America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
IT CAME as a distinct shock to many of us when President Roosevelt some time ago commented on the fact that in providing security for the mass of the people the United States is some twenty-five years behind most of Europe. A country which has always prided itself on the high standard of living among its working people was disconcerted to learn that other nations had gone much further along the road of assuring their people the maintenance of a decent standard of living in both good times and bad. The depression had no doubt brought home to many the realization that high wages and economic security are by no means synonymous. But it was not generally realized—perhaps it is hardly yet grasped in its full import—that in Europe, in spite of the long drawn out severity of the depression, under the protection of social insurance measures the people have suffered much less severely, both in numbers and degree, than have our own workers.
That even in times of apparent prosperity we had an appalling amount of suffering and destitution due to the lack of protection against the ordinary hazards of life can be seen from the fact that there was a steadily growing need for public and private charity, for social welfare work, and for immense "drives" by community chests and individual organizations. Actually it is estimated that in 1929, at the height of our most glittering prosperity, there were at least 2,000,000 unemployed in the United States and hundreds of thousands incapacitated by industrial or other accidents, of whom the great majority were eventually compelled to seek some form of charitable aid. Had this country had some or all of the social security measures in vogue in Europe, most of these people would have been tided over their period of misfortune by financial assistance due them as a matter of contractual right, for which provision had been made during normal earning years.
There are two questions which rather naturally arise. In the first place, why does the United States, which has always been counted as highly progressive, now suddenly find herself the only large industrial country without adequate social security legislation? Secondly, if other countries have already had such legislation in operation for 25 years or more, why is it not possible to pick out the most successful system as a model, and set up a similar one here without delay?
There are several logical reasons why the United States has been slow to recognize the principle of social insurance—the principle that, "in order to advance the prosperity of a nation as a whole, and to conserve its vital forces, it is better that a misfortune falling on an individual should be distributed and borne lightly by the whole community, rather than that the individual should be crushed by the weight of his own misfortune."
In a new and pioneer country like the United States, with its unlimited natural resources and unexplored frontiers, there appeared to be abundance for all. Labor was scarce and the rewards were high. The emphasis naturally tended to be on individualism rather than on coöperation for the common good. As long as opportunity was more or less unlimited, people felt that a man's failure to provide adequately for himself was probably due largely to his own fault, and that no responsibility lay on the rest of the community to do anything about it except possibly as a matter of charity. Furthermore, they felt that it was an individual matter rather than one which affected society as a whole.
It was not until misfortune became more general that the truth was driven home that a man might indeed be the victim of circumstances far beyond his control, and that, in the closely woven fabric of modern life, the misfortune of one group might have a very real and direct bearing on the welfare of the whole society. Recognition of this fact by the older nations of Europe lay at the very heart of their theory of social insurance and of their legislation putting it into effect. It has taken the trials and misfortunes of the great depression to bring it home clearly to this country.
Not that it is an entirely new idea here. For years many have foreseen the eventual need of social insurance in America. But they have been as voices crying in the wilderness. Successful social legislation, like any other legislation, can only be the result of a definite demand by the people themselves. Pioneer efforts along these lines were unable to make headway against certain beliefs which were firmly entrenched.
For one thing, it was believed that with high wages the worker himself should and would be able to make provision against the hazards and vicissitudes of life to which he or his family might fall victim. Protective labor legislation was directed largely towards the maintenance of minimum standards of living. This was of course highly valuable in times of normal employment, but did not cover a gap of prolonged unemployment such as we have had to face in recent years.
Again, in those states where the idea of social security had gained ground, the competitive nature of interstate commerce placed an effective damper on any action. Each state hesitated to be the first to adopt social legislation for fear that the cost would place its industry at a disadvantage with regard to that of its neighboring states. Thus it was that in the progressive state of Wisconsin it took twenty years of continuous effort to place on the statute books the first unemployment compensation act ever passed in the United States. And in order to place the industrialists of Wisconsin at as little disadvantage as possible the sponsors of the legislation found it necessary to compromise on an extremely modest beginning.
It is also true that in the United States, just as had been the case previously abroad, social insurance has had to overcome the opposition of industry and of the ultra-conservative interests which saw in it only a burden of additional taxation.
Such, briefly, were some of the reasons for the coolness with which the United States formerly regarded the idea of social security legislation. But the events of the past few years have brought about a decided reversal of opinion. In the face of a depression of unprecedented length and severity, men have found accustomed ground slipping from under their feet and have looked about desperately for some rock to which to cling. They have seen that the foreign worker is coming through the years of depression with improved health and higher standards of living, and that the credit is due in large measure to the protection which has been his through social insurance. Industrialists, too, have been impressed by the testimony of their British brethren, who have been converted from bitter opposition to unemployment insurance to cordial support through a recognition of its stabilizing influence, particularly in maintaining home industries and a steady minimum of production. As an influence in preventing social unrest, its value is thoroughly appreciated—not only in England but in every country which has adopted it.
But though there has been a definite change in American sentiment, that does not mean that the problem before us is an easy one. President Roosevelt, who has been for many years an advocate of social security measures, recognized this when last summer he appointed the Committee on Economic Security to make a comprehensive study of the whole question and present to him recommendations on which a sound legislative program might be formulated. Evidently, while the United States can benefit by the lessons which others have learned slowly and painfully through trial and error, in the last analysis the system which she works out will be peculiarly an American one and adapted to special American conditions and requirements. No other country, for instance, has a form of government like ours, involving as it does special constitutional questions which directly affect the form legislation must take. Again, in no single European country is there to be found such a striking variation in the standard and cost of living as exists, let us say, between that of the agricultural laborer in the warm South and the highly skilled mechanic or craftsman in one of our cold Northern industrial cities. Thus although Great Britain's system is admittedly the most successful, the flat rate of contributions and benefits which is suitable to her closely-knit and homogenous people would obviously not be the one best adapted to our needs.
Furthermore, in spite of years of experimentation, the systems in effect abroad are still slowly evolving. There is not one which could be claimed to have crystallized into final and permanent form. It is of the essence of social security legislation that to be successful it must adapt itself not only to national characteristics and racial requirements but to changing economic conditions.
Commercial insurance is based on risks which can be predicted with almost complete accuracy. But while the incidence of old age, accident and ill health are measurable, unemployment, which is one of the most important risks involved in social insurance, depends on economic conditions which even the most conservative would admit have been of an extremely unpredictable nature in the past half century or more. While no country (except Russia) which has once adopted this type of legislation has ever given it up, all of them have continually changed and improved their methods. The systems differ in detail. But it will be seen that in general their trend is similar, and that the movement is constantly towards a broader measure of security for the low-income groups.
The French problem has differed from that of Great Britain and Germany, countries where the industrial population predominates. In France, agriculture and industry are more or less evenly balanced and until recently the unemployment problem had never been acute. Hence, provision against the effects of unemployment has played a minor part in the development of French social legislation. On the other hand, concern over the decreasing birth rate shows itself in the provisions made for maternal care, in the birth bonuses and in the family allowances, all of them designed to encourage large families.
Historically speaking, France can claim to have been a pioneer in the field, having set up in 1673 a system of compulsory old age insurance for her seamen, a system which has continued practically without interruption down to the present time. Actually, she was slow in developing a coördinate system, partly because workers were protected against many hazards through the friendly and mutual benefit societies which were encouraged and subsidized by the state. It was not until after she had won back Alsace and Lorraine that she found herself in a situation which demanded action. The people of these provinces had been enjoying the benefits of the German system of health insurance and old age pensions, and it was obviously not feasible either to deprive them of these popular measures or to leave them in a position which would arouse the jealousy of the rest of the country. Hence, after many years of discussion, France in 1930 adopted a fairly comprehensive social insurance act, which does not, however, include any compulsory unemployment insurance. It applies to nearly 9,000,000 workers, and provides old age insurance, cash and medical benefits during illness and invalidity, maternity and death benefits, and medical care for the family of the insured.
The system is compulsory and contributory, one contribution covering all the risks and expenses. The employer and the employee pay an equal amount, the wage earner's share being paid by the employer and then deducted from his wages, and the fund is supplemented by grants from the state. It applies to the wage earner whose income does not exceed approximately $600 to $700 a year, depending on the locality in which he lives, but the amount of the exemption is raised for each child, so that a worker earning approximately $1,000, but with more than 3 children, would still come under the law, although to safeguard the employment of parents of large families the amount of his contribution would be calculated on the lower amount. He pays no contribution if he loses his job, but the government makes good both his and the employer's contribution during the first four months he is out of work. Due to the unexpectedly large increase in unemployment this provision today involves a deficit of nearly 4 billion francs in the French budget.
Pensions amounting to 40 percent of the average annual wage are granted at the age of 60 to workers who have been employed for 30 years. A worker who wishes to retire at 55 can do so by accepting a lower pension; and it also will be decreased for those who during the transitional period reach the age of 60 before they have been able to make their 30 years' contributions. A worker who has brought three children up to the age of 16 is entitled to an increased pension. On reaching the eligible age, he may also, if he wishes, receive a lump sum instead of an annual pension, on conditon that he uses it to buy a homestead. His widow and orphan are entitled to a cash benefit of 20 percent of his average annual wage and if he leaves 3 or more young children they are entitled to a minimum of 100 francs a year each until they reach the age of 16.
If the workman or his wife or children should fall ill, he is entitled to from 80 to 85 percent of the cost of medical treatment; and if he himself is sick for more than 4 days he is entitled to a cash allowance ranging from 3 to 18 francs a day according to his wage class. Maternity and nursing allowances are also granted to insured workers and workers' wives.
French unemployment aid has been handled in the past by trade unions or mutual aid associations, which since 1906 have received government subsidies proportionate to the financial assistance they have rendered. This subsidy was formerly fixed at 33 to 40 percent of the benefits, depending on the size of the association, for a maximum benefit period of 120 days (later extended to 180) and was reimbursed to the organization after the benefits were paid. But so heavy did the demand on the funds become, due to increasing unemployment, that in the spring of 1932 it became necessary to increase the subsidies to 60 percent on benefits paid out during 10 percent of the possible working days; to 70 percent on benefits paid out during more than 10 percent but less than 20 percent of the possible working days; to 80 percent on benefits paid out during more than 20 percent but less than 30 percent of the possible working days; and 90 percent on benefits paid out for more than 30 percent of the possible working days. In addition, it was provided that the association could secure advances from the state rather than wait for reimbursements from benefits paid. The present rate of benefits is 7 francs per day for the unemployed head of a family; for the spouse and dependents over 16 years of age, 4 francs; for persons under 16 years of age dependent upon the head of the house and not working (or if working, earning less than 4 francs per day), 3.50 francs. The maximum total allowance amounts to 19 francs, which however is increased from 1 to 4 francs according to the number of dependent children in excess of two. The total daily family allowance may in no case, however, exceed one-half of the average ordinary wage of the district and the regular family allowance. If unemployment lasts longer than 180 days the worker then receives aid from small offices run by the municipalities, which are also subsidized.
It is this question of extending aid to the unemployed worker beyond the period to which his contributions have entitled him which is proving the most difficult in every social insurance program. If the fundamental principles of insurance are to be maintained, there must obviously be a direct relation of benefits to contributions. On the other hand, it is equally obvious that if the benefits to which he is entitled are exhausted before work can be found for him, the worker must in some way be provided for. The British Government is still struggling to find a proper solution to this problem; in fact, it has recently announced that after only a month's trial its latest scheme of supplementary unemployment insurance is to be abandoned as unsatisfactory, necessitating some new arrangement to care for those who are no longer entitled to insurance benefits.
The British unemployment insurance system was started in 1911 as part of a comprehensive program of social legislation which emphasized old age pensions and health insurance. The plan, which applied to only about 2¼ million workers in specified trades, was a compulsory contributory one with weekly contributions of 2½d. each from the employer and the employee and 1⅔d. from the exchequer, and benefits of 7 shillings (approximately $1.70) a week.
The plan was launched at the beginning of a period of unusual prosperity, followed by four years of war during which there was practically no unemployment. The result was that in November 1918 the fund had an undistributed balance of £15,000,000—almost $80,000,000—although it had in the meantime been extended to cover workers engaged in war industries. Not only did the rapid demobilization of war industries naturally place a heavy drain on the fund, but in 1920 the system was extended to cover practically all workers except those engaged in agriculture or domestic service. Contributions were raised, but the benefits were also increased, being 155. ($3.65) for men and 125. ($2.92) for women, limited to 15 weeks' benefit in any insurance year. Unfortunately, 1920 marked the beginning of a period of postwar depression which caused the number of totally unemployed to increase with great rapidity in a few months from some 500,000 to over 2,000,000, plus another 1,000,000 only partially employed.
It had been one of the provisions of the act of 1920 that the insured worker should be eligible for benefits only after the payment of 26 (later changed to 30) weekly contributions. But as unemployment rapidly increased it was seen that it would be impossible for those recently brought into the system to fulfill this requirement. In the emergency the British Government decided on a step which, while it abandoned temporarily at least the insurance principle, avoided some of the more disagreeable features of relief. By a system of so-called uncovenanted benefits, aid was extended to any unemployed person genuinely seeking work, regardless of whether he had built up the required number of contributions, or even made any. It was this system of "uncovenanted" or "transitional" benefits which started the use of the term "dole," which was later unfortunately applied to the whole system.
Owing to the long duration of the depression, the emergency or transitional period lasted very much longer than had been anticipated, and the insurance fund was piling up a debt which by October 1934 amounted to over £105,000,000. In the meantime, by the amendment of June, 1934, the whole system was drastically reorganized, a sharp distinction being made between the payment of contractual unemployment insurance benefits on the one hand, and the provision of unemployment assistance and relief on the other. Provision has been made for repayment to the Treasury of money borrowed for these transitional benefits. Repayment is to be made in half-yearly instalments of £2,500,000 each, which, it is anticipated, will fully wipe out the debt in less than 40 years. Thus the insurance fund is once more placed on an actuarially sound basis, but at the same time it is burdened with the repayment of money which, according to some opinions, might properly have been charged to relief.
Provision for old age has been an important part of the British system of social insurance since 1908, when a plan of free old age pensions was started. Pensions of 5s. a week were granted to indigent old people of 70 or more who had an income of less than £31.10s. a year (approximately $2.92 a week). This sum was doubled in 1920, and granted to persons with an income up to $4.66 a week. At present, pensions vary with the income of the pensioner, in computing which certain deductions are allowable under a "thrift" clause. In addition, contributory pensions for workers, covering the ages from 65 to 70, have been set up in connection with the compulsory national health insurance system.
To make for simplification, health and pension contributions are paid weekly in the form of a single stamp. For a man the total contribution is 1s. 6d. (36 cents) per week, half being paid by the worker and half by the employer; of this, half represents the contribution for health insurance and half the contribution for old-age, widows', and orphans' pensions. For a woman the total contribution is 1s. 1d. (26 cents) per week, 7d. (14 cents) being paid by the employer and 6d. (12 cents) by the worker; of this 4½d. (9 cents) represents the contribution for pension and the balance the payment for health insurance. In addition to the funds so collected, the sum of £4,000,000 ($19,466,000) is paid annually from the National Exchequer. This annual grant has been made for a period of 10 years, beginning 1926-27, thereafter to be determined by Parliament.
The amount of the pension benefit is 10s. ($2.43) per week. Widows' pensions amount to 10s. per week, to which is added 5s. ($1.22) allowance per week for the eldest child and 3s. (73 cents) per week for each other child. Full orphans of an insured parent or insured parents are entitled to 7s. 6d. ($1.83) each per week up to the age of 14 years (or 16 if attending school). The health insurance program provides not only medical benefits but cash allowances to the worker and a maternity benefit to his wife of $9.73, or in the case of an insured wife $19.47.
It was in 1889 that Germany led the social security movement by establishing a system of health and old age insurance for her workers, but it was not till 1927 that she adopted compulsory unemployment insurance. At the present time two kinds of benefit are provided—ordinary contractual benefits, paid for by contributions; and emergency benefits for those who have drawn emergency benefit to the limit, paid for out of the surplus of the insurance not used for ordinary benefits and a special government tax. In addition there is a supplementary system of local poor relief, to which the central government contributes direct grants proportionate to individual local government requirements.
The compulsory system applies, with certain exceptions, to workers earning less than 3,600 marks a year, and to salaried employees earning not more than 8,400 marks. The 6½ percent rate of contribution, of which the employer and employee each pay half, is based on 11 different wage levels (in actual practice, 6). To be eligible for benefit for the first time, an insured worker must have paid contributions for 52 weeks out of the 2 years preceding his application, and for 26 weeks during the 12 months immediately preceding a second application.
Benefits formerly ranged from 75 percent of the standard wage for those in the lowest wage class to 35 percent in the highest; but in 1932 as an economy measure three scales were introduced, based on the cost of living in various sized communities. Due also to the economic stress of the past years, the period for ordinary benefit has been reduced from a total of 52 weeks to 14 weeks. Then the worker is subject to a strict means test, and if he has no means of support and can be given no assistance by relatives he receives extended benefits. Of these need, rather than time, is the limiting factor.
The system is almost self-supporting. For the fiscal year ending March 31, 1934, contributions of wage and salary earners and of employers were approximately 1,000,000,000 marks; appropriations by the German Government for the welfare relief of communities were approximately 400,000,000 marks; appropriations by the local governments and municipalities were approximately 600,000,000 marks; and the yield from a special "crisis" tax was approximately 500,000,000 marks. The regular and extended benefits are paid out of the funds made up from the premiums paid on account of the insured and the crisis tax, while the welfare relief is provided for from governmental appropriations, federal, municipal, and local.
Some 18,000,000 people in Germany are covered by the combined old age and invalidity insurance system. This calls for contributions, also graduated by wage groups, equally by wage earners and by employers. Small tradespeople and others not included in the system are permitted to participate voluntarily, on payment of the whole contribution. Weekly contributions range from 30 pfennig in the lowest wage group to 2 marks in the highest. The benefits paid include invalidity, old age and survivors' benefit, and certain free medical treatment. The old age pension begins at 65 and varies with the number and amount of contributions, 20 percent of all contributions paid being added to the minimum of 156 marks a year, of which 72 marks represent the state subsidy.
While there can be little weight to the argument that the United States cannot afford to adopt social insurance, when so many other countries much poorer than she maintain such comprehensive systems, the American program has been framed with due regard to our present economic conditions. The legislative proposals before Congress as this is written represent a modest, sound beginning, on which we can build by degrees as circumstances warrant. We do not expect to achieve perfection at once. It is to be expected that the progress of social insurance here, as elsewhere, will be evolutionary. In the course of time, with experience, and as conditions change, alterations and improvements will undoubtedly be made.
The Administration does not entertain the illusion that social insurance is a cure for all our ills. For instance, unemployment compensation alone evidently cannot solve our present unemployment problem. For this reason the Committee on Economic Security emphasized that at the present time the major contribution of the Federal Government towards security should be the provision of work for those now unemployed.
The unemployment compensation plan proposed in the Wagner-Lewis-Doughton Bill, now under consideration by Congress, will be financially self-sustaining and will provide limited benefits on a strict contractual basis. It may be described as a coöperative system between the Federal and State Governments. It proposes a federal payroll tax on all employers throughout the country who employ four or more employees, to come into operation on January 1, 1936. In the first two years the rate of this tax will be either 1 percent, 2 percent or 3 percent, depending upon the progress made toward economic recovery as measured by the index of production of the Federal Reserve Board. If there is no marked improvement, the rate will be only 1 percent; if there is considerable but not complete recovery, it will be 2 percent; and if there is complete recovery, 3 percent. Beginning in 1938, the rate is to be uniformly 3 percent. A credit against this tax is to be allowed for contributions made by employers for unemployment compensation purposes under state laws setting up compulsory unemployment compensation systems. The maximum credit thus allowed is to be 90 percent of the Federal tax, the other 10 percent being in any event payable to the Federal Government, to be used for payment of the expenses of administration by the Federal and State Governments. Employers who have stabilized their employment are under certain circumstances permitted additional credits, but only after they have built up adequate reserves, and subject to continued payment of at least 1 percent into the state fund and of the 10 percent for administration.
All funds collected by the states for unemployment compensation purposes must be deposited in the United States Treasury, to be invested and liquidated by the Secretary of the Treasury. In addition, the Bill prescribes certain minimum standards which must be met by the state laws in order for employers in those states to become entitled to an offset against the Federal tax. The most important of these standards is that all moneys collected by the state must in fact be used for unemployment compensation purposes.
In all respects not specified in these standards the individual states are given complete freedom to establish any kind of unemployment compensation system they wish. They may or may not permit separate industry and plant accounts, and may or may not require employee contributions in addition to the contributions paid by the employers. They can fix their own benefit rates, waiting periods, etc. Likewise they will have direct responsibility for administration, but are required to use the public employment offices for this purpose, and to select all employees concerned with the administration of unemployment compensation on a merit basis. The fact that a uniform tax is levied removes the possibility of any one state being placed at a disadvantage in interstate commerce. At the same time the states are free to adopt legislation best suited to their own needs. The arrangement also insures the safety of all reserve funds and their use to stabilize the economic system.
Regarding old age security the proposed Bill makes three separate provisions: 1. Grants-in-aid toward meeting the costs of pensions allowed under state laws to old people in need. 2. A federal old age annuity system, compulsory and contributory, for all employed persons. 3. A federally administered system of voluntary annuities, designed primarily for people of small incomes not covered by the compulsory system, administered by the Treasury Department.
The federal grants-in-aid will match the contribution made by states to meet the cost of pensions paid to indigent old people under state laws, but the federal part of this cost is not to exceed $15 per month in any case. In addition, the Federal Government will pay one-half the costs of administration, provided they do not exceed 5 percent of the amount expended for pensions. To be entitled to aid, a state must make its old age pension law conform to standards prescribed in the Bill. These standards require payment of old age pensions to old people in need, who are citizens of the United States, who have resided within the state five years or more, and who are 65 years of age or over (with the proviso that until 1940 any state may maintain a 70-year age limit). States may grant pensions on a more liberal basis, but will not receive any federal aid unless they meet the standards.
The federal old age annuity system insures all gainfully employed workers against old age. It is financed by a payroll tax shared equally by workers and employers, and its administration will be placed under the Social Insurance Board.
The system of voluntary annuities provided for in the Bill is designed to enable low-income people who cannot be brought under the compulsory system, or who wish to supplement the annuities which they will get under this system, to purchase old age protection at cost. Wide discretion is allowed regarding the conditions on which annuities are to be sold, but there is a restriction that no person may receive an annuity in excess of $100 per month. In all cases the purchasers will get an annuity based upon the exact amount of their contributions; the Federal Government will contribute only the costs of administration.
The three parts of this program are complementary. The federal grants-in-aid for pensions paid by the states are designed to stimulate all states to enact liberal old age pension laws for the support of people now old who are in need. The compulsory contributory annuity system is designed to enable younger workers, with the help of their employers, to make their own provisions for old age. These annuities will be contractual and free from any means test. Through such annuities the rapidly increasing cost of gratuitous pensions will, in the course of time, be greatly reduced. The voluntary annuities are intended as a supplement to the compulsory annuity system to give self-employed people, housewives, etc., the same opportunity to make their own provisions for old age that the employed persons are required to make.
The Bill also provides for federal grants-in-aid to states to help meet the cost of widows' pensions, and for the care of handicapped children, the extension of child and maternal health services through the Children's Bureau, and an extension of federal aid in public health services.
The total appropriations proposed in the bill amount to $98,500,000 in the fiscal year 1936, and $218,500,000 in subsequent years. Offsetting these appropriations, will be the receipts from taxes which are imposed in connection with unemployment compensation and old age annuities. Unemployment compensation will not involve any cost on general revenues. And for a considerable period to come the federal grants-in-aid to states for old age pensions can be borrowed from the amounts collected by the Federal Government through the system of compulsory old age annuities.
The American program for economic security follows no single pattern. It is broader than social insurance and does not attempt merely to copy a European model. It is calculated, under our American conditions, to protect our citizens from the hazards which might otherwise plunge them into destitution and dependency.