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the fund would increase the interest income of the fund, on the average, by about seven one-hundredths of 1 percent of taxable payroll, or about $160 million a year (less than this in the immediate future, since the trust fund is now smaller than it is estimated to be eventually).

VI. ADVISORY COUNCIL ON SOCIAL SECURITY FINANCING

Advisory Councils on Social Security Financing would be established periodically under the bill to review the status of the old-age and survivors insurance trust fund in relation to the long-term commitments of the program. Each Advisory Council would evaluate the financing provisions of the program before one of the scheduled increases in the tax rates in the light of the dynamic character and growing productive capacity of our economy.

The bill provides that the Secretary of Health, Education, and Welfare would appoint the members of the Advisory Council. The Commissioner of Social Security would serve as Chairman of the Council which would include 12 other persons representing, to the extent possible, employers and employees in equal numbers, and self-employed persons, and the public. Actuarial and other pertinent data prepared by the Department of Health, Education, and Welfare would be received by the Advisory Council. In addition, the Council would be authorized to engage such technical assistance, including actuarial services, as might be necessary. The Council would report its findings and recommendations to the secretary of the Board of Trustees of the Federal old-age and survivors insurance trust fund. The Council then would go out of existence. The Council's report will be included in the trustees' annual report submitted to the Congress.

The first Advisory Council would be appointed after February 1957 and before January 1958. A new Council constituted in the same manner with the same functions, duties, and responsibilities (including the reporting of its findings and recommendations), would be appointed by the Secretary not earlier than 3 years and not later than 2 years before each ensuing scheduled increase in the tax rates, following the increase scheduled for 1960.

VII. MISCELLANEOUS PROVISIONS

Your committee's bill contains provisions that would enable certain employees of nonprofit organizations to secure credit under oldage and survivors insurance for wages on which taxes were paid in good faith (and not refunded) in the belief that the employment was covered, although a valid waiver of tax exemption had not been filed by the organization or, if filed, had not been signed by all the employees for whom wages were reported. The bill provides a 2-year extension of the time period within which an application for a lump-sum death payment may be filed, or within which a dependent widower, husband, or parent may file proof that he was supported by an insured person, where there was good cause for failure to file the necessary application or proof within the original time period. The bill also provides that a widow who lost her benefit rights on her deceased husband's earnings record by remarriage and who is not eligible for benefits on

her second husband's record because he died before the new marriage had lasted a year, would have her rights to widow's benefits on her first husband's record restored. The bill also amends the Railroad Retirement Act so as to preserve the existing relationship between the railroad retirement and old-age and survivors insurance systems. Certain other minor provisions were included in H. R. 7225 to make technical corrections in existing law. These miscellaneous provisions are described in the section-by-section analysis of this report.

VIII. ACTUARIAL COST ESTIMATES FOR OLD-AGE AND SURVIVORS INSURANCE SYSTEM

A. FINANCING POLICY

The Congress has always carefully considered the actuarial and cost aspects in determining the benefit provisions of the old-age and survivors insurance system at the time of the various amendments to the program. In connection with the 1950 amendments, the Congress was of the belief that the program should be completely self-supporting from contributions of covered individuals and employers. Accordingly, at that time the provision permitting appropriations to the system from general revenues of the Treasury was repealed. In the subsequent amendments of 1952 and 1954, this policy was continued. Your committee has always very strongly believed that the system should be actuarially sound. Your committee continues to believe that the tax schedule in the law should make the system self-supporting as nearly as can be foreseen, or in other words, actuarially sound.

The concept of actuarial soundness as it applies to the old-age and survivors insurance system differs considerably from this concept as applicable to private insurance although there are certain points of similarity especially as this concept applies in connection with private pension plans.

The most important difference is due to the fact that a socialinsurance system can be assumed to be perpetual in nature with a continuous flow of new entrants (as a result of its compulsory nature). Accordingly, it may be said that the old-age and survivors insurance program is actuarially sound if it is in actuarial balance by reason of the fact that future income from contribution and interest earnings on the accumulated trust fund will over the long run support the disbursements for benefits and administrative expenses. Quite obviously, future experience may be expected to vary from the actuarial cost estimates made now, but the intent that the system be self-supporting can be expressed in law by utilizing a contribution schedule that according to an intermediate-cost estimate results in the system being in balance, or quite close thereto.

The system's actuarial balance under the 1952 act was estimated at the time of enactment to be virtually the same as in the estimates made at the time the 1950 act was enacted; this was the case because of the rise in earnings levels in the 3 years preceding the enactment of the 1952 act being taken into consideration in those estimates. New cost estimates made after the enactment of the 1952 act indicated that the level-premium cost (i. e. the average long-range cost, based on discounting at interest, relative to payroll) of the benefit disburse

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ments and administrative expenses were somewhat more than onehalf percent of payroll higher than the level-premium equivalent of the schedule taxes (including allowance for interest on the existing trust fund). Under the 1954 act, the increase in the contribution schedule met all of the additional cost of the benefit changes proposed and reduced substantially the "actuarial insufficiency" which the estimates had indicated in regard to the financing of the 1952 act.

Recent operating experience of the program has indicated that earnings level (based on 1955 data) have risen by about 13 percent over those used in the previous acturial estimates (based on 1951-52 levels). Taking this factor into account reduces the "actuarial insufficiency" under the present law to the point where for all practical purposes it may be said to be nonexistent. Accordingly, the system is now in approximate actuarial balance. We believe, however, that our policy should be one of utmost prudence in this area to assure the continuing actuarial soundness of the system.

B. BASIC ASSUMPTIONS FOR COST ESTIMATES

Estimates of the future cost of the old-age and survivors insurance program are affected by many factors that are difficult to determine. Accordingly, the assumptions used in the acturial cost estimates may differ widely and yet be reasonable. Benefit payments may be expected to increase continuously for at least the next 50 to 70 years because of factors such as the aging of the population of the country and the inherent slow but steady growth of the benefit roll in any retirement program, public or private, that has been in operation for only a relatively short period.

The cost estimates for the bill are presented here first on a range basis so as to indicate the plausible variation in future costs depending upon the actual trend developing for the various cost factors. Both the low-cost and high-cost estimates are based on high economic assumptions, intended to represent close to full employment, with average annual earnings at about the level prevailing in 1955. Following the presentation of the cost estimates on a range basis, intermediate estimates developed directly from the low-cost and high-cost estimates (by averaging them) are shown so as to indicate the basis for the financing provisions.

In general, the costs are shown as a percentage of covered payroll. This is the best measure of the financial cost of the program. Dollar figures taken alone are misleading because, for example, a higher earnings level will increase not only the outgo but also, and to a greater extent, the income of the system. The result is that the cost relative to payroll will decrease.

The low-cost and high-cost assumptions relate to the cost as a percentage of payroll in the aggregate and not to the dollar costs. The two cost assumptions are based on possible variations in fertility rates, mortality rates, retirement rates, remarriage rates, and so forth. In general, the cost estimates have been prepared on the basis of the same assumptions (other than as to earnings) and techniques as those contained in the Social Security Administration's Actuarial Study No. 39 (relating to present law) and those contained in the report of the Committee on Ways and Means of the House of Representatives on this bill (H. Rept. No. 1189, 84th Cong., 1st sess.).

One change in assumptions has, however, been made as a result of the revised basis for determining the interest rate on special issues held by the trust fund according to the committee-approved bill, namely, by basing it on the rate on long-term obligations of the United States rather than on all such obligations and by revising the rounding basis so as to round to the nearest one-eighth of 1 percent instead of the lower one-eighth. On the average, this will have the effect of raising the interest-earnings rate of the trust fund by almost one-fourth of I percent. Thus, in contrast with the interest rate of 2.4 percent used in the previously mentioned cost estimates, a rate of 2.6 percent is used in these cost estimates.

The cost estimates are extended beyond the year 2000 since the aged population itself cannot mature by then. The reason for this is that the number of births in the 1930's was very low as compared with subsequent experience, and, as a result, there is a dip in the relative proportion of the aged from 1995 to about 2010, which, in itself, would tend to yield low benefit costs for that period. Accordingly, the year 2000 is by no means a typical ultimate year.

An important measure of long-range cost is the level-premium contribution rate required to support the system into perpetuity, based on discounting at interest. It is assumed that benefit payments and taxable payrolls remain level after the year 2050 (actually the relationship between benefits and payroll is virtually constant after about 2020). If such a level rate were adopted, relatively large accumulations in the trust fund would result, and in consequence there would be sizable eventual income from interest. Even though such a method of financing is not followed, this concept may nevertheless be used as a convenient measure of long-range costs. This is a valuable cost concept, especially in comparing various possible alternative plans and provisions, since it takes into account the long-term rise in benefit disbursements.

The estimates are based on level-earnings assumptions. This, however, does not mean that covered payrolls are assumed to be the same each year; rather, they rise steadily, paralleling the estimated increase in the population at the working ages. If in the future the earnings level should be considerably above that now prevailing, and if the benefits for those on the roll are at some time adjusted upward so that the annual costs relative to payroll will remain the same as now estimated for the present act, then the increased dollar outgo resulting will offset the increased dollar income. This is an important reason for considering costs relative to payroll rather than in dollars The cost estimates have not taken into account the possibility of a rise in earnings levels, although such a rise has characterized the past history of this country. If such an assumption were used in the cost estimates, along with the unlikely assumption that the benefits nevertheless would not be changed, the cost relative to payroll would, of course, be lower. If benefits are adjusted to keep pace with rising earnings, the year-by-year costs as a percentage of payroll would be unaffected. In such case, however, the level-premium cost would be higher, since under such circumstances, the relative importance of the interest receipts of the trust fund would gradually diminish with the passage of time. If earnings do consistently rise and benefits are adjusted accordingly, thorough consideration will need to be given to the financing basis of the system because then the

interest receipts of the trust fund will not meet as large a proportion of the benefit costs as would be anticipated if the earnings level had not risen.

Financial interchange provisions with the railroad retirement system are, under present law, in effect such that the old-age and survivors insurance trust fund is to be placed in the same financial position as if railroad employment had always been covered under the old-age and survivors insurance program. It is estimated that, over the long range, the net effect of these provisions will be a relatively small net gain to the old-age and survivors insurance system, since the reimbursements from the railroad retirement system will be somewhat larger than the net additional benefits paid on the basis of railroad earnings. The long-range costs developed here are for the operation of the trust fund on the basis, as provided in current law, that all railroad employment will be (and beginning with 1937, has been) covered employment. The balance in the fund thus corresponds exactly to the actual situation arising. But the contribution income and benefit disbursement figures shown are slightly higher (by about 5 percent) than the payments which will actually be made directly to the trust fund by contributors and the payments which will actually be made from the trust fund to the individual beneficiaries. This is the case because the figures here include both the additional contributions which would have been collected if railroad employment had always been covered and the additional benefits that would have been paid under such circumstances. The balance for these two elements is to be accounted for in actual practice by the operation of the financial interchange provisions.

C. RESULTS OF COST ESTIMATES ON RANGE BASIS

Table 1 presents costs as a percentage of payroll for each of the various types of benefits. The level-premium cost for the benefits provided in the committee-approved bill, on the basis of 2.6 percent interest, ranges from 6.8 to 8.6 percent of payroll.

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