be undertaken from the point of view of tax liability rather than from that of eligibility for benefits. With respect to any law, certainty as to its scope is, of 75 76 FEDERAL OLD-AGE BENEFITS course, exceedingly desirable. Usually though, regardless of how carefully it is drawn, a zone of twilight exists between those areas in which the law clearly applies and those in which it clearly does not apply. The difficulties arising from the existence of this obscure zone are particularly noticeable in the case of tax laws, for many more persons come into regular contact with these than with most other laws. Moreover, while most laws are merely prohibitory in character, the tax law requires the citizen to take an affirmative action. New laws present especially difficult problems because, in general, certainty is achieved only by a gradual process. Regulations and interpretations formally issued by the administrative agency contribute to but will not by themselves bring about certainty. One after another, special cases arise and either the courts or the administrative agency must decide whether they fall within or without the scope of the law. The decisions may or may not have the benefit of judicial precedents. Frequently none is available. In any event there will enter into the making of a proper decision a consideration of the intention of the legislature, so far as it can be determined; an effort, so far as the essentially arbitrary nature of tax laws will permit, to take account of equity; and, most important, an examination into the probable workability of the decision. After many cases have been determined to be on one side or the other of the boundary of the law it may become possible, using these cases as guides, to pick out a more or less sharp line of division through the twilight zone. Formal regulations relating to both the tax titles of the Social Security Act have been published by the Treasury Department. Regulations 91, relating to the employees' tax and the employers' tax under Title VIII of the Act will be referred to frequently in the pages that follow. Of more interest than the regulations are the large number of decisions upon concrete cases which have been COVERAGE AND TAX LIABILITY 77 announced by the Social Security Tax Unit of the Treasury Department's Bureau of Internal Revenue. By means of these decisions the gradual process of the determination of the dividing line is taking place. Upon these decisions, published in weekly issues of the Internal Revenue Bulletin, the greater part of the discussion of this and the next two chapters is based. In order that the significance of the rulings may not be misunderstood it is necessary to quote the following statement which appears on the cover of each Internal Revenue Bulletin: The rulings reported in the Internal Revenue Bulletin are for the information of taxpayers and their counsel as showing the trend of official opinion in the administration of the Bureau of Internal Revenue; the rulings other than Treasury Decisions have none of the force or effect of Treasury Decisions and do not commit the Department to any interpretation of the law which has not been formally approved and promulgated by the Secretary of the Treasury. Each ruling embodies the administrative application of the law and Treasury Decisions to the entire state of facts upon which a particular case rests. It is especially to be noted that the same result will not necessarily be reached in another case unless all the material facts are identical with those of the reported case. As it is not always feasible to publish a complete statement of the facts underlying each ruling, there can be no assurance that any new case is identical with the reported case. As bearing out this distinction, it may be observed that the rulings published from time to time may appear to reverse rulings previously published. Officers of the Bureau of Internal Revenue are especially cautioned against reaching a conclusion in any case merely on the basis of similarity to a published ruling, and should base their judgment on the application of all pertinent provisions of the law and Treasury Decisions to all the facts in each case.' 1 Because the taxes provided in Title IX of the Act have much the same coverage as do those provided in Title VIII, and because they went into effect a year earlier, a great many doubtful points of gen 78 FEDERAL OLD-AGE BENEFITS The discussion in these chapters undertakes, by classifying the cases which have been decided and noting the salient facts of each, to indicate in considerable detail the coverage of the old-age benefits plan. Obviously, however, the cautioning advice just quoted holds to no less an extent with respect to this discussion than with respect to the original rulings. As said, only the salient facts noted in the rulings are given here. While the rulings make clear the general principles on which they are founded, in many instances they do not point out precisely which of the numerous facts cited were controlling in the determination of the applicability of a principle to the particular case. Where this is so the procedure in these chapters will be to indicate which of the facts appear from the context to have most influenced the decision. The taxes of Title VIII are taxes with respect to "employment" and they are measured as percentages of "wages" paid in such employment. Thus, questions relating to tax liability under Title VIII may be grouped under two main headings. The first of these has to do with the definition of "employment"; it in turn covers two sets of problems, that of defining the employment relationship, and that of distinguishing certain services which are excepted, or excluded, by the terms of the Act. The questions under the second heading have to do with the definition of what constitutes "wages." Problems of the meaning of "employment" will be taken up in this chapter and the next one; those pertaining to "wages" will be treated in the second following chapter. THE EMPLOYMENT RELATIONSHIP The basic considerations in the definition of the emeral nature have been decided in connection with them rather than with the Title VIII taxes. In the following pages the Title in connection with which particular rulings were made will not be indicated except where such information is material. COVERAGE AND TAX LIABILITY 79 ployment relationship are stated in the following paragraph from Regulations 91: Generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor. Certain other general considerations are: "If the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial," and so, too, is the measurement, method, or designation of compensation.2 If the relationship exists at all, its being temporary or of brief duration is also immaterial.3 And, of course, the relation may exist between an employee and two or more employers at the same time. As a specific illustration, an individual whose primary activities are in the employment of one company, and who in conjunction with his regular duties devotes a small 2 U. S. Treasury Department, Regulations 91, Article 3, p. 3. ' S.S.T. 45, I.R.B. XV-41, 11. 80 FEDERAL OLD-AGE BENEFITS part of his time to rendering services for another company without interfering with these regular duties, may be an employee of the one company and also of the other.4 To constitute "employment" the services performed by the employee must be performed within the United States, that is, within any of the several States, the District of Columbia, or the Territories of Hawaii and Alaska. This condition being satisfied, The place where the contract for services is entered into and the citizenship or residence of the employee or of the employer are immaterial. Thus, the employee and the employer may be citizens and residents of a foreign country and the contract for services may be entered into in a foreign country, and yet, if the employee under such a contract actually performs services within the United States, there may be to that extent an employment within the meaning of Title VIII of the Act.5 Accordingly, the services performed within the United States by aliens, even though these aliens are admitted into the country temporarily as employees of either foreign or domestic employers, constitute employment.6 To the extent that an employee performs services outside of the United States he is not in an employment. If he performs services partly within and partly outside of the United States, as in the case of employees of a bus company running between Canada and the United States, only the wages payable on account of services performed within the United States are to be included in the computation of wages for tax purposes.7 DISTINCTION BETWEEN EMPLOYEE AND INDEPENDENT CONTRACTOR One of the major problems in connection with the definition of employment is that of distinguishing between an 'S.S.T. 24, I. R. B. XV-32, 36. 5 U. S. Treasury Department, Regulations 91, Article 2, p. 3. 6 S.S.T. 130, I.R.B. XVI-16, 11. 7 S.S.T. 22, I.R.B. XV-31, 22. COVERAGE AND TAX LIABILITY 81 employee and an independent contractor. "Generally, physicians, lawyers, dentists, veterinarians, contractors, subcontractors, public stenographers, auctioneers, and others who follow an independent trade, business, or profession, in which they offer their services to the public" are considered independent contractors.8 Thus, an individual auctioneer who is engaged by various persons with respect to specific transactions in which such persons do not control or direct the performance of his services, is classed as an independent contractor. Should such an individual be hired by a firm of auctioneers to assist in conducting sales, and should his professional services then be controlled and directed by the firm, he becomes an employee.9 On the other hand, an attorney who is engaged by a corporation and paid a retainer fee to defend it in any suit that may be brought against it during the year, the fee being paid whether or not he actually performs any services, is considered an independent contractor.10 In the ruling in this case it is indicated, in connection with the citation of judicial precedents, that the attorney has not contracted to give his exclusive services, and that the company has left its legal matters in his hands for him to take care of by his own methods. A somewhat similar situation, in which the independent contractor relationship is also found to exist, is one involving adjusters engaged by a board of fire underwriters in the determination and settlement of fire losses. The adjusters are compensated by the board on a per-diem basis and are not required to perform their work at any particular time. None of them is engaged exclusively in performing services for the board. The board calls on them as experts, it exercises no control over them as to the manner in which they perform their services, and it is 8 U. S. Treasury Department, Regulations 91, Article 3, p. 4. 9 S.S.T. 149, I.R.B. XVI-21, 16. 10 S.S.T. 86, I.R.B. XVI-5. 22. 82 FEDERAL OLD-AGE BENEFITS interested only in the result, which is the settlement of the loss. A hotel company contracts with a certain individual for the services of an orchestra of which he is the conductor. The members of the orchestra receive their pay from him and he has the right to hire, control, and discharge these members. He receives from the company a weekly check in a lump sum for the services of the orchestra members and himself. Under these circumstances, the Bureau holds, the conductor is an independent contractor and neither he nor the musicians are employees of the hotel company." Still another case involving the distinction between an employee and an independent contractor is that of "country correspondents" who furnish weekly news items for the use of a newspaper. In a case where the paper may either accept or reject the news items, payment being made only for those items accepted and published, and where the paper has no control as to the hours which must be devoted to the work, the subject matter of the items, or the manner in which the work is performed, the correspondents are regarded as not being employees.12 A further instance of the independent contractor relationship is that of a newsboy who "purchases newspapers from a publisher and sells them in such manner and at such time and place as he chooses." On the other hand, a newspaper "carrier" who is engaged to "deliver newspapers during certain hours each day to customers in a particular territory" is treated as an employee.3 An unusually interesting set of circumstances is that involved in the determination of the status of life insurance agents. A ruling has been published with respect to the agency organization of one company and is based, of course, on the form of contract used by that company. S.S.T. 47. I.R.B. XV-42, 8. 12 S.S.T. 105, I.R.B. XVI-9, 9. "S.S.T. 64, I.R.B. XVI-2, 12. COVERAGE AND TAX LIABILITY 83 In the case on which the ruling was made it was found that The agent's contracts do not permit the company to prescribe rules governing the development of clientele, the time or place of solicitation, or otherwise control the physical activities of the agent. The agents can come and go as they please and are not required to spend a fixed amount of time in working for the company. The company does not furnish or control the means of transportation nor is it required to pay for the means used. The company has no right to say whether an agent shall or shall not advertise... The agent usually has an extensive territory and maintains his office wholly upon his own responsibility and at his own expense.14 These and other facts of the case are compared with those mentioned in a number of judicial decisions on similar questions. "While the decisions cited are not necessarily controlling in determining whether the agents of the - Company are employees..., they are persuasive that the -- Company does not exercise, or have the right to exercise the control prescribed by Regulations 91... as necessary to establish the relationship of employer and employee." Following are a number of instances in which questions of whether individuals might be classed as independent contractors are answered in the negative. In one of these the individuals perform services for a company in their homes and are compensated on a piecework basis. Materials are provided by the company and so, too, are definite instructions as to the way the work is to be done. In some cases two or more members of the same family or other individuals residing in the same home are engaged in the work, the company dealing either with each one separately or with one member of the group who acts as representative of the others. "The fact that the Company permits the work to be done at the homes of the individuals in'1 Chief Counsel's Memorandum, 18705, I.R.B. XVI-28, 7. 84 FEDERAL OLD-AGE BENEFITS stead of at the factory is immaterial," the ruling points out: The relationship of employer and employee depends on the employer's right to control and direct the employee and not upon the extent to which such right is exercised.15 Each of the individuals here in question is held to be an employee of the company and the latter is liable for the payment of taxes on the wages of each, regardless of whether it deals directly with the individuals or indirectly with a group through one member. Adequate records must be maintained by the company showing the remuneration paid each employee, whether directly or indirectly. Another instance of a negative answer to the question of whether certain individuals may be classed as independent contractors involves janitors who serve several different property owners, attending to furnaces, cleaning halls, etc. Although the janitors are unrestricted as to the hours they work they are expected to give whatever attention is necessary to the carrying out of the specified duties.16 Somewhat out of the ordinary is the case of an individual who is given the privilege of operating a shoe-shine stand in a barber shop in exchange for his services as a porter. He receives no remuneration other than this privilege. Inasmuch as the manner in which his services as porter are performed is clearly under the direction and control of the proprietor, he is held to be an employee, and the "fair rental value of the stand" is held to constitute the amount of his remuneration.17 Drivers of taxicabs owned by a certain company and operated in accordance with a contract entered into with each driver are considered employees of the company. No accounting is made of the fares collected by the drivers but 5S.S.T. 137, I.R.B. XVI-17, 10. 16 S.S.T. 172, I.R.B. XVI-29, 23. 17 S.S.T. 147, XVI-21, 15. COVERAGE AND TAX LIABILITY 85 the contract reveals, among other things, that the company pays all expenses of operation except that of gasoline; the driver agrees to operate the cab for the purpose of carrying persons for hire only; the driver makes a deposit as a guarantee of his compliance with the terms of the agreement, and in the event he fails to operate the cab on any day or days in accordance with the agreement the deposit may be applied on the rental for such day or days; the driver specifically agrees to obey in every particular the rules promulgated by the company; and the company retains the right to discharge the driver. The ruling on the case remarks that While it is true that the relationship of employer and employee implies the payment by the employer of wages for services rendered, and in this case the fares received by the driver were not actually paid by the employer, yet the arrangement was such that payment may properly be ascribed to him. The fares received by the driver less authorized deductions constitute his compensation. The effect of the contract was substantially the same as if the driver turned over to his employer all the fares collected by him, less cost of gasoline, and the latter returned to the driver, as wages, the sum remaining after deducting the charge for rental.18 CLASSES OF EMPLOYEES As noted in Regulations 91: Title VIII of the Act makes no distinction between classes or grades of employees. Thus, superintendents, managers, and other superior employees are employees. An officer of a corporation is an employee of the corporation, but a director, as such, is not. A director may be an employee of the corporation, however, if he performs services for the corporation 18 S.S.T. I.R.B. XVI-23, 13. As a result of this ruling, of course, both the driver and the company must keep records of the fares collected and the expenditures for gasoline and cab rental. 86 FEDERAL OLD-AGE BENEFITS other than those required by attendance at and participation in meetings of the board of directors.l1 As an example of the last point in this quotation there may be cited the case of the directors of a building and loan association who were appointed to serve on certain committees of the association and who were paid specified fees for the services rendered as members of these committees.20 Though an officer of a corporation is one of its employees, the same is not true of a member of a bona fide partnership, even though he may receive a salary from the partnership.21 Contrarily, individuals who are members of what is called a partnership but who are in fact in the position of employees are considered as such. An illustrative case is that of the members of a Pennsylvania "partnership association." In accordance with the terms of the State law under which the organization was created the liability of the members is limited to the extent of their ownership of its stock. For the purpose of the Federal income tax law it is treated as an association (and, therefore, as a corporation). Under the Social Security Act, too, the term "corporation" is defined to include "association." The members of this association receive weekly wages, and each partner gives his undivided time to the work of the association or furnishes at his own expense a substitute. They are, the ruling holds, legally in employment relationship with the association.22 WHO ARE EMPLOYERS Closely related to the problem of whether an employment relationship exists is that of deciding who is the employer. Frequently, the question is that of which one or 1 U. S. Treasury Department, Regulations 91, Article 3, p. 4. S.S.T. 82, I.R.B. XVI-5, 18. S.S.T. 23, I.R.B. XV-32, 35. S.S.T. 116, I.R.B. XVI-12, 16. COVERAGE AND TAX LIABILITY 87 ones among a corporation and its subsidiaries employs certain officers. An individual who performs services solely for a subsidiary but whose wages are paid initially by the parent corporation, and the amounts thereof billed to the subsidiary, is held to be an employee of the latter. "In determining liability for taxes under Titles VIII and IX..., the subsidiary for which services are performed is considered the employer." 23 An individual who handles such matters as accounting, auditing, purchasing, etc., for the parent corporation and also for a number of its subsidiaries, but who is supervised, paid, and controlled by the former, which also furnishes the premises on which he works and the equipment he uses, is regarded as an employee of the parent corporation alone.24 Where executives, in addition to being officers of a certain corporation, are also officers of one or more of its subsidiaries, the latter in some instances being charged by the corporation for the services rendered to them and in other instances making no payment for these services, these executives are deemed employees of each of the corporations of which they are officers. The "relationship is not affected by the fact that in some cases the subsidiaries are not charged with any portion of the total remuneration paid to the officers by the Corporation." 25 Any charges that are made to a subsidiary which represent remuneration of an individual as an officer of the subsidiary constitute "wages" paid by the subsidiary. A case having some resemblance to the one of the corporation and its subsidiaries is that of a grand lodge of a fraternity and its subordinate lodges. Where the grand lodge exercises a measure of jurisdiction and control over the subordinate units, and yet each of these owns its own 23 S.S.T. 154, I.R.B. XVI-22, 20. ' Ibid. 2 Ibid. 88 FEDERAL OLD-AGE BENEFITS assets, elects and pays its own officers, and exercises control over its employees, the grand lodge has been held not liable for taxes with respect to the wages of employees of the subordinate lodges.26 Other forms of the problem of who is the employer are to be found in situations involving agency. As one example the case of a company managing improved real estate as agent for the owner, may be noted. In accordance with the agency contract, the company employs, pays, and discharges janitors, maids, and other help. The company: supervises these employees but is not responsible for the payment of their wages except from the funds of the owner in its possession which are deposited in a special bank account in the owner's name. The owner's funds are not commingled with the funds of the — Company. Although the - Company... controls and directs the services of the individuals employed in the operation of the owner's property, such individuals are not employees of the - Company. Under the contract the -- Company is merely the agent and, as such, is authorized by the owner to employ individuals for and on his behalf. The individuals so employed are, therefore, employees of the owner...27 An association of stevedores, organized for the purpose of collective bargaining, has one of its members act as business agent in securing contracts with vessel owners for the unloading of ships. All members of the association perform services in carrying out such contracts, and the amount received from the vessel owner is divided equally among them. The ruling on the case holds "it appears that the business agent does not act for himself as an independent contractor but is merely a representative of the stevedores and acts for each of them in dealing with 2' S.S.T. 76, I.R.B. XVI-4, 13. 27 S.S.T. 92, I.R.B. XVI-7, 15. COVERAGE AND TAX LIABILITY 89 the vessel owners." Hence the members of the association under these circumstances are employees of the owners of the vessels for whom their services are performed.28 A somewhat similar case is one of a motion picture machine operator who works under the terms of a contract between the theater and a labor union. He is permitted to work 36 hours a week. During a certain week he works only 30 hours, being relieved by another operator for the additional six hours. The theater pays him for the full 36 hours, he pays to the union the amount received for the work of the relief operator, and the latter is paid by the union. The Bureau considers the effect of these arrangements to be that the wages paid by the theater to the regular operator are divided between him and the relief man. "The wages are received by each of them with respect to employment." Both are employees of the theater; it is required to carry the names of both on its rolls and to keep such records and make such reports as will show the employment of both.29 In the cases just mentioned the agent has been a company or other form of organization. The agent may also, of course, be an individual employee. To illustrate, a manufacturing company pays, to a certain employee who supervises one of its departments, gross amounts measured by the number of units produced in that department. From these amounts the supervisor pays wages to the employees who work under his direction and keeps the remainder as remuneration for his own services. The employees in question are not carried on the company's pay roll. However, they are performing services in connection with their supervisor's employment by the company, the ruling points out. They are not working for him individually but are engaged in the business of the company. Accordingly, they are employees of the company.30 28 S.S.T. 69, I.R.B. XVI-3, 19. 29 S.S.T. 77, I.R.B. XVI-4, 13. 80 S.S.T. 70, I.R.B. XVI-3, 19. 90 FEDERAL OLD-AGE BENEFITS One more situation having to do with the question of who is the employer may be mentioned. A contractor enters into agreements with jobbers to manufacture certain articles for them. He hires and has the right to discharge the workers employed to carry out the contracts, and he superintends the methods by which the work is done. In addition to paying the contractor an amount sufficient to cover the wages of the workers, the jobber is required under the terms of the agreements to pay to the contractor the amount of his overhead and profit. The agreements provide that the jobber shall be responsible for payment of the wages for the work done under the contractor. The contractor is unable to pass the tax forward since he deals only with the jobber and not with the retailer or consumer. In the ruling on the case the Bureau of Internal Revenue points out that the contractor is the person who is primarily liable to pay the wages of the workers and who controls them not only as to what shall be done but how it shall be done. The employment relation, therefore, exists between the contractor and the workers, and "the fact that the jobber agrees to pay the contractor a sum sufficient to cover the wages of the persons working under him, plus an amount for overhead and profit, does not tend to change the legal relationship of the parties involved." The fact that the contractor is unable to pass forward to the retailer or consumer the taxes on the wages of the workers is not considered material.31 31 S.S.T. 153, I.R.B. XVI-22, 18. CHAPTER VII COVERAGE AND TAX LIABILITY —THE DEFINITION OF EXCLUDED EMPLOYMENTS Title VIII of the Social Security Act lists eight types of employment which are not subject to its provisions. The Carriers Taxing Act, by amending this part of the Social Security Act, excepts, in addition, railroad (and certain related) employment. AGRICULTURAL LABOR First among the services or occupations which are excepted under the terms of the Title VIII definition of "employment" is that of agricultural labor. According to Regulations 91,1 agricultural labor includes all services performed: (a) By an employee, on a farm, in connection with the cultivation of the soil, the raising and harvesting of crops, or the raising, feeding, or management of livestock, bees, and poultry; or (b) By an employee in connection with the processing of articles from materials which were produced on a farm; also the packing, packaging,' transportation, or marketing of those materials or articles. Such services do not constitute agricultural labor, however, unless they are performed by an employee of the owner or tenant of the farm on which the materials in their raw or natural state were produced, and unless such processing, packing, packaging, transportation, or marketing is carried on as an incident to ordinary farming operations as distinguished from manufacturing or commercial operations. As used herein the term "farm" embraces the 1U. S. Treasury Department, Regulations 91, Article 6, p. 5. 91 92 FEDERAL OLD-AGE BENEFITS farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit and truck farms, plantations, ranches, ranges and orchards. Forestry and lumbering are not included within the exception... Despite this amplification of the term "agricultural labor," problems concerning its scope have apparently been more numerous and more thoroughly discussed by the Bureau of Internal Revenue than have those relating to any other single phase of the taxing provisions of the Act. With respect to the services mentioned in subdivision (a) of the definition quoted, the Bureau understands "services in connection with" to mean either those directly in connection with or those performed as an "incidental" and "necessary" adjunct to the activities stated. Services are necessary in the sense that they are essential for the proper carrying on of the activities, "and are incidental in the sense that both their duration and character are such as to constitute their performance a subordinate and minor part of such activities." 2 If, because of the nature of the service, it might properly be said of the individual performing it that he is pursuing a special trade, calling or occupation not closely connected with agriculture, the service does not constitute "agricultural labor," even though the service may be performed on a farm by an employee of the owner or tenant thereof. Typical of such services are those performed by a bookkeeper, stenographer, carpenter, mechanic or engineer. Services of this nature are not agricultural even though pertaining to agricultural pursuits.3 With respect to the services mentioned in subdivision (b) of the definition, the Bureau has expressed the following opinion, which is quoted at length because it clearly indicates the principles involved in the instant case and 2 S.S.T. 125, I.R.B. XVI-14, 19. 9 Ibid. COVERAGE AND TAX LIABILITY 93 at the same time gives an idea of the complexity of the analyses the Bureau finds it necessary to make in dealing with some of the problems of tax collection: The question whether the processing, packing, packaging, transportation, or marketing of farm products is carried on as an incident to ordinary farming operations as distinguished from manufacturing or commercial operations is necessarily dependent upon the facts in the particular case with respect to which the question arises. The nature of the question does not permit of the adoption of a general rule which is controlling under all circumstances, but the following factors, while not all-inclusive, will be taken into consideration as indicating that the services in question constitute "agricultural labor": (1) The same employees who perform services in connection with admittedly agricultural activities (that is, those activities contemplated in subdivision (a) of article 6 of Regulations 91 and the corresponding subdivision of article 206(1) of Regulations 90) also perform services in connection with the handling of the farm products (that is, those activities referred to in subdivision (b) of the aforementioned articles). (2) The equipment used and the methods employed in handling the farm products are dissimilar to the equipment and methods used in like operations by persons admittedly engaged in commercial or manufacturing operations. (3) The employer handles products produced on his own farm exclusively. (4) The place where the handling is carried on is located on the farm. (5) The product handled is sold exclusively at wholesale. (6) It is the general custom and practice in the particular type of farming with respect to which the question arises to perform the handling operations in question. (7) The capital invested in the equipment used in handling the products does not constitute the greater part of the investment in the enterprise as a whole. No one of the conditions specified is conclusive but 94 FEDERAL OLD-AGE BENEFITS each is a factor in determining whether in a particular case the processing, packing, packaging, transportation, or marketing of farm products is carried on as an incident to ordinary farming operations or whether such activity is a part of a manufacturing or commercial operation.4 "Agricultural labor" and services which are included under the definition of "employment" may, of course, be combined in various ways and performed by the same individual. If an employee during certain periods is engaged in the former and during certain other periods is engaged in the latter, and the period of time devoted to each type of service is substantial, the services which constitute "agricultural labor" must be segregated from the services which constitute "employment" on the basis of the time during which each type of service is rendered. If, in such a case, the agricultural services can not be so segregated the entire services must be considered as "employment." Thus, if an employee concurrently performs services which, if separate and distinct as to time of performance, would constitute "agricultural labor," and other services which constitute "employment," the entire services must be classified as "employment." 5 If, however, the employee performs both "agricultural labor" and services classed as "employment," and one type of service is merely incidental in measure of time to the other, then, even though it is possible to segregate the one type of service from the other, the incidental service may be disregarded in determining whether the employee is engaged in "agricultural labor." Thus, if an individual employed on a farm is engaged principally in repairing farm machinery and equipment but incidentally engages in the performance of services in connection with the cultiva4Ibid. 6 Ibid. COVERAGE AND TAX LIABILITY 95 tion of the soil, his entire services may be treated as having been performed in "employment," the incidental agricultural services being disregarded. On the other hand, if an individual employed on a farm is engaged principally in the performance of services in connection with the cultivation of the soil but incidentally repairs farm machinery and equipment, his entire services may be treated as "agricultural labor," the incidental non-agricultural services being disregarded. No fixed rule can be laid down for the determination of what constitutes incidental services for this purpose, but any reasonable conclusion reached by the employer in that regard will not be disturbed.6 Most of the problems which have occasioned rulings on the subject of "agricultural labor" have been concerned with whether services performed for certain quasi-agricultural enterprises are to be included under that term. One of the most important of these rulings has to do with the status of employees of commercial flower growers. After citing a number of different uses of the word "agriculture," the ruling holds that in so far as English usage is concerned the term "agricultural labor" may be interpreted broadly enough to include all labor performed in the tillage of the soil or may be given a narrower interpretation by which it would cover ordinary farm labor but not the services performed for commercial flower growers. This being the case, "the construction to be placed upon the term must depend upon the purpose for which it was inserted in the Act. It is the principal rule of statutory construction...that a statute is to be constructed according to the purpose and intent of the lawmaker." The ruling then notes that the Congress exempted agricultural labor from the taxes imposed by the Act "because of the difficulties of collecting the tax" which otherwise would have arisen. The decision continues: Ibid. 96 FEDERAL OLD-AGE BENEFITS The difficulties of applying the Social Security Act to ordinary farm labor are easily understood. Because of the seasonal character of the employment, such labor is somewhat migratory in nature. Furthermore, a large part of such labor is employed in rural sections at a considerable distance from commercial centers. These conditions, which would make the application of the Social Security Act to farm labor very difficult, do not exist in any substantial degree in the case of commercial flower growers... (the) facts support the conclusion that, so far as the problems of applying the social security taxes are concerned, floricultural labor is much more similar to industrial labor than to farm labor. Since Congress in exempting "agricultural labor," had in mind the difficulties of applying the tax, it would seem that the term should be interpreted as not including labor performed in the flower growing industry.7 Another significant holding is in a case where services are performed by employees of an association of producers in connection with the processing, packing, packaging, etc., of farm products. The Bureau's opinion is that "even though the products in connection with which the services are performed were produced by members of the association, the services of such employees are not excepted... as 'agriculture labor,' since the individuals are employees of the association and not of a particular producer." 8 The services performed for a number of different enterprises have been considered by the Bureau in the light of the principles above set forth. The Bureau has ruled that services for the following enterprises do not constitute "agricultural labor." 1. The raising of wild animals for furs.9 2. The processing of sugar cane.le 7 S.S.T. 72, XVI-3, 21. 8 S.S.T. 10, I.R.B. XV-27, 16. 9 S.S.T. 55, I.R.B. XV-49, 17. 10 S.S.T. 103, I.R.B. XVI-8, 21. COVERAGE AND TAX LIABILITY 97 3. The hatching of chickens where the services performed are commercial and not merely incidental to ordinary farm operations.1' 4. The growing, harvesting, processing, packing, and transporting to market of gum naval stores (turpentine and rosin).12 5. The raising of goldfish.'3 6. The growing and processing of mushrooms. It appears that mushrooms grown in the United States "are not grown under field conditions such as characterize normal farming operations, but must be specially cultivated and grown in cellars, caves, barns, or sheds constructed for the specific purpose." The pertinent reasons set forth in the decision on flower growing are held to apply here with equal force.14 7. The crushing of grapes and other processing operations in the production of wine. These are held manufacturing and commercial operations rather than an incident to ordinary farm operations.l5 8. Cotton ginning, and rice milling.16 9. The pasteurizing, bottling, delivery and sale of milk or the processing, transporting, and marketing of other products in connection with the commercial operation of a dairy.17 10. The raising of rabbits for commercial purposes. The activities in question are "neither necessarily nor usually associated with farms or related to ordinary farming operations." 18 DOMESTIC SERVICE The second type of service which is not included under the term "employment," as defined in the Act, is domestic service in a private home. A private home is the fixed place of abode of an individual or family. A home utilS.S.T. 17, I.R.B. XVI-12, 17. 12S.S.T. 118, I.R.B. XVI-12, 18. 13 S.S.T. 131, I.R.B. XVI-16, 12. 14 S.S.T. 132, I.R.B. XVI-16, 13 16 S.S.T. 139, I.R.B. XVI-18, 25. "6 S.S.T. 142, I.R.B. XVI-19, 18. 17 S.S.T. 158, I.R.B. XVI-23, 15. 18 S.S.T. 166, I.R.B. XVI-26, 18. 98 FEDERAL OLD-AGE BENEFITS ized primarily for the purpose of providing board or lodging to the public as a business enterprise, is not a private home. Rooming or lodging houses, boarding houses, fraternity houses, clubs, hotels, and commercial offices and establishments are not considered private homes. The services must be of a household nature such as that of a cook, maid, butler, valet, laundress, furnaceman, gardener, footman, groom, or chauffeur of an automobile for family use. Service performed by a private secretary is not domestic service.19 CASUAL LABOR The third type of service not considered "employment" within the meaning of the Act is casual labor which is not in the course of the employer's trade or business, that is, labor which does not promote or advance such business. The term "casual labor" includes only labor which is occasional, incidental, or irregular. An example of such labor not in the course of the employer's trade or business is the case of a painter engaged to paint the home of an individual whose business is the operation of a sawmill. If the sawmill operator should engage a laborer for a few hours to remove sawdust from the mill, this service would not be within the exception because, although occasional or incidental, it would be in the course of the business of the employer. Similarly, the services of temporary clerks in a store are in the course of the employer's trade or business. Within the meaning of the term as here used, no services performed for a corporation can be classed as "casual labor." 20 In the only related decision on a particular case it is held that temporary services performed in a private home by a nurse employed by the 19 These provisions are summarized from U. S. Treasury Department, Regulations 91, Article 7, p. 6. 2o Summarized from U. S. Treasury Department, Regulations 91, Article 8, p. 6. COVERAGE AND TAX LIABILITY 99 patient being ministered to, constitute casual labor.21 It would not be so classed if the nurse were employed by a doctor, hospital, or employer other than the patient. EMPLOYEES WHO HAVE ATTAINED AGE 65 A fourth group of services not included under the definition of "employment" is made up of those performed by individuals who have attained the age of 65. The age is considered to be attained on the day preceding the 65th anniversary of the individual's birth. OFFICERS AND MEMBERS OF CREWS The fifth type of service not counted as being "employment" is the service performed as an officer or member of the crew of a vessel documented under the laws of the United States or of any foreign country. The expression "officers and members of the crew" includes the master or officer in charge of the vessel, however designated, and every individual, subject to his authority, serving on board and contributing in any way to the operation and welfare of the vessel. The exception extends, for example, to services rendered by the master, mates, pilots, pursers, surgeons, stewards, engineers, firemen, cooks, clerks, carpenters, deck hands, porters, and chambermaids, and by seal hunters and fishermen on sealing and fishing vessels. The word "vessel" includes every description of watercraft or other contrivance, used as a means of transportation on water. It does not include any type of aircraft.22 An operator of concessions on a vessel, as an independent contractor, may be an employer, and his employees are not regarded as coming within the exclusion. al S.S.T. 71, I.R.B. XVI-3, 20. U. S. Treasury Department, Regulations 91, Article 10, p. 7. 100 FEDERAL OLD-AGE BENEFITS If members of the crew perform part-time services for him they are, so far as such services are concerned, in "employment." 23 However, if similar services, such as the selling of soft drinks and candy, are performed by employees under the supervision of the officers of the vessel, then such employees are regarded as members of the crew and are not in "employment." 24 Employees of a stevedore company which contracts to load steamships are not considered officers or members of the crew of a vessel.25 GOVERNMENT EMPLOYMENT The sixth service not covered under the word "employment," as defined in the Act, is "service performed in the employ of the United States Government or of any instrumentality of the United States"; and the seventh service which is excluded is that "performed in the employ of a State, a political subdivision thereof, or an instrumentality of one or more States or political subdivisions. The Regulations explain that these exceptions extend "to every service performed by an individual in the employ of the United States, the several States, the District of Columbia, or the Territories of Alaska or Hawaii, or any political subdivision or instrumentality thereof, including every unit or agency of government, without distinction between those exercising functions of a governmental nature and those exercising functions of a proprietary nature.26 Relatively few questions have arisen concerning political subdivisions of States. Obvious subdivisions are counties, cities, towns, and townships. The cases that have had to be considered were decided on the basis of 2 S.S.T. 58, I.R.B. XV-51, 13. 24 S.S.T. 113, I.R.B. XVI-10, 18. 5 S.S.T. 36, I.R.B. XV-37, 11. 2U. S. Treasury Department, Regulations 91, Article 11, p. 8. COVERAGE AND TAX LIABILITY 101 definitions of "political subdivision" placed by Congress in various revenue acts, it being clear that the term was not intended to have different meanings as used in the different acts. The definition used in the Revenue Act of 1936 may be quoted: The term "political subdivision," within the meaning of the exemption, denotes any division of the State or Territory which is a municipal corporation, or to which has been delegated the right to exercise part of the sovereign power of the State or Territory. As thus defined, a political division of a State or Territory may, for the purpose of exemption, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of a State or Territory.27 With respect to the question of what constitutes a government instrumentality several cases that are of interest have been considered. Such organizations as a lighting plant, a waterworks, or a cemetery owned and operated by a city are regarded as instrumentalities thereof and neither they nor their employees are subject to the taxes imposed in Title VIII.28 However, a gas plant which is municipally owned but privately operated under lease is not so regarded, and therefore, services performed by its employees are treated as "employment" within the meaning of the Act.29 A case bearing some resemblance to this one involves an association of water-users which enters into a contract with the Federal Government to operate a Federal reclamation project. The relationship with the Government resulting from such a contract does not make the organization a Government agent or instrumentality.30 7 S.S.T. 94, I.R.B. XVI-7, 17. 2S.S.T. 2, I.R.B. XV-20, 13. S.S.T. 89, I.R.B. XVI-6, 17. 30 S.S.T. 38, I.R.B. XV-38, 17. 102 FEDERAL OLD-AGE BENEFITS Another situation in which the status of Government instrumentality is declared not to exist is in the case of a company operating under Public Works Administration and State highway contracts financed in whole or in part from relief funds.83 All national banks are instrumentalities of the United States.32 In addition, all State banks which are members of the Federal Reserve System are instrumentalities of the United States.33 State banks which are not members of the Federal Reserve System are not instrumentalities of the Federal Government. This is true even if the banks are insured by the Federal Deposit Insurance Corporation,34 or are depositories of postal savings funds.35 One State bank is an exception to the rule; the particular statute under which the Bank of North Dakota operates expressly provides that the Bank is an instrumentality of the State, and it is so regarded by the Bureau of Internal Revenue.36 The fact that a company is wholly owned by an instrumentality of the United States does not mean that it, too, is such an instrumentality. Thus it is ruled that a safe-deposit company, though owned by a member bank of the Federal Reserve System, does not have the status enjoyed by the parent concern.37 RELIGIOUS, CHARITABLE, AND CERTAIN OTHER INSTITUTIONS The eighth type of service which the Act excepts under 81 S.S.T. 14, I.R.B. XV-29, 19. 32S.S.T. 16, I.R.B. XV-30, 19. w S.S.T. 44, I.R.B. XV-40, 15. u, S.S.T. 79, I.R.B. XVI-4, 15. 6 S.S.T. 126, I.R.B. XVI-14, 22. Similarly it is held that building and loan, savings and loan, and homestead associations whose accounts are insured by the Federal Savings and Loan Insurance Corporation are not by reason of this fact, instrumentalities of the United States (S.S.T. 115, I.R.B. XVI-11, 14). m S.S.T. 133, I.R.B. XVI-16, 14. 7S.S.T. 108, I.R.B. XVI-9, 11. COVERAGE AND TAX LIABILITY 103 its definition of "employment" is that "performed in the employ of a corporation, community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual." 38 The nature of the service performed is, in this case, immaterial; the character of the organization is the determining factor. With respect to the character of the organization, it should be noted, two distinct requirements must be met if status under the excepted classification is to be established: The organization must be operated exclusively for one or more of the purposes specified; and its net income must not inure in whole or in part to the benefit of private shareholders or individuals. Money contributed by members of an organization to a common fund to be applied to the relief of particular members when in sickness, unemployed, or under other disability, is not a charitable fund. However, the fact that an organization established for the relief of indigent persons may receive voluntary contributions from the persons intended to be relieved will not necessarily affect its status as an organization operated for charitable purposes. An educational organization is one designed primarily for the improvement or development of the capabilities of the individual. Under exceptional circumstances, an association whose sole purpose is the instruction of the public, or an association whose primary purpose is to give lectures on subjects useful to the individual and beneficial to the community may be regarded as educational in purpose. Nevertheless, an organization formed, or availed of, to disseminate controversial or partisan propa8 Section 811(b) (8). 104 FEDERAL OLD-AGE BENEFITS ganda or which by any substantial part of its activities attempts to influence legislation is not classifiable as an educational organization. Since an institution to be within the prescribed class must be organized and operated exclusively for one or more of the specified purposes, an organization which has certain religious purposes and also manufactures and sells articles to the public for profit is not within the class under discussion even though its property is held in common and its profits do not inure to the benefit of individual members of the organization.39 In accordance with the general principles above set forth, organizations such as a fraternity 40 and a political committee 4 are considered to be outside the excepted class. In a ruling based on a comparison of the provisions of the Act regarding charitable organizations with the provisions of certain Revenue Acts, a fraternal benefit society is held to be an organization not in the category of charitable. The Revenue Act of 1934 has a provision substantially the same as the Social Security Act provision now under discussion. In addition, it contains a provision exempting fraternal benefit societies. The opinion points out that Congress in enacting the Revenue Act did not consider these societies to be included under the term "charitable corporation," for otherwise the provision specifically exempting them would have been superfluous. The conclusion depends on the recognized rule of statutory construction that the provisions of an act are to be so constructed that no part will be inoperative or superfluous; and it depends also on the principle that all Revenue Acts stand in pari materia, and their provisions should receive, if possible, a consistent interpretation.42 m The comments in this and the three preceding paragraphs, elaborating on the exception contained in the Act, are taken without material change from Regulations 91, Article 12, p. 9. o0 S.S.T. 18, I.R.B. XV-30, 20. 41 S.S.T. 6, I.R.B. XV-24, 16. 2 S.S.T. 119, I.R.B. XVI-12, 19. COVERAGE AND TAX LIABILITY 105 An organization previously held to be exempt from the payment of Federal income taxes by virtue of the abovementioned Revenue Act provision similar to that in the Social Security Act, is also exempt from the tax levied under Title VIII.43 Of course, an organization exempt by virtue of some other provision in the Revenue Act is not thereby exempted from the Social Security taxes.44 RAILROAD EMPLOYEES In addition to the services excluded from "employment" by the Act itself are those excluded by the terms of the Carriers Taxing Act. This Act, passed in conjunction with the Railroad Retirement Act of 1937, provides that the term "employment," as defined in Title VIII of the Social Security Act shall not include employees of any "express company, sleeping-car company, or carrier by railroad, subject to Part I of the Interstate Commerce Act,"45 employees of national railway labor organizations, and employees of certain agencies or organizations controlled and maintained by railroads and having functions closely connected with those of the railroads. ADMINISTRATORS OF ESTATES AND RECEIVERS Questions involving administration of an estate and those involving receiverships arise under various of the sections into which this and the preceding chapter have been divided. Since it appears advantageous to discuss " S.S.T. 66, I.R.B. XVI-2, 14. "S.S.T. 7, I.R.B. XV-24, 17. Carriers Taxing Act of 1937, Section l(i). A number of the office decisions of the Bureau of Internal Revenue deal with aspects of the Carriers Taxing Act. These decisions are: S.S.T. 3, I.R.B. XV-21, 11. S.S.T. 5, I.R.B. XV-24, 15. S.S.T. 8, I.R.B. XV-26, 28. S.S.T. 9, I.R.B. XV-27, 15. S.S.T. 32, I.R.B. XV-35, 19. 106 FEDERAL OLD-AGE BENEFITS these questions together instead of separately, they have been left to be taken up at this point. In general, an administrator is, in behalf of the estate, an employer, and as such is required to pay the employers' tax and collect the employees' tax from such individuals as may be in the employ of the estate. The administrator himself is not an employee.46 Even if those who are employees are also beneficiaries their status as employees is unchanged.47 Apparently the estate may function in substantially the same legal position as would have been occupied by the decedent. Thus the estate may have a private home and service performed in it comes within the exclusion of domestic service. If, however, the home is not occupied by the family of the decedent, but is merely held by the estate pending sale, this would not be the case.48 Fiduciaries in bankruptcy, whether receivers, trustees, liquidators, or conservators, are in the same position as administrators with respect to the employer-employee relationship, that is, in their fiduciary capacity they may be employers,49 but are not employees.50 The further question exists, however, of whether fiduciaries are governmental instrumentalities. It is held that this is not the case even though they may be acting under the provisions of the National Bankruptcy Act.61. However, a referee in bankruptcy is appointed by a court and is in a position similar to that of a judge; consequently, he is regarded as an instrumentality of the United States.52 The situation is complicated in the case of a bank in receivership. In one case a national bank went into bankruptcy and its assets were taken over by a liquidating S.S.T. 120, I.R.B. XVI-13, 16. 47 S.S.T. 129, I.R.B. XVI-16, 11. 48 S.S.T. 121, I.R.B. XVI-13, 17. 9 S.S.T. 120, I.R.B. XVI-13, 16. 50 S.S.T. 112, I.R.B. XVI-10, 17. 1 S.S.T. 124, I.R.B. XVI-14, 18. 52 S.S.T. 122, I.R.B. XVI-13, 18. COVERAGE AND TAX LIABILITY 107 trust in behalf of creditors. Here it was held that although the bank was a governmental instrumentality the liquidating trust was not.53 Problems in connection with insolvent banks are made especially difficult by the existence of an old statute which prevents the collection of taxes from any bank where such a collection would diminish the assets thereof necessary for the full payment of all its depositors. Under this statute it is held that the fiduciary of an insolvent bank (the bank not having been a governmental instrumentality) is not required to pay the employer's tax under Title VIII. He is, however,.required to collect the employees' tax.54 In another case sufficient money was borrowed from the Reconstruction Finance Corporation to pay the depositors of an insolvent bank in full, and it appeared that the debt could be paid in full upon realization of the assets of the bank. Here, it was held that the fiduciary was liable for the employer's tax, as the payment of the tax would not jeopardize the claims of depositors.55 3 S.S.T. 164, I.R.B. XVI-25, 19. M S.S.T. 37, I.R.B. XV-38, 15. 6 S.S.T. 135, I.R.B. XVI-17, 8. CHAPTER VIII COVERAGE AND TAX LIABILITY-THE DEFINITION OF "WAGES" Questions of what is and what is not "employment" having been disposed of, the next problems in connection with coverage and tax liability are those relating to "wages." These problems may be considered under three headings. The first includes the problems of deciding whether questionable items are or are not wages; the second includes those of how to value wages in kind and wages received intermixed with non-wage payments; and the last covers the problems of attributing to a definite period of time the services for which certain forms of wage payment are made. In accordance with the Act, which states that "the term 'wages' means all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash...,"1 the Bureau of Internal Revenue takes a broad view of what constitutes wages. The name by which the remuneration for services is designated is immaterial. Thus, salaries, fees, bonuses, and commissions on sales or on insurance premiums, are wages within the meaning of the Act if paid by an employer to his employee as compensation for employment. The basis upon which the remuneration is paid and the time of payment, are immaterial in determining whether the remuneration constitutes wages. Thus, it may be paid on the basis of piece work, or a percentage of profits; and it may be paid hourly, daily, weekly, monthly, or annually. Section 811(a). 108 COVERAGE AND TAX LIABILITY 109 The medium in which the remuneration is paid is also immaterial. It may be paid in cash or in something other than cash, such as goods, lodging, food, and clothing.2 Aside from the foregoing elaboration upon the definition contained in the Act, relatively few general regulations have been issued. Most of the Bureau of Internal Revenue pronouncements on the subject have had to do with specific cases. The several statements may be summarized in the form of two lists, one being of items which the Bureau has held are to be included as wages, and the second being of items to be excluded. INCLUDED ITEMS 1. "Payment to an employee of so-called dismissal pay, vacation allowances, or sick pay..." 3 It may be noted that even though "the employer continues to pay the salary of an employee after he becomes permanently disabled... such payments constitute wages..." A further ruling in this connection is also worthy of note. The fact that payments such as these are made pursuant to a general policy of the employing firm, such policy not being known to the employee nor held out as an inducement or part of the contract of employment, does not affect the answer.4 2. Bonuses. Although bonuses are referred to in the Regulations as among included items, one special case involving them has been decided and may be mentioned at this point. A manufacturer authorizes a retailer to pay his salespeople a bonus on sales of merchandise of the particular manufacturer. The retailer keeps a record of sales, pays the salespeople, and in turn bills the manufacturer for the amount of the bonuses, for which he is 2U. S. Treasury Department, Regulations 91, Article 14, p. 12. U. S. Treasury Department, Regulations 91, Article 16, p. 13. 4 S.S.T. 54, I.R.B. XV-48, 10. 110 FEDERAL OLD-AGE BENEFITS subsequently reimbursed. In this case the Bureau ruled that the bonuses clearly constituted wages and that since the salespeople were performing services for the retailer, were hired and paid by him, and were under his direction and control, they were his employees, and that the bonuses were to be included by him in determining his tax liability.6 3. Prizes. A company holds contests among its salesmen for the purpose of stimulating the sales of certain products, the winners receiving prizes either in cash or in property. Such prizes are held to constitute additional compensation or remuneration, and, therefore, must be included as part of wages in computations for tax purposes.6 4. Pay for "idle time." A company voluntarily guarantees its employees a minimum number of hours of work each week, and if the company is unable to use their services to this extent, the employees are paid for the minimum hours nevertheless. Such payments in excess of the amounts for hours actually worked, it is ruled, constitute wages.7 5. Traveling and other expenses. Amounts paid to employees as allowances for expenses incurred in the business of the employer constitute wages to whatever extent such amounts are in excess of expenses actually incurred and accounted for by the employee.8 6. Premiums on life insurance. If the employer is not a beneficiary under the policy, premiums he pays on a policy covering the life of an employee constitute wages. Such premiums are not wages "if the employee has no option to take the amount of the premiums instead of accepting the insurance and has no equity in the policy (such as the right of assignment or the right to the sur5 S.S.T. 42, I.R.B. XV-39, 16. S.S.T. 29, I.R.B. XV-33, 9. 7S.S.T. 46, I.R.B. XV-41, 12. 8 U. S. Treasury Department, Regulations 91, Article 16 (c), p. 13. COVERAGE AND TAX LIABILITY 11I render value on termination of his employment)." 9 Similarly, premiums paid by a company on a sick-benefit insurance policy do not constitute wages where the employee has no option to take a proportionate part of the amount of the premiums instead of accepting the insurance and has no equity in the policy.10 7. Pay to members of a "safety council." Certain employees of a company are designated as members of a council which meets outside of working hours to discuss various plans for the safety of the employees in general. In addition to his regular compensation each member is paid for the meetings he attends. These payments are considered to be wages." 8. Payments by employers to employees' funds. "Payments made by an employer into a stock bonus, pension, or profit-sharing fund constitute wages if such payments inure to the exclusive benefit of the employee and may be withdrawn by the employee at any time, or upon resignation or dismissal, or if the contract of employment requires such payments as part of the compensation." 12 EXCLUDED ITEMS 1. Tips or gratuities. Where they are paid directly to an employee by a customer of an employer, and not in any way accounted for by the employee to the employer, these items are not to be counted as wages.3 Thus, "where a club does not permit the tipping of employees but in lieu thereof adds 10 per cent to the cafe charges made against its members' accounts and disburses the added amounts monthly to the club's waiters, the sums so disbursed constitute 'wages'..." The added charge in this instance is not paid directly to the employee; it U. S. Treasury Department, Regulations 91, Article 16(d), p. 14. 0 S.S.T. 146, I.R.B. XVI-20, 19. S.S.T. 134, I.R.B. XVI-16, 14. "U. S. Treasury Department, Regulations 91, Art. 16(f), p. 14. 13 U. S. Treasury Department, Regulations 91, Article 15 (c), p. 13. 112 FEDERAL OLD-AGE BENEFITS is part of a transaction between the customer and the club.14 2. Pensions. Payments made in the form of pensions to individuals who perform no services for their former employer are not wages inasmuch as the individuals do not occupy the legal relationship of employee with respect to such employer.15 3. Payments made to widow of employee. "An amount paid to the widow of a deceased employee in excess of the compensation earned by him in the course of his employment and for which the widow renders no services is not 'wages' within the meaning of... the.. Act." 16 4. Workmen's compensation. Benefits paid to an employee under a workmen's compensation act are not wages. However, if the employer voluntarily pays an amount in addition to the compensation or voluntarily makes payments during the waiting period before compensation begins, such payments are wages.17 5. Payment by the employer of the employees' tax under Title VIII. The Act specifies that whenever under its provisions an employer is required or permitted to deduct "any amount from the remuneration of an employee... to pay the amount deducted to the United States..., then... the amount so deducted shall be considered to have been paid to the employee." 18 On the other hand, if the employer pays the employees' income tax imposed by Section 801 and does not deduct the amount thereof from his employees' wages, "the amount of the tax so paid will not be considered as additional wages..." 19 6. Certain facilities and privileges. "Ordinarily, fa14 S.S.T. 145, I.R.B. XVI-20, 18. 15 S.S.T. 81, I.R.B. XVI-4, 18. 1 S.S.T. 48, I.R.B. XV-42, 8. 17 S.S.T. 54, I.R.B. XV-48, 9. "Section 1101 (c). 19 S.S.T. 83, I.R.B. XVI-5, 19. COVERAGE AND TAX LIABILITY 113 cilities or privileges (such as entertainment, cafeterias, restaurants, medical services, or so-called 'courtesy' discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as remuneration for services if such facilities or privileges are offered or furnished by the employer merely as a means of promoting the health, good will, contentment, or efficiency of his employees." 20 7. "Supper money." Where an employee voluntarily works overtime and is paid a reasonable amount of "supper money" for the convenience of the employer in having the overtime service and not as additional compensation, such payment is held not to constitute wages.21 WAGES IN KIND Assigning a value to wages paid in kind or to wages received by the employee intermixed with non-wage payments is not, of course, a simple matter. In a decision relating to the determination of the value of meals furnished to employees as part of their compensation, the Bureau of Internal Revenue states that on this question it: will recognize that amount which is the reasonable prevailing value of such meals, taking into consideration all of the surrounding circumstances, such as the value the employer charges on his books of account, if such accounts are regularly kept, any agreement which may exist between the employer and the employee relative to the value of such meals, the place where the meals are served, and the nature of the service, etc.; provided, however, that no one of the above-mentioned conditions is conclusive but is merely a factor in determining the true value to be placed on the meals so furnished.22 20 U. S. Treasury Department, Regulations 91, Article 14, p. 13. 51 S.S.T. 110, I.R.B. XVI-9, 13. "6 S.S.T. 51, I.R.B. XV-43, 17. 114 FEDERAL OLD-AGE BENEFITS A later decision on the same subject adds that cost to the employer is not necessarily controlling, since the term "wages" includes the cash value of the meals or accommodations.23 WAGES AND NON-WAGE PAYMENTS INTERMIXED Perhaps the most common instance coming under this head is the one in which a salesman receives a certain amount to cover both his salary and expenses. The question has been raised whether such amounts may be apportioned between expenses and salary, where the expenses are reasonable, without itemized expense accounts having to be kept. In the ruling on this point note is made of the provision in the Regulations to the effect that the basis for computing the tax is the total amount paid minus the expenses actually incurred and accounted for by the employee. It is held, therefore, that the salesman must maintain such records as will enable him to account for the amount of expenses incurred, and that the employer must "keep such records as will show the portion of the total amount paid to the salesman which represent, respectively, expenses and remuneration for services." 24 A later decision states, further, that "in the event that proper accounting of the expenses incurred is not made, the tax will attach to the entire amount paid." 25 In some instances, of course, detailed records may be unavailing in the determination of wages, even when payments are made in cash. Thus, in the case of a company hiring a truck and driver and paying so much per load hauled, some allocation must be made which will show the amount covering personal services and that covering the use of the equipment. The Bureau says that "if the contract of employment does not specify a reasonable 9 S.S.T. 96, I.R.B. XVI-7, 19. a S.S.T. 28, I.R.B. XV-33, 8. 25S.S.T. 84, I.R.B. XVI-5, 20. COVERAGE AND TAX LIABILITY 115 division of the total amount paid between wages and equipment, a proper allocation may be arrived at by reference to the prevailing wage scale in the particular locality for similar services... or the fair rental value of similar equipment." The division adopted by such a body as a State workmen's compensation commission may be acceptable only if it has been determined with reference to these factors.26 DETERMINATION OF WHEN WAGES WERE EARNED The third problem with respect to wages is that of the determination of the time of the rendering of the services for which certain forms of wages represent payment. This determination is necessary because the taxes imposed by Title VIII are computed by applying to the wages received by the employee the tax rate in effect at the time of the performance of the services for which the wages are received. For example: During 1939 A is an employee of B... In the following year, 1940, B, the employer, pays A $1,000 as remuneration for the services which were performed by A in the preceding year. The tax is payable at the 1 per cent rate in effect for the calendar year 1939 (the year of the employment), and not at the 11/2 per cent rate which is in effect for the calendar year 1940 (the year in which the taxes were paid).27 With respect to ordinary wages the determination of the time of the rendering of the services for which they are paid is not a problem. Only in connection with bonuses, dismissal pay, and similar items does such determination become troublesome. Although no cases requiring decisions on the point have arisen under Title VIII, one bearing certain resemblances has been ruled on in connection with the tax S.S.T. 104, I.R.B. XVI-8, 22. U. S. Treasury Department, Regulations, 91, Article 202, p. 15. 116 FEDERAL OLD-AGE BENEFITS imposed by Title IX. The case was one in which a cash bonus was paid to employees based on the total remuneration received by them for services rendered during the ten-year period immediately preceding the payment. The decision held that only the portion of the bonus attributable to services rendered by the employees subsequent to the time the tax provisions of Title IX went into effect, January 1, 1936, constitutes wages for the purpose of the Title.28 A taxpayer has suggested that this holding is not consistent with the one, previously noted, that so-called dismissal pay constitutes wages; he points out that such dismissal pay may be a cash reward for services rendered during an indefinite period prior to dismissal. The Bureau, disagreeing with such an interpretation, takes the position that the words "dismissal wages" as used in the Regulations "contemplate wages paid to an employee because of his discharge from employment... rather than as a bonus for faithful services. While such a payment is 'remuneration for employment'..., it should not ordinarily be considered as a payment for services rendered prior to dismissal." 29 One further point may be noted with respect to "wages." The taxes imposed by Title VIII attach, that is, the taxpayer's liability is incurred, at whatever time the wages are either actually or constructively paid.30 The taxes attach at the time of payment even if the payment is made prior to the rendering of the services, as in the case of a salesman who has a drawing account.31 To summarize the various references to time relationships: The taxes imposed by Title VIII are computed by applying to the wages the rate in effect at the time of the performance of the services for which the wages 28S.S.T. 27, I.R.B. XV-33, 8. S.S.T. 123, I.R.B. XVI-13, 19. 0o U. S. Treasury Department, Regulations 91, Art. 203, p. 16. S.S.T. 68, I.R.B. XVI-3, 18. COVERAGE AND TAX LIABILITY 117 represent payment. These taxes attach at the time the wages are actually or constructively paid. Payment of the taxes to the Collector of Internal Revenue is due on or before the last day of the first month succeeding that in which the wages were paid.32 2 N. B. The taxes imposed by Title VIII covering a given period are based on the wages paid during that period. The Title IX taxes covering a given period are based on the wages paid or payable during the period. CHAPTER IX THE WAGE RECORDS SYSTEM With the assignment to each employee of a number by which his individual ledger account may be identified, the first task of the Bureau of Old-Age Insurance in establishing a system for administering Title II has been accomplished. Next in order are the tasks of setting up the accounts themselves, posting wage records to the accounts, and, when an employee becomes eligible for benefits, furnishing the data from his record to the Adjudication Operations Section of the Bureau in order that the amount of his benefit may be determined. In a preceding chapter, the fact was noted that the number of accounts to be maintained at any one time will probably grow to at least 40 million in the not-fardistant future. A second dimension of the task of the old-age benefits recordkeeping is that given by the number of years the individual accounts will remain active. The average age of applicants for account numbers being, at present, about 30 years, probably almost half of the records currently being established will have to be kept for as long as 35 years. Future applications will come primarily from individuals who are just commencing an employment career, individuals aged 20 or thereabouts, and the records of most of these persons will have to be kept for approximately 45 years. The operation of a system of the magnitude just indicated would be almost out of the question were it not for the remarkable advances which have recently been made in the development of machines for handling largescale statistical and accounting work-certainly the oper118 THE WAGE RECORDS SYSTEM 119 ation would not be possible without the use of a prodigious staff of employees. Underlying the whole complicated system employed in the maintenance of the old-age benefit records is the rather simple technical item that numbers and letters can be represented by means of holes punched through cards, the relative positions of the holes determining their significance. The cards generally used are of about the same stiffness as a postcard and are of a size a little longer and narrower than such a card; machines, of course, are used for the punching. Having been punched, the cards can be put through various special machines in which electrical circuits, completed through the punch holes, will permit: 1. sorting the cards in any desired order; 2. producing duplicates of each card; 3. printing the information represented by the punch holes; 4. tabulating or summarizing the information; or 5. checking other cards to ascertain that these others carry the same information as does the original card. By combinations of these several machine processes almost any kind of list or accounting record can be made. More importantly, the work can be done with very little chance of error, and it can be done with far greater speed than is otherwise possible. The first way in which the mechanical processes just mentioned come into play in the old-age benefits records operations may be seen from a brief outline of the steps in setting up the individual ledger accounts. From the "typing centers," referred to in Chapter IV, the employee applications for account number and the initial office record cards (Form OA-702) are sent to the "plant" maintained by the Bureau of Old-Age Insurance in Baltimore, the center of the recordkeeping activities. Here 120 FEDERAL OLD-AGE BENEFITS the office record cards are checked for errors against the original applications. Then part of the data on them is "coded," or reduced to numerical symbols, in order to facilitate the most economical handling in the steps to follow. An interesting phase of the coding is the reduction of the employee's surname to a numerical symbol of only three digits. Vowels are eliminated and all similar consonants are represented by the same number. The result is highly advantageous in connection with the use of an alphabetic register or index of employee accounts, for it permits such a register to function more or less independently of variations or mistakes in the spelling of names. The first mechanical operation consists of punching a "master card" for each account. The punch holes represent the employee's name, his account number, and the other identifying data shown on Form OA-702, which form is used as a basis for making the master card. An almost uncanny device known as the automatic interpreter "reads" the information the master card contains in the form of punch holes and prints it across the top of the card. As a final check on errors, this printed information is compared with that shown on the original application-for-account-number. The master card is now ready to begin its numerous duties as the foundation of the recording system. Among the first operations in which these cards play a part is the establishing of a numerical index of accounts. The cards, being in numerical order, are simply run through what is known as an alphabetic tabulator, a machine very similar in function to the automatic interpreter, which "reads" the punch holes and prints the data (one line for each account) on a large sheet of paper. The sheets are then bound into books. From these the name of and identifying data on the owner of any account THE WAGE RECORDS SYSTEM 121 can be learned in a fraction of the time which would be required if the master card had to be located. The production of a duplicate of each master card is an important operation; the master cards for reasons which will appear later, must be retained in numerical order, but the duplicates may be arranged and re-arranged in any way desired. This permits any desired tabulations of the data in the records, a fact of the greatest significance in facilitating actuarial and statistical studies. Through use of the duplicate cards numerous tabulations also will be made for administrative purposes. For instance, the cards can be arranged according to the ages of the employees, and thus lists (made in the same way as is the numerical index) can be made of those who will reach age 65 in any year. Since the duplicate cards can, of course, be arranged in alphabetic order, they can also be used to make an alphabetic register. Here again, the process is practically the same as that employed in making the numerical register, the main variation being in the first step, which in this case is to place the cards in alphabetic order. The primary function of the alphabetic index will be to aid in the location of accounts of which only the names of the owners, and not the account numbers, are known. The aforementioned several purposes for which the master cards are used, while important, are more or less incidental in comparison with the central operation of the entire process, the heading of the ledger sheets on which, periodically throughout his working career, each employee's wages will be recorded. Here, too, the master card plays its part and again, thanks to the alphabetic tabulating machine, the operation is quite simple. As in preparing the indexes, the name and account number as punched on the card are reproduced in a single line of print, the line in this case being placed at the head of the employee's ledger sheet. Although during the early part of 1937 the problem of 122 FEDERAL OLD-AGE BENEFITS establishing the records was one of spectacular proportions and absorbed almost all the energies of those concerned with administration of the records system, the second phase of the work, the posting of current wage data to the accounts, will obviously be by far the more difficult in the long run and will demand far greater attention. Employers report, every three months, the wages paid to each employee during the period. On the basis of each such report a punch card is prepared. The punches show the name and account number of the employee and the amount of his earnings. Preliminary to the posting operation, the name and the account number shown on the current earnings card must be checked against the corresponding information on the master card. This step is necessary as a means of catching the errors which may quite readily occur when the employer copies the account number in his report or when the number is punched on the card. If the information checks then it is clear that the account, the number of which is entered on the current earnings card, is in fact the one to which the wages shown on that card should be credited. The card is then run through an alphabetic accounting machine with the ledger sheet of the same number; the machine "reads" the amount represented by the punch holes in the card and prints this amount on the ledger; thus the wages earned during the period are posted. If an employee has worked for a number of employers during one reporting period a corresponding number of reports are filed, current earnings cards punched, and postings made on the one ledger sheet which represents that employee's social security account. Once a year the quarterly earnings cards of each employee are summarized to one card through the use of a tabulator with a punch attachment. The information on the summary card is also posted to the ledger account. THE WAGE RECORDS SYSTEM 123 Thus the total annual wages are shown and the individual postings can be verified. As the employer's quarterly reports of wages paid to individual employees may be filed at any time within the first month of the following quarter, they may not be received by the Board until four months after the payment of the earliest wages which they cover. Even after the posting operations have become regularized, current earnings data will probably not be posted to the individual accounts within less than several months of the time the reports are received. Thus, clearly, the last wages entered on a ledger account at any given time may have been received by the employee more than six months previously. The expeditious settlement of claims, then, will require obtaining wage data, covering the months just preceding death or retirement, from another source than the official records, and in the next chapter the method whereby such data may be obtained immediately and directly from the employer will be described. On the other hand, after the Act has been in operation a few years, some of the wage data on the basis of which almost every claim will have to be figured will cover periods sufficiently far back so that practically no sources other than the official records will contain the needed information. The furnishing of such information to the Bureau's Adjudication Operations Section will be one of the major activities of the records organization. At the time this is being written the Board is considering a plan for dividing the records operations into 12 distinct units, of which one would be located in each of the 12 regions now used by the Board in differentiating, for administrative purposes, between various parts of the country. In order that the feasibility of the plan may be tested, the entire records system in Baltimore has been divided in the same manner as would be used if each regional unit were being moved physically into the headquarters of the region. Although the units remain 124 FEDERAL OLD-AGE BENEFITS in the same building they are entirely separated functionally. The advantages of decentralization of the records operations, and also of claims adjudication are clear. Administration is brought into closer contact with the peculiar needs and problems of the several regions and thus promotes improved mutual understanding between the Government official and the private individuals with whom he deals. But the disadvantages are also clear. Lack of central control may mean less uniform and less economical administration. In the present case another significant disadvantage exists; it grows out of the fact that the old-age benefits plan covers many individuals who in the course of their working lives migrate back and forth between regions. Determination of the amount of expense and delay involved in the integration of the records of these individuals is the major problem being studied, within certain limits, by means of the experimental setup just mentioned. Recognized, of course, is the fact that a complete study of these factors would require that the experiment be carried on for a long period of years. Although the purpose of the records system is that of furnishing wage information for use in the determination of benefits, a great deal of important statistical data will be obtainable as by-products. To mention only a few examples, accurate and comprehensive information will be available concerning employment, unemployment, and wage earnings. From the actuarial standpoint, the records will be of invaluable assistance in compiling mortality tables and in estimating future tax income and benefit payments. No one denies that the records system just sketched will encounter many serious difficulties. Yet the only question which this fact raises is that which must be raised in connection with any human undertaking: Among the various alternative methods open, all involving difficulties of some kind or other, was the method decided upon the THE WAGE RECORDS SYSTEM 125 one which, after all the advantages and disadvantages are weighed, will prove to have been the wisest choice? In the present case the final answer will not be known for years to come. The best thing that can be hoped for is that the major difficulties can be foreseen and circumvented before they interfere substantially with the forward progress of the social security program. CHAPTER X CLAIMS FOR BENEFITS The ultimate reason for the existence of the Bureau of Old-Age Insurance is, of course, the payment of benefits. During 1937 such payments in the amount of approximately 6 million dollars may be disbursed under the direction of the Bureau. Of this amount a little under 21/2 millions is expected to be in the form of lump-sum payments to individuals who have been in covered employments and have reached age 65 during the year. A little over 31/ millions is expected to be paid, also in lump sums, to the estates of individuals who have been in covered employments and have died before reaching age 65. Until 1942, when the monthly benefit payments begin, the total annual disbursements will increase slowly. Thereafter a more rapid increase will take place and will continue until about 1980 at which time, it is anticipated, the system will, for all practical purposes, have become mature, and the size of the population will have become relatively stable. By the side of the figure for the annual disbursements after 1980, the 6 million dollars in 1937 payments appears insignificant; according to the estimates the 1980 figure will be about 31/2 billion dollars. Of this sum approximately 3 billions will be in the form of monthly income benefits and the remainder will be made up of the various types of lumpsum payments. This figure of 31/) billion dollars represents about 1/20 of the present national income. During 1937 approximately 300,000 individuals or their estates will, according to the estimates, be eligible for benefits. In 1980 and thereafter the number will apparently be not much under 61/2 million. 126 CLAIMS FOR BENEFITS 127 METHODS OF ADJUDICATION Discussion of the methods which will be used in handling the claims of these individuals may well be prefaced with a general analysis of the elements of claims adjudication. Because of the similarity of their operations to those of the Bureau of Old-Age Insurance, reference to the experience of private insurance companies in dealing with claims will be found especially useful in such an analysis. Although not all of them are relevant in connection with every case, the following data may be considered as basic in the settlement of both Federal old-age benefit and life-insurance company claims: 1. Proof of identity 2. Proof of age 3. Records for determining amount to be paid 4. Proof of death 5. Proof of relationship Proof of Identity-Insurance companies have had to establish large investigating units, and in addition have often employed outside agencies, in order to make certain of identities in cases where claims are presented. Because of the large coverage involved, the adjudication of claims under Title II will require even more careful attention to correctness of identity than is required in private company procedure. In the years to come, as much as $85 a month in income benefits and thousands of dollars in death benefits will quite commonly be paid under the Federal old-age benefits plan. With the growth in the possible size of claims more and more temptation will exist for people to try to collect benefits through false identification. One type of fraud will be the attempt to collect the monthly benefits rightly belonging to other individuals who for one reason or another-death, mental incompetence, or continued employment -have not claimed them. Another type of fraud, one which has 128 FEDERAL OLD-AGE BENEFITS caused insurance companies considerable trouble, involves the false identification of the body of a deceased individual as being that of the insured and then, either through being or pretending to be the beneficiary, collecting a death benefit. Proof of Age-The cost of providing retirement benefits is materially affected by variations of only a few years in the age at which retirement takes place. If the benefit payments begin at age 60 the cost is about 20 per cent more than it is if they begin at age 65. Insurance companies have found the determination of the correct age to be one of the most difficult problems in claims adjudication. One indication of the difficulty is the fact that some of the companies have had to have foreign representatives check on the ages of foreignborn policyholders. In some instances age discrepancies of as much as 35 years are found; and the stated age of a father may turn out to be actually lower than the proven age of his son. The problem of determining correct ages has also been serious in the administration of foreign social insurance systems. In a study of the working of the British oldage insurance system, an actuary found from a check against birth records that among 400 employees, aged 40 to 70, of a large industrial concern, the correct ages were on the average seven years higher than those stated. In the operation of the Federal old-age benefits plan the problem of determining ages may quite possibly loom larger than it does in either private company practice or under the foreign systems. Employees, as a group, have more incentive to misstate ages than does the cross section of the population dealt with by the insurance companies. Many employees, in order to improve their chances for obtaining and holding employment, represent themselves as being younger than they are. This is an outgrowth of the fact that a considerable number of industrial companies have set up maximum hiring-age CLAIMS FOR BENEFITS 129 limits. Some firms, though not as many, have minimum hiring-age limits, and as a result a number of the younger employees represent themselves as being older than they are. If a worker has misinformed his employer as to his age he is very likely, in order to avoid taking any chance that the false statement will be discovered, to put down the same wrong age on his social security application blank. The difficulty of securing adequate proof of age will probably be greater in connection with adjudication of claims under Title II than it is under foreign plans because the birth records in most of the foreign countries are more complete than are those in the United States, and because the percentage of foreign-born is higher in this country than in other countries, such as England, Germany, and France, for example, where old-age insurance systems are in operation. The problem of determining correct ages is of importance in connection with Title II not alone because the total cost of an annuity of a given size is subject to large variations depending upon the age at which payments begin. Age is also one of the elements in establishing eligibility to receive monthly income benefits instead of the less valuable lump-sum payments. The "qualified individual" must have received wages with respect to employment on some five days after December 31, 1936, and before he attains the age of 65, each day being in a different calendar year. Thus an individual who was not under the age of 61 on January 2, 1937, would not be qualified for and could not receive monthly benefits unless he successfully misrepresented his age. In numerous other ways age will be indirectly a factor in limiting the size of benefits. To whatever extent the adjudicators fail to detect age discrepancies the cost of the system will be affected, and probably in most instances it will be increased. Records-In handling any claim, whether involving a lump-sum payment or an annuity, the adjudicator must 130 FEDERAL OLD-AGE BENEFITS have at hand records for determining the amount to be paid. In connection with claims arising under private insurance contracts this step is quite simple because typically the amount to be paid has been predetermined. The adjudication of claims arising under Title II will, on the other hand, require checking of records showing wages earned over a number of years in various covered employments. One of the adjudicator's problems will be the expeditious obtaining of such records, particularly those of wages earned in recent months. The data on these wages, because of the relatively long time necessary for the completion of the recording process, may not be readily available. The wage record will have an incidental usefulness to the adjudicator in that it will serve as a check against possible errors in the identification of the owner of an account number. Proof of Death-Proof of death is important both as a means of making sure that death claims are not paid on account of persons who are living, and as a supplemental check in assuring correct identification of the deceased. Proof of Relationship-The experience of insurance companies indicates that the problem of establishing proof of relationship, as a rule, requires as much attention as any in the whole field of claims adjudication. The percentage of cases in which the problem arises will probably be considerably higher in connection with claims under Title II than it is under insurance contracts, for these nearly always specify a beneficiary or beneficiaries, whereas the Act does not make any provision for a worker to name his beneficiary. Moreover, if death benefits are less than $500 the Social Security Board, instead of making payment to the administrator or executor of the estate, may pay claims directly to the beneficiaries as determined in accordance with the laws of the State in which the insured person was last domiciled. Hence, the adjudicators will be faced with problems of interpreting 51 laws, and CLAIMS FOR BENEFITS 131 then of deciding upon the acceptability of proofs of relationships. The tasks will be complicated by the occurrence of various exceptional cases such as those involving illegitimate children, common-law wives, and the possible existence of close relatives in other countries. The detection of fraudulent claims of relationship will demand constant vigilance. As already indicated, only two of the four kinds of benefits provided in Title II are being paid at the present time. Not until 1942 will the monthly retirement benefits be payable, and not until after that time will lumpsum payments, covering the difference, if any, between the aggregate retirement benefits received and the sum of 31/2 per cent of the total wages earned after 1936, be made to the estates of those whose death occurs subsequent to their having become "qualified individuals." Although it is working toward that end, the Board has not yet devised techniques for handling either of these types of claim. Consequently, examination can be made only of the methods which have been set up for dealing with claims in cases where death occurs prior to age 65, and in those where the employee reaches age 65 without having become a "qualified individual." EXAMPLES OF CLAIMS PROCEDURE* In order that an understandable picture may be given of the procedures now being used by the Social Security Board in handling claims, reference to a few typical case may be advantageous. Lump-Sum Payments at Age 65-As an example of the procedure in connection with paying a lump-sum benefit at age 65 to an individual who is not qualified for monthly payments, let it be assumed that the 65th birthday of a certain Henry White occurs on October 14, * The names used in this section are entirely fictitious and should in no way be interpreted as applying to any individual. 132 FEDERAL OLD-AGE BENEFITS 1937. White has been employed for many years by a manufacturing concern in Iowa. His salary has been $100 per month. The concern is a large one and has become familiar with the procedure employed in claims work by the Social Security Board; it has also expressed a willingness to cooperate with the Board. The cooperation will take the form of, first, assisting employees in completing and executing applications for benefits, and, second, voluntarily filing statements of wages received by the employee. Consequently, when White becomes 65 the personnel director of the company (or such other officer, as would properly handle the matter), noting this fact, informs him that he is now eligible for a benefit under the old-age benefits program. White then executes the Wage Earner's Application, Form OAC-1002, with the assistance of the personnel director. The execution of this form is relatively simple. In addition to his account number, the date and place of White's birth is inserted, and so too is a statement of the total wages which he has received in respect of employment during 1937 and prior to the day preceding his 65th birthday.' As the benefit to which Henry is entitled is clearly less than $100 it is not necessary that he execute this form before a notary public. In place of doing so he executes a Certificate of Identification, Form OAC-1013, and on that form his signature is attested to by two disinterested fellow employees.2 The Statement of Employer, Form OAC-1001, which is executed by the personnel director, shows Henry's name, account number, and the total wages paid him by the company during 1937 and before the day preceding his 65th birthday. It serves as corroborative 1 By virtue of legal precedent the time at which any given age is attained must be taken as the first moment of the day preceding that of the corresponding anniversary of birth. Form OAC-1013 provides, "A claim for less than $100 may be acknowledged before witnesses instead of a notary public. (A claim is always for less than $100 if total wages do not exceed $2,857.) One official witness is sufficient; otherwise two witnesses are required." CLAIMS FOR BENEFITS 133 evidence of the amount of wages shown in Henry's application. Had Henry worked for more than one employer during the period and had statements been filed by each, the aggregate of the amounts indicated in these statements would be expected to equal that indicated in the Wage Earner's Application. The Statement of Employer requires no attestation, regardless of the amount of wages involved. As previously explained, Forms SS-2a and SS-3, which are Bureau of Internal Revenue forms, also cover wages received by individual employees, and the filing of these forms is compulsory upon the employer. However, were claims to be adjudicated on the basis of these forms alone as evidence of the wage record, a considerable amount of delay would ensue. The Statement of Employer immediately becomes part of the claims record, without the necessity for the administrative and recording procedures required in the case of the internal revenue forms, and thus a speedy adjudication is facilitated. The three completed forms are forwarded to the local field office of the Social Security Board. When the manager of the office receives them he scrutinizes them for any error or inconsistency and, if he finds none, forwards them by way of the Regional Office to the Director of the Bureau of Old-Age Insurance, who immediately transfers them to the Adjudication Operations Section of the Technical and Control Division. In all transmittals of claims material within the Board, accompanying transmittal forms are employed to avoid duplication of work or unnecessary delay, as well as to provide control. The duty of the adjudicator in a case of this type is simply to make certain that the application, with all substantiating evidence, is in order and to determine the amount of the benefit, which is calculated as discussed elsewhere. He is required to certify, on the basis of the sworn statements in the application and on the basis of the supporting data: 134 FEDERAL OLD-AGE BENEFITS "1. That the wage earner performed services within the United States for employers not engaged in excepted employment as defined by Section 210 (b) of the Social Security Act. "2. That the employment was subsequent to December 31, 1936, and before October 13, 1937.3 "3. That the amount of wages paid for such unemployment totals $938.31.4 "Based on the above findings, the application for lump sum award under the provisions of Title II of the Social Security Act is recommended for payment." In this case, as in most where the lump-sum benefit payable is $100 or less, the statement contained in the application as to the date of birth was deemed sufficient evidence. As a rule, where such small sums are involved, corroborative evidence is not required unless: 1. the date of birth stated in the application is at variance with the date of birth as shown by the records of the Board; 2. the records of the Board do not show the date of birth; 3. the employee has never applied for an account number; or 4. there is reason to suspect misrepresentation. If, for any one of these reasons, or because the lumpsum benefit payable exceeds $100, corroboration of the date of birth is required, the applicant must submit the following evidence: 1. A certified copy of, or a statement as to the date of birth shown by, a public record of the birth, or a As previously noted, although Henry White's birthday is October 14 he is considered to have attained the age of 65 on October 13, which is the date entered above. 'Computed as 9 and 12/31 months at $100 per month. Had the employer actually paid a different amount because he used a different method of calculation, the amount which he actually paid would have been inserted. CLAIMS FOR BENEFITS 135 2. A certified copy of a church record of infant baptism, or 3. A sworn statement of two other persons having knowledge thereof, or 4. Such evidence as shall be deemed by the Board to be of probatory value acceptable to the Board. Upon the completion of its work the Adjudication Operations Section sends Henry White a letter stating in part that, "the evidence of record in this case establishes that such wages upon which benefits are allowable total $938.31. Therefore, certification in the amount of $32.85 is being made to the Treasury Department for payment to you, and payment should follow in due course." The local office of the Bureau is also notified of the completed adjudication. A statement of Henry White's name and address and of the amount payable to him is then forwarded to the Secretary of the Treasury. Through the Division of Disbursement of the Treasury Departient, and normally within a few days after certification ]ad been made, the Secretary will make the payment. While the foregoing is a reasonably typical case of how payment may be made to an individual entitled to a lumpsum benefit at age 65, numerous variations are possible. In the first place, the employer may not have been so well informed and Henry White may have become aware of the possibility of his having a claim through some other channel such as a labor union, a fraternal organization, a news or magazine article, or a placard displayed in a post office. In any of these cases he would probably have applied to one of the Board's field offices, or possibly he would have corresponded directly with the Board and would have been referred to the field office nearest him. The field office would have rendered him substantially the same assistance as was given by his employer. Unless the employer did so on his own initiative, the office would 136 FEDERAL OLD-AGE BENEFITS have requested of him that he furnish the statement contained in Form OAC-1001. Had the employer refused to furnish such a statement no action could have been taken until his quarterly Employer's Report of Wages Paid to Each Employee, Form SS-2a, and his Employer's Information Return, Form SS-3, had become of record in Baltimore. This would have involved a delay of perhaps six months. If White had had more than one employer since December 31, 1936, it would have been necessary, if the long wait were to be avoided, to obtain Form OAC-1001 from each.5 Perhaps the most important variation on the case just discussed would be that in which Henry White was legally incompetent to execute Form OAC-1002. In this event the Guardian's or Committee's Application, Form OAC1006, would have been used. This form calls for the same information as does Form OAC-1002. Accompanying it there would ordinarily be submitted a certified copy of the order appointing the guardian or committee. In the present instance, because the claim is for less than $100, there could be submitted instead a duly executed certificate under the seal of the court making the appointment, stating the name of the person under disability, the name of the person appointed by the court, his legal designation as appointee, and that such an appointment is in force and effect. The claim would be adjudicated in the same manner as that already described and the name of the guardian would then be certified to the Treasury Department. Death Payments-In addition to making lump-sum payments to individuals attaining age 65, the Social Security Board, as noted above, is currently making pay6 The above statement holds at the time of writing. However, after the Forms SS-2a have become of record in Baltimore it will no longer be necessary to obtain Form OAC-1001 extending further back than six months. It is to be presumed that the present Form OAC-1001, calling for a complete record from December 31, 1936, onward, will be modified accordingly. CLAIMS FOR BENEFITS 137 ments upon the death of a wage earner prior to age 65. These payments may be made to the executor or administrator of the estate, and in some instances they may be made directly to the beneficiaries. The simplest procedure is that in which the payment of the claim is made to an executor or administrator. To illustrate, let us assume that Charles Black, who had been employed as a foreman in a machine shop in Phoenix, Arizona, died on November 13, 1937. Let us assume that his salary had been at the rate of $100 a month. As the existence of other assets at the time of his death render it desirable, his heirs have an executor appointed. The executor, a court appointee, is doubtless aware that a probable old-age benefit claim exists. Consequently, he asks the nearest Social Security Board field office for information. He is furnished with an Executor's or Administrator's Application, Form OAC-1005. He is assited in the execution of this form, if necessary, by the field office. However, the form is relatively simple; it differs from the form executed by Henry White mainly in that it calls for information on one additional point, the State in which the deceased was last domiciled. This form need not be notarized, as the executor is required to furnish with it either a certified copy of his appointment papers, or, if the benefit is less than $100, a certificate such as that described in the discussion of the Guardian's Application. The appointment must be in the same State as that in which the deceased was last domiciled. The executor or the field office will try to obtain Form OAC-1001, the Statement of Employer. Also necessary is proof of death. This may take one of three forms. It may be a certified copy of the public record, a statement of death, Form OAC-7001, to be executed by the physician attending the last illness, or a statement of death, Form OAC-7002, to be executed by the undertaker. These forms are simply statements that death actually occurred; no attestation is necessary. 138 FEDERAL OLD-AGE BENEFITS When this material on the claim of Charles Black is assembled and checked by the field office it is forwarded, as in the case of the Henry White claim, to the Bureau in Washington. There the adjudicator must certify: "The facts found to exist in this case are as follows: "1. That the deceased wage earner performed services within the United States for employers not engaged in excepted employment as defined by Section 210 (b) of the Social Security Act; "2. That the employment was subsequent to December 31, 1936, and not later than November 13, 1937; "3. That the amount of wages paid for such employment totals $1,043.33.6 "4. That the lump-sum benefits amount to $36.42; "5. That the domicile of the deceased wage earner was in the State of Arizona." The adjudicator must also certify to the name and designation of the executor, his date of appointment, the name of the court making the appointment, and that the records indicate the appointment is still in full force and effect. He also certifies that "based upon the above findings the application for lump-sum award under the provisions of Title II of the Social Security Act is recommended for payment." The name and address of the executor, together with the amount for which payment is certified, is then forwarded to the Treasury Department and payment is made as described in the previously discussed case. Although a number of variations on this case are possible, none is worthy of note. The procedure would not have been different in any way had an administrator rather than an executor been appointed. As already indicated, the Board is empowered under certain conditions to make payments directly to the bene$1,043.33 is here computed as the wages for 10 and 13/30 months at $100 per month. CLAIMS FOR BENEFITS 139 ficiaries instead of to an estate. Such payments are made under the authority provided in Section 205 of the Act, which reads as follows: Sec. 205. If any amount payable to an estate under section 203 or 204 is $500 or less, such amount may, under regulations prescribed by the Board, be paid to the persons found by the Board to be entitled thereto under the law of the State in which the deceased was domiciled, without the necessity of compliance with the requirements of law with respect to the administration of such estate. What Section 205 amounts to is a provision that the Board shall have discretionary power, under the circumstance mentioned, to act as an unofficial administrator. Under the terms of a ruling by the Board the extent to which this power will be exercised has been limited; payments in accordance with Section 205, that is, payments not made to an estate, will be made only if the "wage earner is survived by at least one of the following persons: his spouse, child, grandchild, or parent." In other words the Board will not "administer" estates for the benefit of creditors or distant relatives. Nor will the Board exercise its power under Section 205 unless it finds that each of the following situations exists: 1. No executor or administrator has been appointed to administer the estate of the deceased wage earner and it is affirmed to the best knowledge, information, and belief of the applicant that no such representative will be appointed, and 2. The law of the State of the decedent's domicile would not require payment in the particular case to any creditor of the deceased, and 3. Either it is affirmed to the best knowledge, information, and belief of the applicant that deceased left no will or instrument appearing to be a will, or the Board finds that while the deceased left an instrument appearing to be a will, each of the following situations exist: 140 FEDERAL OLD-AGE BENEFITS (a) The law of the State in which the deceased was last domiciled does not require the probate of such will, and (b) It is affirmed to the best knowledge, information, and belief of the applicant that the instrument will not be probated, and (c) Payment may be lawfully made under the intestacy law of the State.7 The work of the adjudicator with respect to claims arising under Section 205 is obviously much more complicated than it is with respect to the types of claims previously discussed. In his capacity as an unofficial administrator he must have an understanding of the State laws of allowance and exemption, priority, and descent and distribution. In order that the reader understand his work a short, non-legal description of these terms is in order. Upon the death of any individual his property normally goes to the persons to whom it is willed. However, if there is no will, the property is normally divided according to the laws of descent and distribution of the State in which he was last domiciled. Such laws provide, in general, that the estate of a husband go to his widow if there are no children. If there is a widow and children, the widow usually gets about one-third and the remaining two-thirds is divided among the children. If there are children but no widow the children share the estate equally. Before any payment can be made under a will or under a law of descent and distribution, the debts of the estate must be paid. But State laws do not regard all debts as being on an equal footing. Those owed to the undertaker or owed on account of the last illness are usually considered as entitled to some preference. Also regarded as entitled to preference is the moral debt of some support 7Social Security Board, Regulations No. 2, Article 312, p. 22. CLAIMS FOR BENEFITS 141 for the widow and children. This debt to the widow and children is defined in what is called an allowance, or exemption (the terms are practically synonymous, although an exemption usually has preference over an allowance). All these types of debt are listed in the order of preference, or priority. Thus, a State law might provide that first in priority is the debt to the undertaker for the funeral expenses not greater than $100, that second is an exemption of $500 for the support of the widow and children, that third are the expenses of last illness, and that fourth is an allowance of the amount needed to support, in addition to the exemption, the widow and minor children for one year. After these prior claims are disposed of and if sufficient funds remain, payment is made to other creditors. Included here would be any amount owed to an undertaker in excess of the $100 which was given priority. After these debts are paid the provisions of the will or of the law of descent and distribution apply. To illustrate the procedure in the case of a payment made under the terms of Section 205, let it be assumed that William Gray, a laborer, has been employed by a construction company at a salary of $75 a month for several years prior to his death on December 3, 1937. His domicile at that time was Rochester, New York. Let it be further assumed that he is not survived by a widow, but that he has three children, all over 21 years of age. He does not leave a will nor any assets other than personal effects. Through one of the methods discussed in the above cases it comes to the attention of the children that they may have claim under Title II of the Act. One of the sons applies at the nearest field office of the Board for information on the subject. The field officer informs him of the conditions under which an application may be made for a direct payment in accordance with Section 205. These conditions existing in the present case, the field officer recommends that the Close Relative's Appli 142 FEDERAL OLD-AGE BENEFITS cation, Form OAC-1004, be filed. Although it is not necessary that more than one of the children make application it is desirable that the Form OAC-1004 be filed jointly. This form covers all of the same matters as do the various other types of application for lump-sum payments, and in addition includes a number of items designed to determine whether the claimant is entitled to receive benefits under the laws of the State. Item 5 of this form requires a statement that no widow survives the deceased, that no will or paper appearing to be a will exists, and that there has been and will be no administration of the estate. In item 6 an estimate is required of the value of the deceased's estate, divided between real estate and personal property. The entry made by the son is "none." Under Item 7 a statement must be made of the total funeral or last illness expenses remaining unpaid. The undertaker had charged $100 for the funeral of William Gray and as the bill is still unpaid that amount is entered here. Item 8 inquires as to the amount of such expenses which have been paid from the funds of the claimant and the son indicates that the amount is zero. Under Item 9 the estimated total indebtedness left by the deceased, other than the funeral and last illness expenses, is entered as "none." Item 10 calls for a list of the surviving parents, children, and grandchildren of the deceased, with their ages and addresses. Here the names of the three children are listed. Item 11 requires that "if the applicant is a minor child of the deceased wage earner and has received or will receive any portion of the deceased's property under the allowance or exemption laws of the deceased's domicile, then enter here the estimated value of the property applicant has received or will receive under such allowance or exemption laws." As the three applicants in this instance are all over 21 no entry is made. The general purpose of these questions is to make available to the adjudicator the facts he must have if CLAIMS FOR BENEFITS 143 he is to carry out the quasi-administrative function that is his in this case. The completed form, with answers to the questions having been supplied to the best of the ability of the field officer and of the applicant, accompanied by proof of death, and the Statement of Employer, is forwarded to the Adjudication Operations Section in Washington. When the material is received there, the first task, after routine check, is to refer to the laws of priority, exemption or allowance, and descent and distribution, of the State in which the deceased was last domiciled. In this particular case the only indebtedness is a bill of $100 for funeral expenses remaining unpaid. As the domicile of the deceased was New York State, payment must be in accordance with the New York laws. First in order of priority, under these laws, comes funeral expenses. The adjudicator, knowing this, realizes that payment cannot legally be made to the Gray children until the matter of the funeral expenses has been disposed of. He therefore instructs the field office to communicate with young Gray and to tell him that the execution of Form OAC-7003, a waiver by a creditor of the rights he possesses under the laws of the State to priority in payment, is necessary before payment can be made in accordance with Section 205. Gray explains the situation to the undertaker. The undertaker is willing to sign the waiver since the Board will not make the lump-sum payment to him anyway, and since the waiver will make it possible for the children to receive benefits and therefore more likely to pay him. When the waiver form has been executed it is forwarded to the Adjudication Operations Section. The second priority in New York is an allowance of $300 to the spouse and/or children. As the amount of the benefit is only $29.13 and as the estate was virtually nothing, this entire amount can be paid under the allowance. Even if the amount had exceeded $300, payment 144 FEDERAL OLD-AGE BENEFITS could have been made because the two priority rights mentioned are the only ones which are observed under the laws of the State of New York, and hence, payment for the additional amount would have been made in accordance with the laws of descent and distribution. All the matters relating to priority having been settled, the claim is then adjudicated according to usual practice and the names of the three children, and the amounts payable to each, $9.71, are certified to the Treasury Department. Obviously a great many variations are possible upon the case above described. In this case the assumptions have been that no widow survived and that the only close relatives were the three children. Frequently there will be a widow; if so, she must execute Form OAC-1003 which requires precisely the same information as Form OAC1004, except that it does not have the item calling for the statement that there is no surviving widow. The remaining procedure will be similar to that described, although, of course, the position of a widow is somewhat different in priority from that of other close relatives. As the adjudication is not based upon the laws of the State in which the beneficiary of the estate resides but upon the laws of the State in which the deceased was domiciled, no problems arise if the beneficiaries live in various States. If some of the beneficiaries cannot be located, they simply will not receive the checks covering their shares, but they still have the right to apply for such shares at any time in the future. Although applications for direct payment of lump-sum benefits may be filed only by a spouse, child, grandchild, or parent, it is possible for other close relatives such as brother or sister to receive parts of such payments. This will occur in instances where an eligible close relative files the application and where the laws of descent and distribution of the State under which payment is being made are such CLAIMS FOR BENEFITS 145 that the brothers and sisters of the deceased are entitled to a share. If no "close relatives" survive, and a relative other than one in the eligible categories wishes to file a claim, he will be advised by the field office that no direct payment can be made to him and that for him to receive any part of the lump-sum benefit it will be necessary to have administration of the estate. If despite the advice, such relative desires to file a claim he may do so on the Close Relative's Application, Form OAC-1004. The field office is not permitted to refuse to let him file. The claimant will then be advised formally by the Adjudication Operations Section that no payment can be made without administration of the estate; and the procedure which must be followed to perfect the claim will be indicated. CHAPTER XI RESERVES FOR OLD-AGE BENEFITS The present work is a study of the facts concerning the operation of the Social Security Act; hence it does not undertake to evaluate the purposes of the Act, the methods the Act provides for the achieving of these purposes, or the probable consequences of either purposes or methods. Plainly though, with regard to the operation of the provisions for the financing of the old-age benefits plan, few facts are available. Discussion of possible and probable results of-operation has nevertheless been widespread, and its outcome may be the amendment of these provisions. Since such amendment would have important effects on the functioning of the plan as a whole, analysis of the discussion deserves a place even in what is intended as a factual study. The analysis is not intended to lead to any single conclusion; many conclusions are possible and more than one may be correct. What the facts are, and their relative significance, depends on one's perspective. No perspective is the only correct one. In the present chapter the effort is made to view the issues connected with the financing of the Federal old-age benefits plan from the side of those who oppose the reserve method and also from the side of those who stand in its defense. The resulting presentation, it is hoped, may allow the reader to disentangle the facts, allow him to decide which ones bulk large and which ones are non-essential, and thus enable him to form a clear and unified picture, from his own perspective, of the issues involved in financing oldage benefits. 146 RESERVES FOR OLD-AGE BENEFITS 147 The Act provides, in effect, that the old-age benefits plan is to be financed in accordance with what is known as an actuarial reserve method. Before reference is made to its use in connection with this plan, the main characteristics of this type of method will be outlined. In general, under contributory retirement plans the benefits paid to any individual are determined in relation to his previous wage earnings. An actuarial reserve method, essentially, is one under which the amounts of contributions or premiums collected during a given period, such as a year, are calculated to be sufficient, with interest, to cover the costs of all the future benefits which will be payable on account of the total wages earned in that period. Among alternative methods, the most completely different and therefore most useful for purposes of comparison is the current-cost, or what is frequently called the "pay-as-you-go" method. Characteristic of this method is the fact that under it the amounts collected during a given period are expected to cover merely the costs of the benefits payable within that period. Under either type of method, the wage earnings on which benefits are based may be limited to those with respect to employment subsequent to the inauguration of the plan, or they may include what are known as "prior earnings." If the latter are included, the total cost of the system is, of course, greater than it would otherwise be. The "accrued liability," represented by the benefit obligations involved in the crediting of prior earnings, is commonly amortized over a period of years. Under an actuarial reserve plan, in such a case, the contributions or premiums cover not only the obligations currently incurred but also the amortization charges. The following paragraphs, for the sake of clarity, will refer only to retirement plans of the relatively simple type which provides no credit for prior earnings. For several decades after the establishment of a plan 148 FEDERAL OLD-AGE BENEFITS paying benefits based on wages the size of the aggregate payments will steadily increase. The chief reason for this is that with each successive year there is an increase in the average period over which those retiring that year have been receiving credited wages, until at last every one who was above the lowest age level when the system began functioning has reached the retirement age. At that time the system is said to have matured. Under a current-cost plan this continuous increase in the size of the annual benefit payments is, of course, reflected in the size of the annual contributions or premiums. Under an actuarial reserve plan, on the other hand, since the total wages earned and thus the total benefit obligations incurred in successive years are more or less uniform, the total yearly contributions, as a rule, remain approximately at one level. This means that at the beginning the contributions are higher than are those under a current-cost plan, although they are not as high as the current-cost contributions later come to be. Since the contributions under an actuarial reserve plan are, in the early years, higher than are those contributions which correspond to the amount of the currently payable benefits, obviously, under this plan a "fund" accumulates. Collecting more than is actually needed for current benefit payments, an actuarial reserve retirement plan functions from the beginning as a large savings system. Usually, a savings system must pay interest or the individuals who are depositors will not willingly remain as such. An essential element, then, in an actuarial reserve plan is that the accumulated fund is invested, and by earning interest permits a lower rate of contribution than would otherwise be possible. Inasmuch as, according to the calculations on which the typical actuarial reserve plan is based, the contributions collected in any year under such a plan are expected to be sufficient, with interest, to cover all the benefit obligations incurred that year, and since the obligations RESERVES FOR OLD-AGE BENEFITS 149 incurred in any year represent, practically, the benefits to be due when the maximum level of benefit payments has been reached, the aggregate income from the contributions of any year is expected to be an amount which, with interest, will cover the aggregate yearly outgo when this is at its maximum. Until this maximum level is reached, the contributions are, if the calculations are correct, in excess of the current payments, or together with interest are in excess of the current payments, and thus the fund continues to grow. In general, on the assumption of an eventually stabilized system, when the aggregate payments of benefits have reached the maximum, the amount by which each payment depletes the fund is counterbalanced by the contributions of new members,' plus the accruing interest on the remainder of the fund. Unless the size or other characteristics of the covered group change, or unless the system is being liquidated or is approaching insolvency, the fund is never significantly reduced. Under an actuarial reserve plan it is counted upon to earn interest indefinitely. In the abstract, then, the actuarial reserve method of financing has certain definite advantages: Costs are spread out more or less evenly instead of beginning low and becoming relatively high; and the burden of supporting the plan is lightened to the extent of the interest earned on its fund. Likewise the method has a definite disadvantage, for its success depends on, among other things, the wise administration of the fund and on its sound investment, neither of which can ever be assured and both of which may be particularly difficult where the fund is very large. The current-cost type of method is disadvantageous in the respects corresponding to those in which the other method has advantages, and conversely, 'The correctness of this statement depends on the assumption that one disregards, for the moment, the fluctuations in the amounts of contributions due to fluctuations in employment and wages with different phases of the business cycle. 150 FEDERAL OLD-AGE BENEFITS it is advantageous in the respect corresponding to that in which the actuarial reserve type of method has a disadvantage. When used in connection with a privately operated group retirement plan, the current-cost method has a special disadvantage which causes it to be almost universally recognized as less desirable than the actuarial reserve method. The possibility exists, and, even though remote, should not be neglected, that the industrial concern supporting the plan may at any time either wish to or be forced to liquidate the plan. In such an event a fund covering all the benefit obligations which have been incurred should be available. More important, future contributions cannot be relied on to cover the costs of future benefits, since the number of current contributors may at any time cease to grow as rapidly as the number of those retired and may actually decline while the number of retirements steadily mounts. In the case of a social insurance plan, on the other hand, it is usually assumed that operation will continue indefinitely, and that since participation is compulsory there will be a steady and continuous entrance of new contributing members. To the extent that the age composition of the population remains stable the new members will just fill the places of those who retire and draw benefits, and even where the age level rises the resulting decrease in the proportion of contributing members to annuitants is limited and never becomes as serious as the situation may under a private plan, where the proportion of contributing members may not only decline but (if the plan is suddenly liquidated) may become zero. As indicated above, among various methods alternative to that described as the actuarial reserve method, the current-cost plan is the one most completely different. Between the two types there are, of course, a large number of possible "compromise" arrangements. Each of these in-between methods, since none of them is of the RESERVES FOR OLD-AGE BENEFITS 151 pure "pay-as-you-go" order, involves the accumulation of one kind or another of reserve.2 A brief reference to examples of one or two of these other reserve methods may be illuminating. What is sometimes known as the partial reserve type of financing is intended primarily as a way of avoiding some of the difficulties consequent to the inauguration and early operation of a plan on a current-cost basis. As already noted the benefit payments under a contributory system increase steadily for several decades after the system's establishment. If the age level of the covered population is rising, a further increase in the burden of supporting the plan is involved, for the rising age level means a decline in the proportion of contributing members to annuitants. One of the most significant differences between the actuarial reserve and current-cost methods is in their respective approaches to this matter of the increasing liability. However, when a retirement system has matured, and if the age level has ceased to rise, the two methods operate in ways not greatly dissimilar. As a step preparatory to a system's functioning on a completely current-cost basis, the building of a reserve during the interval before one or both of the conditions just noted is realized minimizes, during the time in which they would normally be most pronounced, the differences between such a system and one of the actuarial reserve type. The "partial" reserve is so used that the transition to the high-cost levels may be more gradual and the maximum costs less high than would otherwise be the case. Under a plan having such a reserve, it is contemplated that costs will be spread, not altogether evenly from one year to another but much more evenly than is the case under a current-cost plan. The major differences between 2Also, many of them cannot be operated without the services of an actuary. The designation, "actuarial reserve method," as used (perhaps somewhat arbitrarily) in this discussion, is intended to distinguish from these in-between methods what might also have been called the "full" reserve method. 152 FEDERAL OLD-AGE BENEFITS a partial reserve plan and one operating on a full reserve basis are that the former results in the accumulation of a fund that is much smaller, and, moreover, is only a temporary feature of the plan. Another type of in-between plan involves the use of a small reserve, intended merely to absorb the effects of reduced amounts of contributions during years of business depression. A reserve of this type, frequently called a "contingency" reserve, is entirely in keeping with the principle of the current-cost method, and it bears no significant relationship to the full or actuarial reserve. It may, of course, be used in conjunction with a partial reserve.3 The foregoing paragraphs have dealt with general principles. Circumstances connected with the operation of any particular retirement system, such as the old-age benefits plan, may modify the working of these principles in various ways, sometimes sufficiently to change entirely the significance which the principles possess generally. Hence, while familiarity with the principles is important as an aid toward the understanding of the method of financing used in the present Act, such familiarity will not, by itself, enable one to reach a conclusion with regard to whether the method is, under the prevailing conditions, advisable or inadvisable. Before a conclusion is possible these conditions must be examined in detail. Under the Federal old-age benefits plan the amounts which may be thought of as contributions or premiums are collected in the form of taxes which legally have no connection with the benefits. The separation was necessitated because at the time the Act was framed it appeared that a direct relationship might be held invalid s Among the reasons which have been advanced for delay in making changes in the present financing provisions of the old-age benefits plan is the one that under these provisions a fund large enough to function in the manner of a "contingency" reserve will not have been accumulated for several years. RESERVES FOR OLD-AGE BENEFITS 153 from a constitutional standpoint. Title II of the Act provides for the establishment of an "Old-Age Reserve Account" and authorizes Congress to appropriate to the Account, for each fiscal year, "an amount sufficient as an annual premium to provide for the payments required under this title, such amount to be determined on a reserve basis in accordance with accepted actuarial principles... " 4 The taxes imposed under Title VIII, instead of going directly into the Account, become part of the Treasury's general fund. However, the taxes being themselves calculated in accordance with actuarial principles to yield annually over a long period of years an amount sufficient to cover the amount of the abovementioned annual premium,6 it is contemplated that the yearly appropriation from the Treasury's general fund to the Account will be equal to the aggregate of the taxes.6 Thus the plan is expected to operate substantially as if each individual's taxes or contributions went directly into the Reserve Account. Benefit payments are to be made from the funds in the Account. The Secretary of the Treasury, who has charge of the administration of the Account, is instructed to invest such funds as are not required to meet current 'With respect to this point actuaries are prone to comment that no set of principles of their science has ever been formulated which clearly applies in a case such as that of the old-age benefits plan. They assert that principles accepted as applicable to other group retirement plans may be invoked, in connection with a plan having benefit and "contribution" schedules like those provided under the Social Security Act, to call for much larger appropriations to the Reserve Account than are at present contemplated; the principles can also be interpreted, it is said, in such a way as to permit of operation without any reserve at all. 5As a matter of fact, it is contemplated that the taxes will equal slightly more than the amount of the premium and will include an amount sufficient to cover the costs of administration. 6 Critics of the existing plan are inclined to emphasize the point that Congress is merely authorized but is not required to make annual appropriations to the Reserve Account. There is nothing, they say, to prevent Congress from regarding the taxes levied by Title VIII as ordinary taxes instead of as "contributions" to a retirement system. 154 FEDERAL OLD-AGE BENEFITS withdrawals. The investment may be made only in interest-bearing obligations of the United States or in obligations which are guaranteed by the United States both as to principal and interest. As is true of the fund under any actuarial reserve plan the Account will continuously increase in size for a number of years, provided Congress makes annual appropriations in the amounts authorized.7 If such appropriations are made, if the benefit formula remains unESTIMATED APPROPRIATIONS, BENEFIT PAYMENTS, AND "RESERVES" UNDER TITLE II [In millions of dollars] Fiscal year ending June 30 - 1937............. 1938............. 1939............. 1940............. 1941............. 1942............. 1943............. 1944............. 1945............. 1946............. 1947............. 1948............. 1949............. 1950............. 1955............. 1960............. 1965............. 1970............. 1975............. 1980............ Appropriation to Reserve Account 255.5 513.5 518.5 662.2 807.2 814.8 970.0 1,126.6 1,137.0 1,291.4 1,447.1 1,460.1 1,621.1 1,783.3 1,861.2 1,939.1 2,016.9 2,094.8 2,172.7 2,180.5 Interest on Reserve Account Funds 0 7.6 23.0 38.8 59.2 84.4 109.8 139.3 173.0 206.5 243.9 285.2 326.3 371.5 615.8 844.2 1,040.9 1,210.9 1,341.8 1,406.0 Balance Benefit in Payments Reserve Account 1.9 253.7 7.2 767.5 14.5 1,299.5 22.0 1,973.6 29.7 2,810.3 52.8 3,656.6 94.2 4,642.1 142.9 5,765.1 191.2 6,883.9 249.2 8,132.7 314.5 9,509.2 377.4 10,877.0 442.1 12,382.4 505.5 14,031.7 887.8 22,115.7 1,379.9 29,543.9 1,844.0 35,898.5 2,303.5 41,366.7 2,872.1 45,368.3 3,511.3 46,942.7 Source: Report of the Committee on Finance, United States Senate, on The Social Security Bill, 74th Congress, 1st Session, May 13, 1935, Report No. 628, p. 9. That is, authorized in accordance with actuarial principles such as seem to have been contemplated by the framers of the Act. RESERVES FOR OLD-AGE BENEFITS 155 changed, and if the estimates of population growth, mortality, and average wage earnings are correct, the growth of the Account will be in accordance with the pattern indicated in the table on page 154. Although any table such as the foregoing is based upon assumptions and forecasts which may be in error by wide margins, such a table does give a rough idea of the situation and manner in which the Reserve Account is expected to function. In and after 1980, at which time, according to the estimates, the Account will probably have ceased to grow, the total annual benefit payments are expected to equal about 31/2 billion dollars, the total annual tax collections to be in the neighborhood of 2 billions, and the difference of about 11/ billion to be covered by interest payments on the investments made with the Reserve Account funds. In support of the reserve method as applied under the old-age benefits plan, it is pointed out that when yearly benefit payments are at the maximum level, the total amount collected through a tax equaling 6 per cent of pay rolls will fall far short of covering the amount of the payments. On the assumption that a tax at a higher rate would not be feasible, it is held that there are only two alternative ways of meeting the deficiency. One is through the provision for a governmental subsidy; the second is through the accumulation of an interest-bearing reserve. The payment of a subsidy is regarded as inequitable on the ground that the old-age benefits plan, which protects only a limited section of the population, would then be supported in a measure by revenues collected from the population as a whole. Although admitting the possibility that before the arrival of the time a subsidy becomes needed the coverage of the plan may have been made practically universal, thus making the argument beside the point, the defenders of the reserve method hold that no one can say at present whether or when such coverage will be achieved. 156 FEDERAL OLD-AGE BENEFITS Not only does it seem unfair to tax the entire population in order that benefits may be paid to a special group, say the advocates, but it also seems unwise to anticipate that general taxation for such a purpose will be found acceptable by the Nation. The general taxpayer of 1980, it is felt, will probably be carrying, among many other burdens, the cost of an old-age assistance program, and may well be unwilling to shoulder the additional burden represented by a subsidy for old-age benefits. Those who are of the conviction that the use of an actuarial reserve method in the present connection is a mistake vigorously challenge the points of view just indicated. Their position, in general, is that the helpfulness of the interest payments in meeting the problems of the future is fictitious. As they see the matter, the interest payments to the Reserve Account, in the same way as would subsidy payments, come from the general revenues and thus from the pockets of the general taxpayers. Unless the interest can be actually earned, and it is denied that this can be done if the Government operates within its proper sphere, the payments differ from subsidies only in having a name which conceals their true nature. Not only are the interest payments invalid, declare the opponents of the method which was adopted, but the reserve fund itself is a delusion. An actuarial reserve can perform its normal function as a savings system when operated by a private institution, they assert, but it cannot do so when operated by the Government or the community as a whole. In saving, one sets aside not wealth, that is, goods and services, but title to wealth-money. Wealth itself, practically speaking, cannot be saved or set aside for use in the future. The goods and services produced this year must be consumed this year or in the near future-as a rule they will be either useless or out of existence a generation from now. It is entirely feasible for individuals and private institutions to exercise their RESERVES FOR OLD-AGE BENEFITS 157 claims on wealth, that is, to use their money, whenever they please. If they do not this year consume wealth they have title to, it will be consumed by other individuals, and society permits them to consume instead the wealth that is produced and available at the time they do choose to spend their money. When individuals save, they consume less in the present and expect to consume correspondingly more in the future. But for society itself, or the community as a whole, to attempt to save is meaningless. All that can result is reduced consumption in the present; no increased supply of goods and services is thereby made available for the future. Since the reserve fund is without any real significance as a means of providing for those who will be aged many years from now, say the critics, the only right procedure is not to attempt accumulating it but rather in the early years of operation to pay more liberal benefits than are paid under a reserve plan, or to reduce the rates of the taxes from which the reserve is indirectly built. Further discussion centering about the issues just sketched can be adequately presented only against the background formed by a consideration of the manner of the investment of the Reserve Account funds. In passing, it may be noted that the funds could, of course, remain in the Account and not be invested. If the savings system phase of the old-age benefits plan operated on a non-interest paying basis such an arrangement would be logical, but, since the payment of interest on the funds is called for, it appears that to allow the funds to remain idle, and thus without even the theoretical possibility of earning the interest, is out of the question. The Act provides that the funds are to be invested in obligations of the United States or ones guaranteed by the United States. The obligations may be acquired on original issue at par, or by purchase of outstanding obligations at the market price. Special obligations bearing interest at the rate of 3 per cent may be issued exclusively 158 FEDERAL OLD-AGE BENEFITS to the Account. Those other than these special ones must yield no less than 3 per cent. Inasmuch as no ordinary obligations yielding as high as 3 per cent are at present available, the funds are being invested in the special obligations. What "invested" means here is simply that the money belonging to the Account is lent at interest to the United States. It thus becomes part of the Treasury's general fund. As long as the budget remains unbalanced the money may be used for any of the Treasury's authorized expenditures. When the budget is in balance the money thus lent will be "surplus money" in the Treasury and the duty of the Secretary will be to use it in the retirement of outstanding debt. The issuance by the Treasury of obligations to the Reserve Account, that is, the borrowing of the Account's funds by the Government, means then, if the budget is balanced, a reduction in the amount of the Government debt held elsewhere (by banks, by other institutions, and by individuals), or, if the budget is not balanced, a reduction in the amount by which such debt held elsewhere would otherwise be increased. The Government either transfers part of its debt from other holders to the Account or, if it is adding to the debt as a whole (has an unbalanced budget), borrows from the Account rather than from other sources. Actual reduction in the amount of the debt as a whole is not contemplated. As a matter of fact, since the amount of the reserve on which interest is to be paid is expected to rise to 47 billion dollars and the amount of the gross debt at present is about 37 billion, the investment of the Reserve Account funds in Government obligations can be accomplished only through a 10-billion dollar increase in the total debt. Such an increase does not, of course, prohibit a balanced budget and even debt reduction in some years; it means simply that between the present and the time the reserve fund RESERVES FOR OLD-AGE BENEFITS 159 reaches its maximum the budget will have had to be out of balance to a net extent of at least 10 billion dollars. The advocates of the actuarial reserve method hold that the above-described method of investment, as a result of which interest payments that otherwise go elsewhere become the property of the Account, is both legitimate and desirable. The Account, they assert, "earns" the interest just as much as would any other institution which lent its funds to the Government. Moreover, they believe, the arrangement is highly advantageous to the Government and the general taxpapers, since, through the payment of interest on the public debt to the Account instead of to other individuals or institutions, the burden of having to pay a subsidy to the old-age benefits system is avoided. In the last analysis, according to this view, the general taxpayer has one burden where otherwise he would have two. Those who disagree point out that the view is possible only on the assumption that the Government is unlikely in the long run to do anything about debt retirement and that a public debt even larger than the present one is likely to exist indefinitely. The defenders maintain that since neither increases in general taxation nor large reductions in Government expenditures seem politically expedient, the assumption just noted is entirely within reason. On the other hand, the critics contend that the political inexpediency is merely hypothetical. The hard fact is, they declare, that the present plan, providing for a 10 -billion-dollar increase in the debt, makes impossible even the attempt to check on the correctness of the hypothesis. Moreover, they continue, since the existing plan precludes all effort at debt retirement, its defenders are in no position to argue that the plan avoids the necessity of an eventual Government subsidy to the benefits system. The point is, say the critics, that if the debt might have been retired within a certain period but because of this plan 160 FEDERAL OLD-AGE BENEFITS remains in existence indefinitely, the plan itself involves a subsidy, since it means that the Government is forced to pay interest on the debt in perpetuity. Those on the other side regard the point as immaterial. After all, they say, under a current-cost plan the Government would undoubtedly pay a perpetual subsidy. The reserve plan merely allows the old-age benefits system, through interest on its loans to the Government, to earn the payments that would have been made even if unearned. There can be no objection to the system's being, in this sense, self-sustaining. Apparently, however, there are objections. Opponents of the reserve method point out that inasmuch as the public debt was incurred by and for the benefit of the whole Nation, the whole Nation should carry the burden of paying off the debt. Making the old-age benefit plan self-sustaining by shifting the burden to the relatively low income groups whom the system covers is in their view inequitable. Moreover, they hold, neither the low-income groups themselves nor the economic organization of society can afford to have the debt absorbed by these groups. The public debt should either be retired through general taxation of the progressive type or, if it is to continue in existence, it should be carried by those who can afford to lend to the Governtment, that is, by those whose consuming power will not be reduced as a result of such loans. The use of the reserve method, they continue, means that for many years-for as long as the system pays out less than it takes in-there will be a serious drain on consumer purchasing power. In this connection they quote economists who consider that the primary deterrent to economic progress is the fact that the great masses of the people are unable to buy back as consumers what they produce as workers. The uneven distribution of income which is at the root of this difficulty will RESERVES FOR OLD-AGE BENEFITS 161 become even more pronounced, they declare, as a result of the building of the reserve fund. Others who object to the method of financing which Title II provides emphasize the disturbances that are expected to follow upon the use of the Reserve Account funds to retire the Government obligations now in the hands of private investors. Inasmuch as these individuals and institutions will be forced to seek other means of investment, the supply of funds in the money market will be considerably increased. As a consequence, rates of interest will tend to decline, or, what amounts to the same thing, the prices of the capital issues of industrial and commercial enterprises will tend to rise. Where such enterprises desire to increase their capital they will be able to do so much more advantageously than they could otherwise. Hence, a significant expansion of production and increase in general business activity may develop. Such developments frequently being cumulative or selfaccelerating, the ultimate result may be not only the investment of all the funds turned back into the money market by the retirement of Government obligations, and of other funds as well, but the expansion of credit proceeding to the point of inflation. Whether the expansion proceeds this far or not, these critics believe, its economic implications are likely to be especially serious in the present case for two reasons: First, the expansion will be accompanied by reduced consumer purchasing power; and, second, the expansion will probably proceed further than it would if its impetus were debt retirement through progressive general taxation, for, in that instance, since the burden of progressive taxation falls largely on the investors who are affected by the debt retirement, less would be reinvested, provided these investors maintained the normal level of their consumption. Still others who oppose the use of the reserve method, while holding as do those just mentioned that economic dislocations may be involved, believe that the dislocations 162 FEDERAL OLD-AGE BENEFITS will be of a deflationary nature. They point out that the reduction in consumer purchasing power which is expected to follow from the accumulation of at least that portion of the reserve fund which is not made up by interest payments will mean a substantial decline in demand for and prices of consumers' goods. This will involve a drop not only in the production of these goods but of capital goods as well. Despite the drop in interest rates, the effect of the reduced production of both types of goods will be that business enterprises will borrow even less than they are at present borrowing to finance the construction of capital equipment. Thus, the funds that the private investors have received as a result of the retirement of the Government obligations they now hold will be forced to lie idle. The process just sketched, tending to be cumulative in the same way as in the inflationary process, these critics hold that not only the funds mentioned but other credit facilities as well may, as the process continues, be forced to remain unproductive. Many objectors to the use of the reserve method maintain that its economic effects may very well be in either of the directions just referred to. They usually regard one or the other effect as the more likely but believe the one which is less likely is nevertheless within the realm of possibility. The difficulty in prediction, they assert, is due to the fact that the ultimate effect will depend on the time relationships between the changes to be brought about by the accumulation of the reserve and changes in various other elements in the economic scene. They emphasize the point that dislocations may occur, and consider more or less immaterial the precise form the dislocations may take. Concerning these several objections with regard to the retirement of Government obligations through the use of the Reserve Account funds, the advocates of the reserve policy declare that they as much as any others favor RESERVES FOR OLD-AGE BENEFITS 163 the retirement of existing debt by means of progressive general taxation, although they doubt that such retirement is likely to be accomplished. If not accomplished, they point out, the obligations must be either absorbed into the Reserve Account or remain outstanding. The former alternative is felt to be clearly preferable. Its chief advantage would be that, because it provides methods of raising the money with which to make the payments, it assures as much as is possible that the promised benefits will be paid. Moreover, they contend, the latter alternative no less than the former would involve severe economic dislocations. These would be expected to occur when the larger aggregate benefits became payable. In 1980, it is pointed out, the aggregate benefits are likely to be of such a figure that they can be paid for on a current-cost basis, only through a combined pay-roll tax of about 10 per cent or through a Federal subsidy covering the difference between the amount of such a tax and the 6 per cent combined tax now contemplated. Under conditions in which the taxpayers had also to carry the burden of interest charges on the outstanding debt, it is maintained that either the 10 per cent tax or the supplementing subsidy would cause serious economic disturbances. Furthermore, say the advocates, if the existing debt is not actually retired, its absorption into the Reserve Account must be expected to improve, in the long run, the distribution of income. The large sums paid in interest every year on the obligations held in the Account would be going to the lower income groups rather than to the private investors who are, on the whole, those in the higher brackets. Still further, it is argued, these investors would no longer be able to put their funds into Government securities, which are tax-exempt. Since the securities of private corporations, which they would purchase instead, would be subject to tax and the income from these securities would also be taxed, the net result 164 FEDERAL OLD-AGE BENEFITS ought to be a reduction in the tax burden carried by those in the low-income brackets, thus tending to improve income distribution. Those who support the reserve method bring forward one more argument, one which applies both to the objections concerning the reserve as an instrument for debt retirement and to the primary objections that the community as a whole cannot save and that interest on the Reserve Account funds cannot be truly earned. They hold that retirement of all or any part of the existing debt through general progressive taxation is by no means incompatible with the functioning of the reserve method. In effect, say the proponents of this idea, all or part of the present debt may be retired, and a new debt of a different kind and intended for altogether different uses may be created. Should the debt be retired by means of general taxation, the Reserve Account funds can be borrowed by the Government for use in the making of what are termed "social investments." Through making such investments, it is declared, the community can really save and can earn interest on its savings. To present the idea in detail: In the first place, an investment under any circumstances involves the use of wealth-goods or services which might be turned to the satisfying of immediate wants-for purposes of creating capital equipment, that is, equipment that will facilitate or make possible the production of other goods and services. Perhaps the simplest type of investment is that in which the farmer, instead of using his efforts ' to grow as large a crop as possible uses part of his energies to clear land on which he may grow crops in the future. A much more complex instance is that which involves the use of claims on wealth, money, instead of real wealth, and also involves specialization of function; one individual may merely lend funds to another individual who actually puts them to productive use. Thus, by purchasing securities of a corporation one may help RESERVES FOR OLD-AGE BENEFITS 165 it to build a new plant and produce more goods. In any case, if the resulting increased productivity is sufficient not only to cover the value of the goods and services which made it possible but is in excess of that value, the investment may be said to have been a good one. Among the services which made it possible there are to be included those of the entrepreneur-the individual who planned and arranged for the particular method of increasing productivity-and of the banks or other institutions or individuals which bring borrower and lender together. Furthermore, payment to the lender must include compensation for his risk. Any excess after these various costs are met is the yield or return on the investment. Part of this must go to the lender as compensation for his temporary sacrifice of liquidity or full control over his wealth. This part of the yield is called interest. The remainder is the profit of the entrepreneur. Still continuing with the argument of the proponents of "social investment": A large number of ways in which the community's productive capacity may be increased are not suitable for private investment. Usually the reason is that the return would be intangible, or, rather, not measurable in dollars and cents. Various other reasons may exist, such as those having to do with the size of the projects or the length of time before any returns can be realized. Instances of possibilities for such investment, possibilities in which there is no competition with private enterprise, are suggested in profusion. Forests may be planted and dams built in order that floods may be minimized and controlled, with the result of avoiding great losses in life and property, and preventing the erosion of incalculably valuable soil. Other dams may be built to conserve waters which can then be used to irrigate, and make productive, land that is fertile but arid. Such investments as these, it is pointed out, may very well be profitable to the community, and through them the community may in a real sense "save." 166 FEDERAL OLD-AGE BENEFITS To pick out a particularly dramatic illustration of this point, one may note the argument that even though the present generation cannot actually save food for the use of the next generation it can by conserving soil make it possible for the people of the next generation to grow food they would otherwise be unable to grow. That an investment which results in such conservation may be worth while is hardly to be denied, the argument runs. Moreover, the yield on the investment may well be priceless. Another type of "saving" may be involved in the building of dams and other structures which, because they depreciate very slowly, may be useful and productive for many decades, thus making it possible for the people of the next generation to devote their energies to the production of things they could not produce if they had to build these structures. A quite different type of "social investment" is also frequently mentioned. This is the improvement of that part of the community's capital equipment which is constituted in the health and education of its members. Investments in such equipment are, and for a long time to come will be, urgently needed. For example, there are hospitals, water systems, and sewer systems to be built, and schools and school equipment to be constructed. In so far as these things make for better public health and better educational standards they make for a more efficient and productive community, not only in the present but in the future. Thus, it is contended, investments in these things can be a means whereby the present generation "saves," and turns over to the next generation something of value which will assist the next generation in supporting this generation's members who are then aged. On these points the critics of the reserve method raise the same type of objections as they raise to the use of the Reserve Account funds for the retirement of the Government obligations in the hands of private investors. RESERVES FOR OLD-AGE BENEFITS 167 These social investments, they maintain, are for the benefit of the community as a whole and should, therefore, be financed through general taxation. The reserve advocates counter, as in the other instance, by saying that taxation sufficient to provide for these investments would probably not be levied. As a result, they contend, the future productivity of the country may not be adequate to allow for payment of "real" benefits in the amounts which have been promised. The critics then retort that the productive capacity may well be inadequate even with a reserve, since the effectiveness of this instrument in accomplishing its purposes depends on its being used as contemplated, and there is no way of assuring such use. Indeed, according to their view, what is most likely is that it will not be so used. They argue that the scope of Government functions will continue to grow, with the result that Congress will be faced with almost continually increasing expenditures. To provide for higher taxes, on the other hand, will always be unpopular. The tendency will exist, then, to do the easiest thing-go further into debt. The presence of the Reserve Account, from which funds may be borrowed more readily than from outside institutions, may result in such borrowing, and in failure to impose necessary new taxes. Consequently, the prediction continues, the Reserve Account funds will be used for other expenditures than those connected with debt absorption and the financing of social investments, the only uses that will serve to accomplish satisfactorily the purposes for which the Reserve Account is established. The reply to this is that the argument presumes the unworkability of democratic government -and from this point on the discussion becomes largely philosophical. A consideration of all the views which have been presented indicates that each side has good and, in some cases, unanswerable arguments. But, as is frequently true in controversies, the arguments are less important 168 FEDERAL OLD-AGE BENEFITS than the fundamental assumptions. Here the assumptions are more than usually difficult to evaluate, for most of them concern what may or may not happen in the future. The reader must examine the assumptions and assign values to them on the basis of how they appear in this particular perspective, and must draw his own conclusions. PART III UNEMPLOYMENT COMPENSATION CHAPTER XII THE SOCIAL SECURITY ACT AND STATE UNEMPLOYMENT COMPENSATION LAWS The Social Security Act uses two types of stimulus to State legislation for unemployment compensation: a taxoffset device, such as that employed in Federal inheritance taxation, and grants for the cost of administration of State laws. The Act does not itself set up a system of unemployment compensation for the United States; unemployment compensation remains a State rather than a Federal responsibility. Nevertheless, to the existence of the Social Security Act may be credited the passage of fifty State laws providing for the payment of benefits to unemployed commercial and industrial workers. No two of these laws are identical in all their provisions. Each, having been enacted by a State or Territorial legislature, is an attempt to meet special objectives and economic conditions of a State or Territory. The traditional freedom of State action has been preserved and the Federal role has been limited to providing an incentive to State action and to setting certain criteria for the framework and administrative practices of unemployment compensation programs, as contrasted with unemployment relief. PROVISIONS OF THE ACT Two titles of the Social Security Act, Titles III and IX, embody the part of the Federal Government in this Federal-State program of unemployment compensation. Title IX imposes a tax and establishes the requirements which 171 172 UNEMPLOYMENT COMPENSATION a State law must meet to permit employers a credit offset against that tax. Title III establishes additional requirements which must be met if the State is to receive Federal grants to defray the administrative costs of its unemployment compensation law. Title IX of the Act levies an excise tax amounting to 1 per cent of pay rolls in 1936, 2 per cent in 1937, and 3 per cent in 1938 and thereafter, on employers who employ eight or more persons for all but certain types of services. The excluded occupations include agricultural labor, domestic service in a private home, shipping on the navigable waters of the United States, service within certain family relationships, Government service, and service for certain institutions not operated for profit. The tax is based on the entire pay roll of covered employees and is collected by the Bureau of Internal Revenue of the Treasury Department. This uniform Federal tax has removed a former handicap to State action which was the fear that employers in a State with an unemployment compensation law would be at a disadvantage with respect to their competitors in other States which did not impose similar tax burdens. Against this tax, an employer in a State with an approved unemployment compensation law may credit the amounts he pays as contributions to the State unemployment fund, except that these credits may not exceed 90 per cent of the Federal tax for which he would otherwise be liable. In order to be approved by the Social Security Board, the State unemployment compensation law must include provisions that: 1. All benefits shall be paid through public employment offices or such other agencies as the Board may approve. 2. No benefits shall be paid until two years after the first day of the first period with respect to which contributions are first payable. 3. All contributions to the State fund must be UNEMPLOYMENT COMPENSATION LAWS 173 immediately transferred to the Unemployment Trust Fund in the United States Treasury. 4. Money withdrawn from the Unemployment Trust Fund must be used solely for the payment of benefits. 5. Benefits shall not be denied any person for refusing to accept work vacant because of a trade dispute; if the wages, hours, or other conditions of the work are substantially less favorable than those prevailing in the locality for similar work; if as a condition of being employed, the worker would have to resign from or refrain from joining a labor organization, or would be required to join a company union. 6. No vested rights are created which prevent modification or repeal of the State law. The requirements of Title IX do not prescribe the fundamental provisions of a State unemployment compensation law. They leave to the States the responsibility for writing into their statutes the conditions of coverage, type of fund, contribution rates, qualification for benefits, rate and duration of benefits, and similar substantive provisions. Summarized, the conditions laid down in Title IX of the Social Security Act specify some essentials to a genuine unemployment compensation law, provide safeguards for its funds, and prevent the use of the system to depress labor standards. The State law may create a State pooled fund in which all the contributions are mingled and available for benefit purposes to any unemployed and eligible individual in the State. It may provide for individual employer accounts, where contributions of an employer are kept separate and are available for benefits only to his own employees, or it may set up a combination of these two plans. It may authorize individual accounts under guaranteed employment plans where the employer guarantees his employees at least 30 hours of work a week for 40 weeks in a year. It may provide for scaling contributions of individual employers or industries according to benefit 174 UNEMPLOYMENT COMPENSATION experience. Under any type of plan, if reduced contributions are permitted by the State law, under prescribed safeguards, it may be possible for employers to secure credit against the Federal tax for both (1) the amount of contributions which they actually pay under State laws, and (2) the amount, within certain limits, of the reduction in their contributions permitted because of good employment experience. The States may also increase the amount of money available for benefits by requiring contributions from any source-employers, employees, or the State itself-or by increasing the contribution rate for employers with unfavorable employment experience. The administrative costs of State unemployment compensation systems cannot be paid from the contributions into the State funds, but are to be financed by the Federal Government out of the general funds of the Federal Treasury. In order to receive grants for administrative purposes, the State law must be approved by the Social Security Board under Title IX and must also provide, in accordance with Title III (Section 303 (a)): 1. Such methods of administration (other than those relating to selection, tenure of office, and compensation of personnel) as are reasonably calculated to insure the full payment of compensation when due. 2. Opportunity for a fair hearing before an impartial tribunal for all whose claims to benefit are denied. 3. Full and complete reports, as desired by the Social Security Board, on the activities under the State law, and information as requested by other Federal agencies engaged in the administration of public works or assistance. These conditions are designed to secure efficient administration by the several States so that benefits will be paid when due, and to assure applicants for benefits that they will be given an opportunity to state their cases UNEMPLOYMENT COMPENSATION LAWS 175 before an impartial tribunal. Reports from the State agency are required to keep the Board in touch with the developments in State administration and the use of Federal funds granted for administrative expenses and to provide the data on employment and unemployment on which sound administrative policies and future legislation must be based. The Board's determination of the amount to be granted to each State is based upon: 1. Population of the State; 2. An estimate of the number of persons covered by the State law and of the cost of proper administration of such State law; and 3. Such other factors as the Board finds relevant. EFFECT OF THE SOCIAL SECURITY ACT ON STATE ACTION Prior to the passage of the Federal Act, only seven States had enacted unemployment compensation laws. These States and the dates of enactment of their laws are as follows: California, June 25, 1935; Massachusetts, August 12, 1935; New Hampshire, May 29, 1935; New York, April 25, 1935; Utah,1 March 25, 1935; Wisconsin, January 29, 1932; and Washington,2 March 21, 1935. It is fair to assume that in all these States, with the exception of Wisconsin, the legislation was passed in anticipation of the passage of the Social Security Act. The operation of the laws of California, Massachusetts, New Hampshire, and Washington was made expressly conditional on the passage and continued effectiveness of the Federal Act. So precise was the reference in the Washington statute that the Supreme Court of that State ruled that the State law had never been enacted, since the Federal bill, upon the passage of which the State act was contingent, had never been passed.s Later repealed and a new law passed in August 1936. 'Declared invalid by the State Supreme Court, September 15, 1936. 3 The Economic Security Bill (H.R. 4120) which was replaced by H.R. 7260. 176 UNEMPLOYMENT COMPENSATION In the remaining months of 1935, after the passage of the Social Security Act, only three more State laws were enacted: Alabama, September 14, 1935; District of Columbia, August 28, 1935; and Oregon, November 15, 1935. In the following year, 1936, eight laws were passed prior to November: Idaho, August 6; Indiana, March 18; Louisiana, June 29;4 Mississippi, March 23; Rhode Island, May 5; South Carolina, June 6; Texas, October 27; and Utah, August 29. Thus there were in the United States, on November 1, 1936, sixteen unemployment compensation laws. During the next two months twenty were added. The great majority of the legislatures in these States had not met in regular session in 1936. The failure of these States to act before the last two months of 1936 may perhaps also be attributed to (1) a hope that, because of the large number of States which had not enacted laws, special provision would be made by Congress to segregate the receipts from the pay-roll tax levied by Title IX, permitting credit to those States which should thereafter enact unemployment compensation legislation; and (2) some uncertainty as to the permanence of the Social Security Act which had become an issue in the national election campaign. With respect to the first, a formal resolution had been adopted by the annual Governors' Conference held in Jefferson City, Missouri, in the early part of November, which had asked the President to request Congress to enact special legislation in the interest of those States which had no "approved" laws prior to December 31, 1936. At a press conference on November 24, 1936, Chairman John G. Winant of the Social Security Board, stated that no action would be taken to enable the States which did not have approved unemployment compensation laws to receive the benefit of the credit off4 Not effective until after the passage of an amendment to the State constitution in November 1936. UNEMPLOYMENT COMPENSATION LAWS 177 set during the current year. As for the second possible reason for delay in State action, the re-election of President Roosevelt made it probable that the Social Security Act or some similar Federal program would continue without substantial change. The result was quick legislative action by the following twenty States: Arizona, Colorado, Connecticut, Iowa, Kentucky, Maine, Maryland, Michigan, Minnesota, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Vermont, Virginia, and West Virginia. There were, at the end of 1936, thirty-six State laws, including that of the District of Columbia. In the course of the first six months of 1937, the remaining States, together with Alaska and Hawaii, passed similar laws, so that by July 1 all States, the District of Columbia, and the two Territories, had made provision to protect workers within their boundaries through unemployment compensation legislation. The dates of passage of these laws were fairly evenly distributed over this six-month period, although six occurred in March.. By May 24, when the Supreme Court upheld the constitutionality of both the Federal Act and State unemployment compensation legislation, only three States-Florida, Illinois, and Missourihad not passed laws. The last law, that of Illinois, was enacted on June 30. According to the Social Security Board's estimates, nearly 21,000,000 workers are employed in jobs covered by these fifty-one laws.5 The framework of the Federal-State program permitting the States, through the tax-offset device, a freedom they did not previously possess, to enact social legislation without inflicting a competitive disadvantage on State industries, made possible this amazingly rapid enactment of fifty unemployment compensation laws within two and one-half years. This record is to be contrasted Table 1 of Appendix III gives a complete list of States with dates of the enactment of their laws, the month and year benefits are payable, and the estimated coverage. 178 UNEMPLOYMENT COMPENSATION with the progress of workmen's compensation legislation in this country which, with a history reaching back over a quarter of a century, does not yet show laws in every State. THE PROVISIONS OF STATE LAWS The unemployment compensation laws enacted by the forty-eight States, the District of Columbia, Alaska, and Hawaii, show great variety in their provisions for the payment of unemployment compensation benefits. Type of Fund-Unemployment compensation laws may provide that all contributions paid by employers and employees shall go into one fund in which they shall be mingled and from which benefits will be paid without distinction as to the employers for whom the claimants worked, other than that such employers must have been subject to contributions. Most State laws, forty-four in all, provide for this type of fund, called the pooled fund. At the other extreme, a State law may provide that all contributions shall be credited to employers' accounts in the State fund and that benefits will be paid to an individual only to the extent that the benefits can be charged to the individual's previous employer or employers: if previous employers' accounts are exhausted, benefits are not payable.6 Only two States, Wisconsin and Nebraska, have such laws, although Vermont permits an employer to elect this type of fund for his account. The theory behind the employer-reserve type of law is that the employer has a high degree of control over unemployment and that by placing direct responsibility on him to maintain an individual reserve account he will be most effectively encouraged to stabilize employment and thus pre6 Except to the extent that they may be payable from a "balancing account" which is supported by interest on the fund, penalties, and all balances in accounts of employers who cease to be subject to the law. UNEMPLOYMENT COMPENSATION LAWS 179 vent unemployment. The experience with workmen's compensation is cited as a proper precedent. Following this plan, but providing more substantially for the "pooled account," are the laws of Indiana, Kentucky, Oregon, and South Dakota. In three of these States, one-sixth of all employer and employee contributions are set aside in a pooled account for the payment of benefits to workers whose previous employers' accounts are exhausted; in Oregon a constant 0.5 per cent of wages payable by employers is so set aside. These provisions for a pooled account in an employers' reserve plan do not make the plan substantially identical to a pooled fund in effect, as is sometimes supposed. Under the reserve plan, even with a supplementary pooled account, it remains possible, when the pooled account is exhausted, for benefits to be denied to claimants although the accounts of some employers in the fund are ample to pay all obligations of the fund as a whole. Because of further provisions of the Indiana, Kentucky, and South Dakota laws, it is possible that some employers, because of their good experience, will not be required to contribute to the fund in a year when benefits are being denied to claimants whose employers' accounts have become exhausted and as a result have drained the pooled account. Most of the States having pooled funds accept as valid the argument that the differences in employment experience between employers should be recognized in the rates of contributions and that this recognition may result in individual efforts to reduce unemployment. Meritrating provisions in these laws permit varying contribution rates with varying benefit experience of individual employers. Twenty-seven States have automatic meritrating-that is, the rates and conditions under which they apply are set forth according to a fixed formula stated in the law. Eight more States provide that the State agency can determine and apply an equitable meritrating system: Alabama, Alaska, the District of Colum 180 UNEMPLOYMENT COMPENSATION bia, Montana, Nevada, Vermont, Washington, and West Virginia. Eleven pooled-fund laws do not provide for merit rating: Georgia, Hawaii, Maine, Maryland, Massachusetts, Mississippi, New York, North Carolina, Pennsylvania, Rhode Island, and Virginia. Of these, all but Maryland and Pennsylvania call for a study of merit rating. No uniform and constant trend in the type of fund established by unemployment compensation laws can be detected. The first law was strictly an employers' reserve law. The next law was definitely of the pooledfund type. The trend throughout 1936 was distinctly to the pooled fund. All twenty-two laws approved by the Social Security Board in 1936, after November 1, were of that type. However, since January 1, 1937, Oregon shifted to the employer-reserve plan, with a pooled fund account supported by a continuous contribution of 0.5 per cent, and Nebraska adopted an employer-reserve law. However, Nebraska has recognized the necessity for a supplementary or "balancing account" by placing therein all penalties, earnings of the reserve accounts, and all accounts of employers who cease to be subject to the State law and Wisconsin has revised its law to include somewhat similar provisions. Coverage-The tax levied by Title IX of the Social Security Act is applied to all employers who employ eight or more persons on twenty days, each day being in a different week in the course of a taxable year. Probably in consequence of this fact, twenty-nine State laws7 cover employers of eight or more, some if they employ eight or more workers on twenty days, each day being in a different week, and others if they employ such employees merely in twenty weeks. The latter standard is more easily determinable, inasmuch as a weekly pay roll is more easily inspected and daily records are kept by 7 Twenty-seven laws in 1938 and twenty-six in 1939. UNEMPLOYMENT COMPENSATION LAWS 181 fewer employers and less reliably. The Wisconsin law covers employers of eight or more in 18 weeks, and the Iowa law, eight or more in 15 weeks. The remaining laws extend their coverage to employers of less than eight employees: Connecticut covers employers of five or more, seven States 8 cover employers of four or more, two cover employers of three or more, and ten cover employers of one or more. While usually the employment of the specified number must be for twenty weeks, in the District of Columbia and Ohio the employment may be at any time; and in New York may be in any fifteen days. Anticipated administrative difficulties in the discovery of those subject to the law, in collecting contributions, and in obtaining satisfactory wage reports are chiefly responsible for a failure on the part of the States to extend coverage to all employees. While the Federal tax is applied each year as a consequence of an independent determination that the employer has employed a sufficient number of workers in that year to become subject to the tax, State unemployment compensation laws provide for continuous coverage. By this is meant that the employer remains subject from one year to the next automatically, positive action by him being necessary to secure termination of coverage. Continuous coverage is achieved in two ways. First, coverage is defined in terms of employment in the current or preceding year. Second, and more important, no employer is released from coverage unless, shortly after the end of a calendar year, he sends to the State agency a written application for termination of coverage and the State agency finds that in the preceding calendar year the employer did not employ a sufficient number of workers for the time required to remain subject to the law. Thus, an employer may continue to be subject in the course of a year in which he did not have enough employees to 8 Nine in 1938 and ten in 1939. 182 UNEMPLOYMENT COMPENSATION qualify had he never been previously subject. This rule is deemed necessary under an unemployment compensation law which is a social device with a purpose significantly different from that of a taxing provision such as that found in Title IX of the Social Security Act. It would not be feasible or practicable to await the passage of twenty weeks each year before finding that an employer is subject to contributions and ruling that benefits may be payable with respect to wages earned in that twenty weeks. For a great many firms, such as those in seasonal industries, the fulfillment of the requirements for coverage would occur late in each year. Obviously, no State agency could operate successfully on a basis for determining coverage other than that of automatic continuance of his liability for contribution. Forty-nine laws permit firms having fewer than the qualifying number of employees or having the qualifying number for less than the required number of weeks, to come under the law voluntarily. Such a provision is chiefly for the benefit of those employers (1) who have a humanitarian interest in extending unemployment compensation protection to their employees; (2) who feel handicapped in obtaining labor because workers see some advantage in working for larger firms where they are covered by the unemployment compensation law; or (3) who, because of having establishments in more than one State and employing enough workers in enough weeks to be subject to the Federal tax, consequently have a certain passive interest in paying contributions to States in sufficient amount to secure full credit against the Federal tax and get whatever advantage that may be derived for themselves and their workers from participation in the State program. Thirty-nine laws also permit employers to elect that services not covered by the law, such as agricultural labor, domestic service, and service for non-profit institutions, may be considered to be subject for all purposes. The UNEMPLOYMENT COMPENSATION LAWS 183 purposes of this provision are chiefly (1) to accommodate those firms which have employees in both subject and nonsubject employment and which wish to treat all their employees alike, and (2) to permit certain philanthropic non-profit institutions which wish to associate themselves with the principles of social security legislation to bring their employees within the scope of a State unemployment compensation law. All States have been careful to provide that such election to coverage shall become effective only after an application by the employer and the express approval of the State agency. If such approval, given only after some consideration of the industrial history of the applicant, were not required, the State might unwisely be accepting risks which would prove to be an unreasonable and disproportionate burden on the fund. The laws always require that the election be for at least two years; otherwise the credits acquired by workers covered would be inadequate to provide sufficient benefits to warrant handling the accounts. Employment Inclusions-As will be pointed out in a subsequent chapter, much of the administrative difficulty with which State agencies are faced hinges on questions of interstate relationships with respect to coverage and benefit payments. The majority of laws, forty-one in all, cover employment localized wholly within the State boundaries. The same number provide that if the individual's services are not localized in any State, the State will cover all his services if he performs some services in the State and if the base of his operations is in the State; if his base of operations is not in a State in which he performs services, the State will cover all his services if he performs some services in and resides in the State. Thus, a salesman, residing in Maryland, working regularly in Virginia, West Virginia, and Maryland and having his work directed from Virginia, would have all his services covered by the Virginia law. However, it 184 UNEMPLOYMENT COMPENSATION is possible that his base of operations or the place from which his work is directed might be in New York, where none of his services are performed. In that case, the State in which he resides, Maryland, would cover all his services as long as he performs some service there. A few State laws limit their coverage to employment "all or the greater part" of which is performed in the State, although these States through amendments are gradually shifting to the provisions of the majority of States. A still smaller number cover only service performed within the State. The objective of the kind of definition of employment adopted by the majority of States is to have all the services of an individual covered by one State, rather than partitioned among a number, and to have that State cover his services in which he is most likely to seek work when unemployed. It is clear that, if each State would cover only the services performed within its boundaries, a partitioning of the individual's services would be the manifestly undesirable result. Likewise, if that State is to cover the worker's services in which "the greater" part of the services are performed, not only will serious problems be raised in determining "the greater" part, but, in a great many cases, as among railroad workers, that State will be selected in which there is no probability that the worker would be unemployed or seek reemployment. The Federal Act specifically permits the coverage of employment in interstate commerce and all but two laws cover it. However, forty-three States have provisions automatically exempting services if and when they are covered by a Federal unemployment compensation law. It is probable that Federal legislation will be proposed which will cover the services of railroad workers. While most State laws cover all services performed for wages or under any contract of hire, the laws of Connecticut and Minnesota restrict coverage to the masterservant relationship and Kentucky to the legal employer UNEMPLOYMENT COMPENSATION LAWS 185 employee relationship. Forty States have attempted to define the relationship between an individual and those for whom his service is performed with respect to which contributions are collectible and benefits payable. In this they provide that service for remuneration is covered unless (1) the individual is free from control over the performance of the service, (2) the service is outside the course of the business or performed outside all the places of business of the enterprise for which it is performed, and (3) the individual is customarily engaged in an independently established trade, occupation, profession, or business. Employment Exclusions-In general, most States have adopted the same employment exclusions as those to be found in the Federal Act. Thus in all States but New York, domestic service is excluded. In New York this type of work is covered if the employer has as many as four in such services. All States but New Hampshire, Ohio, and Wisconsin exclude "family employment." In addition to the employment exclusions of Title IX some State laws specify other types of work which are not covered. Insurance company solicitors or agents are excluded in Alabama and Kentucky; agents or representatives of insurance companies engaged in field work are excluded in South Carolina and Tennessee, and insurance agents on a commission basis are excluded in Texas and Michigan. Casual labor not in the course of the business of the employer is excluded in Connecticut, the District of Columbia, Indiana, and Oregon, and casual labor for not longer than four weeks may be excluded in Massachusetts and Ohio if the State unemployment compensation agency so rules. Service in a professional capacity not in the nature of permanent employment is excluded in Michigan. Golf caddies are excluded in Wisconsin, individuals paid on a commission basis and master of their own time, in Ohio and Indiana. It should be noted that many other laws, by 186 UNEMPLOYMENT COMPENSATION the nature of their definitions of employment, indib rectly exclude some of the same types of services as those specifically excluded in other laws. Where certain limited classes of services are specifically named as outside the coverage of the State law the exclusion is usually an evidence of the effective representation of certain interests in the legislatures. Wage Exclusions-Two State laws, both passed prior to the passage of the Social Security Act, provided for wage exclusions with respect to both contributions and benefits. New Hampshire did not require an employer not subject to the tax under the Social Security Act to pay contributions on non-manual workers receiving remuneration at a rate of more than $2,500 a year. New York excludes those whose wages exceed $3,000 in any year. The exclusions in New Hampshire have been deleted by amendments. Wages of an employee in excess of $3,000 a year are not subject to employer contributions in Michigan or employee contributions in Rhode Island. Employee contributions are not required in Kentucky from non-manual workers employed at a rate of more than $50 a week or $2,600 a year nor in Massachusetts on wages in excess of $2,500 a year. Wisconsin excludes from benefits those persons employed (a) at a fixed salary of $150 or more a month for more than ten months out of the twelve preceding unemployment, or (b) at a rate of $35 or more a week for the forty-five weeks preceding unemployment. Contribution Rates-Only three laws-those of the District of Columbia, Michigan, and New York-impose contribution rates higher than 90 per cent of the tax levied by Title IX of the Social Security Act. Wisconsin imposed a rate of 1 per cent in 1936 and 2 per cent in 1937, but the rate for 1938 and thereafter will be 2.7 per cent, which will represent 90 per cent of the Federal 3 per cent tax in that year. These same rates apply in New Hampshire, except that for the period from Sep UNEMPLOYMENT COMPENSATION LAWS 187 tember 30, 1937, to December 31, 1937, the rate is 1.8 per cent. Employee contributions were required in three States in 1936: Alabama, California, and New Hampshire. They are required in five additional States for 1937: Indiana, Kentucky, Louisiana, Massachusetts, and Rhode Island. These contributions are required in Indiana only for the first three months of 1937 and are also dropped in New Hampshire after the end of September. The employee contribution rates applying for 1938 and thereafter are as follows: Alabama.........1 per cent California........1 per cent, but not more than 1/2 the employer's rate Kentucky........ 1 per cent, but not more than 1/2 the employer's rate Louisiana........0.5 per cent Massachusetts.... 1 per cent New Jersey.......1 per cent Rhode Island......1.5 per cent State contributions have been made only in the District of Columbia where the Government contributed $100,000 for 1936, and $125,000 for 1937. Merit Rating-Only eleven laws are without provision for merit rating. This means that in the remaining States which have pooled funds the States maintain, within the fund, separate employer accounts for bookkeeping purposes so that they may know how the employer's contributions compare with the benefits paid to his employees from the pool. In twenty-seven pooled type laws and in six employer-reserve or combination type laws merit rating is automatic. In nine other laws, merit rating is not automatic, but the State agency is authorized to determine and establish rates. These States comprise Alabama, Alaska, District of Columbia, Montana, Nebraska, Nevada, Vermont, Washington, and West Virginia. 188 UNEMPLOYMENT COMPENSATION Certain safeguards, based on the following principles, surround most merit-rating provisions: 1. No rate shall be reduced unless the fund is in a sound condition. Of the twenty-seven pooled type laws with automatic merit rating, sixteen provide that no employer's rate shall be less than 2.7 per cent unless the assets of the total fund exceed the total benefits paid in the preceding year, nor shall any employer's rate be less than 1.8 per cent unless the assets of the total fund are twice the total benefits payable in the preceding year. 2. Rates may be increased as well as decreased. Of the twenty-seven pooled type laws with automatic merit rating, twenty so provide, eighteen States providing that if the benefits paid from the employer's account exceed his contributions for the sixty preceding months or for all past periods, whichever period is more advantageous to the employer, his rate shall be increased to 3.6 per cent of his pay roll. Ohio and Michigan provide that if the employer's account falls below 8 per cent of his annual pay roll, his contributions shall be 3.0 per cent until his reserve again reaches 8 per cent of his pay roll, and if benefits exceed contributions for all past periods the rate will be 4 per cent. 3. There shall be a continuous minimum rate. Of the twenty-seven pooled fund laws with automatic merit rating, only four, Connecticut, Delaware, Idaho, and Missouri, permit contributions to cease altogether. Sixteen have a minimum rate of 0.9 per cent; nine have a minimum rate of 1 per cent. Most of the employer-reserve and combination types of laws also provide certain safeguards by increasing contributions when the employers' funds show signs of greater outgo than income. Oregon would permit an employer's rate to go up to 4 per cent if his reserve were less than 2.5 per cent; Indiana and Kentucky to 3.7 per cent if the reserve is exhausted; Wisconsin to a maximum of 4 per cent if benefits are exceeding contributions. UNEMPLOYMENT COMPENSATION LAWS 189 South Dakota and Vermont do not provide for higher rates. Four laws-those of Wisconsin, Kentucky, Indiana, and South Dakota-permit the rate to go down to zero; Oregon holds its rates to a minimum of 0.5 per cent. Under the terms of the Federal Act additional credit against the Federal tax claimed for reduced contribution rates allowed by the State law with respect to an employer-reserve account cannot be obtained until after one year of experience in the payment of benefits. Such credit with respect to a pooled plan can be allowed only after three years of compensation experience. It is thus apparent that no approved State law except that of Wisconsin, provides for the application of merit rating before January 1939. Oregon, Nebraska, and South Dakota will be able to apply merit rating in January 1940; fifteen more States in 1941, and nineteen more in 1942. It must be realized that while the merit rates become nominally effective on the dates indicated, in some of these States no employer will actually be entitled to a lower rate because insufficient time has elapsed in which to accumulate a reserve. At an annual rate of 2.7 per cent, almost three years must elapse before the employer's reserve will exceed 7.5 per cent, even assuming that no benefits are paid to his former employees. Benefits-All States except two provide for a basic benefit rate of 50 per cent of weekly wages. The District of Columbia law provides for 40 per cent of the weekly wage plus 10 per cent for a dependent spouse and 5 per cent for each dependent relative, up to a maximum of 65 per cent of the weekly wage; Wyoming provides for a rate of 60 per cent of the weekly wage. All but two of the States place a maximum limit of $15 on the weekly benefit amount payable; Michigan will pay $16 and Wyoming $18. Only five laws have no minimum weekly benefit: Alabama, the District of Columbia, Mississippi, Ohio, and 190 UNEMPLOYMENT COMPENSATION Wisconsin. Delaware, Hawaii, Indiana, and Massachusetts have a flat $5 minimum. Most other States have a conditional $5 minimum, the condition being that in no event shall the weekly benefit exceed three-fourths of the full-time weekly wage. Fourteen States have a basic minimum higher than $5 with variations ranging from the $7 flat minimum in New York and California, to the $7.50 flat minimum in Pennsylvania and the $8, or threequarters of the weekly wage, in Oklahoma. All States but seven, Kentucky, Massachusetts, Montana, Nebraska, New Jersey, New York, and Pennsylvania, also provide for the payment of benefits even when the eligible worker who is usually employed for fulltime is engaged in part-time employment. Such provision is a recognition of the possibility that an individual's wage loss might be so large that his actual earnings from a part-time job may be less than his benefit for total unemployment. Hence the necessity, in equity and social policy, of paying a benefit at least equal to the difference between his actual earnings and what he would get in benefits for total unemployment. Most States do better; that is, they would pay benefits for partial unemployment in such an amount that the individual would always receive more, with his earnings plus the benefit, than he would if he were getting benefits for total unemployment. Thus, most commonly, the individual is considered to be partially unemployed when he is earning less than six-fifths of the benefit for total unemployment. For such partial unemployment he will be compensated in an amount equal to the difference between his benefit amount for total unemployment and five-sixths of his actual earnings. When partially unemployed his income will then be an amount equal to the benefit for total unemployment plus one-sixth of his actual earnings. Thus, if a worker's benefit for total unemployment were $15 a week and he is in part-time work which pays him $6 UNEMPLOYMENT COMPENSATION LAWS 191 a week, his benefit would be $10 a week ($15-(%5/ x $6)), and his total income $16 a week. Some few States employ a more arbitrary though simpler basis for computing benefits for partial unemployment. They provide in such cases for a benefit equal to the difference between actual earnings and $2 more than the benefit for total unemployment. For example, if the worker were entitled to $12 a week for total unemployment, and his part-time work brought him in $6 a week, his benefit would be $8 a week, so that earnings plus benefits could equal $14 a week. Only two States make the amount of salary paid the basis for exclusion from benefits. In New York, all workers earning more than $3,000 are excluded and in Wisconsin persons who have earned a fixed salary of $150 or more a month for ten out of the preceding twelve months, or $35 or more a week for 45 out of the preceding 52 weeks, are excluded. Calculation of the Weekly Wage-Unlike workmen's compensation laws, which usually refer to wages without any attempt in the law to give the term precise meaning, all the unemployment compensation laws prescribe the method of calculating the weekly wages on the basis of which the weekly benefit is computed. In the earlier unemployment compensation laws-in almost all of those passed prior to December 1, 1936 -the full-time weekly wage was to be calculated by determining separately the component parts of that full-time weekly wage; that is, the full-time hours worked and the hourly rate of earnings. As a rule the full-time hours were to be computed by taking an average of the hours worked in each of the weeks, within the fifty-two preceding the last week of employment, in which more than thirty hours were worked. The hourly rate was to be an average of hourly earnings in those weeks in which an approximation of full-time hours were worked. Although the State agency was commonly given authority to utilize 192 UNEMPLOYMENT COMPENSATION a simpler method where it was possible to determine the customary hours of work and wages, the basic information required and the minimum computations necessary were clearly such as to place a heavy reporting burden on employers and a heavy administrative burden on the State agency. As the magnitude of the task became more apparent, a simpler, more arbitrary method was devised. For those cases in which the individual's full-time weekly wage is not readily determinable, only a report of the worker's quarterly wages is required. By this method the highest quarterly wage within a stated past period of employment-usually the first eight out of the last nine quarters preceding the date of unemployment-is divided by 13 to find the weekly wage. The highest quarter is used because the division by 13 is on the assumption of fulltime work and because it is desired, as it was under the earlier formula, to secure a full-time, rather than an average, wage. For example, the individual may have earned, in each of the first eight out of the last nine calendar quarters preceding his unemployment, the following amount in each quarter, respectively, $260, $275, $260, $250, $260, $275, $286, $260. The highest quarterly wage would be $286 and the full-time weekly wage $22 ($286 - 13). Seven of the States secure substantially the same results with a different formula: since the weekly wage is one-thirteenth of the highest quarterly wage, the benefit, 50 per cent of the weekly wage, may be defined to be onetwenty-sixth or approximately 4 per cent of the wages in the highest quarter. The benefit rate is so expressed in Connecticut, Indiana, Kansas, Massachusetts, Michigan, Missouri, and New Hampshire. Most States use this new formula, at least in principle. New York and Wisconsin are probably the most notable exceptions. New York requires the employer to report the full-time weekly wage for each quarter. Among the figures so reported for the first four out of the last five UNEMPLOYMENT COMPENSATION LAWS 193 completed quarters prior to the week for which benefits are payable, the highest and the lowest are dropped, the middle two averaged. Wisconsin requires the employer to compute an average weekly wage for each employee. It may be said that a definite attempt has been made to base benefits on full-time weekly wages. Where it was proposed that benefits be based on total earnings within a certain period, thus taking into consideration weeks of low or no earnings as well as full-time weeks-the proposal has been rejected in the legislature. The full-time wage basis is sound in principle. Unless the compensation is related to the loss of regular full-time employment, the worker is not adequately protected. If full compensation were made for all loss of wages, there might be some reason to fear the result of paying benefits on the basis of a full-time wage. When the benefits represent only 50 per cent of the wage loss with an additional safeguard in the maximum payable, there would seem to be little justification for reducing the weekly benefit to the level of the low earnings resulting from short time or intermittent employment in the period on the basis of which the weekly rate is determined. Lower than normal earnings, as will be explained later, affect the total benefits a worker may receive, because the number of weeks for which benefits are payable is usually based on the total amount of wages earned by the individual in the period which is used to compute the duration of his benefits. The State laws, almost without exception, provide that the benefit rate shall remain unchanged for the "benefit year." The "benefit year" is defined as the 52-week period starting with the first week with respect to which benefits are payable, or the 52-week period starting with the first week with respect to which benefits are payable after the expiration of an immediately preceding benefit year. Again, New York is the most notable exception. 194 UNEMPLOYMENT COMPENSATION Under its law, the weekly benefit rate is computed every quarter and may change every quarter. The term "wages," in the sense in which it is used as a basis for the determination of benefits, usually means all remuneration for personal services, including commissions and bonuses and the cash value of all remuneration payable in any medium other than cash. In addition, thirty-one laws specifically include in wages tips which the individual may receive in the course of his employment. The laws of only five States-Alabama, California, Indiana, Maine, and Massachusetts-specifically exclude tips from the computation of the worker's earnings. The tendency to include tips marks an effort to use as the basis of benefits the total earnings of the individual in the pursuit of his occupation, and not simply the most convenient tax base. From the standpoint of the broad purposes of the unemployment compensation acts and the position of workers who are unemployed and seeking compensation for their wage loss, it would seem that the more realistic approach has been followed. However, provisions for the inclusion of tips in wages have been criticized as involving administrative difficulties and as being an unwise recognition of a method of wage payment which is inherently bad and opposed to sound labor policy. Duration of Benefits-All States, except Massachusetts, limit the number of weeks for which an individual may receive benefits within a period of 52 weeks, the "benefit year." Most commonly this limitation is expressed in terms of an amount, such as 16 times the weekly benefit for total unemployment, so that it is a limit on benefits for partial unemployment as well as for total. Three States-Alabama, Idaho, and Rhode Island-will pay benefits for an ordinary maximum duration of 20 weeks. In both Rhode Island and Alabama, employees contribute to the unemployment compensation fund. In general, however, there is no apparent relationship between em UNEMPLOYMENT COMPENSATION LAWS 195 ployee contributions and duration of benefits: Kentucky, California, Louisiana, States which require employee contributions, plan to pay benefits to an individual for a shorter maximum period than do twenty-eight other States without employee contributions. Calculation of Duration of Benefits-The basis for determining the duration of benefits is most reasonably measured by past employment. And past employment would seem to be most reasonably measured in units of time-that is, so many days or weeks of employment. This measure was used by all States which passed unemployment compensation laws prior to December 1936. However, further thought on the problem led to the conclusion that the use of days or weeks of employment might lead to inequitable results, because part days or weeks would almost necessarily be given the same weight as full days or weeks. Extensive records would also be required by such procedure, and it was difficult to devise appropriate reporting forms. These considerations have led to the use of total wages, earned within a certain past period, as the measure of past employment. The past period specified is commonly designated the "base period." For most States the "base period," as of the beginning of the "benefit year," is the first eight out of the nine completed calendar quarters preceding the week with respect to which benefits are payable to the individual. The last of the nine quarters between the base period and the benefit week is always left out of any calculation because of an inevitable lag in the regular reporting and posting of wage records. Total benefits payable to an unemployed individual are limited to a percentage of those past wages payable to him in his base period. An account is kept for each employee to which are credited the wages payable to him in each quarter. However, wages payable to an individual in any quarter in excess of $390 are excluded in order to avoid the possibility of paying benefits for a 196 UNEMPLOYMENT COMPENSATION relatively long period on the basis of a relatively short period of earnings. Earnings of $390 a quarter would permit the payment of the $15 maximum weekly benefit. Benefits paid to an individual are charged against his wage account, starting with the earliest uncharged wages earned during his base period. The charge against each quarter is commonly limited to one-sixth of the wages credited for that quarter. Thus the maximum quarterly earnings of $390 would permit the payment of the $15 maximum weekly benefit for four and one-third weeks. There is an over-all limitation that benefits are not payable to an individual in his benefit year to an amount greater than a certain multiple of his weekly benefit amount. The usual maximum duration is expressed as 16 times the weekly benefit amount, which is generally equivalent to providing that the benefit payments will not extend beyond 16 weeks. Usually the base period is defined so that it can be extended in order that an individual may also, in the course of the year following his first week of benefits, obtain credit for wages which had been paid to him subsequent to those eight quarters on which his duration was first based, but prior to the last completed quarter preceding the week for which he is receiving benefits. For example, an individual who becomes unemployed in the middle of January can at first receive benefits only on the basis of wages earned prior to October 1 of the preceding year, because his wages have not yet been reported by the employer and posted by the State agency for any time subsequent to that date. However, on April 1, the wage record for the quarter October 1 to January 1, will be available to use as a basis for further benefits. Similarly, on July 1, his wages for the first part of January will become available. Employment Qualifications-All States require that an individual, to be eligible for benefits, must have had a certain period of employment covered by the State law. UNEMPLOYMENT COMPENSATION LAWS 197 The States which use a wage basis for calculating the duration of benefits require that he must have earned wages of a certain amount in a recent past period. Most commonly this past period is the first three out of the last four calendar quarters, although thirteen States use the first four out of the last five quarters, and one State, Washington, permits the wages to have been earned in the first eight out of the last nine calendar quarters. In most cases, the minimum amount of wages which a worker must have earned within a given period, if he is to be eligible for benefits, is expressed as a certain multiple of the sum he would receive as his weekly benefit for total unemployment. This is a convenient device for making the amount of wages which will qualify a worker for benefits proportionate to his rate of pay. At the same time, this procedure permits automatic adjustment to the maximum and minimum benefits established by the State law. The multiple of the weekly benefit amount may be as low as 12, as it is in West Virginia, or as high as 24, as in Connecticut. The most frequent figure is 16. Since the worker's weekly benefit is usually half his weekly wage, this means that he must have the equivalent of at least eight weeks of full-time employment within from nine months to a year before he can draw benefits at all. For the few States which pay benefits on the basis of past days or weeks of employment, the qualification period is also in terms of days or weeks. In all cases, there must have been a certain period of employment within the past 52 weeks: 20 weeks in Kentucky and 13 weeks in the District of Columbia, Mississippi, Louisiana, and South Carolina. Wisconsin does not permit an employee to draw benefits against the account of any employer unless he has worked for that employer for four weeks, and if he has not worked for that employer for the past three years, the four-week probationary period must again be served. All these methods of prescribing employment qualifica 198 UNEMPLOYMENT COMPENSATION tions are an attempt to reserve benefits for those who are relatively steady rather than intermittent workers. Waiting Period-Before a worker receives unemployment compensation some time must elapse between his loss of work and his first benefit payment. The waiting period requirements of State laws show only slight variations. Most States, thirty, require a waiting period of two weeks in the 13 weeks preceding the week for which benefits are claimed. There is usually an additional proviso that not more than five weeks of waiting for benefits will be required in any 65 consecutive weeks. Nineteen States require a three-week waiting period, but in seven of these, the three weeks may be accumulated in a period of 52 weeks preceding the week for which benefits are claimed, so that the requirement is probably less onerous than where two weeks of waiting in 13 weeks are required. Two States require a four-week waiting period in 52 weeks. For the most part, the State laws provide that two weeks of partial unemployment shall be considered equivalent to one week of total unemployment. Also, most States require the same waiting period before benefits are paid for partial unemployment that they do for total unemployment. Seven States, however, do not require any waiting period for benefits in cases of partial unemployment. Provisions for Special Groups-Thirty-three States permit the State unemployment compensation agency to make special provision for the part-time worker. The part-time worker is understood to be one whose normal work is in an occupation in which his services are not required for the customary scheduled full-time hours prevailing in the establishment where he is employed or one who, owing to personal circumstances, does not customarily work the prevailing scheduled full-time hours. Such special provision by the State agency relates to the determination of the full-time weekly wage and the total wages required to qualify the worker for benefits. UNEMPLOYMENT COMPENSATION LAWS 199 Twenty-two States also permit the State agency to establish special conditions with respect to workers in seasonal industries. Three other States charge the State agency with the responsibility for study of the problem of seasonal industries with a view to making recommendations with respect to their treatment. Disqualifications-Refusal of suitable work or loss of work because of a labor dispute in the worker's establishment constitutes grounds in all States for the extension of the waiting period or for disqualification from benefits for the duration of the dispute. In most States the disqualification for loss of employment because of a labor dispute does not apply if neither the worker nor any member of his grade or class of workers is participating in, financing, or directly interested in the dispute. Discharge for misconduct in all States but one and voluntarily leaving employment without cause in all States but one constitute grounds for similar penalties. The administrative agency is usually given leeway to fix the length of the period of disqualification in these cases. In cases of labor disputes, all States except New York, Pennsylvania, and Rhode Island specify that the worker is ineligible as long as the dispute exists. Pennsylvania provides for a waiting period of three weeks in addition to the usual waiting period in such cases, in New York the normal waiting period is extended to ten weeks, and in Rhode Island the disqualification is for ten weeks in addition to the normal waiting period. Claims Procedure-The procedure established in the various State laws for the determination of a claim for benefits is fairly uniform or is stated in such terms that a substantially uniform procedure is possible. Most of the State laws simply provide that claims shall be filed in such manner as the administrative agency prescribes; only sixteen laws specifically require that the claims be filed at local employment offices. All but five States provide that the initial determination shall be made by a 200 UNEMPLOYMENT COMPENSATION deputy designated by the administrative agency. Generally this initial determination involves an examination of the claim, a determination as to whether such claim is valid or not, and if valid, the week with respect to which benefits' shall commence, the weekly benefit amount payable, and the maximum duration. New York and New Hampshire provide that the initial determination of the validity and amount of the claim shall be made by a local employment office official. In more than half of the States it is provided that cases which involve labor disputes shall be immediately referred to the administrative head of the State agency for initial determination. If the local representative of the unemployment compensation agency were responsible for decisions in such cases it might be difficult for him to withstand local pressure or adverse reaction to his decision. In all cases, an individual who has been denied benefits is guaranteed an opportunity for a fair hearing before an impartial tribunal. This requirement is a prerequisite for grants from the Federal Government for administrative purposes. The appeal may usually be made to a tribunal which is either a single representative of the administrative agency or of the higher appeal board, or a board of three, consisting of one representative of the administrative agency or of the higher appeal board, one representative of employers, and one of employees. In most States the question of whether it shall be a single representative or a board is in the hands of the administrative agency. In all States provision is made for a higher administrative review of disputed claims, which may be obtained by direct appeal of the complainant or on the initiative of the appeal body itself. In thirty States this last administrative review is conducted by the State administrative agency; fourteen States set up a special board of three members, usually appointed by the Governor and generally called a board of review. Only three laws, those of Hawaii, California, and Kentucky, lack a provision for an intermediate UNEMPLOYMENT COMPENSATION LAWS 201 appeal, through a referee or appeal tribunal, prior to a hearing before the final board of review. Administrative Organization-In twenty-two States the agency designated to administer the unemployment compensation law is independent of other administrative agencies in the State. In the remaining States the law is administered by another State agency. In twenty-one of these States, the existing agency charged with the administration of the law is subject to, or in, the department of labor. In three States, the agency is not in the department of labor but does administer other labor legislation; in three more States the agency is independent but has within it representation by a member of the department of labor. In only two States are existing State agencies utilized which do not administer other labor legislation: in one case, a division of the Department of the State Treasury and in another by a division of the State Departmnent of Social Security. The Social Security Act, except to the extent that it requires the payment of benefits through public employment offices, does not give any direction to the States as to the type of administrative organization they should set up to administer the unemployment compensation laws. It is universally recognized that the employment service as such could not perform its primary placement functions if it were required to take on the direct responsibility for administering unemployment compensation. However, it was clear that the State agency which administers unemployment compensation must also have authority over the employment service, because benefits must be paid through employment offices only to those to whom no suitable work is available. It was doubtless this consideration which in many States had much to do with placing the administration of unemployment compensation in a State agency-the department of labor or the industrial commission-which already supervised the employment service. It may be said, however, that, in 202 UNEMPLOYMENT COMPENSATION general, the administrative agency was selected in accordance with the peculiar needs of the State, the manner of administrating other State laws, the character of the government and the temper of the legislature. Summary-The foregoing outline of the substantive provisions of State laws shows the extent to which they follow a similar pattern while each maintains its individual characteristics. Some fear that the fifty-one variants of a similar theme will introduce administrative complexities and inequalities of treatment which will frustrate most of the objectives of this form of legislation. Others feel that such variation offers desirable opportunity for experimentation and that from these experiments the best of each may come to prevail. In certain major features the State laws are uniform to a high degree. Although there is divergence in the size of firm covered, there is substantial uniformity in the type and nature of the employments protected by these laws. The uniform definition of employment found in all but eleven of the laws clearly shows which State has responsibility for covering services performed in more than one State. The definition of employment found in Title IX of the Social Security Act is doubtless largely responsible for the similarity of employments covered by the State laws. In addition, State officials have shown a desire to cooperate with those of other States in the formulation of statutes and procedures which will reduce the complexities of their programs. All States have provided that in order to be eligible for benefits an individual must be able and willing to work, will be disqualified for refusing to accept suitable employment, and will be ineligible for benefits if he has not had a certain amount of regular employment in the recent past. In all States, except Wisconsin, the fulltime weekly wage is recognized as the standard on which to base the weekly benefit. All but one State base the UNEMPLOYMENT COMPENSATION LAWS 203 duration of benefits on the record of employment. In all but New York, Wisconsin, and the District of Columbia benefits are paid without regard to need; that is, benefits are not denied because the individual's past earnings were high nor increased because of his responsibility for dependents. A high degree of uniformity is to be found in the procedure prescribed for the payment of claims. This uniformity will have added significance when benefits are payable in all States and when it will become manifestly desirable to permit the payment of benefits from the fund of one State even though the unemployed claimant is living in another State. American workers frequently move from one State to another through normal shifts in employment or in search of jobs when work at home is scarce. If the eligibility for benefits built up by employment in one State were to be forfeited by moving to another, the mobility of labor might be seriously affected. State officials have also been aware of the need to develop procedures which will permit uniform types of reports and records in order to reduce the burden on employers operating in more than one State. Such uniformity of reporting procedures will at the same time provide comparable data which can be used in studying the progress of the programs for unemployment compensation throughout the United States. Without such studies little can be gained from past experience for future guidance. A certain degree of uniformity in organization has been the inevitable result of the requirement in the Social Security Act that benefits be paid through employment offices. This has almost invariably meant that State unemployment compensation agencies have been established as two divisions, an unemployment compensation and an employment service, under an administrative head to coordinate their services in the payment of unemployment compensation through the employment services. The 204 UNEMPLOYMENT COMPENSATION substantial uniformity in organizational structure in agencies established by the State laws has led to a somewhat like degree of uniformity in the subdivision of functions within the State agencies. This similarity affords wide opportunities for cooperation between like functional units in all States. It is this degree of uniformity on essentials, with variety of expression in application, that offers hope that an integrated Federal-State system will provide all the advantages of a completely Federal system and at the same time preserve the advantages of independent State responsibility. The part of the Federal Government in providing this integration will be described in the next chapter. CHAPTER XIII FEDERAL RESPONSIBILITIES The Social Security Act establishes a cooperative Federal-State program in the field of unemployment compensation. The States have the direct responsibility for legislation and for administration. The framing and passage of laws, the organization of the agency and the selection and appointment of adequate personnel, the administration of the law in such manner as to pay promptly the benefits when due, are all State functions. Each State, to administer its law, must collect the contributions due, keep adequate records of wages and employment, and maintain procedures for the payment of benefits to eligible unemployed individuals. Two Federal agencies are specifically charged under the Social Security Act with the administration of its provisions relating to unemployment compensation: the Social Security Board and the Treasury Department. A third Federal agency, the United States Employment Service, enters into the administration of unemployment compensation indirectly, but nevertheless vitally. BUREAU OF UNEMPLOYMENT COMPENSATION The role of the Social Security Board in the administration of unemployment compensation is somewhat secondary. Its relations with the State agencies arise from the requirements of the Social Security Act that the Board certify as to the conformity of the State law, and its administration, to the requirements of Titles III and IX of the Act, and that it certify for payment to the 205 206 UNEMPLOYMENT COMPENSATION States such moneys as are necessary for the proper administration of their laws. The States are required to make such reports to the Social Security Board as the Board may require. The Board is also charged, by Section 702 of the Social Security Act, with the "duty of studying and making recommendations as to the most effective methods of providing economic security through social insurance, and as to legislation and matters of administrative policy concerning... unemployment compensation..." The Bureau of Unemployment Compensation is the operating bureau of the Board with respect to unemployment compensation. With the assistance of the General Counsel's Office, the Bureau of Research and Statistics, the Bureau of Accounts and Audits, and the Office of the Actuary, it has the responsibility of advising and assisting the States on legislation, analyzing State laws submitted to the Board for approval under Title IX and recommending appropriate action, certifying the State law for administrative grants under Title III, and giving administrative aid and advice on the administration of unemployment compensation. The Bureau consists of the Director's Office and three operating divisions-the Division of Legislative Aid, the Division of Administrative Aid, and the Division of Grants. The Director's Office is responsible for the formulation of Bureau policy and coordinates the work of the Bureau in line with that policy. The Director's Office also controls the activities of the Bureau's regional representatives and directs the Bureau's programs for interstate conferences and personnel training. The Bureau maintains a regional representative in each of the twelve regional offices of the Board. These unemployment compensation representatives maintain contacts with the State agencies for the purpose of promoting cooperative relationships and understanding, assisting the FEDERAL RESPONSIBILITIES 207 States in drafting amendments, aiding them in their administrative problems and budgetary requirements, and observing and reporting, on behalf of the Bureau, the progress in the States. The functions of the three divisions subject to the Director are, respectively, 1. The establishment of legislative standards and the rendering of legislative aid to the States in the drafting of unemployment compensation laws and amendments to laws which meet the requirements of Titles III and IX of the Social Security Act, and in the clearance of information; 2. Administrative and procedural aid to States in setting up their organizations, in determining their personnel needs and training programs, and in establishing their rules and regulations; and liaison between the United States Employment Service and the State unemployment compensation administration; 3. Certification of grants to the States for administration of their unemployment compensation laws and aid to the States in processing State budgets submitted for grants. Legislative Aid-The Bureau of Unemployment Compensation had large demands placed upon it by the States for assistance in drafting legislation. It responded by making its staff available to the States for help in the treatment of the technical and legal problems involved. This help was given only upon formal request, usually by the Governor, his representative, or a legislative committee. The technical assistance rendered took the form of advice on the requirements of the Federal Act, comments on the administrative implications of proposals which had been made, and suggestions for technical improvement in draftsmanship and administrative feasibility. Much of the work of the Bureau in this respect was limited to correspondence and took the form of the review of proposed legislation. However, the Bureau was able to send to a number of States representatives who 208 UNEMPLOYMENT COMPENSATION were able to assist them at the time the legislation was being drafted or revised. They also explained to legislative committees the position of the Bureau with respect to the requirements of the Federal Act and the Bureau's interpretation of the meaning of the Federal requirements concerning "such methods of administration as are reasonably calculated to insure the full payment of compensation when due." This service in many cases started many months prior to the beginning of the State's legislative session and continued to the last hour of the session. This legislative service has, of course, been increasingly devoted to amendments rather than to new laws. To a large extent the standards on which legislative aid is predicated are clearly set forth in the Social Security Act as requirements which a State law must meet either to permit employers to obtain credit against the Federal tax for their contributions or to enable the State administrative agency to receive Federal grants for administrative purposes. However, certain requirements, especially those essential to certification for grants, need considerable interpretation. Such especially are those which require that the State law provide such methods of administration as are reasonably calculated to insure the full payment of compensation when due and which afford an opportunity for a fair hearing before an impartial tribunal to any individual whose claim has been denied. Provision for "such methods of administration as are reasonably calculated to insure the full payment of compensation when due" include the creation of an administrative agency sufficiently empowered to discharge its responsibilities under the law, safeguards for the collection and disbursement of the unemployment fund and for the monies granted by the Federal Government for the payment of administrative costs; provisions for securing necessary reports from employers, whether or not FEDERAL RESPONSIBILITIES 209 they are subject to the payment of contributions; power to collect contributions; appropriate technique to assure sufficient authority over the employment service to facilitate the payment of benefits through such agencies; coverage provisions without gaps and loopholes whereby employers might evade or escape their responsibilities and employees might be left unprotected; adequate enforcement and penalty provisions. The requirement that an opportunity for a fair hearing before an impartial tribunal be afforded to any individual whose claim has been denied includes provisions requiring notice of hearing, disqualification of any interested party from an appeal tribunal, availability of records to the claimant, and limitations of counsel fees. In addition to the administrative standards which are based on the requirements of the Social Security Act, others have already grown out of practical experience in administration. Whereas the Board has no authority to enforce these additional standards it would be remiss in its obligations to the States if it failed to recommend them. One of the most concrete forms of the Bureau's activities in legislative aid to the States was embodied in the draft bills for State unemployment compensation laws. Drafts of two bills were prepared, one of the pooledfund type, one of the reserve-account type. These draft bills met the minimum requirements of both titles of the Social Security Act concerned with unemployment compensation and were intended to present some of the various alternative proposals that a State might wish to consider in drafting legislation. They were in no sense "model" bills, but were merely presented as representing the best opinion of the staff of the Bureau of Unemployment Compensation on the problems with which the legislation is concerned. They contained (1) minimum requirements of the Social Security Act; (2) recommendations of the Bureau of Unemployment Compensation on tech 210 UNEMPLOYMENT COMPENSATION nical and administrative provisions, for example, the handling of the unemployment fund by the creation of three accounts, a clearing account, a trust fund account, and a benefit account; (3) provisions on which there seems to be almost unanimous opinion, for example, those conditions which should disqualify a claimant from unemployment compensation; and (4) alternative provisions on controversial matters. The Committee on Economic Security had prepared draft bills prior to the creation of the Social Security Board. The first draft bills of the Board were issued on January 1, 1936. These were revised and improved in the draft bills of September 1, 1936, but no great changes were made. However, between September 1936, and January 1937, it became apparent that it would be very advisable to simplify the basis on which the weekly benefit amount and the duration of benefits should be computed. The January 1, 1937, revision of the draft bills substituted recommendations for the use of reports of quarterly wages to replace weekly reports of wages and hours for the computation of the weekly benefit amount and the duration of benefits. This proposal, although made chiefly for administrative reasons, involved such substantive changes that the advice of interested groups was sought before it was made. On October 27-29, 1936, the Bureau held a series of conferences with representatives of employers, employees, and experts in unemployment compensation, in order to obtain the opinion and advice of these groups with respect to the proposed changes. A State law includes not only the enacted portion which is to be found in the statutes, but also all rules and regulations and interpretative decisions which have been made pursuant thereto. Hence, any legislative standards must apply to them as well. The Bureau classifies, codifies, and distributes to State agencies all the interpretative decisions of the States relative to unemployment com FEDERAL RESPONSIBILITIES 211 pensation. This service affords an opportunity for one State to consider the rulings of others and for States to bring their rulings into reasonable conformity with each other. The rulings of the Bureau of Internal Revenue are also classified and distributed. The Bureau of Unemployment Compensation will soon have the function of classifying and disseminating decisions on benefit claims. Administrative Aid-The immediate tasks of all new State unemployment compensation agencies are to determine the employers subject to the law and to collect contributions. In order to do this, they need to build up an organization, to obtain quarters and equipment, to make necessary rules and regulations, and to plan forms and procedures. The Bureau of Unemployment Compensation has responded to the requests of the States for counsel and aid in all of these activities. The Bureau has outlined standards of administrative procedure on the basis of both social policy and practical technique, and has recommended the acceptance of such standards by the States. Among the standards drafted were Procedures for the Determination of Coverage (May 1936), Procedures in the Collection of Contributions (June 1936), and Procedures in the Payment of Benefits (July 1937). States with recently enacted laws have been assisted in the preparation of their initial announcement to employers and the instructions to employers accompanying the first form for the summary contribution report. The Bureau has also given aid in drafting liability reports; explanations of the liability and contribution provisions of the law; question-andanswer bulletins; contribution report forms, with instructions; and rules and regulations. The States have also received aid in outlining personnel standards. The Bureau has readily cooperated with those States with civil-service laws or with provisions in their laws for the merit selection of personnel. At 212 UNEMPLOYMENT COMPENSATION the request of the States, classification plans have been drafted to establish channels of authority, and to produce proper relationships between salary schedules for different classes of positions. State officials responsible for classifying personnel come to Washington for training in the Classification Section of the Personnel Division of the Board. Through the cooperation of the Analysis Section of the Personnel Division of the Board, the Bureau has been able to supply suggested examination questions for States to use in selecting personnel by merit, and to supply technicians to go into the States and advise the administrators of the merit system on methods and procedures. The Bureau has recognized its responsibility for planning for the future. In order to assist States with advice on procedures for the payment of benefits, studies have been made of the benefit procedure in Wisconsin, the only State which is now paying unemployment compensation. Test studies have been also carried on in Oregon and New York and draft procedures have been developed and distributed to all the States. The Bureau has also concerned itself with the availability and adequacy of the employment service at the time that benefits will become payable. The use of the employment service in Wisconsin has been studied, with special reference to the extension of the employment office facilities to rural areas. As has been indicated, the performance by the public employment offices of the additional responsibility involved in the payment of unemployment compensation makes essential the coordination of employment services as an indispensable part of unemployment compensation administration. "Without an effective placement service, the objectives of unemployment compensation cannot be achieved. Only to the degree that the employment service functions in relation to the whole labor market does it serve as a factor in preserving the solvency of the unemployment compensa FEDERAL RESPONSIBILITIES 213 tion fund." 1 This means a greatly expanded employment service, and it is evident that this expanded service will require grants from the Social Security Board in amounts greater than the Federal funds now available to them under the Wagner-Peyser Act. A most important step toward coordinating the employment service and unemployment compensation agencies and especially toward adjusting the fiscal problems related thereto, was taken on March 30, 1937, when the Department of Labor and the Social Security Board entered into an agreement. According to the terms of this agreement the Department of Labor, through the United States Employment Service, and the Social Security Board, through the Bureau of Unemployment Compensation, will, with respect to all matters affecting State employment services, act as if they were a single agency. Joint action on the part of the Social Security Board and the Department of Labor will be pursued in assisting the States in the administration of State employment services as an integral part of the State unemployment compensation system. In accordance with the agreement, the Secretary of Labor and the Board appointed a joint coordinating committee to integrate their programs with respect to State employment services and to assure unity of action on the part of the Bureau of Unemployment Compensation and the United States Employment Service in their relations with the State employment services. Grants to States-The Bureau of Unemployment Compensation has developed procedures and forms to be used by the States in connection with the preparation and submission of their requests for funds for administration and for reporting their expenditures. The forms, so far as practicable, conform with those used by the United 1A. J. Altmeyer, "Coordination of Employment Service and Unemployment Compensation Administration." Address before the International Association of Public Employment Services, May 6, 1937. 214 UNEMPLOYMENT COMPENSATION States Employment Service, since grants are given by both the United States Employment Service, under the Wagner-Peyser Act, and the Social Security Board. Up to the present the Board has approved budgets and made grants on a quarterly basis. At first the new State agencies found it difficult to estimate their requirements accurately for a three-month period and would have found it almost impossible to project such estimates for an entire year. However, it may be possible in the future, after the State agencies have been in operation for two or three years, to approve budgets on an annual basis, even though grants may continue to be made quarterly. The budgets of the States are now beginning to include funds required by State employment offices. These offices now obtain their funds on the basis of an annual budget submitted to the United States Employment Service. Now that these offices are receiving funds under the Social Security Act as well as under the Wagner-Peyser Act, added force is given to the advisability of having such budgets on a comparable annual basis. The Bureau of Unemployment Compensation has furnished technical assistance to a number of States in connection with the preparation of the quarterly budgets which they submit to the Board. This aid was especially needed during the period of initial grants while the procedures for the proper handling of fiscal affairs were being evolved. Since all the necessary expenses for proper administration of the State laws are paid by the Federal Government, the Bureau of Unemployment Compensation has the duty of seeing that this money is wisely allotted and efficiently spent. Prior to July 1, 1937, certifications for grants had been made for an amount in excess of $10,000,000.2 In passing upon the State budgets sub2 See Table 2, Appendix III. FEDERAL RESPONSIBILITIES 215 mitted, the Bureau has been careful to see that the proposed expenditures for the various budgetary items are reasonable, that only such items as are believed necessary at the particular time are included, and that the actual organization and procedure of the State agency are such as will provide efficient administration in the most economical manner. The money granted must be kept within the reasonable limits contemplated by Title III. Considerable work is yet to be done in connection with the establishment of standards of administrative cost, based upon the experience of those State programs which have been longest in operation. Cost standards must be developed against which the State administrative expenditures may be measured. The maximum prices which should be paid for office furniture and equipment, the salaries of personnel, and the appropriateness of rental values and other expense items must be determined. The Bureau, by the terms of the Federal Act, must investigate the appropriateness of expenditures and, on the basis of a study of the ratio of varying cost factors, must develop standards for its appraisal of State budgets. As far as possible, the Bureau uses standards which have been developed within the State with respect to such matters as salary scales, travel regulations, and the use of a State purchasing department. The Bureau finds it important to maintain field contacts with the State agencies adequate to provide current information on the administrative and fiscal requirements of the States. Until recently, most of the personal contact with the State agencies has been through visits of the State representatives to Washington, although in certain specific cases technical advisers of the Bureau's staff have visited the States in connection with fiscal matters. It is contemplated that henceforth the Bureau representatives stationed in each of the twelve regional offices of the Board will render valuable and necessary assistance to the States in the preparation of their bud 216 UNEMPLOYMENT COMPENSATION gets, and, by sending in current first-hand reports concerning fiscal affairs, will aid the Washington ataff in its analysis of budgets submitted. The Board's Bureau of Accounts and Audits maintains an inventory system of equipment purchased by State agencies and will make regular quarterly field audits in every State. This inventory and audit provides valuable information in connection with the consideration of budgets and requests for funds, as well as in determining that grants have been properly expended. The Social Security Act does not invest the Board with any penalty power in the case of improper administration, other than that of withholding future grants until a defective situation is corrected. Section 303 (b) of the Act provides that if the Board, after permitting the State agency reasonable notice and opportunity to be heard, finds that the administration of the law has resulted in the denial of full benefits to a considerable number of eligible applicants, or in failure to comply substantially with the requirements for grants set forth in Section 303(a), it shall make no further grants until the situation has been corrected. Under such circumstances, it has appeared better policy to take steps to prevent such situations from arising than to set up penalties to take effect after the harm has been done. It is necessary, however, to adhere to the policy of keeping control to the minimum, in order that the State agencies will not be unduly burdened in their administrative activities. Since the unemployment compensation administration is an agency of the State government, it may be subjected, in addition to Federal control, to varying degrees of control which the State government exercises. If the administrative authority were hedged about too tightly by restrictions from both the Federal and State governments, its activities would be seriously hampered. The question of the extent to which grants-in-aid FEDERAL RESPONSIBILITIES 217 should be made to cover expenses of State agencies other than the State unemployment compensation agency has offered some difficulty. Incidental services are rendered to the unemployment compensation agency by such other agencies as the civil-service commission, the attorney general's office, the State auditor, treasurer, or comptroller. The State tax commission, the attorney general, or the State employment service, on the other hand, may perform major functions for unemployment compensation in addition to their regular and normal duties. If all auxiliary services were financed by Federal grants for unemployment compensation administration, it would be impossible to limit the extent to which such requests would be made. Many of these services are also performed for other branches of the State government. For example, in California and Virginia, the State auditor is required by law to audit the books of all of the various State departments, of which the unemployment compensation agency is only one. In certain cases, however, various State agencies perform special services of a type which would seem to be legitimate unemployment compensation functions to be financed by Federal grants. For example, in Utah the State tax commission is required under the unemployment compensation law to establish a separate division for the purpose of collecting the contributions due under the Act, and thus to perform a function ordinarily performed by a State unemployment compensation agency. This is a direct service and not an incidental service of a type customarily performed as a part of the function of the State tax commission. Similarly, the State employment service is the agency through which the unemployment compensation benefits will be paid. Payment of benefits will be made by these offices, however, in addition to their regular placement functions, and the extra expense will be met by Federal grants to the States for unemployment compensation administration. 218 UNEMPLOYMENT COMPENSATION Long consideration of these problems led to an announcement by the Board, in February 1937, of the policy of refusing to pay the expenses of other State agencies. Two exceptions to this rule were admitted: (1) the Board may pay monies to another agency where it is the general fiscal practice for such outside service agencies to receive their necessary administrative funds by a charge upon each State agency based upon the service rendered rather than by general legislative appropriation; (2) the Board may pay such monies where the service performed by such outside agency is a distinct and additional function of a type customarily performed as a function of an unemployment compensation agency and not of a type performed as a part of the regular service rendered by such outside agency to other State agencies, where the unit of such outside agency performing such services operates as an integral part of the unemployment compensation agency, and where its sole function is the servicing of such unemployment compensation agency. Examples of the latter type of exception are the special unemployment compensation functions of the Utah tax commission or the functions of an assistant attorney general who spends all his time on the work of the unemployment compensation agency. Special consideration was given by the Board, in cooperation with the United States Employment Service, to the problem of allocation of funds between the State employment services and the State unemployment compensation administration. The decision finally reached was as follows: 1. To regard the State employment service and the State unemployment compensation system as a unified service. 2. To require of the State, prior to certification of grants to provide for the cost of the State's employment service as a part of the State's unemployment compensation system, either: (a) an affirma FEDERAL RESPONSIBILITIES 219 tive showing on the basis of which the Board finds that sufficient sums (exclusive of funds received under Title III) have been, or will be, made available and are being, or will be, used to provide for the necessary cost of a proper State employment service for workers not subject to, and for employers to the extent that such service is not required under, the State unemployment compensation act, and of such other activities of the State employment service as are not essential to the proper administration of the State unemployment compensation act; or (b) in the absence of such a finding, the Board will assume that the amount required to cover such necessary cost will have been provided, if the Board finds that with respect to the fiscal year the State has made, or will make, available to the State employment service and such service is using, or will use, a sum equal to the total amount available to the State upon acceptance of the Wagner-Peyser Act and upon matching by the State of its maximum annual apportionment under that Act. 3. To accept its responsibility for developing and providing funds for the State employment service, for insured workers, as a part of the State unemployment compensation system when benefits become payable. 4. To supplement the sums required to be available to the State under paragraph 2, as the need for such additional funds in connection with the proper administration of its unemployment compensation act is established by the State. This supplement, as part of the administrative grant to the State, shall be in such amount as is necessary to assure the effective operation of a State-wide employment service as an integral part of the State unemployment compensation system. 5. To cooperate with the United States employment service in the maintenance and further development of standards for State employment services, in order that the Board may have additional and reasonable criteria on which to base future grants for the expansion of the State employment services. 220 UNEMPLOYMENT COMPENSATION OTHER BUREAUS OF THE SOCIAL SECURITY BOARD The Bureau of Research and Statistics of the Social Security Board has performed an important part of the Federal Government's obligation to assist the States in providing a sound foundation for their unemployment compensation programs. Necessarily much of its contribution has been made through the medium of the Bureau of Unemployment Compensation. The most apparent aid was given in the development of the industrial classifications and in the direct application of the classifications in the States. Representatives of the Bureau of Research and Statistics visited the States as soon as the "status" or liability reports had been received from the employers and participated in the classification of employers. The Bureau of Research and Statistics, in cooperation with the Bureau of Unemployment Compensation and the various State representatives, has developed basic statistical reporting requirements. The statistical reports are to be made to the Social Security Board and have already been made known to the State agencies. The Bureau has made a number of spot studies based upon State records, such as the treatment of "other remuneration" and "tips" in the reporting of wages, and the time involved and the results secured from computing benefits according to several proposed formulae. It has also made a number of studies or analyses of special problems, such as those of the seasonal character of industries, multi-state employment, merit rating, partial unemployment, and partial benefits, and the stamp system as a method of collecting contributions and determining benefits. It has undertaken to measure the progress of administration made by State agencies by such standards as the degree of their completeness of coverage and the level of delinquencies. Not the least valuable phase of its work is the survey of such problems as the solvency of State funds in the light of current and probable rates of employment and unemployment. FEDERAL RESPONSIBILITIES 221 Questions involving legal interpretations of the provisions of Titles III and IX are decided by the General Counsel's Office of the Board. Consequently, the Bureau of Unemployment Compensation relies on the General Counsel's Office for legal advice concerning the approvability of bills and laws under these titles. The draft bills and special provisions prepared at the request of the States have been framed jointly by both Bureaus, the Bureau of Unemployment Compensation being responsible for questions of policy. One function of the General Counsel's Office which has assumed major proportions is that of aiding the Bureau in considering the proposed rules and regulations submitted by the State agencies, and to certify formally that the rules and regulations meet the legal requirements of Title III. The General Counsel's Office also considers the effect of court decisions, amendments to the law, and any other acts of the State agency which may affect continuing conformity of the State law with Titles III and IX. The Bureau of Accounts and Audits, through its Unemployment Compensation Finance Division, has assisted the States to establish adequate record keeping systems, and to maintain efficient internal accounting procedures. The work of establishing recording procedures is primarily constructive accounting and has been one of the most vital services given to the States. The Bureau of Accounts and Audits has also worked with the Bureau of Unemployment Compensation in the development of procedures and forms for audit reports and for inventory equipment records and it transmits to the Bureau of Unemployment Compensation the results of its audits. THE TREASURY DEPARTMENT The Bureau of Internal Revenue has been given a most important part to play in the Federal-State unemployment compensation program. Prior to August 31, 1937, it 222 UNEMPLOYMENT COMPENSATION had collected $69,232,703.16 under Title IX of the Social Security Act. Table 3 of Appendix III shows the collections, by States. It must be realized that with respect to fifteen of these jurisdictions, there was no offset against the tax, since no unemployment compensation laws existed. In its collection of the excise tax levied by Title IX, the Bureau of Internal Revenue was compelled to make certain rulings and regulations which were of great significance to the States. Treasury Regulations No. 90, and all the rulings made in the interpretation of the taxing provisions of the Act have been of immeasurable assistance to the States in determining the existence of the employer-employee relationship, the precise interpretation to be given to such terms as "agricultural labor," "domestic service," and "Federal instrumentalities," and similar questions involved in the application of the law. The Social Security Act requires the Secretary of the Treasury to maintain an Unemployment Trust Fund in which the States may deposit their State unemployment funds in trust. These deposits to the credit of the Unemployment Trust Fund are made with the Treasurer of the United States, Federal Reserve Banks, or member banks of the Federal Reserve System designated by the Secretary of the Treasury to receive such deposits. The Fund is invested as a unit, but the Secretary of the Treasury maintains a separate book account for each State agency and credits quarterly, on March 31, June 30, September 30, and December 31, of each year, to each account, on the basis of the average daily balances of such account, a proportionate part of the earnings of the Fund for the quarter ending on such date. Immediately following the quarterly credits to the respective State accounts, the Office of the Commissioner of Accounts and Deposits advises each State agency having monies to its credit in the Unemployment Trust Fund, as to the amount of quar FEDERAL RESPONSIBILITIES 223 terly earnings so credited but subject to independent certification and review in the Treasury Department. Section 904 (f) of the Social Security Act provides that "The Secretary of the Treasury is authorized and directed to pay out of the Fund to any State agency such amount as it may duly requisition, not exceeding the amount standing to the account of such State agency at the time of such payment." Payments out of the Unemployment Trust Fund are, therefore, made only on requisition of the State agency, approved by the Secretary of the Treasury. In order that a requisition for withdrawal may be honored, it is necessary that there be filed with the Treasury Department by each State agency having funds to its credit in the Unemployment Trust Fund, the original signed opinion or certification by the attorney general of its State, or a certified copy thereof, to the effect that the individual over whose signature the requisitions are made has duly constituted authority under the State law, and, under resolution of the State agency, if so required by law or regulations, is authorized to act in that capacity. Table 4 in Appendix III shows the month-by-month investment of the Unemployment Trust Fund since the initial investment in February 1936. There is also shown the type of security in which the investment is made, including the interest rate and maturity date. Section 904 of the Social Security Act restricts the investment of the Fund to obligations of the United States or to obligations guaranteed as to both principle and interest by the United States. As may be seen from the figures in the Treasury Monthly Statement on the public debt of the Federal Government, the Fund has been invested thus far in a special series of short-time certificates of indebtedness rather than in regular outstanding obligations. A small but fluctuating uninvested cash balance constitutes the remainder of the assets and is the 224 UNEMPLOYMENT COMPENSATION result of a brief lag between deposits and investment and of the necessity of meeting occasional withdrawals. Additional securities are purchased for the Fund as deposits are received from the States or as certificates mature and are reinvested. Certificates purchased during the fiscal year 1936, amounting to $18,909,000, matured on June 30, 1936, and were redeemed at that time. The amount shown in the column "investment" for July is made up partly of funds newly available because of deposits in the Trust Fund and partly of funds reinvested when the series matured on June 30, 1936. The interest rate on these certificates of indebtedness has thus far remained fixed at 21/2 per cent. Section 904 of the Social Security Act requires that the interest on investment of the Fund, if in the form of special obligations, is to be at a rate approximately equal to the average rate of interest borne by all interest-bearing obligations of the United States. A further provision affecting accumulations in the Trust Fund is that in Section 904 of the Act, which authorizes and directs the Secretary of the Treasury to pay out of the Fund such amounts as may be duly requisitioned by States for the payment of unemployment benefits. CHAPTER XIV STATE ADMINISTRATIVE RESPONSIBILITIES Seldom have States embarked upon programs presenting greater or more pressing administrative responsibilities than those imposed by the State unemployment compensation laws. The laws of twenty-two States require the payment of benefits in January 1938. Twelve of these laws were passed in November or December of 1936; in thirteen months' time each of these States has to organize the State agency (in eight of the twelve States new agencies were created), determine which employers are subject to the law, collect contributions for 1936 and 1937, collect employment records for 1937 for each employee covered by the law, establish procedures for the payment of benefits, and create a State-wide system of employment offices through which to pay benefits. This is a stupendous undertaking, especially when it is realized that the whole course is almost uncharted. There is no place where guidance is to be found for the development of procedures for the recording and use of employment data to calculate the rate and duration of benefits or for procedures for the payment of benefits for partial unemployment. The requirements for the payment of benefits are not paralleled or even approached in the laws of foreign countries. The experience of foreign countries in the techniques of calculating contribution and benefit rates is of little value / to the United States, for none of the foreign systems attempts to relate benefits closely to wages. The existingsystem of employment offices is completely inadequate for the payment of benefits; twelve States at the end of 225 226 UNEMPLOYMENT COMPENSATION 1936 were not even operating an employment service affiliated with the United States Employment Service; the employment services of the thirty-six States and the District of Columbia, together with the National Reemployment Service and that of one non-affiliated but cooperating employment service, provided facilities for scarcely more than half of the gainful workers in the United States. Add to these basic difficulties the necessity of drafting and enforcing numerous rules and regulations, instructions, and directions on the details of recordkeeping and reporting, defining the border lines between covered and uncovered employments, interpreting the subtle meanings of the term "wages" upon which contributions are based. In the light of these problems the progress which has been made in the few months which have elapsed since the passage of the State laws gives reason for encouragement. ADMINISTRATIVE ORGANIZATION l The problems of organization have probably been most acute in these States in which the laws created new agencies for the administration of unemployment compensation. In approximately half of the States, the administration of unemployment compensation was placed in existing State agencies already administering labor laws -the department of labor or an industrial commission. By so doing, much was gained, not only in making readily available the experience accumulated by these existing agencies but also in time-time which would otherwise have been spent in selecting administrative personnel, locating office space, developing contacts, and obtaining assistance from other State agencies. Where the State employment service was already in the hands of the agency designated to administer unemployment compensation, it made unnecessary a radical change in the ad STATE ADMINISTRATIVE RESPONSIBILITIES 227 ministration of the employment service. Nevertheless, in almost all cases, it did not avoid the need to establish a new department or division or the necessity for mastering a new field of social legislation in which few are well-versed, and organizing an agency capable of winning the respect of employers, workers, and the public generally. SELECTION OF PERSONNEL It was clearly recognized, to some extent by the legislatures and to a marked extent by those charged with the administration of unemployment compensation laws, that successful administration was vitally dependent on the careful selection of competent personnel. Yet, since unemployment compensation is such a new development in this country, the acquisition of a skilled technical staff was, and remains, a challenge to the ingenuity of the most competent administrators. There are few persons in the country with proper training for the jobs required. The States had to look to public administrators, labor economists, statisticians, accountants, labor-law administrators, and employment office personnel. The laws of eleven States' require that appointments be made in accordance with the established civil-service procedure in the State. This type of provision was doubtless of material help to those States, enabling them to insist upon a standard of qualifications that might not otherwise have been attainable. Only three States-the District of Columbia, Louisiana, and Texas-make no reference to the selection of personnel on a merit basis. A training program in the details of administration! of unemployment compensation has been found essential] Such a training program includes an examination of the unemployment problem, the development of unemploy1Arkansas, California, Colorado, Connecticut, Illinois, Massachusetts, Michigan, New Jersey, New York, Ohio, and Wisconsin. 228. UNEMPLOYMENT COMPENSATION ment compensation in this country and abroad, the provisions of the Social Security Act, and an analysis of State unemployment compensation laws. The close tie-up between unemployment compensation and the employment service makes it necessary for the staff of each division to know and understand the methods and objectives of both. In addition, some knowledge of the type of problems to be encountered in actually administering the law must be drawn from all available experience. The whole v training program must be definitely oriented toward the payment of benefits. Without some training program of this kind, the unemployment compensation administrative agency might easily develop into an organization which collects and pays out money, without any real appreciation of the actual task set for it. One of the greatest difficulties encountered in the selection of adequate personnel is the question of salary scales. v While salaries offered to the professional and technical staff of the unemployment compensation administration had to be such as to attract competent personnel, at the same time they could not be out of line'with salaries for similar work being done in the regular departments of the State government. This problem is Ifurther complicatedl because, while the unemployment compensation agency is in most cases considered to be an integral part of the regular State government, the salaries of staff members' are not paid from regular State revenues but from revenues of the Federal Government. In addition, persons in the public-employment service in the State receive / their salaries from matched Federal and State funds. In many cases, the employment service and the unemployment compensation personnel will be doing related work, sometimes in the same offices. 4 Under such circumstances, variations in salary schedules will inevitably react upon the quality of performance and morale of the staff. STATE ADMINISTRATIVE RESPONSIBILITIES 229 DETERMINATION OF COVERAGE Once the State unemployment compensation administration is organized, staffed, and implemented with funds, its first task is the determination of what employers are actually subject to the law. /An employer may be said to be subject when the services his employees perform fall within the definition of employment in the State law and the employer has the prescribed number of employees for the required period./ Since the Federal payroll tax levied by Title IX applies throughout the country to all employers who have eight or more employees in employment, as defined in the Social Security Act, whether or not they operate in States with unemployment compensation laws, there is reason for following the rulings of the Bureau of Internal Revenue on the coverage of employment subject to the Federal tax, in order that every employer who contributes to the State fund may obtain the maximum tax credit allowable. Such a procedure is, of course, impossible if the coverage provisions of the State law are different from the provisions of the Social Security Act. /Commonly State laws have broader coverage than the Federal tax] In addition, the Bureau of Internal Revenue has ruled that employers can get credit only for the contributions paid to the State fund on "employment" as defined in the Federal Act. Technicalities of coverage have beset every State administration, especially in certain types of employment in which the employer-employee relationship is not very clear. /The determination of the employing relationship is especially difficult when sub-contractors, leases, or contracts intervener Also among the most difficult interpretations of coverage are thosetrelating to exempted services, particularly those involving the fine distinctions between agricultural labor and certain types of trading in, or processing of, agricultural products.( Not only are clearly defined rulings on these questions important from 230 UNEMPLOYMENT COMPENSATION the point of view of the State administration, but they are significant in the effect these decisions may have on the future course of employer-employee relations. One State considered it necessary, in drafting a form designed to reveal the status of salesmen and agents, to ask reports on the following points: whether the worker is furnished with transportation, drawing account, expense account, office facilities, samples, business cards, order blanks, price lists; whether he is free to sell noncompetitive lines, to sell competitive lines, or to engage in other employment; whether he is required to attend sales meetings, work fixed hours, make any minimum number of calls, have the employer's approval of sales, make reports, collect accounts, perform other duties in addition to selling, follow instructions, follow a certain policy, or furnish a surety bond; whether the worker is restricted in territory, selling prices, terms and conditions of sale, or persons to whom sales may be made; who carries the accounts, collects the accounts, and stands the losses if the goods are sold on credit; whether assistants are engaged and, if so, subject to whose control, by whom paid, by whom discharged, and whether hired with knowledge and consent of employer; whether the employer has the right of discharge and whether the worker can terminate his services at any time; the mode of payment for the services and the interval of payment; whether the worker's name is on the pay roll; whether the services performed by the worker are in the usual course of the commercial activities of the employer; and whether the services are performed in the worker's or the employer's place of business. A copy of the contract or agreement between the employer and the worker was also required. /By acting as a clearing agency for the States, the Bureau of Unemployment Compensation has kept each State informed concerning the regulations of all other States./ In this way the State can make its decisions more promptly and can base them on actual experience STATE ADMINISTRATIVE RESPONSIBILITIES 231 and cognizance of the issues involved in any specific rulings. If, within the limits possible under the varying provisions of State laws, decisions on such matters can be made uniformly throughout the United States with common reference to the rulings of the Bureau of Internal Revenue on similar matters, a large amount of confusion on the part of both employers and employees will be avoided. The question of the coverage of interstate employmentV was one of the most difficult that faced State agencies. Originally the State laws did not treat interstate employment uniformly. Some of them covered the entire employment in which all or the greater part of the work was performed in the State, while others covered the entire employment when service performed elsewhere was incidental to the service performed within the State, provided that no contributions on such services were required by another State. Still others included service under a contract of hire made within the State if some service was also performed in the State, provided no contributions on such services were required by another State. In whatever way coverage of interstate employment is determined, it is clear that uniformity of treatment by the different State agencies is essential. The fact that forty/ laws, many of them by amendment, now have a uniform definition of employment is encouraging evidence of the ability of the States to work together and of the possibility of success with a Federal-State plan of unemployment compensation. This definition recognizes the right of a State, under certain circumstances, to collect contributions and pay benefits on the basis of employment in other States. Even if all States adopt a uniform definition of employment, however, and that definition uses tests which, if applied generally, would result in mutually exclusive jurisdictions, there still remains the need to interpret uniformly such terms as "incidental work" and "localized work" and to define the time unit upon which 232 UNEMPLOYMENT COMPENSATION the coverage is based. And it does not appear that any definition will completely obviate the necessity for reciprocal agreements between States for special cases. EMPLOYERS' INITIAL STATEMENTS In order to obtain a list of subject employers, almost every State drew up a report form for an initial statement, or status report, to be filed by employers indicating their acceptance of coverage under the State law or stating the grounds for their statutory exemption on the basis of excluded employment or an inadequate number of employees. The Indiana Unemployment Compensation Board eliminated this step on the assumption that the records of the State Gross Income Tax Division contained a complete list of all subject employers. In the District of Columbia, where employers of one employee are subject, an employer census was taken. Each State sent the form for initial statement to a large mailing list of employers, made up from various directories and from the records of other State agencies, such as the department of labor, the workmen's compensation commission, and the tax department. The returns from employers acknowledging coverage constituted, in each State, the nucleus of the list of subject employers who would be circularized for contributions at an early date before the full list of covered employers was determined. A number of returns were eliminated as representing employing units clearly not subject to the law. Doubtful cases and employers who did not respond were followed up through correspondence by the State agency or through contacts by field agents. The spread of information concerning the State law, the collection of the Federal tax in January of each year, and the work of the field agents of the State agency will probably lengthen substantially the list of subject employers in each State. From the long-range point of view, STATE ADMINISTRATIVE RESPONSIBILITIES 233 the determination of coverage is F continuing function, as businesses are started or reach sufficient size to be coveredl The State agencies are cognizant of this fact and have arranged, in various ways, to keep their lists of subject employers up to date. The States used a variety of announcements for their initial statements to employers, ranging from a postcard form for employers claiming exemption, to a four-page form with sections for employers in subject, non-subject, and voluntary categories. Most of them followed, in general, the draft initial statement prepared by the Bureau of Unemployment Compensation. /Usually the forms included questions concerning week-by-week employment in the period on which the coverage is based, with separate columns for total employees, excluded employees, and covered employees.! Obviously, reporting this information on a past period was a heavy task for small establishments, and most States have found it necessary to check a high proportion of doubtful returns. Efforts were also made to simplify the initial statement as much as possible. CLASSIFICATION OF SUBJECT EMPLOYERS In order to obtain comparable statistics on employment and pay rolls from various States, it is necessary to have employers classified by industry groups. This has involved assigning to each employer a serial number which reflects a major industrial classifications The Interstate Conference of State Unemployment Compensation Administrators, meeting in March 1937, resolved that "it is the sense of this Conference that the Social Security Board promptly should prescribe and require definite minimum standards for a basic plan of central reporting by the States; that this prescribed plan and rule provide for industrial classification into major groupings with latitude for subclassification to meet special State needs; 234 UNEMPLOYMENT COMPENSATION that a regular procedure for clearance with the States in setting reporting standards should be established and that, when established, such standards should be made mandatory on reporting States, consistent with differences in State laws, to assure reasonable uniformity of national figures for comparative purposes and for State and Federal administrative guidance." The Bureau of Research and Statistics of the New York Division of Placement and Unemployment Insurance studied this question with the cooperation of the Central Statistical Board of the Federal Government, the Bureau of Labor Statistics, and other agencies. A classification using two digits for industrial classification was recommended, which, while different from the classification used by the Bureau of the Census and the Bureau of Labor Statistics, would make possible comparison of unemployment statistics with earlier statistics issued by Federal agencies. The classification was adopted by the Social Security Board for use in unemployment compensation and old-age benefits statistics, although it was modified in application in the States. However, the original plan that employers should use the same serial identification number in reporting both to the Bureau of OldAge Insurance and to State unemployment compensation agencies was abandoned except for New York. It was found that differences in employer coverage, due mainly to differences in the size-of-firm coverage under the Federal old-age insurance plan and State unemployment compensation laws, the number of interstate employers under the Federal plan and State problems of districting required the use of two separate numbering systems. (Representatives of the Bureau of Research and Statistics of the Social Security Board, working in cooperation with representatives of the Bureau of Unemployment Compensation, classified employers in the States as soon as the initial statements became available. At the present time a seven-digit number is being used. STATE ADMINISTRATIVE RESPONSIBILITIES 235 Two of the digits indicate the industrial classification and are the ones in which the Social Security Board is interested. The States are also free to incorporate in their numbers digits indicating the area in which the employer is located, and a large number of States have done so. CLASSIFICATION OF COVERED EMPLOYEES To prevent confusion between employees having similar names on the State agency's records of earnings and claims for benefits, it has been necessary to assign a serial number to each employee. As has been pointed out in Chapter IV, this need was imperative under the Federal old-age insurance system which must maintain records of employees in all States, including employees of employers of one or more. Accordingly, the Bureau of Old-Age Insurance assigned account numbers to employees. In May 1937, duplicates of the old-age benefits employer and employee roster cards were made available to the State unemployment compensation agencies. Their availability to each State was conditional on an agreement by the State agency that the copies of the master cards would be kept in a confidential file; that they would be returned to the Social Security Board if and when the State agency found no further use for them; that the information obtained from the cards would be used only for the administration of the State unemployment compensation law; and that no information derived therefrom would be divulged to any other individual or agency. CONTRIBUTION PAYMENTS AND REPORTS All the States have been concerned with the technique of collecting contributions from subject employers and of determining what report forms shall accompany con 236 UNEMPLOYMENT COMPENSATION tributions. /In all the State laws, contributions are a definite percentage of wages, usually, but not always, amounting to 90 per cent of the Federal tax. ) By placing the contributions at this figure, employers operating in States with unemployment compensation laws are not subjected to any greater burden than employers in other States. Some States have also provided for contributions from employees, but only in Alabama, California, and New Hampshire did employee contributions begin in 1936. lAll the States have had to decide such questions as (1) how often contributions should be collected, (2) how the wage basis on which contributions are based should be defined, and (3) what information should be included in the reports submitted by employers. In Wisconsin, contributions have been accruing since July 1, 1934. In a number of States contributions have accrued on all wages payable for employment from January 1, 1936. This provision sprang from a desire on the part of the States to reduce to a minimum the Federal tax collections under Title IX. This meant that, in most States, contributions had accrued for several months before the State was ready to mail out the first contribution forms and start actual collectionsj All States provide for a summary contribution report to be filed when contributions are paid. These contribution reports require a statement of wages payable for employment over a specified period and the percentage calculation of contributions based upon those wages. The particular items on the contribution reports are largely determined by the provisions of the State law. A few States require a statement of the total pay roll, the payments for exempted employees, and, by subtraction, the payments for employment as defined in the State law. This was necessary in Indiana, where the law requires a calculation of merit rating on the basis of total payrolls rather than covered pay rolls. Under most State STATE ADMINISTRATIVE RESPONSIBILITIES 237 laws, information on wages payable to non-covered employees is not necessary. Most of the States provide that the pay-roll data forms shall show a separate enumeration for each pay roll ending with the period covered, on the assumption that it is easier for the employer to enter his report on the form and easier for the State unemployment compensation agency to check when pay rolls are audited by the agency. Wage Basis for Contributions —he most important decision with respect to contributions is the determination of the basis upon which they are to be collected, namely, the determination of covered employees and of the wages paid to them for employmentj The Bureau of Internal Revenue regulations are useful in interpreting covered employment and wages, although the definitions of wages in State laws differ so substantially from that in the Federal Act that there can be no absolute reliance upon the Treasury regulations in this respect. State laws / commonly provide for the inclusion, within the meaning of "wages," of gratuities or tips received by an individual in the course of his employment from persons other than his employers All State laws, as well as the Federal Act, include in wages the reasonable cash value of remuneration payable in any medium other than cash and gratuities paid by the employer. The purpose of these provisions is obvious-to make certain that contributions are collected and benefits are paid on the basis of total earnings. The State agency has the responsibility of making certain that all "other remuneration" is reported. They have attempted to do so in the instructions for filling out the contribution report form. Almost all States provide for separate reporting of "other remuneration" in each contribution report. The experience gained from these reports will furnish valuable information concerning the prevalence of payments in kind and in tips, the 238 UNEMPLOYMENT COMPENSATION amount of such payments, and the technique of collecting contributions on such payments. One State, in seeking to determine the values to be placed on meals, lodging, and other remuneration, has developed a form with sixty-four items to indicate the values agreed on with the employee on meals and lodging, the retail value of payments in kind actually used or consumed by the employee, and the type of lodging-bunk house, rooms, private dwelling, apartment - whether modern or not, furnished or unfurnished, with or without bath, with or without lights. Frequency of Collection-Much controversy has centered on the question whether contributions should be collected monthly or less frequently. LMost States are collecting them monthly in order (1) to reduce delinquencies, (2) to suit the convenience of the employer to the extent that he is already required to make monthly payments to the Federal Treasury under Title VIII of the Social Security Act, (3) to provide a regular inflow of money into the State fund to offset the regular payment of benefits, and (4) to provide current statisticsj These reasons have led the Social Security Board to rule that the methods of administration of a State unemployment compensation law are not "such as are reasonably calculated to insure the full payment of compensation when due," within the meaning of Section 303 of the Social Security Act, unless, not later than nine months after the effective date of the State law, contributions are required to be paid and are collected at intervals not greater than monthly. RECORDS AND REPORTS ON INDIVIDUAL EMPLOYEES The States have found it necessary to inform the employers concerning the records they will need to keep when benefits become due. LMost State acts require the determination of benefits on the basis of full-time weekly STATE ADMINISTRATIVE RESPONSIBILITIES 239 wages and quarterly earningsj However, following the example of the draft bills of the Social Security Board, credit for wages earned, on which benefit duration depends, begins in most States to accrue one year after contributions accrue, and a year before benefits are payable, thus permitting the State agency to postpone keeping these detailed records until the initial tasks were completed and it had acquired some experience in handling reports. Under the New Hampshire, California, District of Columbia, and Oregon laws, however, weeks of employment, on which benefit credit in those States depends, began on January 1, 1936, and, under the Mississippi law, on April 1, 1936. These States were therefore immediately confronted with the need to keep records for individual employees which other States could postpone until the following year. Opinion is divided as to the best method of obtaining these records for individual employees. There was some feeling, probably suggested by workmen's compensation experience, that the State agencies should not be interested in an employee's record until he became unemployed. On that occasion, the employer could file a report on the employee's employment record for such period as would be necessary to determine the employee's full rights to benefits. There has also been the contrary opinion that the State agencies must assume the responsibility for accumulating records of employment, because of the risk of loss of the employer's records, the impossibility of checking the records with the employee concerned after a long period of employment, and the necessity for estimating the demands to be made upon the fund. If the employee's wage record is to be reported only at the time of separation from employment, it would be combined with the separation notice (showing reason for separation) in a "wage and separation report." The arguments in favor of pay-roll reporting, on the. — -- - 240 UNEMPLOYMENT COMPENSATION one hand, and wage and separation reporting, on the other, are numerous. Among the objections which have been raised to wage and separation reporting are the following: 1. Employers may frequently fail to file their reports or be delayed in preparing them, by reason of a large number of lay-offs at the same time, thus occasioning delay in the calculation and payment of benefits. 2. Absences which really are "quits" may not at first be recognized as such, with the result that the employer will fail to return the wage and separation report promptly. 3. Unless accompanied by an extensive field audit, the wage and separation report method leaves much more opportunity for dishonest reporting than does pay-roll reporting. An employer reporting a complete pay roll must report correctly because he does not know in advance which of his employees will make subsequent claim for benefits and disclose that there has been false reporting. 4. Employers' records may prove to be deficient or to have been lost, or destroyed by fire, making it inadvisable to rely upon them for the maintenance of adequate reports. 5. Employers frequently discover that to go back over an employee's record at the time of termination of employment and to accumulate all the data necessary for a wage and separation report entails, in the aggregate, more work than would be involved in furnishing the agency with current reports. 6. In other cases, where employment is highly seasonal, the task of preparing wage and separation reports in all cases of termination of employment may involve more trouble for the employer than would current reporting. 7. Without pay-roll reporting it is impossible to determine the liability of the fund. This condition is obviously not compatible with sound insurance practices. In view of these objections it is generally believed STATE ADMINISTRATIVE RESPONSIBILITIES 241 that thejpethod of current pay-roll reporting should be the ruled while wage and separation reports should be permitted only upon special permission of the State agency. At an interstate conference held in Wisconsin, in October 1936, the Committee on Employee Data reported in favor of current pay-roll reporting as the normal procedure, with severance reports or a combination method permissible for those employers who can meet certain requirements. These prerequisites to any concession by the State agency of the right to make wage and separation reports include: 1. One or more of the present establishments of the employer must have been in continuous existence in the State for a period of five years or more. 2. The total number of separations (quits, discharges, or lay-offs of one week or longer duration) of insured employees during a stated six-month period must not have exceeded one-half of the number of covered employees on the pay roll of the employer at the end of the stated period. In making this determination, each quit, lay-off, or discharge should be counted as a separation. 3. The employer should be required to submit satisfactory proof of his ability to furnish promptly and in the manner prescribed data as to pay-roll accessions and separations. Meanwhile many valuable experiments are in progress. California and Oregon have used wage and separation reports. According to a report made by the California executive director of the unemployment compensation agency at the interstate conference in Wisconsin, "The experience of the California Department of Employment with the original termination notice was wholly unsatisfactory. The record for the first nine months of the year shows that only 27 per cent of the registered employers have submitted reports." Part of this difficulty arose, it was explained, from complications in the form, but part arose from the fact that although employers gener 242 UNEMPLOYMENT COMPENSATION ally urged the wage and separation reports, this type of reporting, for employers in certain types of business with many temporary employees, involved more work than pay-roll reporting both for employers and for the commisson. Accordingly, the California commission issued a rule "in answer to an evident growing demand" that employers may transmit copies of their pay rolls to the commission if such copies contain all information called for on the severance reports. TTwo other serious questions arise in connection with the reporting procedure for employee employment records. LOne is whether employees should be reported by establishments or by employers. An employer may, of course, represent several establishments. There would seem to bqmany reasons for treating employees by establishmeni since the establishment frequently has more economic significance than a group of establishments which may have component parts quite diverse in industrial characteristics and geographical situation. LOn the other hand, accounts will have to be kept for each employer, and these accounts have special importance in the States with employer-reserve accounts or with meritrating provisions for their pooled fundsj There is also the(question of whether the reports on individual employee earnings shall be made by the "list method" where an employer gives a complete list of all his employees on one or more sheets, or by the "slip method," which consists of a separate sheet with data for each employee. ( The former would, as a rule, permit the employerto make his reports in the same form in which he keeps his pay roll and to maintain the order of presentation uniformly. The forms used for the list method might also be pre-addressed by the State agency and would cost less to store and mail. However, the use of the list method practically necessitates transferring the information reported for each individual employee to the employee ledgers. This STATE ADMINISTRATIVE RESPONSIBILITIES 243 might be done conveniently from the lists if the employee ledgers could be maintained by employer sections. However, because of the rate of shift of employees from one employer to another, which is extremely high in some industries, the maintenance of employee ledgers by employer sections requires a disrupting "exception slip" system to indicate changes. On the other hand, the slip method of reporting may be equally convenient for some employers and, since each employee's record is detached, is much more susceptible to varied treatment in the administrative agency. The use of the slip method permits the filing of the reported record, the slip, without posting, and the slip may be filed by name, number, or employer section. Of course, the slips may also be transferred to ledgers, in which case they can be kept numerically, without the complication of exception slips required in filing by employer sections. The slip method assures the availability of the most recent record for the purpose of computing benefits without interfering with the posting or use of other employee records. Furthermore, the Bureau of Internal Revenue uses the slip method in obtaining records of individual wages for the purposes of the tax under Title VIII of the Social Security Act. The slip method does have certain disadvantages: each slip must contain all necessary information-the employer's name and number, the location of the establishment, etc.; the slip is more easily lost or damaged in handling; the slips may be more expensive for the State agency to examine, mail and store, and more expensive for the employer to prepare and mail. The reports required of employers are often ascribed to a desire for statistical information. It must be realized that complicated reports are frequently unavoidable because of the legal requirements under which they are collected and are necessary for adequate administrative records for the payment of benefits. 244 UNEMPLOYMENT COMPENSATION DEPOSITS IN THE UNEMPLOYMENT TRUST FUND One of the requirements of the Social Security Act, with respect to approval for tax credit by employers and for certification for grants for administration, is that the [State laws provide that all contributions received in the State unemployment compensation fund be immediately transferred to the Secretary of the Treasury to the credit of the unemployment trust fund, established by the ActJ The progress each State has made in the collection of contributions is illustrated by the figures on deposits in the unemployment trust fund in the United States Treasury. The figures as of August 31, 1937, are given in Table 5 of Appendix III. Under the provisions of the Social Security Act, the Treasury Department is authorized to accept from a duly constituted State agency for deposit in the unemployment trust fund, maintained on the books of the Treasury Department, money collected by the State for unemployment compensation purposes, pursuant to State law. Payments into the unemployment trust fund must be made by check or by order drawn by a duly authorized officer of a State agency against the State unemployment fund, subject to certain credit provisions. LThe Treasury Department will not accept checks received by a State agency in payment of amounts due the State unemployment fund under local laws.J LAll deposits to the credit of the unemployment trust fund are made with the Treasurer of the United States, Federal Reserve Banks, or member banks of the Federal Reserve System designated by the Secretary of the Treasury to receive such deposits., Many'States, in enacting their laws, included provisions that in the event that the Federal Act should be declared unconstitutional, all contributions would be returned to their contributors. The action of the Supreme Court on May 24, 1937, destroyed the chief significance STATE ADMINISTRATIVE RESPONSIBILITIES 245 of these provisions. However, these provisions have, from time to time, raised a question as to the status of the contributions deposited by the States in the unemployment trust fund: whether these monies were truly State monies or whether they had passed into the control of the Federal Government, and are no longer subject to the legal claims of the States. This question was satisfactorily answered in a letter by the Acting Secretary of the Treasury on April 22, 1936, in which he said, in part, 'fit is the view of this Department that the money in the Unemployment Trust Fund standing to the credit of the State agency is and will at all times remain the equitable property of the State or State agency in question. The Treasury Department, in accordance with its interpretation of the law, will under all circumstances honor requisitions duly made by any State agency, to the extent of any balance to its credit in the Fund... The question how and by whom the money could be 'duly' requisitioned appears to be primarily a question of State law." BENEFIT PAYMENTS Although the chief present concern of all State administrative agencies, except in Wisconsin, is centered on establishing an organization which will function efficiently in determining who is covered and who excluded under the tertms of the law, and in collecting contributions, in a few months they will begin the actual payment of benefits. The success of benefit procedures will depend upon the maintenance of adequate records on the basis of which benefit rights may be determined, proper technique for the registration of claimants and for cooperation with the employment service, and adequate facilities for the adjudication of claims for benefits. In general, it can be anticipated that the claims procedure will be somewhat as follows: Apon becoming totally unemployed, a worker will receive from his em 246 UNEMPLOYMENT COMPENSATION ployer a separation notice to present at the public employment officej This separation notice will include such items as name, social security account number, occupation, date of separation, and reason for separation. If the employer has not been reporting wage data currently for his employees, the statement will have to include a record of the employee's wages earned in the "base period," on the basis of which the worker's benefit amount and duration of benefits are computed. The worker will also probably be given, at the time that he receives a separation notice or wage and separation report,Lan additional statement advising him of his rights and of the procedure for filing a claim for benefits4 The worker will take his separation notice, or wage and separation report, to an employment office, where he can deposiit itand, while registering for a new job, make a claim for benefits. The claim form will contain a statement that the individual is unemployed, available for work, able to work, and registered for work. The Lworker will then be advised to report at regular intervals to the unemployment compensation representative in the employment office in order to fulfill any waiting period requirements and to continue eligible for benefitsj If the worker has not previously filed an application for work, he will betreferred to an interviewer who will assist him in filling out such an applications If he has previously made out such an application, he may still be referred to an employment service interviewer, where there is some possibility that he can be immediately referred to another job or where he can bring his application up to date; or the individual may simply be informed that he will be notified when the opportunity for his applying for a new job arises. LThe unemployment compensation representative in the local office will send the separation notice, or wage and separation report, together with the claim for benefits, to the State administrative office.J hat office will then STATE ADMINISTRATIVE RESPONSIBILITIES 247 compute the benefit on the basis of the wage reports which it already has in its files from the current reporting of the employer, or from the wage and separation report. LA benefit record will be established, on which will be entered the determination of the claimant's eligibility for benefits on the basis of wages earned during the qualifying period, the computation of the weekly benefit rate, and the maximum duration of benefitsi A report of this determination and perhaps a copy of the benefit record, together with the names and addresses of the employers against whose accounts benefits might be charged, will be sent to the unemployment compensation representative in the local employment office. During the period of unemployment which follows the filing of a claim, the worker will report at the employment office at the time assigned to him and will sign afcontinued claim" stating that during the past seven days he has been totally unemployed, or has earned a certain amount of wages, and continues to be able and willing to work. As soon as the report on his eligibility for benefits has been received from the State administrative office, probably by the time of the worker's second visit to the employment office, he will have an interview with the unemployment compensation representative and his rights to benefits will be reviewed. If the worker disagrees with the report made by the State administrative office on his rights, he then has an opportunity to file a protest. If the worker agrees, the "initial determination" will be given himj While benefits are payable beginning with the expiration of the waiting period, the worker is not eligible for benefits unless he is still unemployed in the compensable week, registers for work, and files his continued claim for that week. The unemployment compensation representative will determine when the claim is ready for payment and will make out a payment order to the State administrative office. The State administrative office will issue 248 UNEMPLOYMENT COMPENSATION its check upon the receipt of the order and the check will either be mailed to the claimant or handed to him at the cashier's window in the employment office. LThe checks will continue to be sent for the same amount unless the unemployment compensation representative in the local office sends a change order or a stop order. A change order might be necessary if the worker earns some wages in the course of the week and thus becomes partially, rather than totally, unemployed. A stop order will be sent if the worker returns to work, fails to register for work, or fails to apply for suitable work or to accept suitable work. Additional determinations of the claimant's rights to benefits will be made by the central office and notice thereof given to the unemployment compensation representative in the local employment office. It is apparent that there are innumerable questions of principle and procedure running through these suggested steps in the payment of a claim. The problem of the relationship between a claim for benefits and a registration for work; the handling of peak loads; the place and manner of making the initial determination of benefits (whether in the central or local office); the indentification of interested parties and their notification of the benefits awarded to claimants; the centralization or localization of the preparation and distribution of checks and the timing of check payments; the procedures for charging benefits to employers' accounts; the necessary reports to employers concerning their accounts and for compiling necessary statistics for benefit payments; all these are just a hint of the job ahead for the State agencies. [Added to these difficulties are those which will be involved in making special arrangements for the payment of benefits for partial unemployment.l In order to pay benefits for a week of partial unemployment it will be necessary for the agency to know that the claimant STATE ADMINISTRATIVE RESPONSIBILITIES 249 worked less than full-time hours and what, if any, remuneration he earned during the week. The only State actually to pay benefits before January 1938, is Wisconsin. The first benefit check was issued there August 17, 1936. Prior to June 1, 1937, 125,768 checks had been issued to 40,000 claimants for an amount of $758,206.70. The policy in Wisconsin is to require the minimum of reporting from employers. This policy has meant that the employer has been relieved of the current reporting of wages and hours for each employee. However, employers, in addition to maintaining the pay-roll records necessary for the accurate determination of the employee's rights, have had to make some of the basic calculations for which they, instead of the offices of the State agency, are held responsible. This policy has consequently imposed a large responsibility on the employer. For instance, the employer must compute annually the weekly benefit rate (for total unemployment) for each of his employees. This weekly benefit rate was, prior to recent amendments, computed on the basis of individual hourly earnings in a preceding period applied to the full-time hours prevailing for each class of workers in a given plant. Since recent amendments have become effective, the employer must compute the average weekly wage for each employee, making the computation on the basis of forms and instructions furnished by the State Industrial Commission. The employer gives to each employee a notice of his weekly benefit rate. With respect to every employee who has low or no earnings in a week, the employer must make a "low or no earnings report" to the Industrial Commission. With respect to an individual, this report may be very simple until the time that the employee has been unemployed long enough to be eligible for benefits. Then the employer must file a "benefit liability report," stating the hours worked and the wages paid the employee in the period on which 250 UNEMPLOYMENT COMPENSATION his benefit rights are based. This report also shows the employer's opinion as to the eligibility of the employee. A copy of this benefit liability report is given to the employee. When the employee becomes totally unemployed he must make his claim for benefits at an employment office, and a renewal of the claim must be made every week. Twenty-six district and six branch employment offices have been established in the State. The smaller cities are reached one day each week by a representative of the employment service. Every employment office is serviced by a "junior unemployment compensation examiner" who is responsible for all local work relating to the filing of claims and the payment of the benefits. The claims and their renewals are sent to the central office in Madison. Employers also receive a copy of the claims which are filed for benefits payable from their accounts. Based on the reports made out by the employee at the employment office and by the employer in his "low or no earnings" and "benefit liability" reports, a determination is made by the unemployment compensation department of the Industrial Commission as to when benefits are payable and for what amount. Where the employer by his benefit liability report concedes that benefits are due, the unemployment compensation department of the Commission proceeds to pay the benefit. Where the employer denies liability in whole or in part, the department considers the reasons given and the facts, and then makes an initial decision on the case, notifying the employer and employee. The employer has an opportunity to request a hearing before payment of the benefits in question is made. The employee likewise has an opportunity to object to statements in the employer's liability report before the department makes a final decision and to request a hearing if he is notified that the department has overruled his objection. Consistent handling of simi STATE ADMINISTRATIVE RESPONSIBILITIES 251 lar questions arising throughout the State has been attempted by having the decisions on disputed eligibility cases made in Madison rather than by the various junior examiners in the field. Disputed claims are taken before a local appeal board made up of a member nominated by the State manufacturers' association and a member nominated by the State Federation of Labor, with a senior unemployment compensation examiner as chairman. Appeals may be made from such appeal boards to the Commission. The benefit is paid by a check sent to the worker's home. Payment by check is deemed to be quicker and more convenient to the employee. Furthermore, the method avoids attracting bars, salesmen, and creditors to the vicinity of the employment office. The employer against whose account the benefit is chargeable receives a carbon-copy statement each month showing the major items on each check paid from his account within the month. Until very close to the time that benefits are first payable, the State administrations concentrate on the collection of contributions, a responsibility of the agency headquarter's staff. The function of paying benefits for the first time brings the local employment office into the system. The unemployed person registers for work at the local employment office and files his claim for benefits there. Under the terms of most State laws, the waiting period begins with registration, after the employment is terminated. The first necessity is for an expansion of the employment service. Even in Wisconsin, where a well functioning employment service has been in existence for some time, there has been need for a greatly expanded employment service, both in number of offices and in size of staffs, to register applicants for benefits. The State office attempts to meet emergency needs by dispatching personnel from one office to another to take care of peak 252 UNEMPLOYMENT COMPENSATION loads occasioned by unusually large lay-offs in the smaller centers. With the beginning of benefit payments the employment service must not only adjust its operations to new methods and new functions, but must also develop placement services for a new type of client-in particular, the white collar or highly-skilled individual who hitherto has not used the public employment agencies. MULTI-STATE WORKERS One of the chief complexities of the Federal-State unemployment compensation programs, and one which will grow in proportions, is that of the worker who, for one reason or another, will find himself in a State other than that in which he has accumulated rights to benefits. For reasons of equity, safeguarding the benefit rights of employees, and maintaining free mobility of labor, some administrative provision will have to be made for the payment of benefits to these individuals. Almost all the laws now contain provisions which authorize the administrative agency to enter into reciprocal arrangements with other States and the Federal Government "whereby potential rights to benefits accumulated under the unemployment compensation laws of several States or under such a law of the Federal Government, or both, may constitute the basis for the payment of benefits through a single appropriate agency under terms which the commissioner finds will be fair and reasonable as to all affected interests and will not result in any substantial loss to the fund." Several reciprocal agreements to effect the payment of benefits to multi-state workers have been proposed. It has been suggested that the first step might be to take care of cases where the worker has moved out of a State in which he has acquired benefit rights, and that the State in which the individual is living when he be STATE ADMINISTRATIVE RESPONSIBILITIES 253 comes eligible for benefits should act as an agent for the other States in which the individual has benefit rights. The agent State would receive the claim, discover the facts, investigate, and hold hearings if necessary, but the State from which the benefit is payable would alone make the necessary decisions and pay the benefit, either by mail or through the agent State. This proposal offers no opportunity for the payment of benefits in those cases where the insured can be considered to have accumulated employment or earnings qualification only by treating as one unit the work he performed in more than one State. It is difficult to say how many of the multi-state workers would be thus excluded from the benefits of unemployment compensation by this limited plan of cooperation between the States, but it is safe to assume that a substantial number of insured employees would suffer loss of benefits. Another suggestion for meeting this problem is that the Federal Government, through the Social Security Board, enter into a compact or agreement with each of the States having unemployment compensation laws with a view to insuring the payment of benefits to all multistate workers, regardless of whether they acquired their benefit rights in one State or in several States. This plan is based upon a recognition of the difficulties that would be inherent in leaving the solution of this problem entirely to the several States. Such a plan would place on the State a liability which does not now exist with respect to individuals who have only partially accumulated rights to benefits in a State. It would therefore have to carry with it a financial inducement to the participating States and would probably also involve setting up an interstate fund out of which benefits would be paid to multi-state workers, in accordance with rules and standards of eligibility set up in advance in a uniform Federal-State agreement. 254 UNEMPLOYMENT COMPENSATION STATISTICS AND REPORTS There has been much discussion of Section 303 (a) (6) of the Social Security Act which requires that the States must "make such reports in such form and containing such information as the Board may from time to time require." Statistical agencies outside the Social Security Board have been interested in the possible data to be derived from such reports. The information accumulated by the State unemployment compensation agencies in connection with contributions might include data on employment, hours, and pay rolls which would be much more comprehensive than the figures now obtained on a sample basis by other State and Federal agencies. Moreover, the data derived from administering State unemployment compensation might be assembled as a by-product of accounting for contributions. True, the data would not be comparable from State to State because of the differences in employment coverage of State acts, size of establishments covered, wage exclusions, and excepted occupations, but they would be more nearly complete than any figures this country has had on employment, and earnings. Some people have argued that the statistics of the State unemployment compensation agencies will supplant those now collected by the United States Employment Service and by the United States Bureau of Labor Statistics, especially the latter's series on trends of employment, hours, and wages. Attention has been given to the technique of providing continuity for the series of the Bureau of Labor Statistics figures and those to be accumulated by the unemployment compensation agencies. The industrial classification system developed for numbers to be assigned to employers by State agencies was designed as a preliminary step in providing continuity and comparability of statistical data (see p. 233). Much apprehension has been expressed oi the possible STATE ADMINISTRATIVE RESPONSIBILITIES 255 duplicate reporting by firms, reporting on a voluntary basis to the Bureau of Labor Statistics either directly or through some State statistical agency, when they now will be required to report to the State unemployment compensation agency. It was feared that firms reporting voluntarily to the Bureau of Labor Statistics might cease reporting and thereby impair the continuity of the series. Every effort has been made to prevent such duplication, and to insure the continuance of the Bureau of Labor Statistics series, at least until the statistics derived from unemployment compensation are well established. The State agencies have been much interested in the question of what reports would be required. At every interstate conference the question of statistical reporting has been discussed by the State representatives, the Social Security Board, and statistical agencies of the Government. For several reasons the statistical program has not developed as fast as was originally expected. The States have been engrossed in the immediate procedures for discovering subject employers, building good will, and collecting contributions due under the law. In the pressure of building up their organizations to do the immediate tasks, the State agencies have had little time for long-time planning of statistical or research programs, though these are called for under most of the State laws. Few have among their major staff statistically-trained or statistically-minded personnel. The collection of contributions was not established in a manner calculated to produce significant figures of employment, man-hours worked, and pay rolls. Moreover, delays in acquiring accounting machinery or putting it into use meant that in very few States were figures available promptly from the summary contribution reports received. Recognizing this situation, the Social Security Board originally required from the States little formal statistical information other than that contained in the reports on 256 UNEMPLOYMENT COMPENSATION expenditures. However, it has been determined that after October 1, 1937, the States will be required to report monthly: 1. the number of reporting units for which the State unemployment compensation agency received separate reports on number of covered workers and amount of wages subject to contributions for the pay-roll month; 2. number of covered workers who earned wages subject to contributions in the last pay period of the pay-roll month; 3. total wages subject to contributions under the State law; 4. contributions received for the pay-roll month of employment; and 5. the total amount of interest and penalties collected during the pay-roll month. In addition, monthly reports based on financial transactions will have to be made for the month of August 1937 and for each subsequent calendar month, giving the following data: 1. total amount of contributions received by the State agency during the month, and cumulative total; 2. total amount of contributions transferred by the State agency to the State treasurer during the month, and cumulative total; 3. total amount of contributions actually deposited in State depositories during the month, and cumulative total; 4. total amount of credits for refunds made by the State agency to contributors during the month; 5. average daily balance in State deposited during the month; 6. total amounts transferred to the unemployment trust fund during the month, and cumulative total; 7. total amounts withdrawn from the unemployment trust fund during the month; 8. balance in the unemployment trust fund at the close of the month; STATE ADMINISTRATIVE RESPONSIBILITIES 257 9. total amount of benefit checks issued by the State agency during the month; 10. total amount of uncashed benefit checks returned to the State agency during the month; and 11. average daily balance in benefit disbursing account during the month. Finally, annual reports on coverage and contributions, classified by industry groups, will have to be made. These will show: 1. a count, without duplications, of reporting units which paid a contribution during the calendar year; 2. a count, without duplications, or reporting units which were registered as liable for contributions during the calendar year; 3. revised report classified by each pay-roll month of employment during the calendar year showing: (a) the number of reporting units, (b) total number of covered workers, (c) total wages subject to contributions, and (d) contributions received; 4. total number of separate places of employment during the last pay-roll period or periods ending in the pay-roll month of September; and 5. total number of covered workers employed in the last pay-roll period or periods ending in the payroll month of September. COORDINATION OF STATE ACTIVITY Many of the details of unemployment compensation administration require the utmost in cooperation between the States. The States have discovered that a high degree of uniformity is desirable in certain procedures and that an exchange of information based upon experience can be of great value. Out of this need and desire for cooperation between the States there developed early in 1936 the practice of meeting in confer 258 UNEMPLOYMENT COMPENSATION ence for the purpose of discussing mutual problems. These meetings have resulted in a formal organization known as the Interstate Conference of Unemployment Compensation Administrators. The framework and sponsorship of the Conferences have changed from time to time. The first conference was held in Washington, on January 23, 1936. It was attended only by representatives of the Northeastern States. The next general meeting was held in New York, February 21-22, 1936. On March 23-24 of the same year, the Coordinator of the Social Security Board called a meeting of a Joint Committee "to organize a committee of State and Federal agencies dealing with unemployment compensation, in order to unify so far as possible the recordkeeping, reporting, and all operations in connection with the administration of the State boards or commissions having to do with unemployment compensation." From this meeting an executive committee was appointed "to work out detailed suggestions with regard to uniformity in such matters as rules, regulations, reports, records, procedures, and definitions of legal terms." At the Interstate Conference held May 21-22, 1936, in Washington, much of the time was devoted to questions arising from the Treasury regulations respecting proof of credit for State contributions against the Federal tax. A New Hampshire conference, July 23-25, 1936, afforded the conferees an opportunity to see the New Hampshire office in operation. New Hampshire had at that time the most nearly complete machine installation of any State. The work of this conference was conducted largely through committees on Basic Data, Wage Bases for Determining Benefits, Severance Reports, Pay Roll Reporting, Personnel Standards, and Resolutions. The Interstate Conference held in Wisconsin, October 21-23, 1936, gave State officials an opportunity to see in STATE ADMINISTRATIVE RESPONSIBILITIES 259 action the only State which was then paying benefits. Committee reports were made on Interstate Coverage, Remedial Legislation, Employee Data, and Basic Statistical Data. Plans were made for standing committees of the Conference, with a staff member of the Bureau of Unemployment Compensation assigned to each committee. The Committee on Employee Data recommended "that the Social Security Board establish an interstate clearing house for information on procedures being developed in the several States and the discussions with employer and employee representatives, under the general auspices of a standing committee of this conference." The most recent national conference, the seventh, was held in Washington in March 1937. At the present time the organization of the conference consists of six standing committees with membership from each region. They are the Committee on Organization, which is an executive committee, the Committee on Accounts, Records and Reports, the Committee on Employment Service, the Committee on Legal Affairs, the Committee on Personnel Standards, and the Committee on Research and Statistics. Analogous committees have been set up in each region. There is also a Committee on Programs and Jurisdictions which has the responsibility of coordinating regional meetings supplementary to the national meetings. In addition to the national meetings, several supplementary meetings have been held in almost every region. The programs have included study and discussions of interstate coverage and reciprocal compacts, benefit payment procedures, selection and promotion of personnel on a merit basis, public-relations policies, integration of compensation and placement in the State agency, appeal procedure, accounting procedures, basic statistical data, and many other topics. Throughout, technical assistance has been supplied by the staff of the Bureau of Unemployment Compensation. 260 UNEMPLOYMENT COMPENSATION The Interstate Conference has performed a notable service in assisting the States in developing procedures and rulings with respect to which a degree of national uniformity is essential to the successful administration of each State law. PART IV PUBLIC ASSISTANCE AND PUBLIC WELFARE CHAPTER XV THE PUBLIC-ASSISTANCE PROVISIONS OF THE ACT Of the three major phases of the social security program-Federal old-age benefits, unemployment compensation, and public assistance-the first two represent innovations in American practices of dealing with the problem of insecurity. Public assistance, on the other hand, follows fairly well-established lines of welfare action. For, previous to the passage of the Act, several States had made a beginning in the payment of "pensions" to the needy aged, to dependent children, and to the indigent blind. Into this more familiar field the Federal Social Security Act introduces certain new elements. It recognizes for the first time the joint responsibility of the Federal Government, the States, and local communities for the protection of certain classes from at least the extremes of destitution. This departure from traditional policy involves a Nation-wide and long-range assistance program, sponsored and supervised by the Federal Government but permitting free adaptation in detail to local conditions. By its permanent design and by the greater administrative latitude left to the States, it differs from the more temporary objectives and techniques, the looser administrative and financial arrangements, the wider degree of Federal control, and the correspondingly higher ratio of Federal contributions, which have characterized the emergency relief activities of the depression and post-depression periods. In this respect, it concerns the payment of direct monetary aid to individuals who are not fundamentally employable, as con263 264 PUBLIC ASSISTANCE AND PUBLIC WELFARE trasted with providing employment on public projects to those able to work but unemployed by reason of circumstances beyond their control and peculiar to the time. Otherwise, the Federal Government thereby accepts as a regular function for the indefinite future a cooperative association with the States for the mitigation of cases of individual need. Nor does the scope of public assistance, as provided in the Act, comprehend all the manifestations of insecurity which may affect the employability of the individual. For its coverage does not extend to invalidity, except in the form of blindness. THE BACKGROUND OF THE ASSISTANCE PROGRAM The germ of the public-assistance legislation embodied in the Social Security Act is found in the Elizabethan poor laws of 1601. It required over three centuries for the evolution of a sufficient social consciousness in the general public, the elaboration and acceptance of effective methods for dealing with the problem of the needy, and the aggravation of the problem of individual insecurity by the vast growth of industrialization and urbanization, to bring about the culmination of effort represented by the Social Security Act. In the United States, as in Englnd, progress towards the solution of the question has been painfully slow. In fact, the magnitude and urgency of the problem in this country have varied considerably with the circumstances of our national history. The expansion of the frontier long furnished work for a growing population. The individual's working life began earlier and ended later than it does today. At the same time, with immigration stimulated by the need for active labor, the proportion of the aged to the total population was much lower than it is now. With economic opportunity so widespread, poverty came to be associated with shiftlessness and lack of thrift. As such, it bore the stigma of popular opprobrium. PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 265 In an atmosphere of individualism and self-reliance, which was justified by the conditions of the time, any organized concern for the welfare of the needy was out of the question. There was a general aversion to assuming a collective responsibility, or a lack of recognition and acceptance of such a responsibility, which involved taxation for its fulfillment. The feeling of family obligation for the support of its weaker members was strong, and in the villages and rural communities neighbors often came to the help of the widows and orphans who had no relatives at hand on whom they could depend in adversity. When concession was finally made in the more settled parts of the country to the necessity of institutional care for certain classes of unfortunates, it was likely to be grudgingly given and the facilities made as uncomfortable as possible for the inmates. It carried with it the ultimate indignity of "the pauper's oath." The guiding principle of such public charity as existed seemed to be rather the discouragement of idleness and improvidence than humanitarian provision for those suffering from unavoidable economic hazards. With the passing of the frontier the problem became more acute. The age of unlimited opportunity was over. Increasing concentration of population in great industrial centers, with their higher living costs and uncertainty of employment, tended to create a growing pool of the needy. Large bodies of immigrants from Europe did not share the native American's traditional aversion to the acceptance of public charity. Local communities could not ignore the situation and the "poorhouse" and the old-fashioned "orphan asylum" became familiar features of the social system. With the rise of large fortunes, private charity supplemented the inadequate efforts of local governments. It was not until the last two decades of the past century that some intelligent direction and coordination were introduced into what had been a very haphazard movement. 266 PUBLIC ASSISTANCE AND PUBLIC WELFARE Trained social workers began to enter the field. Councils of social agencies and community chests gradually gave some unity and order to local programs. The development of "settlement houses," like the famous Hull House in Chicago, influenced and improved community social planning. Meanwhile, increased popular support was slowly won for what was coming to be accepted as a public responsibility. After the beginning of the present century, progress was more rapid. A widening recognition of the need for more adequate care for dependent children resulted in the first White House Conference called in 1909 by President Theodore Roosevelt. At this time the principle was proclaimed that "hereafter no home in America shall be broken for reasons of poverty alone." Two years later the first State Mothers' Pension Law was passed. In 1912 the Children's Bureau was established in the Department of Commerce and Labor, and henceforth was to serve as the informational nucleus for the whole child-welfare movement. By 1935 all but two StatesGeorgia and South Carolina-had laws authorizing payments of aid to mothers for the support of their dependent children. Most of these laws were defective in many respects. A few were altogether inoperative. The rest depended for their efficacy on the voluntary cooperation of counties and other local units of government. It is estimated that less than half of the counties with legal authority to aid dependent fatherless children in their own homes were actually giving such aid in 1934. Though the maximum monthly grant for a family of three children varied from $20.00 in Arkansas, Idaho, and Oklahoma to $69.33 in Connecticut, with no limit in New York, the average amounts actually granted ranged from about $9.00 to about $51.00 per month. In November 1934 it was estimated that 280,000 children throughout the country were benefiting from this form of aid. PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 267 At the time the Social Security Act was passed, twentysix States had laws for aid to the blind. New York City had made such provision since 1865. These laws differed widely in their provisions and in the effectiveness of their operation. In twenty-four of the States there was a total of 31,909 recipients of "pensions" at the end of 1934, which represented 68.4 per cent of their total blind population as of 1930. Total expenditures for aid to blind persons in those States amounted to $6,880,015 in that year. The average grant paid was $19.96 per month, with a range from $0.83 in Arkansas to $33.12 in California, though the maximum payable in each instance was, respectively, $25.00 and $50.00. Of the twentyfour blind-pension systems in force at the end of 1934, those of seven States were State-wide in operation, and the coverage in four others was 95 per cent or more. In the States with optional laws, only one-third of the counties had adopted the system. Concurrently with these legislative developments, there was an active movement for the vocational rehabilitation and curative treatment of this class of handicapped persons. Pensions for the aged came later. The plight of needy old persons had never aroused the same sentimental consideration that the helplessness of orphans and the blind had inspired in the public. Moreover, there were more of them, and the task of providing for their support represented a financial burden which taxpayers were loath to assume. Yet, between 1923 and 1934 twenty-eight States and two Territories adopted some form of old-age assistance legislation. Montana was the first State to establish such a program on a permanent basis, though it was preceded by the Territorial Government of Alaska, which had a pension law providing for assistance to its aging pioneers. In Arizona the law of 1915 had meanwhile been declared unconstitutional, as several later laws were also to be. Much of this early legislation was ill-con 268 PUBLIC ASSISTANCE AND PUBLIC WELFARE sidered and experimental, but the question was being studied by many State governments with a view to future action. However, by the end of 1928, after six years of widespread agitation, only six States had made provision for their needy aged. They were Colorado, Kentucky, Maryland, Montana, Nevada, and Wisconsin. All laws were of the optional type, that is, the counties might choose as to whether they would apply the assistance provisions within their borders. As a result, these laws had very limited effect. In the six States there were only a little over 1,000 recipients of old-age assistance in 1928, and nearly all of these were in Montana and Wisconsin. The total spent by the six States for that year was around $200,000. Thereafter the trend in assistance legislation was towards the more effective mandatory type, whereby the counties had no alternative to a universal and uniform application of the law. The change was smoothed for the local governments by a common provision for State contributions to the cost of the program. The California law of 1929 was of this kind, as were the New York and Massachusetts laws of the next year. In 1931 and 1933 State legislatures were very active in the field of oldage assistance. The net result of about 100 bills introduced in that year was five new laws. In 1933 ten more laws were added to the list, and during the first six months of 1935, when Federal legislation was in prospect, the total was raised by the addition of several more States. In three of the twenty-eight States which had old-age assistance laws on their statute books in 1934, operation of their programs was suspended for lack of funds. Only ten States had State-wide coverage. Some 236,000 old people were being cared for by assistance payments at the end of the year. During the year over $32,000,000 was spent for this purpose. The average monthly assistance payment varied from 69 cents in North Dakota to $26.08 in Massachusetts. Thirteen States and one Territory PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 269 were paying grants averaging less than $10.00 per month. However, in spite of the evident inadequacies of much of this State legislation, a substantial groundwork had been laid for the cooperative Federal-State program which was instituted by the Social Security Act. The unprecedented relief activities of the Federal Government during the depression gave a new orientation to the whole movement for the orderly and systematic care of the needy aged. Great numbers of old people became dependent on public funds for the first time in their lives, as their accumulated resources were wiped out or relatives on whom they had relied proved no longer able to aid them. It was clear that many of these aged persons would remain permanent charges on organized society, and so were subjects rather for regular assistance than for temporary relief. At the same time, the public quickly came to look upon the Federal Government, which alone was able to cope with the problem of the depression, as responsible in the last resort for the care of the Nation's needy. A responsibility that had originally belonged to the individual and the family, and had then been assumed by the local community, was definitely shared by the State, and finally by the Federal Government. The necessary impetus had been supplied for the comprehensive assistance program embodied in the Social Security Act. ANALYSIS OF THE ASSISTANCE PROVISIONS OF THE ACT In contrast to old-age benefits and unemployment compensation, the public-assistance provisions of the Social Security Act are based on the principle of individual need. As such, they are designed to aid members of certain groups of the population who, by reason of age, immaturity, or physical disability, are unable to earn a livelihood. The specific classes provided for are the needy aged (Title I), dependent children (Title IV), and 270 PUBLIC ASSISTANCE AND PUBLIC WELFARE the needy blind (Title X). Eligibility for or receipt of old-age benefits does not automatically exclude a beneficiary from receipt of old-age assistance. If the State of his residence considers that the scale of old-age benefits to which he is entitled is not adequate for his proper support, it may use State and Federal funds to supplement his income by assistance payments sufficient to meet such a standard. The public-assistance program established in accordance with the Social Security Act is founded on a cooperative arrangement between the Federal and State governments. Under the terms of the Act, which are fairly uniform for the three phases of the program in question, the Federal Government makes periodic grants-in-aid on a matching basis to those States whose public-assistance plans have been formally approved by the Social Security Board. The conditions prescribed for approval are set down in the respective titles of the Act and are described in detail below. The grant-in-aid is a familiar device in the American Federal system and ample precedents exist in the form of appropriations made by Congress in the past for establishing land-grant colleges, for building roads, and for other purposes. Under the relationship established by the Act, the Federal Government is not responsible for administering public assistance. This responsibility belongs to the particular State and to its component political units, as determined by State statutes and administrative regulations. Beyond the payment of the necessary grants at quarterly intervals, the function of the Federal Government is largely advisory, that is, the Social Security Board offers its consultative services to State governments in setting up and operating their public-assistance plans. The Board recognizes the need for permitting the widest possible latitude to the States in determining the conditions of their plans, so long as they conform to the general standards laid down in the Act. No uniform PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 271 administrative pattern is required, and such important matters as the scale of assistance payments, conditions of eligibility-within limitations-and methods of financing are left to the discretion of the States. Recognition is given to differences in standards and costs of living, financial resources, and other conditions peculiar to each State. CONDITIONS FOR APPROVAL OF STATE PLANS In order to satisfy the standards required for approval by the Board, a State assistance plan must meet the conditions described in the following paragraphs. State-Wide Operation-A State plan must be in effect in all political subdivisions of the State and, if administered by them, be mandatory upon them. In the past, State assistance programs were often optional and were, consequently, inoperative in many local units. Under this provision, it is assumed that if the State administers the plan directly, it will be in effect throughout the State. If, on the other hand, administrative responsibility rests with local units of government, it is obligatory on them to carry out the provisions of the plan. This requires not merely that the State law shall be effective in each county, but that the State agency have authority to insure such effective operation consistently. Financial Participation by the State-The State, as distinguished from its political subdivisions, must carry part of the cost of financing the public-assistance program. The ratio which State participation should bear to the total cost is not defined. In practice, the proportion represented by State contributions varies widely from a nominal figure of less than 5 per cent to complete responsibility for the cost of the program. The trend is toward increasing the proportion of the cost borne by the State. 272 PUBLIC ASSISTANCE AND PUBLIC WELFARE In the past, it was common for counties and municipalities to furnish all funds for assistance payments to their needy citizens. The constitutions of some States prohibited State participation, and such States were allowed until July 1, 1937, to amend their constitutions to permit meeting requirements of the Social Security Act in this respect. Pending such a constitutional change, the obligation of providing funds for public assistance under the terms of the Act rested with the local units of government. Single State Administrative Agency-A plan must make provision for the establishment or designation of a single State agency to administer the plan or to supervise its administration. The Federal Government cannot deal directly with counties or other political units of a State. Moreover, it cannot deal with more than one official State organization having responsibility for the same plan. A State agency may have administrative or supervisory responsibility for only one of the three types of assistance or for all phases of the assistance program. It may choose to administer the plan directly or to supervise the administration of the plan by local authorities. If it elects local administration under State supervision, the State agency must be able to enforce conformity with the approved plan on the local administrative organization. Among the elements of adequate supervisory authority on the part of the State are: (1) power to pro. mulgate rules and regulations that are mandatory upon the local governments; (2) authority to review and, if necessary, veto local decisions; (3) provisions for auditing local assistance accounts and requiring reports on local administration; and (4) services of a State supervisory staff qualified to provide constructive help and leadership through personal contact with local administrative units. Since the passage of the Act there has been a marked tendency towards centralization of administrative re PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 273 sponsibility in State agencies rather than the local units of government. However, it is the opinion of many observers that the counties and municipalities should always retain a certain measure of control over the assistance activities in their localities. Fair Hearings-A State plan must provide for granting an opportunity for a fair hearing before the appropriate State agency to any person whose claim for assistance is denied. The object is to ensure a square deal for all claimants, and to protect applicants and recipients from arbitrary decisions on the part of local welfare authorities. In practice, formal appeals and decisions have proven to be infrequent, as local and State agencies aim to give the applicant a clear understanding of the reason for denying his application or refusing to increase the amount of his assistance. Efficient Administration-A State plan is required to make provision for methods of administration which, in the opinion of the Board, will ensure the efficient operation of the plan. Matters relating to the selection, tenure, and compensation of personnel are left to the discretion of the States. Each State is free to decide whether it should fix civil-service standards for its personnel. Fortunately, the tendency is towards extension of the merit system to State and local employees. This has resulted not only in greater efficiency and honesty of administration, but in increased public confidence in a program which affects its interests so intimately. The insistence on efficient State administration as laid down in the Act is necessarily framed in broad and general terms, in order to make allowance for the wide differences in conditions as between the various States. Some States already have high standards of public administration; others are still bogged under a rule of patronage and favoritism. The very indefiniteness of the Act's requirement as to efficient administration allows the Board greater freedom in encouraging and aiding 274 PUBLIC ASSISTANCE AND PUBLIC WELFARE the more backward States to raise their standards of public service than if more rigid criteria were imposed. In analyzing a State plan presented for its approval, the Board takes into consideration such factors as: (1) clear, logical lines of responsibility in the State organization; (2) integration of closely related activities under one agency; (3) business-like methods of procedure, which would avoid overlapping of authority and cumbersomeness of operation; and (4) personnel standards designed to secure workers with special qualifications and to fit these workers into well-defined jobs. Reports-As a condition to approval, an assistance plan must provide that the State agency to be entrusted with administration of the plan will make such reports to the Board as it may require, and provide for any necessary verification of such reports. The collection of reliable statistical data, hitherto lacking for many States, is not only necessary for an intelligent appraisal of the operation of a State plan; when coordinated with similar data from other States, it furnishes the Board with a current picture of the whole national problem of public assistance. Under the direction, and with the help of, the Bureau of Research and Statistics, uniform procedures and forms are provided for the State agencies as a basis for the submission of reports. In considering a plan for approval, it is important to assure that the State has set up a system of county reporting which will, in turn, furnish correct data for State reports to the Board. Money Payments-Though not included among the specific tests applied to State plans as a condition for approval by the Board, the requirement that assistance payments be made in money to individuals has the same force. This means that the old practice of granting assistance by means of grocery orders or handing out clothing (i. e., relief in kind) may not be continued with Federal participation, nor may Federal funds be PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 275 used to provide public institutional care for the needy. Money payments are understood to be payments in cash, check, or other negotiable instrument, and are so defined in State statutes. Checks must be made payable to the recipient himself, or to his legally appointed guardian, except that in the case of aid to dependent children, they may be made to a relative "with respect to a dependent child." The above conditions apply equally to all three forms of assistance and are common to Titles I, IV, and X of the Act. Certain provisions pertain to a single title only. Collections from Estates-An approved plan for oldage assistance must provide that, if the State or any of its political subdivisions should collect from the estate of a recipient of old-age assistance furnished him under the plan, half of the net amount so collected must be promptly paid to the United States. Any such payment is to be deposited in the Federal Treasury to the credit of the appropriation for the purposes of Title I. It is not necessary that a State plan provide for collections from the property of deceased recipients. However, in case such collections are made, the United States Government must receive half of the net proceeds therefrom. Non-Duplication of Aid to the Aged and the BlindA plan for aid to the blind must provide that the beneficiaries may not concurrently receive old-age assistance. In addition to the conditions listed above, the Act establishes certain standards of eligibility, generally in the nature of maxima, from which the requirements of State assistance plans may not depart. These provisions refer to age, residence, and citizenship and to certain other special conditions of eligibility for Federal aid. Age-A State old-age assistance plan may not impose an age requirement of more than 65 years. However, in order to give States with a higher eligibility level time 276 PUBLIC ASSISTANCE AND PUBLIC WELFARE to adjust their age minimum to the 65-year standard, a bottom limit of 70 years is permissible until the end of 1939. A State plan may be approved even though it provides for assistance to persons under 65 years, but Federal funds may be used to match State payments only to those at least 65 years of age. In regard to aid for dependent children, Title IV of the Act does not impose any particular age requirement as a condition for the approval of a State plan. However, Federal funds may be used only with respect to children under 16 years of age. Title X of the Act makes no mention of age, but a number of States stipulate that recipients of aid to the blind must have attained a certain age. Residence-Plans for old-age assistance and aid to the blind may not impose residence requirements to exclude applicants who have resided in the State for five of the nine years immediately preceding their application and for one continuous year immediately previous to application. The five years' residence may have been intermittent, but the one year must have been without a break. A plan for aid to dependent children may not be approved if it excludes a child who has resided in the State for a year immediately preceding application, or who was born within the year prior to application, provided its mother had resided in the State for one year preceding the birth. On the other hand, a State plan may be approved if it contains no residence requirements at all. States may not deny aid on the ground that the applicants have no legal domicile or sufficient length of residence in a particular county. Citizenship-Plans for old-age assistance and aid to the blind may not impose citizenship requirements which would exclude a United States citizen, whether nativeborn or naturalized. In fact, there is no provision in PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 277 the Act limiting public-assistance payments to citizens. Federal funds might be used to match payments made to foreigners residing in the United States provided the State plan did not specifically bar non-citizens from receipt of assistance. A citizenship provision included in a State plan may not fix a minimum period after which naturalized citizens are eligible for assistance. The Act does not mention citizenship in connection with aid to dependent children so that State governments are presumably free to establish such restrictions of this kind as they may elect. Inmates of Public Institutions-It is prohibited in a State plan to use Federal funds to match assistance payments to aged and blind persons who are inmates of public institutions for the care of those classes. However, Federal money may be used to match payments to persons residing in similar private institutions, that is, those which are not supported at the public expense. Since the Act requires that recipients of aid to dependent children live in the homes of relatives, they are thereby precluded from residing in institutions, whether publicly or privately maintained. Special Eligibility Provisions-By definition, recipients of aid according to the terms of Title X must be "blind." The Act does not specify the degree of blindness which would establish eligibility for assistance. However, the Bureau of Public Assistance has issued advisory instructions for the use of State agencies in determining the gradations of blindness. Specific conditions are set down in the Act for establishing the status of eligibility for aid to dependent children. As defined in Title IV, a needy "dependent child is one who has been deprived of parental support or care by reason of death, continued absence from home, or physical or mental incapacity of a parent." Such a child must also be living with specified relatives in a place of residence maintained by such relatives as a home. The 278 PUBLIC ASSISTANCE AND PUBLIC WELFARE various degrees of relationship established for this purpose comprise father, mother, grandfather, grandmother, brother, sister, stepfather, stepmother, stepbrother, stepsister, uncle, and aunt. Thus, aid to dependent children is not intended for "boarding home care" or for the support of orphans in institutions. Need-The first section of each public-assistance title of the Act states that the purpose of the program is to provide assistance for "needy" individuals. The exact definition of the term "need" is left to each State, but the fact that this is a basic condition of eligibility for public assistance under an approved plan implies that the plan must embody some form of "means" test. Before being passed on to the Board for a formal statement of approval, State assistance plans are checked for conformity with the above requirements by the General Counsel's Office, the Bureau of Accounts and Audits, and, finally, by the Bureau of Public Assistance. The three bureaus jointly recommend action to be taken by the Board as to approval or disapproval. While the above requirements are applied as preliminary tests for approval of State assistance plans, continued approval is conditional on the State government's subsequent maintenance of what amount in effect to contractual standards governing the Federal-State relationship in the matter. If the State should fail to maintain such standards as are provided for in its approved plan, the Board may suspend payments to the State for assistance purposes, pending restoration of the standards in question. In this connection, the Board makes specific reference to the provisions for eligibility requirements set down in the Act, and forbids any departure from the requirements approved in the original plan which might further restrict eligibility for the receipt of assistance. In the case of old-age assistance, these include age, residence, and citizenship requirements; in the case of aid to dependent children, residence requirements; and in the PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 279 case of aid to the blind, residence and citizenship requirements. The Act provides, moreover, with respect to all three titles of the Act, that, if there develops a failure in the administration of the plan to "comply substantially" with the general conditions for approval as listed above, suspension of Federal payments is thereby necessitated. If any of the above circumstances should arise in the operation of a State plan, the Board is obliged to give the State agency involved "reasonable notice and opportunity for hearing" before further action is taken to suspend Federal participation in the plan. After the Board is satisfied that the State agency has failed to comply with one of the original conditions on which the plan was approved, it notifies the State agency that no further payments will be made until compliance with the original terms of the plan is re-established to its satisfaction. Meanwhile, it will make no further certification to the United States Treasury for payments to the State involved, pending restoration of the original cooperative arrangement to full effect. THE BUREAU OF PUBLIC ASSISTANCE The role of the Bureau of Public Assistance is rather advisory and supervisory than administrative. It advises the Executive Director and the Board on matters pertaining to public assistance and, within the limits of the Act, supervises the operation of State agencies charged with the actual administration of assistance programs. Through its Division of Plans and Grants it is responsible for analyzing State plans and recommending appropriate action thereon by the Board. It studies applications for grants to the States and then recommends the amount of Federal funds to be appropriated. Finally, it exercises general oversight of the operation of State assistance plans. 280 PUBLIC ASSISTANCE AND PUBLIC WELFARE Though the only statutory functions which belong to the Bureau of Public Assistance are those inherent in the powers of the Board to pass upon the conformity of State plans to the conditions prescribed in the Act, its field of activity is a large one. Broadly speaking, its purpose is to be of the greatest possible service to the States in setting up and operating their assistance programs. This implies advising State legislatures as to the most suitable form of organization for administering their assistance plans, and, once the plan is in effect, continuing in its advisory capacity to the State welfare administration. The Bureau's Division of Policies and Procedures serves as consultant to State authorities on matters of administrative regulation, the mechanics of enforcement. The Division of Technical Training cooperates with the agencies in developing a qualified personnel. The Division of Administrative Studies makes surveys of operating problems on the basis of the actual experience of State programs, thereby making such experience available to other States. Through its staff of Regional Representatives, the Field Division maintains close contacts with State authorities, which they advise as occasion arises. A Regional Representative of the Bureau is stationed in each Regional Office, where he acts as technical adviser on assistance matters to his administrative superior, the Regional Director, and represents the Bureau in its routine relations with State legislative and administrative officials within the Region. The Regional Representative also maintains a working relationship with other Government agencies in related fields and with private welfare organizations with similar objectives, such as the American Public Welfare Association, the American Association of Social Workers, and the American Foundation for the Blind. The Bureau of Public Assistance utilizes freely the special services of other branches of the Board, particularly of the General Counsel's Office and of the Bureau PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 281 of Research and Statistics. The latter Bureau performs an important function in gathering from the States periodical statistics relating to their assistance programs, and correlating such data for the use of the Board and State welfare agencies. It is especially concerned with the collection and assembly of statistics regarding the number of assistance recipients and total expenditures. For these purposes it maintains its own representatives in Regional Offices nearer to the sources of information and in a better position to advise State welfare agencies as to the best statistical methods to use. On the basis of the data which it gathers, the Bureau also conducts special research projects on outstanding problems related to public assistance. The Bureau of Accounts and Audits carries on extensive auditing activities in the field, where its traveling auditors check the financial operations involved in State assistance programs. It determines the exact amount of Federal grants to be made to the States, and certifies as to compliance with the matching provisions of the Act by State governments. In order to insure the proper spending of Federal monies by the States, the Bureau of Public Assistance makes use of a number of control devices. In the first place, it has the power to recommend the approval or disapproval by the Board of State organization plans and procedures. Second, it may enforce the regulations promulgated by the Board on its recommendation. Though such regulations are binding on the States, so long as they are confined to enforcement of conditions laid down in the Act, the Bureau has hesitated to exercise its compulsory authority unless other means have failed. It has preferred to bring about the same results, wherever possible, by impressing on the States the value of its recommendations to sound administration. Third, the Regional Representatives of the Bureau may exercise the right to inspect the working of State programs. In case 282 PUBLIC ASSISTANCE AND PUBLIC WELFARE weak spots develop in the operation of a program, which might threaten its effectiveness, the Division of Administrative Studies may send special investigators into the State to report on conditions, though such an investigation is made only at the request of the State government involved. Fourth, the field auditing facilities of the Bureau of Accounts and Audits provide a regular check on State expenditures of Federal assistance grants. As result of such an audit, States sometime have part of their claims disallowed. Fifth, the requirement that State agencies submit monthly statistical and quarterly financial reports furnishes the Bureau with periodic progress reports on the administration of their assistance programs. Sixth, the Bureau may recommend the continuance or suspension of Federal grants to a State, according to the extent of the State's compliance with the requirements of the Act. In its relations with the States on behalf of the Board, the Bureau is careful to refrain from dictation or coercion. In a field where there is still little reliable experience for guidance, where political or group pressures are liable to affect the administrative soundness or financial solvency of a State program, and where antipathy to Federal intervention is active, the Bureau has preferred to use the slower ways of persuasion and advice. In following this course, it has depended much on the example of the more progressive States, the public's growing support of the social security program and insistance on its honest and efficient administration, and the cooperation of professional welfare interests. It also has the powerful leverage implicit in the terms of the Act, which regulate the original and continued approval of State assistance plans. FINANCIAL PROVISIONS OF THE ACT Federal payments to the States for public-assistance purposes are made on a matching basis. In the case of PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 283 old-age assistance and aid to the blind, the matching is on a dollar for dollar ratio; in the case of aid to dependent children, the ratio of Federal contribution is one dollar for two, that is, for every two dollars spent by a State, the Federal Government adds one dollar. In order to permit States whose constitutions prohibited them from making expenditures for local relief or assistance an opportunity to amend their basic law accordingly, the Act provided that Federal appropriations might be made up to July 1, 1937, without requiring any financial participation on the part of the State, as distinct from its local subdivisions. However, none of the States availed themselves of this privilege. Certain conditions are attached to these payments. Federal funds can be used to cover one-half of the amount of assistance received by an individual up to a maximum of $30 per month; that is, the Federal Government will supplement State payments of $15 a month or less with an equal amount. The States are free to make monthly assistance payments of over $30 to their residents, but in such cases they must assume responsibility for any individual payments of more than $15 a month. Thus, if a grant is for $40, the State must bear $25 of the cost. On the other hand, if the total grant is $25, Federal funds may be used to the extent of $12.50. In the case of aid to dependent children, the Federal Government matches State payments on a one-two basis up to $18 for the first child and $12 for each additional child in the same home. According to this scale, it could contribute, respectively, $6 and $4 per child, as against $12 and $8 on the part of the State. Other stipulations with respect to Federal payments on account of old-age assistance are (1) that the recipient be at least 65 years of age, and (2) that he not be an inmate of a public institution. The States are free to make assistance payments to persons under 65 or to those in public institutions, but in that event they must bear 284 PUBLIC ASSISTANCE AND PUBLIC WELFARE the full expense of providing aid for such persons. A similar requirement is made in Title X with respect to blind inmates of public institutions. Though not specifically expressed in this connection, the same condition of necessity applies in respect to payments for aid to dependent children. The procedure to be followed in making assistance grants to the States is explained in some detail in the Act. Prior to the beginning of each quarter, the Board estimates the assistance requirements for the following three-month period. This estimate is based on a report filed with it by the State. (1) This report must contain an estimate of the total amount to be expended for the following quarter, and a statement of the amount appropriated or otherwise provided by the State and its local governments for meeting their assistance requirements for the quarter. If the funds declared to be available for such purposes are inadequate for the quarterly expenditures, the possible source of the additional funds needed must be specified. In other words, the Board must be assured that the State is in a position to meet its obligations under the plan for the ensuing quarter before it makes a matching grant. (2) The State must submit reliable data showing the number of persons eligible for receipt of assistance, in accordance with its assistance plan. (3) It must supply such other pertinent information to the Board as it may require. When these conditions have been met, the Board certifies to the Secretary of the Treasury the amount as estimated, with instructions to make payment to the State agency designated for the purpose. However, if the Federal grant to the State for the previous quarter was greater or less than was due to the State for that period, the estimated payment for the following quarter is to be decreased or increased to that extent. This principle of equalization is carried back still another quarter, or even farther, so that a balance of payments is generally struck over a period PUBLIC-ASSISTANCE PROVISIONS OF THE ACT 285 of nine months. The following hypothetical case explains the accounting formula followed in determining the net payment to be made: Amount estimated for payment to X State, third quarter = $100,000 Amount previously paid to X State, second quarter - 80,000 Amount due X State, second quarter = 90,000 Balance due X State, second quarter = $10,000 Amount previously paid to X State, first quarter = $95,000 Amount due X State, first quarter = 80,000 Balance against X State, first quarter = $15,000 Net balance against X State, first and second quarters = $5,000 Amount of payment to X State, third quarter = $95,000 After arriving at the amount of the net sum due for payment, the Secretary of the Treasury pays to the State the total so certified. Payments are made through the Division of Disbursement of the Treasury Department, without pre-audit by the General Accounting Office. Postaudits made of such payments by the Bureau of Accounts and Audits determine the particular adjustments to be made in payments for subsequent quarters. The Federal grants to States for old-age assistance and for aid to the blind are increased by 5 per cent, in accordance with the provision for a supplementary grant of that amount in excess of the basic matching sum. For example, if the amount certified for purposes of assistance payments is $200,000, the total certification to the Secretary of the Treasury is $210,000. This additional Federal appropriation is particularly designed to aid the State in meeting the administrative costs of its program, but it may be applied wholly or in part to the regular assistance payments under the plan. The Federal grant 286 PUBLIC ASSISTANCE AND PUBLIC WELFARE to States for aid to dependent children includes one-third of the estimated cost of administering the plan, as well as one-third of the cost of assistance payments to be made during the quarter. The Act specified the initial appropriations to be made for the fiscal year 1935-36 for account of assistance payments to such States as might have approved plans. The amounts so specified were $49,750,000 for old-age assistance, $24,750,000 for aid to dependent children, and $3,000,000 for aid to the blind. However, these sums were never appropriated, as the assistance program had not yet developed to the point where such totals were called for. The Act also authorizes subsequent yearly appropriations adequate to carry out the obligations of the Federal Government in connection with the assistance programs of the States. CHAPTER XVI OPERATION OF STATE PUBLIC-ASSISTANCE PROGRAMS The passage of the Social Security Act gave an immediate impetus to the public-assistance movement in the States. Stimulated by the inducement of Federal matching grants, State legislatures hastened to bring existing assistance programs into line with the requirements of the Act, or, where no assistance legislation was in force, to initiate assistance plans for submittal to the Board. For a time progress was retarded by delay in setting up the administrative machinery of the Board; by the necessity of waiting for legislatures, which were then recessed, to convene; by constitutional impediments to the State financing of local assistance; by the need for devising new sources of revenue to meet the prospective costs of assistance payments; and by the lack of a Federal appropriation for matching purposes. In fact, some thirty plans had been approved two months before any funds were available. Since very few of the State assistance plans in force in August 1935 could even approximate the standards fixed by the Act, the whole movement was required virtually to start again with a clean slate. Existing plans were revised accordingly and submitted to the Social Security Board for approval. Meanwhile, the Federal Treasury was not in a position to make matching grants to the States until February 1936. Thereafter, the progress of the general program can be measured by the increase in the number of State plans approved as eligible for receipt of Federal appropriations. 287 288 PUBLIC ASSISTANCE AND PUBLIC WELFARE The quarterly total of approved plans has been as follows: Dependent Quarter Ending- Old-Age Children Blind March 31, 1936............ 32 19 20 June 30, 1936............. 34 20 22 September 30, 1936........ 40 26 24 December 31, 1936........ 42 27 28 March 31, 1937........... 42 28 29 June 30, 1937............. 42 30 29 September 1, 1937......... 50 39 36 Virginia remains the only State which has not had a public-assistance plan approved by the Board. The twelve States and Territories which did not have approved plans for aid to dependent children on September 1, 1937, were as follows: Alaska; Connecticut; Florida; Illinois; Iowa; Kentucky; Mississippi; Missouri; Nevada; South Dakota; Texas; Virginia. The fifteen jurisdictions without approved plans for aid to the blind on the same date were as follows: Alaska; Connecticut; Delaware; Florida; Illinois; Iowa; Kentucky; Mississippi; Missouri; Montana; Nevada; Rhode Island; South Dakota; Texas; Virginia. NUMBER OF RECIPIENTS Other indices to the progress of the assistance movement under the Social Security Act are the growth in number of recipients and volume of payments. In this respect, early statistics are so incomplete and unreliable as to serve for merely an approximate basis for purposes of comparison with conditions previous to the Act. The increase in the number of recipients is due not only to the steady rise in the number of States with approved plans, but to the lowering of eligibility requirements and STATE PUBLIC-ASSISTANCE PROGRAMS 289 to the transfer of many persons from relief to assistance rolls. At the end of 1934 an estimated 236,000 persons were covered by such State old-age assistance programs as were then in operation. By August 1936 the number of recipients of old-age assistance under approved State plans had risen to 829,049, and by July 1937 the total was 1,397,116. In February 1936, the first month in which Federal funds were made available for matching purposes, 68,638 dependent children, belonging to 25,568 families, were in receipt of payments under the provisions of Title IV. The respective totals for July 1937 were 431,446 children and 175,150 families. As of February 1936, 12,058 blind persons received assistance payments in nine of the twenty-four States with approved plans. Over half of these were in Pennsylvania. At that time no payments were yet being made in the other fifteen States. In July 1937 there were 37,031 recipients of aid to the blind in the thirty-six States and Territories with approved plans. On August 25, 1937, the Division of Public Assistance Statistics of the Bureau of Research and Statistics estimated the total number of recipients for September at 1,978,900, of which 1,348,900 would receive old-age assistance, 470,200 aid to dependent children, and 39,800 aid to the blind. An approximate idea of the possible maximum case load of the assistance program was provided by estimates prepared by the Division of Public Assistance Statistics of the Bureau of Research and Statistics as of July 1, 1936. Basic population estimates used in the calculations were prepared with the approval of the Bureau of the Census. Estimates of the number of the blind were recognized as so unreliable as not to permit their use for the purpose in question. Two alternative estimates of the maximum number of eligibles were prepared, one 290 PUBLIC ASSISTANCE AND PUBLIC WELFARE of which was based on more liberal eligibility requirements than was then the rule in State programs. The estimates given were as follows: DEPENDENT CHILDREN Estimated number of children under 16 years of age, July 1, 1936................... Estimated number eligible for aid to dependent children: Assuming 2.5% eligible.............. Assuming maximum 5% eligible...... OLD-AGE Estimated population 65 years of age and over, July 1, 1936............................ Estimated eligible for old-age assistance: Assuming 12.5% eligible............. Assuming maximum 25% eligible.... 36,800,000 920,000 1,841,000 7,700,000 962,500 1,925,000 The actual ratio of recipients to total population of covered age groups in June 1937 was as follows: Number of Old-Age Number of Recipients Assistance Recipients of Aid to Dependent Per 1,000 Estimated Chldren Per 1,000 State Population 65 and Estimated Population Over Under 16 Alabama........... 94 14 Arizona............... 27 Arkansas.......... 156 21 California......... 178 17 Colorado........... 406 28 Connecticut........ 119 Delaware.......... 146 14 District of Columbia. 63 28 Florida............ 121 Hawaii............ 78 Idaho............. 288 35 Illinois............ 237 Indiana............ 140 20 Iowa.............. 172 Kentucky.......... 201 Louisiana.......... 241 28 M aine............. 44 14 STATE PUBLIC-ASSISTANCE PROGRAMS 291 Number of Old-Age Number of Recipients Assistance Recipients of Aid to Dependent Per 1,000 Estimated Children Per 1,000 State Population 65 and Estimated Population Over Under 16 Maryland......... 130 35 Massachusetts...... 184? Michigan......... 128 19 Minnesota......... 328 Mississippi........ 196 Missouri.......... 176 Montana........... 340 16 Nebraska......... 282 26 New Hampshire.... 67 7 New Jersey........ 99 21 New Mexico....... 174 20 New York.......... 125 18 North Dakota...... 199 Ohio............... 219 14 Oklahoma......... 566 34 Oregon.......... 158 5 Pennsylvania....... 149 13 Rhode Island....... 102 12 South Dakota...... 209 Texas............. 466 Utah.............. 253 32 Vermont......... 104 8 Washington....... 272 35 West Virginia...... 208 17 Wisconsin......... 170 25 Wyoming......... 278 25 In Florida, Indiana, Michigan, New Hampshire, and Pennsylvania the minimum age for eligibility under the State old-age assistance plan was 70 years, but the rate as given above was based on the population 65 years of age and over. VOLUME OF ASSISTANCE PAYMENTS Total payments for assistance purposes for the period February 1936 to June 1937 amounted to $384,405,977. This included payments made to individuals from all 292 PUBLIC ASSISTANCE AND PUBLIC WELFARE sources-Federal, State, and local-but did not include administrative expenses. Of the total, $277,524,116 was for account of old-age assistance, $46,066,562 for aid to dependent children, and $10,815,299 for aid to the blind. Monthly payments for all three purposes increased from $4,635,973 in February 1936, when the first Federal grants were made, to $30,578,067 in June 1937. Federal payments for the period February 1936 to May 1937 totalled $152,217,754, or slightly more than half the total sum of all assistance payments for that period. Subsequent adjustment of Federal grants to actual State payments would be expected to alter considerably the ratio between the two sources of assistance payments as expressed by the above figures. Breaking down the total of Federal grants, $131,166,309 was represented by old-age assistance, $15,716,696 by aid to dependent children, and $5,334,749 by aid to the blind. Cumulative figures for Treasury grants to the individual States and Territories are shown by the following table covering the period February 1936-May 1937: Old-Age Aid to State Alabama......... Alaska........... Arizona.......... Arkansas......... California........ Colorado........ Connecticut....... Delaware......... District of Columbia Florida........ Georgia.......... H awaii........... Idaho............ Illinois........... Indiana.......... Iow a............ Kansas........ Kentucky......... Louisiana...... Maine............ Maryland........ Old-Age Aid to Assistance Dependent Children $789,533.70 $394,100.26 48,180.00 844,909.65 217,534.23 12,977,701.54 1,240,820.81 4,703,734.68 375,709.40 1,702,890.18 231,838.08 46,468.70 232,603.18 353,876.91 369,756.23 32,811.94 1,386,891.13 264,213.96 7,513,991.89 3,060,290.69 396,466.67 3,560,139.10 699,800.94 889,080.02 664,533.89 397,850.60 245,671.56 1,475,050.38 1,045,030.76 Aid to the Blind $11,812.50 9,213.75 34,520.51 826,274.83 116,561.56 2,520.00 23,958.27 51,325.06 212,459.62 26,047.59 178,854.64 82,437.34 STATE PUBLIC-ASSISTANCE PROGRAMS 293 - - State Massachusetts.. Michigan........ Minnesota........ Mississippi....... Missouri......... Montana......... Nebraska....... Nevada....... New Hampshire... New Jersey...... New Mexico...... New York....... North Carolina... North Dakota..... Ohio............. Oklahoma....... Oregon.......... Pennsylvania..... Rhode Island...... South Carolina.... South Dakota..... Tennessee........ Texas........... U tah........... Vermont........ Virginia......... Washington..... West Virginia Wisconsin...... Wyoming....... Total............ Old-Age Aid to Assistance Dependent Children $8,385,042.15 $1,251,598.93 3,942,089.12 932,426.94 6,578,410.18 - 607,450.98 5,791.98 3,724,444.65 776,560.50 3,036,629.84 279,169.19 493,129.86 72,358.58 2,789,258.20 1,627,065.37 212,318.20 78,871.27 9,157,884.79 604,551.33 16,402,112.52 1,151,022.38 3,547,997.03 423,767.17 1,738,653.08 7,656,990.41 1,481,642.51 385,872.48 73,675.31 824,786.74 8,377,552.58 743,964.33 361,611.82 403,389.83 35,790.69 3,983,367.99 970,098.19 716,752.58 216,121.19 4,798,802.31 1,369,309.44 387,853.45 93,768.06 $131,144,739.06 $15,716,696.17 Aid to the Blind $129,937.46 50,058.75 7,084.53 83,931.41 47,858.66 66,832.97 13,963.88 5,057.71 17,718.75 265,695.65 76,356.00 58,348.05 2,227,165.22 42,613.80 13,098.04 159,888.07 37,800.00 408,915.98 46,438.67 $5,334,749.27 AVERAGE ASSISTANCE PAYMENTS Though the first result of the new social security legislation was to raise the general average of assistance payments, later increases were very gradual. -In fact, there have been slight declines in two branches of public assistance, probably as a result of recent approval of State plans with relatively lower scales of payment, which weighted the average downward. Increases over presocial security averages have been by no means commensurate with the additional facilities for financing payments which were placed at the disposal of the States by the matching provisions of the Act. Except in a few 294 PUBLIC ASSISTANCE AND PUBLIC WELFARE States, the average paid is still well below the maximum made possible by Federal cooperation in State programs. In general, the average is considerably below the maximum provided by the State law. For the period February-August 1936, the average individual payment for old-age assistance was about $15.90. By October this had increased to about $18.50. In July 1937, the average fell from $18.90 for the previous month to $18.52. The lowest average for that month was $4.25 for Mississippi, and the highest $31.46 for California. Comparative figures for aid to dependent children show an increase from $26.63 per family in October 1936 to $30.76 in July 1937. In the former month, average payments per family ranged from $7.06 in Arkansas to $56.03 in Massachusetts. In July 1937 the range for average family payments was from $10.39 for Arkansas to $58.48 for Massachusetts. Average monthly payments for aid to the blind have been higher than for the other forms of assistance, though there has been little variation in the general level of payments. Thus, the average for States with approved plans was $25.26 in August 1936; in July 1937 it was $24.45, ranging from $9.06 in Arkansas to $36.06 in California. STATE AND LOCAL ORGANIZATION Passage of the Social Security Act has made it necessary to set up special administrative machinery in many States. The Federal-State relationship embodied in the assistance provisions of the Act requires the presence of a responsible State agency with which it can deal. The old system of local welfare authorities, which were formerly accustomed to handle assistance and relief matters on a community basis, is not considered entirely adequate for this purpose. The existing welfare organizations of such States as already had assistance programs ante STATE PUBLIC-ASSISTANCE PROGRAMS 295 dating the Act might use these administrative departments to represent the State in its transactions with the Board. They might also carry out such centralized control and supervision over local welfare authorities as is mandatory under the Act. In some instances a single branch of the State government originally had jurisdiction over all forms of assistance and relief activities; in others, separate State departments supervised assistance to the aged, the blind, and dependent children, respectively. The tendency is now to entrust the administration of all three phases of the public-assistance program to a single State department of public welfare, headed by an appointive board. The executive official of such a department bears the title of director, commissioner, or administrator. At present, the majority of States follow this plan. That is, one agency is responsible for public-assistance plans and programs. However, variations of nomenclature are numerous, and a number of States have a single public-assistance agency under another name. In a few States which have unified direction of assistance activities, special divisions of the central State agency have charge of one or two of the three fields of public assistance. There is a disposition in some States to leave the administration of aid to the blind to a separate department of the State government, sometimes on the principle that care of the blind is rather a question of vocational education than of financial relief. It is probable that as the States complete the organization of their assistance programs under the terms of the Act and come to appreciate the advantages of unified control, the trend towards the consolidation of State welfare agencies will receive further impetus.1 Local assistance administration follows a fairly uniform organizational pattern. The customary adminis1A list of State public-assistance agencies is contained in Appendix IV. 296 PUBLIC ASSISTANCE AND PUBLIC WELFARE trative unit is the county department of public welfare, consisting of an appointed board and an administrative staff. There is a great diversity in the name and form of these boards, but their basic principle of operation is much the same. Sometimes they are named by the Governor of the State or the State public-welfare agency. Others are ex-officio organizations, like the county board of supervisors in California or the board of county comnmissioners in Colorado, which have charge of publicassistance matters within their jurisdictions. Until recently, public assistance in Pennsylvania was administered locally by the board of trustees of the mothers' assistance fund, composed of seven women, but these bodies have been supplanted by a system of county welfare boards. As a rule, these local welfare boards deal with all three branches of assistance, but in a few States their authority is limited to one or two phases of the State program. Thus, Iowa and Michigan have a system of county oldage assistance boards, and Ohio employs boards of aid for the aged. In Ohio applications for aid to dependent children are made to the county juvenile court or probate judge. The tendency is for the county boards to entrust their executive functions to a welfare director or supervisor, who is usually responsible to them. In that event the board largely restricts itself to approval of local assistance policy, to reviewing applications for assistance, to the exercise of budgetary control, and to a general oversight of county welfare activities. The county is not the only unit for local assistance administration. Certain large cities are specifically exempted by State laws and maintain control over their own welfare activities, independent of any county authority. In New England the town, rather than the county, is the traditional center of local government and forms the usual basis for welfare administration. In Vermont, STATE PUBLIC-ASSISTANCE PROGRAMS 297 for example, the official in charge of local assistance affairs is designated by the town council or selectmen, usually from their own number. In actual practice, he consults freely with the field workers of the State agency. In Connecticut the chief executive authority of the town, or his appointee, handles applications for public assistance. In a few States, as in Florida, a group of counties constitutes an administrative district, with a district board in charge of assistance matters. In an increasing number of States the tendency is towards direct administration of local assistance by the State authority. Public assistance is administered directly by the State in Delaware, where the capital is easily accessible from any part of the State. In Rhode Island a cooperative advisory board in each town or city is appointed by the chief of the social security division of the State welfare department. In Maine, public assistance is handled through district offices of the State department of health and welfare. In Kentucky field investigators, representing the State welfare authority, maintain headquarters in each county, from which they conduct the operation of the State assistance program, working in cooperation with local advisory boards. Also in Idaho, New Mexico, North Dakota, Ohio, and Tennessee the county welfare authority is a branch of the State agency, though local boards are retained in an advisory capacity in some of these States. In West Virginia the county public-assistance council is, in effect, a branch of the State department, four of its five members being named by the Governor. In Oklahoma the county commissioners advise the State agent on local welfare problems, but actual administrative authority resides in the State welfare officials. Texas is divided into twenty administrative districts, with a representative of the State agency in each and a sub-district office in most counties. As illustrated by amended State plans during the past year, the 298 PUBLIC ASSISTANCE AND PUBLIC WELFARE trend is toward centralized administration of assistance, with county boards holding only an advisory position. State supervision of local welfare activities, envisaged in the assistance provisions of the Act, is accomplished by a variety of means. The requirement for State-wide uniformity as to eligibility standards and operating methods, the State's responsibility to the Board for enforcement of the matching agreement, and the growing use of State funds for financing assistance programs give the State government a strong leverage in exercising the necessary control over county welfare affairs. Some of the methods used have been described above, as they apply to the more direct intervention of the State agency in local assistance administration. In the instances cited, the function of the county board is essentially advisory, as a concession to its more intimate knowledge of the circumstances of individual cases and to local sentiment. In those States where a considerable measure of authority is left to local officials-and in spite of the encroachment of State power-there persists a strong belief in the value of having the community retain a certain sense of responsibility for the care of its more unfortunate members. This feeling of neighborhood obligation, as against reliance on State action, is generally liable to be stronger in New England and in other long-settled parts of the country than it is in the newer States of the West, where community bonds are usually weaker. This difference of local habit is usually reflected in corresponding variations of administrative technique. Other methods of control utilized by State agencies are: (1) the employment of field workers with power of inspection over local welfare operations; (2) the authority to review local cases; (3) the requirement for the submission of reports; (4) the drafting of procedural regulations of State-wide application. Also, the State agency has the advantage of being able to command the services of a full-time and qualified administrative per STATE PUBLIC-ASSISTANCE PROGRAMS 299 sonnel. Though strictly political appointments are still common and most States have far to go before they realize the ideal of a merit service, there is a marked trend in that direction which is certain to continue. In this connection, the Technical Training Division of the Bureau of Public Assistance places its facilities at the disposition of State agencies to aid them in preparing their administrative employees for their duties. CONDITIONS OF ELIGIBILITY Old-Age Assistance-Of the States with a 70-year minimum, all, except New Hampshire, have taken steps to lower the eligible age limit to 65, thus anticipating the requirement in the Act that such a downward adjustment must be made before 1940. The amended Oregon law provides for the change at the beginning of 1938. Indiana has agreed to reduce the minimum age by July 1, 1938. Florida, Michigan, Missouri, and New York have already made the change or expressed their intention of fixing the minimum at 65 before the expiration of the period allowed in the Act. Colorado is unique in that it pays old-age assistance to persons over 60 years of age. However, the Federal Government makes no contribution to those under 65. This low age requirement is partly counterbalanced by the addition of a State residence requirement of 35 years for those in the 60 to 65-year age bracket. Most States specifically restrict the payment of oldage assistance to citizens of the United States. However, the following States and Territories have no citizenship requirement in their old-age assistance plans: Arkansas, District of Columbia, Florida, Georgia, Hawaii, Kansas, Louisiana, Maine, Mississippi, Missouri, Nebraska, New Mexico, and Utah. As against six States which have recently removed the citizenship requirement, one, Delaware, has amended its plan to include such a restriction. 300 PUBLIC ASSISTANCE AND PUBLIC WELFARE In Minnesota one who has resided in the United States for 25 years is equally eligible with a citizen of the country. Rhode Island has a similar provision though the minimum continuous residence is 20 years. Wyoming requires only 15 years' residence. South Dakota includes applicants for citizenship and Wisconsin those born in the United States. Oregon permits a native American woman, who was married to an alien prior to 1922, to establish eligibility for old-age assistance. State residence requirements are fairly uniform. The usual condition is that the applicant for assistance must have resided in the State for at least five of the nine years immediately preceding the date of application and continuously for the year ending on that date. Four Western and two New England States, Montana, Oregon, Washington, Wyoming, Rhode Island, and Vermont, require five years' residence out of the previous ten years. There are several exceptions to the above rule. Thus, Arkansas, Georgia, and Kansas are satisfied with one year's residence. North Dakota insists on only two years' actual residence out of the nine years preceding application. In Minnesota residence for two continuous years immediately prior to application, even though the applicant has not resided in the State for five years of the past nine-year period, is sufficient basis for qualifying, provided the applicant can show additional residence previous to the nine-year period sufficient to make up the total requirement. The belief prevails in certain States that a relatively high residence requirement is a safeguard against the claims of immigrants from other States in which the rate of assistance payments is lower or from those in which climatic or other living conditions appear less desirable. The Illinois plan specifies that a person may not establish residence in the State for the express purpose of establishing eligibility there. In States where such a condition is specified, the most common requirement for the establishment of county STATE PUBLIC-ASSISTANCE PROGRAMS 301 settlement is one year's residence immediately preceding application. In Minnesota, when an applicant has not lived long enough in a county to establish his legal settlement there, the county of longest residence during the preceding year determines his status in that respect. In several States, including Alabama, California, and Montana, when no county settlement exists, the State pays the entire cost of assistance, pending establishment of such settlement. In Mississippi and Rhode Island the applicant is considered a resident of the county or town in which he makes application. The terms of the needs test established as a condition for receipt of assistance vary considerably in their language, but the spirit and intent of the test are essentially similar in the majority of States. As a rule, the language used in the laws is vague, leaving a considerable measure of latitude to the judgment of local welfare authorities in determining the eligibility of applicants. However, in actual practice there is a wide difference between the liberality with which the concept of "need" Is interpreted in Oklahoma and Texas on the one hand and in Vermont and New Hampshire on the other. The most common criterion of need is possession of an income "inadequate for reasonable subsistence compatible with decency and health." In Delaware, to be considered eligible, the applicant must be "deprived of the essentials of life." In New Jersey he must be "a deserving poor person, unable to support himself in whole or in part." The test of need in New York and Ohio is substantially similar. In Colorado the index of need is possession of a regular income of less than $45 per month. The looser language of the Oklahoma law specifies "insufficient income or other resources to provide for self." In Pennsylvania an applicant must be "indigent" and "unable to provide self with food, clothing, fuel, or shelter." In Iowa and Michigan an applicant must be "unable regularly to earn an annual income of $300 on 302 PUBLIC ASSISTANCE AND PUBLIC WELFARE account of age, infirmity, or inability to secure suitable employment." Other conditions are frequently attached to the needs test, such as lack of children or of other close relatives competent to support the applicant. Property and income limitations are also common. Most States stipulate that an applicant must not have disposed of property in order to qualify for assistance, and frequently establish penalties for that offense. Several fix an annual income of $360 as necessary for subsistence, and limit assistance payments to a level required to bring the individual's income up to that total. The amount of property which an applicant may possess is frequently limited. In Florida, Rhode Island, and Wisconsin the maximum joint equity permitted for a married couple is $5,000. In Ohio and Vermont the limit for man and wife is $4,000, though in the latter State up to $1,000 may be deducted for personal property owned jointly. In California joint equity may be allowed for $3,000 in real property and $500 in personal property, while Minnesota has a similar combined exemption. In Missouri the limit on community ownership of property is $2,000. The maximum equity permissible in the case of single persons is usually somewhat less and may exclude the customary exemption on personal property. The former tendency of State governments to establish liens on property held by recipients of assistance as guarantees for eventual recovery of funds paid to the owner, has declined. Sentimental or social considerations, opposition of heirs, and costs involved in settlement of small estates have dictated this general change in policy. Alabama, Arizona, California, Florida, and Georgia have formally renounced the right to place liens on the property of recipients, or have suspended application of the lien provision in their State plans. Most States permit possession by the widow during her lifetime. However, some States still hold the amount of STATE PUBLIC-ASSISTANCE PROGRAMS 303 old-age assistance payments received as a prior claim against the estate of a deceased recipient, and may even include interest charges for the period during which assistance was received. Provisions that applicants for assistance must not be inmates of public custodial institutions, such as homes for the aged, insane asylums, or prisons, is the rule. Exception is made in Arizona of inmates of the Pioneers' Home at Prescott, and other States recognize the desirability, at times, of enabling an individual to provide institutional care for himself. Also, wife deserters, and habitual tramps or beggars and drunkards are generally denied old-age assistance. Intoxication is a basis for discontinuing assistance in Mississippi. In Idaho an applicant must have a "record for decency and self respect." Other "moral" tests are sometimes applied by local welfare boards at their discretion, but the trend is clearly away from the application of such barriers to eligibility. Aid to Dependent Children-In determining the age limit for assistance payments to dependent children, most State plans follow the definition of the Act, which defines a "dependent child" as one "under the age of 16." Minnesota, North Dakota, and Hawaii, with a maximum age requirement of 18 years, are exceptions. Very few States have a citizenship requirement, so that, as a rule, children of foreign citizens residing in the United States are equally eligible with those of American parentage. However, if the mother is the actual recipient of aid in Arizona, she must be an American citizen, and in the District of Columbia any relative who makes application on behalf of a dependent child must be a citizen. Montana bars the children of aliens who have entered the United States illegally. In Oklahoma, the child-beneficiary must be a citizen. The residence requirements of practically all the States use substantially the language of the Act, which fixes the maximum resi 304 PUBLIC ASSISTANCE AND PUBLIC WELFARE dence test as including "any child residing in the State (1) who has resided in the State for one year immediately preceding the application for such aid, or (2) who has been within the State within one year immediately preceding the application, if its mother has resided in the State for one year immediately preceding the birth." Vermont has no State residence requirement. Though with frequent variation of detail, the definition used in respect to dependent children in the majority of State plans follows closely the terms of the Act, as they define the conditions of dependence and list the degrees of relationship permissible as guardians. The liberal California law includes among those eligible for aid "orphans, half-orphans, abandoned children, children of father incapacitated for gainful work by permanent physical disability or of an imprisoned parent, foundlings, and other dependent illegitimate children." In Delaware assistance grants may be made only to the mother or other woman standing in loco parentis. In New Hampshire and Pennsylvania payments are made only to the mother of children living with her. It is also commonly prescribed that the custodian designated for the child must demonstrate his financial ability to support the child according to reasonable standards of decency. Various States establish certain other specific standards for eligibility. Thus, confinement in an orphanage or other institution is a usual bar, since home care is a basic consideration. Such a home must be "a satisfactory place for training and rearing a child," or it must conform to standards of health fixed by the State agency, or it "must offer some reasonable assurance of stability" (Louisiana). The same official solicitude is usually shown as to the character of the mother or other guardian. In several States she must have shown herself "capable mentally, morally, and physically" of bringing up her children. Delaware and Pennsylvania also require school attendance for children of proper age. The laws of Mary STATE PUBLIC-ASSISTANCE PROGRAMS 305 land, Minnesota, New York, and North Dakota stipulate that the child's religious faith must be fostered and protected. In Delaware the child is expected to maintain affiliation with some religious organization. Aid to the Blind-Age requirements for aid to the blind vary widely between the States. The most common minimum is 16 years. In Colorado, North Dakota, and Wisconsin it is two years higher. In Georgia, Maine, Massachusetts, New Jersey, Pennsylvania, Utah, Vermont, Washington, West Virginia, and Wyoming the bottom is 21 years. In Arizona, Indiana, and New Mexico it is 21 for males and 18 for females. Ohio restricts payments to the age group from 18 to 65. Connecticut, Idaho, Maryland, New Hampshire, North Carolina, Oklahoma, and South Carolina have no age requirement. The majority of State plans for aid to the blind have no citizenship requirement. Arizona, Idaho, and Utah no longer require proof of citizenship, as they formerly did. Residence requirements for most States follow the maximum standard in the Act, which is identical with the standard eligibility requirement for old-age assistance, that is five out of the previous nine years and continuous residence for the year immediately preceding. Several States add the proviso that the applicant must have lost his eyesight while a bona-fide resident of the State. The usual test for need is similar to that commonly applied in old-age assistance cases, and tends to stress the minimum requirement of "a reasonable subsistence compatible with decency and health." Limitations on property and income tend to be somewhat more liberal than with respect to old-age assistance. However, a prohibition against alienation of property for purposes of qualifying for aid is the rule. Inmates of institutions for the blind and public beggars are usually disqualified. Most States stipulate that a recipient must not refuse 306 PUBLIC ASSISTANCE AND PUBLIC WELFARE treatment for restoration of sight if recommended by a competent ophthalmologist. Some States also require recipients to take advantage of their facilities for vocational rehabilitation or instruction, with a view to reestablishing their earning capacity. The District of Columbia will not accept an applicant who has "deprived himself of eyesight or lost his eyesight during the perpetration of a criminal offense, or by reason of vicious habits." In order to establish the degree of blindness required to qualify for aid, most States, generally in their administrative regulations, provide a specific ophthalmic test of vision, which must be certified by a competent specialist. The most common test is one which fixes a minimum standard of vision in the better eye, with correcting glasses, at 20/200 or less, or a disqualifying visual field defect. This degree of vision enables the person to do little more than distinguish the presence of light. Pennsylvania specifies as the degree of blindness 3/60 or 10/200 or less of normal vision. Connecticut declares that the applicant must be "blind or so nearly blind as to be unable to receive instruction in public schools." Nebraska sets as a standard of vision "sight so defective as to seriously limit ability to engage in ordinary vocations and activities of life." The Maryland law does not define blindness. LIMITATIONS OF ALLOWANCES The maximum old-age assistance grant permissible in each State with an approved plan is shown in the table below. The average payment is generally much lower than the maximum indicated and the range of actual payments is liable to be very wide. Thirty dollars per month, or double the Federal matching limit, is the most common limitation placed on individual payments. Sometimes the $30-limit is intended to include both as STATE PUBLIC-ASSISTANCE PROGRAMS 307 sistance and income from other sources. As a rule, funeral expenses which may be incurred are limited to a fixed sum. In some States temporary medical or surgical expenses are allowable. Maximum old-age as sistance grants2 are shown in the following table: State Maximum Payment Alabama............. $30 Alaska.......... 45 Arizona............ 30 Arkansas............ None California............. 35* Colorado.......... 45* Connecticut.... (week) 7 Delaware............ 25 District of Columbia.... 30 Florida............... 30 Georgia............... 30 Hawaii............... 30* Idaho............... 30 Illinois............... 30* Indiana.............. 30 Iowa............... 25* Kansas.............. None Kentucky............ 15 Louisiana........... None Maine............... 30 Maryland............. 30 Massachusetts......... 30* Michigan............. 30* Minnesota............. 30* Mississippi............ 15 State Maximum Payment Missouri............. $30 Montana............ None Nebraska............. 30 Nevada............... 30* New Hampshire....... 30 New Jersey........... 30 New Mexico......... None New York.......... None North Carolina........ 30 North Dakota........ 30 Ohio................. 30 Oklahoma............. 30 Oregon............... 30 Pennsylvania......... 30 Rhode Island.......... 30 South Carolina........ 20 South Dakota.......... 30* Tennessee............. 25 Texas................ 30 Utah................. 30* Vermont.............. 30 Washington.......... 30 West Virginia......... 30 Wisconsin...... (day) 1 Wyoming.......... 30 California and Delaware prescribe a minimum monthly payment of $20 and $5, respectively. Missouri and Vermont allow up to a joint payment of $45 for a married couple. For Massachusetts and Ohio the figures are respectively $50 and $60. Wyoming agrees to pay "as nearly approximately $30 as circumstances warrant." In respect to aid for dependent children, the following fix no definite limitation for individual payments: Arizona, Arkansas, District of Columbia, Georgia, Hawaii, Kansas, Louisiana, Massachusetts, Michigan, Montana, New Mexico, New York, Ohio, Rhode Island, and Wash2States in which the maximum payment permissible includes assistance and other income are designated above with an asterisk. 308 PUBLIC ASSISTANCE AND PUBLIC WELFARE ington. The following States provide for a maximum payment of $18 per month for the first child and $12 for each additional child: Colorado, Idaho, Maine, Maryland, Nebraska, New Hampshire, North Carolina, North Dakota, Oklahoma, Pennsylvania, and Utah. There are several variations from this scale. Thus, California pays $20 for each legitimate child, and $30 for each illegitimate child until it is adopted or reaches the age of two. Delaware, Tennessee, and West Virginia provide $12 for the first child and $8 for each additional child. In South Carolina the respective maxima are $15 and $10. In Indiana the scale is $20 for the first child, $18 for the second, and $12 for each additional child. Vermont pays a uniform rate of $4 per child. In Wyoming the maximum is $20 for the first child and $10 for any other child. Alabama specifies as a maximum "such aid as may be necessary for support of child in own home or home of relatives in manner compatible with decency and health." New Jersey fixes the individual payment at a figure "not to exceed cost of care in approved childcaring institution." Wisconsin fixes as the upper limit "an amount sufficient to enable the guardian properly to care for the child." Thirty dollars per month is the most common maximum for payments to the needy blind. This limitation prevails in the following States: Alabama, Arizona, Connecticut, Idaho, Indiana, Louisiana, Maine, Maryland, Massachusetts, Nebraska, New Hampshire, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Utah, Vermont, West Virginia, and Wisconsin. In Colorado the $30-limit includes aid and other income. No specific upper limit is fixed in Arkansas, Georgia, Kansas, Michigan, Minnesota, and New Mexico. Other variations from the usual rule include: California ($400 per year), New Jersey ($480 per year), Ohio ($400 per year; $600 to husband and wife living together), Washington ($100 per quarter), and Wyoming ($50 per month for STATE PUBLIC-ASSISTANCE PROGRAMS 309 head of family; $30 for others). Extras granted in certain States include temporary medical or surgical aid, funeral expenses not to exceed $100, or traveling expenses incurred in seeking treatment. FINANCING THE STATE ASSISTANCE PROGRAMS In those States which bear the entire burden of oldage assistance costs, to the exclusion of local participation, the apportionment of total payments is on a 50-50 basis, that, is the simple matching arrangement provided for in the Act. Such is the procedure in the following States and Territories: Alaska Mississippi Arizona Missouri Arkansas Nebraska Connecticut New Mexico Delaware Ohio District of Columbia Oklahoma Hawaii Pennsylvania Illinois South Carolina Iowa South Dakota Kentucky Texas Maine Vermont Michigan West Virginia In States where counties or towns share in assistance costs, the ratio between the part of the total borne by State and local governments varies widely. In Alabama, California, Louisiana, Nevada, New York, North Carolina, and Oregon, State and county (or town) share equally. In California any excess over half the $15 Federal matching base is shared in the same proportion, that is, in the case of an individual payment of $36 State and county each participates to the extent of $3 in providing the additional $6. In Idaho, Maryland, and Minnesota State and county share on a two-for-one basis. In Massachusetts and Utah the respective ratio is 33 to 17, in Indiana and Wisconsin it is 3 to 2, in Georgia it is 310 PUBLIC ASSISTANCE AND PUBLIC WELFARE 4 to 1, and in Montana, New Jersey, and Tennessee 3 to 1. In New Hampshire the State contributes only $1 to the county's $9. Florida, Kansas, Montana, and Washington have no fixed ratio between State and county share, with the weaker counties contributing less than those in a stronger financial position. In respect to payments for aid to dependent children the special one-for-two matching provision in Title IV of the Act establishes a formula that is almost uniformly followed by all the States. The variation usually depends on the extent of State participation as against local contributions. Where the State meets the entire expense, the relative percentage is State 66.7, Federal, 33.3. Where the counties participate, the total cost is usually divided equally three ways. There are deviations from this formula in Alabama, California, Georgia, Indiana, Maryland, Michigan, New York, Ohio, Pennsylvania, Tennessee, Utah, Wisconsin, and Wyoming, with county and State proportions varying from the established formula in some of the above States in order to make special provision for the requirements of weaker counties. Although there are minor variations, as a rule the costs of aid to the blind are shared according to the ratios followed in the case of old-age assistance. In many States assistance costs are financed from general revenues. In others they are met from a general relief fund, which is created by special taxation. Some States, including Alabama, Colorado, Kansas, and Oklahoma, depend, in part or entirely, on a sales tax; others derive their revenues from levies on a variety of businesses. The most common taxable source is liquor (Colorado, Florida, Maine, Maryland, Massachusetts, Montana, New Mexico, Ohio, Pennsylvania, South Dakota, Texas, West Virginia, and Wyoming). Among other lines which are taxed for the support of State assistance programs are: chewing gum (Arkansas), slot-machines (Arkansas and Texas), horse races (Ar STATE PUBLIC-ASSISTANCE PROGRAMS 311 kansas, Massachusetts, and Texas), cigarettes (Texas), cosmetics and toilet articles (Maryland), beer and soft drinks (Colorado, Louisiana, Maryland, Massachusetts, and Montana), inheritances (Colorado and Montana), corporation franchises (Louisiana, Maryland, New Mexico), and natural gas (Louisiana, Montana, and Texas). Connecticut levies a poll tax of $3 per head, and Idaho and Iowa have also resorted to a per-capita personal tax as an important source of assistance revenues. The financing of their assistance programs, even with low payment scales and Federal matching aid has presented a serious problem to the poorer States, and it is likely that new fiscal devices may have to be resorted to in some of them, in order to meet their assistance costs. Moreover, it should be recognized that the total costs to State and counties of their assistance programs usually exceed the Federal matching contribution, because of such items as funeral expenses, payments to persons not covered by the Social Security Act, etc. Where counties are required to share part of the State's expenses for public assistance, their usual reliance is on the general property tax. However, in a few States the counties make special levies for the purpose-in Idaho a head tax, and in Louisiana taxes on amusements and gasoline, among others. In this general connection, it is important to note that the ratio of local to State contributions is frequently not fixed or uniform throughout the State. This is on the principle that equalization among counties on the basis of need is essential to proper Statewide operation. PROBLEMS OF PUBLIC-ASSISTANCE ADMINISTRATION The public-assistance movement, as represented by the Social Security Act and cooperative State legislation, faces a number of major problems. One of these is "politics." In States where the spoils system is deeply 312 PUBLIC ASSISTANCE AND PUBLIC WELFARE entrenched there has been a strong temptation to extend the abuses of patronage to public-welfare administration. However, most States have made a commendable effort to place their assistance programs on a non-political basis, both as to selection of administrative personnel and qualification of applicants. The lack in some States of persons qualified by administrative and professional experience has made the task all the more difficult and the insistence of those State governments on merit standards all the more deserving of recognition. The second threat to the sound progress of the program comes from the pressure for higher payments and wider coverage. This takes the form of demands for relaxing or eliminating the needs test and lowering the age limit. The idea of "pensions" as a right, regardless of the degree of individual need, has received a strong impetus from the so-called Townsend movement and other similar "plans" of recent years. It also has a precedent in the wide coverage of American war pensions. It has been a particularly active issue in several western States, notably in Colorado, but also in California, Oregon, Texas, and Oklahoma. The movement has found organized expression in such pressure groups as the National Annuity League, the United States Federated Pension Groups, the newer Social Security Improvement League, and the States Pension and Recovery Plan, Inc., which supported the Balzer Bill in the Wisconsin legislature to give "pensions" of $75 a month to all persons over 60 years of age. The customary strategy of these organizations is to impress State legislatures with the voting strength of their followers, but during the last session of Congress they also succeeded in creating a substantial block of supporters in the House. The principal objective of their efforts in Congress is to change the present dollar-fordollar matching ratio for old-age assistance, with a view to doubling Federal contributions to the States. In its potentialities as a vote-getting device, an uncontrolled STATE PUBLIC-ASSISTANCE PROGRAMS 313 movement for higher assistance payments represents a real danger to the essential integrity of the program. While clear-headed public leaders recognize the complete inadequacy of the general level of assistance now paid as the basis for even a reasonably decent standard of living, they are aware of the possible menace to public solvency in a scale of payments beyond the means of the States. In considering further the adequacy of assistance payments, it should be borne in mind that, in default of a general relief program, in some States they are expected to support the entire family of the recipient. In this respect, statistics are frequently defective in that they do not reflect the number of persons actually supported by assistance payments intended for the sustenance of a single individual. Moreover, in some States the scale of assistance payments is clearly below the reasonable financial capacity of the State. After all, even a moderate assistance program may well put a heavy strain on the finances of a State whose taxable resources are limited and whose normal fiscal obligations are already stretched to the limit of safety. The sales tax, which is used to finance public-assistance payments in several States, is liable to be an unpopular revenue-raising device, and its wider extension to other States may meet with strong opposition, as has occurred in Maine. Additional taxes on liquor, another common source of assistance funds, might easily result in reducing consumption. Proposals for State lotteries, a common expedient for financing welfare activities in some foreign countries, have so far been given little consideration. A general overhauling of State governments, with a view to eliminating permanent sources of loose administration and deep-seated operating extravagances, might provide a sounder position for assistance requirements in the revised political structure of the State. However, there are too many vested interests involved in the perpetuation of existing conditions for any such fundamental solution 314 PUBLIC ASSISTANCE AND PUBLIC WELFARE to be given serious consideration in the immediate future. Legislatures, faced with the dilemma of providing an adequate assistance program and, at the same time, meeting the normal commitments of State governments, may well count on continuing to be harassed with the problems of where to find the funds required to meet the additional burden for welfare purposes. Another circumstance which has aggravated the administrative and financial difficulties of State welfare agencies is the apparently growing tendency of families to shift to the State the burden of supporting their aged and orphaned members. Regardless of whether this trend is due to a general weakening of family solidarity or to the effects of the depression on the resources of producing members of the family group faced with the probable alternative of neglecting their immediate family responsibilities, the result has been to force the State to contribute to the support of many persons who in other times would probably have been considered proper charges for their families. The too close association in some States of assistance administration with that of emergency relief and the consequent psychological identification of the two have proven detrimental to the most effective handling of assistance programs. Hence, this liability is in part counteracted by the fact that the Emergency Relief Administration prepared the way for a wider public acceptance of the public-assistance movement. It should also be recognized that, in case a long-range general relief program is found necessary to provide for those not covered by public assistance or the other phases of the social security program, a certain amount of integration of effort, if not actual administrative identity, may be advisable. Finally, as a correlative phase of the larger problem of public assistance, the lack of adequate provision in our national life for the peculiar needs of the aged makes STATE PUBLIC-ASSISTANCE PROGRAMS 315 it more difficult for the recipients of old-age assistance to adjust their lives to the scale of their assistance grants from the State. In matters of housing and other features of our civilization, little consideration has been shown for the special requirements of elderly people. This is liable to be particularly felt in large cities, whose facilities are especially designed with a view to serving the demands of the young and of the producers. In the same connection, the growing lack of occupational opportunity for those who are able and inclined to work beyond the accustomed age for retirement, rather than apply for public assistance, has inevitably increased the burden of assistance programs. The future trend of public assistance is certain to be affected by other provisions for the welfare of the aged or by changes in the scope of the Act. It is possible that the categories of assistance may be extended to include aid to the incapacitated and other groups. The Federal matching ratios may be changed by amendment of the Act, particularly in respect to aid to dependent children, and equalization of Federal grants to the States on the basis of their respective need may be established. Also, many needy aged are still on relief rolls, and though their gradual transfer to an assistance status is being accomplished, the varying standards for receipt of relief and of assistance and the different scales of payment sometimes make the adjustment difficult. Moreover, where local relief payments are more favorable there may be a tendency for some to remain on relief unless some form of compulsion is used. It is to be anticipated that old-age assistance will be used to supplement low monthly benefits under the Federal old-age benefits program, at least until the general scale for such benefits comes to exceed the level of assistance payments, and possibly longer. The logical assumption is that, as the average scale of monthly old-age benefits rises, the volume of assistance payments will decline 316 PUBLIC ASSISTANCE AND PUBLIC WELFARE accordingly. However, a concerted movement for more liberal support of the aged might easily invalidate this assumption and result in maintaining indefinitely the present volume of assistance costs, or even actually increase it. The extension of the Federal old-age benefits program to some of the larger excluded classes would certainly have a marked effect on future assistance trends, as some of these occupational groups comprise one of the largest fields for public assistance. A steadily increasing demand for the purchase of private retirement annuities by workers in the higher wage brackets may reasonably be anticipated, and there is no indication of a decline in the number and volume of group pension plans. To the extent that the number protected by private insurance plans increases, the ranks of potential applicants for old-age assistance may be expected to decrease, though by no means in the same proportion. In view of our past experience, it is reasonable to believe that the coverage and cost of military pensions will continue to increase greatly for many years. As a preferred class of citizens, with a correspondingly higher scale of pensions, the treatment accorded veterans in this respect may be expected to set an example to any concerted movement for larger assistance payments. However, in case general pensions are provided for veterans of the World War and certain categories of their relatives, the possible field for old-age assistance will be curtailed. Meanwhile, there is much experimenting by the States and much exchange of State experience, in the effort to find the system best adapted to the needs and resources of each State. Many of the plans originally approved by the Social Security Board have since been amended, and the process of modification may be expected to continue for a long time. In some States, as in Colorado and Missouri, the changes proposed have aroused widespread, and sometimes bitter, discussion. In the case of STATE PUBLIC-ASSISTANCE PROGRAMS 317 only one State plan, that of Illinois, has the Board felt justified in exercising its authority to suspend Federal grants for failure to comply with the original terms of the plan. In this instance, after the necessary changes were made in the Illinois State administration, financial cooperation was promptly restored by the Federal Government. With the exception of Virginia, the basic principle of public assistance, as embodied in the Social Security Act, has been accepted by all the States as a settled policy of their governments. To the future is left the task of trial and adjustment. CHAPTER XVII THE WELFARE PROVISIONS OF THE ACT The welfare provisions of the Social Security Act are contained in Titles V and VI. Title V is headed "Grants to States for Maternal and Child Welfare," which is not fully descriptive of the varied contents of this section of the Act. For, of its four parts, (1) Maternal and Child-Health Services; (2) Services for Crippled Children; (3) Child-Welfare Services; and (4) Vocational Rehabilitation-the last is entirely unrelated to the other three or to the subject of the Titles. Title VI deals exclusively with "Public-Health Work," as its heading implies. Five supplementary phases of the general social security program are represented. They differ widely in specific objectives and methods of application from the three major phases of the larger program-public assistance, old-age benefits, and unemployment compensation. They involve no features of "pension" or insurance technique, and provide for no such direct sustenance payments to individuals as are the very essence of the other three fields of activity. Rather they embody certain preventive or corrective services, which are placed at the disposal of particular groups of the population. Four of the five are concerned with hazards or problems of health; one with general aspects of juvenile conduct or social welfare. Three are associated with the welfare of children. Only one-the provisions for the extension of public-health work, in Title VI-affects the population as a whole. The welfare provisions differ from the other phases of 318 THE WELFARE PROVISIONS OF THE ACT 319 the program in another respect-that of administration. They are not administered by the Social Security Board, and are, in fact, completely outside its province of action. Instead, direction of these activities is entrusted to governmental agencies already established and acquainted from experience with the specific problems involved in these subsidiary phases of the social security program. Thus, the related group of provisions which deal with maternal and child welfare are logically administered by the Children's Bureau, of the Department of Labor. By implication, if not by direct reference, the vocational rehabilitation features, comprehended by Part 4 of Title V, are assigned to the immediate supervision of the Office of Education, of the Department of the Interior. As a matter of course, the Public Health Service, of the Treasury Department, is placed in charge of the additional activities in its field, which were made possible by Title VI. In larger matters of procedure the five divisions of the welfare program follow the same general lines. All involve grants-in-aid, made by the Federal Government to the States, for the purpose of supplementing State activities in the respective branches of public welfare. In all but one of them Federal financial participation is conditional on the presentation by the States of operating plans, which are required to meet certain standards laid down either in the terms of the Act or by the particular administrative agency. In the one exception- childwelfare services - plans are worked out by the cooperating States with the aid of the Children's Bureau. MATERNAL AND CHILD-HEALTH SERVICES The provisions comprised in Part I of Title V of the Social Security Act have revived on a larger scale the principles embodied in the Maternity and Infancy Act of 1921. That law, which was in operation from 1922 320 PUBLIC ASSISTANCE AND PUBLIC WELFARE to 1929, represented an earlier attempt at Federal-State cooperation in promoting the hygiene of maternity and infancy. The present program has carried over most of the techniques employed in that short-lived effort and has established them on a more solid foundation. Its objectives are the Nation-wide care of the health of mothers and young children, who, for financial or other reasons, are beyond the reach of such public or private facilities as are available for that purpose. Its field is largely confined to the improvement of conditions in "rural areas" and "areas suffering from severe economic distress," that is, where medical or nursing aid is not easily accessible or where individual means are liable to be unequal to the expense of proper attention. Its particular problems are the conservation of life in childbirth and throughout the period of infancy. The magnitude of the problem can best be expressed in terms of mortality statistics. Reliable records for a relatively long period are limited to twenty-six States and the District of Columbia, where birth registrations have been complete since 1921, though the birth-registration area has comprised all the States since 1933. Although the maternity death rate for the twenty-seven jurisdictions fell from 67.3 per 10,000 live births in 1921 to 55.5 in 1934, and stood at 59 per 10,000 for the entire country in the latter year, it was still higher than that of most foreign countries, and high enough to give grave concern to public-health and welfare authorities. For example, it was nearly three times that of Uruguay and more than double Italy's rate. Of twenty foreign countries in 1933, only one, Chile, had a higher rate. The rates for 1934 ranged from 39 for Vermont to 87 for South Carolina, with only two other States, California and Wisconsin, having rates of less than 45. Compared with an average rate of 54 for white women, that for colored women was 90, heavily weighting downward the showing of the Southern States. According to census reports, THE WELFARE PROVISIONS OF THE ACT 321 12,859 women died in 1934 from causes connected with pregnancy and childbirth. Corresponding statistics for infant mortality show a similar downward trend. In those States in which all births have been registered since 1921, the annual decrease has averaged 2.7 per cent, though the rate of decrease has been much higher for children dying after the first month. In 1934 the rate for the country as a whole was 60 per 1,000 live births, varying from 40 in Oregon to 126 in New Mexico, with its large Indian and Mexican population. The rate was 55 among white infants, as compared with 94 among colored babies. In 1934, 130,185 children less than a year old died, of whom more than half died during the first month of life. The social importance of the problem, from the standpoint of the conservation of human resources, is made more evident by the declining birth rate for the United States. For the expanding birth-registration area the rate fell from 25.1 per estimated 1,000 population in 1915 to 17.1 in 1934. The effects of the depression seriously aggravated the problem of providing for the health of those who are now covered by this phase of the social security program. Public-health services and private organizations which ministered to the special needs of mothers and infants had their budgets curtailed. More women than ever were unable to avail themselves of medical advice during pregnancy and of the services of a physician and nurse afterwards. Infants suffered from the lack of proper care during the critical early months. As a result of straitened circumstances, many of both felt the weakening effects of deficient and ill-balanced nutrition. In October 1932 the Health Department of New York City announced that over 20 per cent of the children in the city's schools were already showing marked effects of malnutrition. Relief measures mitigated at least the worst results of the depression for mothers and children, but could not 322 PUBLIC ASSISTANCE AND PUBLIC WELFARE furnish the special care that was needed under the circumstances of childbearing and infancy. By January 1934 the Federal Emergency Relief Administration declared that there were 1,822,762 children under 6 years of age and another 2,774,016 in the age group between 6 and 13 in families on relief. The mechanics of the Federal-State cooperative relationship involved in the program for maternal and childhealth services are somewhat similar to the arrangements prescribed in the case of public assistance. They involve Federal grants-in-aid to the States on a matching basis, with substantially the same rules for governing the method of making Federal payments; the requirement for the submittal of State plans to meet specified administrative standards as condition for approval; and the usual provision for suspension of Federal appropriations for reasons of non-compliance with the original terms of approval. To finance the Federal share of this feature of the social security program the Act authorizes an annual appropriation of $3,800,000. A triple basis is prescribed for allotting these funds to the States. First, an unconditional grant of $20,000 is made to each State with an approved plan. Second, another $1,800,000 is distributed among the States, according to the ratio which the number of live births in each bears to the total of live births in the United States. Third, the remaining $980,000 is allotted on the basis of the financial need of the individual States. The relative number of live births is also taken into consideration in making the apportionment on this basis. A State is not required to expend its total appropriation during the fiscal year for which it is granted, but a credit for the unexpended balance is carried over to the following year. However, it cannot draw on a new appropriation until the previous allotment has been exhausted. Approval by the Secretary of Labor of a State plan for THE WELFARE PROVISIONS OF THE ACT 323 maternal and child-health service is conditional on its satisfying the following requirements: (1) the State must share in the cost of the program; (2) the program must be administered or supervised by the State health department; (3) such administrative methods must be provided as will insure the efficient operation of the plan; (4) the State health department must submit such reports as the Secretary of Labor may require; (5) provision must be made to extend and improve any locally administered maternal and child-health services in the State; (6) assurance must be given that the State health department will cooperate with established medical, nursing, and welfare groups and organizations in carrying out the purposes of the plan; and (7) the plan must provide for health demonstration services in needy areas and among specially distressed populations. On approval of its plan the State receives its grants in quarterly installments. As preliminary to its receipt of Federal funds, the State must file a statement with the Secretary of Labor, in which it estimates its needs for the ensuing quarter and declares the amount of State and local funds available for the same purpose. The Secretary of Labor must be satisfied that the State is in a position to match the Federal grant for the quarter. After these conditions have been complied with, the Secretary of Labor certifies the amount in question to the Secretary of the Treasury, who then issues the necessary order to the Division of Disbursement for payment to the State authority. Actual administration of this program, on behalf of the Department of Labor, is vested in the newly created Maternal and Child-Health Division of the Children's Bureau.. Similarly, there have been set up within most State health departments special divisions of maternal and child health, headed by specialists in pediatrics and obstetrics. The Children's Bureau maintains a staff of qualified consultants in this phase of the program to 324 PUBLIC ASSISTANCE AND PUBLIC WELFARE advise the appropriate State health authorities on their problems. The State agency usually delegates specialized functions of the program, such as public-health nursing, to personnel experienced in those lines of work, and, in turn, delegates to them the duty of advising local public-health personnel in these particular fields. At a conference of State directors of maternal and child-health divisions, held in Washington under the auspices of the Children's Bureau in June 1936, administrative standards and procedures were discussed and certain general lines of action agreed upon. At that time plans had been submitted to the Secretary of Labor by all the fifty-one States and Territories, and have now long since been approved and placed in operation. Though the State programs vary considerably in detail according to the special needs and resources of each State, emphasis is placed throughout on a number of similar factors which are fundamental to the problem involved. These include public-health nursing, nutrition, health education, and dental hygiene. Much of the work is carried on by means of demonstration services among population groups which it is desired to reach and by such special activities as the instruction of general practitioners in obstetrics and pediatrics. The ultimate effectiveness of the program largely rests with the "country doctor," the visiting public-health nurse, and local health authorities, and it is only by equipping these elements in the program with the best knowledge and facilities available that the objectives contemplated in the Social Security Act can be attained. SERVICES FOR CRIPPLED CHILDREN The second part of Title V of the Social Security Act provides the statutory framework of a joint FederalState program for the treatment of crippled children. Like the provisions for maternal and child-health serv THE WELFARE PROVISIONS OF THE ACT 325 ices, special attention is given to the needs of children in rural areas and in distressed industrial districts. In the language of the Act the purpose of this program is "to extend and improve services for locating crippled children, and for providing medical, surgical, corrective, and other services and care, and facilities for diagnosis, hospitalization, and aftercare, for children who are crippled or who are suffering from conditions which lead to crippling." This phase of the general social security program does not represent an innovation in American welfare efforts. By 1934, thirty-seven States had provided some form of care for crippled children, through the medium of either a State commission or department or hospital. All but two had made appropriations for the purpose. The special activities involved in the various State programs have been continued on the same lines under the new Federal-State arrangements. In the operations of these programs a much larger total of State and local funds was already being expended than is represented by the combined Federal appropriations of $2,850,000 made for the purpose under the terms of the Social Security Act. Added to this total were large expenditures by private welfare organizations interested in the same problem. The cooperative effort of the Federal Government is particularly directed at the amelioration of conditions in localities which are normally beyond the reach of existing public and private facilities. The total annual appropriation authorized by the Act is allotted to the States on a dual basis: $20,000, or a possible total of $1,020,000, is granted to each State regardless of other conditions than the approval of the State plan; the remainder, amounting to a possible maximum of $1,830,000, is distributed among the States according to their need, as determined largely by their relative numbers of crippled children. Requirements for the approval of State plans are 326 PUBLIC ASSISTANCE AND PUBLIC WELFARE substantially similar to those provided in the case of maternal and child-health services as described above. Exceptions are (1) that the plan is to be administered or supervised by "a State agency," and not specifically by "the State health agency;" (2) that the plan definitely provides for carrying out the express purposes of the program as stated in the first section of this part of the title; (3) that, in addition to the provision for cooperation with certain groups and organizations named in Part I of the same title, such cooperation is to include agencies "administering existing State laws which provide for vocational rehabilitation of physically handicapped children"; and (4) that no provision is made for demonstration services, as in the former part. The mechanics established for making payments to the States with approved plans are identical with the provisions made in connection with maternal and child-health services. These include the common matching requirement. For the purpose of administering this part of the Act the Children's Bureau of the Department of Labor has established a special Crippled Children's Division, staffed with field consultants and other specialists. On the part of the States local participation is not required by the Act. The program is directly administered by the State, though the cooperation of local public-health and welfare agencies and related social institutions is implied and sought in actual operation of the program. There is no uniformity among the States in respect to the governmental department which administers the State plan. Some utilize the department of public health; others delegate.this function to the department of public welfare or the department of education; and several States entrust the administration of the plan to special commissions for crippled children. All States and Territories now participate under the terms of this part of the Act. Though there are variations in methods, the principal feature of the annual State program is the orthopedic THE WELFARE PROVISIONS OF THE ACT 327 clinic. These clinics are held at different places in the States for making diagnostic examinations of possible subjects for treatment. The customary procedure is for the appropriate State agency to announce to all public agencies that such a clinic is scheduled for a particular date. It can generally count on the active cooperation of a number of private groups in the community. These groups see that the widest possible publicity is given to the clinic, with a view to locating any crippled children who might be in need of treatment. These beneficent organizations which have shown a willingness to volunteer their support include such influential bodies as the Elks, the Shriners, the Rotarians, the Kiwanians, the Lions, and the American Legion. On the day arranged the visiting surgeon examines each child who appears and prescribes as to his care and treatment. Public-health nurses and social workers follow up the preliminary diagnosis and consult with the child's parents regarding the proper treatment advisable in each case. If surgical care is necessary, arrangements are made for hospitalization. Where needed, orthopedic appliances are furnished or provisions made for physiotherapy treatment. Where hospital treatment is ordered, particular effort is made to insure the services of orthopedic specialists. In making such a decision those in charge of the case are guided by the professional and hospital standards set by the State agency. These standards follow the criteria establised by such authoritative groups as the American Board of Orthopedic Surgery, the American College of Surgeons, and the American Medical Association. Aftercare is usually an important phase of individual treatment. On leaving the hospital, the child may need further, and often prolonged, supervision and care before he is physically restored and ready for normal development. This constitutes a continuing feature of the work carried on under the program, for which some States provide special facilities for complete readjustment to the mental and phy 328 PUBLIC ASSISTANCE AND PUBLIC WELFARE sical demands of life. A natural corollary to this development is the training of the child for some occupation. The provision in the Act which calls for cooperation with the State vocational rehabilitation service is a recognition of this obligation to equip the formerly defective child with the means for his own eventual support. CHILD-WELFARE SERVICES The purpose of the third part of Title V of the Social Security Act is stated in the following terms: ".. to cooperate with State public-welfare agencies in establishing, extending, and strengthening, especially in predominantly rural areas, public-welfare services... for the protection and care of homeless, dependent, and neglected children, and children in danger of becoming delinquent." The general concept of such services is somewhat vague and intangible, when compared with the more specific objectives of all the other provisions of the Act. Thus, wide latitude as to techniques is left to those who plan and administer the various State programs in this field. In contrast to the four other groups of welfare provisions in the Act, no question of individual or collective health is involved, but rather broad social or humanitarian considerations. Its objectives are most closely related to those of Title IV of the Act, which provides for financial aid to dependent children. While the population group affected is largely the same in both cases, the method of approach is different. In the one instance it takes the form of direct money assistance; in the other, of moral guidance and protection in the larger sense. Economic factors are associated with both programs, though not to the same degree. Also, the objective of one is the prevention of juvenile destitution; of the other, it is primarily the prevention of juvenile delinquency. It aims to accomplish this purpose by conserving favorable home influences, or, THE WELFARE PROVISIONS OF THE ACT 329 where they are absent, by substituting other social influences which will promote the well-being of the child, and assure him of a normal development. The lack of one or both parents is a fundamental consideration in the program for aid to dependent children; in the program for child-welfare services an orphaned or semi-orphaned condition is not requisite. Both parents may be living and residing with the child, but failing, through incompetence or willful neglect, in their duty to provide for its proper care and upbringing. The Federal Act recognizes that existing facilities for dealing with the problem in the average city are liable to be much more adequate than in rural areas, particularly in backward country districts where poverty or shiftlessness are accustomed to result in the neglect of children. In urban areas, in addition to the activities of established public-welfare agencies, schools, and religious organizations, there generally exist numerous private programs of child welfare, supported by public subscriptions, such as free summer camps and athletic clubs. The influence of these organized movements does not reach to the children in the less prosperous and less progressive rural areas, which accordingly constitute the particular province of this program. However, the coverage of the program is also intended to include children in distressed industrial areas, such as those whose major industries are declining. To meet the Federal share of the costs of this program an annual appropriation of $1,500,000 is made by Congress. This money is allotted by the Secretary of Labor to State welfare agencies, which express their desire to cooperate in such a program. To that end the State agency is required to draft a plan of operation in conjunction with the Children's Bureau. The only condition which attaches to these plans is that they provide for expending the funds received from the Federal Government in carrying out the specified objectives of the program. A total of $10,000 is granted to each State which enters into 330 PUBLIC ASSISTANCE AND PUBLIC WELFARE an arrangement with the Department of Labor under the terms of these provisions of the Act. The remainder is allocated to the States on the basis of the ratio of their rural population to that of the entire country. According to the Federal census of 1930, this ratio varied from 0.096 per cent in Rhode Island and 0.105 per cent in Nevada to 5.732 per cent in Pennsylvania and 6.357 per cent in Texas. The Child-Welfare Division of the Children's Bureau is charged with the administration of this section of the Act. Its staff works in close cooperation with the respective State welfare agencies, which it advises on matters of method and procedure. The State welfare departments, in turn, depend largely on local units to carry out the details of the program. In actual contacts with those whom the program is designed to serve much reliance is placed on the efforts of trained social workers. VOCATIONAL REHABILITATION Part 4 of Title V of the Social Security Act represents only an extension of a long-established program for the vocational rehabilitation of the physically disabled. The statutory basis of that program is the Federal law entitled "An Act to provide for the promotion of vocational rehabilitation of persons disabled in industry or otherwise and their return to civil employment." This law, originally known as the Industrial Rehabilitation Act, was approved on June 2, 1930, and subsequently amended on three occasions. It provided for Federal grants to the States to aid their rehabilitation programs. The brief provisions of the Social Security Act do not affect in any way the essential structure of the earlier law, but increase the amount of the former Federal appropriation for the purpose. The general movement embraced by the program antedated by several years the entrance of the Federal Gov THE WELFARE PROVISIONS OF THE ACT 331 ernment into the sphere of vocational rehabilitation. Prior to the passage of the law of 1920 six States already had a rehabilitation service in operation, and six others had enacted legislation to that end. Private organizations, like the New York Institute for the Crippled and Disabled, the Cleveland Association for Crippled and Disabled, and the Service League for the Handicapped, in Chicago, had long since been working in the same field. A number of social agencies with wider objectives had also begun to take active cognizance of the problem presented by the physically disabled. Two special factors gave an impetus to the movement. One of these was the development of workmen's compensation legislation beginning in 1911, as it came to be recognized that the restoration of the disabled worker to remunerative employment was a logical corollary to the payment of compensation for injury. In their administration the two programs are everywhere closely associated and mutually supplementary. The other factor was the example set by the provision made after the World War for the physical rehabilitation of wounded soldiers. Soon after the entrance of the United States into the war the Federal Board for Vocational Education made a survey of the methods used abroad in rehabilitating disabled soldiers. This report served as the background for the Smith-Sears Bill, providing for the vocational rehabilitation of disabled service men, which passed both houses of Congress unanimously, and was signed by President Wilson on June 27, 1918. A few months later a similar measure, applicable to civilian workers, was introduced into Congress, but failed of passage. However, the Smith-Fess Bill, introduced in the Sixty-sixth Congress, became law in June 1920, and formed the basis of all subsequent efforts in that field as well as laying the administrative foundation for the present Federal-State program. The Industrial Rehabilitation Act of 1920 was successively extended to the end of the 332 PUBLIC ASSISTANCE AND PUBLIC WELFARE fiscal year 1936-37. Meanwhile the Social Security Act had, by implication, prolonged indefinitely the life of the basic law. The Social Security Act provides for an annual appropriation of $1,938,000 for each fiscal year beginning July 1, 1937. For the period previous to that the Act provided for an annual grant of $841,000, to supplement the appropriation of $1,000,000 already mandatory under the revised law of 1920. Of the total, $5,000 is apportioned to the Territory of Hawaii, and the remainder among the several States as provided in the law of 1920. Following the precedent of the original statute, acceptance of the Federal-State cooperative arrangement is optional with the States. The Office of Education of the Department of the Interior is designated by the revised law of 1920 as the Federal administrative agency. Though the Social Security Act does not specify which department of the Federal Government is to be responsible for this phase of the program, in this respect the position of the Office of Education is closely implied in its language. A board for vocational education is the accepted State unit of administration. The conditions for receipt of Federal aid are that: (1) the State board for vocational education must be empowered and directed by State law to cooperate with the Federal agency in administering the program; (2) a plan of cooperation between the State board for vocational education and the workmen's compensation board of the State, in case one exists, must be provided; (3) provision must be made for continued supervision and support of the State's rehabilitation work; and (4) the State treasurer must be designated as custodian of the Federal allotments. The following additional conditions govern the allotment of Federal funds to a State: (1) that it be matched by State funds; (2) that the State agency submit annually a plan for carrying out its program; (3) that the State agency make an annual report to the Office of Edu THE WELFARE PROVISIONS OF THE ACT 333 cation on the operation of the State program and on the expenditure of Federal and State funds in connection therewith; (4) that Federal and State matching funds be not used for purchase, erection, or repair of buildings or equipment, or for purchase or rental of land; and (5) that the State's rehabilitation service be made available to civil employees of the United States while disabled in the performance of their duties. All the States, except Delaware and Kansas, have entered into cooperative arrangements with the Federal Government. Kansas has legislation providing for such cooperation, but the introduction of its plan is delayed for the time being until means of financing its operation are decided upon. Coverage of the entire program also includes Hawaii, Puerto Rico, and the District of Columbia. The Federal Government takes no part in the actual direction and operation of rehabilitation service. It contributes to its support, serves as a clearing house for State experience, makes available to the States the results of studies and investigations in the field, furnishes advice and helps in matters of organization and administration, and generally promotes and coordinates the work on a Nation-wide scale. While no accurate statistics exist as to the size of the problem involved in the program, local or partial studies which have been made would appear to indicate that under normal conditions there is at least one disabled person among each 1,000 of the population who is permanently physically handicapped and a proper subject for rehabilitation. On this basis, roughly 125,000 handicapped persons in the United States are in need of rehabilitation. Comparing the actual results of the national program, the total number rehabilitated in the period 1921-35 was 77,261. The number rose from 523, in the first year of the law's operation, to 9,422 in 1935. At present over 40,000 persons are in process of rehabilitation under the provisions of the program. The service 334 PUBLIC ASSISTANCE AND PUBLIC WELFARE rendered includes vocational training, either institutional or "on the job"; physical restoration, including the furnishing of appliances, such as artificial limbs; and placement in remunerative employment. Living maintenance is also frequently supplied during the period of training. Of rehabilitation cases during 1935, half were the result of accidents, 42 per cent were the result of disabling diseases, and the remaining 8 per cent represented cases of congenital defects. On the basis of costs over a number of years, it is estimated that it requires an average expenditure of approximately $300 to rehabilitate a disabled person. Aside from humanitarian considerations, the vocational rehabilitation program represents a positive measure of public economy, since the cost of restoration to self-dependence is much less than would be the prolonged support of the handicapped individual by organized society. PUBLIC-HEALTH WORK Title VI of the Social Security Act bears the caption "Public-Health Work." This section of the law authorizes a total annual appropriation of $10,000,000 for two general purposes. First, a grant of $8,000,000 is made to the States for establishing public-health services in localities where they are lacking or for supplementing the activities of already existent services of this kind. Second, a yearly appropriation of $2,000,000 is provided for, to be used by the Public Health Service of the Treasury Department in the investigation of preventable disease and sanitation problems. The appropriation to the States for the administration of their public-health services is allotted on the basis of (1) population, (2) special health problems involved, and (3) financial needs. In actual practice 57.5 per cent of the appropriation was first made to the individual States according to the ratio which the population of each bears to the total population of the THE WELFARE PROVISIONS OF THE ACT 335 United States; 22.5 per cent was made on the basis of the particular health problems which, in the judgment of the Surgeon General, are especially urgent; and the remaining 20 per cent was allotted according to the financial needs of the respective States without consideration of other factors. For the fiscal year 1938 the above ratios were changed to 30.7 per cent, 38.6 per cent, and 30.7 per cent, respectively. Balances unexpended at the end of the fiscal year may be carried over by a State to the following year. In that event, their amount is not deducted from the new allotment to which the State would otherwise be entitled. Payments to the States are made in quarterly installments to the Treasurer of the State or other State official legally authorized to receive such funds. They are kept in a special fund and are to be drawn against only to meet expenditures provided for in the budget previously submitted by the State health officer to the Surgeon General. Quarterly financial and progress reports are required of each State health officer who administers such funds. The specific conditions governing the application of the social security provisions for public-health work are laid down in regulations issued by the Surgeon General, as head of the Federal Public Health Service. Before it is eligible to receive payments from allotments, a State must present to the Public Health Service: (1) a detailed statement of its existing public-health administration program, and budget; (2) a plan for extending and improving the administrative functions of its health department; and (3) a plan for extending and improving local (county, district, municipal) health services to be carried out with the aid of funds made available under Title VI of the Social Security Act. Before payments can be made to any State, the State health officer must submit a proposed budget to the Surgeon General for his approval. The budget must show 336 PUBLIC ASSISTANCE AND PUBLIC WELFARE the sources, purposes, and amounts of all funds appropriated by the State, the amounts requested from the Public Health Service for the fiscal year, together with any other related information which the Surgeon General may require. The State health officer must also certify that State and local expenditures have not been replaced or curtailed through the use of Federal funds. Supplemental budgets must be presented by the States to cover any unpaid balances of allotments or unexpended balances remaining from budgets previously approved. It is not contemplated that the allocation of Federal funds should free State governments from the necessity of contributing to their own public-health services or from reducing State appropriations. Such payments to the States are only supplemental to existing funds for the purpose and are not intended to supplant them in whole or in part. Except for the training of State and local public-health personnel, half of the amount allotted to States on the basis of population and for special health problems must be matched at least by an equal amount from existing State appropriations. Another half must be matched dollar for dollar from new State appropriations for the same purpose. On the other hand, it is not required that funds allotted to the States on the basis of financial need should be matched by an equal outlay of State or local funds. The term "special health problems," as used above, is interpreted by the Surgeon General to mean conditions resulting from "high morbidity or mortality on a Statewide basis from particular causes, such as malaria, hookworm, bubonic plague, trachoma, typhus fever, special industrial hazards and similar geographically limited diseases or other conditions that result in inequality of exposure to public-health hazards among the States." Special provision is made for the training of professional and technical personnel qualified to conduct effectively the State and local public-health services. The THE WELFARE PROVISIONS OF THE ACT 337 existence of marked inequalities in this respect among the States was recognized as a serious handicap to the proper administration of a public-health program in the more backward. Among the causes contributing to this condition in particular States were public inertia, lack of active support of the medical profession, incompetent political appointees in public-health posts of responsibility, insecurity of tenure for competent health officers, absence of institutional facilities within the State for adequate preparation of personnel, and financial weakness of the State and local governments. Use of the slightly over $2,000,000 allocated for this purpose for the fiscal year 1937 was limited to the payment of living stipends, tuition, and traveling expenses of State and local public-health personnel for a training period not to exceed one year. Full responsibility for the selection of persons for such training is left with the State health departments. At a conference of State health officers with officials of the Public Health Service, held in June 1935, a set of recommended standards was drawn up as minimum qualifications for the various categories of public-health personnel. These included health or medical officers, public-health engineers, nurses, and sanitarians and sanitary officers. While the standards drawn up at this time were considered to be only temporary and provisional, they represented a very substantial advance over existing conditions in State and local public-health work. For health officers, the standards were primarily concerned with their professional education and experience and with their special knowledge of bio-statistics, administrative procedures, bacteriology, epidemiology, principles of nutrition, and the clinical aspects of the more common communicable diseases as a basis for diagnosis and treatment. Specific requirements in the field of public-health nursing and sanitary engineering were adapted to the particular functions of such personnel. 338 PUBLIC ASSISTANCE AND PUBLIC WELFARE At that time the proposed social security legislation was still under discussion in Congress, and the Public Health Service realized the urgent need of preparing State health departments for the additional responsibilities which they would shortly be expected to assume. Not over half of the State health departments were then adequately staffed or satisfactorily equipped. Most county and other local health services were even more deficient in the essentials of their work. Moreover, radical cuts in appropriations made during the depression had not been restored, so that standards of health service had actually declined. The per-capita expenditure from tax funds for public health in fifty-three cities had fallen from 93.8 cents in 1931 to 77.5 cents in 1934. Normal activities had been curtailed and certain important functions, such as the collection of vital statistics, the maintenance of biological laboratories, and the operation of sanitary engineering services for the supervision of water supplies, sewage disposal, and other phases of community sanitation were inadequately provided for in many localities. In numerous cities public-health work was in charge of physicians engaged in private practice or of lay health officers unfamiliar with the technical requirements of a real profession. The joint Federal-State conference of June 1935 also laid down certain general standards of public-health organization as a condition for receiving funds under the Social Security Act. The qualifying standards established for aid to State health departments were as follows: 1. A qualified full-time State or Territorial health officer. 2. Adequate provisions for the administrative guidance of local health services. 3. An acceptable vital-statistics service. This should include an approved plan for registration of births and deaths and the prompt forwarding of information relative thereto to the Public Health Service. THE WELFARE PROVISIONS OF THE ACT 339 4. An acceptable State public-health laboratory service. 5. Adequate services for study, promotion, and supervision of maternal and child health. 6. Special services for the study, promotion, and guidance of local activities for the control of preventable diseases and for health promotion. This should include an approved plan for the collection of reports of notifiable diseases and the prompt forwarding of information relative thereto to the Public Health Service. 7. Services for study, promotion, and supervision of environmental sanitation. Standards set up at the same time as the basis for aid to local health departments were as follows: 1. The public-health service of the city, county, or district should be under the direction of a fulltime health officer. 2. The personnel of the city, county, or district health department should include, in addition to the full-time health officer, such medical assistants, public-health nurses, sanitation officers, and clerks as will insure at least a minimum of effective health service commensurate with the population and health problems of the area concerned. The Public Health Service, in its allocation to States, should strive to foster the development of health units having a minimum personnel of one full-time health officer, two nurses, one sanitary officer, and one clerk. When a district health unit comprises more than one county or parts of counties there should be at least one public-health nurse and one clerk for each county or similar political unit of government embraced in the health district. In areas whose economic status does not justify this desired minimum, the Public Health Service may feel free to modify these standards. 3. Personnel inclusive of health officers, nurses, sanitation officers, sanitary engineers, and other public-health personnel employed under these grantsin-aid should meet the standards of qualifications established and recommended by the Conference of State and Territorial Health Officers. 340 PUBLIC ASSISTANCE AND PUBLIC WELFARE 4. State and Territorial health departments receiving aid from the Public Health Service should furnish quarterly reports of each project in which Federal funds granted through the Public Health Service are being utilized on forms provided for this purpose by the Public Health Service. The continuation of Federal support for local units should be contingent upon a reasonable development of program and personnel toward the generally accepted standard of adequacy. In the words of Surgeon General Thomas Parran, "Under the public-health provisions of the Social Security Act, a national health program has been made possible for the first time in the history of the Public Health Service." Never before had the Federal Government made adequate recognition in substantial form of its share of responsibility in health matters. The Public Health Service had cooperated for many years with State health authorities. This cooperation had taken the form of occasional technical assistance, the temporary assignment of officers of the Public Health Service, when requested, to duty within the States, and very limited grants-in-aid for the benefit of State and local health services. However, such cooperation had been more or less intermittent and restricted in scope by the lack of funds adequate for the prosecution of a comprehensive and long-range health program on a Nation-wide basis. The States were quick to avail themselves of the opportunity offered by the Social Security Act, and before the end of the fiscal year 1935-36 all of them had submitted to the Surgeon General a program of work in accordance with the provisions of the Act. By 1937 cooperative arrangements were in full operation, with a corresponding improvement in the administration of public-health work throughout the country. In applying the provisions of Title VI of the Act, it has been a guiding principle of the Public Health Service to conserve State and local administrative control of THE WELFARE PROVISIONS OF THE ACT 341 public-health work. It recognizes that the Federal function in this phase of the social security program is only to supply financial and technical aid to the States and indirectly to local communities. For example, facilities for consultation with officials of the Public Health Service are available to State health officers in its five regional offices, as well as at its central office in Washington, where a large staff of specialists is on duty. No attempt has been made to superimpose a Federal administrative machinery which might interfere with the essential independence of the States in the conduct of their own public-health activities. The Public Health Service aims, on the other hand, to cultivate in the States a feeling of local proprietorship and responsibility with respect to their own health organizations. It even refrains from recommending a uniform pattern of organization and procedures, on the theory that out of the diversified experience of the various States may come lessons of common value to all. Finally, it realizes that the particular health and social problems of the individual States may differ too widely to permit standardization of practice in meeting them. The $2,000,000 appropriated under the terms of the Act for direct expenditure by the Public Health Service is largely devoted to the stimulation of investigative activities already in process or to initiating new investigations under the direction of the Service's Division of Scientific Research. Actual work of this kind is carried on under the supervision of the National Institute of Health, though with the cooperation of several private institutions. Particular impetus was given to the campaign carried on by the Service against venereal diseases. This took the form, not only of continued research into methods of venereal disease control, but of the popularization of methods of control and treatment, with a view to reducing the incidence of syphilis and gonorrhea. Special attention has also been given to industrial diseases, like silicosis. PART V PLANNING FOR SOCIAL SECURITY CHAPTER XVIII BASIC FACTORS IN ADMINISTRATION AND FUTURE DEVELOPMENT-ECONOMIC, ACTUARIAL, AND TECHNICAL In order that social security may be provided as efficiently and completely as possible, it is obviously essential that accurate and precise knowledge be available concerning the factors involved in the need for, costs, administrative workability, and effectiveness, of the types of provision either undertaken or proposed. The Social Security Board and the other agencies responsible for the operation of the social security program must have such knowledge if they are satisfactorily to administer the Act and the related State laws. Congress and State legislatures must also have it if they are to deal intelligently with amendments. And, if democratic processes are to function properly, the public too must be acquainted with these basic factors. Research dealing with the nature of these factors is highly practical in character; it is vital to proper administration of the Act and to the attainment of the Act's objective-social security. The Act itself provides that such research be undertaken. In Title VII it is stated that the Social Security Board shall have the duty of studying and making recommendations as to the most effective methods of providing economic security through social insurance, and as to legislation and matters of administrative policy concerning old-age pensions, unemployment compensation, accident compensation, and related subjects. To meet this responsibility the Board has established a Bureau of Research and Statistics, an An345 346 PLANNING FOR SOCIAL SECURITY alysis Service in the Bureau of Old-Age Insurance, and an Office of the Actuary. The basic factors being discussed in this chapter can be described most conveniently and concretely by means of a statement of what is done in studying them. In the following paragraphs, then, there will be included in the way of a by-product an indication of some of the activities of the research organizations, within the Social Security Board and elsewhere, which are endeavoring to throw light upon these factors. The condition primarily responsible for the Social Security Act and the most important one to be considered in the Act's administration and improvement is, of course, that of economic insecurity. Study must be given to all the varied social and economic interrelationships of this condition, both in the United States and in other countries that have tried to deal with it. Current statistics bearing on the different indexes of economic insecurity must be collected and analyzed. Statistical and other materials on the actuarial and technical problems of providing social security, and on the effectiveness of the Act in diminishing insecurity, must also be compiled and studied. Finally, research must be devoted to the social security program as it does at present and may in the future affect, and as it is now and may in the future be affected by, the social, economic, and financial, structure of the country. THE PROBLEM OF ECONOMIC INSECURITY Economic insecurity is not, of course, a unitary thing; many types and variations of it are prevalent. It affects the aged, the blind, the unemployed, the dependent children, the sick, and the crippled, among others, and each group is affected differently. Adequate information on the various phases of insecurity and the magnitude of the problem involved in each is not available. Thus it is ECONOMIC, ACTUARIAL, AND TECHNICAL BASES 347 necessary that data be gathered to show the number of individuals in each of the main categories of those subject to insecurity, the aged, for example, and also the number in each category who are actually affected. Analytical studies must be made of the specific ways in which insecurity is manifested, and of the relative severity of the various forms of the problem. To mention a few projects under way-investigations are being made of the sources and fluctuations of family incomes, and of budgets, expenditures, and standards of living, as they bear upon the possibilities of combating insecurity by means of thrift and saving. The extent to which the wage-earner has been and is able to find dependable and profitable investments (including bank deposits) for the savings he can put aside is being examined; research is being conducted on employment opportunities for older persons; and analyses are being made of the degree to which family income suffers as a result of unemployment, sickness, and death, of wage-earning members. Another very useful type of information is that concerning the fundamental social changes that have caused and the ones that are still causing economic insecurity. The shift from a predominantly agricultural to an industrial economy, the growth of mechanization and the accompanying quickening of the pace of industrial and commercial operations, the trend toward urbanization, and reduction in the size of the family, are among the factors of importance in this connection. Careful attention must be devoted to the adequacy, costs, and social implications, of the facilities existing outside the field of the Social Security Act for dealing with want and for providing economic security. Some of the things being done in this connection are the following: The operations of the public relief agencies and of the works program are studied; note is taken of current changes in employment and pay rolls; data are compiled on developments in the fields of industrial pension plans, 348 PLANNING FOR SOCIAL SECURITY and of group insurance, accident and health insurance, and other private insurance coverages; and evaluation is made of the significance of the roles played in providing against economic insecurity by relatives and friends, private charity organizations, mutual-benefit associations, trade-union benefit funds, and various localgovernment charity agencies. Investigation of Foreign Experience-Only recently have either the Federal or State governments in this country attempted systematically to provide any significant degree of economic security for substantial parts of the population. In various foreign countries efforts to provide security have been under way for the last fifty years. During this period a great deal of very valuable experience has been gained and a great many adjustments in the programs have been made. In a number of the countries the problems of providing economic security have been reasonably similar to those that exist in the United States. The Social Security Board early recognized the usefulness of information on the history of, and developments under, the various foreign plans. A few months after it was organized the Board sent a small group of qualified persons to Europe for the purpose of observing how the European programs are being administered, and to get first-hand information on the experience under these programs and on the problems with which they are confronted. Since that time the Board has also had the aid of other people who, under the sponsorship of different private research organizations, such as the Social Science Research Council and the Twentieth Century Fund, have made thorough, and in most cases first-hand, studies of European social insurance plans. BASIC FACTORS IN PROVISION FOR SOCIAL SECURITY Among the matters which must be thoroughly and continuously investigated if administration and improvement ECONOMIC, ACTUARIAL, AND TECHNICAL BASES 349 of the Act are to be properly guided are: Trends in wage rates, changes in size of and age distribution of the population, trends in mortality, amounts of immigration, ages at which retirement takes place, methods of financing social security, and actuarial principles applying to social insurance. Trends in Wage Rates-The payments under both the old-age benefits and the unemployment compensation plans are geared at a definite ratio to the employee's salary, but tax receipts are geared at another ratio. Thus, if wage levels change, the liabilities under the plans will also change, but tax income may not change correspondingly. For example, under old-age benefits, assuming that wages remain approximately at their present level, that benefit schedules remain unchanged, that appropriations to the Reserve Account are made according to a schedule such as the framers of the Act appear to have contemplated, that longevity remains constant, that retirement takes place, on the average, at the age of 67/2, and that the number of people coming under the plan falls in line with the estimates, the eventual reserve, which would be about 47 billion dollars, may approximately cover all the then accrued liabilities. If wage rates materially increase more people will come within the higher wage groups, their benefits will be lower in proportion to their taxes, and the result may be a surplus in the reserve fund. That consideration be given to the trend of wage rates in this country is essential. Also of interest as possible aids to prediction are trends in wage rates in other countries, especially in those where a relative economic stability and a leveling off of industrial expansion seem to have been reached. Age Distribution and Size of the Population-As indicated in the chapter on the Old-Age Reserve Account, on the basis of certain assumptions it is expected that over a long period of years tax collections under Title VIII, plus interest on the Reserve, will roughly balance 350 PLANNING FOR SOCIAL SECURITY aggregate old-age payments. Among the assumptions that it was necessary to make in order that this theoretical balance could be worked out were ones relating to the rate at which the covered population will grow, the approximate date at which it will reach a maximum, whether it will then remain stable or decline, its size at the maximum, and its age composition during these intervals. Whether these various assumptions will prove approximately correct, only statistical studies will tell. To the extent that the new data coming in each year indicate them to be incorrect, new balances between tax levies and benefit schedules may have to be made. Trends in Mortality-The costs of both old-age benefits and old-age assistance will depend very largely upon the number of those who attain age 65, and upon the number of years they live thereafter. The mortality table is the base upon which the probable number and total value of old-age benefit claims will be estimated. A mortality table may be defined as the moving picture of a large group of people as they go through life, showing the number of deaths and the number of survivors each year until such time as the last member has died. The mortality table is the base upon which insurance companies estimate the number of claims that they may be called upon to pay in any given year. Similarly, the mortality table is the base upon which the probable number of old-age benefit claims will be estimated. The life insurance companies of the United States have developed quite satisfactory mortality tables covering the groups which they insure. Their tables, of course, are changed from time to time as changes occur in the death rates of the insured groups, and in those of the population as a whole. In the "Original Death Registration States" the life span, based on mortality data for 1900-02 was 48 years for white males, whereas in the same area for the period, 1929-31, it was 59 years. A review of the sources and bases of the several types of mortality tables used by life ECONOMIC, ACTUARIAL, AND TECHNICAL BASES 351 insurance companies discloses that although these tables are satisfactory for the work of insurance companies they are not usable in estimating the death rate among the population coming under the provisions of Title II. The insurance company mortality tables cover a very different part of the total population from that covered by the oldage benefits plan. The individuals carrying life insurance are, on the whole, a select group of the population, most of them having been subjected to medical examinations. On the other hand, the people coming under Title II of the Social Security Act are a very broad cross section of the population; they include a great many who are in the lowest income groups, where the standard of living is very low. As a result, the mortality rate for those people coming under Title II of the Social Security Act may be expected to be very different from that which has been experienced by the life insurance companies. In most sections of the United States, until recently, little care has been given to the recording of births and deaths. Therefore, adequate data upon which to build a mortality table have not been available. One of the most important duties of the Social Security Board is to devise methods for assembling more adequate mortality data. New legislation, as well as close cooperation with various Governmental and State agencies, will probably be necessary to bring this about. The Treasury Department, under the provisions of the Act, is called upon to determine each year the amount of the liabilities that will accrue under Title II during that year, and to advise Congress of the size of the appropriation needed to maintain the Old-Age Reserve Account on what is termed "a sound actuarial basis." Among the most significant factors to be considered in determining the size of the reserve is, of course, the mortality experience of the covered population. Although the work of building up an adequate mortality table will require several years of careful study, it is possible that within a 352 PLANNING FOR SOCIAL SECURITY relatively short time a table can be developed which will more closely approximate the mortality experience of the population covered under Title II than does any existing table. In order to have an adequate mortality base to make the many types of actuarial calculations needed under the Social Security Act, it will be necessary to have mortality tables not only for the population as a whole but also for certain specific groups. Special tables ought to be made for the group included under Title II, the inhabitants of each of the several States, for the different races, and for the two sexes. This must be done because mortality rates differ in the various States, especially as between the northern and southern States; they also differ among racial groups, and between the sexes. Under the present Act the old-age benefits provisions cover approximately 53 per cent of the country's working population. As time goes on it is very probable that certain of the excluded groups will be brought under the system. Adequate consideration of the advisability of bringing some of the now excluded groups under the old-age benefits plan necessitates having data concerning their mortality experience, such data making possible estimates of the financial liabilities which will be incurred as a result of inclusion. The data may also be used as a base for making adjustments in the Act necessary because of the entering groups. In computing the mortality base it will be necessary not only to consider present longevity data but also mortality trends over the past few decades. After considering all the factors which may affect a mortality table, the actuary must extrapolate the table into the future, that is, attempt on the basis of it to anticipate future experience. Although some very fine work has been done in this field by such people as Louis I. Dublin and Alfred J. Lotka of the Metropolitan Life Insurance Company, the work has of necessity been so limited in its scope and so different in purpose from that required in connection ECONOMIC, ACTUARIAL, AND TECHNICAL BASES 353 with Title II that it will serve only as a point of departure. Mortality studies will be of great value in connection with the administration of the old-age assistance plans as well as of the old-age benefits system. Amounts of Immigration-The rate of growth and the age composition of the covered population, upon which the costs of the old-age benefits plan will partly depend, will be determined to a considerable extent by the amount of net immigration. Studies must be made of tendencies in immigration in order that estimates of future benefit claims may be as accurate as possible. Ages at Which Retirement Takes Place-In computations of the costs of the old-age benefits program, the assumption has been made that the average age at retirement will be 67/2 years. At the present time this seems to be a reasonable assumption. However, studies must be made of the actual retirement ages. These, of course, will vary with business conditions, and with the size of the average benefit. In times of depression people will retire and begin drawing benefits at lower ages than will be the case in prosperous years. During the early years of the operation of the old-age benefits plan, when the average payments are quite small, the average retirement age will presumably be higher than will be the case later on. In any event, the statistical data must be analyzed and the basic assumption modified, if necessary, in the light of what they show. Taxation and Finance-Probably the most important of the Act's provisions from the standpoint of their interrelationships with the economic structure within which the Act functions are those pertaining to how the several social security measures are to be financed. The capacity of the country and of the several States and regions to pay for social security services now being made available, the possibilities of more adequate services being supported, the optimal rate of putting the present services and possible additional ones into effect, the ramifying 354 PLANNING FOR SOCIAL SECURITY economic effects of the various methods of raising revenue, the repercussions of both the tax and benefit programs on the financial organization of the community, and the relationships between social security and the problems of the national debt and the distribution of the national income, are matters to which it is essential that the most careful analyses be devoted. Particularly important are studies of the Old-Age Reserve Account and of its effects on the operations of such financial institutions as the banks and the insurance companies. Upon the availability of correct analyses of these matters depends whether in the long run the social security program is to be to the advantage of the community or is to be a detriment. In order to be able to estimate as accurately as possible what effects the present program or any modifications of it will have, the Social Security Board's research organizations study the economic and social trends against which, as a background, the effects will occur; they also study the economic and social changes that have accompanied the introduction of foreign social insurance and pension plans. Actuarial' Principles in Social Insurance-As noted in the chapter on the Old-Age Reserve Account, there are at present no "accepted actuarial principles" relating to a social insurance plan, such as that for old-age benefits. Because social insurance is an institution very easily affected by political considerations and by temporary economic dislocations, the actuarial principles used in private insurance work cannot be safely applied to it. Hence, it is desirable that a special code of principles be developed. Upon the type of one adopted will depend, indirectly, the manner in which the costs of the old-age benefits plan are distributed over the years, and the rate at which the Reserve Account will grow. Before such actuarial principles can be formulated, one An actuary, according to Webster, is one whose business it is to calculate insurance risks and premiums. ECONOMIC, ACTUARIAL, AND TECHNICAL BASES 355 of the chief things to be done is to develop an adequate and convenient terminology for handling actuarial concepts as applied to social insurance. During the busy processes of framing the Act and of first putting it into operation, little attention could be given to the definition of terms. But now that it becomes necessary to examine and analyze critically the manner in which the Act is functioning, the value of a precise terminology must be recognized. Further Development of the Social Security Program -One of the primary duties of the Social Security Board is to study the problems involved in creating a more effective and more complete social security system than does the present Act. A major concern here is with the economic and administrative aspects of spreading the coverages of the unemployment compensation and oldage insurance systems to such groups as agricultural labor, domestic servants, State and municipal employees, and employees of certain non-profit institutions. Among the matters to be considered are the costs of such extensions of coverage, the need for them, the determination of whether, and if so what. changes in the benefit formulas should accompany the extensions, and the influence of general factors, such as labor migration and the administrative practicability of the extensions. The problem of providing old-age security for the self-employed is another one demanding considerable attention. Of significance in connection with all these problems are trends in the occupational distribution of the working population. For example, the percentage of those gainfully occupied who are engaged in agricultural pursuits seems to be declining. Should this trend continue, the need for extension of protection to agricultural labor will decline, while the ease of doing it will increase. Also of importance is the devising of methods for providing sickness, disability, and invalidity insurance in order that relevant 356 PLANNING FOR SOCIAL SECURITY information may be available if Congress decides to institute one or more of them. Statistics of Operation-Underlying the studies of all the factors just mentioned will be the current statistics, which serve as a moving picture of the various sections of the Act in operation. Most developed thus far of the statistical presentations are the ones pertaining to public-assistance activities. The rapid development in this field was to have been expected, inasmuch as the public-assistance titles of the Act were put into effect shortly after their enactment, whereas a considerable period of time will be required before the social insurance plans can be put into full operation. Public-assistance data reflect such things as the absolute and the relative or proportional coverages of the several kinds of aid provided by the Act, the total payments, the payments per recipient, and the costs of administration. These figures are broken down by States. Also included in these statistics are figures on other public and private-welfare activities such as relief. Having both the public-assistance and the other figures available, it is possible to study the interrelationships of the activities under the Act with other welfare activities. After the unemployment compensation plans are in full operation it will be the duty of the Board to gather statistics on their coverages, benefits, and tax collections. Tabulation and analysis of statistical materials gathered in the course of administering Title II has already begun. In accordance with Title VII of the Act, the Board compiles and analyzes whatever statistics it can secure on such matters as sickness, disability, and invalidity. These materials will be valuable in determining the extent of need for insurance against these hazards, the amount of protection such insurance should give, and the probable costs of this protection. Special Statistical Studies-Aside from having to make regular and periodic compilations of statistics the Board will also find necessary the making of sample statistical ECONOMIC, ACTUARIAL, AND TECHNICAL BASES 357 studies of special groups affected by the social security program; the groups will include, for example, the oldage beneficiaries, public-assistance families, and unemployment compensation beneficiaries. One of the more important studies of this sort will have to do with the adequacy of the benefit or assistance payments being received. The research organizations will also be called upon by the Board to make special studies to be submitted to Congress and to State agencies. These special studies will deal with matters such as the present status of certain sections of the program, the different effects of these sections, and the bases for and probable effects of proposed changes in the Act. TECHNICAL CONSIDERATIONS IN ADMINISTRATION A major type of research relating to the operation of the social security program is that having to do with the development of administrative techniques. Among the procedural problems in unemployment compensation are those concerning the recording of contributions, the payment of claims, and the protection of interstate, parttime, and seasonal workers. Among the studies needed in old-age benefits are those concerning ways of handling wage records and claims for benefits, the advisability of decentralizing the recordkeeping system, and methods of dealing with complaints. In connection with its work of collecting taxes under Title VIII the Treasury Department is obtaining individual wage data on all employees covered by this title. These data are complete enough so that when turned over to the Social Security Board they can be used as the basis for posting the ledger account required for each employee. From these ledger accounts are determined the benefits payable under Title II. The collection of these wage data is of much more importance to the Social Security Board than it is to the Treasury De 358 PLANNING FOR SOCIAL SECURITY partment, and hence, although the Treasury Department has done and will continue to do a great deal of research work on methods of keeping records, it is going to fall within the province of the Board to make further studies of the various methods used by employers in keeping pay-roll data. It may even be advisable for the Social Security Board to draw up a model plan which could be used by employers in setting up their pay-roll systems to provide the wage data required by the Treasury Department. It is estimated that approximately 50,000 private employees are required to furnish the wage information necessary for the operation of the old-age benefits and of the State unemployment compensation plans. The task of improving methods of reporting wage data is one of tremendous practical importance. In claims work, under both the old-age benefits and unemployment compensation programs, the experience of the large life insurance companies, the Veterans Administration (some of whose officers are aiding in the administration of the Bureau of Old-Age Insurance), and a few private investigation bureaus, has been of great assistance. Through the insurance-trained men on the Board's staff, close contact is maintained with the life insurance companies. The value of the experience of these companies with problems closely similar to those of the administration of old-age benefits and of the other features of the Social Security program can hardly be overstated.2 2 Though it is not generally known, one life insurance company in this country is maintaining records for 28 million policyholders and 46 million outstanding policies. The problem of keeping these records is actually more difficult than the problem of keeping the wage records under Title II of the Act. One reason for the greater difficulty is that the policyholders are buying the insurance on a voluntary basis. Moreover, in a great many cases, the premiums are collected more often than are the taxes under Title VIII of the Act. Additional administrative problems result because these 46 million policies do not operate under one standard formula; the formula differs according to which of the many different policy provisions is used and according to the many personal factors involved, such as health, age, sex, and race. ECONOMIC, ACTUARIAL, AND TECHNICAL BASES 359 Although the States administer the unemployment compensation laws, and although the devising of satisfactory methods of financing, keeping records, paying claims, collecting taxes, choosing personnel, and setting up the administrative machinery of their respective plans, is mainly up to them, the Social Security Board, through its Bureau of Unemployment Compensation, has placed itself at the disposal of the various States in the capacity of consultant on unemployment compensation problems. While the States are at liberty to adopt whatever techniques they wish, the general outlines of their plans must satisfy certain fundamental requirements laid down in the Social Security Act. The Board's staff is called upon to do a considerable amount of checking to ascertain whether the plans submitted are in line with these requirements. Analyses of the Social Security Act and its administration are being made in order to determine the extent to which loopholes may permit evasion of its purposes. Thorough studies will be made of possible "rackets" which may be conducted under the Act, and of ways to combat them. Everyone familiar with the experience of the insurance companies administering total and permanent disability insurance policies recognizes the importance of carefully considering the factor of moral hazards. Although the actuaries of these companies have found it comparatively simple to estimate the disability hazard, they have found it next to impossible to calculate the moral hazard. Thus, in 1936, the insurance companies of the United States paid out approximately $104,000,000 in disability claims, whereas their original estimates were of approximately half this amount. The newspapers have recently carried accounts of a disability "racket" which has been uncovered in New York City. A clique of doctors and lawyers there have been able to establish fraudulent total and permanent disability claims in extremely large amounts. 360 PLANNING FOR SOCIAL SECURITY Although the Social Security Board is the agency most immediately concerned with the investigation of the various factors that have been listed, a number of other organizations, both public and private, have directed their efforts toward the solution of the problems involved. Among the Government agencies participating in the research program are: the Children's Bureau, the Bureau of Labor Statistics, and the United States Employment Service, all in the Department of Labor; the Bureau of the Census; the Office of Education; and the Works Progress Administration. Among private and semipublic organizations that are rendering significant services in clarifying issues and in recommending improvements in the Act are: the Social Security Advisory Council, named jointly by the Special Committee on Social Security of the United States Senate and the Social Security Board, and consisting of representatives of employees, employers, and the public; the American Association for Social Security; the Hearst Non-Partisan Social Security Commission; the Social Science Research Council; the Twentieth Century Fund's Committee on Old-Age Security; the American Public Welfare Association; the American Municipal Association; the American Association for Labor Legislation; the Actuarial Society of America; and American Institute of Actuaries. Not only are these organizations, as such, contributing valuable research, but individual representatives of many of them have furthered the program by making available to the Social Security Board their experience and expert knowledge of certain phases of social security problems. A list of some of the publications of these research agencies is given as Appendix V. APPENDIX I Regional Offices of the Social Security Board Region I Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Regional Office: Boston, Massachusetts. Regional Director: John Pearson. Region II New York. Regional Office: New York City. Regional Director: Anna M. Rosenberg. Region III Delaware, New Jersey, and Pennsylvania. Regional Office: Philadelphia, Pennsylvania. Regional Director: W. L. Dill. Region IV District of Columbia, Maryland, North Carolina, Virginia, and West Virginia. Regional Office: Washington, D. C. Regional Director: G. R. Parker. Region V Kentucky, Michigan, and Ohio. Regional Office: Cleveland, Ohio. Regional Director: Benedict Crowell. Region VI Illinois, Indiana, and Wisconsin. Regional Office: Chicago, Illinois. Regional Director: Henry L. McCarthy. Region VII Alabama, Florida, Georgia, Mississippi, South Carolina, and Tennessee. Regional Office: Birmingham, Alabama. Regional Director: Bowman Foster Ashe. 361 362 APPENDICES Region VIII Iowa, Minnesota, Nebraska, North Dakota, and South Dakota. Regional Office: Minneapolis, Minnesota. Regional Director: Fred M. Wilcox. Region IX Arkansas, Kansas, Missouri, and Oklahoma. Regional Office: Kansas City, Missouri. Regional Director: Ed McDonald. Region X Louisiana, New Mexico, and Texas. Regional Office: San Antonio, Texas. Regional Director: Oscar M. Powell. Region XI Arizona, Colorado, Idaho, Montana, Utah, and Wyoming. Regional Office: Denver, Colorado. Regional Director: Heber R. Harper. Region XII California, Nevada, Oregon, and Washington. Regional Office: San Francisco, California. Regional Director: Richard M. Neustadt. The Honolulu, Hawaii, and Juneau, Alaska, field offices are directly responsible to the Board and are not within any regional jurisdiction. APPENDIX II Field Offices, Bureau of Old-Age Insurance (October 15, 1937) Alabama: Anniston, Birmingham, Decatur, Dothan, Gadsden, Mobile, Montgomery, Tuscaloosa. Alaska: Juneau. Arizona: Flagstaff, Phoenix, Tucson. Arkansas: Fort Smith, Jonesboro, Little Rock, Texarkana. California: Eureka, Fresno, Long Beach, Los Angeles, Oakland, Pasadena, Sacramento, San Bernardino, San Diego, San Francisco. Colorado: Denver, Grand Junction, Pueblo. Connecticut: Bridgeport, Hartford, New Haven, New London, Waterbury, Willimantic. Delaware: Wilmington. District of Columbia: Washington. Florida: Jacksonville, Miami, Orlando, Pensacola, Tallahassee, Tampa. Georgia: Albany, Athens, Atlanta, Augusta, Columbus, Macon, Savannah, Waycross. Hawaii: Honolulu. Idaho: Boise, Pocatello. Illinois: Chicago-6, Danville, East St. Louis, Mount Vernon, Peoria, Quincy, Rock Island, Springfield, Waukegan. Indiana: Evansville, Fort Wayne, Gary, Indianapolis, Kokomo, Lafayette, Muncie, Richmond, South Bend, Terre Haute. Iowa: Council Bluffs, Davenport, Des Moines, Sioux City. Kansas: Dodge City, Kansas City, Salina, Topeka, Wichita. Kentucky: Ashland, Bowling Green, Covington, Frankfort, Lexington, Louisville, Owensboro, Paducah. Louisiana: Alexandria, Baton Rouge, Monroe, New Orleans, Shreveport. Maine: Augusta, Bangor, Portland. Maryland: Baltimore, Cumberland, Hagerstown, Salisbury. Massachusetts: Boston-2, Brockton, Cambridge, Fall River, Fitchburg, Lowell, Lynn, New Bedford, Pittsfield, Springfield, Worcester. Michigan: Bay City, Dearborn, Detroit, Hamtramck, Flint, Grand Rapids, Jackson, Kalamazoo, Lansing, Marquette, Pontiac, Saginaw, Traverse City. Minnesota: Albert Lea, Duluth, Minneapolis, St. Paul. 363 364 APPENDICES Mississippi: Columbus, Greenwood, Hattiesburg, Jackson, Meridian, Vicksburg. Missouri: Cape Girardeau, Clayton, Hannibal, Jefferson City, Kansas City, Springfield, St. Joseph, St. Louis. Montana: Billings, Butte, Havre, Helena. Nebraska: Lincoln, North Platte, Omaha. Nevada: Reno. New Hampshire: Berlin, Concord, Manchester, Portsmouth. New Jersey: Atlantic City, Bayonne, Camden, Elizabeth, Jersey City, Newark, Passaic, Paterson, Perth Amboy, Trenton. New Mexico: Albuquerque. New York: Albany, Binghamton, Brooklyn, Bronx, Buffalo, Elmira, Jamestown, Kingston, New York-4, Niagara Falls, Ogdensburg, Rochester, Schenectady, Syracuse, Utica, Yonkers. North Carolina: Asheville, Charlotte, Greensboro, Raleigh, Rocky Mount, Salisbury, Wilmington, Winston-Salem. North Dakota: Fargo, Grand Forks, Minot. Ohio: Akron, Ashtabula, Canton, Cincinnati, Cleveland, Columbus, Dayton, Hamilton, Lima, Lorain, Mansfield, Portsmouth, Springfield, Toledo, Youngstown, Zanesville. Oklahoma: Ardmore, Clinton, Muskogee, Oklahoma City, Tulsa. Oregon: Eugene, Klamath Falls, Portland, Salem. Pennsylvania: Allentown, Altoona, Erie, Harrisburg, Hazleton, Johnstown, Lancaster, New Castle, Oil City, Philadelphia, Pittsburgh, Reading, Scranton, Uniontown, Wilkes-Barre, Williamsport, York. Rhode Island: Pawtucket, Providence, Woonsocket. South Carolina: Charleston, Columbia, Florence, Greenville, Rock Hill, Spartanburg. South Dakota: Aberdeen, Sioux Falls. Tennessee: Chattanooga, Columbia, Dyersburg, Jackson, Knoxville, Memphis, Nashville. Texas: Amarillo, Austin, Beaumont, Brownsville, Dallas, El Paso, Fort Worth, Houston, San Angelo, San Antonio, Tyler, Wichita Falls. Utah: Ogden, Salt Lake City. Vermont: Burlington, Montpelier, Rutland. Virginia: Bristol, Lynchburg, Norfolk, Richmond, Roanoke. Washington: Olympia, Seattle, Spokane, Tacoma, Yakima. West Virginia: Charleston, Clarksburg, Huntington, Parkersburg, Wheeling. Wisconsin: Eau Claire, Fond du Lac, Green Bay, LaCrosse, Madison, Milwaukee, Racine. Wyoming: Casper, Cheyenne. APPENDIX III TABLE I STATE UNEMPLOYMENT COMPENSATION LAWS July 1, 1937 Estimated Date Benefits Number of State Date Enacted First Payable Jobs Covered Alabama......... Sept. 15, 1935 Jan. 1938 291,000 Alaska......... Apr. 2, 1937 Jan. 1939 (1) Arizona......... Dec. 2, 1936 Jan. 1938 62,000 Arkansas.........Feb. 26, 1937 Jan. 1939 139,000 California........June 25, 1935 Jan. 1938 1,179,000 Colorado......... Nov. 20, 1936 Jan. 1939 124,000 Connecticut.......Nov. 30, 1936 Jan. 1938 405,000 Delaware.........Apr. 30, 1937 Jan. 1939 45,000 Dist. of Columbia. Aug. 28, 1935 Jan. 1938 140,000 Florida.......... June 9, 1937 Jan. 1939 217,000 Georgia........... Mar. 29, 1937 July 1939 306,000 Hawaii...........May 18, 1937 Jan. 1939 (1) Idaho............Aug. 6, 1936 Sept. 1938 48,000 Illinois...........June 30, 1937 July 1939 1,433,000 Indiana.......... Mar. 18, 1936 Apr. 1938 548,000 Iowa.............Dec. 24, 1936 July 1938 258,000 Kansas........... Mar. 26, 1937 Jan. 1939 214,000 Kentucky......... Dec. 29, 1936 Jan. 1939 293,000 Louisiana.........June 29, 1936 Jan. 1938 212,00 Maine............Dec. 18, 1936 Jan. 1938 132,000 Maryland.........Dec. 17, 1936 Jan. 1938 304,000 Massachusetts.....Aug. 12, 1935 Jan. 1938 865,000 Michigan.........Dec. 24, 1936 July 1938 1,033,000 Minnesota........Dec. 24, 1936 Jan. 1938 434,000 Mississippi........ Mar. 23, 1936 Apr. 1938 100,000 Missouri..........June 17, 1937 Jan. 1938 532,000 Montana..........Mar. 16, 1937 July 1939 67,000 Nebraska.........Apr. 30, 1937 Jan. 1939 113,000 Nevada......... Mar. 24, 1937 Jan. 1939 23, 00 New Hampshire.. May 29, 1935 Jan. 1938 91,00 New Jersey.......Dec. 22, 1936 Jan. 1939 902,000 New Mexico.......Dec. 16, 1936 Dec. 1938 44,000 New York......... Apr. 25, 1935 Jan. 1938 2,729,000 North Carolina.... Dec. 16, 1936 Jan. 1938 372,000 North Dakota.....Mar. 16, 1937 Jan. 1939 42,000 Ohio.............Dec. 17, 1936 Jan. 1939 1,438,000 Oklahoma.........Dec. 12, 1936 Dec. 1938 246,000 Oregon.......... Nov. 15, 1935 Jan. 1938 136,000 365 366 APPENDICES TABLE I-Continued --- Estimated Date Benefits Number of State Date Enacted First Payable Jobs Covered Pennsylvania......Dec. 5, 1936 Jan. 1938 2,370,000 Rhode Island......May 5, 1936 Jan. 1938 176,000 South Carolina.... June 6, 1936 July 1938 177,000 South Dakota.....Dec. 24, 1936 Jan. 1939 44,000 Tennessee........Dec. 18, 1936 Jan. 1938 290,000 Texas............Oct. 27, 1936 Jan. 1938 670,000 Utah............ Aug. 29, 1936 Jan. 1938 64,000 Vermont.......... Dec. 22, 1936 Jan. 1938 43,000 Virginia......... Dec. 18, 1936 Jan. 1938 320,000 Washington.......Mar. 16, 1937 Jan. 1939 232,000 West Virginia.....Dec. 17, 1936 Jan. 1938 306,000 Wisconsin........Jan. 29, 1932 July 1936 398,000 Wyoming.........Feb. 26, 1937 Jan. 1939 40,000 (1) Current figures for covered employment in Alaska and Hawaii are not available. On the basis of the Federal Census of April 1930, it is estimated that there were approximately 43,000 workers in Hawaii and approximately 15,500 in Alaska in jobs of a type now covered by the approved laws of these jurisdictions. The number of covered jobs probably doubles in Alaska during the summer months when there is a large influx of migratory workers. APPENDICES 367 TABLE II UNEMPLOYMENT COMPENSATION LEGISLATION AND GRANTS Cumulative to June 30, 1937 State Plans Amount of Approved and Grants for Grants Extended Administrative Costs Alabama....... $211,794.97 Alaska......... 5,099.51 Arizona......... 30,573.00 Arkansas....... 61,135.05 California...... 654,486.76 Colorado........ 92,492.11 Connecticut..... 117,451.18 Delaware....... 635.45 Dist. of Columbia. 152,427.38 Georgia......... 46,073.46 Idaho.......... 104,969.25 Indiana......... 370,986.29 Iowa........... 110,412.64 Kansas......... 45,284.74 Kentucky....... 118,165.19 Louisiana....... 156,621.59 Maine.......... 92,463.03 Maryland....... 144,117.39 Massachusetts... 363,078.79 Michigan....... 337,331.25 Minnesota...... 268,479.16 Mississippi...... 101,300.27 Montana........ 21,269.30 Nebraska....... 26,183.90. State Plans Amount of Approved and Grants for Grants Extended Administrative Costs Nevada......... $10,640.46 New Hampshire. 276,239.93 New Jersey...... 316.992.98 New Mexico..... 44,687.95 New York...... 1,966,948.37 North Carolina. 144,146.29 North Dakota.... 35,256.39 Ohio........... 325.412.30 Oklahoma....... 140,019.21 Oregon......... 151,444.84 Pennsylvania.... 1,121,495.69 Rhode Island.... 148,096.76 South Carolina.. 111,041.04 South Dakota.... 85,066.01 Tennessee....... 121,961.12 Texas.......... 245,395.94 Utah........... 120,435.57 Vermont........ 50,240.32 Virginia........ 114,699.49 Washington..... 29,684.14 West Virginia... 107,700.68 Wisconsin...... 766,650.52 Wyoming....... 19,801.79 Total......... $10,096,889.45 368 APPENDICES TABLE III TAXES COLLECTED UNDER TITLE IX OF THE SOCIAL SECURITY ACT Cumulative to August 31, 1937 (On Basis of Receipts Covered) State Amount* Alabama........ $242,272.32 Alaska.. (Included in the State of Washington) Arizona........ 48,466.14 Arkansas....... 454,591.14 California...... 2,108,082.42 Colorado........ 201,857.54 Connecticut..... 770,915.31 Delaware....... 599,930.35 Dist. of Columbia.. (Included in the State of Maryland) Florida......... 1,151,533.53 Georgia......... 1,811,803.57 Hawaii......... 382,449.29 Idaho.......... 51,790.37 Illinois......... 17,200,179.89 Indiana......... 552,019.22 Iowa........... 320,551.39 Kansas......... 1,026,167.21 Kentucky....... 413,831.42 Louisiana....... 245,424.34 Maine.......... 112,158.74 Maryland....... 890,160.58 Massachusetts... 1,709,199.49 Michigan....... 2,034,163.19 Minnesota...... 1,037,988.14 Mississipi..... 53,681.50 State Amount* Missouri........ $5,260,850.47 Montana........ 298,415.23 Nebraska....... 1,034,029.71 Nevada......... 165,446.79 New Hampshire.. 69,666.15 New Jersey...... 1,259,995.05 New Mexico..... 19,124.93 New York...... 15,468,820.65 North Carolina. 430,789.68 North Dakota.... 124,616,35 Ohio........... 2,576,257.36 Oklahoma....... 470,822.63 Oregon......... 191,230.93 Pennsylvania.... 3,425,357.65 Rhode Island.... 255,656.42 South Carolina.. 117,379.83 South Dakota... 29,102.88 Tennessee....... 354,027.03 Texas.......... 651,334.85 Utah........... 81,314.22 Vermont........ 48,972.81 Virginia........ 423,713.52 Washington..... 2,131,189.64 West Virginia... 241,850.92 Wisconsin...... 538,935.47 Wyoming....... 144,584.90 Total......... $69,232,703.16 Accounts and Deposits, Treasury Department, September 13, 1937. * The collections for each State cannot be interpreted as a measure of the employment in each State with respect to which the tax is collected. APPENDICES TABLE IV 369 UNEMPLOYMENT TRUST FUND Statement Showing Amounts to the Credit of State Agencies in the U. S. Treasury State Alabama...... Arizona...... Arkansas..... California.... Colorado...... Connecticut... Dist. of Columbia Idaho......... Indiana....... Iowa......... Kansas....... Kentucky..... Louisiana..... Maine........ Maryland..... Massachusetts Michigan..... Minnesota.... Mississippi.... Nevada....... New Hampshire New Jersey... New Mexico... New York..... North Carolina. North Dakota.. Ohio......... Oklahoma..... Oregon....... Pennsylvania Rhode Island.. South Carolina. South Dakota.. Tennessee..... Texas........ Utah......... Vermont...... Virginia...... Washington... West Virginia. Wisconsin.... Wyoming..... Deposits $6,112,347.30 1,382,397.00 900,000.00 44,433,400.00 2,953,521.30 10,550,000.00 4,196,004.81 1,239,687.29 16,448,942.02 3,900,000.00 1,847,138.64 5,250,000.00 4,850,000.00 2,500,000.00 5,500,000.00 27,200.000.00 13,555,000.00 7,100.000.00 1,554,553.64 100,000.00 2,889,886.91 20,365,000.00 800,000.00 69,000.000.00 6,480,000.00 155,000.00 27,440,468.32 4,435,000.00 4,162,269.96 53,280,000.00 5,636,042.91 2,950,000.00 670,000.00 5,275,000.00 13,255,000.00 1,763,367.70 920,014.76 5,900,000.00 2,875,000.00 5,663,467.76 25,747,813.66 416,146.10 as of August 31 Earnings $23,392.47 4,927.52 242,944.34 14,709.81 46,814.60 46,758.71 5,489.91 143,076.96 6,610.16 10,459.81 24,169.43 10,889.88 16,919.51 169,145.19 91,614.88 29,730.48 12,200.04 17,521.71 85,414.88 4,159.04 663,174.64 32,855.72 117,807.07 22,980.14 39,409.16 224,190.67 37,769.97 17,695.89 3,367.73 18,051.16 73,749.45 9,229.72 4,301.82 21,153.45 22,754.62 513,442.32 $2,828,882.86., 1937 Total $6,135,739.77 1,387,324.52 900,000.00 44,676,344.34 2,968,231.11 10,596,814.60 4,242,763.52 1,245,177.20 16,592,018.98 3,906,610.16 1,847,138.64 5,260,459.81 4,874,169.43 2,510,889.88 5,516,919.51 27,369,145.19 13,646,614.88 7,129,730.48 1,566,753.68 100,000.00 2,907,408.62 20,450,414.88 804,159.04 69,663,174.64 6,512,855.72 155,000.00 27,558,275.39 4,457,980.14 4,201,679.12 53,504,190.67 5,673,812.88 2,967,695.89 673,367.73 5,293,051.16 13,328,749.45 1,772,597.42 924,316.58 5,921,153.45 2,875,000.00 5,686,222.38 25,061,255.98* 416,146.10 $423,281,325.94 Total........ $421,652,470.08 * Balance after withdrawal of $1,200,000.00 for benefit payments. 370 APPENDICES TABLE V INVESTMENT OF UNEMPLOYMENT TRUST FUND (Certificates of Indebtedness-UTF Series) As Shown in Monthly Statement of Public Debt (Cumulative) As of Amount Interest Rate 21~2%; Maturity 6/30/36 Feb. 29, 1936 $ 5,250,000 Mar. 31, 1936 6,500,000 Apr. 30, 1936 9,250,000 May 31, 1936 10,432,000 June 30, 1936 18,909,000 Interest Rate 22%; Maturity 6/30/37 July 31, 1936 25,111,000 Aug. 31, 1936 29,907,000 As of Amount Interest Rate 22%; Maturity 6/30/37 Sept. 30, 1936 $ 34,018,000 Oct. 31, 1936 37,849,000 Nov. 30, 1936 47,091,000 Dec. 31, 1936 63,783,000 Jan. 31, 1937 73,636,000 Feb. 28, 1937 113,984,000 Mar. 31, 1937 187,213,000 Apr. 30, 1937 226,838,000 APPENDIX IV State Public-Welfare Agencies State welfare agencies administering public-assistance programs approved by the Social Security Board, as of October 1, 1937, are shown in the following table: Old-Age Assistance ALABAMA Department of Public Welfare ARIZONA State Board of Social Security and Welfare ARKANSAS State Department of Public Welfare CALIFORNIA State Department of Social Welfare COLORADO Department of Public Welfare CONNECTICUT Commissioner of Welfare DELAWARE Old-Age Welfare Commission DISTRICT OF COLUMBIA Public Welfare FLORIDA State Welfare Board Aid to Dependent Children Department of Public Welfare State Board of Social Security and Welfare State Department of Public Welfare State Department of Social Welfare Department of Public Welfare Aid to the Blind Department of Public Welfare State Board of Social Security and Welfare State Department of Public Welfare State Department of Social Welfare Department of Public Welfare Mothers' Pension Commission Public Welfare State Welfare Board 371 Public Welfare State Welfare Board 372 APPENDICES Old-Age Assistance GEORGIA State Department of Public Welfare IDAHO Department of Public Assistance ILLINOIS Department of Social Welfare INDIANA Department of Public Welfare IOWA Old-Age Division, Social Welfare Board KANSAS State Board of Social Welfare KENTUCKY Department of Public Welfare LOUISIANA Department of Public Welfare MAINE Dept. of Health and Welfare MARYLAND Board of State Aid and Charities MASSACHUSETTS Department of Public Welfare MICHIGAN State Welfare Department Aid to Dependent Children State Department of Public Welfare Department of Public Assistance Aid to the Blind State Department of Public Welfare Department of Public Assistance Department of Public Welfare Department of Public Welfare State Board of Social Welfare State Board of Social Welfare Department of Public Welfare Dept. of Health and Welfare Board of State Aid and Charities Department of Public Welfare State Emergency Welfare Relief Commission Department of Public Welfare Dept. of Health and Welfare Board of State Aid and Charities Department of Education State Emergency Welfare Relief Commission APPENDICES 373 Old-Age Assistance MINNESOTA Director of Public Assistance, State Board of Control MISSISSIPPI State Welfare Department MISSOURI State Social Security Commission Aid to Dependent Children Director of Public Assistance, State Board of Control Aid to the Blind Director of Public Assistance, State Board of Control MONTANA State Department of Public Welfare NEBRASKA Department of Assistance and Child Welfare, State Board of Control NEVADA State Board of Relief, Work Planning and Pension Control NEW HAMPSHIRE Division of Relief, State Board of Welfare and Relief NEW JERSEY Department of Institutions and Agencies NEW MEXICO State Department of Public Welfare State Department of Public Welfare Department of Assistance and Child Welfare, State Board of Control Department of Assistance and Child Welfare, State Board of Control Division of Welfare, State Board of Welfare and Relief Department of Institutions and Agencies State Department of Public Welfare Division of Welfare, State Board of Welfare and Relief Department of Institutions and Agencies State Department of Public Welfare NEW YORK State Department of Social Welfare State Department of Social Welfare State Department of Social Welfare 374 APPENDICES Old-Age Assistance NORTH CAROLINA State Board of Charities and Public Welfare NORTH DAKOTA State Board of Public Welfare OHIO Division of Aid for the Aged, Department of Public Welfare OKLAHOMA State Welfare Commission OREGON State Relief Committee PENNSYLVANIA Department of Public Assistance RHODE ISLAND Division of Old Age Security, State Depart m e n t of Public Welfare SOUTH CAROLINA State Department of Public Welfare SOUTH DAKOTA State Social Security Commission TENNESSEE State Department of Institutions a n d Public Welfare Aid to Dependent Children State Board of Charities and Public Welfare State Board of Public Welfare Division of Public Assistance, D e - partment of Public Welfare State Welfare Commission State Relief Committee Department of Public Assistance Aid to the Blind State Commission for the Blind State Board of Public Welfare Division of Public Assistance, D e - partment of Public Welfare State Welfare Commission State Relief Committee Department of Public Assistance Bureau of Mothers' Aid, State Departm e n t of Public Welfare State Department of Public Welfare State Department of Public Welfare State Department of Institutions and Public Welfare State Department of Institutions and Public Welfare APPENDICES 375 Old-Age Assistance TEXAS Old-Age Assistance Commission UTAH State Department of Public Welfare VERMONT Old-Age Assistance Department WASHINGTON State Department of Social Security WEST VIRGINIA State Director of Public Assistance WISCONSIN State Pension Department WYOMING State Department of Public Welfare ALASKA Department of Public Welfare HAWAII Board of Public Welfare Aid to Dependent Children State Department of Public Welfare Department of Public Welfare State Department of Social Security State Director of Public Assistance State Pension Department State Department of Public Welfare Aid to the Blind State Department of Public Welfare Department of Public Welfare State Department of Social Security State Director of Public Assistance State Pension Department State Department of Public Welfare Board of Public Board of Public Welfare Welfare APPENDIX V American Association for Labor Legislation. American Labor Legislative Review. Quarterly. Has frequent articles on social security. American Association for Social Security. Social Security. Monthly. American Association for Social Security, Inc. Social Security in the United States, 19-. The Association. Annual report of proceedings of the National Conference on Social Security published since 1928. (In 1933 the Association adopted its present name. It was previously the American Association for Old-Age Security, Inc.) American Municipal Association. Washington News Letter. SemiMonthly. American Public Welfare Association. Public Welfare News. Monthly. Washington News Letter. Irregular. Lansdale, Robert T., and others. The administration of old-age assistance in three States: Massachusetts, New Jersey and New York. Public Administration Service, 1936. Prepared by staff of Committee on Public Administration, Social Science Research Council. Matscheck, Walter. Unemployment Compensation Administration in Wisconsin and New Hampshire. Public Administration Service, 1936. Sponsored by Committee on Public Administration, Social Science Research Council. More Security for Old Age; a report and a program. The Committee on Old-Age Security, New York, Twentieth Century Fund, Inc., 1937, XIII, 191 pp. Social Security Analyst. Weekly. Published by Foundation Press. Social Security in America; the factual background of the Social Security Act as summarized by Staff Reports to the Committee on Economic Security. Washington, U. S. Government Printing Office, 1937. XIX, 592 pp. Social Security Board Publication No. 20, obtainable from the Superintendent of Documents, Government Printing Office. U. S. Bureau of Labor Statistics. Monthly Labor Review. U. S. Children's Bureau. The Child. Monthly. Grants to States for Maternal and Child Welfare Under the Social Security Act. Published by the U. S. Government Printing Office, 1935. Maternal and Child Welfare Bulletin. No. 1. U. S. Office of Education. Vocational Rehabilitation of the Physically Disabled. Published by the Government Printing Office, 1936. Vocational Educational Bulletin, No. 190. U. S. Works Progress Administration. Current Statistics of Relief in Rural and Town Areas. Irregular. 376 INDEX Account numbers, 48-49; application for, 53-58; assignment of, 58-61; railroad employees, 61-62. Account, Reserve. See Reserve account. Accounts and audits, Bureau of, 29-31, 206, 215, 221, 278, 281. Act, passage of Social Security, 17. Actuary, office of the, 206. Actuarial principles, 153, n., 354. Actuarial reserve plan, 147-151. Additional credit, against Federal tax, 174-189. Administration, Federal aid to blind, 279-282; aid to dependent children, 279-282; childwelfare services, 330; crippled children, services for, 326; maternal and child health, 323; old-age assistance, 279 -282; old-age benefits, 37, 39 -43; public assistance, 279-282; public health, 340, 341; vocational rehabilitation, 332; unemployment compensation, 205-220. Administration, local public assistance programs, 272, 295 -298. Administration, State public assistance, 270-274; public welfare, 35, 294-299, appendix IV; unemployment compensation, 226-227. Administrative aid, Division of, 206-211. Administrative g r a n t s, see grants. Administrative techniques, research in, 357. Adjudication, old-age benefits claims, facts certified, 134, 138; methods, 127-131. Age: moment at which attained, 132, n; proof of, 128-129; requirements, aid to the blind, 305; aid to dependent children, 303; old-age assistance, 275, 299; verification, 128-129. Age distribution of population, 349-350. Agents, tax liability; As employees, 82-83; As employers, 88-89. Agricultural labor, exclusion of, 91-97, 172, 182. Allowances, limitations of assistance, 306-309. Altmeyer, Arthur J., 7, 17, 18. Appeal procedure, unemployment compensation, 201. Appropriations: old-age reserve account, 153-154; public assistance, 286; public-welfare, 322, 325, 329, 332, 334. Assistance plans, conditions for approval of State, 271ff. Assistance program, background of, 264-269. Assistance provisions, Social Security Act, 269-271. Attorneys, tax liability of, 81. Balancing account, in unemployment reserve funds, 178, 180. Bane, Frank, 21. Banks, tax liability of, 102; insolvent, 106-107. Base period, 195, 196. Benefit year, 193. Benefits, see under Old-age benefits, and Unemployment compensation. Bigge, George Edmund, 19. Birth: date of, evidence required, 134-135. Blind, aid to the, 267, 277, 285, 288, 289, 292-295, 305, 306, 308, 309. Board of review, unemployment compensation claims, 200. Board, Social Security, 16-20. Bonuses, as wages, 109, 194. 377 378 INDEX Bureau organization, Social Security Board, 29. Business Management, Bureau of, 31. Casual labor, exclusion of, 98-99, 185. Charitable institutions, exclusion of, 102-104. Child-welfare services, 328-330. Children's Bureau, Department of Labor, 34, 266, 319, 323, 326, 329, 330. Citizenship requirements, public assistance, 276, 299, 303, 305. Civil service, see Personnel, merit selection of. Claims, see under Old-age benefits, and Unemployment compensation. Classification: industrial, 220, 233-235; employee, 255. Committee on economic security, 6-7, 210. Company union, 173. Conditions of work, 173. Constitutionality, of Act, 177, 244. Contractors, independent, tax liability, 80-85. Contractors, tax liability for under P. W. A., 102. Contributions, see under Unemployment compensation. Coverage, see under Old- age benefits and Unemployment compensation, extension of, 355; financing, 353-354. Corporations: tax liability for directors of, 85-86; officers of, 87; subsidiaries of, 87. Crippled children, services for, 324-328. Death, proof of, 130. Death benefits, direct payment, 138-145; to estates, 137-138. Death-rate, maternal and infant, 320-321. Decentralization, of old- age benefits system, 124. Decisions, unemployment compensation, interpretative, 210; benefit, 211. Deflation, influence of reserve account, 162. Dependent children, aid to, 276, 277, 283, 286, 288-294, 303 -305, 307, 308, 310, 328, 329. Descent and distribution, laws of, 140. Dewson, Mary W., 19. Dismissal wages, 116. Dismissal pay, as wages, 109. Disqualifications, from unemployment compensation benefits, 199. Domestic service, exclusion of, 97-98, 172, 182, 185. Draft bills, unemployment compensation, preparation of, 209, 210. Education, Office of, 34, 332. Educational organizations, exclusion of, 103-104. Eligibility, for old-age benefits, 37-38, 129. Employees: As agents, tax liability of, 82-83; application for account number, 53-58; contributions for, in reserve accounts, 179; rates, 187; wage exemptions, 186; personal data required, 57; records of wages, 64-65; Social Security Board, 25-27; supervisory, tax liability of, 85; tax, assumed by employer as wages, 67, 112; temporary, tax liability of, 98. Employees' funds, tax liability, 111. Employment, definition of, 75-90, 183, 184, 231; excluded, 91 -107, 172; government, exclusion of, 100-102; place of, 80. Employment office, see Employment service. Employment relationship, 78-85, 184-185. Employment service, adequacy of, 225; as administrative agency, 201; claims at, 199; direction of, 226; grants for, 214, 218, 219; payment of benefits, 172; use of, 212, 251; United States, 34; affiliation with, 226; coordination with unemployment compensation, 207, 213, 218, 341; responsibility of, 205. Employer reserve funds, unem INDEX 379 ployment compensation, 173, 178, 180, 188. Employers, as agents, tax liability of, 88-89; application for identification number, 52 -53; classification of, 233; records, 65-66; tax liability of, 86-90, 172. Estates: administrators of, tax liability of, 105-107; collections from, 275, 302. Executive Director, office of, 20 Executor's application, old-age benefits claims, 137. Excluded employments, 91-107, 172, 185. Expense accounts, as wages, 114. Expenses, traveling, as wages, 110. Expenses, administrative, Social Security Board, 21. Experts, employed by Social Security Board, 25-26. Fair hearing, denied claims; public assistance, 273; unemployment compensation, 174, 200, 208. Family employment, exclusion of, 172, 185. Farm cooperatives, tax liability of, 96. Farm, definition of, 91. Farm labor, see Agricultural labor. Federal law, for unemployment compensation, 184. Federal-State division of powers, 11-12, 270-271, 282, 340-341. Fiduciaries, tax liability of, 106. Field Offices, Bureau of Old-Age Insurance, 41. Financing, State assistance programs, 271-272, 283-286, 309 -311, 313. Forms, old-age benefits: OA-702, Initial Office Record, 58-59; OAC-1001, Statement of Employer, 132; OAC-1002, Wage Earner's Application, 132; OAC-1003, Widow's or Widower's Application, 144; OAC1004, Close Relative's Application, 142, 145; OAC-1005, Executor's or Administrator's Application, 137; OAC-1006, Guardian's or Committee's Application, 136; OAC-7001, Statement of Death (Physician's), 137; OAC-7002, Statement of Death (Undertaker's), 137; OAC-7003, Waiver, 143; SS-1, Employer's Return Under Title VIII, 67; SS-2, Employer's Summary Information Return, 71; SS-2a, Employer's Report of Wages Paid to Each Employee, 72; SS-3, Employer's Information Return, 73; SS-4, Employer's Application for Identification Number, 50; SS-5, Application for Account Number, 49. Fraternities, tax liability of, 104. Fraternal benefit societies, tax liability of, 104. Fraudulent claims, for old-age benefits, 359. General Counsel, office of, 31, 278, 206, 221. Grants, Federal, public welfare, 12, 270; unemployment compensation, certification of, 207, 208-214; division of, 206; procedures of, 213; provisions for, 171, 172, 174; standards for, 215. Government service, exclusion of, 100-102, 172. Gratuities, see Tips. Group retirement plans, private, 150. Guardian's application, for oldage benefits, 136. Guaranteed employment, 173. Health insurance, 8. Hearings, fair, see Fair hearings. Homeworkers, tax liability, 83 -84. Identification, of employee, 46 -47, 48; of records, 45; numbers, 49-50; application for, 52-53. Identity, proof of, 127-128. Immigration, 353. Industrial Rehabilitation Act, 330-331. Inflation, effect of old-age reserve, 161. Information, concerning em 380 INDEX ployees, 57; returns, old-age benefits, 71. Informational Service, 31-33. Insecurity, 346. Institutions, inmates of public, 277, 303,304. Instrumentalities, government, exclusion of, 100-102. Insurance agents and solicitors, exclusion of, 185. Insurance companies, experience of, 358-359; tax liability of, 127-128, 130. Insurance, old-age, see Old-Age benefits. Insurance, Bureau of Old-Age, 39-43. Insurance premiums, as wages, 110. Interior, Department of the, see Education, Office of. Interest, 165; on old-age reserve account, 154-160; on unemployment trust fund, 224. Internal Revenue, Bureau of, 73 -74-75; Bulletin, 77; collection of Federal tax, 172, 222; regulation, 237; rulings of, 77, 222; rulings of, classified, 211. Interstate agreements, 252. Interstate commerce, coverage of, 184. Interstate Conference of State unemployment compensation administrators, 206, 233, 241, 258. Interstate employment, coverage of, 231. Investment of reserve funds, 157-160. Investments, social, 164, 167. Jobbers, tax liability, 90. Labor, Department of, see Children's Bureau. Labor disputes, disqualifications for, 199-200. Labor standards, 173. Labor, State department of, as unemployment compensation administrative agency, 201, 226. Lump-sum payments, at age 65, 131-136; at death, 136-145; directly to beneficiaries, 138-145. Latimer, Murray W., 7,18. Legislative aid, division of, 206; work of, 207. Liens, public-assistance, see Estates, collections from. Maritime employment, exclusion of, 99-100, 172. Matching provisions, FederalState, 270, 283, 309, 310. Maternal and child-health service, 319, 324. Meals, value of as wages, 113 -114. Means test, see Needs test. Merit rating, 173, 179, 187, 188, 189. Migratory labor, see Multi-state labor. Miles, Vincent M., 18. Misconduct, disqualification for, 199. Money payments, public assistance, 274. Mortality, 350-353. Mortality table, 350. Mothers' pension laws, 266. Multi-state labor, benefits for, 203; interstate agreement for, 252. National Reemployment Service, 226. Needs test, public assistance, 278, 301, 305. Non-profit organizations, exclusion of, 103, 104, 172, 182. Old-age assistance, 267-269, 275, 283, 285, 288-294, 299-303, 306, 307, 315. Old-age benefits, 35-169; accounts, system of, 44-48; application for, 132, 136, 137, 142, 144; Bureau of Old-Age Insurance, 39-43; claims, 126 -145; costs, 128; coverage, 75, 107; payments during 1937, 126; method of payment, 135; residence of beneficiaries, 144. Old-age reserve account, 153. Old-age Insurance, Bureau of, organization, 39-43. Partial unemployment, benefits, 190; procedures for, 248. Partnerships, tax liability, 86. Part-time workers, provision for, 198. Pay-as-you-go system, 147-152. INDEX 381 Payments, public - assistance, 291-294. Pay-roll systems, research on, 358. Pay-roll tax, see under Tax. Pensions, 112. Personnel, Social Security Board, selection of, 24-27; public-assistance agencies, 273; unemployment compensation agencies: merit selection of, 211, 227; salary scales of, 228; standards, 211; training of, 206, 227. Plans, State public assistance, 271-279, 287-288. Post Office Department, 34, 51 -52, 58, 60. Pooled account, unemployment compensation, 179, 180. Pooled fund, 173, 178. Political subdivision, exclusion of, 101. Population, 349-350. Projects, Federal, tax liability, 101. Property qualifications, public assistance, 302. Professional service, exclusion of, 185. Public-assistance administrative problems, 311-317. Public Assistance, Bureau of, 279-282; programs, 263, 317. Public debt, 158-160. Public Health Service, United States, 34, 334. Public-health work, 334, 341. Public relations, see Informational Service. Public-welfare programs, 318 -341. Purchasing power, consumer, 160-162. Qualification, for unemployment compensation benefits, 196. Quarterly wages, 192-210. Railroad employees, account numbers, 61-62; coverage of, 184; exclusion of, 105. Receiverships, tax liability, 105 -107. Recipients, number of public-assistance, 288-291. Reciprocal agreements, see Interstate agreements. Records, see Wage records. Referee, unemployment compensation, 201. Regional directors, 23, 40. Regional offices, 22, Appendix I. Regional representatives, 23; Bureau of Old-Age Insurance, 24; public assistance, 280, 282; old-age insurance; unemployment compensation, 206, 215. Registration, problems of, 55-58; results of program, 62-63. Relative's application for old-age benefits, 142, 145. Relationship, proof of, 130-131. Relief, emergency, 269, 314, 322. Religious institutions, exclusion of, 102-104. Reports, public assistance, 274, 284, 298; unemployment compensation, basic statistical, States, 220; pay roll, 239, 242; required by Social Security Board, 174, 254, 257; wage, separation, 239-242, 246; wage, list, 242-243; wage, slip, 242 -243; wage, see Wage records. Research and Statistics, Bureau of, 206-220, 281, 289. Research, functions of Board, 345. Reserve account, old-age, 153 -169. Reserve, actuarial, 147-151; contingency, 152; partial, 151 -152. Residence requirements, public assistance, 276, 300, 303, 305. Retirement age, 353. Revenue Acts, 104. Seasonal industries, coverage, 182; provision for, 199. Separation, notice, 239; reports, 239-242, 246. Stamp system, study of, 47, 220. Sick pay, as wages, 109. Social changes, 347. Social insurance, foreign experience, 348. Social investments, 164, 167. Statistics, use of, 356, 357. 382 INDEX Stevedore company, tax liability, 100. Suitable work, 199. Supervisors, tax liability, 85. Tax-employee's, see Tax, Title VIII; employer's, see Tax, Title VIII and Tax, unemployment compensation; excise, see Tax, unemployment compensation; old-age benefits, see Tax, Title VIII; pay-roll, see Tax, unemployment compensation; Title VIII, adjustments, 68-70; computation of, 71; liability, 75-117; rates, 68; returns, 67-71; unemployment compensation, amount of, 222; collection of, 172; excise, 171, 172; offset, 171, 174; pay-roll, 222; State, see contributions under Unemployment compensation. Taxation 353; unemployment compensation plans, 359; Taxicab drivers, tax liability, 84 -85. Tips, as wages, 111-112, 194, 220, 237. Trade dispute, disqualification for, 173. Training courses, Social Security Board, 27. Treasury Department, 33, 172, 222, 224, 244, 245, 285. Unemployment compensation, benefits; claims for, 246, 247; duration, 194; duration, calculation of, 195; partial, 190; procedure for payment, 211, 245, 249; rates, 189; rates, calculation of, 191; record, 247; in Wisconsin, 249-251. Unemployment compensation, administrative grants, standards for cost of, 215; bureau of, 205; claims procedure, 199, 203; contributions, collection of, 235-238; employee, 187, 237; government, 187; offset for, 172; procedures in collection of, 211; rates, 186, 187; reports, 211, 235, 236; wage basis for, 237; wage exclusions from, 186; coverage, continuous, 181; determination of, 229; election to, 182, 183; exclusions, service, 184, 185; exclusions, wage, 186; procedure for determination of, 211; under State laws, 177, 180. Unemployment trust fund, deposit in, 14, 173, 244; interest rate of, 224; investment of, 222, 223; requisition from, 173, 245. United States Employment Service, see Employment Service, United States. Vacation allowances as wages, 109. Vessels, crews of, exclusion of, 99-100. Veterans' Administration, 358. Vocational rehabilitation, 330 -334. Wage deductions, statement of, 66-67, 70. Wage rates, fluctuations in, 349. Wage records, data for, 48; stamp method, 47; employer's, 65-66; in claims adjudication, 129-130; system of, 118-125. Wages, as basis for benefits, 194; as basis for contributions, 237; definition, 108-113, 237; constructively paid, 70, n; in kind, 113-114, 220; non-wage payments, 114-115; paid or payable, 117, n; when earned, 115-117. Waiting period, 198-199. Widow's application, for old-age benefits, 144. Williamson, W. R., 7. Winant, John G., 6, 17, 176. Workmen's compensation, 112. m i11 1 11111 1 1U11N 1 111111ii TY OF MICHIGAN 3 9015 01324 3525 DO NOT REMOVE OR MUTILATE CARD FFH D (\rIZ A )