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Old-Age, Survivors, and Disability Insurance Program: History of the Benefit Formula

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Old-Age, Survivors, and Disability Insurance Program: History of the Benefit Formula Old-Age, Survivors, and Disability Insurance Program: History of the Benefit Formula by MARICE C. HART* The program of old-age, survivors, aB,d disa- ber by the 1952 formula. The 1954 formula be- 6iZity insurance affects virtually every person in came effective in September 1954 and the 1958 the United Xtates and many of its citizens work- formula in January 1959. ing abroad. A full discussion. of the program The 1935 formula was based on cumulative wouZd $11 many voZumes, but one of its phases wage credits under the program and thus was can be sebcted and foZZowed, in the pages of the directly related to total covered wages. The 1939 BULLETIN, from inception to the present time. amendments introduced the concept of the aver- The phase seZected for the current presentation is age monthly wage, defined as total covered earn- the benefit form&a, with digressions to certain ings divided by the number of months elapsed closely related provisions. after attainment of age 21, with the period before inauguration of the program on January 1,1937, THE SOCIAL SECURITY ACT of 1935 and disregarded. Use of the average monthly wage its amendments have included six different for- rather than cumulative wage credits permits mulas for determining the amount of monthly higher benefits to be paid in a system’s early years retirement benefits payable under the old-age, of operation and also relates the benefit more di- survivors, and disability insurance program. rectly to the worker’s standard of living. Available initially only when a worker retired Length of service remained a factor under the because of age, benefits have also been payable 1939 formula, in the form of a l-percent increase since mid-1957 to a worker retiring because of in the computed benefit for each year of coverage. permanent and total disability. It will be observed that the 1939 formula, as well The application of the six formulas to selected as subsequent formulas, was more heavily earnings is analyzed in t.he following pages. Par- weighted than the 1935 formula in favor of the ticular attention is given to the benefits payable worker wit,h low average earnings. under each formula in the early years of its oper- The 1950 amendments eliminated the length-of- ation and the potential benefits payable in a ma- service increment. As a result, benefits payable ture system to a beneficiary whose entire working life was spent in covered employment. The anal- TABLE I.-OASDI benefit formulas under the Social Security ysis includes a discussion of family benefits, intro- Act and its amendm.ents duced by the 1939 amendments. Monthly retirement benefit Formula en- acted in- Basis Percentages applied THE SIX FORMULAS 1935 ..___ .____ Cumulative wage credits .___ l/2% of first$3,000 plus l/12% of next $42.000 plus l/2470 of next $R4,OM). A summary of the six formulas contained in 1939..--e-...- Average monthly mage * 40% of first $50 plus 10% of after 1936. next $200, all increased by the act and its amendments is presented in table 1% for each year of cover- 1. Before the formula in the 1935 act became 1950.-e_-..-- Average monthly wage ’ 5O;:;f first $100 plus 157, of after 1950. next, $200. operative, it was superseded by the 1939 formula, 1952..-.---.-e- Average monthly maze ’ 55?> of first $100 plus 15% of after 1950. nest %200. which went into effect in January 1940. The 1950 1954.e----ee.-- Average monthly wage 1 55C of first $110 plus 2.0% of after 1950, escludinr 4 or 5 next $240. formula was operative only for the 5 months years of lowest earnings. 19%---- .____ Average monthly wage 1 58.8570 of first $110 plus 21.47, April-August 1952 and was replaced in Septem- after 1950, excluding 5 of next $290. years of lowest earnings. 1 Total credited earnings divided by months elapsed after year of attain- *Division of the Actuary, Office of the Commissioner. ment of age 21. BULLETIN, SEPTEMBER 1960 3 to a worker meeting the minimum coverage re- each dollar of momhly retirement benefit.l The quirements may be as large as those payable to a benefits shown by the table for average monthly worker covered during his entire career. The 1950 wages of less than $85 are in some cases higher law also permitted exclusion of the period before than the amount the benefit, formula would pro- 1951 in computing the average monthly wage. duce, to reflect the lo-percent. increase in the This exclusion, desirable because of substantial minimum benefit and to achieve smoothly graded extensions in coverage., had the additional merit inc.reases in benefit amounts immediately above of recognizing the changes in earnings levels in the minimum. the 1940’s. In the long ru11, the period on which To compare the benefits provided under the the average wage is based is the time. from a several formulas, a hypothetical earnings record worker’s attainment of a.ge 21 until his retire- has been selected to which ea,ch formula is ap- ment; few workers born after 1929 are nffected plied. In the following comparisons, benefits for by exclusion of years before 1951. “career coverage” assume covered employment The formulas adopted in 1952 and later years from age 21 to age 65. Actually, earnings before followed the general pattern of the 1950 formula. age 21 may be included in bhe computation of The 1954 amendments included a provision per- benefits, and earnings after age 65 may be used mitting the 4 years of lowest earnings (5 years for sll except the 1935 formula. Basing poten- for workers with at least 20 quart,ers of coverage) tial career-coverage benefits on a maximum of 43 t.o be excluded in the computation of the average years of covered employment produces compara- monthly n;age. Under the 1958 amendments, 5 ble benefits under all six formulas, since for an years may be omitted in all cases. Thus, even entrant at age 22 that is the maximum permis- though a worker may have no covered earnings sible period under the 1935 formula. Benefits for for as many as 5 years, no reduction is made in “immediate retirement” are based on 2 years of the amount of the average monthly wage upon coverage except under the 1935 formula, for which his benefit is based. Established periods which 5 ye.ars of employment are assumed. The of permanent and tota~l disability may also be 3-year difference stresses the dramatic increase in omitted under the 1954 amendment,s in the com- inunedia~te retirement benefits under the 1939 and putation of the average monthly wage, so that subsequent formulas. the loss of ea.rnings caused by such disability does As the system matures, the immediate retire- not reduce the amount of the monthly benefit. ment benefits under the five formulas based on The 1958 formula was not expressly stated in the average monthly wage become almost mean- the 1958 amendments. Instead, a benefit compu- ingless, both because in the long run 10 years of tat,ion table based on the formula was incorpo- employment are necessary for eligibility for bene- rated in the law. At a glance, it might appear fits and because credited earnings are spread over that a different principle from that prevailing in the career period in determining the average previous amendments had been adopt.ed. What monthly wage. Thus, immediate-retirement bene- the 1958 legislation did was to increase the bene- fits are of interest only with respect to an indi- fits, generally by 7 percent. This adjustment, in vidual near retirement age at the time each for- effect, changes the existing formula from 55 per- mula was enacted. cent of the first $110 of the average monthly wage and 20 percent of the remainder to 58.85 pe.rce.nt of the first $110 and 21.4 percent of the remain- COMPARISON BASED ON LEVEL EARNINGS der. At the same time the maximum amount of For the first comparison, level annual earnings the remainder was increased from $240 t.o $290 (the use of which eliminates the effect of chang- to reflec,t the accompanying rise from $4,200 to ing wage rates) have been chosen in the amounts $4,800 in maximum annual creditable. earnings. The table in the 1958 law, derived by applying 1 The term “monthly retirement benefit” is used here this formula to every possible average mont.hly to denote the amount payable to a worker retiring at or n-age, rounds t,he result to the nearest dollar for after age 65 who does not have an eligible dependent (or facility of administration. It then groups the to a disabled-worker beneficiary with no eligible depend- ent) ; in the terminology of the law, this is the primary ranges of average monthly wages that produce insurance amount. 4 SOCIAL SECURITY of (a) $1,500, the approximate avera.ge amiual TABLE 3.-Maximum creditable annual earnings and maximum credited earnings in the program’s early years, and minimum monthly benefits - and (b) $3,000, the maximum creditable annual Month~e~;~ment earnings during its first 15 years. Maximum Formula creditable _. Table 2 shows the monthly retirement benefit annual earnings Minimum Maximum Minimum 1 Maximum based on such earnings. The marked decrease in ~___ the career-coverage benefit payable under the 1935--...-.. “;#g (1) 1939-- __ ____ %:~ pm k?o.oo 1939 formula from that payable under the 1935 1950 _______ 3:6OO 20.00 80.W 15.w d:Ei 195x-.....- 3,fioo 25.00 85.W 18.80 168.75 formula is the result of changes in the philosophy 1954--.
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