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A COMPENDIUM OF PAPERS ON PROBLEMS AND POLICY ISSUES
IN THE PUBLIC AND PRIVATE PENSION SYSTEM
|
SUBMITTED TO THE
SUBCOMMITTEE ON FISCAL POLICY
OF THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
Part I: General Policy Guidelines
DECEMBER 1967
Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.]
WILLIAM PROXMIRE, Wisconsin, Chairman
WRIGHT PATMAN, Texas, Vice Chairman
SENATE HOUSE OF REPRESENTATIVES
JOHN SPARKMAN, Alabama . RICHARD BOLLING, Missouri
J. W. FULBRIGHT, Arkansas HALE BOGGS, Louisiana
HERMAN E. TALMADGE, Georgia HENRY S. REUSS, Wisconsin
STUART SYMINGTON, Missouri MARTHA. W. GRIFFITHS, Michigan
ABRAHAM RIBICOFF, Connecticut WILLIAM S. MOORFIEAD, Pennsylvania
JACOB K. JAVITS, New York THOMAS B. CURTIS, Missouri
JACK MILLER, Iowa. WILLIAM B. WIDNALL, New Jersey
LEN B. JORDAN, Idaho . DONALD RUMSFELD, Illinois
CHARLES H. PERCY, Illinois W. E. BROCK 3D, Tennessee
John R. STARK, Ezecutive Director
JAMEs W. KNOWLEs, Director of Research
ECONOMISTS
WILLIAM H. MOORE John B. HENDERson GEORGE R. IDEN
DONALD A. WEBSTER (Minority)
SUBCOMMITTEE ON FISCAL Policy
MARTHA. W. GRIFFITHS, Michigan, Chairman
HOUSE OF REPRESENTATIVES - SENATE
HALE BOGGS, Louisiana WILLIAM PROXMIRE, Wisconsin
WILLIAM S. MOOREHEAD, Pennsylvania HERMAN E. TALMADGE, Georgia
WILLIAM B. WIDNALL, New Jersey STUART SYMINGTON, Missouri
DONALD RUMSFELD, Illinois . JACOB K. JAVITS, New York
- JACK MILLER, Iowa -
CHARLES H. PERCY, Illinois
NELSON. D. McCLUNG, Economic Consultant
23WAH&L WAOHOM iO T2HNMU H .


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LETTERS or TRANSMITTAL
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DECEMBER 4, 1967.
To the Members of the Joint Economic Committee:
Transmitted here with for the use of the members of the Joint Eco-
nomic Committee and other Members of Congress is part I, “General
Policy Guidelines,” of the compendium of papers entitled “Old Age
Income Assurance,” prepared for the Subcommittee on Fiscal Policy.
The views expressed in this document do not necessarily represent
the views of members of the committee or the committee staff, but
are statements of issues and alternatives intended to provide a focus
for hearings and debate. : - -
- WILLIAMI PROxMIRE,
Chairman, Joint Economic Committee.
*
. DECEMBER 4, 1967.
Hon. WILLIAM PROxMIRE, - - -
Chairman, Joint Economic Committee,
Congress of the United States, Washington, D.C.
DEAR MR. CHAIRMAN: Transmitted herewith is part I, “General
Policy Guidelines,” of the compendium of papers on problems and
policy issues in the public and private pension system, entitled “Old
Age Income Assurance.”
Part I considers the political and social issues in retirement in-
come policy and contains 13 papers contributed by invited specialists.
The subcommittee is indebted to these authors for their excellent
contributions, which we believe will add much to a general awareness
of the issues in retirement income policy, particularly as these relate
to old-age and survivors insurance and tax programs. The time and
learning devoted to the preparation of these papers should do much
to stimulate interest and to assist in policy decisions concerning future
programs for old-age income assurance.
Dr. Nelson McClung, consultant to the subcommittee, is responsible
for the planning and preparation of the compendium, with the edi-
torial assistance of Anne McAfee, and the advice and suggestions of
other members of the committee’s professional staff.
As the executive director’s letter indicates, the compendium should
not be viewed as an expression of views or conclusions of the com-
mittee staff, nor should it be viewed as an expression of views of the
subcommittee or individual members. -
MARTHA W. GRIFFITHs,
Chairman, Subcommittee on Fiscal Policy.
III
IV LETTERS OF TRANSMITTAL
DECEMBER 1, 1967.
Hon. MARTHA W. GRIFFITHs,
Chairman, Subcommittee on Fiscal Policy, Joint Economic Commit-
tee, U.S. Congress, Washington, D.C.
DEAR MADAM CHAIRMAN: Transmitted here with is part I, “General
Policy Guidelines,” of the compendium of papers entitled “Old Age
Income Assurance.” This study was prepared at your request in order
to bring together current thinking on the questions of retirement in-
come programs and thereby contribute to policy decisions by focusing
attention on the more promising solutions of the income problems of
older people. -
The compendium, which is being issued in five parts, confirms the
fact that programs to aid older people have grown in number, size,
and complexity, and that the coordination of these programs and
their combined impact on the income of older people have received
too little attention. Clearly, public policy issues exist with respect to
coordination of these programs, appraising their effects on the econ-
omy, and improving equity.
Part I contains contributions by the authors listed below. The com-
mittee is indebted to these contributors who have given generously
of their time and expertise to provide the latest available information
and competent analytical perspective on this important subject.
Mr. Robert M. Ball Mr. Andrew A. Melgard
Prof. Merton C. Bernstein Mr. James F. Oates, Jr.
Mr. Pearl E. Charlet Mr. Charles A. Siegfried
Mr. Roger Fleming National Association of Manufac-
Mr. Marion B. Folsom turers -
Prof. Byron L. Johnson Mr. Robert Tilove
Dr. John McConnell New York Life Insurance Co.

The major work in planning and compiling this compendium was
undertaken by Dr. Nelson ºši. consultant to the subcommittee,
with the advice and suggestions of other members of the staff. He was
assisted in the editorial work by Anne McAfee. Nothing herein should
be interpreted as representing either the opinions of the staff or the
members of the committee on any of the matters discussed.
JoHN R. STARK,
Eacecutive Director, Joint Economic Committee.
OLD AGE IN COME ASSURANCE
Part I: General Policy Guidelines
C O N T E N T S
Letters of transmittal----------------------------------------------
PENSION, PRODUCTION, FREEDOM AND SECURITY, by Professor Byron L.
Johnson, University of Colorado-----------------------------------
INCOME For THE ELDERLY THROUGH Work-LIFE ExTENSION, AssFT Con-
version, AND PENSION IMPROVEMENTs, by Robert Tilove, Senior Vice
President, Martin E. Segal Company------------------------------
Role of PUBLIC AND PRIVATE PROGRAMs IN OLD AGE INCOME AssurANCE,
by Dr. John McConnell, President, University of New Hampshire----
SoME REFLECTIONs on SELECTED ISSUES IN SocIAL SECURITY, by Robert
M. Ball, Commissioner of Social Security-------- = * = ** = * sº ºne sº ass = ** = * * * * * =
EconoMIC SECURITY IN OUR FREE SocIETY, by Mr. Andrew A. Melgard,
Senior Associate, Human Resources Development Group, Chamber of
Commerce of the United States-----------------------------------
Commentary by The National Association of Manufacturers------------
PRIVATE PENSIONS AND THE PUBLIC INTEREST, A Special Report Pre-
pared for the Eastman Kodak Company and Marion B. Folsom, Director,
by Towers, Perrin, Forster & Crosby, Inc.---------------------------
Remarks by Mr. Roger Fleming, Secretary-Treasurer and Director, Wash-
ington Office of the American Farm Bureau Federation---------------
PRIVATE PENSION PLANs, IN THE UNITED STATES, by Mr. James F. Oates,
" ... . § Chairman, The Equitable Life Assurance Society of the United
tates----------------------------------------------------------
Statement by Mr. Charles A. Siegfried, President, Metropolitan Life
Insurance Company---------------------------------------------
Statement of The New York Life Insurance Company----------------
STRENGTHENING PENSION EQUITIES THROUGH EMPLOYEE ContRIBUTIONS
AND A CLEARING Hous E FOR CREDITs, by Professor Merton C. Bern-
stein, Visiting Professor of Law, Columbia University Law School-----
PUBLIC Policy AND PRIVATE RETIREMENT PROGRAMs—A SUGGESTIon
For CHANGE, by Mr. Pearl E. Charlet, Manager of Research, Hewitt
Associates------------------------------------------------------
AUTHORS LISTED ALPHABETICALLY
BALL, Mr. Robert M-----------------------------------------------
BERNSTEIN, Prof. Merton C----------------------------------------
CHARLET, Mr. Pearl E---------------------------------------------
FLEMING, Mr. Roger----------------- ‘es sº as * * * * = * * * = * = a- - - * * *-* = - = * * * * *s, * =
Folsom, Mr. Marion B---------------------------------------------
Johnson, Prof. Byron L--------------------------------------------
McConn BLL, Dr. John---------------------------------------------
MELGARD, Mr. Andrew A- - - - ---------------- am wº- ºr- tº-- * * * * * * * * * * * * * *- * *- := *
OATES, Mr. James F., Jr.-------------------------------------------
SIEGFRIED, Mr. Charles A.------------------------------------— — — — — —
TILOVE, Mr. Robert-----------------------------------------------
Page
31
43
48
58
77
91
113
115
120
127
129
170
48
129
170
National Association of Manufacturers-------------------------------*
New York Life Insurance Company----------------------------------
113
91
43
58
115
120
31
77
127
PENSION, PRODUCTIVITY, FREEDOM, AND SECURITY
By ByRON L. JoHNSON*
SoME CoNFLICTs IN Policy LoNG OVERDUE FOR BETTER ANswers
The United States is deep into the third phase of its experience with
provision of income assurance to the aged. This new phase, of private
pensions programs, poses very serious questions of policy deserving the
most thoughtful consideration. This paper reviews some key questions,
identifies some policy conflicts, and suggests possible courses of action
for a fourth phase, which needs prompt attention. .
The first phase—
Starting in 1935 (and ignoring the very modest public and private
pensions already in existence) during the first 15 years (or until 1950)
the primary support for the aged was, in fact, old age assistance.
The second phase—(OASI now OASDHI)
The 1950 amendments turned attention from the old age pension to
the social insurance program; and in the past 17 years this transforma-
tion has been profoundly significant. Today 22.5 million persons are
drawing OASDHI benefits, of whom 16 million are elderly. Benefits
are averaging just under $90 per month. By contrast, only 2 million
of the elderly, including 1 million of those also drawing insurance
benefits, are now dependent upon old age assistance, and receive an
average of less than $70 per month. Put it another way, 80 percent of
the elderly are now primarily dependent upon social security; another
5 percent draw welfare payments which supplement their social secu-
rity; another 5 percent of the elderly must still rely almost entirely
upon the Welfare Administration’s old age assistance payments; and
the other 10 percent are still actively employed and rely on employ-
ment for their income.
The third phase— i
Private pension plans have been moving rapidly forward. Today,
some 50,000 plans nominally cover at least 28 million workers. Al-
though one-third of the labor force are now under some private retire-
ment plan, only 15 percent of those over 65 are drawing pensions or
are wives of those drawing pensions under such plans. Before World
War II, in 1940, only 4 million workers were covered by such plans and
the pension funds totaled only $2.4 billion. Today these funds exceed
$134 billion and they are expected to grow beyond $200 billion well
before 1980. . - . T .
*Professor of Economics, University of Colorado; Economist, Social Security
Administration, 1944–47; and agency consultant, 1948–58; Colorado Legislator,
1955–56; Governor's aide, 1957–58; Member of 86th Congress, 1959–60.
1
2 OLD AGE INCOME ASSURANCE—PART I
This rapidly emerging third phase in the field of old age income
assurance warrants every serious public examination and discussion.
Serious questions have been raised, as by Father Paul Harbrecht, S.J.,
in his book, Pension Funds and Economic Power, written for the 20th
Century Fund, published in 1959; by Merton C. Bernstein, in his book,
The Future of Private Pensions, published in 1964; and in various con-
gressional hearings. This symposium offers yet another opportunity
for bringing to public attention some of the very searching questions
that have not been fully examined by industry, by labor, or by the
Government. Let's look at some of the questions:
A. CAN PENSIONS PROTECT BOTH FREEDOM AND SECURITY 2
Shall the retirement system, increase freedom while increasing secu-
'rity or sacrifice freedom in order to increase security?
One of the original reasons for adopting a nationwide program of
old-age benefits was to assure the worker that his rights would follow
him in every covered employment and that he would be fully protected.
The intent of the law was to provide him with security while under-
writing his freedom. -
Ten years later, the Employment Act of 1946 declared it the intent
of Congress to promote and maintain maximum employment, pro-
duction, and purchasing power. Obviously the intent of Congress
requires that each worker be enabled and encouraged continuously
to seek and to accept that position, that job in that industry where
he might make his own maximum productive contribution, even
though it may mean a change in employments.
Lnhappily this has been somewhat inhibited by the widespread
growth of private pension plans. Many reasons have been given for
this rapid growth. In part, it may have been the failure to provide
more nearly adequate social security pensions before the 1950 amend-
ments. Certainly these helped encourage such early major programs
as the Krug-Lewis agreement covering the United Mine Workers.
In part, it grows out of the willingness during the war years to permit
employers to spend money for fringe benefits outside the guideposts
of the wartime stabilization program, but not for salaries or wages.
In part, the generous provision of the Federal income tax treatment
of contributions into retirement funds has stimulated their use. In
part, it was encouraged by the unions’ response to the Inland Steel
decision in 1950, that pensions were a proper issue for collective
bargaining. .
The hard fact is that half of the 28 million workers who believe they
are covered are likely to find that the time spent will not cover them
because the plans are inadequately vested and because American
workers do change their jobs. Unless the plan provides for vesting
and unless the worker stays with the employer long enough to earn
a vested right, he will find that when he exercises his freedom to change
jobs, he loses either all of his retirement security or that portion
which is not fully vested. Some plans do require employee contribu-
tions and they do provide a refund of the employee contribution. But
this helps little because the bulk of the funds are provided by em-
ployer contributions. Thus the net effect of the private pension plans
is either to reduce the mobility of workers and thus inhibit maximum
OLD AGE INCOME ASSURANCE—PART I 3
production rather than promote it, or, to the extent that the workers
exercise their freedom in order to maximize their contribution to pro-
ductivity, the plans cause workers to reduce or abandon their security.
These general principles take on flesh and blood only when one thinks
in terms of specific cases. Among the cases that early attracted my
concern were many such as the following: -
Case 1: A worker, with 23 years of service, approaching retirement,
whose wife's health made a move mandatory—but vesting occurred
only after 25 years. To meet vital family needs and use his freedom, he
and his wife lost their security. Therefore he launched a small business
with his personal assets, and lost most of these.
Case 2: A worker under an industrial plan was reassigned, during a
labor shortage, from a desk to a road job, completely outside his back-
ground, with bad hours and worse meals. To protect his pension, he
accepted the transfer rather than seek suitable employment outside the
plan. The new duties weakened him, leading to untimely death. Pro-
tecting his security cost him his freedom, and shortened his life.
Case 3: A worker who wanted his freedom delayed taking it for
several years, protecting his security. When he finally had what he
thought was a vested right, and quit to go into business for himself,
he found that he could only withdraw what he himself had put in, far
less than the amounts set aside “for him” by the employer. The security
was more illusory than real, when he exercised his freedom.
Case 4: A professional man covered by a State employees’ system
could not transfer to other larger schools in the same State, operating
under different retirement systems, nor could he leave the State, with-
out abandoning much of his security. His career advancement was
sacrificed on the altar of Security, because the system would not protect
both.
Case 5: A widow, seeking a new career in later years, found her
normal employment opportunities largely blocked because these were
mostly covered by retirement systems that discourage hiring older
workers. . -
The Nation has a great interest in assuring that the old age income
protection methods encourage each worker to make his own maximum
contribution to production. But the national policy with respect to
private pension plans discourages what is obviously in the national
interest. - -
Similarly, the national interest is not served by discouraging the
worker from making his maximum contribution. It is unfair to force
him either to buy greater old age security at the expense of his freedom,
or to abandon a portion of his old age security in order to regain his
freedom. The rapid rise in the number of private pension plans and
the sharp limitations upon their vesting have woven a net which has
trapped an increasing number of workers as the years go by. Those
who have discovered the trap are coming to resent it. -
We can organize old age income assurance to provide greater security
Awhile earpanding freedom, but we have not fully done so. Must this
become a public scandal before action is taken? Or can reasonable men,
seeing the consequences of their previous action, take corrective action?
This is the first question facing the Congress.
4 OLD AGE INCOME ASSURANCE—PART I
B. ARE WE MEETING THE CHANGING PURPOSEs of PENSIONs?
The Congress decides which of the various purposes it will serve, and
how fully. From the outset existing law has tended to stress minimum
protection together with some reward roughly related to the past
E. contribution of the worker. This reward is increasingly
ing geared to productivity in the more recent past.
But pensions have also been designed to provide retired persons with
an equitable share in the growing output. Some other countries are
already using productivity increments to provide retired persons with
their proportionate share in the improvements of productivity in the
nation. This might call for a 3.2 to 3.6 percent increase per year.
Pensions can be, and sometimes are, directly protected against in-
flation and the rising cost of living. The Federal employees’ retirement
system and the military retirement system both include an automatic
cost of living or Consumer Price Index increment. Similarly, the wel-
fare department’s old age pension in Colorado contains an inflationary
price adjustment to protect the retired person against changes in the
Consumer Price Index.
Pensions sometimes build estates. The social security program at
present is designed to provide income assurance during the life of the
assured and of his dependents, and to his surviving dependents, plus a
modest payment toward burial expenses. Some private and supple-
mental annuity insurance plans include the possibility of a payment
to his estate in the event that the monthly payments to the retired
person or his dependents did not exhaust the amount to his credit in
the fund. .
It would be possible for the Social Security Act to be amended to
provide some combination of these purposes: minimum protection,
plus adequacy related to prior income, plus an automatic adjustment
for productivity and for the changes in the Consumer Price Index.
Finally, the social security program serves the essential purposes of
an estate by assuring income to surviving dependents.
These purposes are more likely to be performed equitably through
OASDHI. Similarly these purposes are more likely to serve all elderly
through OASDHI than through private pension plans.
C. WHose RESPONSIBILITY Is OLD-AGE INCOME AssurancE?
Responsibility has been shared by the State and local governments,
by the Federal Government, by the unions, by the employers, by the
insurors, and by the workers. The role of each of these will be con-
sidered in turn. - - -
1. STATE AND LOCAL–OR FEDERAL GOVERNMENT 7
At the outset the responsibility appeared to be heavily that of the
State and local governments. In 1940, their public assistance programs
paid $1.1 billion compared to only $28 million under social security
benefits, for all purposes, but especially to the aged. In 1950 the public
assistance programs paid $2.5 billion compared to $784 million under
Social security. By 1960 the public assistance programs continued to
pay $4 billion, but OASDHI has risen to $17 billion and in 1966 there
OLD AGE IN COME ASSURANCE—PART I 5
was more than $20 billion paid out by OASDHI. See the attached
table 1 which compares dollar expenditures for OASDHI, public
assistance, and private pensions since 1940.
TABLE 1.-COMPARATIVE EXPENDITURES FOR SOCIAL WELFARE
|In billions of dollars
OASDH1 Public assistance 1 Private employee's retirement
Fiscal year insurance,
Federal only Federal funds State-local Benefits paid Contributions
1939–40------------------------------ 0.028 0.28 0.84 0.14
0.31
1949-50----------------------------- .78 1. 10 1. 39 . 40 2.08
1959-60------------------------------ 11. 03 2. 06 1.98 1. 75 5. 48
1965-66------------------------------ 20. 29 3. 49 2.97 3.18 7.75
1 Approximately half of this has been for the aged. For OASDHl, about 80 percent goes to the elderly.
Sources: Social Security Administration. R. & S. note No. 13, of Oct. 21, 1966; and note No. 7 of Mar. 8, 1967; and
“Public Policy and Private Pension Programs,” President's Committee on Corporate Pension Funds, January 1965.
It is evident that the 1950 amendments led to the social security
insurance program taking over the major share of the burden, so that
today it receives the attention which 20 years ago was largely given
to the State old-age pensions. Thus the Federal Government is now
paying the lion's share of the burden. However, there are still 2 mil-
lion aged persons on the public assistance program of whom 1 million
are wholly dependent upon it for their old-age income assurance.
Continued reliance upon State and local financing creates great in-
equity in the amount of protection provided among the 2 million
aged as between one State and another. Four jurisdictions pay an
average less than $40 a month and only four pay more than $80 a
month. The Advisory Council on Public Assistance recommended a
nationwide minimum plus account of significant regional variations.
A mandatory national minimum may require the Federal Govern-
ment paying the entire cost, at least of the minimum, with an equal-
ization sharing of any payments in excess of that minimum.
2. THE U.S. TREASURY
In the last few years, the suggestion has increasingly occurred that
the U.S. Treasury might take a larger share of income assurance
through a negative income tax. One version of this plan would have
the Treasury, through a negative income tax, replace the whole fabric
of other income protection schemes. The more common proposal, how-
ever, looks to the negative income tax as a form of income protection
primarily for the low-income employed worker, especially those with
heavy family responsibilities, as a form of children's allowance system
for the poor, just as the personal exemption under the income tax now
º as a children’s allowance for the middle- and upper-income
Cla.SSéS. . . - • *' . . "
The U.S. tax code now loads the dice in favor of private pension
plans. Thus the United States seems to be favoring plans which, as
noted above, may inhibit the freedom of the worker and minimize to-
tal national productivity. . - -
The Government loads the dice in favor of private pensions by
making it possible for the corporation to pay a major share of the
6 OLD AGE INCOME ASSURANCE—PART I
whole amount of the pension contribution and treat the employer pay-
ment as a tax deductible expense item. Somewhat similar permission
is extended to individuals, primarily professional persons, who may
deduct up to 10 percent of their own income for payments into certain
types of approved private pension plans.
The revenue loss to the Treasury from these provisions constitutes
a significant subsidy to private plans. The exact amount of the loss is
a matter of Some dispute, depending upon assumptions used.
However, with substantially more than $8 billion currently being
paid into such funds, primarily by employers as a tax deductible ex-
pense, and with income upon $135 billion in trust funds almost com-
pletely tax exempt, the revenue loss certainly exceeds the $1 billion
minimum estimate reported by the President's Committee in January
1965, and probably now substantially exceeds the $3,350 million maxi-
mum estimate shown in the appendix to their report. -
Had the administration and Congress been able to foresee all the
consequences of these choices at the outset, it is doubtful that either
would have approved the present course. It is already late to be re-
examining these choices under the tax laws, but each delay makes the
need for reexamination more vital.
3. THE UNIONS 3
The union serves in a variety of roles to help assure that old-age
income protection is available. It acts as lobbyist with respect to the
Federal old-age survivor's disability and health insurance. Recently
the labor movement has taken a strong stand in favor of higher bene-
fits, a higher wage base, automatic cost-of-living adjustments, a gen-
eral revenue contribution, and other improvements.
The union also acts as a bargaining agent for the workers. It has
frequently been easier to win employer acceptance of supplemental
pension plans than of increases in take-home pay. Among the many
reasons for this preference is the desire of union officials to use this
to help tie the worker to the union. -
Some unions also help administer welfare and retirement pension
plans. The reports of the Department of Labor would indicate that
this role is only occasionally exercised by the union, and investiga-
tions suggests it is not always done well. (Discussion of corrective
steps occurs later in this paper.)
4. THE EMPLOYER:
The employer accepts increasing responsibility for old-age income
assurance for the longtime worker. The employer does so to hold the
worker within the firm and within the industry. Where the company
is a part of an industrywide retirement system, such system permits
some mobility of the worker within the industry, but not beyond that
point. This has proven helpful in attracting and holding persons
within the industry. That it may serve to deny the worker's freedom
of choice is not the immediate concern, unhappily, of either the union
or the employer. Both are frequently fighting for the soul of the
worker to hold his primary loyalty.
OLD AGE INCOME ASSURANCE—PART I 7.
The employer's willingness thus to restrict the freedom of the
worker is encouraged by favorable tax treatment, which underwrites
his power to do so. If the law continues to permit the employer
to return nothing to a departing employee, or only the employee's own
contribution where such exists (and which for tax reasons may be
only a token contribution) or to permit limited or no vesting, then
the Government is indeed discouraging mobility and truly helping an
effort to freeze the worker into his present job. Actually, nearly 40
percent of the workers have no vesting and 10 percent have only
limited vesting, according to the President's Committee. This means
the employers are helping to protect the income of only 14 of the 28
million nominally covered. Half will exercise their freedom anyway.
As a separate but related issue, in some cases the employer may wel-
come the opportunity to influence or control the investment of the
growing retirement funds, whether or not invested in the corpora-
tion itself.
5. THE INSTUROR 2
The insuror—whether insurance company, a trust fund, a bank
trust officer, or otherwise—simply accepts responsibility for the ad-
ministration of the funds. Technically he exerts no policy influence.
But he holds vast power, with limited control and almost no
accountability.
Life insurance companies have included supplemental income as-
surance as basic to their overall sales campaigns. Maximum safety
along with maximum profit will influence insurance company policy
and practices.
6. THE WORRER 2
He was, at one time, expected to take primary responsibility for his
old-age income assurance. The great depression significantly damaged
that idea. The bank failures, mortgage foreclosures, the losses in the
stock market crash, the demonstration that even those who had taken
all the appropriate precautions could lose their income protection,
weakened the appeal of this approach among that generation. The
high cost of insurance in later years makes the private insurance
approach to such protection increasingly difficult to maintain. Also,
the worker may feel it more important to invest in the future pro-
ductivity of his children than in income assurance for himself and
his dependent survivors.
The worker does, of course, protect his later years in the purchase
of a home, in the purchase of insurance, the accumulation of basic
consumer goods ić of financial or other liquid assets. But the hold-
ings of elderly persons, as disclosed in the sample ability of bene-
ficiaries of old-age survivor's disability and health insurance, would
indicate quite plainly that most workers do not build significant
estates. Put it another way, those who need it least are most likely to
have it; those who need it most are least likely to have it. .
The worker has a right to view with a somewhat critical eye the
manner in which the union, the employer, the trust fund or insurin
agency, and the Government have discharged their individual and
joint responsibilities to him and his family. For the cumulative
impact of their choices has been significantly to impair his freedom if

8 OLD AGE IN COME ASSURANCE—PART I
he wishes to protect his security, or significantly to impair his security
if he chooses to exercise his freedom. Both the worker and the Nation,
therefore, have an interest in full, immediate, and complete vesting of
both the worker's and the employer's contribution. Otherwise the
worker faces an “immobility trap.” .
In summary, the Congress has an obligation to face plainly the
consequences of its past behavior and to undertake corrective steps
which will better protect the worker's security and his freedom by
appropriate changes in Federal retirement programs, in the Federal
income tax, and in the law concerning welfare and pension plans.
D. ARE WE PLANNING FOR A HEALTHIER FUTURE!
More people are living longer. Planning for later years must adjust
to that fact. With better health and better medical care, the number of
years that persons reaching 65 live will significantly lengthen. Up until
now the greatest gains in longevity have been in keeping alive the
children born." It is also clear that some persons need to retire before
age 65 for reasons of health. However, it is probable that a growing
number of persons will be in good health at age 65 and more of them
will be ready, willing, and able to serve in a meaningful job. -
Basic questions about retirement policy -
Shall law and public policy require full retirement at age 65 or
Some earlier date? Shall the aged spend an ever-increasing number of
years in retirement, with its frequent waste of human potentials?
Does not the present program seem, for those able to work and those
desiring to work after age 65, a logical absurdity? Is it not a social
waste when one thinks of the great persons who have made their
major contributions to the human race after the age of 65? Is it not a
human tragedy to put a person on the shelf by reason of a date upon
the calendar rather than his own requirements and desires?
Or, to suggest an answer, might we not begin planning to encour-
age those who can work after age 65 who wish to do so? We could do
so by providing a larger monthly benefit for each month by which
they would postpone retirement after age 65. Any personal annuity
program would permit this choice. Should not the social insurance
program also permit such a choice? This would be a logical corollary
of the present program which provides a reduced benefit for those
taking their retirement before age 65. And it would meet the growing
criticism of the group who continue to pay in after they have reached
the age when they could draw out.
In either case, should the program not also provide the right of the
partly retired worker to earn any amount over the Aiºi. $1,500
minimum without loss of more than $1 for each $2 earned? This
would provide an incentive to the worker to continue his employment
as he saw fit so long as he felt ready, willing, and able and so long as
there were employers willing to use him. And in this connection,
should the Nation not also encourage work schedules and job oppor-
tunities that permit one to move from a 40-hour week down to a 30-
* Medical progress in middle, and later years has also been very import. E.g., estimates
made in the 1930's as to the life expectancy of persons already born in the United States
before 1900 were far short of the actual mark. The 1935 estimates suggested only 16 million
; for the year in which we actually reached 19 million. (Thompson and Whelpton
eStimateS.
OLD AGE IN COME ASSURANCE—PART I 9
hour week, or to a 20-hour week, for each and all who would find
this a reasonable working time? And should we not provide, particu-
larly for the elderly, the opportunity for prolonged vacations?
More employers are recognizing that certain employees, particu-
larly the elderly, but also married women and students, are in serious
need of work schedules other than the conventional 40-hour week
for a 50-week year. Such lighter schedules could be particularly help-
ful for increasing the income of some of the elderly and for giving
them an opportunity to participate more effectively in the society and
for giving the society the benefits of their contribution to it. Several
million of the elderly face this need. As time goes on, the need will
be increasingly clear for a larger number of the elderly. And the
need we speak of here is psychological, not just financial. Status, per-
sonal dignity, and self-realization are at stake, as well as income. The
Department of Labor might will encourage more experimentation
with such programs.
E. Is AGING PHYSIOLOGICAL, PSYCHOLOGICAL, OR CHRONOLOGICAL}
Present retirement policy puts the entire emphasis upon chrono-
logical retirement. However, the disability insurance does add a
physiological concept to retirement. There has been little national at-
tention to the psychological consequences of retirement. For many
elderly persons this is a traumatic period, and for many it should
be deferred as long as possible. However, the deferral could well take
the form of part-time retirement or a reduced workload as noted
above.
“Demotion from within” may be a proper supplement to “promo-
tion from within” for the elderly. Many an elderly worker, who may
no longer wish to carry the earlier full burdens of responsibility,
could nonetheless make a significant contribution on a reduced work-
load. Many would accept a reduced base pay for a drop in rank, for
a reduced basic type of job. - .
The Federal civil service today represents in some ways the an-
tithesis of a desirable policy. Its present incentives for accelerating
retirement are driving many of its most competent servants * into
other lucrative employments where they can draw their retirement
while being paid to serve as teachers, as salesmen, as research sci-
entists, or whatever. But the Government is the loser. No doubt the
military program has special reasons for providing such circum-
stances. . - . .
The Government has the responsibility to provide a wise program
in its own interest as an employer. It has since 1935 accepted general
old age income responsibility. It ought to perform both roles in terms
which are best both for the worker and for the whole society.
It may be desirable to provide psychological and physiological tests
so that those who need to retire early can do so, and to assure that
those who wish to go on working after age 65, or even 70 (apart from
elected officials), can do so without a special act of Congress or an
Executive order. . . . . . -
*The early retirement features were defended as making possible the retirement of the
inefficient workers. But the highest incentive is to the best ones ; they get the best offers
from the outside, by drawing retirement pay and the new salary simultaneously. - -
10 OLD AGE INCOME ASSURANCE—PART I
F. THE TRUST FUNDs—ARE THEY RESPONSIBLE CAPITALISM
1. THE FEDERAL TRUST FUNDS
These are no longer the occasion for battle they were in the early
years. From 1935 to 1950 battles raged concerning the size and use
of the U.S. Government Trust Fund; but the issue was substantially
settled when it became clear that the Congress intended to use the
Social Security Trust Fund primarily as a reserve to assure that
benefits could always be paid. The OASDHI Trust Fund has not
grown appreciably for a dozen years. The United States has moved
largely to a “pay-as-you-go” system, even for its civil service retire-
ment program. Indeed the trust fund, in terms of its ratio to annual
benefits, has fallen from 1,000 to 1 in 1940, or 17 to 1 in 1950, to 1 to
1 in 1967.
The investment of the trust funds in the years before World War
II was a matter of some concern. Had there been full funding, the
trust fund would have exceeded the size of the prewar public debt.
The profound increase in the public debt during the war years
has reduced the ratio of the trust fund to a modest fraction of the
total debt. OASDHI Trust Fund holdings are now but half the size
of the public debt holdings of the Federal Reserve System.
Some foreign countries use a significant portion of their social
security retirement funds to finance housing, to make direct loans or
mortgages to certain preferred customers. In the United States, it
has seemed until recently more practical to have the trust fund buy
Government bonds and let the Treasury use its own funds to purchase
securities of the Federal Home Loan Bank Board, the Federal Na-
tional Mortgage Association, et cetera. Recently certain Government
loan funds have borrowed directly from the trust accounts, removing
them from the administrative budget. Of course, the trust funds can
be empowered to make direct loans or make direct purchase of Se-
curities from the other lending agencies; but there seems to be more
political than economic virtue in this “cosmetic approach” to budget-
ing bypassing the regular channels established heretofore.
2. WILL PENSION TRUST FUNDS PROVE GOOD FOR THE AMERICAN
ECONOMY }
The phenomenal acceptance of pension funds has caused them to
grow from $2.4 billion in 1940 to $134 billion in 1965. The rate of
growth is expected to exceed 8 percent a year. This means they will
double within less than 10 years. Secretary of Labor Wirtz has esti-
mated that trust funds will exceed $200 billion by 1980. It is quite
likely that this total will be exceeded well before 1980.
Searching questions have been asked about the impact of this mas-
sive power upon the American economy. Thus Father Harbrecht sug-
gests, “The concept of ownership is meaningless since the ownership
resides in a legal fiction, the financial corporation. A bare title held by
a legal fiction is an inert concept. In the financial institution the con-
cept of ownership has reached a dead end and no longer has any func-
tional meaning, whereas the control over property which resides in
the managers of these institutions is a dynamic and powerful force.” "
19s * Funds and Economic Power, by Father P. Harbrecht ; 20th Century Fund,
, Q. 4. -
OLD AGE INCOME ASSURANCE—PART I 11
Father Harbrecht suggests that our Society has passed from a prop-
erty system to a power system. “The pension trusts are becoming one
of the primary centers of power in the newly emerging social system.
The concentration of power they represent is not the result of a drive
for power itself but of the social forces that have been at work for other
purposes. They are vast aggregations of wealth, neither public nor pri-
vate (except in the Sense that they are not owned or controlled by the
state). They are ‘owned' by no one in any meaningful sense of the term.
Such a phenomenon in a capitalist Society which has traditionally con-
sidered the distinction between public and private ownership to be ade-
quate and complete, challenges us to find a rational framework to ac-
commodate it. The old conceptual framework has no room for the pen-
sion trusts. The old bottles are now bursting with new wines.” “
Writing almost 10 years ago, when pension funds were only half
their present size, he said, “The power now exists in the financial trus-
tees of pension funds to purchase enough stock to control or at least to
influence our corporations.” ” Or, “Certain large New York banks will
soon approach a point where their combined holdings of stocks for pen-
sion funds could give their opinions considerable weight in the councils
of the larger corporations.” & “What we are witnessing is a genuine evo-
lutionary development rather than a temporary consolidation of power
resulting from personal acquisitiveness.”" He suggests that the time
has come to declare that the “assets of the pension funds rightfully
belong to the employees.” “ For, he finds, “They cannot be said in any
proper sense to be ‘owned' by either the employer or the employee.
In fact no one actually ‘owns’ them, although at the present time many
of the prerogatives of ownership are being exercised by pension fund
managers and financial institutions.” ”
He comments, “Control by the employees for whom these funds were
created is nonexistent. The employee does not become independent
by reason of a body of capital wealth gathered for his benefit, but
through his dependence on this wealth he has become subject to the
decisions which are made by others concerning his welfare. Capital
reserves dedicated to an employee's future may work to free him from
want but they do not make him more independent. The employee gains
economic security without corresponding economic power * * *.
While there is no gain in economic power for the employee there is
a considerable increase of power in the corporate employers, in the
labor unions, and in the financial trustees on the economic side, and in
government on the political side. Power follows property and it does
so inevitably. Thus power has come to those who control the concen-
trations of property that have been created to serve our workers * * *.
The growth of these new powers along with the powers already in the
hands of the corporations is producing a Society whose economic life is
based on a structure of the power that results from the control of prop-
erty. It is not a society organized by individual property ownership
and diffused power. Property ownership is not the organizing prin-
* Ibid., p. 11
5 Ibid., p. 2
7
I
b
i
;
f
2
5
O
S3–200–68—pt. 1–2
12 OLD AGE IN COME ASSURANCE—PART I
ciple; power is. Thus the direction of the transition,” says Father
Harbrecht, “to the paraproprietal society.””
“Institutions that determine a man’s relationship to productive
property and to other men are the structuring elements of today's
Society insofar as it is given form by economic relationships. Thus
we conclude that a man’s relationship to things—material wealth—
no longer determines his place in society (as it did in a strong pro-
prietary system) but his place in society now determines his relation-
ship to things. This is the consequence of the separation of control
over property from individual ownership. The name given to this new
type of society, paraproprietal, is an attempt to express in a word the
nature of its structure. Our Society is called paraproprietal, or beyond
property, because in it the connection between man and things, which
is another way of Saying property, is so attenuated that the funda-
mental function of property is not dominant though it still serves a
purpose.” ” .
He concludes his book by calling for us to continue “to press for a
system in which corporate management and the private individual
will behave responsibly with regard to the common good * * *. Care
and concern over material wealth will always be the task of every
man to a greater or lesser degree and we cannot be indifferent to the
alinement of powers over property.”” -
Some of the same concerns have been expressed more recently by the
staff of the Federal Reserve Bank of Chicago. In an article in their
publication “Business Conditions” for September 1966, the staff found
1965 net receipts of private and State and local pension funds to be $12
billion. They found these funds heavily invested in corporate stocks
and bonds. They found the market value of these funds to exceed the
total assets of Savings and loan associations or of life insurance com-
panies exclusive of reserves of the insured pension plans. Stocks now
represent the major portion of the new investments, with corporate
bonds drawing another one-fourth. -
“The total market value of all stock of the United States corpora-
tions was estimated at almost $780 billions at the end of 1965. Individ-
uals—including personal trust funds—owned the great bulk (86 per-
cent) of this total. Next to individuals, the largest group of stock-
holders were the pension funds with almost $40 billion or 5 percent of
the total. Open end investment companies (mutual funds) held $31
billion in stock, 4 percent of the total. Stockholdings of pension funds
first exceeded those of open end investment companies in 1959. The
gap has widened each subsequent year.
“Pension fund purchases of stock are much more important than
indicated by the proportion of total stock they own. For one thing, the
funds confine their purchases almost entirely to blue chip stocks of
large, well-managed firms typically listed on the New York Stock
Exchange. These funds owned about 7 percent of all the stock on the
big board and much larger proportions of particular issues. -
“Several of the firms have assets of $1 billion or more. Placing even
a tiny proportion of their assets in the stock of a moderate sized firm
could influence the price of these shares substantially. Moreover, siz-
*Ibid., p. 285.
11 Ibid., p. 287.
13 Ibid., p. 289.
OLD AGE IN COME ASSURANCE—PART I 13
able holdings of stock of smaller firms could result in the pension fund
gaining working control, a development frowned upon by Govern-
ment and most fund managers alike.
Sales of stock on the New York Stock Exchange involved 14 percent
of the market value during the year 1965. Pension funds accounted for
10 percent of the total volume either as buyers or as sellers. Pension
fund purchases of stock exceeded sales by $3 billion. With new stock
issues averaging less than $1.1 billion a year for the past 6 years, pen-
sion funds obviously are buying up existing shares of stock. What
would have happened to stock prices if pension funds had not been buy-
ing so heavily, asks the Federal Reserve bank staff. While State and
local pension funds have increased their corporate stockholdings
from only 2 percent up to 5 percent of their assets during the last 5
years, they have greatly increased their holdings of corporate
bonds, moving from $6 up to $15 billion, or from 33 percent to 47 per-
cent of their assets in 5 years. State and local plans are more like pri-
vate plans than like the Federal plan.
During the period 1960–65, State and local pension funds and pri-
vate pension funds acquired $22 billion in corporate bonds. “Together
these institutions accounted for over 54 percent of the increase in out-
standing bonds during this period.””
The article concludes “a number of questions arise concerning the
growing common stock investments of private pension funds and
State and local plans " * *. First is the question of control or lack
of control over management of firms in which stock is purchased.
There is little evidence that pension fund managers have attempted
to use their voting powers to control operating management. In fact,
many trustees specifically avoid any participation in annual meetings
or proxy fights. But here is a dilemma. These trustees are among the
most knowledgeable stockholders and presumably have a duty as well
as a right to scrutinize and criticize the activities of firms in which they
hold shares. - - -
“A broader question arises about the economic effects of pension fund
stock purchases. Newly issued bonds or mortgages provide the funds
for new investment, but common stock is purchased almost invariably
in a ‘secondhand’ market. Money is transferred from the funds to
existing holders of stock certificates. No data is available on the use
of funds by individuals who liquidate stocks.” . . . .
And finally, “Experience of pension funds with stock investments
has been ‘favorable’ in that capital gains have been achieved. . . The
apparent success of the decision to invest in stocks has been validated,
in large degree, by the purchases of those making the decision. Pension
fund managers buy stocks expecting prices to rise, and it may be that
prices have risen in large degree because pension funds have directed
such a large portion of their net inflow to stock purchases.” “
Four basic questions are presented by this discussion involving the
very nature of the American economy: . ... -
(a) What is the fund impact upon the size of the economy?
There is little indication that pension funds cause covered workers
to reduce their savings. Indeed, workers with pension rights tend to
* “Business Conditions,” Federal Reserve Bank of Chicago; September 1966–p. 18.
14 Ibid., pp. 19–20.
14 OLD AGE INCOME ASSURANCE—PART I
save more in other ways than those who do not have coverage. Pension
reserves represent net additions to personal Savings. Moreover, they
represent a contract type of Savings not likely to be appreciably re-
duced as the years go on. As plans mature, a somewhat larger outflow
of funds can be expected, however. If the funds are used to buy up
existing stocks rather than be invested in new activity to expand the
economy, the question may well rise as to whether the funds are fully
encouraging growth or merely changing the ownership of assets, (no
data is available on the use of funds by individuals who liquidate
stocks) and possibly restraining economic growth.
(b) What is the impact upon the direction of the economy?
When a small number of trustees responsible for the investment of
billions of dollars each year can negotiate directly with those who
would borrow money, whether through corporate bonds or through
a mortgage bond, these trustees enjoy very great power over the di-
rection in which the American economy will be moving. Is there any
evidence that this power is used wisely and for socially beneficial
purposes? Is the housing that is financed serving the needs of the
lower- and middle-income persons for whom these funds are being
accumulated? Or are these for high-rise luxury apartments? Are the
funds building new productive equipment? Are they financing new
shopping centers which serve to make more rapidly obsolete already
existing shopping centers? Are they encouraging new dynamic de-
velopments to increase the welfare of the American consumer? Are
trust officers of banks or insurance company executives the best persons
to make such investment decisions? Is there any way by which the
utilization of trust funds can be encouraged to serve more fully the
needs of all Americans? Is the investment of vast sums which ulti-
mately belong to the workers (whether or not this be legally estab-
lished) being conducted so as to serve their interest by the best use
of the capital acquired, or only by use of funds derived as income from
the capital investments? The trustee relationship here is of great con-
sequence and growing greater with each passing year. Undoubtedly
the sense of trusteeship would be improved by accepting Father
ºntº Suggestion that ownership be viewed as vesting in the
WOI’Ker’S.

(c) What is the impact on the performance of the economy from year
to year? -
The Federal Reserve Bank of Chicago notes, “In the late 1950's
and early 1960's, it is generally agreed that the U.S. economy was
operating below its potential. The sector lagging most noticeably was
business investment. Nevertheless, additional spending by consumers
based on high current cash income or reduced saving might have stimu-
lated additional expenditures for new plants and equipment.””
While managements seek to fund their plans fully and as soon as
possible, they do tend to vary annual, contributions in, response to
variations in before-tax profits. The F ederal Reserve study notes that
employer contributions declined in 1954 and in 1958 and increased

only slightly in 1961.
in Ibid., p. 19.
OLD AGE IN COME ASSURANCE—PART I 15
Pension programs tend to become virtually a contract form of
savings which are relatively inflexible and not significantly reduced
during economic down-turns. Nor do they rise rapidly during a period
of rapid increase. Trust funds, therefore, may well be said to be a
built-in destabilizer rather than a built-in stabilizer. As the size of
funds increases and the annual outlays for such programs increase,
it may become more and more important to examine the impact of the
flow of these funds on the economy. It may become necessary to invent
tax incentives or policy guidelines which will help assure that the flow
of pension funds will, in fact, prove to favor the orderly growth of
real investment in the economy. -
This brings up an even larger question about tax policy, invest-
ment, and corporate structures: Against the market value of common
stock last year, roughly $3 was paid out on each $100 of value and $4
was retained as earnings. Present tax concessions to capital gains con-
tinue to encourage this process and have operated to discourage the
use of new issues of common stocks to raise funds for the corporate
enterprise. The effect of this has, of course, helped to encourage the
purchase of common stocks for the chance of capital gains by pension
funds which have no special tax incentives to seek capital gain in place
of cash income. But the effect nationwide has been to have $47 billion
in retained earnings currently available for reinvestment by the man-
agers of the corporations in which the funds arose, in addition to the
depreciation allowances now exceeding $60 billion. The stockholder
does not have a choice as to where he would prefer to invest the earn-
ings that flow from his investment. It would be more equitable to dis-
tribute corporate earnings to the stockholders. Those whose tax rates
were low, would rather receive cash dividends than capital gains.
Those whose tax rates were high have no special reason in equity or in
economic policy to be favored with a tax concession. The committee
might wish to reexamine the tax treatment of capital gains and of
cash dividends made upon stock. Corporations could be encouraged to
distribute most of their profits by permitting cash dividends to be -
deducted along with other allowable corporate expenses in computingllºw
the tax base for corporate income taxes. Along with this should be a
treatment as fully taxable income of all capital gains from the sale
of financial instruments, regardless of how long held. (Whether or
not to continue a tax favor for capital gains from the sale of houses
or other real property is a separate but certainly related issue.)
Such a proposal assumes not only the closing of a major tax loop-
hole and greater equity as between wealthy and low income stock-
holders, but also it assumes that management would then undertake
to issue new common stock to provide additional investment capital
for its expansion. This would mean that investors including pension
funds could buy new shares, rather than simply bid up existing stocks.
It would provide an orderly use for the funds coming into the hands
of stockholders, and of trustees of pensions funds and other mutual
investment funds. It would increase the true earnings of such funds,
Most of all, it would restore a real role for the investor in a capitalistic
society by permitting him to choose where to reinvest his earnings. It
would help restore substance to the capitalist society and not merely
observe its form. It would make stock ownership among lower income
16 OLD AGE INCOME ASSURANCE—PART I
families much more attractive by assuring them that cash dividends
would flow from their equity share of the corporate enterprise.
It would throw into sharp focus the question of the reasonableness
of investment in new as against old stock by pension and other trust
funds. Such a tax change would greatly reduce the corporate income
tax revenue, but would increase personal income tax revenue much
more equitably. It would put an end to the present tax discrimination
in favor of debt over equity instruments in corporate financing. It
would restore to a place of importance the sale of new corporate
Securities. But the role of trust funds as major investors would still
call for some greater measures of accountability by fund managers.
(d) A fourth question: Cam management responsibility be assured
through greater accountability?
With ever larger sums available to them, trust funds are becoming
a popular source of mortgage market funds for large commercial and
industrial mortgage placement. It is very difficult for an insured
worker (and even some fund trustees) to evaluate meaningfully the
bona fides of proposed transactions. The opportunities for hanky-
panky are thus greatly increasing. The proposed 1967 amendments to
the Welfare and Pension Plans Disclosure Act to make it a protection
act provide a hopeful corrective. The Yarborough, McClellan, and
Javits bills would define the trustee's responsibilities, impose liabilities
for breach of duty, and provide remedies.” If such legislation were
; to all trust funds and enforced, it would certainly prove
elpful.
Some fund executives and trustees have abused their responsibilities
through manipulation of trust funds, without necessarily violatin
any existing law. Self-dealing or dummy corporations have been j
for excessive management fees, for mortgage amounts that are
excessive (sometimes above the true purchase price of the property),
for dealing in stocks to their own advantage, et cetera. Moreover some
trustees have collected a placement fee from the trust fund for loans
made through a dummy corporation that they owned No
doubt chronic inflation will often make even a bad deal ultimately
look good. But too often the beneficiaries suffer while the trustees gain,
and continue free to make other deals. The present disclosure law is
not enough. All pension and welfare funds should come under the
protection of law, defining fiduciary duties, requiring annual audits,
much greater accountability, and prohibiting self-dealing and exces-
sive fees. - - -- . -
In summary—A free competitive enterprise capitalistic economy
presumes that along with power there goes not only responsibility
but also accountability. The power piling up in trust funds is virtually
without accountability, for the covered employee is not by himself
a competent analyst. He cannot know from looking at a portfolio or
an annual report whether the funds have been competently, properly,
or wisely invested and he does not know, nor perhaps care, whether
the vast power over the lives of individual corporations piling up in
the trustee's hands is being used in his best interests or in the best
10 For a complete discussion, see “The Law, the Pension Fund, and the Trustee,” a
paper presented to the 20th Annual Conference on Labor at New York University, Apr. 19,
1967, by Frank M. Kleiler, Office of Labor Management and Welfare Pension Reports, U.S.
Department Gif Labor.
OLD AGE INCOME ASSURANCE—PART I 17
interest of the corporate enterprise over which they are gaining in-
creasing control. The legislation must increase his protection and
remedies beyond those now available.”
Is it really the intent of Congress that the American economy should
See an increasing separation between ownership and control? The fail-
ure of individual stockholders to interest themselves in the operation
of the modern corporation already reflects some such separation. James
D. Burnham discussed “The Managerial Revolution” nearly a quarter
century ago. But the trust funds are more important because they
provide an institutional basis for completing the separation between
ownership and control, for completing the separation between respon-
sibility and accountability.
The Congress, and economists as well as business executives, ought
to face up to the question of “whither are we tending?” Are the man-
agers of mutual funds and trust funds to be the potential oligopolists
of tomorrow? Are these to be the managers of a new private collec-
tivism : If so, may these not prove to be a possible prelude to a later
demand for public ownership? Might not such power without account-
ability become a stepping stone to Socialization? Certainly they pro-
vide an easy route toward nationalization of enterprises. So long as such
great power is being exercised with little accountability and less con-
trol, these funds can be characterized as mindless giants turned loose
in the American economy. Must catastrophe occur before adequate
precautions are taken 2
3. DO PENSION FUNDS ASSURE EQUITY 7
There is a growing chorus of concern with respect to pension plans
as to their protection of all workers, as to their financial protection,
legal protection, their protection of living standards. Some of these
questions were asked in Father Harbrecht’s book, and more recently,
by Merton Bernstein, in “The Future of Private Pensions.” ” Out of
an unusually rich background of experience, Bernstein has been able
to identify and establish in substantial detail many of the major
questions. He has proposed an answer which differs somewhat from
the one which appears below, but it looks in the same broad direction.
(a) Is employee freedom, mobility, and turnover restricted by tenure
and vesting 3 - . - -
Ours is a highly mobile population. Among the young workers,
changes in employment are quite frequent. Among women the retire-
ment from the labor force during the years when their children are
young is common. Only among older males, say those over 40 years
of age, is there likely to be substantial continuity of employment.
Even such workers frequently find reasons of family, of career, of
climate or health, which justify a change of employment in later
years. -
Retirement systems have built-in inhibitions against exercise of
that freedom. Of the 28 million presumably covered by existing plans,
17 Profit-sharing plans raise special problems not dealt with here. These might not be
considered as pension plans. They deserve new scrutiny, and probably new safeguards for
the worker and the public. • * * - -
18 Published by the Free Press of Glencoe, 1964.
18 OLD AGE IN COME ASSURANCE—PART I
given present plan characteristics, fully one-half, or 14 million, are
not likely to remain under such a plan until they are eligible for the
benefits.” There is every reason to believe that our Society requires
increasing rather than less mobility. It requires this because of the
rapid rate of change in technology. It requires this because of the
necessity for workers to adapt to rapidly changing circumstances in
their own separate field or employment as well as in the companies
and industries with which they work. Yet pension plans do not fully
protect the old-age income assurance of the half who, for reasons of
personal income advantage during their working career, for reasons of
family life, and for reasons of contribution to the national economy,
must change jobs.
Increasingly liberal vesting arrangements will help some, but short
of total vesting of the employer's as well as the employee's contribu-
tions from the first day of employment, there is no complete protec-
tion for the persons seemingly covered by private pension plans. Only
by accepting Father Harbrecht’s position that the contributions be-
long to the employee from the outset, is there any protection for
those who must be mobile, who must show up in the turnover statistics.
Because complete and immediate vesting is contrary to one of the
purposes of the pension plans; namely to hold workers on the job,
it is most unlikely to occur unless Congress were to require it as a
consideration for tax exemption of the contributions.
Practically all plans in which there is an employee contribution
give the employee back his portion in the event he withdraws. But
since his portion is, overall, roughly one-seventh of the total con-
tribution, this is the appearance of equity without the reality of
equitv.
"Hºuse the pension plans are mostly in their early years, they
have not yet been a major handicap to mobility. But as workers be-
come conscious of their growing apparent equity in Such plans, the
inhibitions on freedom and mobility can be expected to grow, and
criticism to mount. Constructive action to improve the worker's equity
becomes increasingly important to him, and to the rate of growth of
the national economy, which requires mobility.” .
(b) How adequate is the financial protection the funds provide?
The adequacy of the amounts in funds may be examined from two
points of view. Given present plan provisions and the likelihood that
half the persons nominally covered will not be around to draw benefits,
there is no doubt that the contributions tend to be overstated. The
most prudent actuaries tend to use a low turnover rate and to use
low interest or earning rates, and such biases will yield higher cost
estimates than are justified by existing experience with turnover and
earnings. Other actuaries are under some sales pressure to under-
state the costs. Depending on the pressures, and the assumptions used
as a result, funding may be more or less than adequate.
However, from the standpoint of ultimate costs for adequate pen-
sions that fully protect all workers, the presently stated costs are un-
doubtedly fairly low and the funds will prove inadequate. By way
10 See chapter VI, “Prospect of Benefits,” in “Labor Mobility and Private Pension Plans,”
BLS Bulletin No. 1407, June 1964. U.S. Department of Labor. For example: “45 percent
# º,Yºrkºs if hired at age 25 would not qualify for any benefit by age 50 under the
plans.” P. 51. -
20 Ibid., p. 49.
OLD AGE INCOME ASSURANCE—PART I 19
of comparison, the Federal Reserve Board's own retirement plan,
which is approximately equivalent to the U.S. civil Service plan, now
takes 22 percent of wages, of which the employee pays less than one-
third. The costs approximate 6 percent for the employee and 16 per-
cent for the Federal Reserve Board. While the civil service plan has
an equal cost, it is not fully funded, and therefore the Government's
ultimate contribution has been substantially deferred. The time will
come when payouts will require very significant increases in the Fed-
eral contribution, parallel to the Federal Reserve plan, which tries
to be fully funded on an accrual basis.
The adequacy of funding is not a major question for a corporation
which has reasonable security with respect to its longevity. Obviously,
deficiencies in prior funding can be made up out of increased contribu-
tions paid out of future earnings—if there are future earnings. We
will examine below the protection afforded during shutdowns or
mergers or bankruptcies.
Clearly, existing funds are growing rapidly. Payments are being
made to those eligible in the amounts intended. For most workers who
are now achieving eligibility, there is no reason to be concerned. Clearly
also, however, if plans become increasingly liberal so that they afford
in fact the protection to all workers they appear to afford in theory,
then they are inadequately funded. But it will take years for this to
º evident because by their nature retirement plans mature very
slowly. -
The more immediate tragedy is that the financial protection the
worker thought he was acquiring may disappear like dew in the
morning sun when automation hits the industry, or when a personal
tragedy, changing family circumstances, or other causes require him
to be separated from the firm before he has achieved the protection
the funds were set aside to provide. Unless there is vesting and he has
attained the age and years of service it requires, there is no protection.
(c) Do pension funds protect when the jobs leave?
“The great strength and vitality of our economy may give the
impression that most companies, especially the large ones, are stable,
Solid, unchanging, and permanent. In fact, the forces of change con-
stantly challenge the powers of permanence. Perhaps it is unthinkable
that any of the great manufacturing or commercial corporations is
mortal. However, that formerly great railroads have vanished as
Separate entities should serve as a warning. The short and unhappy
life of the Ford Edsel Division demonstrates that even the most
solidly planned and financed enterprises perish.” ”
Pension plans disappear. Some 3,357 plans were terminated between
1956 and 1962. About one-half of these were profit sharing; the other
half were pension or annuity plans. Mergers, corporation dissolution,
financial difficulties and sales of companies lead the list of causes.
The average plan terminated in New York covered 350 employees.
Data on mergers and their effect on plans is woefully inadequate.
There is serious need for the Congress to order a regular gathering
of data with respect to the impact on pension plans of terminations,
mergers, sales, shutdowns. Bernstein summarizes many specific situa-
tions and discusses some of the case law. He concludes, “constant
*i Bernstein, op. cit., p. 85.
20 OLD AGE INCOME ASSURANCE—PART I
changes in employer location, organization, and ownership, which are
so characteristic of our economy, constitute an indeterminate but sub-
stantial threat to continuity of employment and therefore to pension
expectations which are based primarily upon single employer plans.
Contractual and judicially fashioned job transfer rights for employees
would mitigate their impact to a limited extent. However, more basic
changes in pension arrangements probably are required if they are to
be able to overcome the limitations of single employer plans when
subjected to the strains of such exigencies.””
In a review of some illustrative cases, Bernstein, notes in chapter :
in Some cases large groups of employees lost substantial pension credits
because the courts refused to vary the terms of the plans to accord righ's
not affirmatively conferred by the plan itself. “At least in some in-
stances, the employees' losses resulted in monetary returns to the em-
ployer which were so large that they exceed what could have been
expected from normal turnover.””
A review of the cases would indicate that case-by-case solutions are
not likely to be very satisfactory. Pending the adoption of some more
sweeping reform, the best answer is Father Harbrecht's suggestion
that the law vest full equity rights in the workers. Inasmuch as the
funds are treated as compensation in the bargaining arrangement and
by the Treasury, there is good reason to suggest that the compensation
rights vest in those who are expected to receive them. Then, assuming
no more sweeping reform, the courts might well provide arbitrators
to administer pension rights in the event of plan terminations for what-
ever reason. Certainly it cannot have been the intent of the Congress
to provide what Bernstein properly characterizes unjust enrichment
of employers as a consequence of plan termination. Bernstein concludes,
“It would be difficult to conclude that the present pattern of single em-
ployer pension plans will afford adequate security to the tens of thou-
sands of employees who could be affected. And it is difficult to conclude
that the courts presently are sufficiently solicitous for the interests of
employees when their pension expectations are put in jeopardy by
plant and unit shutdowns.” ” *…; - . .
(d) Should private pension plans provide adequate protection of re-
łżrement income? - .
Clearly, it will require the virtually universal coverage of the social
Security program to assure a minimum standard of decency to every
worker and his dependents as retirement is reached. There has been
increasing acceptance of the proposition that social security should
provide benefits based on a larger fraction of the first dollars of pre-
retirement income than of the later dollars in the average monthly
wage. There is also acceptance of increasing the minimum benefit to
any qualified beneficiary. And there appears to be growing acceptance
of the concept of increasing the wage base so that social security bene-
fits continue to discriminate between those with minimum income and
those in the middle and upper middle income brackets. Were this not
to be done, social Security would ultimately, by the change in wage
levels, become a flat benefit in which the maximum would become the
minimum as a flat benefit.
OLD AGE IN COME ASSURANCE—PART I 21
In light of this changing pattern for old-age survivor's disability
and health insurance, the role of private pension plans, except for
those few public employees who are not covered by social Security, is to
supplement whatever benefits social security provides. This more
nearly accords with the purposes of the employer and the unions in
negotiating such plans. The formulas used in such plans tend to give
heavy weight to the number of years of Service so that the supplement
will be a function not only of the wage level for retirement but of the
length of service with the corporation or the insurance plan.
In other words, the easistence of private supplemental retirement
plans is no substitute for having an adequate social Security program.
What about inflation?
Many private plans provide that the benefit shall be based upon the
earnings during the last few years before retirement.” This protects
the worker both with respect to his highest income and to the price
levels at the time of retirement. However, plans do not usually adjust
benefits to rising living costs after retirement. Some beneficiaries will
live as long as 30 years after retirement. For them, the benefits in later
years will be scandalously low. Neither the employer nor the union
feel a strong obligation to the person already retired. Hence his bar-
gaining position is very poor. A. few plans do have a cost of living ad-
justment. And those plans which are based upon profit sharing may
provide a better hedge against inflation. College faculties have been
rovided with a combination program: the # A annuity portion is
invested in debt issues and gives a fixed income payment; the CREF
(college retirement equities fund) portion is a variable annuity,
based on the value of the shares, and recomputed each year.
However, as noted heretofore, the increase in stock prices may
yery well be a result of the increasing use of variable annuity plans.
The program will prove self-defeating unless some device for en-
couraging increased equity shares is made available. . . .
Effectively, only the Congress can assure aged persons that their
monthly benefit amounts will be adjusted periodically to take account
of changes in the cost of living. Inasmuch as inflation is a result of
governmental policy, both monetary and fiscal, it seems appropriate
to suggest that the Government protect the adequacy of pension plans
by an orderly cost of living adjustment from time to time for all re-
tirees and their dependents. . . . .
What about productivity gains? . . . .
Shall the income of an aged person be frozen at his retirement level
except for cost of living adjustments? Or shall those on retirement
benefits share in the annual increase in productivity of the national
economy? . .
Profit sharing plans solve this question, not in terms of the produc-
tivity of the national economy, but in terms of the profitability of the
firm providing the supplemental pension. This may provide a some-
what more variable payment than would flow from a productivity
adjustment, whether 3.2 percent, 3.6 percent, or some other number
per year. The variable annuity formulas depend entirely too much
upon the capital gains features and the value of their assets. Only
25 About 55 percent use earnings and service formulas; of these half are based on career
earnings, but there is a growing use of terminal earnings. '' . - *
22 oDD AGE INCOME ASSURANCE—PART I
the Government can provide an orderly annual adjustment for pro-
ductivity changes. It should do so regularly through the social Se-
curity program. - .
(e) Who will protect the worker's equity in pension plans?
If the worker is not protected through vesting in the event of turn-
over, if he is not protected in the event of shutdown or merger, if his
benefits are not protected against inflation, if the retired worker is
not protected against falling behind as the retirement years wear on,
how shall he be protected? Will he be protected:
1. By better information? The Government ought to require regular
reporting to all persons covered by such plans as to the nature of their
coverage along with their rights and privileges, as well as the limita-
tions thereon. It ought also to require disclosure of the uses of the funds
and of the current income and expenses as well as the assets and lia-
bilities. It ought also to require and prescribe proper practices for
those responsible for the handling of such funds. State banking and
insurance laws are inadequate and State bank and insurance depart-
ments are inadequate to this task. Only the Federal Government can
undertake it.
2. By the unions? Inasmuch as most of the contributions are made
by employers rather than by employees, the unions have somewhat
less bargaining power than if they were discussing the contributions
made by employees. The absence of an employee contribution has
proved to be a weakness in unemployment compensation, and it is
proving to be a weakness in pension plans.
The unions, like the pension plans, have a built-in bias in favor
of oldtimers against the newcomers, in favor of the regular workers
against the irregular workers, in favor of the employed workers
against retired workers. These are all part of the built-in resistance
to early and full vesting. These are a partial resistance to bargaining
for inflation and productivity increments in existing pensions. These
are a part of the resistance to hiring older workers. Retirement sys-
tems sometimes serve to put a ceiling on the age of entry into the pro-
gram and thus into employment. Thus freedom to transfer jobs may
be effectively restricted to those under 40 or even under 35 in order
to avoid the increasing cost of pensions for persons hired in later
€8, S.
y 3. By the employers? The employers do not fully share the union
bias. Many patterns are visible. Some may share opposition to late
entry and to hiring older workers. Some appear to encourage person-
nel turnover to avoid pension costs. Some even find some cause for dis-
missal short of the initial vesting period. Some show a bias in favor of
front office and executive personnel. Employers could conceivably agree
to transfer retirement credits from one retirement system to another so
that a worker's payments and benefit rights would be cumulative in
more than one employment. However, neither the employers nor the
unions have much interest in those who leave an employment. It will
take an act of Congress to assure meaningful supplemental protection
to those who, for whatever reason, move from one employment to
another, from one retirement system to another.
4. By the courts? Until plans are drawn with greater concern for
the rights which may be endangered, whether by worker mobility, by
OLD AGE INCOME ASSURANCE—PART I 23
change in corporate ownership, or by dissolution; , and until the
Congress provides, or the Treasury regulations require, recognition
of the equity of the workers in the funds, it is unlikely that the courts
will protect workers beyond the letter of the plan. Because the worker
does not discover his loss of protection or the inadequacy of his pro-
tection until he has left employment or has been retired or been dis-
charged, his standing in court is limited and evidently insufficient to
protect him.
5. Or by the º It will take an act of Congress to provide
greater assurance of the workers' legal rights. Assigning the equity
ân the funds to the covered workers would be a major step forward.
Short of such a step, Congress will continue to receive from time to
time, the anguished letters of outrage from workers who discover too
late that the plan did not provide in fact the protection they had be-
lieved it to provide in principle.
In summary—One cannot anticipate that the systems will be modi-
fied without further congressional inquiry and direction. The basic
question is: Are the present consequences the ones that the Congress
seeks? If these are not, should not this inquiry lead to a fundamental
redefinition of public purpose and public policy? This total inquiry
is an ideal opportunity for such a reexamination. It ought not to
be neglected.
G. SUGGESTIONS FOR RECONCILING SECURITY, FREEDOM, AND Equity BY
INCREASING EACH
1. Increasing wage base and benefit amounts.
Private pension plans were, in part, a response to congressional
timidity during the 1940's as to increasing the wage base and the
benefit amounts under the Federal old-age benefit program. The orig-
inal $3,000 limit on the wage base included all the earnings of virtually
95 percent of covered workers. The failure over the years to permit
the same extent of coverage to be reflected in a growing wage base is
one of the prime reasons for the widespread adoption of supplemental
programs. It is unlikely that supplemental retirement programs will
ever be abandoned by reason of a more adequate old-age survivor's
disability and health insurance. Yet it is certainly essential that the
benefit levels be significantly improved by increasing the wage base,
by making coverage truly universal, by increasing the maximum bene-
fit amount (with benefits proportionate to covered wages), and by
providing a more reasonable minimum benefit to all who qualify. Yet
even after these steps have been taken, there will be need for some
form of supplemental pension to accommodate both employers and
employees who wish to assure higher retirement benefits. .
2. Cost of living and productivity benefit increments.
No doubt, if the Congress were to include both a cost-of-living ad-
justment and a productivity increment into the basic retirement system,
the pressure for supplemental benefits would be reduced. But clearly
the Congress ought to assure, on a continuing basis, the proposition
that every man ought to have his necessities of life provided, especially
during his retirement years. The Congress ought to accept the proposi-
tion that this is done not only out of love of fellow man but out of a
24 OLD AGE IN COME ASSURANCE—PART I
desire that the entire Society be strong. And for the whole to be strong,
each part of it must be strong. .
3. Voluntary supplemental group annuities—the neart step.
The voluntary supplemental annuity was discussed in the 1935
report of the Committee on Economic Security. Attention in those
days focused on voluntary individual annuities. These almost always
encourage adverse selection of risk. That is to say, workers whose
parents and grandparents died while in their 90's are more likely to
choose supplemental retirement annuities than workers whose parents
and grandparents died in their 50's. This problem can be avoided by
providing voluntary supplemental group annuities. Such a program
was part of my testimony before the Senate Finance Committee in the
hearing on the 1950 amendments,” elaborated in subsequent letters
to members of the committee. -
I renew the suggestion that the Congress actively study the possi-
bility of providing a Federal program of voluntary supplemental
group annuities. This would be administered for groups working
under one or a group of employers and covering all employees in such
a group. The contributions, whether from employees or employers or
any combination thereof, should be fully and immediately vested
and be completely cumulative for the worker whether he be covered by
one employer or by 10 such covered employers in the course of a work-
ing lifetime. The benefits under such a program could be paid out,
based upon total contributions plus accumulated earnings, on a
straight actuarial basis to the worker, with the usual standard options.
If the Congress saw fit to do so, it could subsequently add a produc-
tivity and a cost-of-living adjustment to these annuities. It is highly
unlikely that the private pension plans would ever be able to offer
such adjustments. Such an adjustment would more than compensate
for the lower earnings rate on Government trust funds.
There were three basic arguments I offered in support of this plan.
“First, it would assure the worker that the exercise of his freedom
would not jeopardize his security. He could move from one covered
employment to another and accumulate his benefits in his supplemental
pension annuity. Secondly, if Federal programs were to absorb and
thus replace some or all of the existing plans, it would cut the cost
of administering such plans and improve the total funds available
for payment to the annuitants. And thirdly, only the Government can
take the risk of annuities. With the science of geriatrics constantly
prolonging life, this is a bad business for private concerns. But the
Government can and should take the risk.” These were my words of
1950. I repeat them now. The essence of the argument is that only
the Congress can provide additional security without some loss of
freedom. . . . . . . . .
In testimony before this committee in 1955, I suggested that the Gov-
ernment begin the process by transforming its own civil service and
military Service pension programs into a voluntary supplemental grou
annuity, and integrate fully the regular retirement program wit
OASDHI.” I suggested as a second step that a similar package then


* see hearings, Committee on Finance, U.S. Senate, January 28, 1950.
27 Subcommittee on Low Income Families, Joint Committee on the Economic Report,
Héarings, Nov. 18, 1955; Washington, D.C. -
OLD AGE INCOME ASSURANCE—PART I 25
be offered to the public school employees, to the police and firemen, and
to the other State and local employees; adding, “When this had been
successfully consummated, it would be time enough to offer such supple-
mental annuities on a group basis to private employers. Many millions
of workers are in for disillusionment in the years ahead as they find
that their rights in their company and union plans are not vested at
all; and many others will have their rights vested only after periods of
service.” Nothing that has happened in the past 12 years has weakened
the argument I made then. However, some progress has been made
toward increased vesting.
4. Other alternatives—
Merton Bernstein became interested in this topic and began his in-
quiry in late 1959. His book, published in 1964, comes to a conclusion
similar to that I had stated above. He observes, “No proposal for vest-
ing in the United States has included any device or institutional ar-
rangement whereby vested rights follow the employee, rather than,
as at present, having the employee and his credit go separate ways
until retirement. -
“The possibility of small, perhaps miniscule benefits, the incom-
patibility of benefit provision, disproportionately high administrative
costs, attrition of fixed benefits by inflation, withdrawal of contribu-
tions, their lack of utility for the disabled, and the nonparticipation
of vested deferred benefits in plan improvements, all argue for the
desirability of collecting the bits and pieces of employees’ vested pen-
sion credits into one more adequate benefit, a benefit based upon con-
tributions which have earnings and growth up to the date of retire- “
ment. * * * such piecing is not presently possible; no device exists
in this country for transferring and cumulating credits. In my discus-
sions starting in 1959 with officials of insurance companies, banks,
pension consulting firms, unions, management, government, and aca-
demics I found interest in some device to coordinate plans or
benefits.” 28 . .
Bernstein reviews a variety of possible devices for what he calls
a “pension credit clearinghouse.” These range from a simple record-
keeping and reporting system, to a clearinghouse transfer system, to
a voluntary supplemental annuity plan such as I have suggested here-
tofore. He also examines the possibility of doing this as a private plan,
as a mixed plan, and as a public plan. -
While Bernstein does not make a firm choice among the alternatives,
he does say this, “The future of private pensions will be whatever we
make it. * * * Presently, private plans are designed to supplement
OASDIbenefits for a minority of those who work. How large or small
that minority will be cannot be ascertained with any accuracy. About
one-third to one-half of the civilians who work in nonagricultural,
nongovernmental jobs, are under private pension plans. Perhaps half
of them will achieve benefits under their present plan; very likely less
will. Some of those who fail to achieve benefits under their present
plans, will do so under plans they enter at a later period in their work-
ing life, hence their benefits will be below the optimum. How many
fall into this category, no one can say—indeed, no one has guessed.
28 Op. cit., Bernstein, p. 264.
26 OLD AGE INCOME ASSURANCE—PART I
“So the present system, left unchanged, may provide benefits to
about one-sixth to one-quarter or even less of the civilian population
privately employed in nonagricultural work. Most of those who do
achieve benefits will have them based upon only a portion of their
working life, the later years.” ” - .
“A clearinghouse arrangement, including a central group plan for
employees without planned coverage, has all the flexibility of private
plans * * plus the universality which is the great strength of the
OASDI system. Those who desire and can afford such a supplement,
can achieve it under the transfer value-clearinghouse method, if, as
seems likely, it facilitates the spread of plans and vesting. Such a sys-
tem will require more funds, because benefits must be paid for. But
by virtue of longer periods of earnings for contributions made on be-
half of each employee, less of the benefit would derive from contribu-
tions and more from earnings” “*
“If the proponents of a strong system of private plans wish that
this system prevail, they must act in the near future to make it a mass
program with ample supplements to OASDI. Otherwise they run the
great risk that private plans will be discredited for providing too small
benefits to too few people, or ample benefits to even fewer. In short,
the private pension system runs the risk of condemnation as a class
program when the level of OASDI benefits requires a mass program
of supplementation.” ” .
“Vesting as currently practiced seems of quite limited value to the
reat majority of those under plans—and perhaps even more limited
for those to whom the plans may be extended.” ”
He concludes his volume with this statement: “The decisions to be
made are myriad. Most—at least in the short run—are to be made by
private groups, principally employers and secondarily unions. But
Government has duties which are not being fully discharged. There
is not a great deal of time before the fruits of pension plans will be in
demand. Indeed, for millions, harvest time is close at hand. We cannot
afford to fling the seed broadcast letting it fall where it may to yield
with uncertain quantities as now we do. We must plan, select, and suit
what we plant to what we need and can afford. Our soil is rich, our
Seed is sound, our experience rich in example. There is no reason for a
short or bitter harvest.” ” -
Another alternative becomes possible through the use of a new series
of U.S. Government bonds—U.S. retirement plan bonds under the
Self-Employed Individuals Tax Retirement Act of 1962; these bonds
are not restricted to self-employed individuals or plans established by
them. Any pension plan which meets the qualification requirements of
section 401(a) of the Internal Revenue Code may invest in this new
series of bonds.” . .
The bonds may be purchased at any Federal Reserve Bank or
branch, or direct from the Office of the Treasurer of the United
States.” Banks and other financial institutions take applications for
issue and redemption of these bonds for transmittal to the issuing
agents. - -
* Bernstein, op. cit., p. 299-300.
..., p. 301.
* Internal Revenue Regulations, sec. 1.405—1 (a).
* Code of Federal Regulations, pt. 341 of ch, 11, title 81.
OLD AGE INCOME ASSURANCE—PART I 27
The bonds are sold at par in denominations of $50, $100, $500, and
$1,000 and provide an investment yield of 3% percent per year, com-
º: semiannually. They bear interest from the first of the month
in which the authorized issuing agent receives payment for them.
They are issued in the name of the individual employee or owner on
whose behalf they are bought. They may be distributed to the em-
ployees at any time; however, they are nontransferable and nonfor-
feitable and cannot be cashed until the individual: (a) is 59% years
old (insurance age 60) or before he attains the retirement age specified
in the plan (if later than 59%); (b) becomes disabled; or (o) dies.
The principal and interest on the bonds will be paid only upon re-
demption and will not be included in the bondowner's income until
he redeems the bonds. -
The bonds may be registered only in the names of natural persons
in single ownership or beneficiary form, and they must be registered
in the name of the self-employed person or the employee for whom they
are bought. Bonds are reissued to add, eliminate, or substitute a bene-
ficiary. They are also reissued if lost, stolen, or destroyed.
The use of these bonds could accomplish the same purpose as trans-
ferring an employee's retirement credits from one retirement plan to
another, or to a central clearing agency (public or private) with less
trouble and expense. If appropriate legislation were passed to tie in
the redemption value of these bonds with the BLS cost of living index
to protect their purchasing power against inflation, they could serve
as a vehicle, not only for use in distributing vested pension benefits to
terminated employees, but also for pension plan investment purposes.
The machinery for the sale, registration, and redemption of these
bonds is already in existence and operating.
. Evaluation of the alternatives—
My own preference and recommendation is as before—that this be a
voluntary, supplemental group annuity provided by the Congress as
part of the OASDHI. There is no reason to duplicate the OASDHI
files by encouraging a private corporation to provide the same service
the Government is already providing. There is no reason to create a
private corporation to do at greater expense what the Government can
do less expensively. There is no reason to sell stock in a private or
mixed public-private corporation to earn profits for anyone other than
the beneficiaries of the pension trust funds; the important capitaliza-
tion of such funds will come from the retirement contributions. - -
Bernstein's proposal that OASDHI also be a pension trust fund
clearinghouse is most attractive. Private pension plans already in op-
eration are not likely to go out of business in order to be replaced by
an OASDHI voluntary, supplemental group annuity. There is, there-
fore, merit in his recommendation that Congress create such an account
to receive the funds which would be due a worker upon his preretire-
ment separation from employment. These credits would continue to
earn interest, and grow with additional deposits the worker might
make on his own account thereafter, together with other transfers
upon the occasion of his separation from employment covered by other
pension funds.
. This would involve the acceptance of Father Harbrecht's proposal
that the payments into a pension fund be treated as belonging to the
83–200—68—pt. 1–3
28 OLD AGE INCOME ASSURANCE—PART I
employee from the outset whether made by the employer, the employee,
or both. Thus the workers who exercise their mobility would look to
the supplemental OASDHI account while others would continue to
look to their separate trust funds. Those workers who subsequently
established rights under another fund would have both rights. Con-
ceivably, one's final pension benefits might come to be based upon
age, income at retirement, and total Service under all retirement plans,
less the amount of supplemental benefits earned in prior employments.
This might actually serve to reduce the long-run total cost.
6. Implementing the Supplemental group annuities—
The pension fund at the time of separation would simply report to
OASDHI the name, age, and social security account number, and send
along the dollar amount standing to the credit of the separated worker.
These would be duly added to his supplemental record. If workers
are premitted to make voluntary individual deposits, they should be
nonrefundable, as Bernstein suggests, to avoid competition with banks,
and so forth. He suggests, however, that in certified emergencies, work-
ers might borrow against such funds just as they could borrow against
many a personal life insurance contract.
Small groups might welcome the opportunity to buy such supple-
mental group annuities through OASDHI. These would be much more
attractive to workers in the small plants where the problems of estab-
lishing adequate funds becomes too expensive for employers or em-
ployees to contemplate at the present on a group basis. It may be that
millions of additional workers would avail themselves of voluntary,
Supplemental group annuities through such contracts.
It may also be that some existing plans would prefer to transfer
their assets as credits to workers and go out of the pension manage-
ment problem. Currently workers receive, for the Nation as a whole,
wages of roughly $440 billions; all social security tax payments take
another $25 billion; and health and welfare and pension plans take
another $20 billion. The bulk of this latter sum is for term insurance,
whether it be group life, health and accident, hospitalization and
surgery or otherwise. The short-term insurance poses only a few of
the problems that are raised by the pension plans. It may well be that
Some employers and some unions would welcome an opportunity to
transfer the long-term pension obligations, recordkeeping, fund man-
agement, and so forth, to OASDHI. To facilitate this, the OASDHI
supplemental group annuity plan would need to work out a suitable
contract to accept future payments into the Government supplemental
account while the existing assets of the existing trust funds were
properly liquidated, with appropriate transfer of assets and liabili-
ties, case by case, either to the supplemental account or by payment
out to annuitants, thus providing a gradual expiration of the inde-
pendent plans. - -
7. Reea amine taa, concessions for greater equity.
The tax status of contributions to retirement purposes deserves re-
newed attention. Present tax law largely favors employer contribu-
tions only. The tax saving covers almost half of the employer’s con-
tribution. In many cases, the tax law gives no benefit to the employee
contribution...Legislation does give some tax relief to the self-em-
ployed contributions toward retirement under certain circumstances.
OLD AGE INCOME ASSURANCE—PART I 29
At the minimum the tax law should treat both employer and em-
ployee contributions as deductible. The benefits, when received, should,
of course, then be treated as taxable income. But the difference in tax
rates would still favor employer rather than employee contributions.
The evidence is that employers now put up $6 for each $1 put up di-
rectly by employees. Until the employee becomes conscious of the
amount of the payments made (presumably on his behalf as a part
of his income), the lack of employee contributions will continue to
favor the denial to many of those presumably covered of the benefits
they thought they were achieving under such plans.
Thus there may be merit in Bernstein's proposal to reverse the tax
favor and to exempt the contribution made by the employee if it is a
compulsory contribution, but to tax that made by the employer. This
would certainly serve to build pressure for immediate and full vest-
ing, full portability, and help protect the employee's interest because
he would then see the contribution passing through his pay slip.
Tax laws now exempt the earnings by the pension funds as well
as the contributions into them. With $135 billion already in the funds
and the amount soon to reach $200 billion, this could easily mean an
annual escape of as much as $10 billion of interest and dividend pay-
ments from the tax base. If and when the tax laws call this exemp-
tion into question, there may be reason to abandon the exemption or,
if the Congress were to create a governmental voluntary, supple-
mental annuity account in OASDHI and wished to encourage but
not to require its use, the Government could apply a tax differential
between the earnings of private and public trust funds either as to
contributions or as to earnings on the trust fund or both.
One other tax question relates to the taxation of payments to
estates upon death. If the entire contribution plus the earnings thereon
continue to be exempt from the income tax during the time the sums
were accumulating, then the entire payment to any estate should be
taxable under the income tax of the decedent for the year in which
payment was made. Otherwise, such payments may be a permanent
escape from income tax liability.
CoNCLUSION
The Joint Economic Committee has very broad responsibility to
help promote and maintain maximum employment, production, and
purchasing power. This review of the impact of our present methods
of assuring income protection to the elderly should lead to recom-
mendations which not only promote their purchasing power, but also
provide a better system of protection which helps assure maximum
productivity and maximum employment. The goals of the Employ-
ment Act of 1946 are significantly inhibited by the plethora of pri-
vate pension plans as presently constituted. The Nation's failure to
deal competently with the changing nature of aging, and the failure
to encourage older persons who are ready to continue working after
the magic age of 65,62, or 60, Serves as a restraint upon maximum pro-
duction, and upon maximum income, and upon maximum employ-
ment. It is a denial to the aged of their right to live fully, a denial
the Congress would not contemplate for itself. Our society can be
more productive, and more equitable in protecting its aged, through
30 OLD AGE INCOME ASSURANCE—PART I
making the changes suggested here. As the President has said, “Hav-
ing the power, we have the duty.” It is to be hoped that this duty
will be more fully faced as a result of this investigation. It is to be
hoped that the committee's recommendations which grow out of this
study will lead to greater freedom, greater equity, and greater in-
come assurance for the American people, in keeping with the great
purposes of our Nation, and specifically those of the Employment Act
of 1946.
INCOME FOR THE ELDERLY THROUGH work-LIFE
EXTENSION, ASSET CONVERSION, AND PENSION
IMPROVEMENTS
BY ROBERT TILOVE”
INTRODUCTION
If old age is not to be a period of deprivation and poverty for a large
number of people, social measures will be needed to provide wide
opportunities for work and more adequate retirement income through
public programs and private plans.
It is realistic to expect that each individual will be able to provide
adequately for his old age through his own savings, even if our economy
were to provide reasonably full employment over a prolonged period
of years. Too much uncertainty would still surround the economic
life-cycle of the individual. Technological change and the dynamic
quality of the economy may interrupt earnings or cut work-life pre-
maturely short.
Our development into an urban and industrialized society has ag-
gravated the problems of security in old age. It was once possible for
an older person to work part-time on a farm or in a small business and
to live as part of an extended family, sharing living costs and contrib-
uting economically. Now the generations live apart. Economic par-
ticipation has increasingly shifted to an all-or-none basis—either
full-time employment or no job at all. By shifting him from the farm
or small town to the city, by reducing his opportunities for continued
economic production, by separating him in a household apart from his
children and grandchildren, modern work and living conditions have
exposed the older workers to greater hazards of insecurity.
ExTENDING WoRK-LIFE
Greater opportunities for work should be provided for older workers.
There is a large pool of unused productive power among unemployed
persons 55 and older who either lost their jobs or had to leave them
because they were physically too demanding and who could not, with
the handicap of age, find new ones. There are many who could do useful
work accommodated to their reduced capacity, with great benefits to
both their morale and their income.
There has been much discussion of job redesign to convert job con-
tent into something more suitable for older workers, much of it con-
cerned with retaining employees who have grown too old for maximum
efficiency on their existing jobs. However, the capacity and incentive
for particular companies to do this sort of redesign is limited. Greater
*Senior vice president, Martin E. Segal Company. Views expressed are personal
and not necessarily those of Martin E. Segal Company. .
31
32 OLD AGE INCOME ASSURANCE—PART I
attention should be devoted to the possibilities for enlarging access to
the types of employment, in whatever industry they may be found, for
which older workers will be suitable. A clue to the answer might well be
found in observing carefully the kinds of jobs that have been found
by workers who rescued themselves from unemployment at 55, 60, or
65. The jobs they found may be in service trades rather than manu-
facturing and in small, rather than large, firms. The cases of success-
ful employment may define for us the kinds of job adjustments that can
be encouraged.
Another significant possibility for lengthening work-life lies in
the development of “second careers”. That term is not entirely apt;
the word “career” implies a profession, but as used here, it is intended
to refer to entry into a second type of work, not a second profession.
What is involved is the possibility that a worker will be able to leave
a physically demanding job while he is still in vigorous middle age
and shift to a job at which he can continue to be productive into the
middle and late sixties. That type of second employment is already
a fact with career men in the armed forces and with police and firemen,
where pensions frequently permit retirement as early as 40 or 45. Sea-
men have also won full pensions after 20 years of service and they
will likewise have opportunities for shifting their employment to
something they can more readily extend into their later years. Some
truck drivers and driver-salesmen now have pensions which tend to
provide the same opportunities.
These possibilities deserve earnest attention. It is often the case that
a worker will continue at the job for as long as possible, until he is no
longer able to keep up with it, and then find that he cannot get any
other kind of work. A worker does that because he cannot afford to do
anything else. However, given an opportunity and the wherewithal to
make a change, there is no reason why the work a man does at 40
should necessarily be the work that he attempts to do at 55 or 60.
Would shifting into a second career be facilitated by benefits spe-
cifically designed to bridge the transition period, such as extra unem-
ployment benefits, the costs of retraining, and the expenses of pos-
sible relocation ? Would such benefits be more suitable than lifetime
pensions after 20 or 25 years of service in encouraging change to
another job?
As the standard of living rises, as higher levels of educational at-
tainment are reached, as the work-week becomes shorter, and as con-
tinuing education for adults becomes more available, the prospects of
“second careers” may become a major possibility for lengthening the
work-life and earning capacities of the elderly. In time, the fact that
a man or woman now has to cling too long to a job unsuitable for a
persºn of 50 may come to be understood as the consequences of a
“low” standard of living which left workers without the resources
of time and money necessary to change to more enduring employment.
CoNVERTING ASSETs INTO INCOME
A way should be developed for elderly persons to convert the equity
they hold in their homes into lifetime income, without having to
abandon their homes. It does not seem reasonable for an elderly person
to have to get along on an inadequate income, while he or she holds
a frozen asset that will be passed on to a child or other relative.
OLD AGE INCOME ASSURANCE—PART I 33
The 1963 Survey of the Aged by the Social Security Administra-
tion found that, among persons 62 years of age and older, two-thirds
of the couples and one-third of the single persons owned homes and
that their homes accounted for almost one-third of their total assets.
The median equity in the home was substantial—$10,100 for couples;
$9,070 for unmarried women; and $7,810 for non-married men.” These
homes are generally held mortgage-free.” Among the third of
the aged family units with the lowest income, more than 50 percent
of the assets held were in home equity. .
If home equities had been converted into life income it would have
added 23 percent to the income of elderly married couples and 20
percent to the income of the non-married men and women.”
Certainly the homes owned and occupied by elderly persons do not
become valueless upon their death. It should be possible to convert
in advance most of the expected residual value into a life income. Life
annuities might be paid in exchange for non-amortized mortgages rep-
resenting most of the ultimate equity value of the home. New genera-
tions of elderly persons will have substantially greater assets avail-
able; a way of converting home equities into living income should
therefore become a matter of increasing potential in making the aged
financially self-sufficient.
MAKING SocIAL SECURITY ADEQUATE
An adequate Social Security system is an essential basis for the
economic Security of the aged.
While private pension plan coverage has grown rapidly and covers
a little over half the employees in private non-agricultural industry,
there is a sharp limit to their ultimate extension. There are large seg-
ments of industry for which it is hazardous to predict the establish-
ment of pension plans. Small employers and highly competitive, mar-
ginal enterprises may feel that they lack the ability to pay for pen-
sions; if their workers are unorganized, they may never set up plans.
In many industries, job turnover may make individual employer pen-
sion plans virtually meaningless. Without a union to force the estab-
lishment of an industry-wide arrangement, it is difficult to imagine
an unorganized construction worker being covered by a pension plan.
Employment conditions in agriculture would have to be revolutionized
before pension plans could be considered there as realistic possibilities.
In the absence of some radically new development, it is likely that by
1980 some 25 percent of all wage and salaried workers will still lack
coverage by a private pension plan. Aside from the meager personal
savings they may accumulate, the Social Security program will be
their sole source of income.
Adequate Social Security is necessary for another reason. Proposals
have been made for vesting and pension portability to protect the
workers whose worklife is spread over several jobs. However, the more
these proposals are elaborated—with full vesting, accrual of funds,
1 Platky, L.D., “Assets of the Aged in 1962 : Findings of the 1963 Survey of the Aged,”
Social Security Bulletin, November, 1964, pp. 3–13. -
2 Epstein, Lenore S., Income Security Standards in Old Age, U.S. Social Security Ad-
ministration, washington, fjö 1963.
* Murray, Janet. “Potential Income from Assets”. Findings of the 1963 Survey of the
Aged”; Social Security Bulletin, December, 1964, pp. 344. - -
34 OLD AGE INCOME ASSURANCE—PART I
and compilations of lifetime records—the more they tend to re-
establish the value of a Social Security system that grants benefits
based on all covered employment. In short, improvement and extension
of private pension plans will not be a substitute for an adequate Old-
Age, Survivors, and Disability Insurance program.
In making OASDI benefits more adequate, major emphasis should
be placed on avoiding the erosion of benefit levels because of changes
in wage and price (cost of living) levels. The problem can be broken
down into two categories. One is the matter of determining benefits, at
the point of retirement, on the basis of current or recent wage levels.
The other is maintaining the adequacy of benefits through the period
of retirement. .
The Social Security Act now provides that a worker earning $6,600 a
year will be able to retire (some years in the future) on a pension equal
to 30.5 percent of his average monthly pay and his wife will be entitled
to 50 percent of his amount, making the combined benefit 45 percent of
his average monthly pay. A worker earning $4,800 a year will be able
to get a combined benefit (his wife and himself) of 51 percent of his
average monthly pay. However, the plan will not work out that well, in
terms of how his retirement income will relate to his pre-retirement
earnings. There is a large discrepancy between the earnings of the aver-
age worker in the years immediately preceding his retirement and the
average earnings over his entire work-life. In part, this is attributable
to the better occupational position which the worker may have attained
later on. Another part stems from the vast changes in general wage and
salary levels over time, and simultaneously in the amount of wages
taken into account in determining OASDI benefit amounts. A benefit
calculated in relation to career earnings, even if it employs a fairly
generous ratio, is likely to be inadequate in the light of wage and price
levels at the time of retirement.
One remedy proposed has been to base OASDIbenefits on earnings in
the five- or ten-year period preceding retirement or on the five- or ten-
year period of highest covered earnings. This may not work out as
equitably or effectively as a formula which would—for purposes of
computing benefit amount—revise earlier wage credits in proportion to
the change in general wage levels from the year in which the employ-
ment occurred to the year preceding retirement. Such an arrangement
would take full account of a lifetime of earnings, but adjust it to cur-
rent conditions by correcting for changes in general wage levels.
For adequate protection against increases in the cost of living after
retirement, an automatic cost-of-living adjustment should be provided.
Reluctance has sometimes been expressed about these changes
because they would absorb the margins for improvement which rising
wage levels (and contributions) will afford and therefore preclude
other benefit changes that might be considered desirable at the time.
However, that reservation is only a way of expressing some doubt
about the merits of the proposed formula or about the care with which
it might be embodied in the statute. Inflation is a process of partial
erasure. Rising price and wage levels do tend to wipe out, partially,
benefit rights built up on the basis of past earnings. If it is discovered
later that a mistake has been made, the partial erasure is to be wel-
comed as an opportunity to turn the features of the program in a better
direction. But if benefits have been well designed in the first place
OLD AGE IN COME ASSURANCE–PART I 35
and deserve to be protected from the erosion of rising price and wage
levels, then they should be protected from partial erasure by Soundly-
conceived formulas for automatic adjustment.
IMPROVING PRIVATE PENSION PLANs
Private pension plans cover at least half the employees of private
non-agricultural industry; they have rapidly established successively
higher levels of benefit and made liberal eligibility provisions. By 1980,
private pension plans are likely to be paying out more than $9 billion a
year for more than 6 million beneficiaries.
There are Schools of thought that place little value on private pen-
sion plans. The report entitled Old-Age Income Assurance: An Out-
line of Issues and Alternatives submitted to the Subcommittee on Fis-
cal Policy of the Joint Economic Committee expressed the view that
that aggregate of private plans was not well suited—from the stand-
point of equity or efficiency—to accomplish the public purpose of pro-
viding adequacy of income in old age and that “one may suspect that
the cost of the system to the Nation exceeds by a considerable margin
the benefits to the aged.” The viewpoint implied was that whatever
private pension plans claim to accomplish in terms of public good
could be accomplished better by a public program. Overlooked by that
approach is the fact that what has been accomplished by employers
and unions in supplementing Social Security with private plans was
not accomplished, and might never be accomplished at all, through
legislation. It also overlooked the value for a democratic, pluralistic,
and dynamic society of arrangements that can be developed outside
of government, on the initiative of employers and unions, and with-
out depending on majority consensus.
Proposals have been made to regulate private pension plans by re-
quiring vesting, more complete funding, and reinsurance to guarantee
benefits in case of plan default. , --
Vesting—particularly after a substantial period of service—and
adequate funding are both desirable goals from the standpoint of
employees and of the public. Whether those steps should be compelled
by legislation is another question.
Vesting.—Claims have been made that no more than 40 or 50 percent
of the workers covered by private pension plans will ever receive a
cash benefit from the plans because they will leave the employment
covered before fulfilling plan eligibility conditions. These pessimistic
estimates have not been supported by convincing evidence. Certain of
these published conclusions have relied on general labor turnover fig-
ures—separation rates—and have calculated cumulative results over
a period of years which seemed to establish that very few workers will
remain in the same employment. General turnover rates are inappro-
priate for such findings. Even where employment is highly stable, a
substantial turnover statistic can be generated by a few unattractive
jobs that are filled by a succession of short-term workers. There have
been other calculations which are one step more sophisticated. They
recognize that turnover rates vary by the age of the workers and they
therefore utilize turnover tables with specific rates for each age bracket
and sex. From these it is possible to calculate the chances that a young
man or woman will remain in a particular employment to retirement
36 OLD AGE IN COME ASSURANCE—PART I
age. The result is not difficult to predict—with any significant degree
of turnover the result is a high probability that a young man of 25
will not be in the same employment when he is 65.
Those findings have a certain plausibility but they are nevertheless
inappropriate. The real question is not the probability that a young
man or woman will remain with the same employer to retirement age
but rather the following: what percentage of the older worker popu-
lation is covered by pension plans and will be eligible for pension
benefits?
The distinction can be well illustrated by an actual example using
a group with comparatively high turnover—the unlicensed seamen
on the East and Gulf Coasts. If we apply the successive turnover
rates which have actually occurred in a projection applied to seamen
who are 27 years of age, we find that no more than 13 out of 100 will
be sailing by the time they are 65. This is the kind of figure that has
been used to establish the idea that pension plans are a “mirage”. How-
ever, if we look at the seamen who are 60 or over, we find that 71
percent have accumulated the 10 or more years of service required
for eligibility. These figures are by no means in conflict. If we start
at a comparatively young age, the cumulative attrition is high. When
we look at the situation of the older worker, we see that the great
majority is eligible for pensions. These two answers are reconcilable
if we recognize that turnover rates are high in the younger age brack-
ets but they go down Soon enough so that older workers do, in most
cases, accrue pension eligibility. -
However, the observation that the great majority of older workers
covered by pension plans will fulfill their eligibility requirements does
not entirely resolve the question. The objection can still be raised that
these older workers represent a select population, the survivors of a
process of attrition, and that what is missing from the picture is the
ultimate fate of the workers who left that employment. - -
However, that objection only raises a further question. When a
worker leaves an employment in which he is covered by a pension
plan, where does he go? The analyses to date seem to have assumed
that he went to another employment where there was no pension
plan. That assumption is unwarranted. Presumably, there is at least
a 50–50 probability that his next employment is covered by a pension
plan and, since most turnover occurs before age 40, he will still have
adequate time on the new job to become eligible for a pension. One
might argue that the chances are even better that he will wind up
under the protection of a pension plan on the theory that as he changes
jobs he will move into more stable employment in which there is
greater-than-usual prevalence of pension plans. On the other hand,
the claim can be put forward that the process of turnover results in
the accumulation of middle-aged workers in undue proportions in
low-standard industries in which there are few pension plans. That
argument would have persuasiveness if it were true. However, no
facts have been produced to that effect.
Whether private pension plans are an illusion or provide valuable
benefits is amenable to a simple answer. At the present time, private
pension plans hold assets worth close to $100 billion. Since most plans
are not yet fully funded, the benefit rights accrued under the plans by
virtue of employee service in the past are worth (that is, have a
OLD AGE INCOME ASSURANCE—PART I 37
present actuarial value) considerably in excess of $100 billion. In
other words, after discount by their actuaries of the forfeitures of
benefits which will occur as the result of job turnover, these plans have
built up benefit rights worth more than $100 billion.
There is no question but that to the industrial worker who loses out
on pension benefits because of job changes, voluntary or involuntary,
the loss is real and significant. It remains of some importance whether
these cases are 15 percent of the workers covered by private pension
plans, 50 percent, or 75 percent.
Westing provisions have become significantly more extensive. In
1952 only 25 percent of union-negotiated plans had any sort of vesting
provisions. By the winter of 1962–63, two-thirds of all pension plans
provided vesting, and they covered 60 percent of all workers covered
by pension plans." The requirements are 10 or 15 or 20 years of service,
frequently joined to a minimum age requirement. Approximately a
third of all workers covered by private pension plans would qualify
for benefits if termination occurred after they had attained 15 years of
service and age 40.
These vesting provisions are in addition to early retirement provi-
sions, which are today common practice and generally make benefits
available by age 55. Also, evidence indicates that the spread of vesting
has been accompanied, particularly in recent years, by a trend toward
more liberal eligibility rules. For example, the proportion of “pattern”
or negotiated plans studied by the Bankers Trust Company that per-
mit an employee to vest fully at age 40 with 15 years of credited service
increased from 42 percent in 1957 to 75 percent in 1965. Among “non-
pattern” plans, the increase was from 21 percent to 33 percent.
Industrywide or multiemployer pension plans, which provide about
20 percent of total pension coverage, add another element of protection
for workers who hº jobs—continuity of pension covereage if the
worker shifts from one job to another within the scope of the multi-
employer plan. In effect they provide immediate and full vesting to
any worker under their coverage, provided the shift is to a covered
job. Since these plans generally cover a whole industry or craft within
a city or region, they generally provide continuity of pension accrual
for a large proportion of the job changes that are likely to occur.
Reciprocal or integration agreements between industrywide plans is
another development which has enlarged the area of protection for a
worker in the event of a change in jobs. Under these agreements, two or
more multiemployer plans will agree to reciprocal recognition of em-
ployment credits as the basis for qualifying workers for their pension
benefits. So, for example, in the maritime industry, a ship's officer can
switch from the East Coast to the West Coast or vice-versa and be
assured of continuity of pension credits.
The essential problem with legislating vesting is that it would im-
pose a cost on a pension plan at a time when the employer and the
union might consider—and perhaps rightly—that other claims to the
resources available to the plan should take priority. Pension Plans
have gone through successive stages of development. Their first em-
phasis was on benefit amounts for workers facing immediate retire-

• U.S. Bureau of Labor Statistics, Labor Mobility and Private Pension Plans, Bulletin
No. 1407 (June, 1964). . - r - - -
38 OLD AGE INCOME ASSURANCE—PART I
ment. Then they branched out into disability pensions, early retire-
ment, survivors' benefits, and now vesting. Compulsory vesting would
take all pension plans, regardless of their age, their resources, and the
other demands upon them, and create a priority for vested benefits.
A possible source of inequity lies in the fact that industry-wide plans
might be required to provide vesting after 10 or 15 years of service
with a particular employer, when they already provide full immediate
vesting to a worker who is shifting from one employer to another
within the scope of the plan. In essence, they now bear a cost for vest-
ing in the event of intra-industry transfers. The vesting proposals do
not take this into account as a credit toward the suggested vesting
requirements. -
It might be a good idea for proposals for compulsory vesting to be
framed so that the requirement were contingent on the level of benefits,
so that such a requirement would not cut down on the resources avail-
able for improving benefits that are as yet meager.
Compulsory vesting would have far-reaching effects on pension
plans. Difficulties in defining what is to be vested would lead to fairly
elaborate rules. The question has to be asked: “Require vesting of
what?” The report of the President's Cabinet Committee and various
other proposals have seemed to assume that every plan has a normal
retirement age (such as 65) and that the benefit is, in one way or
another, a certain number of dollars per month or a certain per-
centage of pay for each year of service. That is not necessarily true.
Suppose a plan pays a flat benefit of $50 a month starting upon retire-
ment at 65 or later, if the worker had at least 15 years of service in the
period preceding his retirement. How would compulsory vesting
apply? Does this mean that a worker who has acquired 15 years of
service by age 35 has acquired a vested right and is entitled to benefits
deferred to age 65? If this is what it means, then a worker covered
by plans of this kind may, under some circumstances, acquire two
full pensions in one working lifetime, since there is certainly nothing
uncommon in 40 or 45 years of total employment.
Take another example: there are some plans in the maritime industry
and others that pay full benefits tºº. of age after 20 years of
service. Is this to be vested too? Does this mean that somebody with
15 years of service would automatically be entitled to a partial
pension regardless of age? It is doubtful that that was intended by
the proposal. That means that a retirement age would have to be
spelled out.
There are further difficulties in defining what benefit is to vest, if
it is mandated. It is becoming a little difficult to say what the normal
retirement age is, that is, to what age the benefits of a plan are keyed.
The automobile industry agreements provide the same benefits at age
62 as they do at age 65 (and in fact higher benefits for workers who
retire before 65 because of layoff or by mutual agreement). The only
exception is for somebody who left employment with vested rights—
if he wants to claim a deferred pension starting at age 62, it is in a
reduced amount based on his being three years younger than 65. What
is the normal retirement age in such a plan? Is it 62 or 65? What gets
vested if vesting is compulsory, an age 62 pension or an age 65 pen-
sion? Except for their vesting provisions, the automobile industry
agreements actually provide for a normal retirement age of 62. Cer-

OLD AGE INCOME ASSURANCE—PART I 39
tainly a compulsory vesting law could not allow the vesting to be fixed
by a decision of the parties to the plan that they west what they want
to vest. If it has any meaning they would have to vest some part of the
benefit payable to a worker who retires normally. Would that mean
that the automobile pension plans would have to vest the full benefit
amount payable from age 62?
If vesting is to be mandated so as to assure a worker retirement
income despite changes in jobs, then it should take account of the fact
that a full working lifetime is closer to 35 or 40 years than it is to 20 or
30 years. An appropriate formula of what is vested under a compulsory
statute would be, for each year of Service, one-fortieth of the maximum
benefit provided under that plan for a person of 65.
It should be recognized that pension plans have been designed to
cover long-Service employees—and almost always on the assumption
that they would not also have available benefits based on relatively
short service elsewhere before or after. With compulsory vesting, this
assumption would no longer hold and provisions for vesting benefits
should logically contemplate the entire span of work-life during which
vested rights could be acquired. - . . . '
Funding.—Proposals for required funding are subject to some of
the considerations pertinent to the proposals for compulsory vesting.
The objective is in general, desirable. Pension plans are in fact far
along toward accomplishing the goal of adequate funding. A study as
of 1964 of 75 of the largest plans in the country found that their assets
were 69 percent of their accrued liabilities.” This was an impressive
degree of funding, in the light of the liberalizations which had been
made in these plans in the preceding years. To compel adherence to a
funding Schedule would represent an enforced order of priority that
would cut down on what new plans or plans with limited resources
could do in the way of immediate benefits. At what point does Social
policy dictate that an adequate Schedule of funding takes priority over
the other claims? A classic case perhaps is that of the national pension
fund for bituminous coal miners, which provided a pension of $100 a.
month financed out of a cents-per-ton royalty contribution. Through a
combination of circumstances, including a drop in tonnage mined, the
contributions proved inadequate to sustain the $100 pension level and
it had to be cut back for a period of time to $50. With a fuller schedule
of funding, a cutback might have been avoided, but by the same token
the fund would never have gotten started with payments as high as
$100 a month. The question is whether social purpose would have been
served by requirements for funding which would have limited the level
of miners' pensions from the very beginning to less than $100 a month.
Another consideration affects industrywide plans. An industrywide
plan typically undertakes a unique funding obligation, namely, the
obligation of fulfilling benefit rights in the event that a particular con-
tributing employer goes out of business. Fulfillment of that under-
taking is an everyday occurrence. Numerous employers have gone out
of business without any damage to the ongoing pension credits of
their employees, where they have been covered by industrywide plans.
So long as the former employees continued to work within the indus-
trial or craft scope of the industrywide plan, they have been made
* Joseph Krisłow, “A Study of Pension Funding,” Monthly Labor Review, June 1966,
pp. 638—642.
40 OLD AGE IN COME ASSURANCE—PART I
whole on their ultimate pension rights. Fulfillment of pensions in the
face of business turnover represents an implicit cost to these plans, a
cost which represents a margin otherwise applicable toward fulfilling
a Schedule of full funding.
Reinsurance.—The general idea of reinsurance to fulfill pension
promises in the event of default by the plan is attractive, but its
feasibility has yet to be established. Comparisons to Savings or mort-
gage insurance are not convincing. The risks which reinsurance of
pension plans would have to cover including the following:
1. The risk that the company will go out of business. This might
include the risk that a company might elude its commitment to a
pension plan in connection with a merger or Sale of assets.
2. The risk that the assets of the pension fund might depreciate.
It is a common practice for 30 percent to 50 percent (sometimes
more) of the assets of a pension fund to consist of common stock.
Unless a reinsurance proposal involved the elimination of common
stock as a pension fund investment it would have to undertake
to fulfill the dollar commitments of the plan even if the common
stock depreciated. The question is most spectacular in the case of
common stock, but of course the possibility of depreciation could
also apply, to a lesser degree, to preferred stock, bonds, and mort-
gages. Unless the types of securities which a pension fund might
acquire were to be severely regulated, the reinsuring institution
would have to be prepared either to charge a uniform premium, no
matter what degree of risk the Securities represented, or charge a
differentiated premium based on a valuation of the degree of risk
embodied in a specific portfolio.
3. The risk that the actuarial assumptions on which the pro-
jection of benefit commitments were calculated proved erroneous.
Turnover, mortality, salary changes, age, patterns when retire-
ments take place, investment yield, are likely to prove different
to some degree from what was assumed. An undertaking to fulfill
the benefit commitments would involve in essence a coverage of
this risk as well as the others.
Security of investments.--It is possible for the assets of a pension
fund to be invested in ways that take undue risk with the interests of
the beneficiaries. The great majority of pension plans are invested re-
sponsibly in ways intended to serve the interests of the beneficiaries.
There may, however, be cases where self-interest on the part of those
who manage a pension fund leads to undesirable investments. We do
not know how many cases of that kind there are; present federal dis-
closure regulations do not require that individual investments be re-
ported, except where direct self-interest is involved. A pension plan
can make an unusual or questionable investment and even one in which
there is some element of self-interest because of the potentiality for
corporate control or interest, and yet not be required to disclose that
transaction under present reporting requirements. For example, if a
large amount of the stock of Company A is bought by Company B's
pension fund in order to influence a proxy fight or to effect a merger or
as part of some sort of reciprocal business arrangement, it would not
have to be reported at the present time.
OLD AGE INCOME ASSURANCE—PART I 41
It would serve a useful purpose if unorthodox investments were sub-
ject to disclosure. It would give the public and the affected employees
knowledge to which they are entitled and it would tend to impose re-
straint on those responsible. This could be accomplished if every pen-
sion fund were required to file an inventory of its portfolio and trans-
actions. The difficulty with this proposition, however, is that it would
accumulate a mountain of paper, 90 to 99 percent of it from plans
which hold diversified portfolios invested in well-known blue-chip
stocks and bonds and insured or conventional, high-quality mortgages.
It would seem possible to pinpoint disclosure so that only the extra-
ordinary investments are regularly disclosed. For example, annual
disclosure requirements could be made to apply to:
1. Any purchase of a bond or stock not listed on the New York
Stock Exchange, except for shares in a major bank, major insur-
#. company, registered investment company, or a common trust
l] Il Cl.
2. Any investment in a single Security in an amount exceeding 5
percent of the total pension fund (provided it is at least $500,000).
3. Any holding of common stock representing more than X per-
cent—such as 5 percent—of the total outstanding common stock
of the company.
4. Other classes of ordinary investment (such as insured mort-
gages) could be defined for nondisclosure, so that disclosure would
apply only to the extraordinary.
Fiduciary responsibility.—The moneys accumulated in a pension
plan can be used legally only for the benefit of the employees covered
(and their survivors and/or beneficiaries), including, of course, the
reasonable expense of establishing and maintaining the plan. The only
exception is that funds ultimately found unnecessary for the fulfill-
ment of the plan may be returned to the employer. In short, the objec-
tive of preserving the funds for the exclusive benefit of the employees
is already embodied in law.
These funds are accumulated either under an insurance contract or
in a pension trust. The insurance contracts are subject to supervision
by state insurance departments. The pension trusts are governed by
agreements or declarations of trust, which make pension (and related)
benefits the exclusive purpose of the trust.
Trustees are generally held to a high standard of accountability;
they are held liable not only for misfeasance but for negligence and
for failure to exercise prudence. Some pension trust agreements have
exculpatory provisions, which seek to limit the liability of the trustees,
but there is doubt about their effectiveness.
There have been cases in which trustees for large pension plans, cov-
ering thousands of employees, have engaged in acts which might expose
them, as trustees, to civil suit and yet no one has sued them. The answer
lies in the fact that those entitled to enter suit are employees and pen-
sioners, without the resources for legal action, and their interests are
diffuse. If the trustees of a pension fund with $50 million in assets
make an imprudent investment that results in a loss of $500,000, how
much is an individual employee or pensioner affected?

42 OLD AGE IN COME ASSURANCE—PART I
These considerations argue for legislation to empower a government
agency to enter suit to enforce the fiduciary responsibilities of trustees
and others handling pension funds.
In summary, the economic security of the aged can be advanced by
extending their work-lives through continued employment and greater
opportunities for reemployment, by measures to permit conversion of
frozen assets into income, by changes in the OASDI program that
would automatically keep benefits in line with changing wage and
price levels and by measures helping to assure the growth and ful-
fillment of private plans.
ROLE OF PUBLIC AND PRIVATE PROGRAMS IN OLD
AGE INCOME ASSURANCE
BY JOHN McConnELL*
In 1938, Reinhard A. Hohous wrote a masterful statement of the
problems of adequacy and equity as related to social insurance and
private insurance protection." It was his contention that Social insur-
ance must place the highest priority on adequacy of both coverage and
benefit payments, and secondary priority on questions of equity. In
private insurance, he argued, equity is paramount—costs should be
allocated according to risk, coverage may be limited by the decision
of an individual to accept or reject insurance, and the benefit can be
related to the individuals “need for, and his ability to afford, protec-
tion ; :#; ** 2 -
Much of the continuing controversy regarding coverage and benefit
payments in the federal old age insurance system is related directly to
a failure to understand, or an unwillingness to accept, the fact that
OASDI is social insurance, created to combat the widespread and per-
sistent problem of dependency in old age. Hence, adequacy of coverage
and benefit payments must be a primary objective. Quite proper efforts
to include some features of equity in the Old Age Insurange system
have nevertheless from the very beginning confused the Social insur-
ance role of OASDI. These features, such as relating benefits to earn-
ings, coverage as an attribute of private employment and payment of
benefits as a right earned by prior employment, desirable as a reflec-
tion of American ideals, have undoubtedly aided and abetted those
who test the effectiveness of the federal old age insurance system
against the principles of equity as found in private insurance.
The original social security bill did give priority to questions of
adequacy in the program for older people. Benefits it said should fur-
nish “a reasonable subsistence compatible with health and decency.” “
Coverage was broadly conceived. All occupations were included except
public employment and railways for whom other public retirement
systems were in effect or proposed. No exemptions were made for agri-
cultural workers, domestics or employees of non-profit organizations.
Nor was the size of the employing unit grounds for exclusion.* That
the Act itself as finally passed by Congress, limited coverage and Se-
verely restricted the level of benefits is attributable to considerations
of financial exigency; administrative problems; and the determined
efforts of powerful pressure groups to achieve exempt status for cer-
tain occupations. During the past thirty-two years since the passage of
*President, University of New Hampshire. .
#hard A. Hohous, The Record, American Institute of Actuaries, June 1938.
Ibid. -
* H.R. 4142 and H.R. 7260; S. 1130; Paul H. Douglas, Social Security in the United
States, New York, 1936, pp. 87–89. . .
4 P. H. Douglas, Social Security in the United States, New York 1936, pp. 87–89.
43
83–200–68—pt, 1–4
44 OLD AGE IN COME ASSURANCE—PART I
the Social Security Act, revisions have sought to fulfill the conditions
of a viable social insurance system for older Americans. This goal has
not yet been achieved. .
Adequacy with respect to coverage can be precisely defined. All
permanent residents of the United States should be assured protection
against dependency in old age. Despite minor questions which have
given rise to controversy, for example, extent of attachment to the
labor force, citizenship and the specific age when one becomes old, in-
surance protection for the aged is now extended to virtually everyone
in the United States when he reaches the age of sixty-two.
The record of expanding coverage of OASDI is truly impressive. In
1941 about 55 percent of the labor force was in covered employment,
and 10 percent of all persons over sixty-five were receiving or were
entitled to benefits. By 1965, 97 percent of the labor force was in em-
ployment covered by a public retirement plan and 92 percent of all
persons over sixty-five were receiving or were entitled to benefits. In
addition, benefits could be claimed at sixty-two by covered employees
and their wives. More important, 98 percent of all persons under age
sixty-five could confidently expect to receive old age insurance benefits
when they reached old age. -
The definition of adequacy with respect to old age insurance bene-
fits is not nearly so clear cut as for coverage. Moreover, the role of
OASDI, in providing income for older people has been severely chal-
lenged by (1) the proponents of private pension plans, and even more
important by (2) those who claim that because of social insurance
principles too large a proportion of the nation's transfer payments
now go to those older persons who are not and are not likely to become
dependents, while millions of children, widows and the disabled in
younger age brackets are very poorly provided for.
If the old age insurance system were to provide benefits which
would furnish “a reasonable subsistence compatible with health and
decency” what would the scale of benefits be? This is indeed a thorny
question. Regional differences regarding living standards and indi-
vidual variations in need are barriers to agreement with respect to a
minimum adequate income. Two yardsticks are at hand: (1) The
Social Security Administration has defined poverty as annual income
of less than $1,500 for a single person and about $1,900 for a couple; "
(2) family incomes providing for a modest but adequate budget for
families of varying sizes have been calculated by the United States
Labor Department after extensive field studies in a score of Ameri-
can cities. The latest revision would establish the desired income for
an aged couple of $2,400." .
Using the lower of the two yardsticks, the poverty level index,
in 1966 only 25 percent of all aged beneficiaries have incomes above
the poverty level if OASDI benefit income is omitted, but 36 per-
cent more are kept above the poverty line by the OASDI benefit in-
come." It would require an expenditure of $2.2 billion annually to
* Social Scourity Bulletin, January and July 1965; April and May 1966, United States
Pºpº of Health, Education and Welfare, Washington, D.C. -
United States Department of Labor. -
* Ida C. Merriam Social Security Benefits and Poverty, Research and Statistics Note
§ # #. Fºle 3, p. 11, United States Department of Health, Education and Welfare,
$18 Ing OIA, g tº . - -
OLD AGE INCOME ASSURANCE—PART I 45
raise the income of the remaining 39 percent to the poverty line.”
The increases in OASDI benefit levels in 1965 and 1958 were less
than the increases in the cost of living during the intervening periods.
At the present time even a 15 percent increase in benefits would leave
29 percent of the aged individuals or couples below the poverty line.”
The primary cause of low benefit levels appears to be the low level
of prior earnings of so many of those currently receiving benefits.
Hence, in order for OASDI to provide incomes high enough to lift
four million older persons and couples above the poverty line a mini-
mum benefit of $100 per month would be needed.
When the Social Security Act was passed, the purpose of old age in-
surance was said to be the provision of a floor of income support.
It was expected that individual Savings would supplement the basic
OASDI benefit. Following the rapid expansion of private pension
plans during and following World War II, it became quite common
for both the proponents and opponents of old age insurance to refer
to the American system of income maintenance as a three legged
stool, or a three layer cake, although the pitiful nature of the income
received by most older people from all sources made the analogy of
the cake seem something of a mockery. It is quite clear that the
spread of private pension plans has confused the roles of OASDI
and of private pensions and savings. There is a tendency to argue
that OASDI should provide only minimum subsistence, and that
private pensions will supply enough when added to OASDI to equal
an adequate income. Private saving will assure a comfortable exist-
ence. This view of the three elements is reflected in the formulas used
to determine the amount of private pension benefits, since the private
benefit is superimposed on the OASDI benefit to fulfill the popular
formula which yields 65 percent of average wages for the low in-
come group scaled downward so that combined benefits will yield
50 percent to 35 percent for the various gradations of the high income
*I'OUIQ.
g It º, unfortunate that this policy has received such wide support
since only about 15 percent of all older people receive a private pen-
sion. If allowance is made for 50 percent of the beneficiaries being
married the percentage is still only a little over 20 percent of all
persons over sixty-five * who benefit from private pensions.
There has unquestionably been a phenomenal growth in persons
covered, size of benefit payments and number of beneficiaries of pri-
vate pension plans since 1950. The rate of growth has been declining
rapidly, however. The growth rate from 1950–55 for coverage was
9.5 percent, for beneficiaries 16.8 percent; the corresponding figures
for 1960–64 were 3.8 and 8.8 respectively. Coverage increased by
one million workers between 1964 and 1965 but the percentage of the
labor force covered remained the same, 46 percent.” At current rates
§ wilbur J. Cohen, Improving the Status of the Aged, Social Security Bulletin, Decem-
}% 1966, p. 4, United States Department of Health, Education and Welfare, Washington,
* See reference No. 2.
10 Alfred M. Skolnick, Ten Years of Employees Benefit Plans, Social Security Bulletin
April 1966, # 11, U.S. Department of Health, Education and Welfare. - . . . . . . .
11 Alfred M. Skolnick, ibid.; Walter W. Kolodrubetz, Private Employee Benefit Plans in
1965. Research and Statistics Note No. 7, 1967, U.S. Department of Health, Education
and Welfare, Washington, D.C. . & - . . .
46 OLD AGE INCOME ASSURANCE—PART I
of growth approximately half the labor force will not be covered by
private pension plans in the foreseeable future and apparently the
population over sixty-five is now increasing faster than the number of
beneficiaries—by the order of about three to two.
In the face of these somewhat elementary facts about the income
of older people, it is impossible to assume that the population sixty-
five will generally received an adequate retirement income through a
combination of OASDI and private pension benefits. Faced with the
prospect that not more than 20 percent of those over sixty-five (25
percent of all beneficiaries of OASDI) will receive private pension
benefits, if the nation is serious about providing an adequate income
for older retired people it will have to do so through a greatly im-
proved public old age insurance system. !
The cost of bringing all persons and couples sixty-five and over up
to the poverty line, i.e., $1,500 per single individual per year, $1,900
per elderly couple, has been estimated at $2.2 billion annually. With
an annual increase in productivity and in real disposable income esti-
mated at 3.5 percent * it is obvious that the nation can afford this im-
provement, but there is the question of whether in the face of all other
needs additional funds should be spent on older people. Numerous
economists have proposed the introduction of some form of needs test
to reduce the cost of old age benefits, using the saving to improve the
well being of dependent children, widows, and the sick and disabled.
A decision on such an issue is most difficult, but there are other ways of
reclaiming insurance benefits received by those who are above the
economic support line, for example, taxing OASI benefits attributable
to the employers contributions which would not undermine the con-
tributory character of the OASDI System. There is a great deal to
be said in support of finishing the job of providing adequate income for
all ºlder people using the present system. This goal is now within
Sight. - “...
The specific mechanism for adding $2.2 billion to the OASDI bene-
fit payments is an important tactical matter. In the early days of the
old age benefit program, it was recognized that benefits payments to
those at the point of retirement would have to be paid for by funds
other than their own contributions and those of their employers. While
it was generally agreed that these costs should be paid from general
revenues the specter of an unmanageable reserve led to the decision to
pay the current retiree benefits out of the reserves accruing from the
contributions of younger workers, with the understanding that a gov-
ernment contribution to current benefit payments would be made in
the future.” It has, therefore, been proposed that the higher minimum
be paid not from the OASDI reserve but from general taxes.” In the
light of the past history of old age benefit finance, this appears to be
a reasonable proposal. .
In summary, then, the goal of adequacy has been achieved in OASDI
coverage but not in income levels. OASDI benefits are the main source

12 Council on Economic Advisors Economic Report to the President, January 1967,
p. 41–43, Washington, D.C. - -
18 Douglas, P. H., Social Security in the United States, § 59–60, New York 1936, Ball,
*ś, jirº before American Society of Public Administration, Washington, D.C.,
T ":F4 * Lºs
p. Seidman, B., The Case for Higher Social Security Benefits, American Federationist,
January 1967, Washington, D.C.
OLD AGE INCOME ASSURANCE—PART I 47
of income for 85 percent of all older people while but 15 percent re-
ceive private pensions. Present trends indicate that private pensions
can at best be a welcome supplement to OASDI benefits for only a
small proportion of all older people. Adequacy of income can be
achieved at reasonable cost by a general increase in benefit levels and
the establishment of a minimum benefit high enough to provide ade-
quately for those whose lifetime earnings have been too low to claim
an adequate benefit under present benefit formulae.
SOME REFLECTIONS ON SELECTED ISSUES IN SOCIAL
SECURITY +
BY ROBERT M. BALL **
INTRODUCTION
There was a time, back 10 or 15 years ago, when many of us were
quite concerned that social security was not attracting as much in-
terest from the academic and other research communities as we believed
it deserved. I think those times have passed. It is very encouraging, as
well as very important to the country, that an increasing number
of Scholars are devoting time and attention to social Security issues,
as evidenced by the contributions to this Compendium.
During the past few years there has been an increasing tempo of
discussion about the Social Security system, welfare programs, private
pensions and other fringe-benefit arrangements and related programs
and proposals. In this paper I will comment on some of the discussion
that has been taking place about social security.
I would like to begin by making a point that tends somewhat to be
overlooked in our search for ways to improve. The point is that our
national Social insurance system as we have it today—with all the
need there is for improvement—is right now a tremendously sucessful
program, which has changed the face of America in one short gen-
eration. Twenty-four million people who would otherwise be among
our most economically vulnerable group—the retired aged, widows and
orphans and the totally disabled—have income they can count on
month after month as a matter of right. That this has been ac-
complished with the enthusiastic acceptance of the vast majority of
Americans speaks well for the principles on which the program is
founded. These principles have not only been widely accepted but have
stood the test of practical operation for a generation.
Economic security for the American people has radically improved
from just 30 years ago, when few had pension rights of any kind
and few had continuing income protection for their families in case of
death of disability, to the situation today when just about all have
pension rights and when the face value of survivors insurance alone
under social security is $940 billion. Yet the methods used have been
anything but revolutionary; rather they are built on traditional values
and concepts—self-help, mutual aid, insurance, incentives to work and
save. To bring about such a great social change with a minimum of
disruption, using traditional ideas and motivations, is the ideal ap-
proach to social reform. Social security, having taken this approach,
* Adapted from the “Concluding Remarks” at the Princeton University
Symposium on Social Security, June 1967. Symposium papers will appear soon
in The American System of Social Insurance (McGraw-Hill).
** Commissioner of Social Security.
48
OLD AGE IN COME ASSURANCE—PART I 49
is our most successful experience in recent times with a planned and
deliberate effort to bring about a major and permanent social reform.
GENERAL GOALS AND OBJECTIVES OF SOCIAL SECURITY
Let me summarize the principles on which this accomplishment is
based. The most succinct of recent statements summarizing the princi-
ples and purposes of social security that I know of is in the introduc-
tion to the Advisory Council Report of 1965. I quote the statement at
considerable length because I don’t know how to improve upon it as
a description of the principles underlying the American program.
“The Council strongly endorses the social insurance approach as
the best way to provide, in a way that applies to all, that family in-
come will continue when earnings stop or are greatly reduced because
of retirement, total disability or death. It is a method of preventing
destitution and poverty rather than relieving those conditions after
they occur. And it is a method that operates through the individual
efforts of the worker and his employer, and thus is in total harmony
with general economic incentives to work and save. It can be made
practically universal in application, and it is designed so as to work in
ongoing partnership with voluntary insurance, individual Savings, and
private pension plans.
“Under the social security program the right to benefits grows out
of work; the individual earns protection as he earns his living, and, up
to the maximum amount of earnings covered under the program, the
more he earns the greater is his protection. Since, unlike relief as assist-
ance, social security benefits are paid without regard to the bene-
ficiary’s savings and resources, people can and do build upon their
basic social security protection and they are rewarded for their plan-
ning and thrift by a higher standard of living than the benefits alone
can provide.
“The fact that the program is contributory—that employees and
self-employed workers make contributions in the form of earmarked
social security taxes to help finance the benefits—protects the rights
and dignity of the recipient and at the same time helps
to guard the program against unwarranted liberalization. The
covered worker can expect, because he has made social security con-
tributions out of his earnings during his working lifetime, that social
Security benefits will be paid in the spirit of an earned right, without
undue restrictions and in a manner which safeguards his freedom of
action and his privacy. Moreover, the tie between benefits and contribu-
tions fosters responsibility in financial planning; the worker knows
that improved benefits mean higher contributions. In social insurance
the decision on how to finance improvements is always an integral part
of the decision on whether they are to be made.
“Because of these characteristics of social insurance the Council
believes that where it can be properly applied it is much to be preferred
to the method of public assistance, with its test of individual need,
and the Council therefore strongly favors the improvement of social
insurance as a way of reducing the need for assistance. The Council
recognizes the need for an adequate public assistance program, but it
believes that assistance should play the role of a secondary and supple-

50 OLD AGE INCOME ASSURANCE—PART I
mental program designed to meet special needs and circumstances
which cannot be dealt with satisfactorily by other means.
“No matter how well designed and administered, assistance has
serious inherent disadvantages in terms of human dignity and incen-
tives to work and save. People view receipt of assistance as meaning
a loss of self-support. In contrast, they view social insurance as an
extension of self-support. People who had led productive lives and
have supported themselves through their own efforts do not want to
see their self-reliance end with their ability to work. -
“Moreover, applying for assistance is at best a negative experience.
Eligibility for assistance depends upon the individual’s asking the
community for help and proving that he is without the resources
and income to support himself and his family. On the other hand, under
social insurance the individual proves, not that he lacks something,
but that he has worked and contributed, and has thus earned a right
to a benefit.” : ".
Like the United States Constitution, these principles allow for much
leeway in interpretation and application. But they are fundamental;
they have a strong appeal everywhere. People like to earn what they
get and they like to have other people earn what they get. The relation-
ship to work explains much of the great strength of contributory social
IITSUII’8.I] Cè. t
I do not believe at all, as some have evidently come to believe, that
the difference between people's attitudes toward an income-determined
or needs test program and social insurance is primarily a matter of
“style of administration.” -
Although I believe we should do everything we can to make the
needs test less onerous and to make an assistance or income-determined
program as considerate of individual self-respect as possible, it is not
in the nature of people to feel as comfortable about receiving money
payments because they can prove that they otherwise lack enough to
live on as they feel when they get money payments in return for work
and contributions.
- UNIVERSAL CovKRAGE
Today, 9 out of 10 jobs are covered under social security, including
the Armed Forces, the self-employed, the farmer, the farmworker,
and just about everyone except certain Government employees covered
by separate systems. About 90 percent of all people 65 and over are
protected under the program and 95 out of 100 mothers and children
in the country would be entitled to monthly benefits in the event of the
death of the main breadwinner in the family. Nearly 90 million people
will contribute to the system during 1968. :
Although in Europe social insurance started out as a program for
low-income people, in the United States from the very beginning it
has applied without regard to the amount of one's earnings. That is,
the first $7,800 of earnings for everyone is covered under the system.
Our social security system is therefore not primarily a poor man's
system but is also of great importance to people at all income levels—
middle-income people and those with more than average income as
well as the poor. . . .
The fact that this is increasingly true has been brought home to me
by the reaction that I now get in talking to audiences of businessmen
OLD AGE INCOME ASSURANCE—PART I 51
and executives, as compared with the reaction from such groups in the
1940’s. In those days the questioning made clear that the audience was
interested in the program almost entirely from the standpoint of social
policy; their questions related in a very impersonal way to the nature
of the institution and what it might do for others. Today, a high pro-
portion of the questions from such a group show clearly that they
are interested as well, and frequently perhaps more interested, in
what the system will do for them as individuals—how much will they
have to pay and what will they get; and almost all have a question
about some friend or acquaintance of theirs who had this or that
social Security problem. With one out of every nine Americans getting
a benefit every month and just about everyone else insured for future
benefits, this is the one Government program of personal interest to
practically every American family.
Our system, then, is universal in coverage, Serving as basic protec-
tion for just about everyone. It is a system for the supervisor, the
executive, the farmowner, the businessman, the skilled worker, as well
as the unskilled. But it is also a system for the very low-income per-
Son; it just is not true, as has sometimes been implied, that the pro-
gram leaves him out or treats him badly. In fact, in relation to con-
tributions paid, the system does the most for the lowest paid.
SoCIAL SECURITY AND THE PREVENTION OF PoVERTY
Social security has been our most effective weapon in the war on
poverty to date. It has made the difference between being poor or not
poor for more people than all other programs combined. Following the
increase in benefits resulting from the 1967 amendments, we estimate
that nearly 10 million people are kept out of poverty because they are
getting social security benefits. About 7.5 million beneficiaries, while
still below the poverty line, are primarily dependent on Social
security."
Only about a fourth of the beneficiaries have incomes sufficient to
keep them above the poverty level without social security benefits.
And for a high proportion of this group, the Source of income that
makes the difference is continuing earnings from someone in the
family—income which in the case of older people will stop on retire-
ment. There are many people in this group, too, who, Sooner or later,
will be looking to social security benefits to keep them out of poverty.
We have, then, a system of universal usefulness, relied upon by peo-
ple at various income levels; at the same time, a very high propor-
tion of the people drawing the system's benefits would be below the
poverty line in the absence of these benefits. - * - *
EMERGING Issues IN BENEFIT STRUCTURE
The social Security program was designed from the beginning to
play a major role in the prevention of poverty among low-income
workers. There has always been a weighted benefit formula favoring
those with long earnings. The theory was that although benefits should
1 These estimates are based on the Poverty Index developed by the Social Security Ad-
ministration which indicates, for example, that a person aged 65 or older living alone
IłOW º $1,600 a year and an aged couple about $2,000 a year to remain above the
poverty level. - - - .
52 OLD AGE INCOME ASSURANCE—PART I
be essentially wage-related—giving higher benefits to those who earn
more and pay more—nevertheless, the replacement of past earnings
should be at a higher percentage for low earners than for middle and
high earners. If this had not been done, quite clearly, the program
would not have served the interests of the low wage earner. He would
have been asked to pay toward his protection but benefits for him
would have been so }. as to require supplementation from the as-
sistance programs. Wage-related Social insurance systems through-
out the world have made special provision for the low-paid worker.
This approach can certainly be questioned. If one were to design
a transfer system solely to deal with poverty—if nothing else were
involved but this one issue—one could well question whether low-paid
wage earners should be asked to contribute toward their own protec-
tion and whether from the standpoint of their income position they
might not be better off in a separate program that paid them income-
dietermined benefits from general revenues. But there are deep-seated
values in the tradition of self-help and earned rights that support
the independence of the beneficiary and the security of the payment
and that cannot be gained in any other way. Even further, I think
one can generalize beyond this to say that to the extent possible the
poor are served best when served by the same institutions as the rest
of the community rather than separately. Sometimes separation is
necessary, but I would argue that for the sake of the poor we should
avoid it where we can. Our interest, as individuals and as a people,
in institutions that we all have a personal stake in, seems to hold up
better than our interest in institutions that are designed to help “other
people.” We want the institutions that serve all of us to be good all the
time; our interest in institutions specially designed for the poor tends
to be sporadic and occasional.
Some persons looking at the present situation are suggesting that
what we should do is to have a social insurance program that gives no
special advantages to low-income people and that we should treat their
special problems entirely in a separate program Supported by general
revenues. Others say that the only point of the social insurance pro-
gram is what it can do for the poor and that it should be entirely rede-
signed in their interests. I would argue that we should continue to have
one program of universal usefulness. It seems to me that to the extent
feasible we should plan to use our social insurance machinery to pre-
vent poverty among low-income people—including special adaptations
as necessary—while keeping the system useful for and acceptable to
the community as a whole. This involves compromise in benefit struc-
ture. We have here one of the two basic theoretical problems on the
benefit side of the program. How far should we go with a weighted
benefit formula or with a minimum benefit within the contributory
social insurance system? How much of the job of providing a minimum
income guarantee to all is compatible with the social insurance method?
The fundamental idea of social insurance—the partial replacement
of work income which is lost or reduced as a result of defined causes—
is an extremely powerful idea and can go a very long way in prevent-
ing poverty and economic insecurity. However, a program which un-
dertook to provide a minimum income guarantee to every last person
would at Some point have to abandon the method of partial replace-
ment of lost income from work. It is, of course, possible to combine
OLD AGE INCOME ASSURANCE—PART I 53
two programs and to use two different methods in the same administra-
tive structure. Perhaps the first question, though, is how far should
we go with the concept of partial replacement of the loss of work in-
come. At what point does a weighted benefit formula or a high mini-
mum benefit endanger the fundamental values of a wage-related con-
ºtory system and risk the general support that such a system now
8,Sº --
I certainly don’t have the answer to this question in any very precise
way. I will point out, however, that we have a different problem in
relation to each of three different groups. I believe contributory social
insurance can easily provide for the steady worker who earns low
wages over most of his lifetime without significant weakening of the
basic idea. In fact, to a very large extent, we are doing this in a satis-
factory way now. Under present law, following the 1967 amendments,
the worker who has had average earnings equal to the current Federal
minimum wage—that is, annual earnings of about $2,800—will with
his wife get benefits of just over $2,000. Such benefits are in themselves
more than sufficient to keep a couple above the defined poverty level.
Even for steady workers who earn below these minimum levels over
most of a lifetime, the social insurance approach can easily do an ade-
quate job, although this would require some liberalization of present
benefit levels. -
It is not so easy to handle the problem, however, for those people
now retired or about to retire who had a major part of their earnings
in jobs that were not covered under social security until the last 10
or 15 years. These people have low covered wages that result in mini-
mum or near-minimum benefits because their main jobs were not
covered under the program soon enough. In the future people who
have earnings patterns like theirs will get much higher benefits, but
in this first generation of covered workers there are many who have
very low benefits for this reason.
Then there remains the long-term problem of the truly marginal
worker, the in-and-outer with only a slight connection with the labor
force over a large part of his working life. Here the method of social
insurance is not entirely applicable, at least for the extreme case. The
problem can be mitigated, however, and has been by special provi-
sions in Social insurance, such as dropping out years of low earnings
or no earnings in figuring benefits. Perhaps some liberalization of the
“disability freeze,” which protects the benefit level during periods
when an individual is unable to work because of disability, would also
help in this area, as would computing benefits not up to 65 for men but
up to 62 as is done now for women. -
Undoubtedly, however, there is a point at which it is unwise to pro-
vide fully sufficient benefits through a contributory system for people
who have been under the program very little. In the long run I do
not believe that this is a problem involving very many people, but
to the extent that it exists it could be met either by adding a minimum
benefit supported from general revenues and available to all in a given
age group, or through improvements in the public assistance program.
Incidentally, a good public assistance program, to which people can
turn as a reasonably acceptable alternative to social insurance, can
help to preserve the values and principles of the contributory program
by making it unnecessary for social insurance to try to do the whole
54 - OLD AGE INCOME ASSURANCE—PART I
job. A negative income tax, which is one form of a national assistanc
program, would have the same effect.
A temptation that we are faced with right now is that in thi
first generation of coverage under Social insurance, there are s
many of the poor among retired people in the second group—thos
whose jobs (or, in the case of widows, whose husband’s jobs) wer
not covered until relatively recent years—that one is tempted to pus
up the minimum under contributory insurance so that it is rea
Sonably adequate in itself. But to go too far in this direction i
to risk undermining the principle of the benefit-wage relationshi
to solve what, in major impact, is a relatively short-run problem
Thus we compromise—correctly, I believe—when realizing that th
low-paid worker regularly under the program will get much more thal
the minimum (even a $40 a week worker will get a monthly benefi
of $142 for himself and his wife under the 1967 amendments) w
try to arrive at a minimum for the short-term contributor that wil
do a lot of good now but will not be so high as to endanger for th
long run the principle that benefits essentially should grow out o
work and contributions. - .
We have been talking about the extent to which social insuranc
can be expected to take care of the particularly disadvantaged. Th
other basic issue on the benefit side is how much social insuranc
should do for middle-income and higher-paid people. To what exten
is the Federal system to be thought of not as guaranteeing a mini.
mum level of living but designed to maintain in retirement a rea
sonable relationship of income to the past earnings of workers a
all levels—middle and higher earnings as well as low-income levels'
There is now widespread acceptance that our arrangements for re
tirement should be made up of a universal Federal system supple
mented by private pensions. There are, however, a number of un
resolved policy problems relating to specific aspects of the inter.
relationship of public and private plans. Perhaps the most funda
mental is the extent to which we can count on most workers having
the private supplement. There is a growing concern that, after a pe.
riod of rapid growth, the rate of growth of supplemental private plan:
is slowing down, despite the fact that a large share of the labor force
is not yet covered.
It probably is not true that we can count on most workers in the
future having protection under both social security and private pen.
sion plans. Just about everybody will have protection under social
security or the civil service system or railroad retirement—some 9:
percent of the aged do today. But at the present time it is estimated
that only about 18 percent of the aged 65 or over receive private pen.
sions (as annuitants or their wives). Even by 1980, it seems probable
private pension supplements will be available to less than a third of all
older people over 65. - - -
In addition to concern about the limited coverage of supplementa.
pensions, the President's Committee on Corporate Pension Funds and
Other Private Retirement and Welfare Programs pointed out in 1965
that many of the persons “covered” by private plans may not ultimate.
ly enjoy the benefits they anticipate. The Committee strongly en.
dorsed the further development of private pensions, as do I, but in-
dicated that, unless vesting of pension rights could be improved.
()}_I) AGE INCOME ASSURANCE—PART I 55
ºfunding provisions strengthened, better controls established over those
†exercising fiduciary functions, and certain other improvements im-
splemented, we might find the ultimate results disappointing for mil-
ºſions of workers.
; , For most of those who will have combined private and public re-
tirement incomes there will very likely be a reasonable relationship
$of benefits to previous earnings. There is less reason to be optimistic
about the situation of the remainder of older citizens. We need to give
isome careful thought, it seems to me, to ways in which we can assure
#that post-retirement benefits will be adequate for persons who do not
have a private pension supplement—so that the income of such people,
in all likelihood the great majority of workers, is reasonably related
to their previous level of living.
i In considering the proper course of development for either social
'security or the private plans, it is important to take into account
what effect a given course of action or inaction in one area will have on
the other. Although I think it is clear that we will have both ap-
proaches in the future and that both are needed, it is a very important
question whether we have obtained the right balance between the two
or whether one set of arrangements should be encouraged to grow at
the expense of the other. There is, in my opinion, a great need for more
analyses comparing the social efficiency of the two approaches. Such
analyses need to take account of similarities as well as differences. For
example, there has been considerable criticism of the incidence of the
social security payroll tax but very little recognition that the incidence
of the cost of private plans is undoubtedly very similar. Questions are
raised around the issue of supplying more than a minimum income
guarantee in a social security system that is compulsory but little
recognition is given to the fact that coverage under private pension
plans is not really a matter of individual choice and that the private
plans are institutional arrangements through which people earn pro-
tection as they work, just as under social security—automatically.
Although there are these similarities, comparative analyses would,
I believe, make clear the considerable differences between the arrange-
ments in terms of a worker's freedom to move from job to job, the
security of payment, the ability of the systems to adjust to rising price
and wage levels, the ability to provide universal coverage, and other
differences pertinent to social efficiency. I am inclined to think that a
proper mix between public and private systems calls for greater recog-
nition that the public plan must in itself be adequate for at least the
average .*.*.* means paying benefits for him related to his
level of living and considerably ...; the poverty line—with private
plans encouraged to supplement this broad base. .
REVENUE ISSUE
One of the most important issues in connection with long-range
financing of the social security program is whether, if benefits are to
be raised substantially, we are willing to have the contribution rate—
which applies equally to lower-paid and higher-paid workers—raised
sufficiently to cover the cost or whether some of the additional financing
should come from general revenues. : r . . .
56 OLD AGE IN COME ASSURANCE—PART I
There is some leeway for improvement in the future without a Gov-
ernment contribution and without increasing the contribution rate.
First of all, the base to which the rate is applied can be signficantly
increased, an approach which would have the additional effect of mak-
ing the program more effective for the somewhat above-average earner.
But leaving this point aside, I don’t believe there is general realization
of the extent to which the present financing would allow for increased
benefits as wage levels rise. Because of the weighted benefit formula, if
the maximum earnings base is increased somewhat from time to time
(it does not have to be increased proportionately to increases in
earnings levels for this purpose), contribution rates in present law
will produce sufficient income to considerably more than keep bene-
fits adjusted to future increases in prices. Of course, it may well be
that in America we will want to increase benefits substantially more
than can be financed by a higher earnings base and out of rising earn-
ings. If we do, it is at this point that the issue of a Government con-
tribution will be seriously considered.
A Government contribution comes up in connection with both of
the matters already discussed—that is, making the system more ade-
Quate for the poor and improving the system for average and above-
average earners. If benefits at the lower wage levels are to be substan-
tially higher than they are, the most disadvantaged need more of a
subsidy. And those at average and above-average earnings levels do
not want too much of the subsidy to come from payroll contributions
that would otherwise be available for benefits of one kind or another
to them.
OTHER UNRESOLVED PROBLEMs
The broad policy issues discussed thus far are certain candidates
for the agenda of the next Advisory Council on Social Security, which
must be appointed early in 1969. It will ponder as well some other as
yet unresolved problems. -
One of these is early retirement. There is as yet no adequate under-
standing of the extent to which we are developing a problem of low
benefits under social Security arising out of the provisions for ac-
tuarial reduction of benefits when people retire before age 65. More
than half of all people now retiring do so before age 65 and there-
fore get reduced benefits. The amounts are very substantially below
what they would get if they waited until they could receive their bene-
fits in full. The evidence indicates that generally they claim benefits
early because they cannot any longer Secure employment or are in
ill health and unable to continue at their regular occupation, and they
thus have little real choice. . .
The average benefit for men who take the actuarial reduction is
$15 to $20 a month lower than the average benefit being awarded to
those retiring at age 65 or above. In the long run, if allowed to con-
tinue, such a situation might actually reverse the long-range trend of
reduction in the old-age assistance rolls. On the average, the longer
a person is in retirement, the more likely he is to have used up what-
ever resources he took with him into retirement, and the more he
becomes wholly dependent on his social security income. Thus, those
people taking early benefits may later on have to apply in increasing
numbers for assistance. Since 1950, largely because of social security,
OLD AGE INCOME ASSURANCE—PART I 57
the proportion of the aged receiving assistance has been more than cut
in half, dropping from 22 percent to about 10 percent today. It would
be tragic to have this trend reversed.
The low benefits paid to those retiring early is a serious and de-
veloping problem. It may require some modification of the actuarial
reduction provisions, or perhaps some liberalization in the disability
program as it applies to older workers would be helpful.
Another issue involving the disability program is whether it should
take on somewhat shorter-term illness, say by reduction in the waiting
period for disability benefits from 6 to 3 months and dropping the
requirement that the disability must be expected to last for at least
12 months. -
Health insurance is, of course, very new. We have recommended
the inclusion of the disabled social security beneficiary. Should other
Social security beneficiaries—widows and orphans—be included later
on : Is extension of the program to cover prescription drugs feasible
and desirable? What can be done about incentives for efficiency in
the delivery of quality service by institutions? What can be done about
helping to control the increasing cost of medical and hospital care?
It seems likely that the basic protections provided by the social
Security system will continue to be adjusted to economic changes in
the future as they have been in the past. We have not as yet, however,
resolved the important question of whether or not the adjustment
process,is to be entirely on an ad hoc basis as in the past, or whether
the adjustments should, in part, be made automatic by relating benefits
not to a career average but to, say, a high 5 or 10 years, or perhaps
even by introducing automatic increases in benefits after people come
on the rolls,
These are all important issues and there are many others of, per-
haps, lesser importance.
CoNCLUSION
As over the next several years we consider the next steps to be
taken to improve the economic Security of the American people, I
believe that the method of social insurance will be called upon to do
an even bigger job than it is doing today. I believe this is true because
it is greatly advantageous to build on a going system of universal
application, based upon principles that have wide acceptance and have
proven enduring. At the same time, I believe we will have to ask our-
selves what is appropriate for social insurance and what is not. The
idea of insuring against the loss of work income has wide application
in any attempt to improve our economic security arrangements. But
the institution of social insurance should not be expected to cure the
problem of income deficiency singlehanded, nor should its failure to
do everything make us value less the great contribution to security
that this institution can appropriately make.
In my judgment, solutions to the many-sided problem of income
deficiency will be found not in a single program but in a variety of
programs—both public and private. In this field, the simple, single
answer—while intellectually appealing perhaps—will not produce
satisfactory results. . * . - . . . .
ECONOMIC SECURITY IN OUR FREE SOCIETY
BY ANDREw A. MELGARD*
The search for economic security is universal and continuous. We are
witnessing in this 20th century an intensification of that great human
drive that all individuals and families have to achieve financial se-
curity. To the surprise of many, affluence does not decrease economic
Security ambitions or needs. It increases them. As standards of living
rise, the desire and need to protect what has been achieved becomes
greater.
In our free Society, we have developed a mixed approach to provid-
ing economic security throughout the lifetime of an individual. We
have various institutions and mechanisms which help to provide Sav-
ings, homeownership, capital accumulation, insurance and income
maintenance. Individuals, employers, unions, financial institutions, and
all levels of government share in the responsibility for the success of
this great, interdependent system.
This complex system we have developed for meeting economic Se-
curity needs is a part of our free enterprise system. Just as the desire
for economic goods and services is unlimited, so is the search to satisfy
economic security needs and demands. Individual savings, investment
and insurance; social Security, tax policy and public assistance; em-
ployer-provided fringe and employee benefits; intrafamily and charita-
ble aid all contribute to meeting these needs. The component parts of
our economic security system are not perfect. They are simply the most
successful institutions yet devised by human minds to provide eco-
nomic security. The end result is that our free Society’s high standards
of living and high levels of economic security are the envy of the rest
of the world.
Our old age income assurance systems involve an entire spectrum of
issues. It is difficult to isolate these issues from the entire fabric of
our complex economic security system that protects individuals and
families throughout their lifetime. When an individual retires, he
lives on the sum total of everything he has accumulated during a life-
time. His economic comfort in retirement reflects, to a large degree,
both the economic security steps taken throughout his life as well as
the manner in which the entire economic system he worked in has
helped him to have an opportunity to achieve financial security in old
age. -
Old age income assurance issues are, therefore, but one part or aspect
of a much larger issue that must be answered in the years ahead. How
will responsibility for the economic security of the individual be
shared by government, the employer and the individual himself? This
is a major question that will occupy us during the closing one-third
of the 20th century. It is obvious that, during the next decade,

*Senior Associate, Human Resources Development Group, Chamber of Com-
merce of the United States.
58
OLD AGE INCOME ASSURANCE—PART I 59
there will be a great dialog on economic Security issues. The ques-
tions raised will have serious Social, political and economic impli-
cations. -
The decisions made as a result of this national dialog will help shape
the kind of government, economy, family life, and citizenry we will
have by the close of this century. These decisions will affect the rate of
our new capital formation and the degree to which these funds can
help us meet national goals such as price stability, full employment and
economic growth. The extent of freedom for the collective bargaining
process to operate in our economy will be decidedly affected by any
push for further Federal control of the private pension and related
employee benefits areas. Of key importance will be the extent to which
management retains discretion to provide flexible, tailormade employee
benefits and pensions to help meet the overall economic needs and de-
mands of various groups of employees. Of paramount importance will
be the amount of freedom the individual retains in our Society to man-
age and control the economic value of his own life.
The immediate need would appear to be for a broader and more com-
prehensive understanding of our complex economic security system.
Elected representatives, Federal officials, academicians, employers and
union leaders will all benefit from a more precise knowledge of how
our public, private and individual efforts to achieve economic security
are working together today and what can be expected from them in
the near and long-range future. The need for further research and
study will be evident. Equally clear will be the dangers of competition
from the Federal Government to take over more and more control of
employer, union and individual efforts. What will be obvious is the
necessity for cooperation among public and private programs so that
the individual assurance of economic security may be satisfied with-
out any diminishment of individual economic freedom of choice and
opportunity.
For all these reasons, the Joint Economic Committee's symposium
on issues and alternatives in providing old age income assurance is
most timely. The compendium of papers to be published by the com-
mittee will provide a foundation for a true national dialog on old age
income and related economic security issues. The Chamber of Com-
merce of the United States is pleased to present some of its views on
some of these issues in these remarks. - * . .
THE GRowTH OF ECONOMIC SECURITY FOR THE INDIVIDUAL
The average 20th-century American survives on income—earned
income. The economic value of the individual’s life—his ability to earn
income and Save—is subject to certain hazards. The major ones are
death, disability, old age, and unemployment.
Until the 1930’s the responsibility for meeting these hazards was
largely left to the individual. With the economic breakdown that came
. the Great Depression, government and the business community
assumed more responsibility in these areas through collective ap-
proaches. Social security is a mandatory collective approach to provide
a “floor-of-protection” to help the individual find economic security.
Fringe benefits, of which pensions are a part, are the collective ap-
proach used by an employer for all his employees.
83–200—68—pt. 1–5
60 OLD AGE INCOME ASSURANCE—PART I
Today, in his quest for economic security, the average American
enjoys three layers of protection. The bottom layer is provided by so-
cial security. The middle layer is the fringe benefits provided by his
employer. The top layer is what he does for himself—homeownership,
insurance, annuities, savings accounts in banks and building and loan
associations, mutual funds, common stocks, corporate and govern.
ment bonds, property or business ownership, and other forms of Sav-
ings and investment.
Our allocation of funds to security mechanisms are estimated to have
increased more than tenfold since 1940. This is massive growth and
positive response to the economic security needs of our citizenry. It
has been estimated, for example, that aggregate social security taxes for
calendar year 1967 will exceed $25 billion. This would be a 50-percent
increase over the 1964 tax collections of about $17 billion. The final
figures for this year could be increased depending on the progress of
H.R. 12080 in the Congress. .
Fringe benefits now cost American businessmen a staggering $75
billion plus each year—four times as much as the dividends paid to
stockholders. Furthermore, the most recent chamber survey shows that
fringe benefits costs are shooting up almost twice as fast as wage rates.
In the area of pensions alone, employers have put almost $100 billion in
assets in trust to help guarantee income and financial independence
to employees in retirement. Currently, about 3 million persons are
receiving monthly checks that amount to $3 billion a year from these
private retirement plans. These plans continue to grow each year in the
number of employees covered, the benefits offered and the assets placed
in trust.
Increases in personal savings and investment match the growth in
social security and employee benefits. Department of Commerce figures
show personal savings for the year 1966 reached a new all-time high of
$27 billion. In 1966, approximately 63 percent of the Nation's homes
were owner occupied, well up from 43 percent in 1940. Over-the-counter
Savings in our banks, savings associations, and credit unions totaled
$325 billion by the end of last year. Premium receipts of life insurance
companies totaled $26.5 billion for 1966 and we now have over a trillion
dollars of life insurance in force. Meanwhile, each year sees more
Americans buying and holding common stock and other securities.
The remarkable part of this phenomenal advance during the last
30 years in the provision for economic security is the newness of it all.
Social security is only 30 years old and the system is not really expected
to fully mature for many years. Private pensions were in existence
long before social security but the great growth has occurred mainly
during the last 25 years. Related employee benefits began to soar in
volume only beginning about 1950. Furthermore, the continuing in-
genuity of American financial enterprise can be seen in the new ap-
proaches to savings and investment as evidenced by such diverse de-
velopments as the monthly investment plan of the stock exchange, the
variable annuities devised by life insurers and the application of the
mutual fund concept to investment property through the organization
of real estate investment trusts. - - -
There has been some concern whether employer-provided private
pensions cause covered employees to save less money. One prevailing
notion was that if a person was covered by a pension plan it would
OLD AGE INCOME ASSURANCE—PART I 61
weaken his motivation to save and induce him to spend more liberally.
tRut in a recent study made by George Katona of the University of
Michigan's Institute for Social Research, it was concluded that cover-
age by private pension plans actually stimulates individual savings. So
the notion that Americans will tend to reduce their personal savings by
ithe amount they and their employers put in pension plans has been
!contradicted.
: A somewhat similar research project was conducted by Philip Cagan,
and the results published by the National Bureau of Economic Re-
isearch. Mr. Cagan's analysis indicated that when a household comes
under a pension plan there was no offsetting reduction in other forms of
SaVings.
Private pensions, therefore, do not reduce other individual or family
savings. In fact, they stimulate greater savings effort.
THE OBVIOUS CoxsDNSUs
The search for a consensus on the way to achieve economic Security
and old age income assurance should be a short one. There is an obvious
consensus. Our citizenry likes what it now has.
First, Americans expect social Security to provide a floor-of-pro-
tection against want. They look to Congress to periodically review
:OASDI benefit levels to maintain this objective. There is an obvious
concern about the effect of increased social Security taxes on employers,
employees and the self-employed. We see no support for changing
social security into a poverty program, or making it a complete retire-
ment system for all levels of income, or for using general revenues to
finance social security benefit increases.
Second, American employees enjoy pensions and fringe benefits.
They want larger pensions and more fringe benefits. A day-to-day
review of wage negotiations shows the obvious interest of unions and
employees in improving fringe benefit programs. We see no evidence
for any demand for Federal controls or restrictions that would dimin-
ish the flexibility of these programs or limit the free collective bargain-
ăng process.
: The National Chamber follows a positive, clear-cut approach on pri-
wate pension plans. Chamber policy calls for maximum encouragement
for the continued growth and expansion of private pension plans. At
the same time, every effort is made to ease or prevent any needless gov-
ernmental restrictions which will hamper the growth of pensions. In
short, the business community wants to see private pension plans im-
; and their benefits spread to more employers and employees.
Employers and employees should remain free to work out pension
lan arrangements and other fringe benefits best suited to their own
eeds and requirements.
# It must be more clearly understood that an employer has a given
sum of money to devote to programs designed to ease the economic
hazards facing all his employees—death, disability, hospitalization,
unemployment, and retirement. The amount of these available funds
will vary from company to company and from industry to industry.
In distributing these funds, the employer must consider the economic
needs and demands of all his employees, including young, middle-aged
and older workers, male and female employees. Often young single

62 OLD AGE INCOME ASSURANCE—PART I
men and women prefer more take-home pay to fringe benefits. Young
married men with children are more interested in life and hospitaliza-
tion insurance than far-off retirement pay. Some workers want longer
vacations. Older workers are interested in pension and other retire-
ment benefits. The employer, either unilaterally or through free col-
lective bargaining, must reconcile these conflicting demands and work
out the fringe benefit package, in correlation with public benefits, such
as social security and unemployment compensation. If the Federal
Government moves into the picture, both employer and employee dis-
cretion and choice will be limited. The Government will be saying
unless you can set up a pension plan that meets all of these require-
ments, don’t set up any at all. The Government, in effect, will be decid-
ing what the employee wants and what the employer can afford.
All indications point to the continued growth of private pensions
and related fringe benefits—if they are granted enough flexibility and
room to grow.
One of the major concerns of the business community is for the
extension of pensions to those employees not now covered. The con-
cern with further Federal controls over pensions is that, because of
increased costs and other problems, the growth of private pension plans
will be slowed. Federal restrictions will only guarantee that a large
number of employees, not now covered, will not even have an oppor-
tunity to come under a pension plan. -
It is generally considered that the two largest areas where pen-
sion growth is needed are among the self-employed and smaller
corporations.
n April 18, 1966, in a committee print entitled “Data on Self-
Employed Retirement Deduction for Taxable Year 1964,” the Com-
mittee on Ways and Means of the House of Representatives published
a Treasury Department report on H.R. 10 plans. Members of Congress
were shocked to learn that less than 40,000 persons had availed them-
selves of the benefits provided by the Self-Employed Tax Retirement
Act. It was well known that there were over 6 million self-employed
persons who employed over 9 million individuals. Some authorities
have estimated that close to 20 million are self-employed or work for
the self-employed. - -
Although the Treasury Department strongly objected to changes in
the law, it was obvious to the Members of Congress that restrictive tax
provisions were destroying the opportunity for millions of persons in
the self-employment segment of our economy to build effective retire-
ment income. By an overwhelming vote of 291 to zero, the House of
Representatives moved to ease the inequitable and restrictive tax pro-
visions contained in the Self-Employed Tax Retirement Act. Subse-
quently, the Senate voted favorably and the easing of these tax pro-
visions has been provided for in Public Law 89–809 of the 89th Con-
gress. The removal of these restrictive tax provisions will not be effec-
tive until the end of 1967. Already, additional widespread interest in
creating H.R. 10 plans has been in evidence. .
Among smaller corporate employers, the adoption of a revenue pro-
cedure that would make it easier and less time consuming for smaller
employers to start pension plans would do much to spread the benefits
of private pensions to more employers and their employees. We under-
stand that the Internal Revenue Service has been studying the possi-
OLD AGE INCOME ASSURANCE—PART I 63
bility of adopting a procedure that would permit the filing of master
and prototype pension plans for smaller corporate employers. Such a
procedure, if adopted, would greatly encourage those employers who
do not have pension plans to establish one. . .
Third, in the area of individual savings, it is obvious that total
savings and investments by individuals are increasing. The two major
complaints of Americans in this area are about inflation and increased
taxes. Despite substantial wage increases, the, inflation we suffered in
1966 and which continues in 1967 seriously hurts the value of the
saved dollar and fixed retirement incomes. When the effect of inflation
is coupled with increased taxes at various levels of government, the
effect on the average American is to make him feel that he is standing
still or losing ground. -
The Chamber thinks that all individuals should be encouraged dur-
ing their working lives to build private retirement income out of earn-
ings either on an individual or group basis. Restrictive tax provisions
impeding this should be modified in an equitable manner. Individuals
should be permitted to exercise maximum freedom of choice in the
selection of savings and investment media for personal or group retire-
ment planning.
In summary, although disturbed by inflation and increased taxes,
there seems to be an obvious acceptance of social security as a floor
of protection, plus a great desire for freedom to secure fringe and
pension benefits from employers and to save and invest on a personal
or family basis to achieve economic security goals. Although the
growth and refinement of our economic Security institutions are ex-
pected in the future, we observe no demand for radical departure from
what we have thus far achieved.
PROBLEM AREAs
Despite the tremendous gains that have been made and are continu-
ing in all areas of individual and family economic Security, serious
problems remain. The two groups of citizens deserving and receiving
a priority of attention are the poor and the elderly in our Nation. We
have always had, of course, a special line of defense for those individ-
uals who either cannot or do not readily find it possible to secure or
maintain sufficient income. Our welfare programs have assisted these
citizens to obtain the basic, or bare, essentials. In addition, our welfare
aid is abetted by intrafamily income sharing and help from private
charity. - - . " -
To identify and provide solutions in the poverty area, the Chamber
of Commerce of the United States created a special task force of busi-
nessmen. The Task Force on Economic Growth and Opportunity is
made up of more than 100 chief executives of major American corpo-
rations who have been asked by the Chamber to make serious inde-
pendent studies of important domestic problems. It has been examin-
ing poverty in America. The Task Force is an independent group
making independent studies. It is not bound by present or past policies
of the Chamber. Conversely, the National §. is in no way re-
quired to endorse Task Force recommendations. In pursuing its
poverty studies, the Task Force has made maximum use of expert
advice. Three reports on poverty have so far been published. The first,
64 OLD AGE INCOME ASSURANCE—PART I
entitled The Concept of Poverty, attempts to define more clearly what
we mean by describing someone as “poor,” to assess the dimensions of
the poverty problem in the United States, and to develop a general
"Pºº to the problem asidentified. .
he second report, entitled Poverty: The Sick, Disabled, and Aged,
analyzes specifically the medical and social needs of those excluded
from the labor force by sickness, disability, or old age. It puts forward
28 recommendations aimed at mitigating the economic impact of these
circumstances and at improving the quality of life for those inescap-
ably afflicted.
The third published report is entitled The Disadvantaged Poor: Ed-
weation and Employment. It analyzes the difficulties faced by those
whose contribution to society is minimized through racial discrimina-
tion, insufficient education, inadequate employment opportunities, or
Some combination of the three. It makes 28 recommendations aimed
at upgrading the contributions and earnings of the disadvantaged.
Reports on individual and family security and on rural and regional
poverty are now in preparation.
These reports have been distributed to Members of the Congress and
officials of the executive branch of the Federal Government, to uni-
versity social science departments and libraries, and to interested in-
dividuals and organizations around the Nation. More than 20,000 copies
of the first three reports have been distributed, and they are still in
strong demand.
Critical response has been excellent. The reports have been praised
by responsible public and private individuals of all political persua-
sions and have been favorably reviewed in leading publications,
This Task Force has acted in the conviction that the business com-
munity can play an important role in combating poverty. It has em-
hasized that poverty is among our most important domestic prob-
ems. It has determined that, by and large, America's poverty problem
is not a subsistence problem, but rather a problem of relative poverty.
The Task Force does not find a need of radical economic change.
Expert after expert, when consulted by the Task Force, has em-
phasized that income and place in the Social and economic Scheme can
best be restored by providing the employable poor with training and
job opportunities. These have the effect of bringing the poor into the
mainstream of the economy, rather than merely paying them to re-
main outside. At the same time, authoritative opinion has suggested
that Some of the poor—the aged and totally disabled, for example,
cannot take advantage of these opportunities, no matter how attrac-
tively presented, and must depend on a humane social system for even
a minimum standard of living. The Task Force has made far-reaching
proposals designed to offer enhanced earning power to those whose
circumstances have prevented the full use of innate talent. -
The interest of the Task Force in alleviating poverty is founded in
hard economic realities, as well as in its concern for social justice. An
enterprise economy operates most efficiently and productively when its
resources, human and material, are free to flow to their most produc-
tive uses. Waste in human resources is at least as costly as imprudent
use of physical resources. Poverty concerns the Task Force because of
its implications in lost output, as well as its cost in human misery. A
growing, dynamic economy benefits all of us. Making optimum use of
OLD AGE IN COME ASSURANCE—PART I 65
our human and material endowment enables us to better afford to Sup-
port the necessarily nonproductive. The Task Force finds that abun-
dance with dignity can best be achieved by enabling more of our
citizens to earn a fair reward for productive work.
To stimulate further thinking on possible ways to combat poverty,
the Chamber held its National Symposium on &º Income in
December 1966. This is another example of the business community’s
recognition and acceptance of its responsibility for developing and
applying sound workable solutions to poverty and its willingness to ex-
plore all new proposals. Although the concepts of guaranteed income
and negative income tax programs are novel, the suggested advantages
and disadvantages of such ideas were explored to see if even what
are considered radical departures have anything to offer in the poverty
fight.
"Through the achievements of our private enterprise system, the
businessman has always been engaged in a crusade for affluence. Per-
haps some of the negative aspects of the war on poverty can be cured
through a broader recognition of the success the business community
may achieve in helping to identify and solve poverty problems.
The Second group of Americans who have required a high priority
of attention are the elderly. There is an overlapping of the problems
of the poor and the elderly poor. Young and middle-aged poor people
end up as the elderly poor and, of course, poverty among the elderly
is as serious a problem as among any other age group.
Old age income assurance and retirement income have become much
more important issues during the last 20 years. There are many reasons
for this. First of all, through the modern miracles of science and medi-
cine, our average age span has increased phenomenally. Second, we now
have 19 million people age 65 or over, a sizeable percentage of our total
population. Third, as we changed from a rural, agricultural econom
to an urban, industrial and service economy, each individual Ameri-
can's dependence on steady income to provide for the necessities of life
became greater. Finally, in addition to social and economic factors,
there has been a political discovery of the aged. The needs and wants
of 19 million elderly voters is of obvious concern to all our elected
representatives. -
Certainly we have a clearer understanding today of the problems
of the elderly than we did just a few short years ago. Yet, it is im-
portant to distinguish between the retirement income problems of
our present retired population and the problems that will face those
still working.
Disregarding the very elderly, our present retired citizens are be-
tween the ages of 65 and 90. This means most of them retired between
about 1942 and 1966. It is important to keep four factors in mind
about these particular citizens: the depression, the post war inflation,
the growth of social security, and the growth of private pensions.
Their savings and retirement income were seriously hurt by the de-
pression and inflation; they got in on only the beginnings of social
Security and private pension plans. Many a man in this group will see
a grandson or granddaughter graduate from high school or college
this year, immediately begin to work and receive a starting income
larger than the grandfather ever earned in his lifetime. - .
66 OLD AGE INCOME ASSURANCE—PART I
The new affluent “generations” have higher incomes, higher social
Security benefits, more private pensions, more savings and invest-
ments. It should be clear that solutions for retirement problems for
the present affluent working generations should not be based on the
problems that beset our present retired generation. For example, two
relatively new problems are early retirement because of technological
advances, including automation, and post-retirement job opportunities
for pensioners who wish to continue working beyond what are con-
sidered normal retirement ages. We will not be able to use the thinking
of the 30's and depression solutions to help retirees to solve the prob-
lems that will be faced by future retirees of our more “affluent”
Society. - - -
. . . PRIVATE PENSION PLAN ISSUES
PRESIDENT'S COMMITTEE ON CORPORATE PENSION FUNDS AND OTHER
- PRIVATE RETIREMENT AND welfaRE PROGRAMs
In March 1962, following his Economic Report to the Congress,
President Rennedy appointed a cabinet level committee to review leg-
islation and administrative practice relating to private retirement and
welfare programs. The President wanted a report by November 15,
1962, to use in drawing up the administration’s legislative program
for the 1963 session of Congress.
A provisional report of the committee was studied by the Presi-
dent's Advisory Committee on Labor-Management Policy. This com-
mittee found that: “Wide latitude should be permitted in the estab-
lishment of private pension plans consistent with the concepts of the
free economy and the divergent needs and circumstances of various
firms and industries.” -
Individual members of the committee made specific, critical com-
ments about the recommendations in the report. For example, Henry
Ford II, Chairman of the Ford Motor Co., said, “I believe it follows
that the widest possible scope should be given to private decision-
making in the design of private pension plans, consistent with the
public interest in preventing abuses. The present Treasury regulations
covering .# pension plans already afford protection against
abuses, and to my mind the committee has not been presented with
convincing evidence of the need to change them in the respects recom-
mended in the report.” - -
Arthur F. Burns, President of the National Bureau of Economic
Research, Inc., said, “Although I have sympathy with the spirit of
the recommendations in regard to funding, I feel it inadvisable to
endorse any specific proposal until facts are fully developed on the
cost implications for relatively small and financially weak firms.”
W. Anthony Boyle, President of the United Mine Workers of Amer-
ica, said, “The proposed report to the President is based on the er-
roneous concept that governmental specification of standards in pri-
vate pension plans can be mandated by public law to a similar extent
that such standards are fixed by law in public pension plans.”
Despite such criticism. the final report of the President's Committee
on Corporate Pension Funds was released in January 1965. It con-
tained a large number of highly controversial recommendations for
possible changes in the Federal laws and regulations affecting private
OLD AGE INCOME ASSURANCE—PART I 67
pension plans. Essentially, the report contained a strong vote of
confidence in the manner in which private pension plans had been
conceived, established and administered without government involve-
ment. However, the report caused widespread concern because it ap-
peared that the Federal Government was preparing to use its tax
powers to further regulate private pension plans. It was feared that
the operation and growth of the private pension plans system would
be harmed if the recommendations were enacted into legislation.
Although the President's memorandum called for a study of private
welfare (health and insurance) plans and programs, no such study
was, or is, being made. In addition, President Kennedy had suggested
that since the Welfare and Pension Plans Disclosure Act had been
amended in 1962 to provide enforcement procedures and penalties for
embezzlement, these subjects could be excluded from the committee's
consideration. Yet, the first administration bill arising out of this re-
port's recommendations were the proposals made in 1967 to amend
the Disclosure Act. The memorandum also asked for a study of how
retirement and welfare funds affect efficient manpower utilization
and mobility. Although the Report went into the problem of mobility.
there is little evidence that pensions rank as a significant factor in this
area. Reluctance to sacrifice seniority is the principal reason for work-
ers’ immobility. A study in the March 1967 edition of the Social Se-
curity Bulletin states that any evidence that pension rights inhibit
mobility “is very weak.” This fact has an important bearing on how
much need there is for early vesting or portability of pensions.
The report concluded by calling for comprehensive long-range
studies and research.
THE INTERAGENCY STAFF COMMITTEE
In 1966, the interagency staff committee was reactivated. This com-
mittee is comprised of representatives from five Federal Departments
and four Federal agencies: Commerce, HEW, Justice, Labor, Treas-
ury, Bureau of the Budget, Council of Economic Advisers, Federal
Reserve System, and Securities and Exchange Commission. The staff
group is still involved in developing various study papers on the gen-
eral question of public policy in private pension plans. A number of
issues are still under active consideration, and this group is not making
available to the public any additional materials at this time. The
membership of this group shows how fragmented the bureaucratic
approach to an issue like private pension plans can be.
The only clues as to the present thinking of this committee came in
a talk by Stanley S. Surrey, Assistant Secretary of the Treasury for
Tax Policy before the American Pension Conference last May. Al-
though Mr. Surrey made it clear that he was not speaking for the ad-
ministration or other Government officials, he suggested the need for
10-year vesting, 25-year funding and some type of Federal reinsurance
for all pension funds. He referred to these proposals as initial “build-
ing blocks” for “pension reform.” A brief examination of these pro-
posals may be helpful. . . . . . . . . . .
Westing.—Mr. Surrey proposed 10-year vesting. In some cases, serv-
ice before age 25 could be disregarded. New plans would not be required
to meet any vesting standard for employees leaving during the first
68 OLD AGE INCOME ASSURANCE—PART I
5 years. Transitional features would stretch out the full impact for
12–13 years. Other optional features were suggested by Mr. Surrey.
The majority of private pension plans provide for vesting; the
trend is to more and earlier vesting; it is considered desirable. Mr.
Surrey would make it mandatory. There was no discussion of the cost
of mandatory vesting. There would be no latitude for collective bar-
gaining (other desirable features in pensions might be preferred by
unions or employees before 10-year vesting is reached). No evidence
was offered that the absence of 10-year vesting is an important factor
affecting labor mobility.
There was no discussion of contributory plans. For example, it has
been estimated that about 90 percent of Federal employees who leave
Federal service withdraw their contributions to the civil service retire-
ment system, preferring not to vest. Would employees be locked in on
10-year vesting? There was no discussion of the suggested Federal
portability fund which would receive the assets of the vested pensions
of employees who left their employer. Full consideration was not given
to the fact that because of cost factors earlier vesting will help depart-
ing employees at the expense of those who remain to retire. Finally,
there is the question of whether the cost of 10-year mandatory vesting
would result in fewer private pensions for our American citizenry.
Funding.—Under the Surrey proposal, plans would be given 25
years to reach a goal of “assets equal to vested liabilities.” Each plan
would have a funding target to meet each year in terms of a percentage
of assets at market to vested liabilities. This target would be increased
at an annual rate equal to 47 percent of vested liabilities. Adjustments
in the schedule would be permitted to account for amendments to the
plan which substantially alter liabilities. To ease the transition for ex-
isting plans a more gradual schedule would be applied for the first few
years after the legislation is enacted. A report would have to be made
to the Government every 3 years. Penalties would be applied to plans
that were unable to meet the funding requirements. Mr. Surrey men-
tioned the study of funding being made by the Pension Research Coun-
cil of the University of Pennsylvania. This study will be completed
toward the end of this year. The Department of Health, Education,
and Welfare has contributed funds to this major research project. It
is difficult to understand why the Federal Government should get
locked in on funding legislation before evidence is available upon
which a sound judgment could be based.
The social security trust funds have assets slightly over $20 billion
for liabilities far exceeding those of private pension plans which have
assets of close to $100 billion. The civil service retirement fund for Fed-
eral employees has unfunded liabilities of $50 billion. When the Pen-
sion Research Council's study is released, it will be interesting to com-
pare the funding performance of private plans with the performance
of Federal and other governmental plans.
No one disagrees with the importance of proper funding of pension
plans. Present Treasury requirements, in most cases, are that minimum
funding must be equal to current service costs plus interest on past
service costs. In the absence of evidence of large-scale underfunding,
why should Federal requirements be increased? Furthermore, it is
difficult to see how the plan proposed would not have to be based on
specific actuarial and cost assumptions, yet it is claimed the Govern-
OLD AGE INCOME ASSURANCE—PART I 69
iment will not get involved in this area. Such added requirements could
lead to pension fund investment control. Finally, there has been no
full discussion of what effect such requirements would have on the
establishment of new plans or the liberalization of existing plans. Is
this not an unnecessary burden that could well deprive many American
workers of the opportunity for more and larger pensions?
Jºeinsurance.—Mr. Surrey proposed that a common fund should be
established to meet any particular plan's unfunded liabilities in the
event of its termination while moving toward full funding of vested
liabilities. Iºach plan would make contributions based on the amount
of its unfunded vested liabilities. If a plan were terminated for busi-
ness reasons, amounts from the common fund would be available to
make up the difference between its funding target and vested liabilities
not covered by plan assets. The termination protection would not apply
to the extent an employer had not met his prescribed funding target,
either because of a deficiency in contributions or an abnormal drop in
the value of the assets in the fund. . .
The most recent study of termination of pension plans covers the
period 1955–65. This study was supposed to prove the need for rein-
surance. Conducted by the Bureau of Labor Statistics and published
ir, the June 1967 edition of the Monthly Labor Review, it shows that
about 20,000 employees a year can be affected by terminations—about
ore-tenth of 1 percent of total pension plan coverage. These figures
include business mergers and sales where employees are transferred
to other pension plans and suffer no loss. Also included are business
dissolutions where the pension plan is fully or almost fully funded and
there is no loss, or only a nominal one, to plan participants of bene-
fic aries. The study concludes as follows:
“Reasonably accurate estimates of the magnitude of benefit losses
cannot be obtained from any Government reporting system now in
; operation. Unless such reporting systems are changed, only a special
; Survey program can produce more reliable data.”
Therefore, we still do not appear to have the basic facts required to
i support sound judgment on the need for Federal reinsurance and re-
; lated proposals.
INTERNAL REVENUE SERVICE ANNOUNCEMENT 66-5s
. To be designated a qualified plan under the 1954 Internal Revenue
Code, the benefit structure of a retirement program cannot discrimi-
: nate in favor of executives or highly paid employees. A formula is
; used to determine whether any such prohibited discrimination exists.
Under this formula, an employer is permitted to take into account ben-
; efits provided by the social security system. The Cabinet Committee
Report has recommended changes in this area. -
In announcement 66–58, dated September 19, 1966, the Internal
Revenue Service requested background information from interested
persons for developing a new integration formula. The announcement
contained a new suggested IRS formula. If such a formula were
adopted, existing pension plans would have to be changed although
they have been approved for tax qualification as being non-discrimi-
natory. In addition, new plans, not yet approved, would have to meet
the new formula. - - . * . . . . . . . ;
70 OLD AGE INCOME ASSURANCE—PART I
. A new Treasury regulation in this area would affect virtually every
integrated pension or profit-sharing plan in the United States. Such a
new requirement could mean either an increase in pension costs by as
much as 40 percent or more, in some cases, or benefit decreases of 25
percent or more for some employees.
Over 3,000 employers and pension experts responded to this request.
In January ſº, the Treasury Department temporarily shelved its
newly proposed formula and appointed an advisory panel to furnish
advice to the Department on this problem. This panel will restudy the
entire matter, evaluate the suggestions made and take into account ac-
tion on pending social security legislation before making final recom-
mendations.
(After 30 years, it is interesting to note that our Federal civilian
employees are still not covered by Social security nor do they pay social
security taxes. Changes in social security taxes and benefits and prom-
lems of integrating social security with another pension system do not
personally affect Federal Government employees. The departmental
officials who help develop Administration policy have not ordinarly
had the month-to-month pocketbook discipline of seeing social security
taxes withheld from their take-home pay. They are virtually in the
position of saying “Do as we suggest, not as we do.” Although various
proposals have been made over the years to bring Federal civilian em-
ployees under the social security system, they have all failed.)
THE FEDERAL ADVISORY COUNCIL ON EMPLOYEE WELFARE AND PENSION
BENEFIT PLANS
The Federal Advisory Council on Employee Welfare and Pension
Benefit Plans was created by Congress when it passed the Federal
Welfare and Pension Plans Disclosure Act. Congress specified that
the Council should include representatives of the general public, labor,
management, the insurance field, the corporate trust field, and other
interested groups. The duty of the Council is to advise the Secretary
of Labor on how he should carry out his functions under the Disclosure
Act. To retain control, Congress required that the Council's recom-
mendations be transmitted to the Senate and House each year when the
Secretary of Labor reports on his administration of the Disclosure Act.
The Council was asked last year to consider further changes in the
Disclosure Act. In December 1966, the Council unanimously agreed
“that Congress acted wisely in placing primary reliance in the original
1959 act and in the 1962 amendments on insuring integrity of plan
performance through meaningful public disclosure of plan operations.
The Council further believes that the will and intent of Congress as
expressed specifically in the 1962 amendments to the act with respect
to prohibitions against giving the Secretary of Labor any added
powers—‘to regulate or interfere in the management of any employee
welfare or pension benefit plan’—should be preserved.” -
The council wants to see all welfare and pension plans administered
in accordance with the highest standards of fiduciary conduct. The
Council does not think, however, there should be a Federal statute for
pension trustees unless it can be shown that “existing State law is .
inadequate and cannot be reasonably expected in the near future to
provide assurance of satisfactory fiduciary performance.”
OLD AGE INCOME ASSURANCE—PART I 71
Based on the recommendations of the council, it is clear that all the
; members are opposed to giving the Secretary of Labor additional con-
trols over private pension plans although they do wish to see any
# proven deficiencies in the Disclosure Act corrected. The council report
reflected a growing concern about burdensome and unnecessary Fed-
i eral regulation and interference in all employee benefit plans. In
effect, the unanimous report of this council was saying to the Federal
Government, “slow-down or stop” in your takeover of private pension
plans.
- CONGRESSIONAL ACTION
So far, over 30 pension bills have been introduced into the 90th Con-
*gress. In addition to possible hearings on the administration’s bill in
, the disclosure field, hearings may be held on various aspects of private
spensions by the Fiscal Policy Subcommittee of the Joint Economic
Committee and by various subcommittees of the Senate Special Com-
mittee on Aging.
Already, there have been at least six major hearings on pension
issues held among the Subcommittee on Employment and Retirement
Incomes of the Special Committee on Aging, the Senate Permanent
| Subcommittee on Investigations, the Subcommittee on Fiscal Policy
of the Joint Economic Committee, the Senate Finance Committee and
the Subcommittee on Labor of the Senate Committee on Labor and
Public Welfare. -- -
One of the most significant hearings was held by the Subcommittee
or, Employment and Retirement Incomes of the Special Committee
on Aging. In March 1965, Senator Randolph's subcommittee explored
the possibilities of extending private pension plan coverage. Chamber
testimony emphasized the importance of Government encouragement
for the establishment of new plans and freedom from hampering Fed-
eral restrictions. Finding No. 4 of this committee, which was contained
in the report issued in June 1965, stated: “The Federal Government is
not doing all it can do and should do to encourage and stimulate the
extension of private pension coverage.” Following that finding, the
subcommittee made a series of helpful recommendations. The specific
recommendations on the Self-Employed Individual Tax Retirement
Act of 1962 (H.R. 10 plans) were particularly significant in advanc-
sing the objective of this subcommittee: to provide more and better
private pensions and more adequate income for the elderly.
f ºmmendations No. 5 and No. 6 of this subcommittee were as
TOI IOWS . . . . . - - -
Recommendation No. 5.-The subcommittee makes no recommenda-
tion on the adoption or rejection of the recommendations in the report
of the President’s Committee, since most, if not all, those recommenda-
tions are outside the scope of this inquiry. However, it does recommend
that each of those recommendations be considered in the light of its
possible effect upon extension of private pension coverage and that
recommendations expected to have an adverse effect upon such exten-
sion be implemented only if there is reasonable expectation that the
resulting improvements to the Nation’s private pension system substan-
tially outweigh their adverse effect upon such extension. - -
Recommendation No. 6–This subcommittee recommends that the
President direct his Committee on Corporate Pension Funds and Other
72 OLD AGE INCOME ASSURANCE—PART I
Private Retirement and Welfare Programs to conduct a study on ex-
tending private pension coverage and to report on this subject with
recommendations for Sound, effective Federal actions to bring such
coverage to more Americans.
THE IREAL ISSUE
In the final analysis, of course, the specific details of proposed Gov-
ernment regulations and standards for private pensions and their
mechanical feasibility are not the real issues. The real issue is the
extent to which the private plan system will be forced into a Govern-
ment-dictated mold—and the extent that such rigidity may hamper
the growth of established plans and the creation of new plans. The
federalization of private pensions is a negative approach.
A positive approach lies in the search for methods for spreading
the benefits of private pensions to employers and employees who do not
now have them, and to give both employers and employees wide flex-
º in tailoring plans to their individual financial abilities and
€SII’éS. .
NATIONAL GOALS AND PRIORITIES AND THE ECONOMICs of CHANGE
Any consideration of the future of our programs to provide old age
income assurance must give full recognition to the manner in which
these programs relate to our national goals of economic growth, full
employment, and price stability. Any further Federal efforts in the
providing of old age income must assign a priority to these items as
they relate to other national goals such as urban development, educa-
tion, international aid, manpower retraining, natural resources and
many other important programs. (It is perhaps regrettable that our
Social accounting system for evaluating the cost of social ills is not
more advanced. Certainly it would be most helpful to compare the
cost of our various welfare programs with an evaluation of their out-
put.) Another difficult problem is to relate any changes proposed in
old age income assurance programs to the economics of change which
will effectus throughout the remainder of this century.
Recent Chamber studies indicate that we can look forward to sig-
nificant changes affecting our economy in the following general areas:
By 1985, we may have a population of 266 million with young
people making up the greatest part of this population growth.
rban centers, already so dominant, will play a much larger
role in America's future. As we become a Nation of multi-cities,
our rural population will decline. .
America's labor force will change drastically in the years ahead
and will be composed of more younger workers and more women
workers. Spending for new plant and equipment by American
business totaled $378 billion during the past 10 years, while the
labor force was growing by 9 million. With the labor force grow-
ing at a 70 percent to 80 percent higher rate during the next two
decades, and with considerably higher average investment per
job, the substantial rise in capital investment required is evident.
New, investment, averaging about $30,000 is required for every
new job opening in the national economy.
OLD AGE INCOME ASSURANCE—PART I 73
Our greatest asset—better educated Americans—will increase
substantially. The demand for educated workers will forge ahead
while occupations with the lowest educational requirements are
expected to show declines.
Our standards of living will continue to rise. The income pyra-
mid will become top heavy changing from a pyramid to a pot-
bellied stove. There will be smaller proportions of the population
in the lower income levels.
By the year 2000, we may have a population of 325 million, a
gross national product close to $4 trillion, and family consump-
tion averaging about $15,000 per annum at present prices.
The effects these changes will have on attitudes toward old-age in-
come assurance and the design and performance of our retirement
programs is difficult to foresee. Our present system of day-to-day im-
provements in pension plans made or bargained for in the market-
place has many advantages over any sweeping Federal design for
charting the levels of all future retirement pay.
We will see a larger growth in individual savings, investment, and
insurance and in employee benefit plans. This will probably be accom-
panied by a continuing effort to introduce more flexibility into the
entire package of employee benefits so that the benefits provided (or
selected) will more closely match the increasingly specialized needs
and demands of individuals and families. Social insurance cannot,
of course, provide this flexibility to meet individual, family, or special
group demand.
Our private programs, both individual and corporate, to provide
retirement income are an important source of savings. These institu-
tionalized savings are efficiently allocated in our economy as new capi-
tal funds. They increase productivity, assure economic growth, pro-
vide for full employment, and help maintain price stability. To a large
degree, these features are lacking in social insurance programs for
the redistribution of income.
We have been warned by Prof. Simon Kuznets of Harvard in his
monumental study entitled, “Capital in the American Economy: Its
Formation and Financing,” that the demand for capital over the next
Several decades will be large and that our supply of voluntary Savings
may not be adequate to meet this demand. Certainly, the economics
of change outlined above support this finding. In the concluding com-
ments to his study, Professor Kuznets wrote:
“First, the demand for capital over the coming two and a half to
three decades is likely to be large. Second, drains upon the national
product for current consumption by governments will continue to be
proportionately sizable and may well rise. Third, high levels of con-
sumption and the high secular propensity to consume by individuals
and households are likely to continue. Fourth, under the circumstances,
the supply of voluntary savings may not be adequate. Finally, infla-
tionary pressures may well continue, with the result that part of the
savings needed for capital formation and government consumption
will be extracted through this particular mechanism. Yet, extrapola-
tion of inflationary pressures over the next 30 years raises a specter
of intolerable consequences, making the policy solutions adopted criti-
cally important; and those solutions, in turn, will affect the structure
and pattern of financial intermediaries and their role in financing.”
74 OLD AGE INCOME ASSURANCE—PART I
It appears obvious that from the standpoint of our national goals,
Government policy should support those private mechanisms used to
provide retirement income which also help to provide the capital
needed for economic growth. At the same time, public policy on social
insurance programs to redistribute and maintain income will need to
be reviewed to determine their value in an affluent economic environ-
ment where cyclical fluctuations are satisfactorily controlled. Social
insurance programs developed earlier in this country when there was
more Scarcity and wider swings in the business cycle may not work
efficiently as our economic growth continues.
It is most difficult to explain these economic facts to the average
citizen. How do you explain to the grandfather who is retiring today
on a private pension, that the funds accumulated over the years to
guarantee his pension have also contributed to the economic growth
of the country so that his grandson just out of college or high school
will be able to find a job in the private sector of our economy? At the
same time, how can you explain to this same grandfather that, despite
the fact that he has paid social security taxes for 30 years, it will be
his grandson’s social security taxes that will help make up the grand-
father's social security checks that he will receive for the rest of his
life? This raises the political question. The difference between a cor-
porate pension backed by funds held in trust and the social insurance
promise backed by the ability to collect future taxes is quite distinct.
There is no question, however, which side could out promise the other
in a promising contest for old-age income benefits.
THE WALUE OF RESEARCH
The need for further research in the areas of old-age income assur-
ance and in the entire field of economic security assumes more im-
portance. In addition to answering many questions, this symposium
will point the way to much needed research. Indeed, further research
may be the most significant way to sharpen our understanding of the
real issues and alternatives in providing income maintenance.
- For example, the real test of our old-age assurance programs is in
both the manner in which they are meeting the needs of the aged and
the degree to which they are improving from year to year. We do
know that among our entire elderly population, the group that has
retired in the sixties has better retirement provisions than those who
retired in the fifties; and those who retired in the fifties were better
off than those who retired in the forties. We do, nonetheless, need
more research and statistics on the year-to-year improvements in bene-
fits received by each annual class of retirees. We need better projections
of the future progress we have already guaranteed with our present
. . . . THE NEED FOR RESTRAINT -
During the 20th century as our free Society has progressed from
depression toward affluence, there has developed a need for a national
dialog on issues and alternatives in the field of economic security for
the individual and the family. A key part of this discussion involves
old-age income assurance goals for our present and future elderly
citizens. In addition to the dialog, there is a large need for further
OLD AGE IN COME ASSURANCE—PART I 75
research and study to give us the facts necessary to more clearly define
the alternatives before us. -
Our present approach to economic security is pluralistic. We have a
mixed system of Social, employer and individual efforts and programs.
One of the major issues is: How will responsibility for the economic
security of the individual be shared by government, the employer, and
the individual himself? This and similar issues have serious social,
economic, and political implications. The issues must be considered in
the light of our national goals of economic growth, full employment,
and price stability. -
Since economic security provisions involve all Americans from the
newest baby to the oldest citizen, we must take into account the eco-
nomic changes that will occur over long periods of time. We need to
continue j. policy that encourages economic Security programs
that help in the formation of much needed capital. The manner in
which inflation and increased taxes destroy economic security achieve-
ments needs to be reviewed. Support is needed for the appropriate use
of fiscal and monetary policy that will control inflation which is so
destructive of the values of the retirement income received by the
elderly. -
We need to critically reexamine all of our social insurance and wel-
fare programs to determine whether they can continue to operate
efficiently as methods of income redistribution in our new affluent
economic environment. Of major importance is the degree of priority
we should give to new or enlarged social insurance programs. The
share of national income that should be allocated for public assistance
and social insurance—and whether to increase or decrease the amount—
poses a serious question. We need to list the inadequacies of social insur-
ance in providing for highly individualistic needs; the limitations of
private security mechanisms to fulfill the social needs of low income or
nonincome groups; and what the public interest requires as a reasonable
mix of both public and private approaches. Since these issues are so
vital, there is need for restraint on the part of all those who join in the
dialog.
Thus far, with our pluralistic approach, we have achieved the high-
est levels of economic security for the individual and the family ever
known. Some believe that what has succeeded so well is being
threatened.
The threat to our uniquely American system comes from the ex-
ponents of total security for the individual provided by government
through social insurance based on pay-as-you-go tax redistribution.
This Great Welfare Society would offer one layer of protection. There
would be no employer provided layer and no individually provided
layer. The Government would provide for all the economic hazards
faced by the individual. In doing this, taxes on corporations could be
So heavy that little in the way of fringe benefits could be offered. Fur-
thermore, withholding taxes would be so heavy on the individual, he
would tend to consume all take-home pay and have little, if anything,
left for savings. .
More social insurance programs and more Federal control of cor-
porate and individual efforts to provide economic security could de
prive us of the economic growth we need and undermine our capacity
83–200–68—pt. 1–6
76 OLD AGE INCOME ASSURANCE—PART I
to sustain and improve our present corporate and individual economic
Security programs and plans.
Our private enterprise economic system has provided our citizenry
with the highest income and standard of living that has ever existed.
Social security and private pension plans and related fringe benefits
will be improved and will continue to help the individual and the
family meet their economic security needs. It is imperative, however,
i. *gement have discretion in providing pension and other fringe
enefits. -
If the Federal Government were to “take over” the private pension
system, or stunt its growth, then the way would be clearer for total
welfare state concepts to be used. The implications for individual ini-
tiative, limited government, collective bargaining, and the private
enterprise economic system are obvious. The ultimate question is
whether the Federal Government should completely control both pub-
lic and private plans for retirement. If it does, then after a lifetime of
work, the average retired American may find his financial income and
freedom dependent on year-to-year decisions made in Washington.
It is equally imperative that the American citizen retain the free-
dom to manage the economic value of his life beyond the floor of
protection offered by the Federal Government and the employee bene-
fits provided by his employer. A complete takeover by the Federal
Government of control of all retirement income could destroy this
freedom. Without such individual economic freedom, there would be
no political freedom—no free Society.
NATIONAL ASSOCIATION OF MANUFACTURERS
The National Association of Manufacturers appreciates the invi-
tation of the Subcommittee on Fiscal Policy of the Joint Economic
Committee to present its views on the private pension plan system
and, in particular, the committee publication entitled Old Age Income
Assurance: An Outline of Issues and Alternatives. The NAM is a
voluntary organization of many thousands of member companies
located in every State. The views expressed by the association represent
those of a broad cross-section of American industry.
NAM believes that private employee benefit plans with their inherent
flexibility to adapt to the almost infinite requirements of employees
and employers should be encouraged to grow and prosper within a
favorable Government policy and climate. Needless Government inter-
vention can curtail their present significant contribution to both indi-
vidual economic security and to the entire economy.
INTRODUCTION
The past 25 years have witnessed a remarkable growth of retire-
ment programs, both private and public. While many companies have
had private pension plans, some dating back more than 50 years, the
greatest growth in these plans has occurred in the years since 1940.
At that date, about 4 million employees were covered under private
pension programs. Today the total is over 25 million. Similarly, since
1940 combined employer-employee annual payments into private pen-
sion plans have increased from $310 million to an estimated $7 billion
at the present time. Benefits paid have moved upward just as rapidly—
from $140 million in 1940 to $3.04 billion. Reserves held by private
§." plans have grown from $2.4 billion to approximately $85
illion.
During the same period, the growth of the Federal OASDHI system
(Old Age, Survivors, Disability and Health Insurance), hereinafter
referred to as “Social Security,” has matched or even exceeded the
growth of private pension plans. Commencing as a modest program
and supported by taxes of 1 percent each, paid by both employer and
employee on the first $3,000 of wages or salaries, the program has been
expanded by a series of amendments involving coverage, benefits, and
rateS. -
Social security coverage initially was limited to workers in com-
merce and industry (except for railroads). Over the years, however,
coverage has been expanded to include practically everyone except
those covered under Railroad Retirement and Federal, State, and local
government plans. For example, coverage now includes all self-em-
ployed—commercial, farm, and professional—and practically all farm
and domestic workers. Originally limited geographically to the con-
tinental United States, Alaska, and Hawaii, it now includes residents
77
78 OLD AGE IN COME ASSURANCE—PART I
of Puerto Rico, residents of most other U.S. overseas possessions, as
well as certain U.S. citizens who work overseas.
Maximum individual monthly social security benefits have been
increased from $85 to $168, and tax rates and tax bases have been
increased from the combined employer-employee tax of 2 percent on
a $3,000 base to a combined tax of 8.8 percent on a $6,600 base at the
present time. The end is not yet in sight. Combined employer-employee
tax rates on the present $6,600 base are projected to be increased to
11.3 percent by 1987. However, if current proposals to increase the
benefits substantially (perhaps by as much as 20 percent) are enacted
into law, this will almost certainly require a substantial increase in the
tax base, the combined rates, or both, in order to finance the expanded
benefits without resort to general revenue financing.
The growth of private programs has drawn increasing attention
from the Federal Government. To a considerable extent, the attitude
of the Government has been critical in nature. At the same time, in-
dustry is concerned with the rapid growth of social Security. There
is an increasing possibility that the social security system's built-in
governor—the absence of general revenue financing—may be lost. In
this process, a runaway public system—speeded up by general revenue
financing—could preempt private effort. Industry is also concerned
over the rules of integrating social Security benefits with private pen-
sion and retirement benefits, and with the actuarial principles on
which the social Security system is based.
THE STAFF REPORT
This commentary by the NAM is a response to a recent congres-
sional publication entitled Old Age Income Assurance: An Outline
of Issues and Alternatives. The publication, which was released in
November 1966, was prepared by the staff of the Joint Economic
Committee for the Subcommittee on Fiscal Policy which had held
hearings in the spring of 1966 on the subject of old-age income assur-
ance. It is hereinafter referred to as the “staff report,” or simply the
“report.” - -
The covering letters describe the staff report as a “draft” document,
designed to assist in promoting useful debate. In fact, it is a highly
critical evaluation of practically all aspects of private pension plans
and some aspects of the public system which it would enlarge and
expand at the expense of the private. The staff report offers a list of
alternatives to the present system, some of which, if adopted, would
drastically change the structure of old-age income assurance. In-
cluded among these alternatives are guaranteed annual income for
the aged through the tax system, a two-tier OASI system with a vol-
luntary Supplementary plan, a central pension credit clearinghouse
to facilitate transfers of credits among private plans, a central rein-
surance agency to reduce funding requirements, stiffening the tax
treatment of private plans, and much stricter regulation by a public
8. CréIlC.W. . . . . . . . . . . . .
*jid all of these suggestions is the premise that the present old-
age income assurance is inadequate not only in degree of coverage,
benefits, etc., but also in basic structure. Thus, the staff report departs
from the report of the President's Cabinet Committee entitled Public
OLE) AGE INCOME ASSURANCE—PART I 79
Policy and Private Pension Programs released in January 1965. The
latter criticized some operational aspects of private plans but attested
to their important role in providing retirement security to an increas-
ing proportion of the labor force and concluded that public policy
|should continue to provide appropriate incentives to the growth of
'private plans.
The primary purpose of this paper is to examine carefully the as-
sumptions behind the staff report which led to such sweeping pro-
posals for change, and to reply to its specific criticisms. Underlying
the staff report’s criticisms of private pension plans and, indeed, the
principal reasons advanced to justify more intervention in this area, are
three basic assumptions: - -
1. Private pension plans are the recipients of tax favoritism.
2. They are insufficiently regulated at the present time.
3. Pension benefits should reflect the individual’s total service
to society. -
In addition, specific attacks on the private pension system are set
forth in the second paragraph of the report, which also serves as its
Summary:
“The following discussion outlines reasons for thinking that the
old-age income assurance system is neither fair nor efficient. One may
suspect that the cost of the system to the Nation exceeds by a consider-
able margin its benefits to the aged. Pension programs raise the major
questions for policy and it is upon them that we foous attention. May
not pension plans in too many instances generate eaſpectations which
cannot or will not be fulfilled, interfere unnecessarily with the eaſercise
of free choice in employment and in saving, induce an eaccessive rate
or saving, create enclaves of economic power which are not subject to
effective supervision, and hinder the productive deployment of wealth?
The outline which follows is intended to make explicit complaints often
heard that the old-age income assurance system satisfies public objec-
tives very poorly, that combined benefits under all programs are seldom
adequate, the distribution of burdens on the young and benefits to the
aged unfair, and the process of making transfers of income from the
young to the old productive of much economic mischief.” .
(Italic supplied.) - - ".
The first two criticisms—that the system is neither fair nor efficient
and that its cost exceeds its benefits to the aged—are generalized ob-
jections to the whole complex of devices presently used to assure in-
come in old age. To the extent that these two criticisms apply to pen-
sion programs, they are covered specifically in the italicized part of
the paragraph. This commentary will later deal with the points of
objection, one by one. At this stage, however, it is appropriate to ex-
amine the three basic assumptions which led the staff to the quoted
conclusions. - .
THE MYTI1 OF TAx SUBSIDY
The report implies that much of the growth of private pension plans
can be attributed to special incentives in the Federal tax law. This same
argument is incorporated in much of the testimony by Government
witnesses at the hearings conducted by the Subcommittee on Fiscal
Policy of the Joint Economic Committee. Indeed, one is struck by

80 OLD AGE INCOME ASSURANCE—PART I
the frequent and fundamental assertion of “preferential” tax treat-
ment of private plans. This alleged subsidy is said to arise from “one
or the other of two forms: a reduced effective rate of tax on income
received in retirement, or a reduced effective rate of tax on income
received during active years because some portion is set aside for
retirement.”
The implication is that the alleged subsidy justifies greater Govern-
ment involvement and policy determination concerning the form, Scope
and other features of private plans. Other reasons for greater involve-
ment are stated, but the dominant thought seems to be the interrelation
between tax subsidy and control.
A review of the history and nature of the tax treatment of private
pension plans indicates that the “subsidy” concept is greatly over-
stated. Instead, the fair conclusion is that the tax law provisions are
reasonable and practical in light of the nature of the transactions
involved in private pensions. In fact, these provisions have tended to
impose limitations and restrictions on the development of private
pension plans, a far different matter than providing a subsidy to en-
courage their development.
For example, limits were placed on the deductibility of contribu-
tions for past service cost as far back as the 1920's. They had to meet
the test of reasonableness and the 1928 Revenue Act limited their
deductibility to a period of not less than 10 years. The nondiversion
rule was added by the Revenue Act of 1938 and provided that a pen-
sion trust had to be irrevocable and the funds had to be used for the
benefit of the employees. The Revenue Act of 1942 added the so-called
nondiscriminatory feature to the law which provided that plans should
not favor highly compensated employees. It also introduced a limit to
the annual tax deductions for contributions to qualified plans.
In its assumption of a tax subsidy (sometimes described as a tax
incentive, a tax advantage, or favored tax treatment or status), there
is some implication in the report that a tax incentive is involved in both
the deduction by the employer of contributions to the retirement fund
and the delay until retirement of treating these contributions as income
to the employee. However, these tax effects are consistent with the
nature of the transaction.
The employer's contribution constitutes an irrevocable payment
solely for the benefit of employees. In determining the employer's net
income subject to tax, it is immaterial to him whether the amount is
paid as a pension contribution or as wages. It is an ordinary and
necessary business expense, clearly deductible under the income tax
law before any special rules were enacted. Such a deduction is no more
a tax incentive than is a deduction allowed for a wage payment.
Similarly, the attribution of tax to the employee only when he
receives the employer's contribution in cash is reasonable and far from
a subsidy. In the case of wage compensation, the employee receives
immediate spendable income in cash. But the emplovee has no right
to income at the time the employer makes a pension contribution.
Even with immediate vesting, the employee generally cannot with-
draw the vested portion until retirement. Thus, no current taxpaying
capacity is created; the employee only has a right to future benefits
if and when he becomes eligible to receive them. Under many plans,
no employer-financed benefit accrues to his estate if an employee dies
OLD AGE INCOME ASSURANCE—PART I 81
before retirement. But in any event the forebearance of tax until
income is received is a matter of tax timing and not tax exemption.
The attribution of subsidy to these situations apparently derives
from a comparison with the tax treatment of other types of income.
As compared with wages, for example, it is true that the employer’s
payments are deductible and the employee's income taxable at #. Sàille
time. But the fact that this applies with respect to wage or other
income does not establish that it should also apply to pension income.
It is true that income of a qualified trust is not taxable, but in light
of the restrictions already imposed as a condition of qualification and
the nature of the transaction, this exemption does not justify further
control of pension plan operations. Although the trust may have
earned income, the employee may not receive it until a much later time.
And even if an employee's rights are vested, he has no claim to income
until he has actually retired and it would work a hardship in many
cases if the tax was not postponed until that time. In simple trusts a
deduction is available to the trust in the year of distribution for the
amount of distribution actually made, and thus there would be no tax
on income to the trust. The same policy considerations should apply
in the case of employee trusts.
|Therefore, instead of special privilege we thus have a situation in
which pension income is taxed in accordance, with the nature of the
transaction involved. The transaction differs from the current receipt
of wage payments and other types of income. A tax law which does not
take cognizance of such differences would be unrealistic and inequit-
able. Perhaps more importantly the Government interest in control
of these plans has already been exercised in far-reaching measures
which should not be extended further, at least until the necessity of
increased control has been demonstrated. .
The recognition in tax law of an established practice, condition, or
contractual arrangement is far different from application of a tax law
to induce or suppress a particular activity. Such recognition merely
permits the taxpayer to continue to do what he has been doing, or what
he would do except for inhibiting taxation. It is not accurate to de-
º º permissiveness as constituting an incentive, or involving
à, SULOS1C V.
The º that the tax treatment of private pensions is consistent with
the nature of the pension arrangement is confirmed by tax policy else-
where. The more than 6 million Federal Government employees are
not taxed currently on their employer's contributions. This is also true
of the almost 9 million State and local government employees. Trust
fund income likewise is not taxed under these plans until disbursed
as pension income. . -
The social security and railroad retirement systems go further than
these plans and exempt from tax not only the employer's contributions
and trust fund income but all retirement payments as well. However,
Some measure of equality with the social security and railroad retire-
ment beneficiaries is achieved for pensioners under other plans by use
of the retirement income credit.
Taken together, all of these situations add up to a consistent rule
of taxation, instead of a departure justifying an allegation of special
privilege. The rule is that the natural time to apply a tax is when
income is received, just as the time to deduct an expense is when the
82 OLD AGE INCOME ASSURANCE—PART I
expense is incurred. The forebearance of taa, until income is received
is a matter of taa: timing and not taa, ea:emption. It simply is not realis-
tic to consider that any kind of subsidy results because a tax is not
incurred until income is received.
The report also advances the old argument:
“With a 48 percent corporate tax rate, tax deductibility of employer
contributions means that a corporate employer contributes 52 cents
and all taxpayers collectively contribute 48 cents of each dollar of
contributions received by a fund.” -
This is about as absurd as it would be to claim that taxpayers pay
48 percent of the bill for wages and salaries of private employers,
which are also deductible in computing taxable income. By this philos-
ophy, corporations should be hoping for higher tax rates which would
enable them to shift more of their labor costs onto the shoulders of
other taxpayers. -
There is no validity to the view that tax treatment of pension ar-
rangements is a Federal subsidy. -
THE CASE FOR FURTHER REGULATION
Qualified pension plans have for many years been subject to a con-
siderable degree of statutory and administrative regulations. The prin-
cipal regulatory body is the Internal Revenue Service.
The volume of regulations, rulings, and official publications dealing
with employee pension plans attests to the degree of attention and su-
pervision directed to this subject. For example, in order for a plan to
be º the regulations under the Internal Revenue Code now
I’OVICIe
p 1. There must be a trust, contract, or other legally binding ar-
rangement.
2. The plan must be in writing and communicated to employees.
3. There must be a permanent and continuing program. -
4. The plan must be for the exclusive benefit of employees.
5. Pension funds cannot be used other than for the exclusive
benefit of employees and their beneficiaries until there has been
complete satisfaction of all liabilities to employees and their bene-
ficiaries. -- -
6. The plan must not discriminate in favor of employees who
are officers, shareholders, supervisory employees, or highly com-
pensated employees. . -
7. The plan must provide definitely determinable benefits.
8. The funds of a pension plan are to be held only by a life in-
surance company or a trustee acting under a properly constituted
trust. . . - - -
9. All contributions made by the employer are irrevocably com-
mitted to the pension trust.
Illustrative of the review and supervision which qualified pension
trusts receive from the Internal Revenue Service is a quotation from
the testimony given by the Commissioner of Internal Revenue at the
hearings before the Fiscal Policy Subcommittee of the Joint Economic
Committee: - - - -
“Consistent with the requirement that a plan be maintained for the
exclusive benefit of employees, investment of trust funds must meet
OLD AGE INCOME ASSURANCE—PART I 83
tertain criteria. These are: (1) the cost of an investment must not ex-
Čeed its fair market value at time of purchase, (2) a fair return com-
mensurate with the prevailing rate must be provided, (3) sufficient
liquidity is to be maintained so as to permit distributions in accord-
ance with the terms of the plan, and (4) the safeguards and diversity
that a prudent investor would adhere to must be present.
“Furthermore, a trust may lose its exemption if it engages in a pro-
hibited transaction in dealings with the employer, or related or con-
trolled interests. These consist of: (1) loans of trust funds without
the receipt of adequate security and a reasonable rate of interest, (2)
payment of compensation in excess of a reasonable allowance for per-
sonal services, (3) making any part of its services available on a pref-
erential basis, (4) buying securities or any other property at a price
in excess of fair market value, (5) selling securities or other property
at a price below fair market value, and (6) engaging in any other
transaction which results in a substantial diversion of trust income or
corpus. - - - -
“An exempt trust is required to file an annual information return,
Form 990–P, reporting its financial transactions and furnishing a
statement of receipts and disbursements and a balance sheet. Further-
more, if it has unrelated business taxable income, it is required to file a
tax return, Form 990–T, and pay the applicable tax. These returns
are subject to examination in accordance with our audit procedures.”
In the administration of pension plans, the Internal Revenue Service
is entrusted with a high degree of discretion in determining whether
it will approve either initial plans or subsequent amendments. The
justification for this high degree of discretion is based on the Congres-
sional concern that the plan should not discriminate in favor of stock-
holders, officers, or highly paid employees. In many instances, however,
the pension plan specialist who reviews a plan or its amendments may
insist upon changes in the plan to conform to his own ideas of what
the plan should provide. This frequently occurs where there is no
possibility of discrimination. To obtain approval of the plan, the
employer must, nevertheless, accede to the changes required by the
pension trust specialist. - -
The Federal Welfare and Pension Plans Disclosure Act also re-
quires the filing of plan descriptions and disclosures of pension plan
operations. It contains requirements for the bonding of administrators
and grants investigatory, enforcement, and rulemaking authority to
the Secretary of Labor with respect to disclosure—coupled with severe
penal sanctions for fraud. . .
Finally, additional regulation may come into play through the Fed-
eral Reserve, Comptroller of the Currency, Federal Deposit Insurance
Corporation, Securities and Exchange Commission and the various
State insurance and banking commissions. Nor is regulation confined
to governmental bodies. The most recent body to make its views known
is the American Institute of Certified Public Accountants. Accounting
Principle No. 8 devotes itself to the matter of what will and will not
be acceptable in the way of annual balance sheet accounting for private
pension plans costs. . . . .
It is clear from the above that private pension plans are already
º ected to a substantial degree of statutory and administrative regu-
84 OLD AGE IN COME ASSURANCE—PART I
Pension benefits should reflect the individual’s total service to
society rather than his services to any particular employer or
employers.
The report reluctantly concedes that the community’s commitment
is very strong to a pension system based on the individual’s past work,
rather than on the mere fact that he is old. But it goes on to say:
“Unfortunately, private and government plans in general have an
inappropriate work test. The test is of service to the industry, company,
government, or union from which a person retires. However, from the
viewpoint of the public interest in retirement income, it is total service
to society which should determine the pension benefit.”
This is a very strange statement. It calls into question the whole
basis of a private enterprise system of economic organization. When
an individual offers himself for employment, he expects to be com-
pensated on the basis of his contribution specifically to that firm’s
interests—not on some vague basis described as “service to society.”
And, as a matter of fact, we have found that Society is best served
when arrangements are made on the basis of two-party bargains where
each party is governed by his own interests. Socialist societies, in which
everyone's activities are supposedly oriented toward the general pub-
lic interest, are not among the most successful ones.
Pension systems are still evolving and they will undoubtedly con-
tinue to expand and improve. But there is no reason to interfere with
the freedom of employers and employees to agree on the pension ar-
rangements which seem most desirable in each particular case.
In developing its argument on this point the report finally turns
for support to its earlier assumption that pension plans are subsidized
by their tax treatment. We have already seen that the argument that
pension plans are “tax supported” is invalid. .

STAFF REPORT's SPECIFIC CRITICISM's
We now return to the specific criticisms of the private pension sys-
tem that have been summarized in the paragraph previously quoted.
The report finds that pension plans: .
1. Generate unfulfilled expectations
2. Impede free choice in employment
3. Impede free choice in saving
4. Induce excessive saving
5. Create enclaves of economic power -
6. Hinder the productive deployment of wealth
We will comment on each of these points.
1. GENERATION OF UNFULFILLED EXPECTATIONS
An employee's pension expectations depend largely on the care
he has devoted to understanding his company's pension system. Many
employers go to great lengths to ensure that those covered have in-
formation as complete as possible. Employees should have available
to them a complete explanation of their rights and obligations, to-
gether with the employer's and trustee’s responsibilities under the plan.
In fact, this information is required by the Welfare and Pension
Plans Disclosure Act of 1958, as amended. This Act is designed to
OLD AGE INCOME ASSURANCE—PART I 85
effect honest and responsible administration of private employee
benefit plans by requiring reporting and disclosure of financial and
other information. A º of each plan must be filed with the
Department of Labor by the plan administrator. Upon request to
the plan administrator, each plan participant and beneficiary is also
entitled to a description of the plan. In addition, each plan must
file an annual financial report.
2. IIMIPEDING FREE CHOICE IN EMPLOYMENT
. The criticism that a private pension plan impedes a worker's free
choice in employment is puzzling. If it simply means that an employee
may, because of his pension situation, prefer one employer to another,
it is, of course, true. Complaining about this is like arguing that free
choice is impeded by the fact that some companies are more attractive
places to work than others.
Many companies have established pension programs with the spe-
cific purpose of holding their work force together. There seems to be
nothing illegitimate in such an objective. Surely no one would think
it amiss if the company tried to hold its employees by raising wages
or by improving working conditions.
3. IMPEDING FREE CHOICE IN SAVING
Apparently the point of the crticism that free choice in Saving is
impeded by private pension plans is that individual members of
pension plans might have preferred, if the contribution made on their
behalf had been put completely at their disposal, to save it in some
other form. Or perhaps they would have preferred to spend it on con-
sumption and not save it at all. Thus, it is suggested, the individual's
freedom is restricted.
This line of thought is completely unrealistic. It implies that any
company, when offering a benefit to its employees, is restricting their
freedom unless it offers a complete range of options for equivalent
benefits they might prefer. Perhaps one employee would prefer a
longer coffee break to the pension program. Does the company, in the
name of preserving his freedom, have to allow him to make this
choice?
. Also, a very substantial portion of the pension plans in existence
in this country have been negotiated by labor unions which have been
Selected voluntarily by employees. To the extent, therefore, that pen-
sion plans result from labor union negotiations, it can be accurately
º that the employees covered have chosen this particular method
OT S3, VII) Cº. -
Aºi, freedom is preserved by maintaining a number of alterna-
tive º. for employment. A worker can choose a company
with a different type of pension program if he would rather do his own
saving in some other way. Of course, the Social security system provides
no freedom of choice whatsoever with respect to saving.

4. INDUCING EXCESSIVE SAVING
In the view of the report, funded private pension plans lead to over-
saving and hence threaten us with a condition of chronic economic
86 OLD AGE INCOME ASSURANCE—PART I
stagnation. This is the central point in the report's criticism of the
private pension system. & -
Unlike the social security system, which depends for its existence
on the continued power of the Federal Government to tax, a private
pension plan must create a fund from which pension promises can be
paid regardless of the continued profitability or existence of the em-
ployer. Also unlike social Security, current costs of a private pension
plan are current charges against production and should be charged as
the costs are incurred and not deferred only to be charged against
future managements of the company. - - -
The view #. oversaving is a leading threat to economic growth was
prevalent in the 1930's but has fallen into disrepute in more recent
years. But it apparently still has its adherents: - r
“* * * the economy is not subject to chronic excess demand; rather,
there is a more or less continuing problem of keeping demand adequate.
In such circumstances, a high rate of Saving does not add to but sub-
tracts from the capital stock by depressing demand for output and the
motive to invest.” - - * ,
What the question comes down to is this: Where does the greater
danger lie in the future? Is it in the likelihood of oversaving—the fear
that saving may exceed the opportunities for investment and hence by
simply a withdrawal of purchasing power that depresses the general
level of economic activity ? Or does the danger lie in the probability of
undersaving—the fear that saving may not be adequate to meet the
needs of capital formation and hence may retard economic growth?
The fact is that this is an enormously complicated question for
economic analysis, on which there is still room for disagreement. One
may concede that either oversaving or undersaving are possibilities in
the abstract. The concrete queston is, given present and foreseeable
circumstances, which presents the real threat in the future? The most
thorough-going treatment of that question is the volume Capital For-
mation in the American Economy, Its Formation and Financing, pre-
pared by Dr. Simon Kuznets for the National Bureau of Economie
Research in 1961. - - -
It is impossible in this space to summarize all the material pre-
pared by Dr. Kuznets having a bearing on the oversaving versus under-
saving argument. His conclusions, although they are not dogmatically
stated, on the whole favor the belief that undersaving is the danger
for the future. . . . . . . . . .
Since funded private pension plans contribute to the total of volun-
tary saving, they will help in the future attainment of economic growth
and stability, rather than interfere with it as the report maintains.

5. CREATION OF ENCLAVES OF ECONOMIC Power
It is difficult to comment on criticisms of pension plans as enclaves
of economic power, since such criticisms are interlarded with emotional
statements of personal prejudices. The report starts off by a gratuitous
slam at the insurance industry: - . . . . . . . . . . . . . .
“Insurance has been defined as an arrangement whereby certain
people offer to relieve tis of concern for the financial circumstances of
our survivors in exchange for the power to run our lives and it is be-
cause we have not felt altogether comfortable about the bargain struck
OLD AGE INCOME ASSURANCE—PART I 87
that we regulate insurance companies. The pension system may be
thought of as an institution which for the same price offers us financial
security in old age.”
Later it advises unions not to let themselves be “caught up in the
chicane of high finance.” Despite its desire to maintain competition
among fund managers and plan administrators, it thinks there are too
many independent plans in existence. Its conclusion is that: “It is hard
to avoid the suspicion that little enclaves of economic power are being
jealously guarded at the expense of efficiency and, ultimately, the in-
terests of the members.” Again:
“* * * each plan is wooed by a swarm of suitors—life insurance
companies, banks, actuarial firms, lawyers, accountants, and others.
All of this attention, doubtless, is a not insignificant attraction of being
a trustee. However, the more plans, the more trustees, the greater
the volume of wining and dining, the higher the fees, the Smaller the
pensions.”
Aside from these statements of personal views, the point seems to be
that those who control pension funds, and administer the benefits paid
out of them, acquire considerable economic power. They have power
over employees in making decisions on benefits in doubtful or marginal
cases. They acquire powers in the marketplace through the control of
large funds.
The limitation on power in our kind of society is competition. The
report brings forth no evidence to show that insurance companies, and
other financial firms, do not compete effectively with each other for
the management of funds. As for nonfinancial companies which man-
age their own funds and administer their own plans, they are presum-
ably in competition with other firms both for customers and for effi-
cient employees. Their ability to succeed depends on their efficiency
in all phases of management, including pension administration.
6. HINDRANCE TO THE PRODUCTIVE DEPLOYMENT OF WEAIATH
The argument is made in the report that the existence of funded
pension plans results in a misallocation of capital and constitutes a
hindrance to the productive deployment of wealth. -
It is difficult to make sense of this argument. The report seems to
agree that fund savings are a net addition to the national saving,
rather than a substitute for other kinds of savings that would have
taken place in their absence. If this were not so, the report could not
make its other argument that pension funds threaten us with over-
saving. Therefore, savings through pension funds result in a net addi-
tion to the capital facilities of the Nation—over and above what would
otherwise exist—no matter how badly they are misinvested. . .
At one point, the report argues that pension funds misdirect the flow
of capital by concentrating too much on low-risk securities and that it
would be in the interest of all concerned if such capital went into
riskier high-yield situations. Later, it contradicts this argument by
suggesting that the use of internal business funds may misallocate
capital and it would be better to channel them through pension funds.
The report contradicts itself once again by complaining that, instead
of being too conservative, pension funds may be too eager to make
gains through stock market speculation.
88 OLD AGE INCOME ASSURANCE—PART I
It is, of course, impossible to answer all these contradictory criti-
cisms. The point is that pension funds are able to make use of all the
various institutions that make up the American capital market. That
market has a universal reputation for being the most efficient market
in the world for channeling savings into productive uses.
Although not all of the points made by the staff report have been
examined in the foregoing commentary, the remainder are of the same
general character and share the same lack of substance.
PUBLIC PENSTON PLANS
As we have seen, the staff report has been critical of private pen-
sion plans and is concerned over the relationship between the private
and public retirement systems. The report is sweeping in its apparent
indictment of private plans and implies that their continued existence
is justified only where they are made to satisfy public interest cri-
teria—whatever that may mean. It attests to the virtues of the public
system of providing for old-age income assurance through the old-age
features of the social security system.
Although in a broader sense public pension plans also include rail-
road retirement, U.S. civil service, Foreign Service, TVA, Federal
Reserve, and the State and local plans, public pension plans will be
limited to the Federal social security system in the following
discussion.
In any consideration of the social security system, it is important
that its true nature be defined, since it differs materially from private
plans. Although it has been expanded to provide almost universal
coverage, and there is complete portability of credits earned, it is not
in any sense of the term “insurance”; that is, there is no contractual
right against the Government to enforce its benefits. Furthermore,
unlike pension plan benefits which are payable without regard to other
income of the pensioner, social security is a “retirement” system—not
a pension system. This is so because of its so-called work test which,
with respect to persons under age 72, reduces their benefits if they
have earned income in excess of $1,500 per year. It requires only a mod-
erate amount of earned income to eliminate social security benefits
entirely until such time as the individual has reached the age of 72, at
which time the work test is no longer applied. While the staff report
would eliminate the work test, the cost of such a change has been esti-
mated to be approximately $2 billion per year. .
Social security was conceived as a compulsory basic retirement sys-
tem and it was originally the intent to impose taxes high enough to
accumulate a substantial reserve. This original idea was quickly aban-
doned, and the system has been operated for many years on essentially
a pay-as-you-go basis with current revenues being roughly equal to
current expenditures. As a consequence of this process, a substantial
unfunded past service liability has been created, many estimates plac-
ing it in excess of $400 billion at the present time. Inevitably, this
past service liability will grow since extensions of coverage and bene-
fits over the years have invariably preceded tax rate and base increases
sufficient to keep the system on an actuarially sound basis.
The fact that early retirees under the system have enjoyed substan-
tial subsidies—the value of their retirement benefits being vastly in
OLD AGE INCOME ASSURANCE—PART I 89
excess of the total of the payments into the system for their account—
produces a result whereby the discounted value of presently scheduled
benefits to later retirees is less than the taxes that have been imposed
upon them and their employers.
For example, on a taxable wage base of $6,600 today, the employee
and employer are each taxed $290.40 per year, Ignoring the future
increase already projected, the yearly total of $580.80 would, if accu-
mulated at 4-percent compound interest, grow to $55,191 over a 40-
year period. Thus, a worker aged 25 at the start of the accumulation
period would have contributed—or had contributed for him—an
accumulated fund at age 65 in an amount sufficient to pay the accu-
mulated cost of survivor and disability benefits (estimated at 20 per-
cent of the total), and still have left a fund of $44,153. Based upon
today’s annuity rates, that sum would be sufficient to purchase a life
annuity from an insurance company in the amount of $332 per month.
Contrast this to the current social security maximum benefit of $252
per month. And that maximum benefit of $252 cannot be realized
until the year 2004 and then only if future tax increases up to a com-
bined 11.3 percent are put into effect (present total annual tax of
$580.80 results from a combined tax rate of 8.8 percent), and is payable
in that maximum amount only so long as both the retired worker
and his spouse are both alive.
This predictably (and understandably) leads to constant pressure
to expand benefits, since anyone approaching retirement age is justi-
fied in insisting that his taxes have been given to the support of others
who have already retired, and that it is only fair and equitable that
a succeeding generation of taxpayers take care of him. This pressure
to increase benefits, which is greatly intensified by inflationary trends,
requires corresponding increases in the payroll tax rates and in the
wage bases on which they are imposed.
As a consequence, the Nation is approaching several basic limits in
this area, which are:
1. The extent to which future generations can be expected to
contribute to the social security system.
2. The extent that future national income can safely be set
aside for public retirement purposes without impairing capital
formation and growth.
Since the only “asset” behind the Government's undertaking to pay
social security benefits is its power to impose larger and larger taxes
upon future generations of taxpayers, the principal area of danger lies
in the continued liberalization of the benefit structure. The system
may already be vulnerable in this respect.
We should not lose sight of the original purpose of the social security
system which was to pay benefits to retired workers and their families.
It should retain its character as a basic public retirement system and
should not be expanded to include welfare payments of various types.
The financing of the system should continue to be through payroll
taxes—not by resort to general revenues.
If public and private plans are to coexist and if, as suggested above,
the expansion of the social security system is approaching a level
beyond which it would be unwise to go, it follows that the principal
means by which old-age income assurance could be expanded is through
private pension plans.
90 OLD AGE INCOME ASSURANCE—PART I
SUMMARY AND CONCLUSIONS
The vigor and efficiency of private pension plans is confirmed by
their growth. Coverage, vesting, and benefits have constantly been
improved by free interaction of competitive forces. Competition in a
free Society being a principal motivator, present trends toward earlier
vesting, greater funding, and broader coverage will continue. Because
of the diverse needs and circumstances of various industries and
economic sectors of Society, further improvement of private pension
plans will best be effected through voluntary action and labor-manage-
ment negotiations—not through rigid formulas imposed by law or
Government regulation.
The argument that private pension plans are recipients of tax
favoritism and therefore should be subject to substantial new Govern-
ment controls is without merit. The existing treatment of private
pensions is consistent with broad tax policy and confers no special
privilege or subsidy. Private pensions are already subject to many
existing statutory and administrative rules which provide responsible
fiduciary practices and equitable treatment of employees.
With respect to the Social Security system, there are large questions
concerning the extent to which future generations can Be expected
to contribute to the system and the extent that future national income
can safely be set aside by fiat without impairing capital formation
and economic growth.
Social security should retain its character as a basic retirement
system which is financed by contributions by employers and em-
ployees. But the primary means by which old-age income assurance
should be further expanded is through the more flexible arrangements
of private pension plans.
I*RIVATE PENSIONS AND THE PUBLIC INTEREST*
CONTENTS
PART ONE–PRIVATE PENSION PLANs Page
Private pensions and the public interest.--------------------------- 92
Historical background------------------------------------------ 92
Historical tax background-------------------------------------- 93
The present situation------------------------------------------ 95
The present tax policy----------------------------------------- 95
Reasons for existence------------------------------------------ 96
PART Two—THE MCCLUNG REPORT
A critical view of pensions-------------------------------------- 98
The purpose of private pensions and social security in our Society----- 99
The value of public support; tax “inequities”----------------------- 104
Private pensions, their administration and their “unfair” provisions--- 107
Pension plan funds and reinsurance------------------------------ 108
Suggested future approaches or alternates------------------------ 110
Foreword
This paper is divided into two parts. PART ONE discusses the sub-
ject of private pensions in our society. PART Two discusses the Mc-
Clung report.
. Note: While the term “private pension plan” is used exten-
sively in this paper, it is also meant to describe deferred profit-
sharing plans in their role as pension plans; the term “Social
Security”—as used in this paper—is used to describe the retire-
ment portion of the old age, survivors and disability insurance
System.
EDITOR'S NOTE
The McClung Report has caused a great deal of consternation. It is, however,
important that the document authored by Dr. McClung be put into proper per-
Spective. Probably the best evaluation of the Report is in Dr. McClung's own
words, as described in the Spencer Weekly News Digest: .
. “Although many of those in attendance (at the Midwestern Pension
- Conference) were ‘out for blood,' Mr. McClung shocked them into immobility
by his frank answers to the first two questions:
Q: “What data did you use in preparing the staff report?"
A : “None.” .
Q: ‘Are the assertions in the staff report based on fact or assumptions?”
A : “Assumptions, of course.’”
*A special report prepared for the Eastman Kodak Co. and Marion B. Folsom,
Director, by Towers, Perrin, Forster & Crosby, Inc. . -
91
S3–200–68—pt. 1–7
Part One—PRIVATE PENSION PLANS
The economic and social impacts of private pension plans and their
funds have caused a great deal of interest—and some concern—in
various segments of the Government. This interest is personified by
the growing influx of pension-related bills and resolutions into con-
gressional hoppers. Other expressions of interest are demonstrated by
such Government-sponsored papers as Public Policy and Private Pen-
sion Programs (The President's Committee Report on Private Re-
tirement Plans) and Old Age Income Assurance: An Outline of Issues
and Alternatives (The McClung report). Undoubtedly this interest
will become even more intense in the near future as private pension
plans—and their funds—continue to increase.
HISTORICAL BACKGROUND
Private pension plans are a relatively modern social and economic
innovation. As described by Melone and Allen in their book, Pension
Planning:
“The tºgming of industrial pension plans in the United States
date back to the establishment of the American Express Co. plan
in 1875. The second formal plan was established in 1880 by the Balti-
more & Ohio Railroad Co. During the next half century, approxi-
mately 400 plans were established. These early pension plans were
generally found in the railroad, banking, and the public utility fields.
The development of pensions in manufacturing companies was some-
what slower, due largely to the fact that most manufacturing com-
panies were still relatively young and, therefore, not confronted with
the superannuation problems of the railroads and public utilities.
“Insurance companies entered the pension business with the issuance
of the first group annuity contract by the Metropolitan Life Insur-
ance Co. in 1921. The second contract was issued by the Metropolitan
in 1924 to an employer who already had a retirement plan on a ‘pay-as-
you-go’ basis. In 1924 the Equitable Life Assurance Society announced
its intention of offering a group pension service, thus becoming the
second company to enter the field.”"
One of the first large companies to adopt a group annuity plan was
Eastman Kodak Co., which in 1928 established a retirement annuity,
disability, and life insurance plan, underwritten by an insurance
company. . . . . - T -
The underlying reasons why industrial concerns consider pension
lans desirable were explained in an article in the September 1929
issue of the Atlantic Monthly by M. B. Folsom, treasurer of East-
1 Joseph J. Melone and Everett T. Allen, Jr., Pension Planning (Homewood, Ill. : Dow
Jones-Irwin, Inc., 1966) pp. 1–2.
92
OLD AGE INCOME ASSURANCE—PART I 93
mln Kodak Co., who served on the original Social Security Advisory
Council and later as Secretary of Health, Education, and Welfare.
The following are extracts from this article:
“Removing the older man who is no longer able to produce makes
way for younger people and has a stimulating effect upon the whole
organization. Employers all feel that, up to the age of declining
strength, longtime service on the part of many employees is a business
asset. An organization which takes adequate care of its superannuated
people appeals to the workers. A well-established pension plan un-
doubtedly serves to attract employees, even at younger ages, who are
of a more stable nature, and to that extent affects turnover and the
general character of the working force. The reputation of an employer
in a community is enhanced by the fair treatment of the older em-
ployees, and this is a definite business advantage.
“Good, humane management will not permit employees of long
Service to be discharged if they have not adequate means of sustenance.
Yet good management cannot keep employees on the force when they
are no longer productive. The solution is the inauguration of a sound
and adequate pension plan.”
Private pension plans, however, did not enjoy great growth during
the 1930's. As Melone and Allen remark:
“Although the beginnings of private pensions date back to the 1880's,
the significant growth in these programs has come since the 1940’s. As
recently as 1940, less than one-fifth of all employees in commerce and
industry were covered under pension plans.” ” (Our emphasis.)
Since 1940, however, pension plans have grown at an extremely fast
rate. In 1940, about 4 million workers were covered or about 14 per-
cent of the employees in nonagricultural, nongovernmental institu-
tions. By the end of 1966, about 30 million or more of employees in the
same institutions were covered. This represents about 57 percent of
workers in nonagricultural and nongovernmental jobs. (Most State and
Federal employees are covered under their own systems.)
HISTORICAL TAx BACKGROUND
To best understand one of the reasons for this recent proliferation of
private retirement plans, we must look at the Government's Federal tax
policy concerning private pension plans. A good description of this
fiscal policy is found in the book by Paul P. Harbrecht, S.J., Pension
Funds and Economic Power:
“From 1913 when the income tax was inaugurated until 1921, em-
ployers could treat pension liability accruing in the current year as
ordinary business expenses. Amounts contributed to pension funds
could be deducted from gross income. The income from pension funds,
however, was subject to the same taalation as any other trust. At the
8ame time retired employees were subject to taa, on the pension pay-
7ments they received. Employees were also taayed during their years of
active service on the amount of their employer's contribution to a
pension trust for their benefit. Furthermore, there was no ea emption
of an employer's payments to the fund liabilities for the past service
benefits. (Our emphasis.) . . . .
*Ibid., p. 2. ... - . . .
94. OLD AGE INCOME ASSURANCE—PART I
“The situation, then, was that the employee was being taxed on the
contributions made by the employer for pension benefits which might
never be received. The plan itself might be terminated at any time or
the worker might leave the job and thereby forfeit all rights to a pen-
sion. In these circumstances, employers were discouraged from fund-
ing pension plans to meet future liabilities and were also deterred from
funding past service liabilities.
“The first exemption favoring pension trusts was incorporated in
the Revenue Act of 1921. This act exempted the income of pension and
profit-sharing trusts from income tax and relieved employees from the
tax on the current contributions made to a trust for their benefit by
the employer. There was no relief given for funding of past service
liabilities. The provision enabling an employer to j a reasonable
contribution for past service liabilities over a 10-year period was not
made until 1928. At that time employer's contributions to a pension
fund were allowed as a deduction from gross income because they con-
stituted a business expense, even though a company could at any time
amend or revoke a plan and divert pension funds to its own use. The
Revenue Act of 1938, however, provided for an exemption only if
the wording of the plan made it impossible to divert pension funds
from uses other than the exclusive benefit of the employees. (Our
emphasis.)
“Advances previously made were preserved in the 1942 Revenue Act
in which the pension tax provisions were completely rewritten. The
new statute contained much more specific provision for regulating em-
ployees benefits in the method of deduction.” "
Harbrecht's book also gives some other “public” reasons for the
growth of private pension plans:
“An analysis of this rapid growth reveals the influences at work in
shaping the private pension plans. In a report on welfare and pension
plans the subcommittee of the Senate Committee on Labor and Public
Welfare gives the following reasons for the rapid growth of pension
programs: -
“1. During and since World War II, high corporate taxes coupled
with tax reduction for contributions to pension funds permitted the
establishment of these programs at low net cost. -
“2. Wage stabilization programs during and since World War II
and the Korean conflict froze wage rates but permitted increased em-
ployee compensation in the form of these ‘fringe’ benefits.
“3. Court decisions in the years 1948–50 made welfare and pension
matters a bargainable issue. . -
“4. Since 1948 the labor unions have put on a drive to obtain wel-
fare and pension programs. Labor spokesmen stated that another rea-
son for the development of these programs has been the inadequacy
of benefits under the Government programs.
“A survey of corporate pension funds published by the Securities
and Exchange Commission in October 1956 finds essentially the same
reasons for their growth. The SEC study goes on to say: ‘The chief
impetus to pension plan growth, however, was the establishment of old
age and survivors’ insurance in the middle thirties; at about the same
time railroad pensioners also came under the railroad retirement sys-

• Paul P. Harbrecht, S. J., “Penston Funds and Economic Power” (New York: the
Twentieth Century Furid, 1959), pp. 8–9.
OLD AGE INCOME ASSURANCE—PART I 95
tem of the Government.’ It has often been remarked that the Govern-
ment's program to provide social security benefits made Americans
‘security conscious’ “* * *. -
“With the country's social security program providing the psycho:
logical setting for the growth of private pensions funds, the Federal
tax policy added a strong inducement to set up these plans. A brief
history of the Federal tax treatment of pension funds will indicate
the formative influence of Government policies upon the develop-
ment of the pension movement.” “
Harbrecht’s book continues:
“Recent economic developments have also given impetus to the pen-
sion movement. During the 1950's, the period in which private pen-
sion funds have been growing most rapidly, their assets have been in-
vested to an increasing extent in a rising capital market. As a result,
the earnings performance of the funds has been rewarding and has
justified the employers’ hopes in establishing and maintaining pension
trusts. The growing desire of employers to put the plans for retire-
ment of their workers on a steady and predictable basis has also played
a part.” ” (Our emphasis.)
(It should be pointed out that Harbrecht is a “critic” of the private
pension plan system. In the main, his thesis develops the theory that
the vast accumulation of pension funds in the hands of small groups—
bankers, insurance companies, trustees, unions, et cetera—organizes a
new power structure of men who “control” pension funds that no one
“owns.” This is one reason why his quotes are particularly significant.)
THE PRESENT SITUATION
As noted previously, private pension plans now cover 30 million or
more workers—or about 57 percent of nonagricultural, nongovern-
mental workers. In 1966, about 2.7 million retired workers received an
estimated $2.9 billion in retirement benefits from private pension plans.
The President’s Committee report has conservatively estimated that
these figures will go up to 6.5 million workers and $9 billion, respec-
tively, by 1980. (Our emphasis.) -
•º
THE PRESENT TAx POLICY
Any attack on the private pension plan system—almost without ex-
ception—points to the tax situation of qualified pension plans. Under
the present Internal Revenue Code, qualified pension plans:
(a) Permit the employer to deduct contributions (within certain
specified limits) as ordinary and necessary business expenses (as with
wages, salaries, et cetera) for Federal income tax purposes; " -
(b) Do not include the employer's contributions in the taxable in-
come of employees covered by plan until the employees actually re-
ceive benefits from the plan; " -
(c) Are not taxed on funds accumulated by investment return; and
4 Ibid., pp. 7–8.
5 Ibid., p. 9, -
* Assuming a 50-percent corporate income tax rate, it would cost an employer $0.50 to
put a dollar into a retirement plan. . . .
7 This point shows the fallacy inherent in the charge that private pension plans avoid
taxation ; the recipients of private plan benefits pay a taa (on both previously deducted
employer contributions and untaxed fund earnings) at the time benefits are received (as
tºhen, º compen 8ation is received)—the tax on pension plans is only deferred and
11 of a 170ided. .
96 OLD AGE INCOME ASSURANCE—PART I
(d) Have as one of their chief characteristics the irrevocability of
employer contributions—these funds and any investment return on
them must be used to provide benefits for plan members.
In a recent speech before the National Association of Manufacturers
Employee Benefits Committee (Summit Hotel, New York, N.Y.,
March 14, 1967), Representative Martha W. Griffiths (Democrat,
Michigan) commented:
“The (private pension) system, however, increases the tax contribu-
tions of all other taxpayers by approximately $1 billion per year. In
addition, the cost of the contributions to the company is included in
the cost of the product sold to the general public and thus paid for a
second time.”
We might logically ask who would have been responsible for paying
the estimated $2.9 billion to 2.7 million private pension recipients in
1966? The Government? How would the money have been raised?
Through increased taxation? And if the tax policy did not permit the
deduction of employer contributions and private pension growth, the
companies paying benefits would have passed twice the cost on to the
consumer—and how much would this have meant in increased con-
sumer prices and inflation? Finally, since investment return of most
pension funds has been good, how much has this investment return
helped keep increased prices from being passed on to the consumer
because lower funding costs were possible?
The qualification of private pension plans is a strict and formal
process. Companies initiating qualified plans undertake definite re-
sponsibilities. Before approving pension plans, the Internal Revenue
Service requires that the plan—
Be a trust, contract or some other from of legally binding agree-
ment; it must be intended as a permanent and continuing arrange-
ment; *
Must not discriminate in favor of officers, shareholders, super-
visors or other highly compensated employees and must benefit an
establishment's employees in general rather than just a limited
number; the plan must cover at least a certain portion of em-
ployees or cover various groups of employees (salaried, bargain-
ing group, etc.) which the IRS has determined not to favor offi-
cers, shareholders, et cetera;
Must be for exclusive benefit of the plan members and that
jº the plan must be irrevocably dedicated to provide plan
enefits: .
The plan must provide benefits which can be definitely deter-
mined.
REASONS FOR ExISTENCE
There are many public and private reasons why private pensions
are both desirable and necessary. A few reasons include: -
Availability of funds after retirement.—In our society, age 65 is
considered the “normal” retirement age. This age is designated in
most private pension plans and is the age set by Congress as a require-
8 While the Treasury Department requires that the plan be in writing, recent practices
established by the American Institute of Certified Public Accountants (Accounting Opinion
No. 8) for the accrual accounting of pension plan costs also “regulates” “informal” pension
practices which are not in writing but which have been communicated to employees or can
be determined by prior company practices. - - -
oLD AGE INCOME ASSURANCE—PART I 97
ment for receiving full benefits under old age, survivors and disability
insurance. Because of the dropoff of earnings at this age, some type of
income is necessary. Retirees covered under OASI receive pension
benefits related to their coverage and earnings history. Private pen-
sions supplement this income by providing either flat-rate or earnings-
related benefits which permit retirees to maintain a reasonable stand-
ard of living (as compared with their preretirement standard) and
purchasing power.
Humane removal from work force.—The problem of aging, in-
creased deterioration of the body and mind at advanced ages, and
the psychological factors of “growing old” affect the productivity of
.# workers. An employer can meet these problems in several ways:
By discharge of the aged employee without further compen-
sation;
By continued retention of the employee in his present position
and at current compensation;
By continued retention of the employee but transferring him
to a less demanding position and to a lower compensation rate;
By establishing and maintaining a formal pension plan.
The first two alternates are not practical or humane. In the first,
the aged employee is considered nothing more than a factory imple-
ment to be discarded when unproductive. In the second, the employer
runs the risk of having a high cost, and many times, unproductive
shop. The third alternate presents the employer with keeping or at-
tempting to establish “low productivity” jobs—plus the psychological
problems of demotion are great in the aging employee. As Melone and
Allen remark:
“The fourth alternative available to the employer in meeting the
problem of superannuation is to establish a formal pension plan. A
pension plan permits employers to terminate superannuated employees
in a humanitarian and nondiscriminatory manner. The inefficiencies
associated with retaining employees beyond their productive years
are, therefore, eliminated. Employees will know that they are expected
to retire by a certain age and they can make the necessary provisions
for their retirement. Furthermore, the sense of security derived from
the knowledge that provision is made, at least in part, for their retire-
ment needs should increase the morale and productivity of employees.
Also, systematic retirement of older workers will keep the channels of
promotion open, thereby offering opportunity and incentive to the
young, ambitious employees—particularly those aspiring to executive
positions.” " -
Competition.—There is an increasing competition in industry for
personnel—productive personnel. One of the inducements offered is
supplemental remuneration in the form of employee benefits. A retire-
ment plan is one of these inducements for remaining with a company.
Work force stability.—While companies may initiate pension plans
to be competitive and attract employees, they also initiate pension plans
to retain present employees and reduce labor turnover. This objective
is often criticized as reducing the labor mobility of the work force.
Is labor mobility always desirable? Not necessarily. The stability of
a regional work force is both a social and economic necessity. Many
° Melone and Allen, op. cit., pp. 8–9.
98 OLD AGE INCOME ASSURANCE—PART I
employees don’t want to be mobile; deep roots in the community are
often a deterrent against moving—whether jobs are available or not.
TWithout a stable work force, a stable industry is seldom possible espe-
cially at the wage-earner level. It is necessary that plants have well-
trained employees; otherwise companies become uncompetitive and
mobile themselves. .
The }. interest in private retirement plans is obvious—and many
public figures have commented both pro and con on this. Recently, Rep-
resentative Thomas B. Curtis (R., Missouri) in speaking before the
House of Representatives, remarked:
“* * * Congress, to a large extent, has followed the obviously sound
policy that the workers of this country should be encouraged to ade-
quately provide for their superannuation beyond the basic floor pro-
vided by social security to the extent that each person feels is rea-
sonably adequate for his particular circumstances, through a combi-
nation of personal thrift and investments, through insurance, and
through private retirement programs. In 1942, Congress provided an
impetus for private retirement plans by clarifying the tax treatment of
such plans in the Internal Revenue Code. In the years following, busi-
ness and labor responded with great initiative. Today well over 25 mil-
lion people are covered under private pension plans, and estimates are
that by 1980 total coverage will exceed 42 million employees. Equally
important is the growth that private pension plans have experienced.
In 1950 less than 10 million employees were covered in plans with some
$12 billion in assets. Today, the assets of these plans are approaching
$90 billion * * *.”
Part Two—THE MCCLUNG REPORT
A CRITICAL VIEW OF PENSIONS
Recently, the value of private pensions has been the subject of much
discussion—both in and out of the Government. Probably one of the
most negative papers written on the subject is Old Age Income Assur-
ance: An Outline of Issues and Alternatives. The document was pre-
pared by the committee staff for the Subcommittee on Fiscal Policy
of the Joint Economic Committee, Congress of the United States
(Washington, U.S. Government Printing Office, 1966–Document No.
70–5080). In her transmittal letter, Representative Martha W. Grif-
fiths (Democrat, Michi º said that the document was prepared pri-
marily by Dr. Nelson McClung, a staff economist specializing in fiscal
policy matters. The document has become popularly known as the
McClung report.
The report caused a great deal of mental chafing in business,
union, and Government circles because of its rather free-swinging de-
nunciation of the total pension (and tax) system—both private and
public (social security, municipal, State, and civil service pensions
...). Dr. McClung gives the impression that no one is doing a
good JOp. . .
In preference to answering Dr. McClung’s charge on a paragraph
by paragraph basis, this paper will address itself to the major issues
OLD AGE INCOME ASSURANCE—PART I 99
raised by the report. However, to understand Dr. McClung in full,
his entire document should be read.
The following pages address themselves to major issues raised in
the McClung report. These we believe to be in the areas of:
I. The purpose of private pensions and social security in our society.
II. The value of public support (through tax incentives) of private
pension plans.
III. Tax “inequities.”
IV. Private pensions, their administration, and their “unfair” pro-
VISIOI)S.
V. Pension plan funds and reinsurance.
VI. Suggested future approaches or “alternatives.”
I. THE PURPOSE OF PRIVATE PENSIONS AND SOCIAL SECURITY IN OUR SOCIETY
Prior to 1935, the Nation had no public retirement program and
few private retirement plans. As we have seen in part 1, the private
pension segment has increased dramatically. The growth of social
security is no less dramatic. In 1939, the maximum yearly primary
benefit was $492 and the maximum tax was 2 percent (1 percent on
the employer and 1 percent on the employee) on the first $3,000 of
earnings. Today the maximum tax is 8.8 percent (4.4 percent each on
the employer and employee) on a wage basis of $6,600 and the present
maximum yearly primary benefit is $1,630.80.
Dr. McClung gives the impression that pensions are primarily So-
cial in nature. He is right to a certain degree. But pensions also have
economic, business, and personal implications and characteristics.
And perhaps in evaluating Dr. McClung’s various remarks some
discussion is necessary concerning the philosophy of pensions—both
public and private. . • *
Within this context, Dr. McClung makes these comments (inter-
preted and paraphrased):
1. Old age pension system satisfies public objectives very poorly.
2. The objectives of private plans are not in the public interest.
3. Distribution of burdens on young and benefits to aged are unfair
4. The “merit versus needs” concept of benefit payments does not
satisfy the public interest. -
. There are a number of other issues but these are among the most
important. A brief discussion on each of these points follows:
1. Old age pension system satisfies public objectives very poorly:
This is an extremely broad statement and completely unsubstantiated.
As was pointed out in the Editor's Note, many of Dr. McClung's re-
marks were based on “assumptions.” The truth in fact is that both
private and public pensions are serving the public interest very well:
(a) Social security has been in existence for just 32 years and
has provided millions of retirees and their dependents with bil-
lions of dollars in retirement benefits. .
(b) There were about 750 qualified pension and deferred profit-
sharing plans in 1940—the year that private plans began to grow;
today there are well over 132,000 qualified plans; these plans have
also provided millions of retired employees with billions of dol-
lars in retirement benefits. - . . . . . .
100 OLD AGE INCOME ASSURANCE—PART I
While cold statistics are no proof of how well or how badly pension
plans meet public objectives, they are an indication of the relative
merit of pensions to the public. Part 1 has shown that one of 10
Americans now receive social security benefits and that 2.7 million
persons received $2.9 billion in private pension benefits in 1966 alone.
On the basis of logic alone, these figures indicate the relative merit—
if in monetary sums alone—of private and public pensions to the
Society.
These retirees are, after all, a part of the public.
Private pension plans are a very young institution as indicated by
the above figures. Many private plan critics ignore this youth. Of
the 132,000 qualified plans in existence today, over 131,000 did not
exist 25 years ago when the Internal Revenue Code of 1942 was passed
giving tax inducement to establish plans. We can make many assump-
tions about the future of private pension plans. If today’s figures are
an indication of tomorrow’s private pension value, we can make a more
valid assumption of private pensions' success in satisfying public
objectives. -
We might also point out to Dr. McClung that one of the original
objectives of the 74th Congress in enacting Social security was to pro-
vide an economic floor for retirees after age 65. In revising the Internal
Revenue Code in 1942, Congress gave industry a significant inducement
to set up private pension plans for economic, business, and social pur-
poses. The personal aspects of pensions are multifold. Under our pres-
ent form of taxation, thriftiness is practically discouraged. Income
taxes, real estate taxes, State income taxes, excise taxes, amusement
taxes, Sales taxes, and a bevy of indirect taxes of all types make saving
for retirement difficult, if not impossible. Without social security and
private pension plans to help retirees maintain an adequate standard
of living (based on their pre-retirement standard), many retirees would
have become charity cases. (It should also be pointed out that social
security payments are a tax paid jointly by the employer and employee,
and should not be considered some form of Government subsidy given
to the public.) - -
These personal aspects of pensions are undoubtedly social in nature
and serve public objectives.
2. The objectives of private plans are not in the public interest.
Much of this paper refutes this point. A comment by Dr. Carl Fisher
before a meeting of the American Pension Conference (New Yorker
Hotel, New York, N.Y., February 9, 1967) might add another note to
this discussion:
“Now we come to another argument. There is the “question about
the wisdom of entrusting to private organizations the management
of a collective income transfer system.” The reference is to (private)
pensions. So now, the proposal appears to be that something which
originated in private industry, grew under private industry, should
be turned over to * * * the Government.
“Talking about collective income transfer system, what about the
collective income system : It is even more important than the transfer
system, and certainly consumers and taxpayers are interested in that,
too. Interest too important to be entrusted to private organizations?
This reminds me of what the first Queen Elizabeth was reputed to
OLD AGE INCOME ASSURANCE—PART I 101
have said about Sex: ‘It’s much too good to be permitted to the common
eople.’’
p Dr. McClung’s thesis seems to ignore the fact that private plan bene-
ficiaries are the public. Congressmen elected by the public and repre-
senting the public have initiated the tax policy covering private pen-
sion plans in response to the public's desire to see private pension plans
expand and grow.
3. Distribution of burdens on young and benefits to aged are un-
fair.—The first portion of the statement is undoubtedly true and has
been a matter of public policy since the original social security bill was
enacted. It was, however, the fairest of many alternates open to the
74th Congress and a responsibility that the public and industry under-
took as a whole when social security was enacted. A popularized ver-
sion of this public policy can be culled from various paragraphs in
Schlesinger's The Coming of the New Deal:
“* * * In the meantime, corresponding progress was being made
toward provision for the aged. Here there was a long tradition of
national concern. The Progressive platform of 1912 had called for
old-age pensions, and in the years following a number of States
investigated the possibility of pension laws. In the twenties, eight
States passed optional laws, and with the depression there was a great
swing to mandatory legislation. In 1933 alone, 10 states passed manda-
tory acts. Yet in all these laws payments were based on need; coverage
varied tremendously; and nearly half the States had no laws at all.
To Epstein and his Association for Old-Age Security, as well as to
many others, there seemed a pressing need for Federal action * * *.
“* * * On June 8, 1934, therefore, he (Roosevelt) sent a message
to Congress, vigorously affirming his faith in Social insurance (‘among
our objectives I place the security of the men, women, and children
of the Nation first') but suggesting that legislation be deferred until
the next winter. At the same time, he laid down what he regarded as
the principles of a sound program: It should be a State-Federal pro-
gram actuarially sound, and financed by contributions rather than by
an increase in general taxation. Three weeks later he appointed a
cabinet Committee on Economic Security, with Frances Perkins as
chairman, charged with formulating a program to be submitted to
the President before December * * *. (Our emphasis.)
“* * * When the Committee on Economic Security came to the
question of the aged, it adopted a national system of contributory
old-age and survivors insurance without anxiety or fuss. In so doing,
it took a venturesome step which contrasted strikingly with the cau-
tion shown in the case of unemployment compensation—and in spite
of the fact that much more thought had been given to a national system
for the unemployed than for the aged. One reason why the committee
could be more audacious here was the absence of State old-age insur-
ance projects; there was no Wisconsin plan to create vested intellectual
interests. Another was the fierce outside agitation for old-age pensions;
though the Committee on Economic Security had started work before
Dr. Townsend's plan for $200 a month for everyone over 60 had devel-
oped momentum, yet the mounting Townsendite clamor in late 1934
and early 1935 certainly improved the opportunity for inserting
102 OLD AGE INCOME ASSURANCE—PART I

sweeping old-age insurance recommendations in the Social Security bill.
Another—and perhaps decisive—reason was the conviction of the
actuaries that old-age insurance on a State basis would be infeasible be-
cause of the great mobility of workers in the course of a lifetime * * *.
(Our emphasis.)
“* * * On January 15, 1935, the Committee on Economic Security
transmitted its reports to the President. Roosevelt already had his
own views on Social Security. “There is no reason why everybody in
the United States should not be covered,” he once said to Miss Perkins.
“I see no reason why every child, from the day he is born, shouldn't
be a member of the social security system * * * I don’t see why not.
Cradle to the grave—from the cradle to the grave they ought to be in
a social insurance system.’” - - .
“He (Roosevelt) had in addition specific views about the character
of a social insurance program. Thus, he believed that public insurance
should be built upon the same principles as private insurance. ‘If I
have anything to say about it,” he once remarked, “it will always be
contributed, and I prefer it to be contributed, both on the part of the
employer and the employee, on a sound actuarial basis. It means no
money out of the Treasury.’ This meant a self-supporting system.
financed by contributions and special taates rather than out of the
general tax revenue. Frances Perkins, arguing against employee con-
tributions, pointed out that the employer shifted the payroll taa, to the
consumer in any case, so that employees were already paying their
share; Tugwell, arguing against the payroll taal, pointed out that this
amounted to a form of sales taa, and meant that the system would be
financed by those who could least afford it; but none of this argument
availed. ‘I guess you’re right on the economics,” Roosevelt ea plained
to another complainant some years later, “but those taayes were never
a problem of economics. They are politics all the way through. We
wt those payroll contributions there so as to give the contributors a
egal, moral, and political right to collect their pensions and their un-
employment benefits * * *.” (Our º
“ * * * The Committee on Economic Security, confronting the
problem of the aged, proposed a compulsory system of contributory
payments by which workers could build up gradually their rights to
annuities in their old age. This left the problem of persons on the
verge of retirement who had no past opportunity to contribute to their
own old-age pensions. The best way in which these aging workers
could be taken care of, the committee concluded, was through the Fed-
eral Government's paying a share of the cost. By 1980, according to
its estimate, the Government would have to contribute to the old-age
system around $1.4 billion a year. The committee conceded that the
creation of this commitment would impose a burden on future genera-
tions. But the alternative would be to increase reserves at a far higher
rate and thus impose a double burden on the present generation, which
would have to contribute not only to its own annuities but to the un-
earned annuities of people middle-aged or over. ‘The plan we advo-
cate,’ said the committee, “amounts to having each generation pay for
the support of the people then living who are old. (Our emphasis.)
“Morgenthau had accepted the committee plan and signed the re-
port. Yet as he meditated the financing scheme, he began to feel a
OLD AGE INCOME ASSURANCE—PART I 103
certain immorality, as he told the Ways and Means Committee, in
the notion of ‘borrowing from the future to pay the costs.” Roosevelt
shared Morgenthau’s disapproval. ‘It is almost dishonest,’ he told
Frances Perkins, ‘to build up an accumulated deficit for the Congress
of the United States to meet in 1980. We can’t do that. We can’t sell
the United States short in 1980 any more than in 1935.”
“The Treasury alternative was to raise the rates of contribution and
thereby build a much larger reserve fund, so that future needs could
be met from the fund rather than by levies on current general revenue.
This fund, Morgenthau suggested, could be applied to the reduction
of the national debt. Roosevelt even supposed that it might eventually
serve as the sole customer for Federal bonds, thus freeing the Govern-
ment from reliance on private bankers. Under the original plan, the
maximum size of the reserve fund would have been less than $12
billion; under the Treasury plan, it would amount to $50 billion by
1980. The Treasury plan had obvious disadvantages. It shifted the
burden of providing for currently aging workers from the population
as a whole to the younger wage earners. ‘Our programs,’ said Abraham
Epstein, “actually relieve the wealthy from their traditional obligation
under the ancient poor laws.’ Moreover, the creation of so large a fund
involved economic risks. As Alvin Hansen on the Technical Board,
and Marion. Folsom of the Eastman Kodak Co., on the Advisery Coun-
cil pointed out, it would divert a large amount of money from con-
sumer purchasing power; ‘that is bound,” Folsom said, ‘to have a
depressing effect on general conditions.” And the problem of finding
ways to invest $50 billion seemed packed with difficulties.
“The self-sustaining theory of social insurance meant, in effect, that
the poor had to pay most of the cost of keeping the poor. Yet, whether
because of this or in spite of this, the House committee quickly adopted
the reserve system; probably the idea that private insurance should
serve as the model was too compelling. Moreover, there was the political
advantage which so impressed Roosevelt. Under the original plan,
the old-age insurance system would be at the mercy of each succeeding
Congress; while, with a vast reserve fund built up out of contributions,
the people were in a Sense creating a clear and present equity in their
own retirement benefits. The existence of the reserve thus undoubtedly
strengthened the system politically. Yet the impact of the reserve on
the business cycle—the withdrawal of large sums of money from the
spending stream and the reliance on regressive taxation—doubtless
added deflationary tendencies which later in the decade weakened the
whole Nation economically. In time, it appeared that the administra-
tion and the Congress had made the wrong decision in 1935 * * *.
“* * * The Social Security Act in its final form was far from a
erfect piece of legislation * * *.
“* * * For all the defects of the act, it still meant a tremendous
break with the inhibitions of the past. The Federal Government was at
last charged with the obligation to provide its citizens a measure of
protection from the hazards and vicissitudes of life * * *.” 19
Human institutions are, of course, imperfect establishments, but in
the case of social Security what was the alternate to a present young
10 Arthur M. Schlesinger, Jr., The Coming of the New Deal Boston: Houghton Mi --
Co., 1959), pp. 303—3.15. g of ( g flin .
104 OLD AGE INCOME ASSURANCE—PART I
generation accepting responsibility for a present old generation? Dr.
McClung offers no acceptable alternatives. And perhaps none is avail-
able unless we accept a monolithic government which completely
changes our democratic institutions. This is perhaps one of the para-
doaces in the McClung thesis: a complaint that the young take care of
the old (which shows a population’s social commitment) while com-
plaining that private pension plans establish reserves so that the young
will provide benefits for themselves.
4. The “merit versus needs” concept of benefit payments does not
satisfy the public interest. This point attacks some of the basic funda-
mentals of our Society.
(a) An employee has a right to better his work conditions, in-
cluding compensation and all the inherent manifestations of those
conditions (e.g.: wage-related pensions as a manifestation of
“merit”). -
(b) An employer has the right to set the conditions of em-
ployment and the benefits which accrue from that employment;
these may be set unilaterally, but such conditions as collective bar-
gaining and competitive “facts of life” often modify this unilat-
eral right. •)
(c) The free enterprise system has risktaking as one of its most
prominent features; this is exemplified by the birth, growth, or
death of companies; it is also an inherent part of the employee's
right to remain or sever (risktaking) his employment with a
company in order to expand his future opportunities.
(d) The motivation of employees in the United States is a com-
plex phenomenon—but the recognition of “merit” and its attain-
ment is undoubtedly one of the pillars upon which this nation has
been built—and one of the manifestations of merit includes the
building of pension benefits.
The above arguments are not meant to disregard the “needs” aspects
of funds after retirement; they are put forth to show the “needs” as-
pects of “merit.” (Most private pension plans give the “needs” aspects
of retirement high priority. “Final pay” or “minimum benefit” retire-
ment plans are examples of this acute interest—and responsibility—
on the part of management.) If we are to increase an employee's total
contribution “to society,” the destruction of the merit principle will
be extremely harmful to our society—as shown by worker “interest” in
Communist Societies and by worker “motivation” in such “paternalis.
tic” countries as Uruguay.
II. THE VALUE OF PUBLIC support (THROUGH TAx INCENTIVEs) of PRIVATE
PENSION PLANS -
III. TAx “INEQUITIES”
Dr. McClung's entire thesis (as that of other pension plan critics
such as Representative Griffiths, Prof. M. C. Bernstein and others)
rests on the value of public support (through tax incentives) of pri-
vate pension plans. As outlined in part 1, pages 6–8, of this paper
equitable tax treatment has been given to employers to establish pen-
sion plans. Briefly these advantages are discussed on pages 11–12 of
OLD AGE INCOME ASSURANCE—PART I 105
part 1. The following discussion in the form of questions and answers
reviews some of the important points in this “problem”:
Q: Why has the tax policy given an inducement to employers to
establish pension plans? -
A. There were obviously some political reasons why tax incentives
were given, but there were also some very good economic and Social
reasons. This “delegation of social responsibility” is attacked by Dr.
McClung. This attack, however, fails to recognize that private com-
panies and their managers are capable of social responsibility and
commitment. If private plans are not oermitted to expand, there is
one obvious outcome: The necessity of increased Government inter-
vention to supply pensions to the public through social Security,
public assistance or other taw-supported schemes. And this leads to
the question of how much more this will cost in increased taxation as
compared to the “supposed loss” of $1 billion.
Q. Haye public pensions made any contributions to public good?
A. This question can be answered in a series of statements:
(a) In 1966, about 2.7 million retired workers received
an estimated $2.9 billion in private retirement benefits.
(b) Older plans that were initiated long before the sup-
posed “tax subsidization” of 1942 have continued to expand
their plans and supply retirement benefits to their em-
ployees (e.g.: Eastman Kodak, Union Carbide, A.T. & T.,
etc.)
(c) Pensions funds—far from being stagnant reservoirs
of wealth—have supplied funds for growing businesses,
mortgages, and Government needs.
Q. Does the public pay the cost of private pensions plans?
A. It is impossible to ignore Representative Griffiths' charge as
quoted on page 96 in part 1 of this paper that the general public pays
a large part of the cost of private pensions. In arguing with the critics,
this question must be faced squarely. Yes, the public does pay a large
part of private pensions (just as it pays the employees' wages for which
it receives a product); it is justified; it is a part of every economic
system known to man. The basic principle of establishing prices for
the marketing of goods or services requires that projected produc-
tion, distribution, compensation, etc., costs be determined. Predicted
pension funding costs are very often a part of this process. (With the
initiation of accounting opinion No. 8, this cost now becomes—more or
less—a definitely predictable accrual cost to be charged against in-
come.) The cost of the product therefore must include the cost of
pensions. However, the favorable tax policy relieves the consumer of
paying at least a portion of this cost.
Q. But doesn’t the public then pay for this “saving” by increased
taxes as Representative Griffiths points out? -
A. This is also a question which Dr. McClung brings up in his “for-
ward shifting” concept on pages 9–10 in the report. This point may
be discussed within the following context:
(a) If we assume that the “unsubsidized” portion of an em-
ployer's cost for pensions is in the price of his product we can
also readily assume it is a part of doing business and that in a
competitive market it will affect whether the product is purchased
or refused by buyers.
106 OLD AGE INCOME ASSURANCE—PART I
(b) We can further assume that if the product is not competi-
tive because of quality, need or cost, the employer must make ad-
justments of some sort to again make the product competitive or
go out of business.
(c) The employer's portion of pension costs is therefore an im-
portant part of his product’s cost which cannot easily be passed
on to the consumer. -
(d) The employer, however, does receive some tax incentive
in providing pension benefits by having a qualified pension plan;
he is permitted to put sums of money away to º retirement
benefits for present and future retirees (the public?).
(e) We can assume then that a present generation of workers
are providing for their future benefits by a present employer's
contributions to pensions (as opposed to the social security pay-
as-you-go concept where today’s employees are paying for today’s
retirees’ benefits). .
These assumptions are, of course, only one method of evaluating the
charge of “forward shifting.” One concept is, however, often over-
looked. Too often the questions of the value of private pensions and
their taxation are only evaluated in the context of the present. Yet,
the very nature of pensions is to provide future solutions to the prob-
lems of employee retirement and standards of living. Undoubtedly,
one of the long-range objectives of private plans is to have ample
funds readily available when employees retire. And perhaps, this was
one of the long-range objectives of Congress in formulating tax pol-
icy in 1942. If these long-range objectives are being met, we believe
they are in the public interest.
While we hesitate to enter into the field of economics with its vari-
ous theories and jargon, it is worth noting Dr. McClung's document has
a large rip tide of economic theory. Undoubtedly the concept of “lais-
sez-faire” is largely dead, having received a mortal blow since 1932.
Keynesian economics of a government-planned economy have been
with us since that time. And the “new economics” of the Kennedy era
continues the massive government involvement in fiscal policy. If “tax
inequities” do exist in pension-related areas, they are just one small
art of our entire tax structure problem. Perhaps this point can best
e summed up by another “critic.” Louis Rolnick, Director, Welfare
and Health Benefits, International Ladies Garment Workers, in speak-
ing on the President's Committee Report (20th Annual Conference on
Labor, New York University, April 20, 1967) remarked on the ques-
tion of private pension tax relief:
“It is undeniable that this tax treatment constitutes an indirect pub-
lic subsidy to the plans. I find this, however, to be the least persuasive
of the considerations cited as justifying additional regulations. The
report relies heavily for its recommendation on vesting on the theory
that equity requires identification of employer payments as a kind of
deferred wage. If we adopt this premise, it follows that such payments
are normal production costs and should not be taxable in any event.
Estimates of annual revenue losses range from $1.2 billion to $3.4
billion. I am sure that these figures stack up favorably against a whole
host of tax involved public subsidies for institutional schemes which
are far less easily identified as being in the public interest.”
OLE) AGE IN COME ASSURANCE—PART I 107
. As a final comment, we might point out that many features of Dr.
McClung’s “tax policy” are regressive. In part 1, pages 6–8, we noted
the progressive tax policy which was initiated concerning pension
plans. Dr. McClung’s recommendations would do away with all of
these advances and take us back to the tax policies of 1910–1920's.
(This might be considered favorable if we are also permitted to pursue
Some of the personal income tax policies of the period.)
Iv. PRIVATE PENSIONS, THEIR ADMINISTRATION AND THEIR “UNFAIR”
JPROVISIONS
These points can be answered in a series of statements:
Plan administration: The report suggests that the public might be
better served if all plans were joined and administered by a public
agency. (Similar proposals have been made by other public documents
including S. 1103—the Javits bill—and the President's Committee
Report.) This, of course, suggests another Government intrusion into
the affairs of private business. We can assume that if such a “pension
clearing house” is established, it will be the first step toward the
eventual control and regulation of pension fund investments or es-
tablishment of reinsurance—and probably the elimination of funding
altogether.
Another aspect of the plan administration which Dr. McClung dis-
cusses can best be answered by Dr. Fischer again:
“The next topic concerns the administrative decisions which must
be made concerning who is to receive a pension, when he is to receive
it, what will be the amount of the pension and other matters. It is
contended that ‘plans are rarely so simple and the affairs of individuals
so uncomplicated that there is not room, indeed a necessity for plan
officials to exercise discretion,” and this discretion may be exercised
in ways which in effect constitute a system of rewards and punishments.
“Well, let's see how tough these decisions are. Here is John Jones.
He's had 30 years with the company, as the record shows. The plan
states that he gets $4.25 per month for each year of service. What's
so complicated about that? You have to notify the trustee or the in-
surance company that Jones gets $127.50 a month for life. How can
you punish Jones? Who makes what complicated decisions? How does
the administrator reward anybody?...”
|Westing: The matter of vesting is, of course, one of the major prob-
lems of pensions as we know them today. Dr. McClung and other
public figures would prefer either total or partial early vesting. There
is no unanimity of opinion on vesting:
(a) Dr. McClung suggests full and immediate vesting after a
short probation period. . -
(b) The President's Committee Report suggests a possible vest-
ing standard: 50 percent vesting after 15 years of service, increas-
ing at the rate of 10 percent a year to full vesting after 20 years
of service. - . .
(c) Senator Javit's bill (S.1103) suggests full vesting after 15
years of service and age 45, or, alternatively, a 50 percent veste
right after 10 years and full entitlement after 20 years.
(d) Representative J. D. Dingell’s bill (H.R. 4462) requires
vesting after 10 years of service.
S3–200—68—pt. 1––8
108 OLD AGE INCOME ASSURANCE—PART I
While public officials are arguing about the “appropriate” period
of vesting, industry is itself solving the problem of vesting through
plan design, competitive pressures and collective bargaining. Trends
indicate that vesting is becoming much more liberal in many plans
as automation and labor mobility increase in our Society.
We also believe that this right to determine vesting should remain
within the private domain. Vesting, after all, requires money—and
the employer and employee should determine how this money should
be spent.
V. PENSION PLAN FUNDS AND REINSURANCE
In discussing pension plan funds and reinsurance, Dr. McClung
brings up these major points: .
(a) Maintaining an adequate fund is equivalent to the as-
Sumption that the plan might terminate at any time.
(b) Pension funds induce an excessive rate of saving and
hinder a productive deployment of wealth.
(c) Pension fund saving can be reduced substantially by rein-
surance (not of the employer but of pension promises).
These points are interesting challenges to logic and to economic
points of view. In the first point we are to assume that Dr. McClung
challenges the concept of having funds on hand to meet emergencies
or unforseen events.
Referring back to Dr. Fisher's paper, he says:
“We are told that pension plans save in order to provide for the con-
tingency that contributions will diminish or cease. There is much more
to pension funding than that. For example, the funding concept pro-
vides a suitable measure of incidence of cost of the plan even if the
money is not paid in. That is of importance in cost accounting and
the pricing of a product. If the liabilities are actually funded, this
merely means the employer has paid the part of his wage cost repre-
sented by pensions as well as having paid the rest of his wage cost.
If he doesn’t fund, he is deferring the payment of the cost until retire-
ment of his employees, and thus shifting it to another generation of
workers and customers.
“Another reason for funding is that in the event of termination of
the plan, its liability accrued to that date can be met. We are told that
some plans have no need of funding, presumably because the sponsors
cannot go out of business. But who is going to select those? Because
how many of these immune firms are there? At the turn of the century
the railroads seemed among our most solid institutions. A little later
Packard and Studebaker were among the proudest names of the auto-
mobile industry. What happened to them? What does it mean to say,
as the paper does, that ‘those plans most in need of conservative fund-
ing have sponsors who can least afford it’—well, if they can’t afford
funding, they can’t afford pensions.” .
(We wonder what would have happened in ancient Egypt if the
Pharaoh had a similar economic point of view as Dr. McClung's when
Joseph recommended Saving in the 7 prosperous years.)
In Dr. McClung’s second point, he again challenges the concept of
saving. This argument is again a reflection of the “new economics”
where government spending is desirable even in a period of economic
OLD AGE INCOME ASSURANCE—PART I 109
boom. As was pointed out previously, pension funds flow into the
economy.
The concept of minimum or no funding and reinsurance requires
some analysis. One of the most comprehensive evaluations of the re-
insurance concept was given by P. C. Bassett when he appeared before
the Senate Committee on Finance hearing (Washington, D.C., Aug. 15,
1966) to give testimony on Senator Vance Hartke’s Senate bill 1575 on
reinsurance. While Dr. McClung's reinsurance suggestions differ some-
what from Senator Hartke's, the concept remains the same. Mr. Bas-
sett said:
“The purpose of insurance is to spread a risk over a large group in
order to protect individual participants against the loss resulting from
some uncontrolled event. The cost of the insurance to be equitable
should be borne by the participants in proportion to their exposure to
the hazards insured against. As presently written, S. 1575 fails in a
number of areas to meet these requirements.
(1) In this situation, the risk insured (pension benefits) against
is not beyond the control of the insured. The insured determines,
to a large extent, whether or not a certain facility or business op-
eration will go out of existence. An analogy would be to issue fire
insurance on a home and agree to pay the owner for the loss if he
has the right to burn the home down. The risk insured against in
S. 1575 is largely within the control of the purchaser.
(2) Such a program, I believe, may encourage minimum fund-
ăng by employers, since the security of pensions will no longer be
a compelling reason for funding. It may be cheaper to pay the
“premium” than to fund adequately the pension plan, thus stimu-
lating the wrong kind of pension planning. (Our emphasis.)
(3) As stated above, the cost of the insurance should be borne
by the participants in proportion to the risk involved. Under the
proposal, the cost of the insurance is to be a function of the un-
funded cost of the benefit expectations. This is only one small
factor in the measure of the risk. The risk also involves the prob-
ability of discontinuing the plan for business reasons. For exam-
ple, three companies: a utility company in a metropolitan area,
a manufacturer of hoola hoops and skate boards, and a large sub-
contractor Supplying a very special item necessary for the opera-
tion in Vietnam might have the same unfunded pension cost. It
is evident the risk of each of these enterprises going out of business
is radically different, the probability of which would be difficult
to determine. But certainly, some of them would be more likely
to require the insured benefits than another. Yet, the proposed Bill
would charge each company the same premium. (Dr. McClung
does not advance this theory.) Thus, the reinsurance program
would seriously discriminate against pension plans established by
stable organizations which are likely to continue in existence for
many years. The program would operate against our oldest and
soundest corporations in favor of companies which may over-
reach themselves in assuming pension obligations, and other com-
panies which do not expect to exist except for a relatively short
time.
110 OLD AGE INCOME ASSURANCE—PART I
(4) The problem of measuring the risk also applies to the sec-
ond part of the insurance proposal—namely, covering losses on
the liquidation of assets. In order to properly assess the premium
it is necessary to determine some measure of the risk involved in
different investments made by the pension fund. I do not believe
that it is possible to insure that the stock market will not go down
in future years or that poor investments will not be made by
pension trustees. -
(5) If a reinsurance program, were undertaken, I believe the
Government would quickly find itself in the business of estab-
lishing a wide variety of investment standards, payment stand-
ards, funding standards and other criteria for pension plans
which would result in placing all such programs under a govern-
mental strait jacket and thus depriving these plans of the inherent
fleaſibility which, I believe, lies at the root of their success and
walue.” (Our emphasis.)
VI, SUGGESTED FUTURE APPROACHES OR “ALTERNATES.”
There are many suggestions which Dr. McClung makes including:
(a) Removing the wage taxation ceiling on Social Security.
(b) Taxing fund contributions on investment return.
(c) Westing employees, make them contribute to pension plans,
and tax employees for employer contributions.
(d) Fund private pensions at a low level and reinsure pension
promises. -
(e) Regulate pension funds even more than they are today and
require more disclosure.
(f) Initiate a pension clearinghouse.
There are a number of other suggestions in Dr. McClung's Report.
Industry on its side might counter with suggestions:
(a) That employee contributions be made tax deductible.
(b) For the adoption of a master plan and/or trust concept for
small employers similar to the present H.R. 10 method.
(c) That greater tax incentives be granted to encourage private
plan adoption. .
(d) That encouragement be given to more rapid funding.
Undoubtedly, there are many questions left unanswered. Dr. Mc-
Clung admits to having made his charges on “assumptions.” More
study is therefore needed. While Mr. Bassett’s remarks before the
Senate Finance Committee were in answer to Senator Hartke’s rein-
Surance bill, his comments show the value of study needed in this
entire area:
“In my judgment, the true strength and unique value of private
pension and profit-sharing plans lie in this inherent flexibility—in
their ability to meet the requirements and the capabilities of widely
varying corporate situations, and to adjust to new experiences and new
situations. I believe that the government should be extremely &autious
in trying to impose on these plans mandatory standards of a type
which will tend to deprive them of this important flexibility—stand-
ards which would tend to convert the private retirement system into
Something akin to social security.
“This is not to say that there may not be a need for further legis-
lation or regulation. Improvements can and should be made in the
OLD AGE IN COME ASSURANCE—PART I 111
statutes and in regulations; and in my judgment, companies with ex-
perience in this field are quite willing to work with the government
toward the development of such improvements where the need is
demonstrated and where the benefits of such changes clearly outweigh
the difficulties. It is my conviction, however, that some of the alleged
weaknesses in present statutes and regulations have been overstated
and that isolated examples of deficiencies have been cited as justifica-
tion for sweeping new statutes and regulations affecting all plans—
the overwhelming majority of which are soundly conceived and
soundly administered * * *.
“* * * In this regard, I understand from the testimony of the Sec-
retary of Labor Wirtz before the Subcommittee on Fiscal Policy of the
Joint Economic Committee that a joint study is now under way by the
Bureau of Labor Statistics and the Internal Revenue Service of 7,000
pension plans that were terminated between 1953 and 1965. The pur-
pose of this study is to ascertain the reasons why these plans were
terminated. It may also be possible to find out what effect these
terminations had upon the employees * * *.
“* * * But, as I have mentioned, it is my conviction that these
objectives are being achieved to an increasing extent through volun-
tary improvement of retirement programs and that further improve-
ment will come through the years.
“Here again, while this is my belief, facts will be available in re-
gard to the extent of funding in private pension plans. The pension re-
search council under the auspices of the Wharton School of Finance
and Commerce at the University of Pennsylvania is making an ex-
haustive study of funding in 5,000 private pension plans. Consulting
firms and insurance companies are participating in furnishing data.
This study is being financed by the Social Security Administration,
private foundations and by private sources. The study will probably
cost in excess of a half million dollars. It holds promise of providing
a definitive clue as to whether there is any necessity for further gov-
ernmental action in the funding area. I am convinced that this study,
as well as other studies now being conducted by the government and
by private sources, will lead to a better understanding of precisely
which aspects of private retirement programs may be deficient, and
which aspects could be benefited by new statutes and regulations * * *.
“* * * Earlier, I mentioned the studies going on by the pension
research council and the joint study by the Bureau of Labor Statistics
and Internal Revenue Service. I understand that the SEC is making a
study examining the financial data of trusteed pension plans. In addi-
tion to its regular annual report, it is stepping up its studies to
include both book and market values of assets, and the purchase and
sales of common stocks. I believe it intends to issue quarterly reports
on transactions in these funds. Perhaps this information will be of
additional value and give more facts on which to determine the appro-
priateness of any legislation.
“Until these studies are completed, Mr. Chairman, and until sub-
stantial consideration and evaluation have been given to them, I would
urge the Congress not to take action on legislation such as S. 1575.
Private retirement programs adopted by corporations for the benefit
of their employees constitute a unique and constructive American de-
velopment which, on the whole, is serving the Nation extremely well.
112 OLD AGE INCOME ASSURANCE—PART I
In light of the long-range nature of these programs, and their past
success, the Government has an obligation to move deliberately and cau-
tiously in changing the ground rules under which they operate. Cer-
tainly, to date there has been no clear demonstration either of the need
for or constructive results that would result from a program of Federal
reinsurance for unfunded pension benefits.”
And finally, the comments of Frank M. Kleiler, Director, Office of
Labor-Management and Welfare-Pension Reports, U.S. Department
of Labor, might be appropriate with which to complete this discussion.
Mr. Kleiler was speaking before the 20th Annual Conference of Labor
at New York University. His comments were related to-what he con-
sidered—necessary pension legislation. His comments are worth noting:
“Private pension plans should continue as a major element in the
Nation's total retirement Security program, although the public pro-
gram (the Federal Old-Age Survivors and Disability Insurance sys-
tem) will continue to be the Nation’s basic instrument for assuring
reasonably adequate retirement income to workers, their widows and
dependents. Public policy should continue to provide appropriate in-
centives to private plans, and by improving the basic soundness and
equitable character of such plans, set a firmer foundation for their
future development.” (Our emphasis.) -
AMERICAN FARM BUREAU FEDERATION
BY ROGER FLEMING”
We appreciate the opportunity to submit comments for the Fiscal
Policy Subcommittee's compendium on old age income assurance.
Our official policy resolutions on this subject are limited to brief
statements on Social Security and on Self-Employed Retirement
Plans, which read as follows: -
Social Security
Social Security programs should be designed to supplement
pather than replace individual thrift and personal responsibility.
Any increase in social security benefits should be limited to
those which can be financed without an increase in taxes or the
use of general tax revenue.
A retiree's social security benefits should not be reduced be-
cause of his current earnings.
Small employers should be permitted to pay social security
taxes on an annual basis.
The financing of the social security program by payroll taxes
disguises the cost of the benefits and lulls the taxpayer into a false
sense of well being. We support a method of tax collection which
will require people to pay their share directly rather than through
withholding by their employers.
In fairness to young workers, the social security taxes paid by
individuals—but not those paid by employers—should be gradu-
ated on the basis of age.
Self-Employed Retirement Plans
TWe strongly support the Self-Employed Individuals T'aa, Re-
tirement Act as amended in 1966. 3
This act permits farmers and other self-employed persons a
limited deduction for payments to an approved retirement plan,
in recognition of the benefits long available to many employees
under employer-sponsored retirement plans.
Both of these resolutions reflect our belief in the importance of
“individual thrift and personal responsibility” in the solution of old
age income problems; however, these words should be broadly con-
strued to include retirement plans developed by employers either
independently or through collective bargaining with employee repre-
sentatives. Farm Bureau has a retirement program for its own em-
ployees which is available to affiliated organizations. It also has de-
veloped a retirement plan for Farm Bureau members under the Self-
Employed Individuals Tax Retirement Act.
In our opinion, it should be the policy of the Government to en-
courage the development of private methods of meeting the needs for
*Secretary-Treasurer and Director, Washington office,
113
114 OLD AGE INCOME ASSURANCE—PART I
old age income assurance rather than to continue to increase taxes
and benefits under the Social security program.
The present Social Security program places a heavy penalty on the
earning of Supplemental income by benefit recipients. It also penalizes
youthful taxpayers who could buy more protection in the form of
private annuities for the amount of the taxes now being paid on their
earnings. To correct these inequities, our policy resolutions recommend
that retirees be permitted to earn current income without a reduction
in social Security benefits and that the social Security taxes paid by
individuals be graduated on the basis of age, somewhat as the pre-
miums are graduated for several common types of private insurance
olicies. -
p Elimination of the present ceiling on the earnings of social security
beneficiaries would remove an undesirable penalty on productive ef-
fort, and place retirees who depend on labor for supplemental income
on the same basis as those who receive such income from sources other
than current labor.
A system which increased the amount an individual is required to
contribute toward the purchase of social security benefits as he ap-
proaches retirement would distribute the cost of the program far
more equitably than the present system by eliminating, or at least
reducing, the present discrimination against young workers. In our
opinion the greater equity to be achieved through a graduated tax
system would make it acceptable to older, as well as young, taxpayers.
PRIVATE PENSION PLANS IN THE UNITED STATES
BY JAMES F. OATES, Jr.”
In response to an invitation from the Subcommittee on Fiscal Pol-
icy of the Joint Economic Committee of the United States Congress,
the Equitable submits this statement of its position on the private
pension system in the United States and on related issues of major
importance discussed in a joint committee print prepared by the com-
mittee staff. The Equitable has participated actively in the private
pension movement from its beginnings, and now manages almost $5
billion accumulated under several thousand private pension plans on
behalf of over a million persons.
STRENGTH's OF THE PRESENT PUBLIC-PRIVATE SYSTEM
1. In the Equitable's view, the single most important advantage of
the present mixed system of public (social security) and private pen-
sions is that it distinguishes properly between minimum needs in old
age, which the community should assure, and the replacement of in-
come (or any other individual objectives for old age), which can and
should be left to individual initiative and to collective but private
bargainings.
It is now well established that as long as society encourages individ-
ual or collective bargaining with private employers, retirement income
is a proper part of that bargaining. The logic of increased govern-
mental responsibility for retirement income beyond minimum needs
implies far more regulation of wages and salaries than the country
apparently now deems proper.
The committee print states correctly that “a needs-related program
in some form for the aged commends general acceptance,” but adds
that “Americans intend that primary reliance in old-age income as-
surance be placed on a work-related, earning-related, contributions-
related, or merit-related program” (p. 27). The print does not conclude
what general principle to follow in a public program that would go
beyond minimum needs. The presence of a thriving private pension
system, however, avoids the need for public benefits beyond minimum
needs and therefore avoids the need to answer a question the com-
munity has obviously not wished to decide collectively. Once larger
public benefits are undertaken, however, there is an obvious danger
that they could no longer be supported only by employer-employee
contributions, which has been a valuable discipline in every past lib-
eralization of social security. With the support of general revenues
at hand, adequate control of public pensions would be in doubt. The
*Chairman, Equitable Life Assurance Society of the United States.
1 “Old Age Income Assurance: An Outline of Issues and Alternatives,” Joint Economic
ºmittee Congress of the United States, U.S. Government Printing Office, Washington,
115.
116 OLD AGE INCOME ASSURANCE—PART I
issue of what the working population owes the old would be confronted
in far more acute form than it has been so far, and the result might
well be ambitious benefit schemes the country is not prepared to finance
in any noninflationary form.
2. The second major advantage of the present system is its contribu-
tion to the strength of the capital market through its development and
deployment of substantial capital through decentralized saving and
investment decisions.
Fundamental issues would be raised if the power to decide on the
amount and form of investment of aggregate old-age Saving of the
half of the working population now covered by private pension plans
were to be united in a single hand. Further, the management of these
private pension funds by banks, life insurance companies, and other
professional investment institutions has brought º and in-
formed judgments to bear on the selection of competitive investment
opportunities over the whole spectrum of possible capital employment.
Private pension funds now aggregate over $100 billion, and yet cur-
rent events are a fresh reminder, if one is needed, that private invest-
able capital is not in oversupply. It is highly probable that the spread
of private pension plans has effected a net increase in aggregate sav-
ing. The committee print, in effect, grants this, but considers that this
accentuates the dangers of unemployment. Taking a longer run point
of view, however, it is almost universally agreed that proper fiscal and
monetary policies can maintain approximately full employment. This
will not be an easy task since we are on the threshold of a staggering
increase in our labor force, and we are faced with the challenge some-
how to create the jobs needed to employ this surging tide of manpower.
To attain the employment objective will require a huge increase in
capital investment, if along with the jobs we are also to have an acceler-
ated growth of productivity and a more rapid advance in the level of
living. Under these conditions, the argument in favor of stimulating
Saving and thus investment is decisive.
The only point that then remains at issue is whether this saving
should be encouraged primarily in the private sector, or whether pub-
lic-sector saving should be substituted. If insufficiencies of voluntary
individual and collective private savings should endanger the growth
of investment and productivity, Government would have to play a
larger role in supplying investment funds to the private sector, or else
do more of the investment itself. The committee print appears to sup-
port this larger role for Government. We do not believe it to be either
necessary or wise. We prefer private sector activity wherever practi-
cable and reasonable, and consider the encouragement to savings pro-
vided in the present system of private pension plans a distinct advan-
tage that should not be abandoned. .
PROPOSALS FOR PRIVATE PENSION REGULATION
1. The committee print is in general opposed to funding. We believe
that funding is desirable and to be encouraged. Benefit disbursements
are generally at a relatively low level in the early years of a pension
plan but rise gradually toward ultimate stability at substantially
higher levels as the pension roll matures over many years. Funding,
which is contributing to the plan in these maturing years more than
required for current disbursements, has major advantages:
OLD AGE INCOME ASSURANCE—PART I 117
(a) It produces a more level and hence more manageable inci-
dence of contributions. It replaces an initially lower but rigidly
rising scale of contributions with a flexiblity of choice in direct
Pºiº to the extent of prefunding.
(b) It develops a fund that supports benefit payments by invest-
ment earnings, which significantly reduces the plan contributions
required thereafter.
(c) It accords with the concept of accounting for pension plan
costs as they accrue rather than as they mature. This principle is
now part of the body of generally accepted accounting principles
set forth by the Accounting Principles Board of the American
Institute of Certified Public Accountants.
(d) In the relatively infrequent occurrence of plan termination,
it provides the means for meeting part of all of the pension expec-
tations created by the plan.
Mandatory funding requirements, which some advocate, have im-
portant disadvantages, however: .
(a) Nothing is gained with respect to employers that would have
met the legislated requirements in any event. As to those who
would not, the result of driving some employers to greater fund-
ing must be weighed against the result of causing others to reduce
benefits or terminate plans.
(b) Inflexible standards for measuring pension plan costs can
produce estimates quite inappropriate for the individual plan in
the light of its particular mortality, investment, turnover, and
other experience. Companion standards for measuring the values
of plan assets can have the effect of restricting investment flexi-
bility, to the detriment of the plan and the employees who are to
be safeguarded.
If particular funding levels are, nevertheless, to be mandatory, it
is chearly preferable to develop objective, legislated standards than to
rely upon continuing administrative supervision. Requirements should
be moderate in terms, perhaps directed to benefits for which vesting
(see item 2, below) has been similarly mandated; they should apply
prospectively, with reasonable recognition for problems of transition;
and perhaps some exemption or tolerance could be afforded for the
special circumstances that may arise in collectively bargained arrange-
ments. -
2. The Equitable agrees with the committee print that reasonable
vesting provisions in pension plans are desirable and should be en-
couraged. As pensions come to be regarded more and more as an aspect
of compensation rather than as a benefit unilaterally accorded by em-
ployers, lack of vesting will increasingly appear unfair and arbitrary.
However, vesting is costly, and burdensome requirements may dis-
courage employers, particularly small employers, from establishing
pension plans. Accordingly, as with funding, we believe that any
legislated requirement should be moderate in terms and apply pros-
pectively, with provision for transition and perhaps for collectively
bargained agreements. The requirements proposed by the President's
Committee (50 percent after 15 years, full vesting after 20 years)
“A
seem moderate if applied to future service benefits.
3. Disclosure of the status of pension vesting and funding is desir-
able, not only as an alternative to the requirements discussed in para-
118 OLD AGE INCOME ASSURANCE—PART I
graphs 1 and 2 above, but as an end in itself. It will require consider-
able ingenuity, however, to develop mandatory standards that will
produce simple, clear, and meaningful statements to employees. Ex-
perience with present disclosure laws on employee benefit plans and
on Securities teaches that some requirements, though they appear harm-
less, can be farreaching and lead to federally imposed standard ac-
counting methods and even to substantive regulatory requirements.
We do favor statements to each employee showing his vesting status
and the order of priority of applying pension funds if the plan termi-
nates, and to the extent feasible, information as to the extent to which
each category of employee would be expected to receive benefits out of
the funds presently held.
4. Several related proposals described in the committee print,
with variants elsewhere, may be classified under the heading of
portability. Their principal objectives are to preserve pension rights
for employees who change employment, and to assure the fulfillment
of those rights. These objectives are fully achievable by satisfactory
vesting provisions combined with adequate funding.
It is also proposed, however, that these rights be recorded, at the
time of employment termination, with a central registry. The Equi-
table believes it desirable to give terminating employees a prompt
and adequate statement of the terms of their vested benefits, but the
concept of central registration seems costly and unproductive, with
no more justification than a central registry for, say, individual sav-
ings accounts. -
A further proposal is the creation of a central pension transfer
agency that would take over the pension obligation to a vested em-
ployee when he terminates employment in consideration of the pay-
ment by the plan of an appropriate amount. There are three major
objections to j proposal:
(a) Such an agency could become an extraordinary power,
reducing the decentralization of pension plan investment. Also,
in order to accommodate its administration, it would be likely to
suppress the present diversity and continuing innovation of ben-
efit designs and financing vehicles. *...
(b) There are already in existence hundreds of life insurance
companies competing vigorously to offer plans of this service
through individual contracts and group master contracts.
(c) It is wrong to commit a portion of existing funds to indi-
vidual vested employees as they terminate employment while the
employees who continue in employment are not so favored. Nor
is the solution to require current individual commitments of
funds for all employees, which would often create severe cash
flow problems in funding the plan. The best approach is to en-
courage funding and vesting and disclose to employees the extent
to which pension expectations have been assured.
5. Unfortunate or incompetent investment can, of course, undo the
good work of funding. This risk is characteristically greater for com-
mon stocks and other equity investments than for fixed-income invest-
ments, for which, in fact, life insurance companies offer guaranteed
performance. . -
Whether or not this investment risk is to be covered, the proposal
that the committee print inappropriately styles reinsurance would
OLD AGE INCOME ASSURANCE—PART I 119
undertake in the event of plan termination to supply the pension funds
that have not been contributed. On a smaller scale, it is as if a Christ-
mas Club member could not only assure the safety of the weekly con-
tribution he does in fact make, but could also arrange to “insure”
that if his financial circumstances prevented him from completing his
payments, another source would do so.
This proposal is often mistaken as an alternative to plan funding,
rather than an additional cost. The cost of pension benefits cannot be
avoided. Further, if the employee has been kept informed as to the
extent of funding of his pension plan, he is less likely to be disap.
pointed if the plan terminates and funds are not sufficient to provide
his benefits fully. -
6. The Equitable favors extending the standards of fiduciary char-
acter now applied to banks and life insurance companies to others ad-
ministering pension funds and plans. .
7. Wider coverage by private pension plans should be encouraged
by such measures as: .
(a) authorization by the Internal Revenue Service of proto-
type and master plans; - -
(b) allowing the plans of the self-employed more of the flexi-
bility available to other employers;
(c) higher limits for the income tax deduction for employer
contributions to encourage faster funding;
(d) clear and simple rules for the integration of private pen-
sion benefits with those of social security, directed to the reason-
able end result of total benefits in rational relation to earnings
at all levels, without regard to the immediate source of plan
contributions.
(e) deductibility of employee contributions for income tax
purposes, with appropriate safeguards (e.g., locking-in) and
corresponding taxability of pension income.
SUMMARY
In summary, the Equitable believes that as long as Government
leaves to private initiative the negotiation of wages above specified
minimum levels, it should similarly leave to private initiative the
provision of retirement income above minimum (social security) levels.
Further, the private pension movement, which has mushroomed within
the past two decades from modest proportions to an accumulation of
$100 billion on behalf of 25 million people, is entitled to the informed
interest and support of the public at large. Every reasonable sup-
port should be given to non-discriminatory plans, however modest
their beginnings and however gradual their liberalization. Incentives
to more rapid funding and vesting can be increased without revenue
loss and to the benefit of the country as a whole. The extension of cer-
tain desirable regulation of a fiduciary character and broader policies
of meaningful disclosure are in the public interest and should be
encouraged. In general those proposals that are likely to be helpful
are those that allow wide scope for individual plans and bargaining
and impose only broad regulatory standards upon the complex and
competitive forces that have produced the extraordinary progress
of these past decades. -
METROPOLITAN LIFE INSURANCE COMPANY
BY CHARLEs A. SIEGFRIED"
In the interest of promoting clearer insight into the role of both
public and private pension plans in our enterprise Society, we appre-
ciate the invitation from the Joint Economic Committee's Subcom-
mittee on Fiscal Policy to present our views. Financial protection for
beneficiaries and retirees has been a prime concern of the Metropoli-
tan Life Insurance Co. for the past 100 years. As you may have noted
from our advertising, we are now celebrating our centennial anniver-
Sary.
Specifically, Metropolitan’s vital interest in the area of pension
coverages is evidenced by the fact that at the start of 1967 we held
close to $41/3 billion in annuity reserves to assure present and future
payments to owners of group and individual plans. This amount is
twice what it was only 10 years ago and three times the level 15 years
ago. Moreover, we look for continued growth of these funds, and
through their sound and productive investment will provide regular
annuity payments. -
. THE PRESENT SITUATION
Up to the present time—and it must be emphasized at the outset that
this cannot be assumed to be true for the future—growth of Govern-
ment social security plans, even though characterized by rapid expan-
sion, has probably not seriously diminished the role of private enter-
prise and individual effort in providing family security.
However, today we are at a crucial point in the area of pensions
and their auxiliary benefits. At this time the important thing is to see
if there are not some areas where we could all, Government and priv-
ate parties alike, agree on objectives, such as a stable price level,
a sustainable rate of economic growth, and a higher standard of liv-
ing, and then look to attaining these objectives within the framework
of pension planning. -
The basic idea advanced here is this: If it is decided that the level
of incomes that are to be provided for the retired is to be increased to
any significant degree, then a different mix of public and private action
should be considered, with emphasis on private pension plans, which
by their nature are equipped to perform the capital-raising function
as a collateral to their benefit-providing function. The reasoning which
supports this analysis is based on three extremely important economic
considerations: (1) the need to contain inflation and to correct con-
ditions creating inflationary pressures, (2) the need to avoid taxes at
levels too high for long-run healthy economic growth, and (3) the
growing need for additional saving to finance capital formation for
future economic progress. . - -
In this statement, however, we deal only briefly and for purposes
of reemphasis with the need for additional saving to finance future
*President, Metropolitan Life Ins. Co.
120
OLD AGE INCOME ASSURANCE—PART I 121
capital requirements. On this very important matter, we have worked
closely with the American Life Convention and the Life Insurance
Association of America, and support the views presented in the ALC—
LIAA statement on the need for such saving.
Furthermore, for purposes of this analysis, and for better com-
parison with private pension plans, we here focus primarily on re-
tirement provisions when referring to the social security system. How-
ever, it should also be noted that the relationship between survivor
benefits under social security and the role of private life insurance is
equally important. .
RELATIONSHIP BETweBN SocIAL SECURITY AND PRIVATE PENSION
PLANs
While the general purpose of both public and private plans is the
same—the provision of retirement benefits—the method of financing
social security is very different from that used in establishing private
pension funds. And yet it is this very difference which ties the two
together. Under our national accounting system, only a rising income-
generating capacity of the economy can assure a national income large
enough, year after year, to support a social insurance system which
can provide benefits to pensioners, dependents, and survivors, year
after year. Life insurance companies and private pension funds are
two of the main sources of savings accumulations which, when invested,
raise this income-generating capacity. -
In the case of social security, it can be reasonably presumed that
under Government auspices such a system would continue indefinitely
into the future. The test of financial Soundness, then, is not a question
of there being sufficient assets on hand to pay off all accrued liabilities.
Consequently, there is no need to actuarially set up reserves as in a
private system. Nor is it suggested that such reserves should be set up.
However, in addition to this concept of actuarial soundness, there
is also the concept of economic Soundness; whether under a private
pension plan system or a public system such as social Security, it is
necessary for the economy to be large enough at the time retirement
payments come due to make these payments out of the current year's
national income. This can be done in either of two ways. An increasing
proportion of the Nation’s income can be allocated through taxes to
pay retirement benefits, or as a wiser alternative, the proportionate
tax load can be held down if savings of a private nature have been
funded over the years to build the economy’s income-generating
capacity.
To legislate, under the public system, pension and survivor benefits
of a size which could virtually cripple private enterprise in this func-
tion is to surely dilute and eventually cut off these major accumula-
tions of savings from which flow the investment capital to support
healthy sustainable economic growth. Unless such funds are available
and invested, the economy may not be large enough to make retirement
payments.
- THE NEED TO CoNTAIN INFLATION
It is necessary to guard carefully against the inflationary dangers
of overexpansion of the social Security program. Proposals to amend
122 OLD AGE INCOME ASSURANCE—PART I
social security should be tested in terms of the concept that benefits
should not go beyond what is needed to furnish a basic floor of pro-
tection. This concept is not inconsistent with the principle of benefits
varying within limits so as to bear some relationship to the individual’s
previous contributions. Indeed, systems not based on variable benefits
are especially likely to invite overexpansion.
If social security taxes are insufficient to pay additional benefits,
assets of the Social Security system would have to be reduced by ob-
taining cash from the Treasury which in turn would have to obtain
the cash through deficit financing to pay off Treasury securities held
by the system. With savings basically in relatively short supply, such
financing probably would be accomplished through inflationary credit
expansion. This would have serious adverse effects even as a temporary
expedient. Thus, higher benefits would require higher social Security
taxes. In the case of the employer, these would cut into the dollars
available for the purchase of private plans; and in the case of the
employee, higher taxes would i. to increased wage demands to re-
place reduced take-home pay, resulting in inflationary cost-push wage
settlements. Consequently, the immediate effects of higher benefits,
even if financed by higher social security taxes, could be inflationary.
While there can be no single solution to the problem of inflation,
Metropolitan believes that one of the most effective ways to hold the
price line is to encourage people to save. Savings act as a curb on
inflation, both by reducing the amount of money purchasing consumer
goods, and by financing new plant and equipment which produces more
consumer goods thus tending to hold down prices. We feel very
strongly that the entire country—not forgetting the savers, the pur-
chasers of life insurance policies and retirement annuities, and also
the recipients of Social Security benefits—is entitled to a sound dollar.
INFLATION DANGERS OF AUTOMATIC EscALATION
Any automatic escalation of social Security benefits to take account
of rises in the cost of living would only aggravate a basic cause of
inflation by adding to demand without creating any additional goods
or services. In end result, it does the elderly no favor to increase
pººn benefits in a way which again drives up prices out of their
I’êa,Ch.
Escalation of benefits would be merely a treatment of the symptoms
of inflation rather than a remedy for its causes. The 1967 report of
the Council of Economic Advisers stresses that if various groups in
society “* * * were to succeed in tying compensation to consumer
prices, the arrangement would become a vast engine of inflation,
which, once it began to roll, would continue to gain speed.”
It would be a serious mistake to soften resistance to inflation by
leading social security contributors to believe that their future benefits
will automatically be increased to offset inflationary loss of purchasing
power. To preserve the value of the dollars of the elderly and of every-
one else too, inflation must be attacked at its sourceſ
SoME ALTERNATIVE CoNSIDERATIONS
. In searching for ways to provide sound and substantial retirement
income to those of our citizens past the earning years, some new fiscal
OLD AGE INCOME ASSURANCE—PART I 123
thinking is in order which does not automatically include rising Fed-
eral Government expenditures and taxes. Higher retirement income
can be brought about without permanently increasing social security
benefits and taxes. In attempting to suggest some positive alternatives,
consideration might well be given to accomplishing a stronger private
role in the public-private mix by— -
(a) Broadening tax allowances to encourage everyone, includ-
ing employees, employers, and anyone else who chooses, to set
funds aside for pension purposes.
(b) Raising maximum allowable deductions permitted under
current plans.
(c) Increasing retirement benefits only for those now receiving
OASDHI payments, because their benefits are scaled to a lower
earning base. Perhaps also consider those who would start to re-
ceive benefits, say, in the next 5 years. However, younger people
have time to increase their own personal preparations for retire-
ment by providing for supplements to Social Security benefits.
(d) Streamlining the present pension plan approval pro-
cedures.
(e) Encouraging the efforts on the part of the major trade as-
Sociations to make pension coverage available for the smaller
businesses.
PRICE STABILITY, Low UNEMPLOYMENT, AND ECONOMIC GROWTH
In addition to a search for alternatives, we must exert constant vig-
ilance and a determined effort to educate the public in the long-range
implications of social security, particularly with regard to costs and
impacts on price levels. This would represent an important step in
helping to avert inflationary dangers.
Increased education of the public is in fact a must, if we are to under-
stand that it is only under conditions of reasonably stable prices that
the economy can enjoy sound substantial growth, at the same timekeep-
ing unemployment low and employment high. It is this combination
of conditions which will provide the growing national income to not
only support a social insurance program but to provide a rising stand-
ard of living for everyone. In the long run, we can have low unem-
ployment, good and sustainable economic growth, and price stability
by emphasizing that a continued large volume of saving and capital
investment in better plant and equipment provides for increased pro-
ductivity with the least pressure on cost and price levels. -

TAx TREATMENT OF EMPLOYER ContRIBUTIONS TO PRIVATE PENSION
PLANs - - -
Some statements in the Joint Economic Subcommittee staff docu-
ment under consideration raise questions as to whether the present tax
treatment of employer contributions to deferred compensation plans
should be continued. Since deferring the employer's pension contribu-
tion from the employee's taxable income is an incentive for establish-
ing and maintaining a pension plan, the removal of this incentive
would seriously weaken the private role. Among the answers to criti-
cisms of this incentive are the following:
83–200—68—pt. 1 9
124 OLD AGE INCOME ASSURANCE—PART I
(a) The cost to the Treasury is miniscule compared to the in-
crease in Federal social security expenditures that would result if
these pension plans were discontinued because of the loss of the tax
incentive.
(b) Since employers’ OASI contributions are not taxable, it is
reasonable that the tax on employers' contributions to qualified
plans should continue to be delayed until pension payments are
received.
(c) Pension contributions by employers are a cost of operating
an enterprise and should be allowed special tax treatment just as
business investment in plant and equipment, since they both meet
the long-term needs of the economy.
(d) The investment of the funded reserves of pension plans
increases the national income base so that it is easier to finance
the large amounts of contractual old-age income assurance pay-
ments, public as well as private.
(e) The advantage of the present tax arrangement to the high
income recipient is overstated because, when pension benefits are
received, the high income recipient is taxed at a higher rate than
the low income recipient.
(f) A similar delay of income tax liability is permitted on in-
vestment income which individuals earn on Series E savings
bonds. •,•
(g) The continuing increase in the number of nonworking years
points up the need for greater encouragement of effective private
programs through the principle of tax-free input and taxable
output for retirement plans.
TAxATION AND EconoMIC GRowTH
The huge deficit which threatens in the current fiscal year provides
a striking example of how quickly the Federal fiscal outlook can
change. Just a year or two ago, a major topic was whether expected
large Treasury surpluses should be disposed of through higher spend-
ing, tax cuts, or distribution to the States. With the important role
that the United States is forced to take in international affairs, it would
seem a serious mistake to greatly expand future contractual social Se-
curity payments.
The present fiscal dilemma illustrates one of the dangers of increas-
ing future commitments. This is why it is emphasized on page 123, item
c, that increased benefits under OASDHI should be limited mainly
to persons now retired. Moreover, even without any new expansion of
the social security program at all, Federal expenditures apparently
are so entrenched that most proposals to avoid the impending heavy
deficit advocate only increased taxes—not reduced expenditures. How-
ever, a cut in Federal spending has special advantages over a tax in-
crease when economic conditions are as uncertain as they are now.
Higher tax rates might dampen the economy at just the wrong time.
Reduced take-home pay caused by withholding more taxes could add
to the pressure to raise wages and salaries. Higher corporate taxes are
often reflected in wholesale and then retail prices. A tax increase
might reduce saving more than spending. .
OLD AGE INCOME ASSURANCE—PART I 125
DANGERs of FINANCING SocIAL SECURITY FROM GENERAL TAx
REVENUES
Any notion of raising additional funds for the social Security sys-
tem in whole or in part from general revenues should not be given
serious consideration since the direct relationship of benefits and em-
ployer-employee contributions is essential for sound legislative ac-
countability. OASDHI is a system of related earnings, payroll taxes,
and benefit payments, in which rises in benefit payments can be easily
seen to require an increase in either the taxable wage base, the rate,
or both. -
Legislators who vote for more benefits should at each step be able
to determine the degree to which their action will require higher taxes.
This accountability would be lost if general revenues were used to fi-
nance additional benefits. There has already been some limited de-
parture from the contributory concept. Putting any other parts of
social Security financing under general revenues would surely lose for
the whole program the very important advantage of cost control.
ADDITIONAL SAVINGs Essent IAL FOR REAL ECONOMIC GROWTH
Two of our most important national economic goals, as indicated
earlier, are sustainable economic growth and a stable price level. To
achieve these goals, there is a pressing need for additional Saving to
finance capital formation, and it is essential to the Sound operation of
our economic system to have the advantages of decentralized Saving
and investment decisions. Furthermore, carrying forward the main
thrust of the ALC—LIAA statement: If the supply of saving is insuffi-
cient to meet investment demands, the money supply expands to fi-
nance growth, and the resulting increase in credit outstanding causes
strong upward pressure on prices.
This anticipated demand for greater savings is of paramount im-
portance in advocating a stronger private role in the private-public
pension mix. Economic forces indicate a relative shortage of saving
in the future. The expected population distribution, for example, will
result in a high proportion of people in the younger working age group
and in the retired old age group, both of which characteristically spend
rather than save a relatively large proportion of personal income.
Middle-age and preretirement age groups, where more is saved out of
incomes, will be shrinking as a percent of total population.
CoNCLUSION
As the economy grows, more and more Savings is necessary for in-
vestment to keep the expanding labor force employed and to help raise
its productivity. This ultimately raises the standard of living of the
whole population. Life insurance and private pension funds contribute
to the economic growth of the Nation because this money is invested
in machinery and buildings for production, public utilities, housing,
and so forth. Social security, by contrast, tends to reduce aggregate
saving because of the redistributive effect of the taxes used to finance
the program. .
126 OLD AGE INCOME ASSURANCE—PART I
Social Security should be regarded as a minimum basic layer of pro-
tection, and not as a means for providing the full income desired at
retirement. If social security is kept at sound basic levels, employers
will be able to provide additional and excellent private group plan
coverages. Furthermore, individuals will be able to afford personal
supplemental measures. Private plans should wherever practicable
contain appropriate vesting provisions, and funds should be conserva-
tively invested to secure certainty of payment of benefits. The plans
should provide for appropriate disclosure to assure sound adminis-
tration.
Private saving accumulations, whether in pension funds or elsewhere,
are needed to provide strong, noninflationary, and Sustained economic
growth, not only for the prosperity of the Nation in general, but also
specifically to make sure that programs like social security are able
to meet their annual obligations out of national income. Naturally, an
expanded system of private pensions would not rule out improvements
in the social Security program if they were consistent with sound finan-
cial and economic development.

STATEMENT OF THE NEW YORK LIFE INSURANCE CO.
The New York Life Insurance Co. has studied the committee print,
“Old Age Income Assurance: An Outline of Issues and Alternatives,”
with some care. We wish to state at the start that we believe there is
room for improvement in the present retirement income system, which
is essentially a floor provided by the Federal social security system plus
a very considerable Superstructure provided by private pension pro-
grams. The report to the President on private employee retirement
plans has indicated a number of areas, including vesting, funding, and
portability, where the private systems can be im .# We recognize
the importance and desirability of the social objectives reflected in
that report. For example, the private programs—to insure that ac-
crued pensions will be paid when due—should be properly funded,
and fully vested on completion of reasonable service requirements.
We would, however, postulate one caution, that any requirements man-
dated on the private pension system recognize that funding and other
improvements are costly, and must º raised too quickly to too
high a level—a level that would inhibit the growth and vitality of the
private system.
Important as these issues are, those raised by the joint committee
print with respect to private saving and investment seem to us to be
far more important. The argument is made in the print that it is in-
vestment, not savings, that adds to our wealth. Saving is dismissed as
a deflationary force rarely needed in the American economy. It is
suggested that private pension saving is a diversion from other forms
of saving, and that it is so contractual in nature that it does not re-
spond to changes in business conditions. .
Apart from private savings the only other sources of investment
funds that we can think of are monetary expansion and Government
savings. We would like to be strongly on record to the effect that
neither of these other sources constitutes a safe substitute for private
savings in the investment markets. There are obvious limits j
which bank credit creation or other forms of monetary expansion be-
come highly inflationary, as the history of almost all countries so
sadly shows. As to the use of Government savings we doubt if there
are many people in or out of the Government who would seriously
contemplate the widespread use of Government funds as a source of
capital formation. It is hard to see how the private enterprise system
could survive for long if the Government controlled and necessarily
allocated the funds available to the capital market. It might indeed
be possible to maintain a satisfactory level of investment without
Fº savings, but not in the kind of world most Americans want to
IVO IIl.
In the light of the heavy demands the various objectives of national
policy are placing on the economic system, the need for additional
investment in almost all lines of endeavor should place a high premium
127
128 OLD AGE IN COME ASSURANCE—PART I
on private Savings—private savings from any source, at any time. We
think it would be very difficult to substantiate the notion that pension
saving is merely a substitute for Savings that otherwise would occur
in other areas, and hence contributes nothing to the total volume. As
has been argued many times it is a proper function of fiscal and mone-
tary policy to offset the occasional evidences of oversaving that appear
from time to time. We think it would be a grave mistake in public
policy if the Government were to move in any way that would dis-
courage the further growth of the private pension system and the Sav-
ings it furnishes to the American economy.
The life insurance industry has submitted a statement that goes
into the question of the economic role of the private pension funds in
some detail. We subscribe without reservation to the association's views
on this very important matter. We think it is in the best interests of all
of us, both as taxpayers and as eventual participants in retirement, to
see to it that further pension expansion occurs, that payment of the
pensions is better assured, and that the private system continues to
prosper as an essential supplement to the governmental floor.
STRENGTHENING PENSION EQUITIES THROUGH EM-
PLOYEE CONTRIBUTIONS AND A CLEARING. HOUSE
FOR CREDIT*
BY MERTON. C. BERNSTEIN “*
EMPLOYEE CoNTRIBUTIONS TO PLANs
EFFECTS OF NONDEDUCTIBILITY
The declining use of contributory plans is widely thought to be a
direct consequence of the federal tax law under which employer contri-
butions to plans are tax deductible but those of employees are not." So,
for example, in 1949 the pattern-Setting Basic Steel Industry Fact
Finding Board recommended non-contributory plans because, among
other considerations, each dollar of the tax-deductible employer con-
tribution would result in more benefits than employee dollars which
would first be taxed as income and then, after subtraction of taxes,
contributed.” - -
This trend away from contributory plans may have been, and prob-
ably was, accelerated when it was found that an employee can be
given a “raise” equal to his own pension contribution without increas-
ing his current taxes by having the employer assume the employee's
pension contribution. This means an increase in take-home pay without
an increase in employee income tax and, as a result, a raise which prob-
ably costs the employer less than a taxable wage increase. -
Where only the employer contributes it should be apparent that
government revenue would be no less if both employee and employer
contributions, totaling the same amount, were tax free.* Presumably,
any such treatment for employee contributions would be subject to
limitations both upon the amount of permissible employee contribu-
tions and the aggregate of employer and employee contributions.”
There would be a revenue loss if, as might be possible, greater total
contributions are made to contributory than to non-contributory plans.
If, however, there were an overall limit upon contributions, say up to
* Copyright article reprinted with permission: from “The Future of Private
Pensions” by Prof. Merton C. Bernstein, New York: Free Press, 1964.
** Visiting Professor of Law, Columbia University Law School.
1 F.g., “The fact that employer contributions to a qualified pension plan are tax de-
ductible to the employer while employees must pay taxes on their contributions is a
strong factor in the prevalence of non-contributory plans.” Facts and Trends in Insured
Pensions (Hartfold : Connecticut General Life Insurance Co., 1959), p. 10; and to the
Same effect, William Haddad, op. cit., p. 76. . . ' ' . . . . . . . . .
3 Basic Steel Industry, 13 Lab. Arb. 46 at 90 (1949). - ... • A
* Some say that because employee income tax rates are lower than the corporate rate
the government loses less when employees contribute and the contribution is not deductible
from taxable income. But that probably is not so because the equivalent amount in wages.
or salary is deductible to the employer and, over the long, run, the employer would pay
to employees as wages roughly the same amount as it would contribute to pension purposes.
* In Canada both employer and employee contributions are deductible within rather
strict limits. J. Harvey Perry, Taa’ation in Canada (3d ed., Toronto : Univ. of Toronto
Press, 1961), pp. 55–56. … . * 129
130 OLD AGE INCOME ASSURANCE—PART I
the present employer maximums, there would be no loss of revenue
beyond that possible under the present law other than that paid in
taxes on the relatively small amounts of employee contributions now
being made. .
In discussions of the competing merits of contributory and non-
contributory plans little is made of the crucial fact that employees
have quite different rights after the employer assumes the employees’
contributions. Upon separation from employment an employee under
a contributory plan can reclaim his contributions, often with interest
(albeit generally around 2%). Benefits under contributory plans tend
to be higher. Vesting, which boils down to the right, even after sepa-
ration, to a benefit financed by the employer’s contributions, has been
more common among contributory plans.” Not infrequently, contribu-
tory plans give the separated employee the option to leave at least his
own contribution in the plan even if he does not qualify for vesting
of all or part of the employer's contribution,-i.e., he has a right to
a deferred benefit at retirement paid for by his contributions and
their earnings, which provides the not inconsiderable benefit of tax-
free earnings. As the employer typically contributes more per capita
than the employee, the vesting of the employer's contribution is of
substantially greater importance.
What are the amounts of taxes “saved” by the employee under a non-
contributory plan' Let us look at examples which result from applying
formulas in use under contributory plans to an assumed gross income
of $4000 from full time employment, a bit less than $2 an hour for a
full 2080-hour work year.
For the most part, employee contributions are modest. One plan
calls for a maazimum of $13 a year; the employer contribution is 20
times as great. Others call for $54, $96, $100 and $105." It is the rare
contributory plan which calls for more—and then only where benefits
are comparatively large. - -
What is the tax saved if the employer rather than an employee makes
a contribution of $100 annually? A married taxpayer (without chil-
dren) would save roughly $18 in taxes and a single taxpayer $20 a
year. Put another way, under a contributory plan they would “lose”
$18 or $20 a year in the illustrative situation. A man with children
would “lose” less—e.g., an employee with a wife and four children
with an income just under $4600 does not have any taxable income; a
man with a wife and five children and gross income of up to $4650 has
no taxable income at 1963 rates. . -
The employee who is separated without a vested benefit actually
loses most of the benefit of the pay increase represented by the em-
ployer-assumed pension contribution. All such an employee has to show
for the change in contribution method is the slight tax saving—which,
on a $100 contribution, amounts at best to about half a cent an hour
and, for some employees, nothing at all.
5 “In New York State in 1957 about 80% of the contributory single employer plans had
vesting, as against 40% of the non-contributory.” The authors believed the difference to
be narrowing. John McConnell, Charles Pearce, James McNulty, and Robert Aronson,
Westing and Transferability of Pension Rights (New York State, Dept. of Labor, 1960?).
6 U.S. Dept. of Labor, Digest of One-Hundred Selected Pension Plans Under Collective
Bargaining, Winter 1957–58. B.L.S. Bull. No. 1232, pp. 6–7, 8–9, 10–11, 16–17, 32–33
(1958). All of these are bargained plans between such firms and unions as General Foods and
a number of unions, a Brewers Board Trade and the Teamsters, Armstrong Cork and the
Rubber Workers, and Inland Steel and the Steelworkers. -
OLD AGE INCOME ASSURANCE—PART I 131
And what is the difference for an employer? When an employer as-
Sumes a contribution being made by the employee in lieu of an equiva-
lent take-home pay increase, it saves money. To give the employee an
equivalent net take-home wage increase the employer must pay that
$18 or $20 plus a bit more to offset the tax—let us say it averages $20.
If the amount is taken roughly as $20, to an employer whose contribu-
tory plan covers 16,000 employees (as in one actual situation) the dif-
ference in granting a wage increase of $120 and assuming an employee
contribution of $100 a year would be about $320,000 (48% of which
would begained for the stockholders as if it were all profit). In addition
to this saving, the employer gets the benefit of contributions made for
employees who are separated from employment.
An employer might, however, experience certain disadvantages by
changing to a contributory plan. The employer's gains from employ-
ees “forfeitures” would be reduced by the amount of a separated em-
ployee's refund. If the contributory feature results in vesting, or
liberalization of existing vesting rights, the employer also would lose
the benefit of forfeitures to the extent of the vesting. In addition, the
employer does not include its own contributions to a plan in comput-
ing the “regular rate” for overtime or Social Security tax purposes.
(Of course, a change in statute could assure continuation of the pres-
ent situation by affording similar treatment for amounts equal to that
contributed by employees.) Nonetheless, if employee contributions are
substantial, the employer's net cost might be lower than under an
otherwise equivalent non-contributory plan. -
When received as retirement income the portion of the benefit at-
tributable to employer contributions on which income tax has not been
paid will be subject to tax. Of course, double exemptions for those over
age 65 and lower income of retirees will result either in no tax or in tax-
ation at a rate lower than those of the working years. Probably the over-
whelming majority of those over 65 are in the non-taxpaying category.
However, there is less likelihood of having exemptions for ependents
and deductions for mortgage interest payments after retirement than
during working life. Part of the tax “saving” effected by shifting the
contribution from employee to employer (small as it is to many em-
ployees), may be cancelled to some extent by taxation upon receipt as
retirement income. What saving is actually effected also depends upon
the tax rates in force when pension benefits are paid. Although the
1963–64 tendency is toward reduced rates (hence non-payment of taxes
in former years represents a greater saving), future defense, space,
and other public sector requirements may result in higher rates (hence
lower or no savings depending upon income). The growing proportion
of the population over 65, however, may well provide political power
to withstand the extension of higher tax rates to those receiving retire-
ment income. * . . -
In sum, at present and in the future, unless there are substantial
boosts in tax rates, the “saving” to employees attributable to non-
contributory plans frequently are negligible; moreover, the “savings”
may be more than cancelled out by complete loss of the contribution
upon an employee's separation from employment. Thus, change to a
contributory plan is advantageous to employees and, in fact, costs them
little or nothing. In order to maintain the same level of benefits a shift
from a non-contributory to a contributory plan requires larger funds.

132 OLD AGE INCOME ASSURANCE—PART I
But the fact that employer contributions for young employees have
earnings for longer periods, and the fact that many incoming em-
ployees bring vested credits with them, means that the larger fund re-
quirements need not be met wholly from increased contributions.
Both employees and employers have interests in contributory plans
which would warrant tax deductibility to employee contradictions,
within specified limits.” Rainard Robbins urged such a result with this
Summary of arguments: -
Employee contributions should be deductible in calculating taxable
income. Compulsory contributions are not income; while voluntary
contributions may be income, a single rule for all employee contribu-
tions is desirable. And besides so long as employee contributions are
taxable, the tax rule will have an artificial, undesirable influence on
the source of contributions to pension plans. Direct employee contri-
butions will be avoided, although they are cousidered socially desirable
and it is well understood that in reality all contributions must come
from total production.*
It must be recognized, however, that such a result is not easily
achieved, for it involves a loss of revenue from employee contributions
already being made. Employee contributions in 1961 were estimated to
be $780 million, but the estimate may be high; * if all of that amount
was effectively taxed at the rate of 22% the revenue loss of making
employee contributions tax free would be in the neighborhood of $170
million—not a formidable amount of federal revenue. More impor-
tantly, other groups probably would seek such favorable treatment for
what they regard as, and indeed may be, similar contributions. One
such group, the self-employed, won their objective in 1962 with some
unsought limitations. In the recent past the standard railroad organi-
zations sought tax exemption for employee contributions to the Rail-
road Retirement system which are substantial and are scheduled to
rise (for employer and employee combined) to 9% 96 on the first $400
of monthly wages. Recognizing that railroad employees could not be
privileged beyond employees subject to Social Security (FICA) pay-
roll tax, the railroad unions also urged such exemption for these
employee payments and employee payroll deductions under the Civil
Service Retirement Act.” *. -
* . . .
* Required employee contributions must not be so burdensome as to favor higher paid
employees, i.e., operate discriminately. Treas. Reg. Sec. 1.401–3 (d). Generally “contribu-
tions of six percent or less are not deemed to be burdensome.” Rev. Rul. 61–157, Part 5 (g),
1961–2 Cum. Bull. 67 at 82. Moreover, employees may make voluntary contributions (in
addition to those required for participation in a contributory plan) up to 10 % of their
compensation, so long as this additional employee contribution does not result in larger
benefits from employer contributions. Rev. Rul. 59–185, 1959 Cum. Bull. 86. In all likeli-
#. it is the better compensated employee who benefits from this arrangement, by and
arge. . . -
8 Rainard Robbins, Impact of Taa’es on Industrial Pension. Plans (New York : Industrial
Relations Counselors, 1949), p. 64. More recently, and for much the same reasons Dean
McConnell, one of the authors of Economic Needs of Older People (New York : Twentieth
Century Fund, 1956), advocated deductibility for employee pension plan contributions.
Statement of John W. McConnell, “Treatment of Pension Plans,” U.S. Congress, House
Committee on Ways and Means,” 2 Taa: Revision Compendium, 1347 (Committee Print,
1959). - -
9 Alfred Skolnik, “Employee-Benefit Plans, 1954–61,” 26 Soc. Sec. Bull. (No. 4) 4 at 12
(1963) gives that estimate. However, 1962 employee contributions to corporate pension
funds were estimated by another agency at $440 million. U.S. Securities and Exchange
ºnion. Corporate Pension Funds, 1962, Statistical Series, Release No. 1902, p. 3
10 At least one objection to granting exemption to OASDI and Railroad Retirement pay-
roll taxes on employees is that this would provide such employees with tax exemption
both on contributions and benefits. E.g., Report of Dept. of Health, Education, and
Welfare on S. 1313 and H.R. 4101 etc., Hearings on Amending Railroad Retirement Act
by Subcommittee on Railroad Retirement of Senate Committee on Labor and Public
Welfare, 85th Cong., 1st Sess., 11 (1957). -
OLD AGE IN COME ASSURANCE—PART I 133.
The revenue loss of such deductions, according to Treasury Depart-
ment estimates, would be on the order of $70 million if limited to Rail-
road Retirement contributions, $630 million if limited to Social
Security employee contributions, and $330 million if limited to United
States government plan employee contributions. If all such contri-
butions were made tax free, the combined revenue loss was estimated as
$1,030,000,000. If all individuals could exclude retirement contribu-
tions up to 71.4% of income, the estimated annual revenue loss would
total more than $2 billion.”
A potential revenue loss of that dimension raises serious problems.
Tax exemption for employee contributions to private plans would
have a negligible tax effect (especially if limited to given percentages
of income with an annual maximum for any individual, and if the
total of contributions were under the same limits as employer con-
tributions are today). It is clear that the revenue loss objection to the
same favorable tax treatment for the retirement plan contributions
of the self-employed and those subject to Social Security, Railroad
Retirement, and Civil Service Retirement tax deductions is much
stronger. Many considerations of equity favor preferential tax treat-
ment to Social Security and Railroad Retirement employee taxpayers.
Realistically viewed, however, the tax relief aspects of employee con-
tributions to private plans are not of major importance, except for
the distorting effect they have upon plans. To the extent that employee
contributions replace employer contributions the tax effect would be
the same as under the present law—no tax upon the contributions. The
important effect would come in the non-tax area—strengthening the
rights of the employees to benefits from the contributions made. This
is not discriminatory; instead, as noted below, it might help reduce
discrimination in favor of highly compensated plan participants.
It should be recognized as a fact of life that the groups seeking
exemption for self-employment, Railroad Retirement, Social Security,
and Civil Service employee contributions probably will not forego
their leverage upon those who may seek tax exemption for contribu-
tions to private plans and will, in effect, insist that each should fail
until all can succeed. Such action may well result in the continued
failure of all groups.”
Many will feel that the tax treatment of contributions to private
plans should not be considered apart from all other aspects of taxation
as they relate to the aged.” Moreover, some make the point that such
consideration of taxation must be coupled with consideration of the
OASDI program and proposed improvements to it.” Considering an
entire program of taxation for the aged is most logical and appar-
11 Hearings on Taa: Deductions for Railroad Retirement Contributions Before House
Committee on Ways and Means, 85th Cong., 2d Sess, 7 (1958). - -
12 In 1959, the AFL–CIO proposed the taxation of OASDI and Railroad Retirement
benefits and the exclusion from taxable and withholdable income of employee payroll taxes
for the OASDI and Railroad Retirement programs. Statement of Raymond Munts, Social
Security Department, AFL–CIO in U.S. House of Representatives, Committee on Ways and
Means, 2 Taa, Revision Compendium 353 at 357–358 (Committee Print, 1959), and Munts
testimony and discussion, U.S. House of Representatives, Committee on Ways and Means,
Income Tag Revision 142 at 143-44 (85th Cong., 1st Sess. Panel Discussion, 1959). I have
seen no evidence of a drive to achiave this result. Others suggested that making benefits
taxable would create pressure to promise offsetting benefit increases. - - . . . . .
, 13 Such a canvas is beyond the scope of this study, although obviously relevant to it.
is, gºvision Compendium, op. cit., at 539–578 and 2 Taz Revision Compendium,
14 Statements of Wilbur J. Cohen (before he became Assistant Secretary of H.E.W.) and
Eveline Burns in 1 Income T'aa, Revision, op. cit., pp. 244–45, 26–61. . . . .
134 OLD AGE INCOME ASSURANCE—PART I
ently reasonable; it also is the hardest to do and to legislate, and to
that extent is undesirable.
So long as employer contributions are deductible from income (and
that is not about to be changed), there seem to be quite strong argu-
ments in favor of giving similar treatment—with similar limitations—
to employee contributions. - -
UNION AND MANAGEMENT WIEws on CoNTRIBUTORY PLANs
In the late 1940's and early 1950's management and labor debated
whether plans should be contributory or non-contributory.
Management generally took the view that the plans should be con-
tributory so that employees would be aware of the cost factors and
hence more responsible in their demands. The proposition seems quite
reasonable, although payment of the employee share by payroll with-
holding may reduce worker sensitivity on this point. There is no reason
to believe that many employers would not still prefer contributory
plans, especially if employee contributions were large enough to fund a
substantial portion of the plan.
öß labor espoused (without exception. So far as I am aware)
non-contributory plans. That union position contrasts with the AFL–
CIO's consistent devotion to the contributory principle for the Old
Age, Survivors’, and Disability Insurance program ** for much the
same reason employers argued for contributory private plans. In addi-
tion, organized labor believes that the contributory principle estab-
lishes the “right” to a Social Security benefit. But unions also argue
that only a non-contributory plan can be made compulsory, and that
participation of all employees is the only way to ensure against “ad-
verse selection,” whereby older employees, whose pension costs are
higher, will join, while younger employees will not. This objection is
more apparent than real. There is no question that plans in which all
employees participate automatically can be compelled in bargaining.
Many unions now contend that the employer contributions to non-
contributory plans are a form of wages. If both propositions are cor-
rect then mandatory participation in a non-contributory plan is in fact
the same as for a contributory plan. There is also the precedent pro-
vided by the many universities which require faculty members to par-
ticipate in contributory plans that in Some measure are for the protec-
tion of the employing institution. Perhaps union officials believed that
members would not favor having a portion of the employee's pay check
subtracted for a private program but that such a method is palatable
by compulsory governmental action. One may wonder whether either
assumption is correct. In 1958 proposed increases in the Railroad Re-
tirement payroll tax to support improved benefits was opposed by
many railroad workers, although increases in both benefits and taxes
were enacted thereafter. Organized labor has strongly supported re-
peated increases in the OASDI payroll tax on both employers and em-
ployees as a means of improving benefits, and I am not aware of op-
position to these increases by members, although the increases have
not yet taken full effect. . . . . -
* Nelson Cruikshank (then Director, Social Insurance Activities, AFL; now Director,
Social Security Dept., AFL–CIO), “Some Labor Views on the Social Security Program,” in
Proceedings, Industrial Relations Research Association, 183 at 185 (1953). Of five basic
principles he listed for OASI its contributory character was the major element of two.
OLD AGE INCOME ASSURANCE—PART I 135
DESIRABILITY of CoNTRIBUTORY PLANs
It seems reasonably clear that, especially over the long haul which
pension financing requires, the employer funds allocable to the wage
bill probably are not very elastic. This is not revealed truth, nor can it
be demonstrated empirically, because negotiators cannot afford to dis-
close how much better or worse the bargain is than their predetermined
goal. The conclusion is based upon the nature of bargaining over pen;
sions and other fringe benefits and the expressed opinions of union and
management representatives. In sum, it appears a reasonable hy-
pothesis, even if not a demonstrably certain conclusion, that employer
pension contributions are nothing more than part of the wage bill
which would otherwise be applied to wages or other fringes. At least
from the union point of view, employer contributions are deferred
wages.” This makes somewhat disingenuous those not-So-rare union
pamphlets on pension plans which make much of the fact that the pro-
gram is financed “solely by the employer|s].” .
But unions and employees are kidding themselves, it seems to me, if
they honestly believe than a non-contributory plan results in greater
economic benefits for employees than contributory plans. The evidence
on benefits and vesting—as far as it goes—is against them; opinion of
informed commentators is against them; their own position on OASDI
financing is against them; and the foregoing analysis is against them.
Maturity and realism should counsel that, as with Social Security,
employees have greater security and more leverage in the operation of
contributory than non-contributory plans.
Moreover, we have seen how ineffectual the anti-discrimination
provisions of the Code regulations and rulings may be, so that in fact
employer contributions can redound mostly to the benefit of manage-
ment officials where employee separations are numerous. In contrast,
whatever dollars are contributed by an employee are practically uni-
versally returnable to him, often with interest, upon Separation—and,
as observed, vesting has been more common in contributory plans.
The revival and expansion of the contributory method ...if be a
powerful, practically a self-enforcing, preventive measure against fa-
voring management elite, for it would be impossible to divert the em-
ployee contributions to the benefit of the not-to-be-favored groups. In
addition, to the extent that effective vesting is promoted by employee
ºutions the prohibited discriminations are more readily pre-
Vented.
Undoubtedly, proposals for a revival of contributory plans are a
case of swimming against the stream. Whether the foregoing analysis
can help revive interest in contributory plans is rather questionable.
It is not very questionable that the initiative for changes in tax treat-
ment of employee retirement plan contributions must come from out-
side Congress; the effective lead cannot be taken by legislators, already
overburdened with demands for legislation by organized groups.
Realism seems to favor a revival of the contributory plan and, per
haps, tax changes to stimulate it or, more accurately, to remove the
present tax encouragement for non-contributory plans. Whether
realism is a sufficient force remains to be seen. Let the cynics give an
1° E.g., union brief in Inland Steel Co. vs. NLRB, 170 F. 2d 247 (7th Cir. 1948).
136 OLD AGE INCOME ASSURANCE—PART I
unreserved “no”; others of us live in hope, even if not with vibrant
expectations.
The policy of according deductibility to employer contributions
but not to employee contributions should be reconsidered and reversed,
because employee contributions strengthen employee benefit rights and
minimize discriminations in favor of stockholders and highly com-
pensated employees. -
::: Sk # :}; :}: :}: Sk
TRANSFERABLE CREDITS AND CLEARING HOUSE DEVICES
In this country no device other than vesting or multi-employer plans
has been seriously considered to provide retirement income to able-
bodied employees separated before retirement age. No proposal for
vesting in the United States has included any device or institutional
arrangement whereby vested rights follow the employee, rather than,
as at present, having the employee and his credit go separate ways until
retirement.
The possibility of small, perhaps miniscule benefits, the incompati-
bility of benefit provisions, disproportionately high administrative
costs, attrition of fixed benefits by inflation, withdrawal of contri-
butions, their lack of utility for the disabled, and the non-participa-
tion of vested deferred benefits in plan improvements, all argue for
the desirability of collecting the bits and pieces of employees’ vested
pension credits into one more adequate benefit, a benefit based upon
contributions which have earnings and growth up to the date of re-
tirement. Indeed, as will be shown, such a combination of credits can
facilitate liberal vesting. Outside of the multi-employer plans, such
piecing is not presently possible; no device exists in this country for
transferring and cumulating credit. In my discussions starting in
1959 with officials of insurance companies, banks, pension consulting
firms, unions, management, government, and academics I found inter-
est in some device to coordinate plans or benefits. But I encountered no
fixed ideas, except that some want to exclude or minimize the role
of the federal government. A basic purpose of this book is to pro-
vide fairly concrete suggestions for institutional arrangements to en-
able employees to carry all or some of their pension credits with them.
I suggest a set of alternative institutional arrangements as a basis for
discussion in solving the problems of pension, which are coming to be
recognized, and the shortcomings of vesting as now practiced, which
have yet to be widely recognized.”
17 The outlines of my ideas were first presented to specialists in this field and the Board
of the Meyer Institute in late 1959 and discussed with others throughout 1960 and 1961.
The Ontario proposal for a Central Pension Agency, presented in the February 1961 Sum-
mary Report of the Ontario Committee on Portable Pensions, has some similarities to a
few of the following “clearing house” proposals. It first came to my attention in late
August 1961 after my own first draft on clearing house devices was written. I mention these
details to show that similar notions were developed independently by a group of experts
and by me, working separately, to deal with the same basic problem. The Canadian proposal
and my alternatives have several significant differences, described below.
OLD AGE IN COME ASSURANCE—PART I 137
TRANSFERVALUES
At least 24,561 pension plans were in force in the United States in
mid-1959,” varying in coverage from a relative handful of employees
to tens of thousands. About 7,800 plans were for groups under annuity
or deposit administration plans with insurance companies.” Roughly
15,000 plans were administered by trustees—generally management
personnel or bank trust companies. Eligibility, administration, bene-
fits, contributions, funding medium (insured, trusteed, or some com-
bination), and funding method (level, pay as you go, profit-sharing)
are anything but uniform. Some object that “complete portability
of pension rights might require ‘pooling' of the responsibility for
making the ultimate benefit payments. This would mean uniformity
in benefit formulas, eligibility requirements, retirement provisions,
and financial policies to a degree which appears impractical in view of
the wide diversity which exists today in all these matters.”” These
and similar objections apparently, are based upon the vesting of
benefits without portability of the funds underlying them, i.e., “cold
storage” credits as they are sometimes known. I suggest that the objec-
tions are not valid.
How then can benefits be carried from one plan to another dissimilar
plan and perhaps later the credits from both imported into a third?
No arrangements for such transfers now exist, but the medium for
doing so exists,
It is money.
DESCRIPTION
At any given point in time it is possible for an actuary to place a
monetary value upon the pension credits of an employee. The ap-
propriate bases for such valuations are not a matter of settled practice
by actuaries and several alternate methods are possible.” The 1957
report and discussion of the Spratling, Bacon, and Bromfield study,
sponsored by the British Institute of Actuaries, emphasize that, despite
differences of opinion as to precisely the best and fairest methods to
employ, there are several reasonably good ways of making such valua-
tions which, while intricate, can be done routinely.
Under a voluntary credit transfer system the valuation process
would be determined by the parties to plans. A workable system
of “transfer values” does not require that every element of valua-
tion be fully agreed upon as rendering precise justice for the separat-
ing employee, the employer, and those who remain behind. For the
Separating employee, something to transfer is better than nothing and
18 U.S. Department of Labor, Characteristics of 127,657 Welfare and Pension Benefit
Plans, B. L. S. (processed, 1960) Table I. This was based upon filings under the Welfare
and Pension Plans Disclosure Act for plans covering “more than 25 employees.” The
Secretary of Labor believed that a large number of plans were not reported ; it can be
reasonably assumed that the plans for which reports were not filed for the most part
covered small groups of employees. - - - -
19 Not included are 17,870 individual policy pension trusts (life insurance plans with
pension features), covering about 670,000 persons. 1960 Life Insurance Fact Book (New
York : Institute of Life Insurance, 1960), p. 35. -
30 U.S. Department of Labor, Pension Costs in Relation to the Hiring of Older Workers,
B.E.S. Rept. No. E150 (1956), p. 15. -
_* They are discussed rather fully in F. H. Spratling, F. W. Bacon, and A. E. Bromfield,
“Preservation of Pension Rights,” 83 Journal of the Institute of Actuaries, pp. 173, 184-
187, 188–189, 191–195 (1957) and Abstract of Discussion [on that report] idem at pp.
202–224. The article was a result of a study made under the auspices of the British
Institute of Actuaries. .
138 OLD AGE INCOME ASSURANCE—PART I
a reasonable amount transferred can be far more valuable than a
“cold storage” vested right; indeed, the transfer can overcome the
Several drawbacks of vesting described in the previous chapter. Those
who have the power to decide upon the valuation method, the employer
alone or the employer and union in bargaining, may agree only to
transfer part of the then present value of credits, as under a system
of “graded vesting.” There is a certain element of arbitrariness in the
whole system of actuarial analysis and computation (necessarily so),
and another slightly arbitrary set of assumptions or methods should
be bearable.
This sort of valuation is done routinely in Norway where white
collar workers’ private pension credits are universally transferable.
Setting such “transfer values” has proved to be no problem.” The
value of the separated employee's past credits are simply transferred
to the plan into which he moves and the new plan gives him whatever
credits he is entitled to by virtue of the payment made. As between
the four companies which make such transfers (all of the insurance
companies dealing in pensions in Norway), the transfers are made
as bookkeeping transactions and net differences settled in cash from
time to time. The insurers also receive transfer value in cash for
employees transferring from non-insured plans. Apparently there
should be no difficulty in establishing the value to be accorded by
the receiving plan to the credits which an employee brings with him.
In effect, the money received would be translated into some equiv-
alent years of credits under the plan into which he moves.
Whenever a plan is less than fully funded, the award of a fully
paid up benefit or credit to a separated employee favors that employee
to the possible detriment of the employees who remain behind in the
plan. Part of the funding for their benefit is removed, and what
remains might be inadequate to meet their valid claims if the plan
were terminated soon thereafter. To allow for this contingency the
credit to be conferred upon departing employees could vary according
to the state of funding. Payments from the old plan to a new plan
could be paid in installments to minimize the possibly adverse impact
upon the old plan. This feature may raise a problem with the Internal
Revenue Service as possibly not a “definitely determinable benefit.”
But I.R.S. might well be flexible in view of its enthusiasm for vesting.
Moreover, as the various plans proposed may require federal legisla-
tion, such arrangements could be exempted from the “definitely deter-
minable” requirement if otherwise satisfactory. And if a plan must use
the same formula for computing the transfer values of entering and
exiting employees, windfall gains to the receiving plan can be
forestalled. -
Experience under a transfer scheme could develop more or less
standard criteria for valuing the credits of exiting and incoming em-
ployees, thereby making possible continuity of credits and participa-
tion in growing plans presently denied to tens of thousands of
employees who lose or leave jobs covered by plans.
* Interview with Eigil Möen, Assistant Chief Actuary, Norske Folke (Norway's largest
life insurance company), July 1959. Individual plans vary greatly as to amount of benefits,
disability coverage, etc. . . . . . :
OLD AGE INCOME ASSURANCE—PART I 139
PLAN PROVISIONS FOR TRANSFER VALUES
Plug and socket arrangements
Transfer value schemes would require plan provisions to give trans-
fer credits to separating employees and to give an employee enterin
a plan credits for the amount of money he brings with him. j
an employee not move directly to an employer with a retirement plan
but do so subsequently, the credits could be transferred when he next
enters employment with a plan. Whether such a delayed transfer
gredit would be of the value at separation plus all or some of the earn-
ings up to the time of actual transfer or without any of the earnings is
a matter for individual determination. The crediting of earnings to
the transferee would diminish the fund available to remaining em-
ployees, but no more so than a cold storage credit may. As the loss per
capita would be small to those who remain, but the gain would be
proportionally large for the individual transferee, it may be little or
no strain to give the transferee the benefit of the full earnings. Upon
leaving the second employer and going to a third, a similar transfer
could be made. It would seem only fair that with each shift the em-
ployee would be given full credit for everything he brought with him,
plus earnings on it—even if the second employer has a graded system
of vesting under its own plan. However, the proposition is not revealed
truth and some may view the matter differently
The mechanics are no great problem once plans are supplied with
the provisions for such financial plugs and sockets. Both plans, the
one the employee leaves and the one he joins, must have provisions for
the transfer. Only the last plan would be responsible for the benefits,
under its own formula—having received and credited value from all
prior plans in which the employee participated. Or a central agency,
8,S ºiled below, could receive the value of the departing employee's
CreditS.
Once the large plans (at least those with vesting) adopt such pro-
visions, their use would undoubtedly spread. The only uniformity
required is accommodation for cash transfers in and out of the plans.
All other elements of the plans could be as dissimilar as imaginable.
Transfer at Retirement Age .
The Spratling, Bacon, and Bromfield study suggests the possibility
of combining ordinary “cold storage” vesting with a transfer value
system under which credits from all plans under which an employee
worked would be transferred to the last employer when the employee
reaches retirement age.” However, this arrangement, the authors said,
might have the undesirable effect of embarrassing the last employer
if the resultant benefits differed markedly from those given retirees
with similar service accumulated wholly in the last employer's service.
They were of the opinion that otherwise such a scheme presents “most
of the advantages and few of the disadvantages of both systems” (i.e.,
cold storage and value transfer). This is a little hard to follow. Such
a scheme would obviate the multiplication of costs of administering
several benefits but would not overcome any of the other already de-
scribed drawbacks of cold storage vesting, especially exclusion from
plan improvements after the employee's separation.
23 “Preservation of Pension Rights,” op. cit., esp. pp. 212–213.
83–200—68—pt. 1–10
140 OLD AGE INCOME ASSURANCE—PART I
Probably under this alternative method the valuation problems are
easier to handle in both the transferring and accepting plans because
at retirement age the employee's credits have a determinative value
under the plan; all the receiving plan need do is combine all the money
and either buy whatever annuity the sum will purchase at regular
rates or give the “benefit” it would result in under the last fund’s
formula—both routine matters. But such a system contemplates that
the plans which accord the vested rights continue in active existence
to the dates of retirement of employees separated with vested rights.
This is an assumption which may be entirely too optimistic, partic-
ularly for Small company plans. In my judgment, only credits trans-
ferred at the time of job separation into another group plan can fully
overcome the present limitations of vesting and fully realize the
benefit of a transfer value system.
Transfers Costs and Charges
Under any transfer value scheme the plan from which an employee's
credits are transferred incurs some costs in collecting his records
(probably quite routine), valuing his credits, communicating the
transfer to a clearing house or directly to another plan, and recording
the completion of the transaction upon receipt of acknowledgment
by the receiving agency or plan. These operations are similar to those
at retirement, although the valuation might be more complicated, at
least until standardization is achieved. As only one transfer is involved,
the transferring plan is relieved of the burden of annuity or benefit
payments; hence the transfer value transactions may actually involve
less cost than processing a regular benefit.
There are no exact precedents or experience for the transfer of
credits (and cash) for individuals. Of course, vested rights to a de-
ferred benefits administered by a plan involve Some cost, but no direct
charges against the plan are made for that item. Under a group annuity
plan, employee separations without benefits result in credits to the em-
ployer’s account of something slightly under 100% of the amount
which had been credited to the separating employee. These charges
often are made up even though “loadings” for costs and contingencies
also are charged.* No charge is made, normally, for separations under
deposit administration and trusteed plans.” Under a bilateral or clear-
ing house arrangement, whether private or public, it would be desirable
to minimize the costs and charges for transfers. Probably experience
is needed to minimize transfer costs. It may be pertinent to note that
in Norway no charge is made by the insurance companies for
transfers.” . .
EFFECTS OF TRANSFERABILITY
Effects for Older Workers
Many workers in their 40's, 50's and 60’s, once out of work, have
great difficulty in finding any employment when jobs are not plenti-
24 Dan McGill, Fundamentals of Private Pensions (Homewood, Ill. : Richard D. Irwin,
Inc., 1955), pp. 95–96. -
25 Willard Weiss, “A Critical Analysis of Trustee and Insurance Company Administered
Employee Retirement Plans,” 5 Proceedings, Conference of Actuaries in Public Practice,
1955 (reprint. ed., for Eugene I&lein & Associates, Actuaries, Cleveland, Ohio), p. 176.
26 Interview with Eigil Möen, Assistant Chief Actuary, Norske Folke, Oslo, July 1959.
OLD AGE INCOME ASSURANCE—PART I 141
ful.” Very likely the skilled do better than the less skilled, at least so
long as their skills are in demand. Those who do gain employment
have lower seniority than their fellow workers and are most vulner-
able to involuntary separation. When separated at yet higher ages,
their prospects are even less enviable. Judging by the substantial and
stubborn unemployment figures of recent years, the º elderly
are all too numerous. During the next decade or so, the relative scarcity
of workers in the 30–45 age group may improve matters for older job
seekers. Perhaps by the 1970's the problems of older job seekers will
have been reduced by education and economic growth. Equally possible,
and more probable, is that technological advance and accompanying
overseas competition will continue to shrink job opportunities while the
labor force grows.
Many older members of the labor force separated from long-held
positions must piece out the time before reaching Social Security re-
tirement age with short term jobs as best they can. Under such circum-
stances an employee will have had to make all or most of his provision
for private retirement income in his prime (younger) working years.
And if, as their numbers grow, the job opportunities for older workers
decrease, it will be that much more desirable for the younger years to be
years of effective saving for retirement. The period between pension
contribution and retirement the less need to be contributed for any
given level of benefits or the easier it is to provide a larger benefit.
To the extent that older workers experience substantial unmeploy-
ment in their later years, or are employed for periods too brief to
qualify them for vested or normal benefits, the single-employer plan
pattern is decidedly less desirable than a system of transferable credits.
This much can be said with reasonable certainty: the more years in
which employees earn creditable pension service, the closer to adequate
will be their retirement benefits. For many tens of thousands of em-
ployees this will require pension credits from more than one employer,
or even more than two or three employers. -
Moreover, there is some evidence that pension considerations operate
to hinder older job seekers in obtaining employment. It is thought that
some employers with plans do not hire older workers because their
pensions would be either substandard or would cost too much to be
made more equal to those of long-term employees.” If this is so, and it
is widely believed to be so, an older employee with a substantial vested
benefit or a block of credits earned in prior employment which can be
transferred to the plan of a potential employer would be more
employable. -
Effects on Employee Turnover - ‘. . -
Transferability is desirable because of the strong possibility that
hundreds of thousands of employees will be changing jobs, voluntarily
* See, e.g., U.S. Senate, Special Committee, on Unemployment Problems, Report, Sen.
Rept, No. 1208, 86th Cong., 2d Sess., 151 ff. (1960). An excellent collection of articles on
the subject will be found in U.S. Senate, Special Committee on Unemployment Problems,
Readings on Unemployment (Committee Print, 1960), pp. 758–825. - . - - -
28 E.g., Margaret Gordon, “The Older Worker and Hiring Practices,” 82 Mo. Lab. Rev.
1198 (1959) ; Canadian Dept. of Labour, Pension Plans and the Employment of Older
Workers (Ottawa, 1957), presents the strongest evidence—statements by employers as to
their policy. Also see U.S. Dept. of Labor, Pension Costs in Relation to the Hiring of Older
Workers, B. E. S. Rept, No. E150 (1956). • , . . .
142 OLD AGE INCOME ASSURANCE—PART I
and involuntarily, and may thereby lose their pension credits. In large
part it is suggested as a response to turnover.
Yet some may object that transferability would stimulate employee
turnover and thereby defeat one of the principal purposes of private
plans. What evidence there is indicates that pension plans do not tie
workers to jobs. (Executives are another matter.) So this objection
probably is insubstantial. Indeed, transferability may be such an at-
tractive feature that it would hold employees; or conversely, a plan
without it, once it came into fairly common use, would be considered
inferior and less attractive. Moreover, it has been pointed out that
employees who are held by non-vesting features of pension plans, be-
cause they are anxious about their retirement savings, often are the
marginal employees whom the employer least desires to keep.” Em-
ployers who feel the desire to use pensions to keep employees can em-
ploy a system of graded—and transferable—vesting. In this way the
employer would feel that its purposes are served, yet the employee's
iº in steady accumulation of pension savings would be protected
8,1SO.
Unless it is hopelessly naive to believe that the ultimate justification
of pension plans is that they provide income to employees when their
earnings have declined or stopped, it would seem that transferability
Serves the basic purpose of plans. And it is in the interests of the
private pension system, for if the system is not adequate to the needs
of employees under plans it will become discredited.
TRANSFERABILITY FACILITATED BY A CLEARING HOUSE
Whether individual plan provisions, without supporting institu-
tions or devices, are sufficient to facilitate transfer values for exiting
employees is to be doubted. There are today So many insurance com-
panies and bank and other trustees administering plans that the prob-
Iems of communication alone could be formidable. The transfering
employee would have to inform the new plan of his credits under the
plan in which he had participated. The new plan's officials would have
to inform the old plan's officials of his new employment and inquire
about transfer value provisions of the old plan. Further exchanges of
correspondence might be necessary to establish the bona fides of the
new plan (if the first plan prohibits cashing out of vested benefits);
valuation problems may arise if the old plan wants assurance that the
employee will get full value for the funds transferred to the new plan.
Lventually the transfer would be made. If this had to be done by a
plan for hundreds of employees in a year, or even thousands, the ar-
rangement could bog down in a morass of paper. -
A “clearing house” could facilitate and, in addition, supplement.
the transfer value provisions of individual plans—and thereby stimu-
late them. Indeed, such an arrangement might be the indispensable
condition of a workable system of transferring pension credit values.
* This paragraph is based upon Spratling, Bacon, and Bromfield, op. cit.
OLD AGE INCOME ASSURANCE—PART I 143
A PENSION CREDIT CLEARING House
POSSIBLE FUNCTIONS OF A CLEARING FHOUSE
A pension clearing house could perform one or more of the follow-
ing functions:
1. Maintain records of “cold storage” vested credits, with the credits
themselves remaining with the plan under which they were earned.
2. Facilitate the actual transfer of the value of vested credits for
employees leaving one plan and entering another.
3. Receive tranfer values for separated employees who do not enter
a new plan, thereby providing the advantages of a developing group
plan. -
4. Provide basic coverage for small groups of employees for whom
regular plan coverage is impractical due to high costs and the uncer-
tain longevity of the job, or, indeed, of the employer.
Any of these functions could be performed by a wholly private or
wholly governmental agency or any one of several private-public co-
operative arrangements. These alternative devices are described and
explored in some detail after a description of the manner in which the
functions enumerated could be performed.
Maintaining a Pension Registry
As already noted, some management and bank officials oppose vest-
ing in the belief that it entails too great a record-keeping burden. In
addition, there is a problem of the inadequacy of records (and mem-
ories) of separated employees. A central pension registry could pre-
serve individual employee records of vested credits as they are awarded
and maintain up-to-date information about the plan under which the
credits were earned. When the employee reaches eligibility, but is un-
clear as to the location and amount of all vested credits, he would ask
for his record at the registry and, on the basis of it, he could º
directly to the appropriate insurance companies or trustees for his
several benefits. Such an arrangement does not overcome any of the
limitations of vesting as presently practiced except record maintenance.
Facilitating Transfer of Credit Values
A clearing house could facilitate the transfer of credit values for
employees passing from one plan to another, thereby reducing, if not
eliminating, individualized handling of each transfer, and the attend-
ant cost. The following description is suggestive of how a clearing
house could operate. -
The similarity to a check clearing house is obvious. Plan-adminis-
tering institutions, would register plans to establish their identity and
receive code numbers either in expectation of transfers or at the time
a transfer is made. (Periodic updating of registrations would be in
order, especially to keep track of smaller plans.) When an employee
leaves a plan with a vested deferred right to pension benefits he would
receive a certificate to that effect, showing the plan name, clearing
house code identification, the date of the transfer, the value of his
credits, and the employee's name. Whenever a transferring employee
obtains a new job which has a plan he presents the transfer informa-
tion to the new employer. An employer with a plan which accepts
144 OLD AGE INCOME ASSURANCE-PART I
transfer values takes the certificate and its plan administrators sub-
mit it to the clearing house (with information about the receiving
plan, if not already registered and its identity established). The
clearing house would record the transaction, remit the certificate to the
issuer, and credit and debit the accounts of both plans appropriately.
Periodically accounts would be settled. The transfer values might be
subject to the consummation of the cash transaction so as to cover those
instances in which an issuing plan might not be able to make good
on certificates. . .
In all likelihood a clearing house limited to this purpose would be
a cooperative or non-profit association or corporation rendering serv-
ice at cost. If the clearing house were also to provide group coverage
(as considered in the sections which follow) the simple transfer op-
erations also should be at cost. However, some of its operations—such
as the study, and possibly establishment, of transfer valuation meth-
ods—would require capital. The New York Vesting Study * opines
on the subject of pension registries and clearing houses that they
would be an aid to small employers but that “presumably” large firms,
insurance companies, and “some banks” would find it more economical
to handle their own vested accounts. Note that the comment was
limited to records of vested rights of the kind presently accorded.
The comment would seem inapplicable to a system employing the
transfer of the value of vested rights to another plan or a central
agency since there would be nothing left for the old plan to handle.
Not the least of a clearing house's advantages would be the standard-
ization of transfer practice—itself a source of economy—and, perhaps,
the establishment of standards for valuing transferred credits.
Providing Coverage for Transferees to a Job Without a Plan
The clearing house also could provide group coverage for employees
separated from a job with a plan and not subsequently covered by
another plan. In this way, the last employer’s plan could clear its
books for the employee by paying the cash equivalent of the separated
employee's credits *... if quite small) to the clearing house. This
would give the individual employees the benefit of group coverage:
diversification of investment, for Security; expert management, and
hence good earnings; a large fund with low per capita overhead costs.
The continuation of earnings by his credits under current rates would
help offset the attrition of value due to inflation before retirement.
Individual employees whose credits are transferred into a clearing
house group plan may not obtain a job providing pension plan cover-
age for some time—possibly never. To guard against this possibility,
or merely to enhance retirement income, individual employees might
want to augment their pension credits by making their own contri-
butions. There would seem to be no reason to exclude employee con-
tributions to the clearing house group plan—so long as the plan oper-
ated on a fully insured basis and the dollars contributed “purchased”
their exact equivalent in benefits and were not “subsidized” by the
contributions of others or by the government. .
However, insurance companies may feel that such an opportunity
would compete with their individual annuity business. It might, but
sº John McConnell et al., Vesting and Transferability of Pension Rights (New York State
Dept. of Labor, 1960).
OLD AGE IN COME ASSURANCE—PART I 145
only on the fringes. Perhaps, the right to make their own supple-
mentary contributions could be limited to employees with incomes
of, Say, under $7500 or $10,000, who are not good prospects for indi-
vidual annuity policies. The arguments in favor of participation by
the Self-employed and the non-covered employed are just the same as
those for extending OASDI coverage to the self-employed and near
universality for the employed. Participation by them would be wholly
voluntary. Perhaps there should be income limitations upon partici-
pation by the Self-employed so as not to give cut-rate competition to
insurance companies where now they are rendering acceptable service.
Providing Group Coverage to Employees of Small Companies
A group pension plan may be beyond the reach of many employee
groups, particularly small groups. This is especially true of employers
who are uncertain about their ability to sustain a plan. Moreover,
plans for employees whose jobs are of uncertain or relatively brief
duration are not presently practical unless there is some unifying
factor—such as craft status—which has led to the creation of a multi-
employer plan.
The clearing house could provide low cost group coverage for em-
ployees of small companies (say up to 250 or 300 employees)* to meet
these problems. In effect, the employees would be members of the
clearing house group plan with the employer making contributions
for them. Upon separation from such a job, employees would continue
to be group plan participants with the option of supplementing their
credits by individual contributions. If they were unable or did not de-
sire to do so, their already paid-for credits would continue to partici-
pate in the earnings of the group plan and would be available for
transfer into another private employment plan. -
Most, or a large part, of the clearing house coverage so provided
would be “new business,” but some undoubtedly would represent funds
which otherwise would have stayed in single-employer plans either as
“gains” from employee separations or as vested rights to deferred
benefits. But, as I propose to show in the next section, such losses need
not be net losses. .
WIDESPREAD USE REDUCES COST AND EN COURAGES VESTING
A clearing house probably would effect economies in the ad-
ministration of vesting. More importantly, if a clearing house was
widely used, the cost of vesting could be reduced, perhaps substan-
tially. Presently the cost of any vested rights conferred by a plan is
borne by that plan alone. Whatever the pattern of employee turnover,
under conventional vesting all the money is outbound. Under a clear-
ing house (or mutual bilateral) arrangement some incoming em-
ployees would bring funds with them. Of course, the incoming em-
ployee would get the full benefit of any funds he brings and so there
is no “profit” to the plan he joins on that account. But to the eaſtent
that employees arrive with money for credits, the receiving employer
3. Applying limits of this sort is a little tricky on the margins, particularly for new or
young enterprises, as employment increases and decreases. Groups which grow beyond the
limit— as measured by average employment during the preceding two or even three years—
might be required, on notice of several months or more, to obtain more conventional cover-
age. This limit, or at least its details, would best be set after a thorough examination of
the factual situations involved. - . .
146 OLD AGE INCOME ASSURANCE—PART I

is required to contribute less in order to provide any given level of
benefits. Therefore the receiving employer can base his plan on a
longer period during which pension credits are earned.
For example many plans limit participation to employees with
specified age and/or service. In effect, this can and does exclude con-
siderable periods of employment from pension credit. And, it excludes
the earliest years whose contributions would be of the greatest value
because they have compounded earnings for a longer period. In effect,
under present practice the employer is financing each retiring or early
retiring employee's benefits over a period of, say 30 rather than 40
years. For any given amount of normal or early retirement benefit
the employer must contribute more for that employee, and the con-
tributions will have very substantially less earnings and less earnings
on earnings—all tax free. Under clearing house arrangements, the
older the incoming employee the less is the burden to the receiving
employer of providing a decent benefit if that employee brings (in
money) Some or all of the pension credits he earned elsewhere.
Some may say this is “taking in each other's wash”—that if each
did his own it would be the same. The reply is that it would not be
the same because under Schemes contemplating the funding of every
employees' benefits over a longer period, more of the benefit financing
derives from earnings rather than contributions. And it is to be hoped
that by reducing the cost of each year of plan coverage more employers
would be able to provide plan coverage and transfer value vesting.
The more plans utilizing the clearing house and providing transfer-
able credits, the less ea pensive it would be for each employer to pro-
'wide a unit of coverage.
So, for example, the per capita annual costs of providing full vest-
ing to an employee achieving pension credits under a universal trans-
fer-value clearing house for every year of work between age 22 and
65 may be less than one third the cost of a 10 year vesting provision.
Obviously the savings for employees who are older when universal
transfer-value arrangements are instituted would be less. And the
problems of financing benefits for those near retirement would remain
what they are today; decent benefits cost proportionally more for
them. Quite clearly, however, the savings possible under a universal
transfer-value º, house system are substantial—indeed, drama-
tic. But, if they are to be gained the system must be put into operation
as soon as possible. Of course, the aggregate amount required to fi-
nance pension benefits would be greater, but much of the increase
would derive from fund earnings. And, as the earnings are tax free to
the fund, they are commensurately more productive than if they were
used for regular business purposes and put into pension plans later.
But what, it may be asked, would be the incentive to give as well
as receive the benefits of the system 7 Several forces would be at work.
First is the force of competition. Transferability would be an attrac-
tion for desirable employees (how strong a factor depends upon many
variables), once it is introduced, employers would be under pressure
to match such features in others' plans. Secondly, collective bargain-
ing would tend to spread the feature of transferability.
The clearing house, whether private or governmental if it seemed
desirable to add further inducements, could set a deadline (of perhaps
several years after inception of the clearing house or inception of the


OLD AGE INCOME ASSURANCE—PART I 147
plan) within which plans would have to provide for giving transfer
credits as a condition of eligibility to receive transferees’ credits
through its machinery. I rather doubt that even this degree of com-
pulsion would be necessary. At the most it might be useful for a few
marginal employers. -
The results of a clearing house transfer-value arrangement would
be reduction of the cost of providing any year of plan coverage, so
that the wider the use of transfer values, the less costly would be plan
coverage. This in turn can bring plan coverage within the reach of
those to whom costs are prohibitive under single-employer plans. And
the clearing house transfer-value system would promote the vesting of
credits for short periods of service which otherwise would not be
amenable to vesting.
HOW A CLEARING HOUSE PROVIDING EMPLOYEE GROUP COVERAGE
WOULD WORIC
Basic Arrangements
Most schemes for a clearing house, whether providing for operation
by private, federal, or by a joint federal-private group, would func-
tion in essentially the same fashion. .
Employers would “contract” for a period of time to provide clear-
ing house coverage for employees separated from private plans. The
“contract” would provide that all employees separated under age and
service conditions specified by the employer (entirely at its option or
in conformity with a collective bargaining agreement) would be given
transfer value credits computed in a specified fashion which would be
paid over to the clearing house. In the event of plan termination, the
value of vested credits could be transferred to the clearing house rather
than dissipated in cash payments or paid-up annuities for small
amounts. The contract requirement of equal treatment would not be
so much to protect the clearing house as to ensure fair operation of
each employer's plan. As already described, small companies could
contract for clearing house group plan coverage for all of their em-
pº *
After an employee's separation from a job covered by a private#.
le a
his pension credits would be evaluated. The employer would
report and payment for the separated employee, or perhaps make pay-
ments periodically. If the OASDI machinery were used for either
a private or public system, the report and payment would accompany
the employer's report and payment of Federal Insurance Compensa-
tion Act payroll taxes (Social Security payroll taxes). That supple-
mental report would show the employee's name, his Social Security
number, the amount to be credited to his supplemental retirement ac-
count, and his age.
Contributions and Benefits .
Basic to a supplementary system grounded in private plans is ad-
herence to private insurance principles—which means primarily that
benefits will be proportional to contributions, rather than accom-
modated, in part, to the insured’s need, as in the OASDI system. On
this point I have found no disagreement among those with whom I
have discussed such arrangements, whether they are in government,
unions, management, insurance, banking, or pension consulting. The
148 OLD AGE INCOME ASSURANCE—PART I
voluntary nature of the program would seem to indicate offering ben-
efits essentially commensurate with the individual’s savings. But, some
private plans .# their formulas in favor of lower paid employees;
this pattern could be maintained by making proportionally larger
contributions on their behalf to the clearing house plan. .
Under present plans (except for deferred profit-sharing plans)
either contributions or benefits (perhaps both) are fixed, and contribu-
tions are made according to the same formula over a period of years,
with specified or ascertainable amounts of benefits as the goal.
However, a clearing house, if it is to be adaptable to varying needs,
could not operate with either fixed contributions or a fixed schedule
of benefits to which each participating company must gear its con-
tribution or to which individual employees must adhere as in a pri-
vately purchased individual annuity plan. Rather the contributions
would be much as they are under private plans today—varying from
plan to plan and in conformity with each company's contributions
formula. Separated employees would bring to the clearing house plan
varying amounts of money representing different service, different for-
mulas, and, indeed, different percentages of the contributions or pre-
miums paid for them. Plans could confer the full value of their credits
or some fraction; the only limitation would be against invidious dis-
criminations. Similarly, varying rates of contribution would be made
for employees whose basic coverage is provided by the clearing house
group plan; as they move to different jobs also covered by the clearing
house group plan contributions on their behalf might—probably
would—vary. This system could include transfers from profit-sharing
plans. The central group plan would credit each employee with what-
ever credits his transferred value will purchase, taking into account
his age, much in the manner of insurance arrangements. Only if age
were a factor would there be protection against “adverse selection” of
risks in which the high cost elderly would gravitate toward the clear-
ing house plan with employers using other private methods for “lower
cost” young employees. . -
As to benefits, the plan could guarantee a fixed dollar amount at
retirement in accordance with regular insurance practice. Favorable
fund earning experience beyond the necessary reserves could be re-
flected in dividends purchasing additional credits; a cash dividend
would seem inharmonious with the savings aspect of the plan, es-
pecially as dividends would supply a means of offsetting inflation—
at least in part. All paid-up credits would be totalled at retirement to
supply the benefit. If employee contributions were permitted to sup-
plement the contributions made under private plans, some of the un-
certainty introduced by varying contributions could be eliminated if
the individual desired to do so. Such action would be stimulated if
employee contributions were made tax deductible within specified
limits. Or the plan could operate on a unit purchase basis in which the
value of the units would vary according to the value and earnings of the
fund's investment. This would be similar to the method just described
up to retirement; in addition, after retirement it would fluctuate in
accordance with fund conditions, hopefully reflecting movements in
the cost of living. Perhaps the two methods could be combined as
under TIAA and CREE. - . . .
OLD AGE INCOME ASSURANCE—PART I 149
I suggest that minimum eligibility requirements would not be ap-
propriate until participation by plans in the clearing house was close
to universal. An eligibility test, as under Social Security, is designed
to limit payment of benefits to those who work long enough—or, in
the case of disability, regularly enough—to establish that they de-
pend upon work for the support of themselves and dependents. So
long as significant blocks of employment lay outside the system
an eligibility formula would not demonstrate such dependence. And
if, voluntary employee contributions were permitted, as seems de-
sirable, the amount of credits would not show work connection, unless
such contributions were ignored. Such exclusion would run counter
to encouraging retirement Saving, the exact opposite of what appears
to be desirable. -
Meeting the Cash. Withdrawal Problem -
The clearing house would not serve its purposes if cash withdrawal
were permitted, as is now the practice when employees are separated
from jobs under contributory plans. It may well }. that a clearing
house would not be feasible until employees prefer the continuation of
their credits to a cash payment of considerably less value. The greater
value of the retirement benefit should not be too hard to demonstrate to
employees. But until the idea is conveyed and accepted, it will be hard
to insist upon benefiting employees against their will. This sort of
paternalism is not acceptable in our system. The continuity provided
by a clearing house system may help demonstrate to employees how
much it is in their interests to leave their own contributions in a plan
and thereby gain the benefit of the employer's contribution. The fact
that with the clearing house the value of their credits “accompany”
them wherever they go may remove any uncertainty that they will
realize benefits, a factor which probably now helps discourage non-
withdrawal. Many vested credits are too small to warrant leaving them
in a plan from either the employee's or employer's point of view. But,
if they can increase in value and be added to other credits earned before
and after, it becomes worth while for an employee to leave them in a
plan. And, of course, the employer is relieved of administrative expense
and bother. .
Of course, employees would have to understand that contributions
(like those under OASDI) are not refundable. The draft Ontario Pen-
sion Act (1961) would make all contributions non-refundable, and the
proposal recommends itself. All participants in the 1957 discussion of
transfer methods conducted by the Institute of Actuaries (Great
Britain) seemed agreed that a system of transferability requires a ban
upon cash withdrawals by employees. This would limit the diversion of
other forms of savings into the Pension Clearing House—it could not
become a savings bank with demand deposits plus the option of retire-
ment benefits. - -
Recognizing that sometimes participants may have urgent needs
for cash which their other savings are insufficient to meet, some consid-
eration might be given to limited grounds for borrowing against the
contributions made on behalf of an employee. Such an arrangement
would be terribly awkward under OASDI; however, as private plans
represent supplementary and more voluntary savings, consideration
150 OLD AGE INCOME ASSURANCE—PART I
should be given to such a feature. There would seem little purpose to
forcing a participant into charity while he has thousands of dollars to
his credit in the clearing house group plan. But the exigencies should
be limited to bona fide emergencies. Such availability might make this
form of Saving more attractive to employees and hence encourage the
funding of larger benefits which require larger savings.
Possible Use of OASDI Facilities by Clearing House
A national clearing house—whether public, private, or some com-
bination of public and private—might find it advantageous to use
OASDI reporting and record-keeping facilities for which the Social
Security Administration would be reimbursed at cost.
Should the clearing house offer interim coverage for individuals and
basic coverage for small groups, the simplest arrangement would be
for the employer to remit contributions and records for that coverage
along with the payroll taxes and records for the F.I.C.A. (Social
Security) payroll tax. OASDI has established a well-rationalized,
fully operating records system covering almost all employees and the
self-employed. It would be rare to find an employee under a private
plan who is not at the same time subject to OASDI payroll taxes.
If, in the course of decades of operations, millions of employee records
required recording by the pension clearing house, it would seem a
matter of simple economy to employ the already-established OASDI
record-keeping facilities. Individual files would require only the entry
of a few coded items to record the private credits. An employee could
et either his OASDI or private record, or both, through his Social
ecurity number—which is so repeatedly used by an employee that
it is quite well known.
Were the clearing house wholly private, its owners might prefer not
to be so closely identified with the Social Security system; others may
have misgivings about the use of governmental machinery for a com-
pletely private enterprise. However, if using OASDI record-keeping
is most economical, then it has a great deal to recommend it. After all,
retirement savings are intended for benefits, not administrative and
overhead costs. The government has leased facilities to private enter-
prise before—frequently with a less clear social purpose.
We turn next to consideration of the various private, public, and
mixed private-public clearing house arrangements.
CLEARING House Own ERSHIP AND OPERATION.—ALTERNATIVE
. METHODS .
A clearing house could be established and operated: (a) wholly by
private institutions already operating in the pension field, (b) wholly
as an agency of the federal government, or {c) by some combination
of private and public (federal government) institutions.
A wholly private clearing house could be organized and operated by
the private institutions now servicing pension needs as a Supplement to
their present operations. Banks and insurance companies with pension
facilities, self-insured plans, and unions are the obvious participants.
Or unions could provide the initiative through bargained plans as they
already have done in a few industries.
A wholly public clearing house could be organized much as the
OASDI and Railroad Retirement programs are, except that it would
OLD AGE IN COME ASSURANCE—PART I 151
be fully funded. The plan funds would be invested in fixed return gov-
ernment bonds or government guaranteed obligations. Qr, to improve
the return on investments and to approximate the benefit potential of
private plans, the government clearing house could invest in both gov-
ernment and private Securities.
A government-private institution combination could be based upon
federal record-keeping, collection of contributions, and the purchase
from private institutions of fixed annuities and investment in deposit
administration and bank trusteed funds in an adaptation of the Fed-
eral Employees Life Insurance program. Or the federal agency could
run all aspects of the plan except investment, which could º adminis-
tered on a fee basis by a corporation owned and operated by the pri-
vate pension institutions. Or a joint federal-private venture could be
fashioned after the Federal National Mortgage Association (Fannie
Mae) or the Telstar corporation.

A WHOLLY PRIVATE CLEARING HOUSE
A private clearing house presents these major organizational ques-
tions: (1) How should it be organized (owned and controlled)? (2)
Should it operate under state law or under federal law or a federal
charter which, perhaps, grants an exclusive right to perform the func-
tion ?
Ownership and Control
A wholly private clearing house requires the participation of all, or
at least the major, insurance companies with annuity business,” the
more numerous bank-trust companies, and the self-administered plans
(e.g., those in the automobile and steel industries), including at least
those union-administered plans in the non-craft categories. However,
coverage gaps in even the best multi-employer, craft-union plans
could make participation in the clearing house advantageous for them
as well. Not all participants need have a share of ownership and con-
trol. But a prerequisite for a workable system—especially if the clear-
ing house were to provide coverage to employees of Small companies—
would be the feeling on the part of potential participants that the
system was fair and did not favor any particular kind of private plan
or group of companies or employees. A combination by any one group
to the exclusion or disadvantage of another would be thoroughly un-
desirable and would be an invitation to corrective legislation.
A private clearing house could be established as a corporation
whose shares are available to all groups with an interest in this field.
The proportion of ownership available to any group probably should
be decided in advance of incorporation, with at least ownership par-
ticipation available to any institution in the pension field. One possible
measure of the percentage available to the respective groups and&
ticipants might be the amount of the retirement plan business done.
However, that is not the only conceivable measure, for some may
have a greater interest in “transients” than others. Perhaps the value
of actual or potential vested benefits would be more an appropriate
& As of the early 1950's there were only 56 such insurance companies. Kenneth Black,
Group Annuities (Philadelphia : Univ. of Pennsylvania Press, 1955), Appendix A. .
152 OLD AGE INCOME ASSURANCE—PART I
measure. Obviously, the matter is a subject for negotiation and com-
position by the potential shareholders. I would presume that profits
would be expected only from operation of the group plan. While some
might suggest that this as well as the transfer operations should be non-
profit, insurance companies and banks could argue that because some
of the funds handled would remain in plans they service were it not
for the clearing house, they should not be expected to operate the clear-
ing house with no returns. Much of the clearing house coverage might
be available only because the clearing house exists; but the private
groups—if they operate it—would seem to have a valid claim for their
normal reimbursement for their services and enterprise.
Shareholding may well be more pertinent to participation in profits
than formulation of policy, because the major policies and methods of
the clearing house may have to be decided in advance of its establish-
ment in order to assure participation by the necessary groups. Em-
ployee coverage by trusteed plans is about three times that of insured
plans. Within each group there are competing enterprises and meth-
ods. In order to approach universality for the clearing house system,
without compulsion, the adherence of participants will have to be in-
duced. And near-universal participation (I assume that you cannot
please everyone) can be induced only if minority, or potential minor-
ity, groups are given assurance that their interests will not be sub-
merged by the majority or a potential majority of other classes of
plans and interests.
In short, the bylaws of the corporation, or a related stockholders’
agreement, would be much like a treaty providing not merely for the
usual corporate powers and procedures but possibly defining, in ad-
vance, the principal policies and methods of the institution itself. Pro-
vision must be made for amendments to the underlying agreement
and the possible reallocation of shares and the power to select desig-
nated officials; of course, any amendment raises the problem either
of deadlock or basic alteration in the distribution of power which
might prove unacceptable. But an amendment formula should be pos-
sible and amendments may be so obviously beneficial as to pose no
difficulty in fact. *...
Difficult as the assignment sounds, private institutions, impelled by
common interests and the potential competition of other, perhaps less
acceptable methods, should be able to agree upon a workable frame-
work. If the advance solution of all problems were a prerequisite of
new institutions, there never would be any. Indeed, one advantage of
an all-private scheme is that its legislative implementation would prob-
ably be speedier than any public or partially public program; it
therefore may be the more feasible alternative. -
If, as I assume to be quite possible, a clearing house arrangement
were agreed upon by the private institutions with a direct interest,
there remains the questions of what would be required in the way of
public authorization and control, and what governmental authority
should be exercised. -
Public controls: State or Federal?
The establishment and operation of a clearing house performing
only transfer functions would require no more than the amendment
OLD AGE INCOME ASSURANCE—PART I 153
of some state laws to permit insurance companies and banks to pur-
chase and own the shares of such a corporation. -
However, the organization and supervision of a clearing house pro-
viding some form of group coverage entail more substantial problems
of protection for participating interests and covered employees.
Statutory authorization for the operation of the clearing house
would probably be required, inasmuch as its functions fall at least
partially within domains presently regulated by statute (insurance,
corporate trusteeship, and possibly the issuance of securities) but do
not correspond to any of the categories sufficiently to operate pursuant
to any one set of such statutory regulations. Moreover, in many juris-
dictions, if not most, corporate trustees and insurance companies would
be either prohibited or limited in their authority to purchase shares
of the clearing house. -
There are four possible devices for authorizing and controlling the
operation of a clearing house: -
1. A state statute authorizing the establishment of a clearing house
and defining conditions for its operation and participation in it.
2. An authorizing state statute supplemented with regulation by an
existing or new state agency. -
3. A federal statute authorizing establishment of a clearing house
and defining the conditions for its operation and participation in it.
4. Such a federal statute supplemental with regulation by a federal
agency.
Regulation of insurance companies and corporate trustees tradition-
ally has been the domain of the states. When the Supreme Court held
that insurance operations in some instances constitute interstate com-
merce, Congress quickly responded with the McCarran Act which
reconfirmed state regulatory authority and declared that a federal
statute is to be applicable to “the business of insurance” only if it
specifies that it is.” While the federal government has legislated and
regulated in the field of banking, it has not been dominant in the
affairs of corporate trustees. A prima facie case is made for state
interest. -
Two major difficulties could be encountered with a clearing house
regulated by the states. That there should not be a multiplicity of
clearing house systems seems too clear to require exposition. How
then can the 50 states legislate compatibly on one clearing house to
operate throughout the country? The mere statement of the question
implies that where all states have an interest in one institution (not
merely a class of activity), federal action is indicated. Indeed, the
need for institutions and laws to advance interests of nationwide scope
was the very thing which called the Union into being. Additionally,
the expressed need for even-handed treatment, among the various
interest groups may not be readily forthcoming in some states where
either the insurance or the banking industry enjoys economic and polit-
ical predominance over the other.
However, should all the interested groups join in the º for a
clearing house plan based upon state regulation, it might be possible
to obtain compatible legislation and regulation in the states with the
major interests and the greatest number of employees under plans,
& 15 U.S.C. 1011.
154 OLD AGE INCOME ASSURANCE—PART I
so that the states with lesser interest might follow their lead. Although
the states legislating in the welfare and pension plan disclosure field
have not acted uniformly, to the chagrin of companies with multi-
state plans, a clearing house, as one institution, might fare better; but
I would not be too sanguine about the possibility.
If such near-unanimity is not achieved, the federal government
could provide the unifying factor by authorizing one clearing house
corporation. Legislation should protect access to participation by all
interested groups and, if necessary, set the proportions of participa-
tion—preferably on a basis acceptable to the potential participants.
Indeed such acceptability would seem to be essential.
All profit-making enterprises in the field will have a double interest:
to participate as fully as possible in the new venture and, perhaps
primarily, to minimize the competition from it. From the employee
point of view, if the clearing house is to do an effective job of provid-
ing interim coverage for employees between jobs with plan coverage
and provide basic coverage for Small groups, its rates must be low and
its conditions generous. Rates and conditions of coverage are the areas
of competition and the areas where the interest of producer and con-
Sumer diverge and, therefore, are the traditional areas of public
regulation. . -
What is an appropriate federal agency to superintend rates and op-
erations? The federal government has little experience in the area.
Would this one program warrant a new agency? Would such an
agency have enough to do to warrant its establishment and sufficient
funds to recruit first-rate personnel? Some undoubtedly would regard
such an agency as a foot in the door for federal regulation of insurance,
although there certainly has been no clamor for such federal action.
While there has been little criticism of state regulatory practice in
regard to financial practices of insurance companies, there has been
Serious question as to how effective rate supervision has been.” Cer-
tainly in other fields—e.g., natural gas—the federal rate-making pro-
cedure and agency have been distinguished more by first-rate litigation
than by first-rate rate Setting.
A single, all-private clearing house system, whether authorized by
state or federal legislation, might require some absolution from the
antitrust laws if, as it should to do its job, it exercises virtually a mo-
nopoly in its own area. As noted, the McCarran Act sought to remove
the applicability of the Sherman and Clayton Acts to the “business of
insurance” and in the process declared the primacy of state regulation.
However, the participation of bank-trust companies and the use of
non-insurance devices, Some of which the trust companies are bound
to insist upon, might remove the private clearing house from the
realm of “insurance.” Almost certainly it would not be the kind of in-
surance which has traditionally been the subject of state regulation.
The strong probability is that federal legislation absolving a private
clearing house from the limitations of the federal antitrust laws or
limiting their application would be possible only if federal restraints
to protect employee interests were imposed. .
Perhaps the foregoing raises more questions than it answers. None
of the questions, however, seem unanswerable. They present problems,
not barriers. The problems may prove easier or harder to solve than
* E.g., Note, “State Supervision over Insurance Rate-Making Combinations Under the
McCarran Act,” 60 Yale L. J. 160 (1951). -
OLD AGE INCOME ASSURANCE—PART I 155
those presented by other alternative methods. As the answers emerge,
they may appear more or less satisfactory than the answers given to
the questions presented by other clearing house devices. -
Clearing House Participation—Questions of Legal Limitations and
Authority Under State Law - - r
A clearing house composed of private financial institutions and not
organized pursuant to federal authorizing legislation would have to
conform to state law. In order to “do business” in states other than
that of its incorporation it would also have to qualify under the laws
of such other states. The question of how such an institution would
be categorized, whether as a trust company, an insurance company,
or an investment company, should not detain us very long. The strong
likelihood is that such a new and special institution (if composed of
both trust and insurance companies and possibly others) would re-
quire new and specially tailored legislation. When CREF (College
Retirement Equities Fund) was established to provide variable an-
nuities in association with TIAA (Teachers Insurance and Annuity
Association), legislation tailored to its needs was enacted by the New
York State Legislature. -
Whether trust companies, insurance companies, and self-insured
trustees could participate in the operation and profits of a clearing
house with (and very likely even without) investment functions,
whether public or private, would depend upon state statutory provi-
sions. Self-insuring trustees are not limited in their powers to invest
and purchase shares. If the clearing house were a corporation issuing
shares, a self-insurer could purchase such shares and participate in
the operation and profits of the clearing house according to its bylaws.
In most states insurance companies are limited in their investments;
and stock purchases are either prohibited or permitted within nar-
rowly defined limits. Investment in equities (stock) is permitted in
limited amounts in 33 states and the District of Columbia. In addi-
tion, some 25 states (some not among those in the preceding category)
permit a limited percentage of assets or surplus to be invested with-
out limitation as to type; these are called “leeway investments.” "
Thus insurance companies in the annuity and deposit administration
field should, for the most part, be able to purchase shares of the clear-
ing house even without additional authorizing legislation. Some juris-
dictions might require new legislation. -
Bank-trust companies are in a different situation. Their investment
funds are held directly on behalf of the beneficiaries of the trusts
administered under the directions established by the donors or in
pools for such trusts. Unlike insurance companies, the funds they
invest are not their own. Bank-trust companies are permitted to pur-
chase stock as trustees, but generally are not permitted to purchase
and own shares for their own profit.” Exceptions are for salaries in
safe deposit companies, the Federal Reserve Bank, Federal Deposit
Insurance Corporation, and similar agencies.” Thus, it would seem
* The information in this paragraph is presented in somewhat more detail in Edwin

Patterson, Legal Protection of Private Pension Earpectations (Homewood, Ill. : Richard D., ,
Irwin, Inc., 1960), pp. 146–152. . . . . . - - - , ,
* E.g., Annotated California Code, Financial, $ 761; Connecticut General Statutes: Aº-,
notated, Title 36—no direct prohibition, but exclusive permissive provisions—$ 57, 86,
and 96 ; N.Y. State Banking Law, § 97 subd. 5 § Supp.). . - -
8" E.g., Annotated California Code, #nancial, §§ 754, 755, 756, 758; Connecticut G. S. A.,
$ 36–57; Nº. state Bººking favº'gº.
83–200—68—pt. 1 11
156 OLD AGE INCOME ASSURANCE—PART I
that specific state legislation or federal action in the case of national
banks probably would be required to authorize the purchase of stock
of a pension clearing house corporation by trust companies. If banks
generally wanted to participate, and such a desire might well be a
condition of federal legislation establishing the plan and would be a
condition of a wholly private undertaking, there would seem to be no
serious objection to such legislation. The same may be said of any
additional authorizing legislation for insurance companies in states
where there is no authority to purchase clearing house stocks. In both
cases, once a few institutions took the lead, competitive considerations
would probably induce at least the major institutions in the field to
follow suit and to obtain enabling legislation.
A Union-Operated Clearing House - .
Unions are in a position to take the initiative in providing clearing
house arrangements. In essence this is what some of them have done
in negotiating multiemployer agreements which provide for accumu-
lation of all pension credits in multiemployer groups without the
requirement of adherence to any one employer. Industry-wide and
area-wide multiemployer plans are a form of clearing house which
meets some of the problems of “normal” turnover and the other hazards
to continuity of employment. Dut, they do not meet the whole problem,
especially where the job opportunities in the units covered are shrink-
ing. They do not meet the needs of those who cannot continue in the
same industry because of injury and debility or family considerations.
They do not meet the needs of workers whose skills are useful in
more than one industry. As automation reaches broader areas of in-
dustry, commerce, and service trades, “industry” classification may
become less and less significant, and jobs shifts across industry lines,
already common, may be expected to increase. - - -
Unions may find that if they can offer transferability of pension
credits they will perform an important function at a time when their
employee appeal reportedly has been on the wane. .
Of course, they could negotiate individual agreements with transfer
plug and socket arrangements. Until the sockets become numerous
and well known, this may not have great appeal. A clearing house
arrangement would be more dramatic evidence of transferability,
especially if it provided continued “coverage” when a worker did not
have a job under a plan or was unemployed. The Machinists have
established a multi-employer plan primarily designated to make pen-
sion coverage feasible for employees of Small companies. However,
one may question whether unions can muster sufficient unity of pur-
pose to achieve transfer rights throughout all or a large segment of
organized industry. . .
But, if all negotiated plans had transfer rights provisions the ar-
rangement would still omit at least half of those under plans. Labor
organizations might reply, “Let the rest join unions.” Others may find
this less than a complete answer. . .
Conceivably unions could be first in the field with a clearing house
and might stimulate interest in the institution among employees and
non-unionized employers. They could take the lead here as they have,
to Some extent, with plans in general.
OLD AGE INCOME ASSURANCE—PART I 157
A PUBLIC (FEDERAL GOVERNMENT) PLAN
Before exploring the possible methods of operating a national clear-
ing house by the federal government, some comments are in order as
to the general desirability of federal agency participation in such
an undertaking; some apply equally to the federal-private combina-
tions discussed subsequently.
Advantages of Federal Participation -
In the first place, in the OASDI system the federal governmen
already has the operating procedures for collecting and keeping rec-
ords of practically all the employed and self-employed. Those proce-
dures are fully rationalized, fully functioning, efficient, and cheap.
Employers already report employee earnings and remit payroll taxes
to the Internal Revenue Service, which transfers equivalent amounts to
the credit of QASDI. To duplicate any major part of this system
would seem rather wasteful. Of course, if only a small percentage of
employees under OASDI were involved, the use of the OASDI sys-
tem would be questionable. Probably the breaking point for economic
operation could be readily ascertained; and if, taking into account the
convenience of the clearing house, the potential use of the clearing
house might be expected to reach the break-even point, Serious con-
sideration should be given to using the public facilities. * , ,
In addition, the federal government could supply the assurance of
plan permanence and identity and fund sufficiency that are lacking in
vested credits afforded by private undertakings. Perhaps, too, it would
be easier for the federal government to achieve universality (with per-
manence) than a private consortium composed of hundreds of compet-
ing institutions. Universality might be a condition of obtaining a suf-
ficiently large and diversified group to operate a sound system.
As a practical matter, the financial institutions which operate in
these fields might, probably would, resist a government enterprise
which threatens to be a competitor for their usual business. Some of
the vested credits handled by the Pension Clearing House would be
those otherwise administered by insurance companies and trust com-
panies (as well as some large self-insurers). To some extent, probably
increasingly so, clearing house group plan credits would represent
“new”, business which under present practices are too costly or too
complicated to be feasible. .
Moreover, as federal participation would be on a non-profit basis,
more of the funds allocated to pension purposes could be translated
into benefits. - . . .
Three major objections may be interposed to a federal Pension
Clearing House providing coverage for separated employees and basic
coverage for small groups: (1) government voluntary annuity pro-
grams abroad have failed; (2) there is no demand for either type of
coverage; (3) such a program, particularly for small group coverage,
would #. unacceptable to private institutions as unfair governmental
competition. Let us examine each one.
Wherever the sale of annuities to private individuals by govern-
ments has been undertaken it has failed.* Public interest was slight

88 For a brief summary of such attempts see Henry stelnhaus, Financing old Age. (New
York : Committee for Economic Development, 1948), pp. 40–41. ; : . . . . . . . . . . .
158 OLD AGE INCOME ASSURANCE—PART I
and concentrated among the more well-to-do, contrary to the purposes
of the programs, but it must be observed that these programs all pre-
date the modern pension movement; indeed, they occurred before
World War I. One cannot rely upon experience in other places at other
times under quite different conditions as an index of present and
future needs and desires in our old-age-Security-conscious society. In
1935, a proposed domestic program of government-offered annuities,
proposed as part of the Social Security Act, was defeated primarily
because of the opposition of the insurance industry and unpromising
experience abroad.” Even at that time the plan was favored by the
president of the Equitable Life Insurance Company as a means of
stimulating interest in pensions.” Conditions then were so different
that this too is a dubious precedent.
Moreover, while individual interest or initiative called for by such
programs might be slight, initiative on behalf of Small groups (up to
several hundred employees) may be much stronger and far easier to
translate into action. Employers of small groups, who now find plans
prohibitively expensive and for whose employees such plans are of
questionable value, might desire clearing house coverage for their em-
ployees so as to be competitive with other employers, and also to obtain
coverage for stockholder-employees and officers. .
Much of the pension coverage afforded by the clearing house could
not be provided by insurance and trust companies. Clearing house ac-
tivity might actually expand the private market, as many contend the
OASDI program already has. - .
Finally, opposition from private institutions might be entirely ab-
sent if they could participate gainfully in the clearing house opera-
tions. -
What follows is a description of the types of wholly federal agencies
and federal-private combinations which could operate the clearing
house and a discussion of their merits, demerits, and the questions they
present for future resolution. -
Investment limited to government obligations - -
The Old Age Survivors Trust Fund and its cousin, the Disability
Insurance Fund; the National Service Life Insurance Fund; the Civil
Service Retirement Fund; the Railroad Retirement Fund all are au-
thorized to invest their monies in federal government long-term securi-
ties. Some of them also are permitted to invest in government guaran-
teed obligation. But they may not make other investments. These au-
thorized “investments” provide modest earnings with maximum—in-
deed, complete—security for principal; so long as the federal govern-
ment is solvent, the principal is secure and income is assured. However,
the earnings on these obligations sometimes have been lower than gov-
ernment short-term borrowings, the obligations of other governmental
units, and, especially in “good times,” the yield on private investments.
Exemption from state and local taxation is one incentive for private
investment in government obligations but is irrelevant and unneces-
sary to a federal agency. Yet this advantage is one factor that makes
** wilbur Cohen, Retirement Policies Under social Security (Berkeley and Los Angeles:
Univ. of California, 1957), p. 4: Paul Douglas, Social Security in the United States. (New
), p. 4
York : McGraw-Hill, 1936), pp. 103, 116. .
* Douglas, op. cit. p. 116. . . . . , , , , , , , , , , ,
i & ' ' , ". . . . . . . - .
y . . . . . . ; : . . " . . . ; ; ; , ; - * : -
OLD AGE INCOME ASSURANCE—PART I 159.
government bonds marketable with a lower rate of interest than
private offerings. - -
The Advisory Council on Social Security Financing recommended
improvements for OASDI earning power in 1959" which were
adopted in the 1960 amendments. The major gain was achieved by
permitting purchase of government obligations either at current in-
terest rates or at the rate of the average of long-term issues outstand-
ing, whereas formerly the latter rate was mandatory. The current rate
may be the market rather than the coupon issue rate.” However, these
improvements do not overcome the built-in “discount” for immunity
from state and local taxation and will not increase fund earning power
up to that of private funds not so restricted. . . . . . . . .
The investing federal agency has no real alternatives and no bar-
gaining power, hence interest rates may be lower than what is avail-
able on other borrowings. This is good for the government; it keeps
interest costs on the federal debt down. In turn, low interest costs are
good for the general taxpayer (individual and corporate). But one
can at least raise the question whether the employees whose savings
are so invested have been subsidizing the rest of the taxpayers of the
country and losing part of the full earning power of their funds. In
return, however, those covered by these programs are receiving a guar-
antee, explicit or implicit, that the federal government stands behind
the benefits afforded by the program. No such guarantee would seem
to be in order in a supplemental voluntary pension system operated
on private insurance principles. Perhaps more importantly, the bene-
fits of the OASDI and some other governmental programs are not
heavily dependent upon fund earnings as a source of money with which
to pay benefits. In contrast, private plans—after which the clearing
house group plan would be patterned—rely upon fund earnings as a
major source of benefits. Hence, in such a group plan earnings should
be as high as possible consistent with protection of principal.
Investment in Both Government and Private Securities Permitted
If a government fund were operated by a group of experienced
investors, empowered to invest in all kinds of securities and invest-
ments, probably a portfolio could be devised consisting of federal
bonds and insured mortgages, state and local government obligations,
industrial bonds, and private equities (stocks) so as to attain both
security of principal and a higher rate of earnings than is now realized
on the government’s retirement trust funds. If a government clear-
ing house fund were given power to invest in all kinds of securities
and investments the risks of both favorable and unfavorable earn-
ings experience would be borne by the employee participants unless
a guarantee of interest, even at a fairly low level, were given legis-
latively. The Railroad Retirement system provides for a guarantee
of 3%. It is dubious that Congress would be favorably disposed to
do this for an optional system in which middle and high income per-
sonnel could participate and from which some employees, eligible for

41 “Financing Old Age, Survivors, and Disability Insurance: Report of the Advisory
Committee on Social Security Financing,” 22 Soc., Sec. Bull. (No. 2) 3 at pp. 9-10 (1959).
42 74 Stat. 924 at 993, Pub. L. 778, 86th Cong. 2d Sess., Sec. 701. This authority is given
to the Managing Trustee, who is the Secretary of the Treasury. He is authorized to borrow
at current rates “only where he determines' [that it] is in the public-interest.” In other
words, he may consider factors other than the earnings of the fund. . . . ;
160 OLD AGE INCOME ASSURANCE—PART I
OASDI coverage, are excluded by the present rules on “integration.” A
guarantee for such a fund, not available to employees covered by ordi-
nary private plans, probably would be unacceptable because it would
be a potential obligation of all the taxpayers in favor of a limited group
which already enjoys tax advantages for its savings. .
Of course, the element of risk inherent in private investment could
be limited in the same way that insurance companies are limited to
certain kinds of high grade securities (which may have a lower yield
than less renowned securities), with a specified percentage allowed
for investment in common stocks or “leeway investments.” Without
evaluating the desirability of legal limits upon the investment of
private insurance company funds, the arrangement does not seem,
to me at least, readily exportable to a government fund. Legal direc-
tions and limitations specifying minimum and maximum percentages
of kinds of investments would defeat, to a considerable extent, the
value of investment by such a committee guided by expert judgment
as to what is sound and advantageous at any given time under the
specific conditions pertaining. Even the best drafted statute could
not anticipate the multifarious combinations of circumstances which
would warrant buying or selling certain kinds of investments. A
responsible committee or board would be mindful of the desirability
of combining security with earnings and not unduly sacrificing either
to gain the other. That is the task of an investment committee.
Nor is a government agency the same as a private corporation. In
maturity, the agency would have greater resources, unlimited access
to government bonds at either the average interest rate or the current
interest rates (if in no worse a position than OASDI), and under no
necessity of showing a profit. In all or most of these respects it is free
of the pressures to which private institutions are subject to maximize
income. And, in this area, it would be operating as a monopoly and
solely in the interests of future beneficiaries, thereby being free of
Some pressures to show high returns. For all of these reasons, limita-
tions on investment designed to promote the security of policyholder
i. depositor funds are not necessary for the government clearing
OUIS6. . . . . . . . . . . . . . . . . . . . *...
The desirability of maximizing income by investing funds in pro-
ductive private enterprise does not, derive from the fact that the
OASDI fund (and those that are patterned after it), as some contend,
“represents nothing more than a dead weight of debt” and has “already
been spent, chiefly if not entirely, on non-productive projects.” “The
OASDI funds are invested in government bonds, which represent debt
for governmental expenditures, practically all non-productive in the
manufacturing sense. However, most of these expenditures are es-
sential to the protection and operation of the private economy and so
may properly be regarded as national overhead without which our
directly productive facilities providing goods and services would func-
tion poorly, erratically, or not at all. And, of course, there are private
enterprises whose output of goods and services are reflected in gross
national product but satisfy only the most marginal human needs and
may, in fact, be deleterious. Their multiplication will not expand the
is E.g. see Allen Rucker. “Economic challenge of Longevity." 32 Harvard business
Review) (No. 12) 94 at 98 (1954). . . . . . . . . . . . . . . . . . . . . . .
OLD AGE INCOME ASSURANCE—PART I 161
economy’s ability to support a larger dependent population. Clearly,
parts of both the public and private sectors are socially productive
and promote an expanding economy and others are not. .
And investment of retirement trust funds does not represent an
amount not available for private investment. For, to the extent that
governmental trust funds meet the bond sale needs of the federal
government, private funds are not drawn upon for that purpose.
Instead private funds must secure some private investment, a rather
direct contribution to “productive” facilities. -
Originally I believed that the often superior dollar yield of private
investment made a private investment scheme markedly superior to a
clearing house fund limited to governments. Private equity investment,
it seemed at first, was the only way to ensure that “savings” would go
into expanding capacity out of which the needs of the elderly could #.
met. The balance no longer seems so clear to me. The economy since
World War II has shown remarkable ability to grow; unprecedented
increases in productive capacity made º by private investment
are evidence. Alas, some of the capacity goes unused for lack of buyers.
New or enlarged sources of investment capital do not seem to be the
critical element to achieve growth, although there is more than one
opinion on this subject. -
Public services—education, hospitals, medical care—may be equally
important to balanced growth. Government bonds purchased by a trust
fund for a supplemental pension system may be useful to the economy
as a whole and in providing an expanding base for a larger “depen-
dent” population. The public should not expect a subsidy from these
retirement savings and should be prepared to pay interest on such
bonds equal to the value of the funds borrowed. -
Some may question, as I do, the desirability of government officials
operating in the private financial market, especially if the funds at
their disposal are large. On political grounds, it does not seem desir-
able for a government agency to have the power of a multi-billion
dollar fund hanging over the investment market, although in view of
the government's vast borrowing operations the objection may have
become academic. But the government's present powers, to borrow,
spend and invest are not concentrated upon financial dealings in gen-
eral but are channeled by specific programs to meet specific needs, such
as fund raising, defense procurement or housing. #. objectives of
Such programs give them their shape; their financial aspects are gen-
erally contained by substantive purpose and º: policies. In con-
trast, the objective of the Pension Clearing House roughly would be
those of the traditional investor—security of principal i. with
maximization of income in the interests of “investors.” The clearing
house would not be confined, as most government units are, to a pro-
gram to which the financial powers are merely incidental; its financial
operations would be central. Although some federal agencies, e.g.,
TVA, presently manage their own pension systems, including the in-
vestment function, their systems are miniscule compared to the poten-
tial of a federal Pension Clearing House. . . . . . .
The objections to broad investment powers in private as well as gov-
ernment securities on the part of a government clearing house could
be met by assuring a substantial measure of participation, especially
in financial operations, by the institutions which presently perform

162 OLD AGE INCOME ASSURANCE—PART I
these tasks in the private economy; the insurance companies, bank
trust companies, and “self-insured” trusts. Such arrangements will
now be considered. - . . .
FEDERAL-PRIVATE CLEARING House ARRANGEMENTS
A pension clearing house offering group coverage to separated work-
ers and employees of small companies could operate under any number
of public agency-private institution combinations.
Federal Clearing House Purchasing “Goverage” from Private In-
stitutions - -
In a combined federal-private arrangement, the federal clearing
house could operate transfer facilities and a group plan. It could invest
portions of its accumulated funds in deposit administration plans and
with bank-trust companies and purchase paid-up annuities for those
retiring—much as some smaller funds use “split funding.” A major
difficulty with the purchase of paid-up insurance for active plan par-
ticipants would be the frequent—indeed, constant—separation of
short-term participants moving to individual company plans. How-
ever, insurance companies could participate on a deposit administra-
tion basis, with a guaranteed rate of earnings which would balance
investments with corporate trustees without such an assurance. In this
fashion, the traditional private institutions would handle the invest-
ment of the funds on a contract basis and some annuities might be
purchased only when the participant retired, although some might
prefer drawing benefits directly from the fund on a variable annuity
basis. Whether the government agency could deal effectively and
intelligently with more than a few insurance companies and banks
is an open question. Presumably the considerable size of the clearing
house funds would enable it to obtain favorable terms, although the size
might also interfere with a high degree of selectivity. Competition
might operate to give the clearing house maximum returns. Very pos-
sibly the business would be concentrated among the largest carriers
and banks, to the exclusion of the smaller private institutions. .
In addition, the large self-insurers would be excluded from any di-
rect participation in clearing house operations or arrangements, unless
an advisory group were formed in which they were adequately rep-
resented. Presumably the large self-insurers would have direct access
to clearing house officials, to say nothing of executive and Congres-
sional officials, adequate to register their needs and opinions effectively.
Conceivably, too, the investment program might be used for political
purposes. . . . . . - - - - - - - -
Since the mid-1950's the Civil Service Commission has operated
the Federal Employees Life Insurance program by purchasing group
coverage for most federal government civilian employees from a few
large private companies. The coverage and benefits are standardized,
the rates are low, and judging by the lack of criticism of the program
from any quarter, this novel program may be regarded as a success.
In sum, operations under the Federal Employees Life Insurance Act
provides something of a precedent for the practicality of a federal
agency collecting funds and keeping records while purchasing group
pension coverage from insurance companies and bank trustees.


OLD AGE INCOME ASSURANCE—PART I 163
Federal Clearing House Purchasing Investment Services From a
Consortium of Private Institutions - -
The clearing house could assume all responsibility, except fund
management, which is, perhaps, closer to the foregoing purchase
arrangement than it Sounds. -
In effect, the federal clearing house would entrust its funds to a
Pension Finance Corporation (PFC I shall call it, a rather humble
name) which would receive fees for managing the fund. The PFC
would have authority to invest in federal securities and guaranteed
investments, state and local obligations, and private obligations and
securities. Such an arrangement would combine many of the advan-
tages of government administration and private investment. The ar-
rangement would overcome the objection that a potentially multi-bil-
lion dollar fund managed by government officials would give too much
financial and political power to the federal government.
But there are other problems. What control could be exercised over
the PFC: If it enjoys a monopoly, the clearing house's bargaining
power on fees and investment policy might be slight. If lack of bar-
gaining strength by government agencies has been a problem in deal-
ings with private companies with great market control in the vast
procurement efforts of the past two decades, it has not been a matter
of much comment or public concern (other than in the field of elec-
trical equipment—where the problem was not bargaining power).
In any event, the management fee schedule could be set by statute;
such an approach would substitute Congressional control for execu-
tive negotiation. Congress may lack “expertise” on questions such as
fees for investment services and be susceptible to special-interest tugs
of war that have characterized interest rates on government-insured
loans. In this particular area, the realm of potential disagreement
seems limited. The investment fees probably would be lower than
those paid by companies to corporate trustees and the “loading” in
deposit administration plans because of the large fund and the favored
position of the one group dealing with the government. Obviously the
system would not work satisfactorily without fees adequate topºvide -
a profit to the enterprises participating in, or owning, the PFC. , ,
PFC would be composed of those private groups desiring and able
to participate, presumably insurance and bank-trust companies; and
perhaps self-insurers and unions with pension funds also may desire
ownership shares. A corporate form of organization under a federal
charter specifically providing the PFC's power and freeing it from
the investment limitations imposed upon insurance companies and
bank-trust companies would seem desirable. As already indicated,
the Commission would receive a management fee for investing the
clearing house reserve funds—set by statute or by negotiation. The
PFC would require some working capital for rent, for salaries for its
investment committee, supporting experts, actuaries, and clerical and
record-keeping staff, and for other operating expenses. The capital
requirements would be relatively small so that the tangible value
underlying Commission shares would be relatively small. Therefore,
no immediate purpose may be served by setting a high price upon
Commission shares unless a source of revenue for iſiºn. ad-
ministrative and research costs is desired. In that case the price of
164 OLD AGE INCOME ASSURANCE—PART I
the shares could be set at a fairly substantial figure, which also might
have the effect of distributing ownership and control of the PFC in
some rough proportion to the financial strength of the participating
institutions. In all likelihood, the price of shares—unless it was high
and the shares numerous—would not have such an effect and some
other method of determining participation would have to be devised.
Shares up to a low limit could be available to all financial institutions
meeting certain criteria—the most meaningful of which would be
their actual involvement in pension plans. Unlike the Federal Em-
ployees Life Insurance Act arrangement, the participating institu-
tions would not provide services or policies of their own so that their
size and capability are not relevant for that purpose. But the size of
an institution's pension business might be considered relevant to the
size of its role in the PFC. -
The most important “asset” of the Commission would be the exper-
tise of its personnel. That expertise, developed primarily in private
finance, would, of course, carry the possibility of “conflict of interest.”
The problem of abuse does not stem from the natural cupidity of man-
kind but rather from the biases, attitudes, and loyalties developed in
private financial institutions.
I assume that the finance committee and managerial groups would be
chosen, in effect, by large stockholders, presumably banks, insurance
companies, large plants, and possibly unions. They would be, by and
large, men and women with experience in banking, insurance, and
security investment. Assume further that they are required to sever all
employment connections and devote themselves solely to the fund man-
agement. (What would become of their private pension credits?
Answer: Transfer them to the clearing house !) Would they not operate
nonetheless as representatives of the institutions from which they
come, at least on occasion and if not consciously, unconsciously? More-
over, would not many expect to return whence they came or some place
like it? This influence might infringe upon total objectivity.
Alas, we have tolerated worse conflicts of interest, especially in war
and emergency situations in organizations such as OPA and the Office
of Defense Mobilization, where experts were “on leave” from the indus-
tries they controlled or whose tax “write-offs” they acted upon. At the
least, complete severance of employment and a ban upon arrangements
for re-employment while still employed by PFC should be required.
This may be all that can be accomplished by direct prohibition.
In addition, the government clearing house should have complete
access to the records of the PFC, including the minutes of meetings at
which investment decisions are made. It should have access to confi-
dential information and the right to conduct formal inquiries upon
formal charges of alleged violation of trust responsibilities. It may also
be that the possible conflicting biases and interests within the PFC
would offset one another. . . . . . . . . . - -
Finally, most talented men and women probably have enough pride
of expertise and are not so dependent upon one employer as to sub-
ordinate the interests of the undertaking to those of their former or
possibly future employer. There are risks in all undertakings. And the
particular conflict of interest problem here may be less difficult than it
has been in many other situations, provided that it is recognized and
dealt with in advance.
oLD AGE INCOME AssurancE—PART I 1.65
Some other problems of such an arrangement are dealt with at the
conclusion of this section because they involve several of the arrange-
ments under discussion. -
A Federal-Private Corporation - . ‘. . .
Except for the novel Telstar satellite corporation, the federal gov-
ernment has yet to enter into active ownership with private groups
in a formal enterprise, although not infrequently it has taken much
of the risks of private undertakings without participating in the
orofits. - . . . . .
p The Federal National Mortgage Association is a federally chartered
corporation in which both the United States and private enterprises
own stock. Although it is contemplated that one day FNMA will be
privately owned and operated, the United States has owned the pre-
ponderant number of shares and dominated the mortgage purchasing
operations of the Association.* It cannot be said that FNMA provides
a precedent for an undertaking jointly owned by the United States
and private groups in which the interests and authority of both are
nearly equal. This is not said in criticism of FNMA, whose operations
should be judged in terms of the program it was designed to foster.
As an experiment in joint federal-private ownership and operation,
it probably should be regarded as not yet mature. • ,
Perhaps a joint operation can be devised for clearing house pur-
poses. Since no large amounts of capital would have to be provided
by government for the pension undertaking, division of authority
would not be based on the amount of Congressional appropriation, as
is the case with FNMA. Instead the distribution of authority would
be made legislatively on a “philosophical” basis: What portion of
power should government and private interests have? What system of
checks and balances does not threaten to end in deadlock and yet pro-
vide public and private representatives with sufficient power to protect
legitimate interests? To me at least, this arrangement contains many
insoluble problems and offers no clear advantages over the alternative
arrangements. Others may be able to devise a joint undertaking that
would serve the purposes of low-cost, universal credits connectin
private plans, in which the government provides its reporting an
record-keeping facilities and contributes to policy formulation while
private interests have enough incentive to participate and sufficient
control of investment policy to prevent its use for political purposes.
Perhaps the Telstar experiment will provide some answers. There the
federal government and private interests are collaborating; however,
the government is able to establish its control over the corporation
should it so desire, and the private interests are dependent upon space
vehicle launching facilities of the government. Because a pension
clearing house would lack such government control of key facilities,
it is doubtful that the Telstar corporation can be regarded as a prece-
dent, although it may provide us with some lessons. . . . . . . . . .
Problems of Ownership and Voting of Shares in Private Corporations
... The ownership and voting of private shares purchased by a federally
chartered private or public-private pension venture presents problems,
“For a fairly detailed account of Fannie Mae. and her predecessor it"its" seems un-
fººt), see Charles Haar, Federal Credit and Private Housing (New York : McGraw-Hill,
166 OLD AGE INCOME ASSURANCE—PART I
principally: would the funds available for private investment repre-
sent too great a concentration of investment power and voting power in
the affairs of private corporations?
Over an extended period, the clearing house might accumulate sub-
stantial funds and, hence, investments. In the case of a Pension Fi-
nance Corporation the Corporation would have the authority to invest;
it would have to be decided whether it would purchase and hold the
shares in trust for the clearing house or only advise, albeit with almost
binding force, the clearing house to purchase, hold, and sell the shares
for its account. Which entity would vote the shares? If the PFC were
established to keep a government agency out of the private economy
to the extent possible, it would seem to follow that the governmental
clearing house should not vote the shares. Should the PFC.? Perhaps
the shares might not be voted; but voting might be pertinent to the
continued soundness of the investment, hence such an alternative does
not seem prudent. Establishing a third group, to vote the shares after
consultation with PFC, would partially divorce the investment power
from the power to vote the shares purchased and would reduce the
effects of the concentration. But such a separation of functions might
be awkward and not operationally sound because the two functions
might often be interdependent. -
How could the voting group be selected? Representatives of em-
ployer, employee, and union groups are an obvious beginning. Each
would balance the other where the employer-union, employer-employee
relationship is potentially involved. Others with knowledge of special
fields would be useful on such a voting board. There need not be tri-
partitism of the kind employed in the National War Dabor Board,
the Wage Stabilization Board, and some ad hoo groups in the labor-
management field, because the third force would not be “public mem-
bers” without allegiances to either side. Rather the voting group could
be made up in part of specialists in areas pertinent to the limited func-
tions of the stock voting board. Such a board would not seem neces-
sary before the fund involved became quite substantial. Up to that
point (whatever it may be deemed to be) the PFC could vote the
shares and an Advisory Council and the Clearing House itself would
pºly provide sufficient back seat driving and a governmental
How great a concentration of economic power might there be in any
of the groups discussed? The total resources of private group pension
plans are estimated to be in the order of $60 billion—some of it in-
vested in government bonds. Only a very small portion of that amount
is dedicated to funding vested deferred benefits. Of course, both totals
will grow, and funds for vested rights may grow at a faster rate. With
the encouragement of a clearing house, the total and the vested por-
tion may grow even more rapidly than otherwise. In terms of our
economy even several billion dollars in the hands of one corporation
(especially one owned in common by competing interests) hardly rep-
resents a threat of too great economic concentration. For example, the
assets of the Metropolitan Life Insurance Company alone were over
$17 billion in 1959. The clearing house's PFC’s “portfolio” would be
very much like that of an insurance company or bank trustee with
large portions in public and private debt securities and a portion in
oLD AGE INCOME AssurancE—PART I 167
equities. It would be possibly decades before the amount of stock hold-
ings would become significant, especially in comparison to the hold-
ings of individual enterprises such as the Metropolitan. At any rate,
we presently permit similarly large private concentrations of wealth
and while they may make us nervous we prefer them to governmental
control. Another large owner should not be too great a $other.
Adequate Representation for Interest Groups in an All Public or
Public-Private Clearing House
An advisory committee composed of government, “public,” em-
ployer, union, insurance, bank, self-insured, and possibly consultant
personnel might be capable of exercising some influence upon any of
the clearing house arrangements in which government has a part. An
advisory committee need not be without character and effect, espe-
cially if the public members command respect.” Interest group repre-
sentatives often are the “big names” who can not possibly attend the
meetings of all the public advisory groups of which they are mem-
bers. Their representatives, though not speaking with the entire au-
thority of their principals, do have access to the inner workings of
both the agency being “advised” and their own organization. In-
formed and attentive observers so placed can exercise influence at
least indirectly by raising issues intramurally—or if necessary, pub-
licly. Of course, as in any undertaking of our pluralistic system, this
does not insure an outcome determined strictly on the formal merits.
That the advisory council device has been deemed useful is indicated
by the provision in the 1960 Social Security Act amendments for
periodic advisory councils; the council appointed in 1963 is to con-
sider all aspects of the program. - . . . . . . -
THE OUTLook For TRANSFER VALUES AND CLEARING House DEVICES
If the foregoing discussion makes a sufficient case for the prop-
ositions that transfer value arrangements and clearing house devices
are desirable and that they complement each other, what are the pros-
pects for their adoption in some form? . . . . . . . . . .
Any prediction is premature because the problems to which they
would be the answers, or palliatives, have not themselves been scru-
tinized intensively since the advent of the modern pension movement.
Any prediction also is premature because transfer values and clearing
houses have not been the subject of any extensive commentary in this
country. . . . . . . . . .
Since I undertook this study in mid-1959 there have been stirrings of
interest in the pension problems posed by turnover, structural un-
employment, and changes in employer organization. Until the problems.
of pension expectations are widely recognized, until there is a strong
demand that “something be done about it,” and until transfer values
and specific clearing house proposals are given widespread and serious
study, no one can know how they will fare. . . . . . . . . . . . . . . .
The New York Westing Study, based upon interviews with pension
experts representing management, labor, insurance, banks, and con-
* For a generally favorable presentation of the potential contribution of such groups, see;
Joseph Becker, “Advisory Councils in Employment Security” 12 Ind. & Lab. Rel. Rev. 370.
(1959).
168 OLD AGE INCOME ASSURANCE—PART I
Sultants principally about vesting, with some questions about transfer
values and undefined clearing house devices, indicates that we can
expect some negative reactions. But I suggest that they were premature
opinions about an amorphous proposition, whereas the major details
of a scheme can be crucial. As to the transfer values the New York
Westing Study reports: . -
The objection was in every case that the diversity of actuarial prac-
tice with respect to valuation of plans would make the valuation of
withdrawal credits in one plan unreal in terms of the valuation pro-
cedures used in the other and that all sorts of malpractices in the
matter of valuation would thereby be encouraged.”
In strong contrast is the discussion based upon an intensive study of
transfer values by the British Institute of Actuaries; the three
actuaries who conducted the study reported that while there is no
uniformity of actuarial opinion as to how transfer values should be
derived, a major result of the study was the recognition that such
valuation is “practicable.” “Moreover, they concluded:
It is clear that there is no royal road of simplicity to the assessment
of transfer values and cold-storage benefits in privately administered
schemes. Whatever methods are adopted, valuation profits and losses
are likely to arise, but in relations to the liabilities of the scheme as a
whole, they should be relatively unimportant. . . . - -
Whichever method is used the additional benefits would be payable
in the circumstances prescribed by the rules of the scheme, which
would be related to the conditions of the new employment. These
might be quite different from the conditions of the old employment,
for example, in regard to retirement are. Because of differences in the
conditions of membership of the two schemes, the amounts of the
additional benefits granted in the new scheme might be very different
from the member's accured benefits in the old scheme, while remaining
their equivalent in value.”
While I doubt any great potential for profiteering, there should be
Safeguards against abuse in establishing transfer values. Under pres-
ent regulations qualified plans must report any plan amendment to the
Internal Revenue Service and in the annual reports required by the
Welfare and Pension Plan Disclosure Act. At least the tax authorities
and transferring employees would be interested in the formula for
computing incoming and outgoing transfer values. Many such provi-
sions would be bargained collectively and only after thorough explora-
tion by experts. Perhaps more importantly, an experienced clearing
house administration, whether private or public, could promulgate one
set or alternative sets of criteria for appropriate valuation provisions.
At the minimum, I suggest, plans and the clearing house should limit.
transfers to plans which apply identical procedures and valuation
methods to both incoming and outgoing transfer values. The self-
disciplinary function of such a requirement should be apparent.
The Ontario group of pension experts recommended the establish-
ment of a transfer value arrangement as an adjunct to compulsory

“op. cit., pp. 24–25. . . . . . . -
47 Spratfield, Bacon and Bromfield, op. cit., at “Abstract of the Discussion,” p. 202 (The
Qº Second Report, discussed below, is in accord as to the practicality of transfer
Will Uſe S. - . . . . . . . . . . . . . . . . . . . . . . . . . " . .
48 Id., p. 187. -
OLD AGE INCOME ASSURANCE—PART I 169
vesting. Under the 1963 Ontario law there would be a compulsory pri-
vate pension scheme for employers with 15 or more employees. Vesting
would be compulsory on a graded plan for service after age 30. To
conserve credits of separated employees and those earned under plans
which become defunct, a Central Pension Agency is to be available
to bank transfer values on a voluntary basis. The proposal's major pur-
pose is to provide wage-related retirement benefits with specified mini-
mum standards and benefits. The Ontario plan favored a private
clearing house, not otherwise described, which would provide minimum
transfer service at retirement So as to overcome valuation problems
(the pros and cons of this were discussed above) and also to accumulate
small vested credits for separated employees. While the Ontario re-
port recognizes the spottiness of Small company plans, it makes no
proposal for a system of providing basic coverage to this group
through the clearing house. Of course, perhaps the greatest difference
is that the Ontario system would be compulsory and what I suggest
for consideration would be wholly voluntary. It contemplates limited
operations for a central agency because of fears that its fund would
be too great a concentration of economic power if given a large role.
However valid that might be for Ontario, the reasoning seems inappli-
cable to our situation. Moreover, I believe I have suggested feasible
means of checking and balancing that potential power.
Although my alternatives differ markedly from the Canadian pro-
posal, it demonstrates that such an agency has recommended itself
to a group of independent experts who were set the problem of how to
deal with the pension problems of turnover and vesting. If the scheme
goes into operation we may discover that fears expressed about trans-
fer values are unfounded. - - - -
Whether clearing house devices will prove useful and acceptable in
the United States one cannot foretell. New ideas initially generate
friction and resistance. But it is assuredly too early to choose up sides
until concrete proposals can be assayed. Until now, none has been put
forward in this country, let alone considered on the merits.” .
With growing disquietude about the resilience of private plans and
their adaptability to changing economic conditions, I suggest that
transfer values and a clearing house system may be indispensable to
their continuation as a major means of providing income in retirement.


49 Since the completion of this manuscript an actuarial consultant has endorsed the idea
of transfer values and a clearing house to meet the turnover problems of automation. He
favors a wholly private arrangement not otherwise described. The New York Times,
April 22, 1963, p. 29, col. 5. -
. PUBLIC POLICY AND PRIVATE RETIREMENT PRO.
GRAMS-A SUGGESTION FOR CHANGE
BY PEARLE. CHARLET* -
PREFACE
The purpose of this paper is to view the aggregate sources of old-
age income in their entirety from four different perspectives:
1. Background and history. . . . .
2. Current status.
3. Outlook for the future.
4. An alternative avenue for consideration.
Every society in the history of mankind has been faced with the
problem of dealing with its aged members. Solutions have sometimes
been radical but have always reflected the needs and conditions of the
society that devised them. - - -
In the American society the problem of the aged citizen who becomes
economically nonproductive has been dealt with in a number of ways
which have reflected the social and economic conditions of the period.
The solutions have encompassed both private and public efforts and
have included both work-related and nonwork-related approaches,
Nonwork-related solutions:
Private methods: - - • , ;
Private charity, including church, fraternal, and charitable
organizations, etc. -
Family and friends.
Public methods: - - -
Public charity, including the alms-house, local relief agencies,
etc. . . *- :
Veterans' pensions.
Old-age assistance.
Work-related solutions:
Private methods:
Personal savings.
Employers, including work continuation, individual grants,
and employee retirement systems. .
Public methods:
Old age and survivors’ insurance.
Public employers, i.e., public employee retirement systems.
Basically, our Society accepts the principle that no member should
suffer for want of the basic needs of life. When the number of aged
persons represented a small proportion of the population, those needs
*Manager of Research, Hewitt Associates.
170
OLD AGE INCOME ASSURANCE—PART I 171
which individuals could not provide from their personal savings could
be met by comparatively simple methods of public or private charity
at the local community level. But as the aged sector grew and the
country changed from a rural agricultural society to an urbanized
industrial economy, it became necessary to seek more Sophisticated
solutions to the “unsaved for” needs of old age. -
These new solutions were first expressed in employer and trade
union attempts to formalize systems of work-related annuity pay-
ments for superannuated workers. The second major attempt at new
solutions was the action of the Federal Government in enacting social
security legislation. This approach also stressed the provision of
retirement income from work-related sources; however, the two solu-
tions, the private and the public, utilize different concepts and
methodology for implementing the transfer of income from work to
the nonproductive years of old age.
Much of the current debate about such aspects of the private pen-
sion approach as funding, vesting, portability, etc., is in truth directed
to an unspoken questioning of the need for a pluralistic system of
retirement income when both private and public systems appear to
be directed toward the same goal. Such debate hides the real need
for deliberation about the fundamentals of the present two-part
system for old age support. -
The primary objectives of the two systems are necessarily different.
The social security program is concerned with the social need of
assuring a basic subsistence level of income for all older citizens.
It meets this need to the extent possible through the work-related
mechanism of Old Age and Survivors’ Insurance; where work-related
earnings are nonexistent or inadequate, the need still remains and is
met through the Old Age Assistance provisions of the Social Security
Act. The fact that Old Age and Survivors' Insurance is related to
work earnings may actually be more an “accident” resulting from the
need to create acceptance of the program as an insurance system
(rather than a need-related welfare program) than, a deliberate
design by the architects of the System. Certainly, the ultimate benefits
received from the System by individuals bear little relationship to
their payments into the System, since they are related to the individ-
ual's needs as society defines them. The social concept of the System
is further exemplified by its utilization of current transfer payments,
i.e., payment of benefits from current taxes imposed by the §.
The private pension system is primarily a device for transferring
earnings during the working years into income for support in old age.
As such, it utilizes the principle of “time transfer payments.” This basic
function is fulfilled whether the earnings come from the worker after
he has earned them, or whether the employer diverts the money from
the pay check and channels it into a fund to produce retirement income.
An employer need be concerned with social goals only as they relate
to the needs of his own work force and can design the program to
meet these needs in the most efficient manner. He need not spread avail-
able funds to achieve broad social objectives, but can direct them to
provide maximum equity within the work group. This equity is
achieved by structuring benefits to reflect the worker's period of serv-
ice or a combination of earnings and service. The private pension plan
S3–200—68—pt. 1–12
172 OLD AGE INCOME ASSURANCE—PART I
deals only with replacement of work-related income—it is precluded
by its basic nature from concerning itself with the income problems of
the nonworking segment of the population. -
Much of the criticism that has been directed at both public and pri-
vate systems for old age support results from the confusion that arises
in trying to adapt social aspirations to an economic device, or vice
versa. Each of the major systems has a role to play and a function
to perform, and neither system should be measured or judged in terms
of the purposes of the other. * , , - -
The area of criticism most frequently heard relates to tax privileges
granted to time transfer payments under private retirement plans
without concomitant requirements to satisfy broad social interests. It
should be remembered that tax exemption was extended to private re-
tirement plans before the social conscience of the country was ex-
pressed in a public system for old age support. The early retirement
programs of private employers were in fact the initial step toward
expression of what later was recognized as a national social goal,
namely the formalizing of old age support systems.
Current discussion of ways to strengthen the private pension move-
ment has focused attention on areas of private plans that should con-
form to certain broad social criteria as now defined by the public sys-
tem. There are implications that continuation of the tax deferment
privileges extended to private retirement plans more than 40 years ago
should be dependent on a shift in emphasis from concern with the
needs of a single work group to a broader base of concern for the en-
tire labor force. Suggestions of this kind ignore the fact that private
retirement plans perform a secondary function of social significance by
virtue of their ability to meet old age income needs over and above the
subsistence level for those work groups covered. Arguments for ex-
tending the social concern of private plans imply that social objectives
are met by spreading available funds to provide a little above the
minimum level for many workers, rather than an adequate level for a
lesser number. Perhaps the true concern of social thinking should be
the extension of the adequacy level of old-age income through the pri-
vate retirement system. . .
The most common criticism of the OASI program is that benefit
amounts are inadequate. The corollary question, of course. is: “What
constitutes an ‘adequate’ benefit?” or, more precisely, “What is the
level of old-age income maintenance that is appropriate for the OASI
system to provide?”
Unfortunately, when the original Act was passed the question of
benefit adequacy was secondary to the greater concerns of the consti-
tutionality of the bill, its passage through Congress, and the method
of financing benefits. In fact, the original schedule of benefits was
determined as the actuarial value of the contributions that the de-
signers of the system felt could be imposed without risking rejection
by Congress. . . . - - . -
The inadequacy of the original benefit schedule is confirmed by the
fact that Congress has increased the amount seven times (including
one increase prior to the actual payment of benefits) and an eighth
increase is likely to be passed by the 90th Congress.
The role of Old Age and Survivors' Insurance was described by
the Senate Finance Committee in 1935 as a “system which will pro-
OLD AGE INCOME ASSURANCE—PART I 173
vide something more than merely reasonable subsistence” and by
the House Ways and Means Committee in the same year as “a system
that would assure support in old age in amounts which will insure
not merely subsistence but some of the comforts of life.” In 1954 the
House Committee referred to “establishing a level of social security
benefits which will represent a realistic floor of protection in line
with current price and wage levels.” Despite these and other defini-
tions of the role of social security which have been expressed, since
1935, there has not been any coordinated attempt to translate such
expressions into dollars and cents, or even into understandable stand-
ards of living, other than the benefit levels that Congress has from
time to time enacted. -
Certainly, any definition of the role of OASI in providing old age
support is complicated by the fact that a single “standard of living”
carries different price tags in the various parts of the country, or
that any dollar benefit will translate into numerous standards of
living. But unless some generally accepted agreement can be reached
as to the level of support that OASI should provide, the system will
be judged by the standards of income adequacy that can be normally
produced by a private system of retirement benefits.
Thus, we find that the private system is criticized for its failure
to adhere to the social values of a public system, and the public system
is criticized for its failure to produce benefits of an “adequate” amount.
The balance of this paper is devoted to examination of the forces
and conditions that shaped our total system of old age support and
to consideration of a possibility for future change in the private retire-
ment system to increase its effectiveness. -

I. BACKGROUND AND HISTORY OF OLD-AGE INCOME SOURCES
The evolution of systems for financing old age in the United States
has run parallel to the current of social, economic, and political de-
velopments. Since today's systems are an outgrowth of past events,
a review of old-age income sources in their historical setting should
lend perspective to current thinking. - . . . . .
EARLY HISTORY
During the first century of American political life—from the be-
ginning of the Revolution in 1775 to 1875—the economic needs of
older citizens were satisfied chiefly by family resources. It must be
recognized that the elderly represented a relatively small segment
of the population. The incidence of life extending into the seventh
decade (the sixties) was not the commonplace rule that it is today.
The influx of European immigrants, who typically arrived in youth
or early adulthood, tended to weight the population toward youth.
Thus the ratio of older citizens was low, and the economic burden of
support usually spread over a number of younger family members.
Economic activity during the first century of American history
stemmed principally from agriculture—a form of livelihood that lends
itself naturally to the retention of aged members within the economic
sphere of the farm and its household. The typical farm household in
the 18th and 19th centuries included two or more generations of family
174 OLD AGE INCOME ASSURANCE—PART I
members. The older generation was likely to be the owner of the land
and household property, while younger members principally Sup-
plied labor in return for the livelihood the land provided. As land
owners aged, they gradually decreased active participation in the
affairs of the farm but remained in the household and shared in the
income produced. Where the older member was the landowner, such
income represented a return on investment from either his own efforts
or from property inherited from earlier generations. Even where the
older generation was not in the propertied class, the support of parents
in old age was generally the accepted responsibility of children dur-
ing this period.
In the case of individuals who devoted their active lives to self-
employment in a trade or business, the picture was apt to be much
the same as that of the aging farmer. There was no question of forced
retirement, and the individual usually continued to his business affairs
until he chose to turn over the reins to younger family members or he
was forced to do so by ill health. . -
For self-employed workers, both in agriculture and in trade or
business, the dominant pattern of the early era was for children to
follow in the occupational footsteps of their parents, a system which
offered the twofold advantage of providing employment opportunity
for the young in an age when little outside demand for workers existed
and economic security in the later years for aging parents.
Those older Americans who were not attached to the land or self.
employed in their own business looked to somewhat different sources
for income maintenance in old age. Those individuals who spent their
working lives in the employ of others for wages or salaries had to
rely on their own ingenuity and frugality to save for the day when
they would be unable to work. Failing financial independence, the
aged worker was dependent on the ability and willingness of family
members for support, or on the generosity of his employer either to
retain him on the payroll in some appropriate capacity after his pro-
ductive capabilities had diminished or to grant him some modicum
of financial assistance as a matter of charity. A scattering of employee
relief associations were in existence during this early period and in
Some cases aged workers received assistance, but there is no evidence
that these associations were a significant factor in financing old age.
In the absence of any of these forms of support, the impoverished
older citizen was faced with the choice of accepting public charity
in the poorhouse or poor farm, begging, or starvation.
One other alternative did exist during the period following 1818
for a special group of the population: if the individual had served
his country in a military capacity, a pension might be available, or
care in a home established for old ...i. of broken fortunes. The
veteran's pension was for many years the only public source of old-
age assistance with “honor.” . . " e f : . . .
The sources of old-age income during this early period reflected the
conditions of the era, which was marked by a spirit of strong personal
independence, the westward movement of the population, and reliance
on agriculture as the principal source of livelihood. Although these
were the dominant characteristics of American Society, changes began
to occur gradually during the latter part of the period which fore-
shadowed future developments in old-age income resources. These
OLD AGE INCOME ASSURANCE—PART I 175
changes included the beginning of the industrialization of the econ-
omy and the migration from rural to urban areas. -
The earliest attempts to formalize systems for old age financin
emerged toward the end of the 19th century. Interest was concentrate
primarily in the railroad and closely allied industries, the reasons be-
ing that railroads were the first American companies to employ sub-
stantial numbers of workers, and because it was not feasible to con-
tinue older workers in positions that might jeopardize the Safety of
passengers and equipment. - . . . . .
The comments that follow trace the development of today’s systems
of old-age support by quarter century periods from 1875 to the present.
1875-1899
The final quarter of the 19th century marked the origin of the
company pension plan as a Source of income during old age. In 1875
the American Express Company established a system for retiring per-
manently incapacitated workers who were 60 years of age or over and
had worked for the company at least 20 years. Retirement was at the
discretion of the executive committee of the board of directors and re-
quired the recommendation of the general manager. The pension al-
lowance was half of average pay earned during the ten years precedin
retirement, but not more than $500 annually. Benefits were finance
by the company from current income.
Shortly thereafter several railroads adopted programs—or infor-
mal arrangements—for pensioning superannuated employees. A few
isolated plans are recorded in other industries, but in most cases they
were abandoned after a few years. Pension schemes were slow in de-
veloping and there were probably fewer than ten plans in operation
by the end of the century. The only form of public support in old age
continued to be the veteran's pension. . . . . .
1900–1924
Early in the new century a number of rapidly growing corpora-
tions established retirement programs. These, were principally rail-
roads, utilities, and firms in the metal industry, although a few banks
and manufacturers were represented. . . . . . . . . . . .
During this same early period of the 1900's trade unions evidenced
interest in arrangements for old-age income for members. The first of
such plans was adopted in 1905 by the Granite Cutters, followed two
years later by the first of the large international unions, the typograph-
ers. Early plans of this type were supported entirely by members and
tended to #. in those industries where there were no company
p. By 1910 roughly half of all railroad employees were covered by F.
sion plans, although the total number of plans in existence in all in-
dustries may not have exceeded 75 to 100. Between 1910 and 1920 the
pace quickened and some 150 new plans were established. Also during
this period several states considered proposals for old-age pension
laws, with the first enactments coming in 1923. . . . . . . .


The general recession period following World War
. . . . Sº . . . . ir Ibrought a slow-
down in new plans, but produced an event that later proved to be a
176 OLD AGE INCOME ASSURANCE—PART I
motivating factor in the establishment of retirement plans. The Rev-
enue Act of 1921 contained a provision exempting from taxation
employer payments to, and the earnings of, trust created as part of a
stock bonus or profit sharing plan. The same legislation included pro-
vision for capital gains tax treatment on sales or exchanges of capital
assets but did not extend the privilege of such treatment to amounts
paid to participants from such plans. The objective of this legislation
was to provide the incentive for increased business activity—to start
the economy on the road to recovery by attracting managers and work-
ers with the prospect of sharing the results of the extra efforts required
to §. business out of its post-war slump.
everal other significant developments in the history of pension
growth occurred before the end of the first quarter of the 20th century.
First, state and municipal governments began to adopt retirement
programs for their employees. In 1921 the Civil Service Retirement
Act brought coverage to most federal civilian employees. Also in 1921
the first group annuity contract was issued by a U.S. life insurance
company. - w
Summarizing the first fifty years of retirement plans from the frag-
ments of data available, the record shows the following progress:
Private retirement plans.—About 300 plans were in operation cov-
ering nearly three million workers, or about 11% of the work force
employed in private nonagricultural industries. These plans were
probably generating about $22 million of annual retirement income
for some 42,000 retired workers. -
Public employee retirement plans.—The number of plans and ex-
tent of coverage is unknown. The only evidence of their magnitude is
the fact that governmental units expended about $36 million in 1922
and $64 million in 1927 for employee retirement benefits. If the growth
rate during the intervening period was fairly constant, the 1924 ex-
penditure might have been about $46 million. - -
The dollars produced by both private and public employee retire-
ment plans at the end of the first quarter of the 20th century probably
represented a very modest portion of the total income needs of people
age 65 and over. If spread equally among the older segment of the
population, the $68 million estimated payments in 1924 would have
provided each person about $12 for the year. For those fortunate
older persons actually receiving benefits from private pension plans,
the annual amount was in the neighborhood of $500, -
The income needs of the older person thus continued to be met to
a large extent by the same informal sources (family members and
continued employment) that prevailed in earlier years. There is also
evidence that private charitable sources (such as churches, fraternal
orders, etc.) and local governments played a role in supporting the
needy aged whose family structures had dissolved and who had no

income from employment or pensions.
:. . . . . g : " . . . * * , 1925–1949
This 25-year period marked the transition of retirement plans from
the relatively simple arrangements of their early developmental period
to the complex structures they are today. Three landmark events grew
out of the économic and social conditions of the period that shaped
OLD AGE INCOME ASSURANCE—PART I 177
the future development and role of retirement plans and other old-
age income sources. These events were the granting of tax exemp-
tion to private pension plans, the passage of the Social Security Act,
and the refusal of the U.S. Supreme Court to review an earlier deci-
sion that required employers to bargain with labor unions on the
issue of pensions, together with the subsequent findings of the steel
industry fact-finding board that industry has an obligation to provide
pensions and welfare benefits for workers. Each of these events is dis-
cussed further below in relation to the conditions that fostered its
OCCUITTen Ce.
Taa, ea'emption for private plans.—The first fifty years of pension
growth had passed with virtually no concern about taxes or tax exemp-
tion. Nor was there need for concern prior to the imposition of income
taxes on corporations in 1909 and on individuals in 1913. As mentioned
earlier, the first formal provision for tax exemption of employee trusts
enacted in 1921 applied only to profit sharing and stock bonus plans. It
was not until 1926 that tax exemption was extended to pension plans,
and even then it resulted from a Senate floor amendment to the Revenue
Act of 1926 to include pension plans along with stock bonus and profit
sharing plans. -
Prior to the adoption of statutory authority for tax exemption, the
income of employee trusts was taxable either to the employer, the
employee, or to the trust itself, depending on the terms of the trust
instrument. Amounts contributed by employers to such trust funds
were generally taxable income to the employee at the time paid unless
his rights under the plan were so contingent on future events that it
would be unreasonable to impose a tax on the basis of currently realized
IIlêOIſle. -
The original tax exemption legislation of 1921 and the extension to
pension plans in 1926 imposed no limitations on employer deductions
and no special rules relating to coverage. Most of the restrictions cur-
rently existing in tax legislation were adopted in a series of tax bills
between 1928 and 1942. Those of major importance include:
1928—provisions added relating to deduction of employer contri-
butions in excess of requirements for benefits accrued during the cur-
rent year. The Revenue Act of 1928 permitted reasonable payments
made to a trust to be deducted over a ten-year period. According to the
report of the Senate Finance Committee, the purpose of this provision
was twofold: (1) to encourage the financial and actuarial soundness of
pension plans by funding liabilities for previous service through regu-
lar or lump-sum payments and to permit employers who had carried
past accumulations as a book reserve to transfer them to a trust fund
with the permitted deductions prorated over ten years, and (2) to pre-
vent companies from concentrating pension deductions in years most
advantageous from an income tax standpoint.
1938—added requirement that emplover contributions be irrevo-
cable with no diversion of funds permitted for purposes other than
the exclusive benefit of employees. The purpose of this legislation was
to prevent the possibility of pensions becoming a tax avoidance device
whereby employers could set up funds in good years and later recap-
ture them in years of financial distress. Even though the return of
such funds with their accumulated earnings would represent taxable
178 OLD AGE INCOME ASSURANCE—PART I
income, in years of loss their recovery would simply reduce the
amount of loss without affecting tax liability.
1942—minimum coverage requirements added; provision added
prohibiting discrimination in contributions or benefits in favor of
higher-paid employees: deductions for employer contributions to fund
past service pensions liberalized to 10% of past service liability or an
amount when combined with current service contribution would not
exceed 5% of covered employee compensation; capital gains tax treat-
ment extended to single-sum distributions to employees at termination
of service. .
The changes made by the 1942 Revenue Act were in part restrictive
and in part liberalizations of earlier tax provisions. The restrictions
imposed (coverage and nondiscrimination requirements) were largely
corrections of omissions in the original tax exemption law which had
become obvious during years of experience with such legislation, and
which had been accentuated by changing economic conditions. The ab-
sence of such requirements had led to the creation of some plans for
the benefit of a few key individuals within companies, which in oper-
ation were merely tax avoidance devices rather than bona fide retire-
ment plans.
As early as 1937 the President had pointed out to Congress that at-
tempts to encourage employee retirement plans through special tax
treatment had resulted in tax avoidance and requested that an inves-
tigation be made. When Congress failed to enact coverage and non-
discrimination requirements in 1938, the Treasury Department
attempted to institute standards of this nature in its Regulations
implementing the changes made by the Revenue Act of 1938. In 1940
the Treasury Department was forced to amend its Regulation in this
regard because of the absence of statutory authority and several ad-
verse decisions by the Board of Tax Appeals. World War II finally
provided the stimulus for Congress to give legislative approval to
close some of the loopholes of earlier tax laws. . . . . . . .
The liberalization features of the 1942 Act were further expression
of the principle of incentive taxation, a subject which had been
broadly explored by a Congressional Committee in 1938 in connection
with the use of profit sharing arrangements as a possible solution to
stimulating the economy. - . . . ; - . . . . .
Enactment of the 1942 changes was aided by the fact that World
War II was on and wage and salary controls were in effect. Methods
of compensating workers for increased production efforts without
adding to inflationary pressures were needed. One solution was to
channel compensation into non-cash deferred forms such as qualified
pension and profit sharing plans. . . . : . . . . . .
The need was apparent therefore for change in the revenue provi-
sions to accomplish this shift in emphasis; hence the minimum cover-
age requirement and the ban on discrimination.
Social Security Act.—Conceived and created out of nearly five years
of economic depression, the Social Security Act of 1935 was a sweep-
ing piece of legislation designed to provide some form of economic
security for almost every American citizen. The vast program of Old
Age and Survivors' Insurance, to which workers and their employers
commenced contributing in 1937, became an important source of old-
age income from the time benefits became payable in 1940.
OLD AGE INCOME ASSURANCE—PART. I 179
The program of federal grants to states for Old Age Assistance pro-
vided for in the Social Security Act had an even more significant
impact as a source of old-age support during the early years of the
program. It was not until after the OASI program was greatly ex-
panded by legislative action in 1950 that it produced as many dollars
of support as Old Age Assistance.
Revolutionary as the Social Security Act was to the American way
of life in the 1930's, the United States was among the last of the
major industrial nations of the world to establish a social insurance
System. .
Supreme Court confirmation that pensions are subject to bargain-
&ng.— In 1947 the National Labor fº Board É (in the well-
known Inland Steel case) that employers are required to bargain on
pension plans under the Labor-Management Relations Act of 1947.
The following year the Seventh Court of Appeals upheld the decision,
and in 1949 the Supreme Court affirmed it by refusing to review the
case. These decisions, coupled with the steel industry’s fact-finding
board ruling in 1949 that pensions are an appropriate responsibility
of industry, led to a rapid extension of the private pension movement.
With coverage no longer a matter of tºº, unilateral action,
almost all major U.S. corporations were faced with negotiating plans
for hourly workers. Most of the impact of the Supreme Court’s action,
of course, came in the early 1950's, with the auto and steel industries
largely responsible for the patterns that emerged.
Economic conditions during the 1930's and 1940’s had a profound
effect on the development of old-age income sources. Although the
economy was moving in opposite directions in the two decades, there
were contributing factors in each period that increased the momen-
º for both public and private programs of income assurance in
old age. . . . • . . . .
# Depression of the 1930's had been a bitter lesson for the Amer-
ican worker and had taught him to value economic security more
highly than he had in earlier years of prosperity. The Social Security
Act, which grew out of the Depression, had as one of its primary
objectives the removal of older workers from the labor force to create
work opportunity for the young, and did much to establish the pro-
priety of retiring older workers at a set chronological age. The com-
bination of Depression experience and social security providing a basic
floor of old-age income influenced the attitudes of employers and
workers alike to favor the establishment of private retirement plans
that would assure a modest, rather than a minimum, level of retire-
ment living. - . . . . . .
Apart from the security aspects of private retirement plans, the
expanding war-time economy of the early 1940's increased the attrac-
tiveness of tax deferment privileges. º was not a new
aspect of qualified plans, it was not until the 1940's that the bulk of
American workers felt the impact of income taxes. Prior to that time
the average worker realized little, if any, advantage from tax defer-
ment on amounts contributed by his employer to retirement plans.
For example, in 1935 a single man earning $5,000 a year (and it should
be remembered that $5,000 was a substantial salary in 1935) paid only
$140 in income tax. In 1942 the tax on the same earnings was $920,
and the value of the $5,000 income was considerably depreciated. If

180 OLD AGE INCOME ASSURANCE—PART I
the salary of this man had kept pace with the general trend of com-
pensation during the seven-year period, the $5,000 would have grown
to about $7,500 by 1942 and the income tax would have been about
$1,600. In other words, the tax effect increased tenfold while the in-
dividual merely maintained his before-tax economic status.
Another event that resulted from the Depression was passage of
the Railroad Retirement Act in 1935. While the railroads were the
first U. S. industry to adopt pensions widely (some 80% of all rail-
road employees had pension coverage by the end of 1927), many plans
ran into financial difficulties during the early 1930's and some were
forced to reduce pension payments. This situation compounded the
problem of unemployment in the industry, since many of the older
railroad workers who might have retired under normal conditions
could not, or would not retire on reduced pensions.
An interesting occurrence of the late 1930's was the inquiry of the
U.S. Senate into the desirability of incentive tax legislation in con-
nection with deferred profit sharing retirement funds. The report
issued in June 1939 by the staff of the Subcommittee on Finance (com-
monly known as the Vandenberg Report) included two specific rec-
ommendations for legislation: (1) exemption from income tax of all
payments to employees from profit sharing retirement funds, and (2)
establishment of a special U.S. Government Profit Sharing Fund
Bond to be used for the protection of profit sharing fund investments,
The impetus for the investigation was the desire to find methods of
restoring vigor to the U.S. economy by reducing labor unrest and
the unemployment rolls. While no legislation resulted directly from
the inquiry, changes enacted by the Revenue Act of 1942 reflected
some of this earlier thinking in adopting new provisions requiring
broadened coverage of employees under tax-qualified plans and non-
discriminatory treatment of participants, and in the extension of
capital gains tax treatment to lump-sum distributions from employee
trusts. . . . • - - - -
Summarizing the events of the 1925–1949 period, the common sourcés
of financial support in old age had been expanded to include Old Age
and Survivors' Insurance, Old Age Assistance, and Railroad Retire-
ment in addition to continued expansion of the role of private em-
ployee retirement plans and government subsidy of aged war veterans.
Private retirement plans had grown to over 12,000 in number and in
coverage to about nine million of the 371% million workers employed
in private. nonagricutlural business. Total retirement income produced
by these plans was in the nature of some $300 million annually for per-
haps 400,000 recipients. (Precise data is not recorded for the period
before 1950, but an estimate of this magnitude is reasonable for 1949
on the basis of later figures.) . . . . .
Social security contributed $439 million to old-age support by 1949,
while Old Age Assistance payments totaled $1,380 million. Payments
to retired railroad employees added another $234 million to the grow-
ing list of sources.
1950–ToDAY
Most of the growth in formalized sources of old-age income from
1950 to the present can be attributed to expansion and extension of
programs created by events of earlier periods.
OLD AGE INCOME ASSURANCE—PART I 181
Social security, for instance, has undergone numerous revisions with
each change resulting in either greater benefits for existing beneficiaries
or extending coverage to new groups, or both. One major change in
the program, the medical benefits provisions enacted in 1965, is more
in the nature of income protection than income production.
Developments affecting private retirement programs were relatively
minor in nature. A few changes in the tax treatment of pension and
profit sharing plans occurred, and in 1958 plans were subjected to re-
porting and disclosure legislation. The major impetus for expansion
came from the necessity for employers to negotiate plans with collective
bargaining agents.
In 1962 Congress extended limited tax exemption privileges for
the first time to self-employed persons who chose to establish retire-
ment programs for themselves and their employees. These tax
privileges were extended in 1966 and are now comparable to the treat-
ment accorded employees of corporations under profit sharing or
future service pension plans. - - - - -
By the end of 1965, well over 100,000 private retirement plans were
in operation, covering more than 25 million persons—which is one out
of every two workers employed in private, nonagricultural industry.
The plans provided about $3.2 billion toward the financial support
of 234 million retirees. In 15 years retirement income from private
plans increased more than tenfold while the number of beneficiaries in-
creased nearly sevenfold.
Dramatic as the growth of private retirement plans was in contrib-
uting to financial support in old age, it was far surpassed by social
security. Old-age benefit payments in 1965 were nearly 29 times those
paid in 1950 ! Old Age Assistance payments increased only slightly
during the 15-year period, while the dollars of support from railroad
retirement and veterans pensions each roughly quadrupled.
As an illustration of the evolution of formalized systems for old-
age income, Exhibit A represents a graphic chronology of both private
and public sources from 1900 to the present time. It reflects the growth
in the number of dollars produced by the various sources against the
background of existing conditons which influenced their development.
Unfortunately, the picture before 1930 was, by necessity, constructed
from fragmentary and incomplete information. If a true and complete
history could be compiled, formal sources of old-age income during
this early period would be credited with producing more dollars of
support, but it is doubtful whether the additional amount would sig-
nificantly alter the pattern of growth depicted by Exhibit A.
Translated into annual income on a per capita basis for the age 65
and over segment of the population, the payments from all sources
increased as follows: . . -
1900 – $32.55 | 1940 ----------------------- $119.96
1910 – 28. 61 | 1950 –– . . . . . . . 297.95
1920 25, 34 || 1960 – --- 922. 64
1930 45. 22 | 1965 *E. -- 1,266. 30
The dip in the per capita rate during the early years was due to
the fact that the number of people age 65 and over was increasing
more rapidly than dollars available from all sources for their support.
182
OLD AGE INCOME ASSURANCE—PART I
Exhibit A - HISTORY OF OLD AGE INCOME SOURCES
(in billions of dollars produced annually)
Prepared by
Hewitt Associates
1875 – 157 private PENSION
1884 – 2ND PRIVATE PENSION
iºns 1920 1925
1905 1910
I
| (INSET Above HAS A GREATLY
| INCREASED VERTICAL SCALE
of INDICATED portion)
woo isos Mºlo, Wis gº ... º.º. ºf wº. 19ss isso Tºss tºo lºss
º º sº gº º sº sº gº
* gº º & sº & sº 39
£9 69 Sº & A 6. &S &s - &
* g’ sº & gº & *& &
dº & sº 4 - -
& o &
& -
r ESSION DEPRESSION WORLD KOREAN WAR VIETNAM.
WAR II - CONFLICT
world RE: .
I. . .














OLD AGE INCOME ASSURANCE—PART I 183
The foregoing comments and illustrations are intended to put into
proper focus the events of the past that have brought us to the present
state of affairs, and to shed some light on possible future directions
in the management of old-age income financing. Three somewhat obvi-
ous conclusions can be drawn from the experience of the past ninety
€8,I’S.
y First, changing economic and Social conditions of the past century
have led to general acceptance of the desirability of organized sys-
tems for old age income maintenance. -
Second, the private movement of business and industry to provide
income assistance for aging workers was a logical outgrowth of the
employment of large numbers of workers in a single business enter-
prise which made earlier forms of providing for older workers im-
practical and obsolete. -
The same reason can be cited for the initiation of retirement systems
for employees of governmental units. -
Third, government has assumed the dominant role in the creation
and maintenance of old age income systems. The original role of
government was limited to that of employer, then expanded via tax
legislation to encourage other employers to establish programs, and
finally to the enactment of compulsory legislation requiring workers
and employers alike to contribute to the financing of old age. ,
A fourth related point, which may not be obvious, is that the effec-
tiveness of permissive tax legislation as an incentive to the accumula-
tion of retirement income is directly related to the impact of taxa-
tion on the income of individuals rather than on the income of
business. -
II. CURRENT STATUs of OLD AGE INCOME Sources
Exhibit A indicates that by 1965 the combined sources of old-age
income were producing nearly $23 billion of annual income, more
than $1,250 per capita if spread equally among the age-65-and-over
population. More than half of the total income was provided by the
OASDI program under the Social Security Act. If other government-
sponsored systems are taken into account, the portion of total retire-
ment income provided by government is 71% exclusive of programs
for the benefit of its own employees, and 84% including those pro-
grams. This means that private employee retirement plans are pro-
ducing only 16% of the total of all formal sources today, although
the employers and workers in private industry are directly respon-
sible for the financing of about 72%% of the income generated. . .
Recent estimates of the U.S. Department of Health, Education, and
Welfare indicate the aggregate income of all older persons is over
$40 billion a year. This leaves $17 billion of annual income which is
provided from personal assets and savings, family assistance, charitable
sources, and continued employment. At the $40 billion annual income
rate, the resulting per capita income of $2,200 for persons age 65 and
over is several hundred dollars under the 1965 national average of
about $2,750 for all age groups. . . . . . .
184 OLD AGE INCOME ASSURANCE—PART I
Undoubtedly, the measurement of the progress of private retire-
ment plans as a source of old-age support in terms of the dollars
currently produced does not give full credit to their actual present
value. Extensive coverage of American workers is a relatively recent
phenomenon; many of the persons whom plans have been designed to
cover are still actively employed and amassing retirement income
credits for the future. It may be another decade or two before the
effect of today’s coverage can be measured in terms of income pro-
duced. In order to provide a clearer picture of the role of private retire-
ment plans, Exhibit B summarizes the extent of coverage under such
plans, as well as those providing income protection for employees of
government. - -
The current status of old-age income sources cannot be fully de-
scribed by tabulating and charting statistical data. The nature of
the roles played by the various sources needs to be defined before
moving on to the future outlook for old-age income sources.
VETERANs’ PENSIONS
Most veterans' pensions are neither true pensions nor an intentional
source of old-age income. Only a small portion of today's veterans'
pensions are paid as a right earned by virtue of military service (per-
formed outside the Regular Establishment). They are paid only to
veterans of wars prior to World War I. Most of the so-called veterans'
pensions fall into the classification of non-service-connected pensions,
which apply to unemployable veterans with limited incomes. A veteran
is generally considered totally and permanently disabled at age 65
if he is retired from employment and has a 10% disability. Payment
of the benefit is dependent on proven financial need. In 1965 nearly
a million veterans of World War I were receiving over $1 billion
in this form of income; thus over 5% of the aged population were
benefiting from this unintentional source of old-age income.
The role of the veterans' pension as a source of old-age income is
primarily one of filling certain income gaps that exist among a special
class of older citizens. Unless Congress should see fit to extend “serv-
ice” pensions to veterans of World War I and later wars, the role of
the veterans' pension should diminish in relative importance as other
forms of retirement income provide the financial means of living in
old-age. -
OLD AGE ASSISTANCE
The role assigned to º assistance programs has been generally
that of a stop-gap measure designed to fill a #. need during the
period between enactment of the Old Age and Survivors' Insurance
program and the time when its provisions would be fully operative
and filling the basic income needs of the preponderance of older
citizens. Evidence that Old Age Assistance is performing this func-
tion can be found in the relatively constant number of dollars ex-
pended by such programs during the past 15 years and by their
diminishing importance as a factor in old-age financing.
OLD AGE IN COME ASSURANCE—PART I 185
oDD AGE AND SURVIVORs' INSURANCE
The role assigned to the Old Age and Survivors' Insurance Pro-
gram under the Social Security Act is to assure a basic floor of old-
age income to all workers and their dependents, without requiring the
recipient to prove financial need. The system was thus designed to
simulate the characteristics of an insurance arrangement rather than
a welfare program. :
To achieve the goal of income assurance, the system required broad
coverage of American workers, which has been accomplished through
the intervening years since 1935 to the point where coverage is now,
for all practical purposes, universal.
In keeping with the insurance image of the System, payments to and
benefits from Social Security have been expressed in relation to earn-
ings and years of coverage, while the right to receive benefits has been
related to broad concepts of what constitutes an individual's need to
receive income from the system. . . . -
Although Social Security represents the single largest source of
retirement income today, fulfillment of its assigned role can be
frustrated in two major areas:
1. Identification of what constitutes the basic floor of income that
the public is willing to underwrite on a compulsory, universal basis.
To date this level has been determined largely by political pressures
of the moment with little, if any, attempt to relate benefit levels to
some factual measure of income needs of older citizens. -
2. Attempts to erode the original insurance concept of Old Age and
Survivors’ Insurance through periodic legislative amendments that
have sacrificed the implied relationships between payments into and
benefits from the system in the interests of attaining universal benefit
coverage for older citizens.
PUBLIC EMPLOYEE RETIREMENT SYSTEMIS
The role of public employee retirement systems is virtually identical
to that of private systems with the possible exception that in many
cases the public system is not a supplement to Social Security, but
performs both roles simultaneously. Governments, as employers, as
seeking in their retirement systems the same vehicle as private em-
ployers to provide for the systematic accumulation of adequate retire-
ment income and for the orderly removal of workers whose skills or
capabilities become inadequate because of aging.
PRIVATE RETIREMENT PLANS
The primary role of private retirement plans has been to provide
a vehicle through which a corporate employer could systematically
provide income maintenance for workers who become nonproductive
because of the aging process, by means of diverting earnings during
the productive years to retirement income. The role has been performed
either through unilateral employer decision or by providing the
means for voluntary employee saving for old age. The private retire-
ment plan actually is a continuation of the earlier practice of smaller,
more personally-involved employers of providing old-age income
186 OLD AGE INCOME ASSURANCE—PART I
through continuation of employment of nonproductive older workers
or by extending personal gratuities in selected cases.
ith the advent of social security, the role of the private retirement
plans was enlarged to provide a “living” income level commensurate
in Some way to the income earned during the working career, as dif-
ferentiated from the basic floor of income provided by the public pro-
gram and to a large extent under earlier private plans which had been
the Sole Source of old age income for many workers.
A third important aspect of the private retirement plan is that it
permits tailoring of benefits to meet special needs of an employee group
to a degree which is impractical under a universal system. For ex-
ample, there can be greater flexibility in determination of an appro-
priate retirement age to meet special employee or employer needs.
Early retirement in cases of work force reduction or plant shutdown
(which is possible only under the private retirement system) does much
to relieve the unemployment situation of older workers who would
otherwise be at a severe disadvantage in finding suitable employment
until they reach “normal” retirement age.
The end result of the role played by private retirement plans is a
...: advantages to Society in general, which can be identified as
ollows: - - -
1. Increased vigor of the labor force through selective retirement
of workers with obsolete skills or inadequate education, and the crea-
tion of job opportunities for younger, better educated employees.
2. Enhanced ability of the industrial sector of the economy to mod-
ernize production techniques with minimum displacement of workers
resulting from “retirements” as opposed to “terminations.”
3. Increased consumer purchasing power of older citizens.
4. Elimination of hardship in cases where the individual has no
resources other than Social Security or old age assistance.
Several characteristics of the private pension movement are worthy
of noting in assessing where we stand today and what future course
might be expected. The public is prone to think of “private pensions”
solely in terms of the plans operated by medium to large-sized corpora-
tions. While plans of this kind may typify the private pension scene,
they are not its entire substance. . , , , ,
Today’s private pension sector is actually composed of arrangements
of several different basic natures. These can be classified and described
as follows: . . . . . . . . - . . ... 3
1. The corporate pension plan—or the “typical” plan referred to
above which is adopted and maintained by a single employer for the
benefit of all, or of special classes, of his employees. It is usually a
funded, tax-exempt arrangement which is subject to the rules and
regulations of the U.S. Treasury Department, the U.S. Labor De-
partment, and the Securities and Exchange Commission. 3 *
9. The joint labor-management pension plan—which is an out-
growth of the trade union plan in which the union set up the mecha-
nism for collecting funds and distributing benefits. The 1947 Taft-
Hartley amendments to the National Labor Relations Act made it.
unlawful for an employer to pay any money to a bargaining repre-
sentative of his employees, except that payments were permitted to
trust funds established for the exclusive benefit of employees if the
employer and employee representative had equal representation in

OLD AGE INCOME ASSURANCE—PART I 187
administering the trust fund. This legislation, together with the later
action of the Supreme Court in confirming that pensions were a bar-
gainable issue, led to the development of negotiated joint labor-man-
agement pension trusts, with employers tpyically agreeing to make
contributions on behalf of workers in terms of cents per hour.
The joint labor-management trust was one of the first major efforts
to extend tax-free retirement income accumulations to workers in small
business enterprises—at least to those who were members of the unions
negotiating plans. This is not to imply that joint labor-management
plans cover only small employer groups, although it is true that this
type of plan has flourished chiefly among “trade” unions as distin-
guished from industrial unions, where the practice has been to nego-
tiate individual employer plans.
3. Association plans—these are plans usually sponsored by a busi-
ness or trade association, which offer voluntary participation to mem-
ber employers, and are subject to the government º applica-
ble to the corporate and joint labor-management pension plans. While
these plans share the common objective with the joint labor-manage-
ment plan of providing a central mechanism for establishing and main-
taining a retirement program, they differ in methodology. The associa-
tion usually arranges details of the program and then delegates man-
agement control of funds to a third party, such as an insurance or
financial institution, whereas management control is vested by law
in the labor-management trustees of jointly-managed funds. -
4. Self-employed plans—these are qualified retirement plans that
were first authorized by Congress in 1962. Prior to that time non-
corporate businesses could set up plans for employees, but partners
and proprietors were excluded from participation. The brief period
of experience with these plans has been disappointing, and the lack
of acceptance is probably attributable to three major reasons:
a. The mechanics for establishing self-employed plans are approxi-
mately parallel to those for corporate plans, and the cost in money,
time, and effort is prohibitive if prorated over a small employee group.
b. Experience to date results from the original legislation which
limited the tax advantages offered to owner-employees. This situation
was remedied by legislation in 1966, but its effect is not yet evident.
c. The nature of self-employed business activity is such that em-
ployees are few and frequently of short tenure. The need for an
orderly system of retiring workers has not existed to the same extent
as it has in larger business organizations.
The Tax Code provision that all employees with three or more years
of service must be covered has undoubtedly created some resistance on
the part of many self-employed proprietors and professional persons.
Group arrangements for covering self-employed persons and their
employees have been developed by a number of professional and busi-
ness organizations. Insurance companies and financial institutions
have also developed prototype plans to simplify the qualification and
operation of self-employed plans. . 3. - -
5. Bond Purchase Plans—are arrangements under which special
U.S. Retirement Plan Bonds, which are sold by the Treasury De-
partment, are used to provide retirement benefits under approved
plans. The device became effective in 1963 and is used primarily to pro-
vide self-employed individuals a means of investing their retirement
83–200—68—pt. 1–13

188 OLD AGE INCOME ASSURANCE—PART I
plan contributions. However, any qualified corporate pension plan
may also purchase such securities. Each bond purchased is issued in
the name of the individual employee, or self-employed person. It is
nontransferable, nonforfeitable, and cannot be redeemed until the
individual reaches age 59%, dies, or becomes disabled. Bonds become
taxable when redeemed. -
6. Taa’-sheltered annuities—which are special arrangements, au-
thorized by legislation since 1939, for the benefit of persons employed
by tax-exempt organizations. These are typically nonprofit religious,
charitable, scientific, or educational organizations. Qualified employers
may purchase nonforfeitable annuity contracts for employees, who
may exclude from taxable income such employers payments up to 20%
of pay for each year of service. Since 1958, the annuity payments have
been permitted as the result of a reduction in the employee's salary if
a suitable Salary amendment agreement is adopted. The same exclusion
from income tax is permitted as if the employer paid for the annuity
in addition to pay. Amounts received from the annuity contract are
included in taxable income in the year received.
7. Other arrangements—which include diverse approaches to group
action are also in operation. These include area-wide and industry-
wide plans as well as the recently-established small employer plan
sponsored by the industrial union department of the AFL–CIO.
It is readily apparent that most of the methods in use are for the
primary purpose of simplifying the complicated tangle of rules and
regulations covering the operation of qualified private retirement plans
to the point they can be made economically attractive to small groups.
The current status of old-age income sources cannot be fully de-
scribed without noting that the single private source of retirement in-
come (employee retirement plans) has been the subject of extensive
review and re-appraisal during the past five years. The review was
initiated as a result of a report of the Commission on Money and
Credit published in 1961. This report recommended that an appro-
priate regulatory body be given responsibility over private corporate
pension funds to study and develop standards of fund investment,
to enforce such standards, to require periodic reporting to beneficiaries,
and to bring legal action against malfeasors on behalf of plan par-
ticipants and beneficiaries. . . . -
* Within a few months after publication of the report, President
Rennedy named a Cabinet-level committee to review the implications
of retirement plans for the financial structure of the economy as well
as the role and character of retirement systems in the economic security
of the nation, and to consider how they might contribute more effec-
tively to efficient manpower utilization and mobility. -
Nearly three years later the President's Committee on Corporate
Pensions submitted its report to the President under the title of “Pub-
lic Policy and Private Pension Programs.” One of the major conclu-
sions of the report was that: .
“Private pension plans should continue as a major element in
the nation’s total retirement security program. Their strength
rests on the supplementation they can provide to the basic public
system. . . . . . . - * . -
“The basic justication for the indirect public subsidy involved
in favored tax treatment lies in the social purposes served by
OLD AGE IN COME ASSURANCE—PART I 189
private pension plans. In view of these social purposes, public
policy should continue to provide appropriate incentives to pri-
vate plan growth, and by improving the basic soundness and
equitable character of such plans, set a firmer foundation for their
future development. Because protection will always be far from
complete, private pension plans cannot be a substitute for public
programs, but public policy can encourage developments which
will provide supplementary retirement benefits to a growing pro-
portion of the nation’s workers and will provide greater assur-
ance that the promised benefits will be paid.”
The report goes on to outline specific recommendations for achiev-
ing the desired “basic soundness and equitable character.” These in-
clude establishment of vesting requirements, minimum funding stand-
ards, more stringent requirements for qualification for tax-exempt
status, restriction on investments in employer securities, and elimina-
tion of some tax advantages currently available to employees. The re-
port also concludes (although not included as a formal recommenda-
tion), that proposals for arrangements for portability of pension cred-
its and for insurance of benefits in event of plan termination are
worthy of study. -
In the two years since the report of the President’s Pension Com-
mittee was released, a great deal of study and attention has been given
to its content by representatives of government, labor, business, aca-
demic institutions, and of the so-called public interest. The resulting
dialogue encompasses volumes of written words and countless hearings
and meetings of study groups, and Congress has received numerous
proposals for translating recommendations of the Committee into leg-
islative reality. .
Within this framework of past history and current status, it is ap-
propriate to view the future outlook of old-age income. -
III. OUTLoor For OLD AGE INCOME SourcEs
There are basically two methods of viewing the future of retire-
ment income sources: - . .
(a) on the assumption that future developments mainly will
follow the pattern of the past and vary to accommodate chang-
ing conditions caused by the same economic and social forces that
have influenced earlier events, or
(b) on the assumption that some major change will occur in
the basic structure .old age financing. . . . . . .
FollowLNG THE PATTERN of THE PAST
If the “status quo” mood prevails, a projection of the trend illus-
trated in Exhibit A suggests that 50 years hence it is not unlikely
that 95% to 99% of all retirement income will be generated as a result
of government action, either in the form of direct outlay from general
revenue sources or the product of compulsory legislative requirements.
It appears almost certain that the OASDI program will continue
to expand until every nonworking older citizen is within the scope
of its benefits. The dollars of benefits produced on behalf of each indi-
vidual beneficiary will have to grow to keep pace with living costs if
190 OLD AGE INCOME ASSURANCE—PART I
the system is to fulfill its stated role of providing a basic floor of
old-age income protection. An even more important consideration is
the extent to which this role exceeds what social planners refer to as
“the subsistence level”. If this occurs to any appreciable degree, the
volume of income that will be produced for old age social Security
beneficiaries in 2015 would stagger today’s imagination. Assuming
that Social security does not grow to the point of rendering other
forms of old age income unnecessary, it would still be consistent with
#. hº to expect government to play a major role in old age
ancing through continuation of the old age assistance programs
now in operation, or as part of Some expanded program for the
alleviation of pºvery among all age groups.
The effect of the “status quo” condition on private employee retire-
ment plans is more difficult to assess. Certainly, the tax incentives
originally extended to employers to establish retirement programs
have been gradually hampered by restrictions and regulations that
affect their attractiveness to employers. At the same time the attrac-
tiveness to employees has increased because of the growing impact
of income taxes. The steady growth record of private retirement
plans stems not from tax advantages to employers, but from the func-
tion they serve in the orderly removal of unproductive older workers
from the payroll, combined with the tax advantages accruing to
employees. -
| If Congress sees fit to further regulate and control the affairs of
corporate pension and profit sharing plans, the day may come when
the burden of administering programs for the tax benefit of em-
ployees may exceed the value of the program to private employers.
If that day arrives, Congress will be faced with the choice of taking
over and operating an industrial retirement system (as it did the
railroad system in 1935) or of compelling private employers to main-
tain retirement systems as a matter of legal responsibility. On the
other hand, if Congress limits its concern to the prevention of abuse
of the tax privileges currently enjoyed by private plan participants
(without legislating plan provisions) private plans will probably
continue to play a growing role in the aggregate of retirement income
sources. Either course is a likely description of the road ahead, and
the day of decision as to which course we follow is not far away.

DEVELOPING MAJOR CHANGEs
In view of all the attention currently devoted to public policy on
private pensions, this may be an appropriate time to go a step further
and review public policy on all aspects of old age financing. The
American public might well ask those who determine its policy the
following series of questions. - . -
1. What constitutes reasonable goals for old age income?
a. a minimum subsistence level? .
b. a modest standard of living?
c. pre-retirement standard of living?
2. Whose responsibility is it to provide the desired level?
a. government? -
b. employers?
c. individuals?

OLD AGE INCOME ASSURANCE—PART I 191
d. family?
e. charity? - - -- -
• f. combination—or different responsibility at different levels?
3. What form should old age support take? . . . . -
a guaranteed income unrelated to past work?
b. income based on past work history? - - -
c. income for work performed; even if job must be created?
d. as a matter of “right”? .
e. provided to meet need? . . . -
The most desirable solution for society, of course, would be for
every older citizen to continue his pre-retirement standard of livin
out of his own resources accumulated during a working career o
full and adequately-compensated employment. The minimum that
most Americans are willing to settle #. is assurance that no one in
our society is without the basic necessities of life, but fixing respon-
sibility for this minimum is another matter, as is identifying the need
by classification or by individuals. In the absence of adequate and
clear-cut private channels for satisfying minimum income needs of
older citizens, government has assumed the responsibility, first at the
local community level, later at the State level, and now largely through
Federal sponsorship of programs in cooperation with State and local
governments. -
Minimum income objectives are met chiefly through the mechanism
of the OASDI program, supplemented, where required by old age
assistance payments and veterans pensions. The OASDI program
rants benefits on the basis of past work history without regard to
#. need while the other two programs are based entirely on
need and have no relation to work history. .
Somewhere in between the ideal of a continued pre-retirement
standard of living and the subsistence amount from government
programs is the “modest level” of living standard. This is a level
that private retirement plans commonly attempt to reach when bene-
fits are added to those of social security. Other plans relate retirement
benefits to earnings before retirement, and in so doing may exceed
what is ordinarily considered a modest level. (A “modest but ade:
quate” level of living for an elderly couple has been defined and
measured in dollars by the Bureau of Labor Statistics, most recently
in the fall of 1960. At that time annual income needs ranged from
$2,641 to $3,366 in 20 major U.S. cities. Changes in prices of goods
and services since that time would require a range of $2,932 to $3,676
in the same areas in the spring of 1967.) . .
In the absence of benefits from an employer retirement plan, work-
ers are left to their own devices to supplement social Security to an
acceptable standard of living. Where a plan is in operation, a living
standard beyond that produced ºf security and the retirement
plan is also the private affair of the individual.
An appropriate corollary question in assessing public policy for old
age financing is: Assuming that the Utopian goal of continuing
the pre-retirement living standard is unrealistic and further that the
subsistence level is now generally assured by government programs,
how can more of our aged citizens be assured the modest level now
enjoyed by most retiree beneficiaries of private plans?
83–200—68—pt. 1–14
192 OLD AGE INCOME ASSURANCE—PART I
Increase Social Security?—One answer is to expand the social se-
curity system to the point where benefits would provide a modest level
of living rather than a subsistence level. Some social planners seem
to favor this approach. Other students of old age financing are un-
alterably opposed to such a suggestion. Perhaps the most compelling
argument against such an expansion is that the basic structure of the
system probably could not support such a demand. Social Security is
not a true insurance arrangement where each individual’s payments
are held in reserve for his future use; instead it is a system of transfer
payments where payments made by and on behalf of today’s workers
are being used for the current support of today’s retired population.
Today’s workers will in turn be supported by the payments made
by tomorrow's work force. The ability of the system to fulfill its sup-
port commitments at any given time is dependent on the delicate i.
ance of three factors: the ratio of retired beneficiaries to the workin
population, the amount of dollars required for retiree support, an
the willingness and ability of workers to assume the obligation of pay-
ment in return for the federal government's promise that tomorrow's
work force will do the same for them. . X-
Whenever one of these factors gets out of line and upsets the bal-
ance, some compensating adjustment must be made. For example,
when benefits fall below the desired level or when the number of
beneficiaries suddenly increases, the system requires more dollars for
current benefits and must increase tax rates or the taxable wage base,
or both. As long as the economic climate is such that the workin
force is able to provide the additional revenue, balance is restored an
the system remains healthy. But if a severe depression should occur,
or the ratio of the population over age 65 to the working population
should increase beyond present expectations, the capacity of the work
force to increase payments for the aged would be seriously affected
at a time when demands for benefit payments could be expected to
increase. The likely solutions to maintaining the system under such
conditions would be to reduce benefits or seek funds from general tax
SOUII’CeS. - - -
Expansion of social security to provide a modest level of living
wif put increased pressures on the system and could destroy the
balance mechanism to the point of endangering the basic floor of
protection it now provides. - . - .
Ea:pand private retirement plans?—Theoretically, at least, this is
one of the recommendations of the President's Committee on Cor-
porate Pensions and the subject of much discussion in both govern-
ment and private circles. - - . -
Expansion of coverage under private plans is continuing with about
a million workers added to plan rolls each year. However, the work
force is growing by approximately the same number every year so that
little if any progress is being made in reducing the number of persons
without pension coverage. - - - -
A forecast of the future spread of retirement plan coverage must
take into account the characteristics of the principal groups of per-
sons not covered. Exhibit C identifies these groups, their numbers, and
their prospects for coverage.
OLD AGE
INCOME ASSURANCE—PART I 193
EXHIBIT C.—WORKERS CU
RRENTLY WITHOUT PENSION COVERAGE–WHO ARE THEY! How MANY ARE THERE!
AND WHAT ARE THE PROSPECTS FOR THEIR COVERAGE” - .
Who are they?
How many?
What are the prospects for coverage?
Unemployed--------------
Unpaid family workers.----
Government workers------
Self-employed------------
Agricultural Workers-------
Wage and salary workers
in private nonagricul-
tural industries.
3, 456,000
1,403,000
1,445,000
8, 490,000
1,492,000
25,741,000
As a class, this group will probably never '...} for pension coverage since
even the nearly universal coverage of social security does not provide
coverage for periods of unemployment. The fundamental problem is to
transfer workers from this category to a gainfully employed group. .
This group—also largely without social security coverage—is a marginal
art of the labor force at best. With the possible exception of individual
ax incentives which might # to forms of income other than “earnings
from work,” it appears unlikely that this group will ever be eligible for
pension coverage—certainly under existing conditions their prospects are
virtually nonexistent.
Many of this group are employed by small local governments where coverage
is generally available by voluntary participation in an already established
State-operated system. Also included in this group are a few persons who
for various reasons do not qualify for participation in the programs of the
government agency for which they work. The coverage prospects for the
group as a whole are reasonably good.
This group is composed of 2,307,000 self-employed persons in agriculture
and 6,183,000 self-employed in nonagricultural industries. -
The self-employed have been "potentially eligible” for pension coverage
since the enactment of special legislation in 1962. Although 20,000 plans
were approved by the end of 1965 only about 30,000 persons are covered. .
However, the machinery for coverage is now available and individual coverage
.." increase in volume as master and prototype plans become avail-
3Dłę. -
A major deterrent to the growth of self-employed coverage has been the fact
that their tax incentive is considerably less than that enjoyed by employees
of corporations. Legislation to eliminate this discrimination was enacted in
1966.
A sizable portion of this group is º by the 2,300,000 self-employed
farm operators who are now eligible for pension coverage. As such they
could be covered by plans established by their employers in the same man-
ner as agricultural workers who are employees of corporations. However,
from a realistic viewpoint, the agricultural worker group will probably
never attain a high level of pension coverage because of the itinerant
nature of many farmworkers. º s
This group accounts for the balance of all workers presently without pension
coverage. Its number is currently being reduced at the rate of approxi-
mately a million each year who are added to the rolls of “covered" em-
ployees. However, the total labor force is growing at a roughly equal rate,
about a million persons annually. So in effect, while the number of persons
with coverage is increasing, we are standing still as far as reducing the ,
number not covered.
The available data on pension coverage do not indicate whether the approxi-
mate million persons being added each year results from the establish-
#. of new plans or from additional employees covered under existing
3||ſ|S.
|t º: generally agreed that smail º groups are at a serious dis-
advantage in establishing retirement plans—from the standpoint of cost.
of establishment and cost of administration. As a result, it is assumed that
the number of persons without pension coverage includes a high propor-
tion of workers employed in small employee #. The latest figures
available (for 1956) indicate that 44 percent of all persons employed at that
time worked for firms with fewer than 100 employees; 36.2 percent work
for firms with fewer than 50 employees. Of all employers paying social
. taxes in early 1962, over 90 percent employed fewer than 20
WOTKelſ S.
That portion of this group of nearly 26,000,000 workers who are employed in
very small business operations may never attain pension coverage under
existing legislation. There is an evident need for further study and develop-
ment of association plans, community plans, individual tax incentives,
industrywide plans, etc., to provide new methods for private coverage of
small employee groups. .
Note: At the end of 1965 a total of 42,027,000 workers were without pension coverage.
In a free economy, there will always be businesses that will not
voluntarily provide retirement income, or that cannot afford to do so.
There will always be transient and marginal workers who willingly
work for such employers and who prefer current to deferred income.
There will always be many part-time and temporary employees. These
groups tend to distort the statistics as to how many workers are not
covered by private plans at any time. The problem is that many in this
194 OLD AGE INCOME ASSURANCE—PART I
group can, by their own efforts and through the passage of time, trans-
fer to other groups. The number of workers not covered by a plan at a
specific date is not a true measure of how many will reach retirement
without having been covered by a plan. - . -
With respect to the single largest group, the 25% million nonagri-
cultural workers, it should be recognized that many of these persons
work for employers of smaller average size than those which operate
plans today. It is likely that progress will be particularly slow among
business firms of limited size. At least three reasons can be cited for the
small employer's reluctance to establish plans:
1. He tisually has less reason for maintaining a program of retire-
ment benefits for employees than the larger organization has. The
competitive influence of pensions in hiring and holding employees has
not been significant among Small companies. - - -
2. Many of the advantages in sponsoring retirement programs do not
apply to the Smaller employer, or at least he does not recognize them as
advantages to himself. - .
3. The present cumbersome procedures for qualifying and maintain-
ing plans are not justified for the few employees involved. -
The encouragement of private efforts to put aside funds for retire-
ment has been a point of national policy for many years. The prin-
cipal expression of this policy has been in the form of federal tax
incentives. This device has been particularly successful among large
employers. More recently the principle has been extended to self-em-
ployed individuals on a modified basis under the Smathers-Keogh
legislation. In addition, tax-sheltered annuities are permitted for em-
ployees of not-for-profit organizations and public schools. -
Perhaps because so much of the successful spread of private retire-
ment plan coverage has occurred since the enactment of tax legislation,
there is a tendency to assume that tax incentives have been an essen-
tial factor in the growth rate. What are these tax incentives? Who
receives the benefit of them? And what role do they play in encour-
aging employers to institute plans? Answers to these questions may
indicate future trends in the growth of private plan coverage.
A company does not initiate and maintain a retirement plan because
it receives a tax deduction for its contributions, since the same tax
deduction would be permitted for the same amount of money paid in
wages. Employer motivation for retirement plans in most cases is for
reasons completely apart from tax considerations. The reasons may
include need for an orderly method of removing the too-old workers
from the payroll, creation of a sense of employee security and morale,
competitive advantage in the labor market, and a form of extra com-
pensation for long service. The employer may, however, be influenced
in his decision by the tax advantages his employees would realize on
money put aside by the employer in qualified retirement plans.
"Because of the combination of employer and employee objectives,
companies are willing to start retirement plans. There is nothing that
prevents the employer from paying pensions from current income as
they come due; this is the course of action followed with an unfunded
plan. Usually a company chooses to fund its liability in advance for
a variety of reasons. For example, the company wants to guarantee
that money for pensions will be available when needed; it also recog-
nizes that its liability will grow as time passes; and it prefers to ex-

OLD AGE INCOME ASSURANCE—PART I 195
pense pension charges to income received from the results of the work
that created the charge. ; : - .
| Even before the advent of pension tax legislation, retirement plans
were started and ways found to fund in advance for their costs. After
permissive tax legislation was introduced, restrictions and regula-
tions were gradually added that prescribed limits in terms of the
group covered, the type of benefit, the amount of contribution, etc. The
employer must observe all these restrictions if the contributions he
makes to the retirement fund and the earnings on accumulations are
to be tax free to employees until received in the form of benefits. It
should be kept in mind, however, that this tax advantage to employees
increases as the effect of income taxes increases.
... The preceding comments have attempted to answer the questions of
who receives the benefit of tax incentive legislation and what role
does it play in the employer decision to initiate qualified retirement
programs. A third question deals with what are these tax incentives?
And what is their practical effect? - -
The tax advantage enjoyed by employees under qualified plans is
twofold: first, deferment of income tax on employer payments in their
behalf and second, deferment of income tax on earnings of the fund
during the accumulation period. Payments from qualified plans are
taxable income when received. -
The effect of tax deferment can be illustrated by comparing the net
retirement income produced by a qualified plan with net income from
a personal Savings program. As an example, assume two young men
each age 30 who work for different employers. The employer of
Employee A established a retirement plan and contributes $500 an-
nually on his behalf until he attains age 65. Employee B's company
elects to give him a $500 annual pay increase instead, from which
Employee B sets up his own retirement income savings program.
Assume further that the two workers are in moderate tax brackets
and that their highest taxable income dollars are subject to an effective
rate of 20% and that investment earnings on both retirement income
accumulations average 5% annually.
At retirement age, the value of Employee A's tax-free accumulation
is $47,418 ($500 contributed yearly for 35 years with 5% annual earn-
ings) while Employee B's after-tax accumulation has grown to $30,639.
The effect of taxes has eroded his savings in two ways: his $500 salary
increase provides only $400 for saving after payment of taxes, and
his 5% annual earnings are equivalent to 4% º: taxes. Employee A,
however, now has to pay taxes on his fund. If he receives the money
in a single, lump-sum payment in one tax year following termination
of employment, his income tax (assuming present rates, a joint return,
and no other taxable income) would be about $6,218 if both he and his
wife were age 65 or over. This leaves a net $41,200 of retirement income
compared with Employee B's $30,639, or nearly a third again as much.
If, instead of a single sum of money, the two accumulations are con-
verted to straight life annuities, Employee A's fund would buy about
$4,500 of annual income, while Employee B's would buy about $2,900.
Again, Employee A's $4,500 would be included in full in taxable in-
come, while Employee B's would be includable only to the extent that
it exceeded his investment in the contract. If the annuities received by
the two employees are their only taxable income, Employee. A would
196 OLD AGE INCOME ASSURANCE—PART I
pay approximately $240 a year in taxes while Employee B's deductions
and exemptions would probably more than cover the “taxable” portion
of his annuity. Expressed as a monthly retirement income #. life,
Employee A would receive $355 compared with Employee B's $240, or
about a 50% higher monthly income.
The advantages of tax deferment to individuals is obvious from the
above illustration. Yet the individual has little, if any control over
whether his retirement savings are to be tax deferred or tax paid—ex-
cept, of course, to seek a career with an employer who provides the
advantage. -
A Universal Approach?—It appears that universal coverage of
workers under private retirement plans that will ensure a modest level
of living in retirement is not likely to be achieved under the existing
system of tax incentives for employer-sponsored retirement plans. To
achieve this goal, we must look for avenues outside the employment
relationship. We must seek some form of tax equality for individuals
who work for corporations, for small employers, or for themselves.
If public policy recognizes the accumulation of retirement income
through the employment relationship as a social aim worthy of en-
couragement by special tax treatment, is not the accumulation of retire-
ment income outside the employer-employee relationship equally
worthy? A program for extending an incentive for building retire-
ment income through private sources should be based on the following
characteristics. . -
1, Universality.—There must be one system that permits equal op-
portunity for all income producers to accumulate retirement income—
whether they work for a corporation, a government entity, a not-for-
profit institution, a sole proprietor, a partnership, an individual, or
are self-employed. . . . . .
2. Equality.—Because tax incentives produce a form of subsidy only
for those who take advantage of them, they should be available to tax-
payers on a relatively equal basis. Equality cannot be achieved through
programs restricted to the employment mechanism where the indi-
vidual worker is dependent on the actions of his employer to realize the
full advantage of special tax treatment accorded deferred retirement
income accumulations. Therefore, the incentive should be equalized
through tax adjustments for the individual universally applied.
3. Simplicity.--Even if a suitable mechanism is available, its use
may be severely limited unless the arrangement operates in a simple
manner. The need for simplicity in turn requires a single measure
of tax deferment. -
4. Flexibility of Choice.—Any universal mechanism must have a
structural flexibility to allow a variety of objectives of individuals in
vastly differing circumstances to be met through a wide choice of
methods and rates of individual savings. The greater the flexibility,
the wider the appeal to the largest number of persons. - t
5. Economy.-Maximum incentive for private retirement income
accumulation will result only from a program that permits personal
retirement objectives to be met at the lowest possible cost in time and
money. .
If ão objectives of maintaining private systems of retirement in-
come are judged worthy of encouragement through tax incentives
and if the characteristics outlined above appear to be appropriate
OLD AGE INCOME ASSURANCE—PART I 197
guidelines for achieving the objectives, it would seem that such an
alternative source of old-age income should be thoroughly explored
and appraised. There should be no hesitation about conducting such
an exploration on the grounds that it represents a substantial de-
parture from the present form of private retirement systems.
IV. AN ALTERNATIVE APPROACH TO OLD AGE INCOME
The most obvious barriers to the maximum effectiveness of present
tax policy as an incentive for the accumulation of retirement income
are the absence of simple, economical arrangements for encouraging
small employers to establish retirement plans and the absence of any
incentive for individual saving for retirement outside of the em-
ployment relationship. * - -
What course then might federal tax policy take to remove these
barriers and encourage accumulation of retirement income? If tax
incentives are considered a desirable method of encouraging private
initiative to provide the funds required to support the aged Sector of
the population, the universal tax incentive described in broad terms
below, may merit consideration by federal tax planners.
The philosophy underlying the universal tax incentive is simply
this: that all workers should be provided comparable tax incentives
to accumulate funds for retirement—whether the source of those
funds is the taxpayer's employer, his own wage or salary, his earn-
ings from Self-employment, or any combination of sources. Such
equity of tax treatment and incentive might be achieved through legis-
lation that would need to be concerned with only three major points:
1. Calculation of the tax deduction; -
2. Control of funds during the “holding” period; and
3. Payout of the funds. . . *
Mechanics of the legislation might follow these general directions.
The taa, deduction.—Permit each taxpayer to have a tax deferment
of up to x.9% of his gross annual income, set aside for retirement,
subject to Some dollar maximum that would provide an appropriate
level of living in retirement. Also, permit the taxpayer to save addi-
tional amounts to “catch up” for the past years of his working career
when no deductions were available. Tax deferment for savings for the
“catch up” years would be spread over the period remaining to retire-
ment. The allowable tax deduction in any year would be the x9% of his
gross annual income used to purchase Retirement Certificates by the
individual or his employer, or if larger, the amounts contributed to
a qualified plan by the employee or his employer in his behalf for both
current and past service. Any difference between the employer's con-
tribution and the x9% deduction could be taken by the taxpayer as a
deduction from gross income in the current year. - - -
The application of the allowable deduction could be effected solely
through the individual's tax return. Supporting evidence would be
coupons evidencing contributions for Retirement Certificates by the
individual or by his employer. Contributions to a plan qualified under
section 401, or tax exempt under section 403, of the Internal Revenue
Code would be evidenced by a statement provided by the employer
accompanying form 1099. This would report contributions by the
employee and contributions by any employer to such plan used to

198 OLD AGE INCOME ASSURANCE—PART I
purchase individually identifiable retirement benefits, if any, or the
actuarial value of retirement benefits earned by the individual, such
value of benefits to be determined in accordance with standards to
be established by the Internal Revenue Service as to the dollar value
of benefits provided (e.g., six times the amount of benefits earned).
Control of funds.-A system for holding funds in an acceptable de-
pository would be required. The prime concern would be assurance
that the tax-free funds would remain on deposit until the individual’s
retirement. An appropriate vehicle, for example, other than devices
presently defined by legislation, might be a series of Retirement Cer-
tificates, bearing a maturity date coinciding with the taxpayer's 60th
birthday, issued as evidence of the taxpayer's bona fide retirement
saving. Such certificates could represent actual investment in govern-
ment obligations, common trust funds, insurance contracts mutual
fund shares, or special funds created for the purpose by responsible
fiduciary institutions. Government approval of the issuance of Retire-
ment Certificates by any investment medium would be automatic
approval of the investment by the taxpayer. The choice of investment
would be at the option of the taxpayer, or his employer in the case of
company contributions. -
Payout of funds.--Funds would be paid out at any time after retire-
ment at age 60 or later, or at the death of the taxpayer, but distribution
should commence no later than age 70. Funds could also be released on
proof of total and permanent disability, without adverse tax
consequences. . .
Funds paid out on matured Retirement Certificates would be tax-
able as ordinary income when received. In the event of the death of
the taxpayer, some form of “averaging” could be applied to reduce the
tax impact on a large accumulation becoming payable in one year.
Married couples could be permitted to own Retirement Certificates in
joint tenancy with proceeds taxable as ordinary income until the
death of the last surviving spouse. If Certificates were cashed before
ºrity (except in case of death or disability), a tax penalty would
result. - - - . - -
Under the simplified type of legislation described above, a retire-
ment accumulation plan could be initiated by either an individual or
by an employer, or both, to the limit of each taxpayer's maximum
allowable deduction. An arrangement of this kind would offer a num-
ber of advantages to employers, particularly small unincorporated
employers. For example, it would: .
1. Eliminate the necessity for the complicated machinery for
“qualifying” a retirement plan since— . .
- a, the question of “discrimination” is nonexistent if all tax-
payers are permitted the same tax treatment for either employee
or employer payments on an equal basis and
b. the system of Retirement Certificates would automatically
guarantee compliance with the principles of present tax law
regarding both insured and noninsured funds. -
2. Simplify administration of the retirement program.
3. Justify retirement of unproductive older workers.
4. Promote the mobility of manpower.
OLD AGE INCOME ASSURANCE—PART I 199
Relationship to traditional “qualified” plans.—Such a retirement
accumulation plan is not intended as a replacement for the qualified
pension or profit sharing plan. Rather it is suggested as an extension
of present tax policy to provide an incentive vehicle for the benefit of
those millions of workers whose employment pattern is unlikely to
ever produce retirement income coverage. Therefore, the Small em-
ployer considering the adoption of a retirement plan should be aware
that the advantages of such a retirement accumulation plan are offset
by disadvantages, when compared with traditional qualified plans.
Principally these are: - . . . . . .
1. Employer contributions would have to be fully vested immedi-
ately, with the result that a disproportionate share of the employer's
funds would be spent for employee retirement benefits for short-service,
non-career workers. - - - . . . .
2. The arrangement virtually precludes a fixed-benefit type of re-
tirement plan—therefore the income produced for older employees
during the early years of the plan might be inadequate to justify
enforced retirement. . -
3. In the long run it may be a more costly method of providing
retirement income than the qualified pension plan since investment
gains and earnings would accrue to the employee, and there would be
no offset for employee terminations. -
Some of the effects that such a retirement accumulation plan would
have on qualified plans include: -
1. Some of the employee relations value of an employer-sponsored
qualified plan might be dissipated if the employee could obtain the
same tax advantage on his own accumulation plan. This effect would
be partially offset to the extent that the employer contribution repre-
sented an increase in total compensation. - -
2. Vesting would become almost universal since employees would
resist having their “deduction” in any other form. To avoid the admin-
istrative expense of immediate vesting for short-term employees, quali-
fied plans would probably require a service eligibility period for
participation. : - - -
3. Accelerated funding policies would almost surely result in view

of the greater vesting of employee rights. - … . . . .
4. Encourage “portability,” since the benefit of such a retirement
accumulation plan is attached to the individual rather than to a job.
The principal advantages that the qualified retirement plan would
retain over such a simpler form of retirement accumulation are these:
1. The employer could design his retirement income program to pro-
vide a fixed benefit in relation to the total period of service rendered
by the employee, rather than in terms of a sum of money which might
or might not provide the level of benefit in keeping with the employee's
contribution to the business. . -
2. The benefit amount could be related to earnings during the final
period of employment rather than to earnings during the actual years
of participation. - - -
3. There would be greater flexibility in funding benefits under
either a traditional qualified pension or profit sharing plan than en-
visioned under such a retirement accumulation plan.
200 OLD AGE INCOME ASSURANCE—PART I
IMPLICATIONS OF A UNIVERSAL TAX INCENTIVE FOR PUBLIC POLICY
The desirability of adequate old-age income is a generally accepted
fact. The question for public policy is whether an increase in the as-
surance of such income is worth the potential revenue loss, particularly
in the early years of a tax incentive program. The aggregate amount
of tax loss that might result from legislation authorizing universal
tax incentive is difficult to anticipate since the loss would be dependent
on the degree to which American workers are willing, or can be per-
suaded, to divert current income to long-term retirement saving. There
is the added question whether such a tax incentive would encourage
people to save more than they are already saving, or would it merely
provide favorable tax treatment for present saving resulting from
transfer from present forms to tax-favored forms at present rates
of savings? Unless there is added saving, there is no increase in re-
tirement income other than tax saving. . . . . . .
It is also important to emphasize the question this concept raises
as to present inclusion in taxable income of the amounts that an em-
ployee contributes to social security or to a private retirement plan.
At the present time all employee contributions are made from after-
tax income. The benefits from social security and the employee's con-
tributions to a private plan are returned to him as nontaxable income.
An argument could be made that with, or without a universal tax in-
centive that reasonable accumulations for retirement by an individual
should be made from before-tax income, with benefits received taxable
as proposed herein for the retirement certificates. The adjustments
in the tax impact on people with low retirement incomes would then
be handled through special exemptions or other forms of tax treat-
ment of income in old age. The only argument against this line of
reasoning is, of course, the resulting reduction of current tax revenue.
This concept of the universal tax incentive is not an innovation in
tax policy since in essence it represents the same concept that is ex-
pressed in the legislation dealing with the tax-sheltered annuity. If
it is sound policy for this segment of the working population, it would
appear to be equally applicable to a device made available to all
workers who, for reasons in many cases similar to the reasons justify-
ing the tax-sheltered annuity, should be permitted similar treatment.
While broader in application, this concept is similar in justification
to the Registered Retirement Savings Plan in Canada.
It is difficult to make even a rough estimate of the current tax rev-
enue loss that might result from a universal tax incentive. Any esti-
mate would have to include assumptions as to how many individuals
would participate; the degree of participation (up to the maximum
allowable or to some lesser degree); the level of participation (the
earnings from which savings are made); and the effective tax rates
on deferred saving. - - -
The minimum tax loss that would occur is that resulting from
deferment of income taxes on employee contributions to both private
and public employee retirement systems (excluding OASDI and Rail-
road Retirement). In 1965 employees contributed just under $4 billion
to such plans. If such contributions had been made from before-tax
income, the revenue loss would have been in the neighborhood of $0.8
OLD AGE INCOME ASSURANCE—PART I 201
billion, assuming an average effective tax rate of 20% on amounts
contributed.
\ . The most likely area for additional revenue loss to occur from
the operation of such retirement accumulations is the transfer of pres-
ent savings to the tax-deferred status envisioned under the universal
tax incentive. This is particularly true of those long-range savings of
individuals that are earmarked for providing income in old age, with
the exception of Savings in the form of home ownership.
Present forms of savings most susceptible to transfer would prob-
ably include tax-exempt state and local government securities ($2.4
billion in 1965), U.S. Government savings bonds ($0.6 billion in 1965),
savings shares ($9.3 billion in 1965), and investment company shares
($2.1 billion in 1965). This is not to imply that all, or even a substantial
portion, of these forms of current saving would be deferred under
retirement accumulation plans. The shorter-term forms of Savings
(such as time and demand bank deposits, preferred and common
stocks, and other U.S. Government obligations) would be less likely
to be transferred.
There is no question but that the universal tax incentive would
have its greatest appeal to individuals in the higher tax brackets, both
because of the greater effect on savings through tax deferment and
the generally increased ability of such individuals to undertake long-
term saving. This conclusion presumes that individuals are in high
tax brackets due to any one, or a combination, of several circumstances,
including: “high” income level, marital status, lack of deductions, and
exemptions, and that each of these factors tends to effect simultaneous-
ly both the taxpayer's marginal tax rate and his financial ability to
SãWe. -
The current revenue loss on amounts saved is not the sole consider-
ation. A continuing revenue loss would occur on earnings of such re-
tirement savings during the accumulation period. It should be noted,
however, that the revenue “loss” would not include a loss resulting
from fund earnings on present contributions by individuals to private
and public employee retirement plans, since taxes are already deferred
on such earnings. Nor would there be revenue “loss” resulting from
earnings on Savings diverted from U.S. Government savings bonds and
tax-exempt securities of state and local governments, since taxes on
savings bond earnings may be deferred until redemption and earn-
ings of state and local government securities are tax-exempt. --
The revenue losses that would occur because of tax deferment on
contributions to such retirement savings arrangements and on the
earnings during the accumulation period would, of course, be offset
by increased tax revenues on funds released as retirement income.
The effective tax rates of such future revenue recoveries may not be
substantially lower than the rates at which the revenue losses occurred.
Changes in marital status and deductions that tend to accompany the
later years may have the effect of maintaining relatively stable effective
tax rates, despite lower income. And the net difference in effective
tax rates at time of loss and time of recovery may be less for high-
bracket taxpayers due to the wider range of income taxed at specified
rates, and to the fact that such individuals may have amassed sub-
stantial income-producing assets for use in their later years.
202 OLD AGE INCOME ASSURANCE—PART I
The effect of current revenue loss and the future offset by additional
revenues can be illustrated by the tax consequences that might result
from a given dollar amount of tax-deferred saving. For instance,
if a taxpayer Saves $1,000 annually for twenty years under the uni-
versal tax incentive described and if he earns 5% a year on his savings,
the before-tax value of his accumulation after twenty years will be
$33,065.95. But if $1,000 is “saved” each year by the same taxpayer
under present tax rules, the federal government would collect a total
of $5,306.60, during the twenty-year period, assuming effective tax
rates of 20% on amounts saved and 10% on earnings. (A lower tax
rate is assumed on earnings because investment income from various
forms of long-term savings currently is not subject to the full im-
pact of taxes, e.g., earnings on U.S. savings bonds and tax-exempt
securities, and appreciation on equities.) This represents the “current
revenue loss” that the federal government would incur on comparable
Savings under the universal tax incentive. - - -
&
Under the universal tax incentive accumulation, however, the full
amount of accumulated retirement savings would be taxable when re-
ceived as retirement income. If a 10% effective tax rate is assumed
(because of additional exemptions and reduced income) on funds re-
ceived over a fifteen-year payout period, the probable tax recovery
would amount to $4,652.51. This amount would reduce the earlier
revenue loss to $654.09. However, additional tax revenue would be
“lost” on earnings of the declining fund during the payout period of
approximately $1,306,55, which would in turn increase the revenue
º during the combined periods of accumulation and payout to
1,960.64. . . -
Under existing tax rules on personal saving, the value of the twenty-
year accumulation described above would be $25,097.14. The difference
between this amount and the $33,065.95 that would accumulate under
a tax-deferred arrangement would produce total additional after-tax
income of $7,631.25 over the fifteen-year payout period assumed. Thus
each dollar of tax revenue lost by the federal treasury would generate
an eventual $4.00 of retirement income. .
The foregoing illustration makes no provision for interest on cur-
rent revenue losses sustained by the Treasury Department, since it is
assumed that such revenue losses would be replaced by additional
revenue from other sources rather than by Treasury borrowing,
A universal tax incentive is not suggested as a perfect solution to
the entire problem of assuring adequate income for the aged citizens
of our nation—nor is it intended as a replacement for the existing
forms of qualified pension and profit sharing plans, and other tax-
favored devices. It is offered instead as a stimulus to widen the horizon
of thinking about old age financing. - -
CoNCLUSIONS
The conclusion of the President's Committee on Corporate Pensions
that “private pension plans should continue as a major element in
the nation's total retirement security program” seems to reflect the
majority opinion of people in government and industry. This review
of the background, history, current status, and outlook for the future
of the private retirement system appears to support this conclusion.
DATE DU;

OLD AGE INCOME ASSURANCE—PART I 203
However, there is one deficiency of the private retirement system
which will not be overcome by the processes and changes in the system
that might develop through forced action, such as have been proposed,
or through voluntary action, such as might come in the normal future
development of the system. This deficiency is the apparent inability
of the private system, as presently structured, to achieve universality
of coverage.
Thus, in answer to the challenge of the Joint Economic Committee
of the Congress of the United States to view these problems from a
system-wide standpoint, it seems important to recognize this essential
deficiency in the private system.
If “public policy should continue to provide appropriate incentives
to private plan growth and by improving the basic soundness and
equitable character of such plans set a firmer foundation for their
future development,” then it follows that devices which could correct
this deficiency should be widely explored. There should be no reluc-
tance to consider changes necessary to achieve the fulfillment of agreed-
upon basic public policy.
It is toward this objective that the device described herein is sug-
gested as an illustration of one alternative for consideration. It is
interesting to note that such a basic change in the private system
emight in itself, by reason of its characteristics, effect many of the
other changes proposed as necessary for improvement of the private
system. The nature of a change, such as adoption of a universal tax
incentive with the tax privilege related directly to the individual tax-
payer rather than limited to application through the employer-em-
ployee relationship, would appear to lead to the natural achievement
of the goals of portability, vesting, and adequate funding without the
need for specific mandatory regulation of private plans to achieve
this result. an
While this is not intended to presume a final answer, it is hg, e.
that it will sufficiently illustrate the possibility of extending the
wate retirement system to produce the characteristic of univers
to warrant further exploration and consideration by those conce
with the determination of public policy for the entire area of re
ment income. *,
The objectives of such efforts should be to develop a better way:
1. To encourage individuals to accumulate funds for their own re-
tirement; to encourage employers to assist their employees to pro-
vide for their own retirement income; and to encourage employers to
provide funds for their employees’ retirement income.
2. To provide equity among all groups of taxpayers by extending
to all the same opportunity to accumulate tax deferred retirement
funds.
- 3. To preserve freedom of choice and action for individuals and
employees in meeting their own needs and preferences in the provision
of retirement income.
O
IVERSITY OF MICHIGA
Millilull