In terms of providing adequate income in retirement, such projections, together with projections of social security benefits, indicate that we still have a long way to go in providing adequate retirement income for many older Americans. The future inadequacy of pension income for the retired can be illustrated, for example, by two charts which I have brought with me today. These charts are based upon the simulation projections which I discussed briefly before and were prepared for use by the Senate Committee on Aging.

Chart 1 shows the percentage distribution of total pension income projected for couples and single individuals in 1980. Given the existing institutional pension structure and certain minimum assumptions with regard to changes in these institutional arrangements in the next decade, a majority of the retired aged in 1980 will have pension income below any reasonable level of adequacy. Total pension income will be below $3,000 for about half the couples, and below $2,000 for more than half the single individuals.

Chart 2 shows the results of comparing total pension benefits at the time of a worker's retirement with his average earnings during the 5 years prior to retirement. For workers retiring between 1960 and 1980, simulation projections indicate that approximately three-fourths of the males and one-half of the unmarried females will have a ratio of pension income to prior average earnings of less than 0.50, that is, less than 50 percent. In fact, nearly onequarter of the married males have a projected ratio of less than 0.20.

45-800-70-8

CHART 2

FOR MOST RETIREES, PENSION INCOME WILL BE
LESS THAN HALF OF PAST EARNINGS

Projected Ratio at Retirement of Public and Private Pensions to Preretirement Earnings

Of perhaps greatest interest to this subcommittee is the implication from these projections that private pension plans would have to liberalize at a much faster rate if they are to fill in the gap between projected retirement pension income and anticipated retirement spending needs. This implies that pension funds would have to grow at rates greater than their current pace.

I have not dealt with the general economic impact of the current growth of private pension plans in my statement today. However, I have tried to show that any efforts to significantly improve the economic situation of older people by providing them with more adequate incomes through private pension plans are likely to significantly affect the aggregate impact private pension funds will have on the economy in the future.

There is no question in my mind that the current development and growth of private pensions is one of the major institutional changes occurring within our economic system. Once again, therefore, I would like to compliment this subcommittee for its pioneering work in this area and urge it to continue examining, as the facts become known, the economic significance of this growing sector of our economy.

Thank you for giving me this opportunity to appear before the subcommittee.

Chairman GRIFFITHS. Thank you, Mr. Schulz.
Mr. Schotland?

STATEMENT OF ROY A. SCHOTLAND, ASSOCIATE DEAN,
GEORGETOWN UNIVERSITY LAW CENTER

Mr. SCHOTLAND. Thank you, Madam Chairman. Pursuant to request, I wish to note at the outset that although I served until

last month as Chief Counsel of the Securities and Exchange Commission's Institutional Investor Study, the views I express today are entirely my own, have not been discussed with and cleared by the Commission or the study nor do they derive from nor, so far as I know, reflect the thinking at the Commission or the study. I will, especially in light of the bulk of my statement, try to reduce it as much as I can.

Chairman GRIFFITHS. Thank you very much.

Mr. SCHOTLAND. First, no new words or data are needed about the catastrophic insufficiency of funds available for such socially useful activities as housing, or for State and local government projects like schools and hospitals, or for inner city business enterprise. The severity of the problem, and our relative unresponsiveness to it, call less for further lawyerlike or economic analysis than for political leadership.

It is equally well known, and being valuably documented and analyzed by these hearings, that the funds held for pension plans are enormous and growing at a staggering rate. Private pension funds' aggregate assets were $126.2 billion as of the the end of 1969 according to last week's SEC release. I might point out that that is a $26 billion increase over the press release announcing these hearings. I do not think that indicates the rate of growth, though.

The growth rate of State and local pension funds has become even more rapid; their assets totalled $52 billion by the end of 1969.

With such vast funds available, identifiable, and enjoying the benefits of tax exemption, it is unsurprising that the call should arise to tap those funds for activities starved for new investment. And it is right to look to the pension funds for help: the only question is how to get that help. Bills have been introduced that would require private pension funds to invest prescribed proportions of their assets in housing investments.

Some noncompulsory steps have already been taken to draw pension plan moneys into such projects. We need more devices like the new mortgage-backed bonds of the GNMA to induce pension funds to invest in such projects and below I suggest legislative steps to be taken. But any legal requirement that pension funds buy certain kinds of investments will be bad for pensioners-today's and tomorrow's. It will undermine confidence in pensions and thus add to inflation. Moreover, the idea that pension funds must meet today's needs for investment in order to justify or "earn" their tax exemption, is new, strange, and hopefully will not recur.

Pension funds are tax exempt because, by their very existence, they are "socially useful projects." First, they provide for decent, dignified retirement-not only for today's old people, but for all of us when we become old.

Second, pension fund are perhaps the best machinery we have for increasing personal savings. Most people cannot save for themselves as well as they can by way of pension funds, because current needs and temptations tend to win out over the needs of future decades. However, if one focuses upon particular investment areas, espe

cially housing and State and local government projects, it is undeniable that pension funds do little and lately have been doing less.

Pension fund investment in housing is episodic at best. But most dramatic has been the pension fund's noninvestment in, or net liquidation of, State and local government bonds. Private pension funds, being tax exempt, are not even listed among the sources of funds for such securities in the last decade. State and local pension funds, although also tax exempt of course, for noneconomic reasons were large holders of State and local bonds but have been net sellers since 1960, cutting their holdings almost in half. Clearly, then, pension funds have not met the public sector needs for the society's basic infrastructure. The pattern of pension fund investment is clearly to avoid such fund-starved projects as low-cost housing and local gevernment financing, for the very reason that has kept others away from those projects: Those projects offer poor economic returns, badly below inflation-adjusted returns elsewhere. It is the obligation and the reason for being of the pension funds to earn good returns so as to help meet obligations to pensioners.

Pension funds simply must make high-yield investments: a 1-percent difference in yield earned on pension fund assets means roughly a 20 to 25 percent difference in ability to pay benefits, or in the employer's cost of paying the benefits. If pension funds are forced to make some low-yield investments, the funds' ability to pay benefits will be strikingly reduced. Even if the benefits are not immediately affected, because they are fixed by contract, and as is most frequently the case, the employer, not merely the fund, is ultimately liable for the benefits, the employer will be much less willing to agree to further increases in pension benefits. He will know that he will be unable to make his contributions to the pension fund work productively enough to cover the costs of benefits. And benefits must be raised frequently unless inflation is stopped permanently, or else we will all be like the retired clergymen who, in the 1960's, were getting total pension benefits of $600 per annum, because their pension depended on salaries of earlier decades.

Professor Schulz' testimony this morning makes clear how current and important is the dimension of the problem.

In the last 18 years, I believe United States Steel has agreed 11 times to increase pension benefits. If pension funds cannot be run to meet pension benefit costs, unions will find it easier to bargain for increases in current compensation, whose costs can be met by adjustments more within management's control. We will see a rise in current income, reduction in deferred income, and obviously, a new inflationary force will have been added.

Secondly, a legal requirement that pension funds make any particular kind of investments will undermine confidence in pension plans. Workers will be less willing to accept deferred compensation, as fear will spread that by the time they become eligible to enjoy their pensions, the Government will have taken steps which reduce the value of the pension. Providing for retirement, and increasing personal savings, are sufficient social contributions in themselves, as well as immensely important economic contributions to the endless

battle against inflation. Undermining those contributions for shortrun help with today's pressing problems is shortsighted. Surely we should not sell other people's inheritance for a mess of pottage, especially when they do not even get the pottage.

Thirdly, such a legal requirement, by compelling purchase of what are sure to be lower yield investments and thus lowering the funds' overall yield and raising the cost of pension benefits, will make it much harder to increase portability, vesting, funding, and the other improvements which everyone involved with pensions has been striving for over the years.

A further difficulty with any legal requirement lies in defining what will qualify as "socially useful projects." For example, the need for aid to low-income housing is far too great to allow such a requirement to be satisfied by aid to high-income housing. Yet, one bill which requires pension funds to shift a quarter of their assets into housing investment over the next 25 years, would allow that requirement to be satisfied 100 percent by investment in highestincome housing. The bill permits the requirement to be satisfied either by holding certificates of deposit or other obligations of savings and loans, without any ceiling on the cost of the housing involved, or by directly holding any residential property again without cost ceiling. We must never subsidize housing for the rich at the ultimate expense of pensioners.

Moreover, implementing any legal requirement which, like one bill introduced, does not assure pension funds adequate time to adjust their portfolios, would unnecessarily upset the securities markets and lower the prices at which the pension fund would be selling.

Last, any such requirement goes against the decades-long, decisive trend away from legal inhibitions on the kind of investments fiduciaries may make. In ordinary trust law, we have seen the almost universal abandonment of the "legal list" in favor of the "prudent man" rule. In life insurance, the tight statutory net covering investments has been consistently changed in favor of fewer restrictions and higher ceilings on the amounts that may be invested in common stocks.

Rather than inventing new procrustean beds, we should make the investments in question attractive to pension funds. For example, the Federal National Mortgage Association's debentures and the Government National Mortgage Association's mortgage-backed bonds, are an imaginative combination of Government guarantees, an attractive yield, and freedom from the need to deal with borrowers. However, even the energetic people presently involved in these programs have not been able, thus far, to attract much new investment. Hopefully, the HUD conference with pension fund and other money managers this week, will result in a significant infusion of new funds.

In addition to HUD's work on new devices, Treasury officials have been "jawboning' pension funds and others to invest more in housing, but there are several problems here. First, the Treasury has not heeded its own preachings: so far as I have been able to learn after substantial efforts, the Treasury will not reveal the public