tinue in the same manner and to the same extent as if these amendments had not been enacted.

Approved October 11, 1962, 9:30 a.m.

LEGISLATIVE DIRECTIVE

Mr. MACY. That legislation calls for an increase in the annuitant rates based upon a cost-of-living formula and the money here is necessary in order to cover the increased payments resulting from that legislation.

As required by law, estimates of the appropriation necessary to finance the fund on a normal cost-plus-interest basis are included in the document before you. However, an appropriation request for this amount is not being made.

The request is limited to the additional funds that are necessary to meet the incremental cost involved under the statute passed in 1962. Senator SALTONSTALL. One question, Mr. Chairman.

Senator MAGNUSON. Yes.

LIABILITY UNDER LAW

Senator SALTONSTALL. Am I right in saying that if you did put that money in that it would be $38 million-I am reading from page 146 of your detailed report.

Mr. MACY. NO, $32.6 billion is the liability in the retirement fund

Senator MAGNUSON. I might observe that when I started with this committee it was $9 billion and it is now $32.6 billion.

Mr. MACY. Yes; the normal cost plus interest would be approximately $1 billion.

Senator SALTONSTALL. Mr. Chairman, I am sorry to interrupt again, I see that I had a misunderstanding there off the record. (Discussion off the record.)

LONG-TERM FINANCING OF RETIREMENT FUND

Mr. MACY. You will recall that when we appeared before you a year ago, we had a rather lengthy discussion of the legislation which the Commission was proposing for long-term financing of the retirement fund. There have been hearings on that legislation before the Senate Post Office and Civil Service Committee. However, no legislative action has been taken up to the present time.

It is the position of the administration that legislation of that type is necessary in order to maintain this fund in a satisfactory condition to meet the long-term needs for financing.

Senator MAGNUSON. How much has the figure gone up from last year you say $32.6 billion?

Mr. MACY. Normally it would be about $1 billion a yearSenator MAGNUSON. It goes up about $1 billion a year, then? Mr. MACY. That is due to the failure to replace the interest lost. Senator ALLOTT. We have here what is supposed to be a funded liability of the Government, have we not?

Mr. MACY. An unfunded liability. Right.

Senator ALLOTT. I thought it was supposed to be funded.

Mr. MACY. The liability I am referring to is unfunded.

Senator ALLOTT. It is unfunded, but it is supposed to be funded, is that right?

Mr. MACY. Correct.

APPROPRIATION FOR FUND ON ANNUAL NEED BASIS

Senator ALLOTT. Now, since we are in an inflationary pattern and have been for over 30 years, and since this has not been funded, does it not make more sense to forget about the funding of this thing and merely make the appropriations, year by year, to take care of these obligations. You would then be making the appropriations, year by year, in the deflated value of the dollar which we are dealing with each year. Has consideration ever been given to this thought?

Mr. MACY. If I understand your proposition, this would mean that the fund would be exhausted by 1989, and it would be necessary to make direct appropriations at that time of a figure in excess of $1 billion in order to meet the then current demands upon the fund.

Senator ABBOTT. Yes; and I am assuming that between now and that time it will be necessary for the Congress, through this devaluation of the dollar which is occurring daily and has for over the last 30 years, and we have to admit it, to increase the amounts that are paid to these people, so why does it not make more sense to forget about the funding and to make direct appropriations, year by year, for the amount that is fixed for these people?

Have they ever given consideration to that?

Mr. MACY. Oh, yes

Senator MAGNUSON. Off the record. (Discussion off the record.)

AMOUNT REQUESTED FOR INCREASED COST

Senator SALTONSTALL. It has been called to my attention that this figure on page 146 of $38 million is to pay for the increased cost due to increased salaries and so on, and this other figure that I referred to of $32,653 million is on page 152-and I wonder if the record is correct in that respect?

PROVISIONS OF KAPLAN REPORT

Senator MAGNUSON. What is the name of the report that we had on this?

Mr. MACY. The Kaplan report.

Senator MAGNUSON. We had that before us. And we went through it from A to Z.

Mr. MACY. That calls for a financing plan which would be based on normal cost plus interest.

Senator MAGNUSON. Plus interest?

Mr. MACY. Yes. And really what we are proposing is basically the same thing and is financed by increasing the Government contribution one-half percent a year until it moved up to

Senator MAGNUSON. I never could get any too excited about the interest idea because, in effect, aren't we paying ourselves? Aren't we paying that interest to ourselves?

Mr. MACY. Well, yes. The funds are invested in interest-bearing securities that produce additional income. The fund receives its income from Government contributions and employee contributions and the interest on the invested funds. As long as the funds stay at a depressed level, the amount of income that comes from interest is

Senator MAGNUSON. Treasury invest it in their own bonds?
Mr. MACY. That is right. They are required to do that.
Senator MAGNUSON. It is in their own bonds.

Mr. MACY. In U.S. securities.

Senator MAGNUSON. And they vary from time to time so that that would be reflected in the interest that they would have to pay back to themselves-it is kind of a complicated thing.

Mr. MACY. It is, indeed, Mr. Chairman.

Senator SALTONSTALL. Mr. Chairman, may I ask another question? Excuse me for interrupting.

Senator MAGNUSON. Surely, Senator.

PURPOSE OF 1965 REQUEST

Senator SALTONSTALL. On page 147, Mr. Macy, in the first paragraph, what you are telling us in substance is the amount of $65 million included in this request is your estimated amount of such payments as you are going to be out-of-pocket in 1965. Is that correct?

Mr. MACY. That is for the incremental amount authorized by Public Law 793.

Senator SALTONSTALL. Thank you.

Mr. MACY. Under the existing legislation it is necessary for us to secure special appropriations for increases of that type. This is the so-called Thomas rider. The request here for $65 million is to cover that particular incremental amount in accordance with that rider. It is pegged to the increases in annuities authorized by that law.

Senator SALTONSTALL. Yes; but that is what the Government pays out in actual cash as its share as opposed to building up any annuity

ANNUITIES INCREASE PERCENTAGEWISE

Mr. MACY. It is just because of the increases in annuities.
Senator ALLOTT. What was the increase?

Mr. MACY. The annuities were increased roughly by 3 percent in 1962 and the financing of that 3-percent increase is the $65 million. That is just the increase in annuities, not the full amount of the annuities. The basic amount will be financed out of the existing fund and out of income that is received through employees' contributions of 61⁄2 percent of salaries and the agencies' contribution.

SLOWER INCREASE IN FUND

Senator SALTONSTALL. So, to carry out what the chairman said, the fund would constitute the basis for payment?

Mr. MACY. At the present time the fund is still rising but at a reduced amount because the outflow is catching up with the intake. Our estimate is that the two will cross in the 1970's and after that, the outflow will be greater than the input and the entire fund will be exhausted by 1989, even though we continue to have 61⁄2 percent contributed by employees and 61⁄2 percent contributed out of payroll. Senator MAGNUSON. Well, maybe none of us will be left here then but somebody is going to have to do that.

Senator MONRONEY. You say, though, that the health program levels off. Why won't it level off in the retirement thing?

Mr. MACY. It will sometime.

Senator MONRONEY. After several years?

Mr. MACY. It will level off but we still have these tremendous obligations.

Senator MONRONEY. The 13 percent will not pay it out; is that correct?

Mr. MACY. No, sir. In any event, Mr. Chairman, you will have increased retirements as those who came into the Government in large numbers at the time of World War II begin to retire. It is sort of the same thing as the baby boom of the postwar years entering colleges. It is going to hit hard when we start getting 25 years beyond World War II.

Senator MAGNUSON. All right. Any more questions on this item? (No response.)

ADMINISTRATIVE EXPENSES

LIMITATION OF EMPLOYEES' LIFE INSURANCE FUND

Senator MAGNUSON. Now, the last item, the "Limitation on administrative expenses, Employees' Life Insurance Fund." That is $277,000 and I think that we understand that. There is a slight increase in that workload every year.

Mr. MACY. That is right. That is the group life insurance program. Senator MAGNUSON. Yes. Would you put in the record how many people participate in the life insurance program so that we will know that. You can do that later.

Mr. MACY. Yes, Mr. Chairman, all right.

(The information referred to follows:)

There were 2,525,000 persons participating in the life insurance program through June 30, 1963, which included 275,000 retired employees.

Senator MONRONEY. Let me ask one question there, Mr. Chairman, please.

Senator MAGNUSON. All right.

QUESTION OF COST OF ADDITIONAL BENEFITS

Senator MONRONEY. The contributions of the Government and of the employees make it possible, do they not, to increase the benefits without much additional charge on this life insurance program? Mr. MACY. Increase the benefits?

Senator MONRONEY. The benefits, yes.

Mr. MACY. Well, there would be additional cost to the fund if we were to provide additional insurance, additional cost to both the Government and the employee.

Senator MONRONEY. Well, has not that rate been cut back? I understood that the rate at which it started was sufficient to carry a greater amount of insurance than has been given. Have we increased it?

Mr. IRONS. No. At the time that the act was passed it was specified, I testified that the rate established by the Congress and the insurance benefits established by the Congress would carry that program for probably 25 years before there would have to be any increase in the premium rate.

Senator MONRONEY. I see.

Mr. IRONS. Any significant increases in benefits would have to be accompanied by an increase in the premium. Senator MONRONEY. Thank you.

EMPLOYEES UNDER HATCH ACT

Senator MAGNUSON. All right. One last question. The elections are rapidly approaching. Civil service employees are under the Hatch Act, and there is always some confusion as to what they can do and what they could not do. You will recall that the last time we discussed the general proposition of a bulletin or an interpretation by the Commission as to what employees could do.

Mr. MACY. Yes. We have followed that suggestion out and our current poster which is widely distributed and posted for Federal employees indicates what is permitted and what is prohibited, so that this should be clearer than it has been in the past. We also have a pamphlet that covers it.

Senator MAGNUSON. Would it be too long to put in the record? Mr. MACY. No, it is a single-page poster and we would be happy to have it in the record.

Senator MAGNUSON. All right.
(The poster referred to follows:)

FEDERAL EMPLOYEE FACTS-POLITICAL ACTIVITY-RULES FOR FEDERAL

EMPLOYEES

HOW POLITICAL-ACTIVITY RESTRICTIONS PROTECT EMPLOYEES

Federal employees who are a part of the Government's career civil service are protected by law from efforts to force them to render political service or tribute. This was not always the case. Federal employees derive this protection from the Civil Service Act, passed in 1883, which laid the foundations for the Federal merit system.

The Hatch Act, passed in 1939, goes further than the Civil Service Act. It provides in general that Federal employees cannot render political service that is, take an active part in political management or political campaigns-even if they are willing to do so.

Basically both these laws have the effect of insulating the Federal career employee against the effect of political considerations that might damage his job tenure. They are a protection to the employee against political "reprisals"which were the order of the day under the spoils system-because they eliminate grounds for such reprisals.

WHO IS SUBJECT TO POLITICAL ACTIVITY RESTRICTIONS

In general, employees of the Federal Government and the District of Columbia government, whether career or excepted, are subject to political-activity retrictions. Part-time and temporary employees are included.

A few specific exemptions are made, including the heads and assistant heads of departments, members of the White House staff, and officials who determine national policy and who are appointed by the President subject to Senate confirmation. There is a partial exemption for Federal employees who live in communities in the immediate vicinity of the National Capital, and in other communities the majority of whose voters are employed by the Federal Government (see. p. 6).

Some State employees are also subject to political-activity restrictions. They are employees whose principal employment is in connection with an activity that is partly or wholly financed by Federal funds.

WHAT EMPLOYEES MAY DO

These are some permissible activities with regard to politics:

You have the right to vote as you choose. Political-activity restrictions do not relieve a Federal employee of his obligation as a citizen to inform himself of the