Soc Sec XXXI: What is Title 1? How does it relate to worker/retiree ratio?

I suspect few people know that the original Social Security Act set up not one but two retirement systems. Title 2 set up what we recognize as Social Security today, a worker funded retirement based on an insurance model. Title 1 set up something quite different. The history can be found on the website under Historical Background and Development of Social Security.

Following the outbreak of the Great Depression, poverty among the elderly grew dramatically. The best estimates are that in 1934 over half of the elderly in America lacked sufficient income to be self-supporting. Despite this, state welfare pensions for the elderly were practically non-existent before 1930. A spurt of pension legislation was passed in the years immediately prior to passage of the Social Security Act, so that 30 states had some form of old-age pension program by 1935. However, these programs were generally inadequate and ineffective. Only about 3% of the elderly were actually receiving benefits under these states plans, and the average benefit amount was about 65 cents a day.

There were many reasons for the low participation in state-run pension systems. Many elderly were reluctant to “go on welfare.” Restrictive eligibility criteria kept many poor seniors from qualifying. Some jurisdictions, while having state programs on the books, failed to actually implement them. Many of the state-passed pension laws provided for counties within the state to opt to participate in the pension program. As a result, in 1929 of the six states with operating pension laws on the books only 53 of the 264 counties eligible to adopt a pension plan actually did so. After 1929, the States began enacting laws without county options. By 1932 seventeen states had old age pension laws, although none were in the south, and 87% of the money available under these laws were expended in only three states (California, Massachusetts and New York).

So our starting point is a hodge podge of underfunded and largely ineffective state old age plans. Title 1 established General Fund ‘Grants to States for Old-Age Assistance’ or in other words a federal welfare system. Title 2 or Social Security as we know it was designed (and did) to phase out Title 1, but really didn’t start to do so until after 1950.

The significance of the new social insurance program was that it sought to address the long-range problem of economic security for the aged through a contributory system in which the workers themselves contributed to their own future retirement benefit by making regular payments into a joint fund. It was thus distinct from the welfare benefits provided under Title I of the Act and from the various state “old-age pensions.” As President Roosevelt conceived of the Act, Title I was to be a temporary “relief” program that would eventually disappear as more people were able to obtain retirement income through the contributory system.

. The key word is “eventually”, monthly benefits under Title 2 would not start until 1942 and for years would be swamped by benefits under Title 1.

Because the program was still in its infancy, and because it was financed by low levels of payroll taxation, the absolute value of Social Security’s retirement benefits were very low. In fact, until 1951, the average value of the welfare benefits received under the old-age assistance provisions of the Act were higher than the retirement benefits received under Social Security. And there were more elderly Americans receiving old-age assistance than were receiving Social Security.

. Okay what does all this have to do with covered worker ratio? Follow me below the fold.

(Reader Paul schooled me on the numbers. The overall point is sound but some of the arithmetic was off. So while I am busy fixing up the post please see Paul’s numbers in comments.)
It is common to hear people making claims that the ratio of workers to retirees went from an initial 16 to 1 at program inception down to 3 to 1 today enroute to 2 to 1 ‘soon’. Which sounds scary until you realize that no one was even eligible for benefits until 1942, the ratio before that point being literally infinite. Moreover all Americans were paying taxes to support Title 1, if we examined this from the standpoint of taxpayer to federally funded retiree you would end up with a much smaller initial ratio. Moreover the net effect of the phase in of Title 2 and the phaseout of Title 1 was to give all taxpayers an effective tax break with wage workers ultimately shouldering the entire burden for their own retirement. Not that people who earn their income from returns on capital showed much appreciation.

So much of that 16 to 1 transition to 3 to 1 was the result of a transformation from two programs with two sets of beneficiaries, one funded by all taxpayers and the other funded only by wage workers. That is we are not really talking fundamental demographic trends but instead designed policy outcomes. But the distortion doesn’t stop there.

If we examine Figure II.D3.—Number of Covered Workers Per OASDI Beneficiary we do see a reduction in the ratio from the 3.2-3.4 level typical since 1974 to about 2.2% in 2030, Boomer demographics are in fact real. But this ignores a couple of points. First of all the ratio is not as often stated worker to retiree, with the implication that the idle old are parasitic on the working young, instead it is worker to BENEFICIARY which includes minor children of deceased workers, those childrens mothers, disabled workers, and surviving spouses of one income households. That is not all of this is about paying for greens fees for geezers in Phoenix. In fact in 2007 the total amount of Social Security paid to people other than the retired worker was just over 50% 34%. Table III.A5.—Distribution of Benefit Payments by Type of Beneficiary or Payment, Calendar Years 2006 and 2007 [Amounts in millions]. If Social Security did not exist much of this burden would fall back on the overall taxpayer. (Or I suppose we could simply have orphans and paraplegics begging in the streets instead.)
{Reader Paul astutely notes that I am not including Aged Widows and Widowers with Retired Workers in figuring out how much of this is really going to seniors. Well in my thinking these people would fall in the category of people society would need to cover anyway. But it is a fair point and would drop that 34% down to 21%}

Which brings us to the second point. A lot of the narrative about Social Security is deliberately shaped around the intergenerational unfairness narrative with Boomers placed in the position of villain while our hero is played by long suffering young Gen-X worker/father. First that ignores the fact that under current projections most of Boomer retirement is in fact funded but second ignores the fact that it only describes a part of the actual demographics. To look at the bigger picture we would need to examine the numbers in Table V.A2.—Social Security Area Population as of July 1 and Dependency Ratios, Calendar Years 1950-2085. If we do we see that the actual ratio of people 20-64, i.e. mostly workers, to people over 65, i.e. mostly retirees in 2007 was in fact .207 or 5 to 1 rather than the loosely cited 3 to 1. While this ratio does increase due to Boomer demographic realities it only goes to .357 by 2035, a point at which Gen-X themselves will be entering retirement. This isn’t to understate the realities, going from 5 to 1 working age to retirement age to 2.8 to 1 does require some adjustment. On the other hand if we shift focus and look at total dependency ratio, which includes children, and then examine it in historical perspective things look quite a bit different.

In 1965 total dependency ratio was at .905. In 2007 total dependency ratio is at .667. in 2030 it will be back up to .806. And the reason for the change is pretty obvious, all Boomers were children in 1965, all Boomers are working age in 2007, all Boomers will be retirement age in 2030. But if America didn’t break at the expense of feeding, clothing and educating us while we were children, it hardly will do so when it comes to feeding us when we are old.

In the end the old 16:1 worker to retiree going to 3:1 going to 2:1 narrative is an attempt to convince people that demography is running amuck when instead most of that is the result of phasing out one program (Title 1) in favor of another (Title 2), with the rest the result of a combination of a large birth cohort (Boomers) life cycling through followed by assumed increases in lifespans for Gen-X retirees. It is just not as dire as the scaremongers would have you want to think.