As I suggested before, Roger Murray made one suggestion, that this be done through savings banks and thrift institutions. We need some sort of enabling legislation to allow an employee to direct his employer to put a certain amount of money, if nothing else, into passbook savings account, on the same basis as people employed in larger corporations.

And as I indicated before, it may be worth suggesting, for those people who have only social security, that they be allowed to voluntarily add something to their social security accounts on a tax-deferred basis, perhaps a matching situation with the employer, where if the employee wished to have such a plan he could require the employer to go into it.

I recognize that some people will not voluntarily do this. This might be one of the great objections, whereas if I work for a company which has a pension fund, obviously I am locked into it if I want to be in their employ.

It seems to me that as long as we have social security, which is required, then at least the basic needs are met. But this would afford an opportunity for those people-and it is primarily those engaged in corporations with 25 or 30 or less employees that do not have pension plans, because they are so tremendously expensive-to get better retirement benefits.

I might indicate that some industry trade associations are working on developing industrywide plans which they can provide for small companies with 20 or 25 employees.

I personally have been trying to get some of my friends in the investment banking community to develop such a plan and sell it. But they indicate that the costs of selling such a plan would just be stupendous.

I think, though, that the problem can be solved if we look at itif we were to have a study and decide the best way to go about doing it.

Chairman GRIFFITHS. I am not sure that I go on the freedom of choice, because I think what the choice is, you have a choice of directing my taxes to be greater. That is what I really think your choice is.

Mr. HARBRECHT. May I address myself to that argument, Madam Chairman?

Chairman GRIFFITHS. Surely.

Mr. HARBRECHT. The proposal you make of simply turning the whole thing into a very much larger social security system is something that I have thought about from the beginning of my study of it, of the pension system. And I think it has a good deal to recommend it from the point of view of efficiency, portability. Vesting it would solve all of these problems we are trying to cope with individually at one blow. But I think in proposing that you are proposing something that goes very profoundly to the roots of how our economic system works. For example, you feel concerned that the small pension trustee will be driven into the Chase Manhattan Bank. I think the Chase Manhattan Bank would feel concerned that you are driving everybody into the hands of Washington. Chairman GRIFFITHS. No doubt.

Mr. HARBRECHT. There is sometimes a difference of view as to who ought to be running a show.

It is very common in Europe to have statewide controlled pension arrangements.

But the thing that would concern me about a proposal like this is that the discretionary use of these blocks of capital is very important to the development of our economy. Since going to Canada about a year ago and continuing my interest in financial markets, corporations, and so forth, I have had occasion to see how the Canadian economic system works. And I am most impressed by the fact that there are about seven banks in Canada that control just about all the investment capital that is available to Canadian business.

Chairman GRIFFITHS. There are only seven banks in Canada, aren't there?

Mr. HARBRECHT. That is right. There are trust companies and there are some small investment firms. But I find in looking at this that you have a control by banks, and not a little bit by the government too, through its ability to control the banks, control of sources of investment capital. I conclude from studies of medium-sized corporations and smaller businesses that this has a very strongly inhibiting effect on the development of the Canadian economy. One of the real strengths of American economy is widespread and competitive sources of capital.

Chairman GRIFFITHS. I think you are quite right. I looked that Canadian situation over too, we live right close, and it is amazing. They have control, apparently.

Mr. HARBRECHT. Even to the point where banks will insist on taking shares of stock and even controlling interest in businesses. Their grip on the industry in Canada is somewhat astounding.

And I think to withdraw such large blocks of capital as you would be in taking on a different kind of management-that is, government management-would have an inhibiting effect on our economic development.

Chairman GRIFFITHS. I do not think it would be a good idea in a lot of ways. In the first place, you would have to raise the tax tremendously-and I am sure they would be very interested in doing it-and you would never get a very satisfactory setup. But the thing I think is very unfair is that there are people who are going to retire on reasonably decent pensions. And that is being paid for by everybody else. It is being paid for through the years because some people did not put their fair share into the tax structure. It is being paid for by those who are paying Government pensions, by those who are working now and paying taxes. It just seemed to me it would be fairer if everybody was going to be taken care of. But we need a better way to do it.

Congressman Patman recently published some data suggesting that the Standard Oil of Indiana fund had a turnover rate with total assets of 95.9 percent in 1968. General Mills' plan had a turnover rate of 130.6. How can such figures be explained?

Mr. LERNER. That turnover rate, Madam Chairman, is essentially once a year. That means that you held-the average life of a security in the portfolio is 1 year. I find that not astounding. As a matter of fact, when I look at a university where we have a turnover of 6 or 10 percent, that means the average security stays in the

portfolio for 10 to 16 years. And my hunch is that it is probably too long.

Chairman GRIFFITHS. Do you think that selling off these stocks once a year is really advisable? Don't you think that must have quite a little effect?

Mr. LERNER. I wished Roger Murray had sold all of mine on January 1st.

Mr. DIETZ. First, let me say that if such turnover rates occur on the stock portfolio, I think they are too high. I feel some responsibility for the advent of the turnover cult since I so forcefully advocated better performance. However, I have always advocated a two 5-year-measurement period. Most studies of the capital markets indicate that excessive turnover may in fact worsen performance. Second, I am not sure, of course, not having looked at the figures, but I think we want to be very careful as to what we mean by turnover rates. You did not specify whether Congressman Patman indicated that they were common stock turnover rates or the entire portfolio.

Chairman GRIFFITHS. Total assets, the whole portfolio.

Mr. DIETZ. If it is total assets, and it included any amounts of Treasury bills, which would be very possible in this particular market where nobody knew whether it was going up or down, the turnover of Treasury bills, since they turn over overy 3 months—and it could be shorter-could have an astounding effect on the figures which you have just cited.

Chairman GRIFFITHS. But this was in 1968, when the market was a little steadier.

Mr. DIETZ. It was a little steadier then. But in any case, it depends if we are taking a look at, for example, substantial sizes of bonds where they are simply coming due, you will have some turnover as a result of that. So I do not think we can ascribe it to all common stocks, I would be inclined to agree with Professor Lerner that in general the investment outlook for a stock, if you really are on the top of it, might in general be anywhere from a year to in some instances 4 or 5 years. And I would expect turnover rates of somewhere between 25 and 35 percent to be normal, but not once a year as Mr. Lerner suggests.

Mr. LERNER. Part of that, Madam Chairman, is essentially the urge for performance. As long as there is intense competition among the trustees for the pension fund business, and it is a competitive business, the principal selling device is performance. It is very hard to get performance without activity.

I would say that those are particularly aggressively well-run funds. If you move to personal trusts, the turnover is substantially less. But there a different kind of service is performed. There a concern is expressed every time the stock is traded as to what are the tax consequences of the sale, the effect of capital gains, on the trust and so forth. In the pension fund area you are not inhibited by the capital gains implication of the tax. You are interested in performance alone, pure, naked performance. We used to talk about the dilemma in security analysis between return versus risk. But the current dilemma is between performance versus liquidity.

Mr. HARBRECHT. Madam Chairman, that gives me a chance to return to a pet point of mine. I think maybe theoretically in this room

we could give a defense for that type of action. But what concerns me most is that by law we have no way of checking that kind of activity if it should be proved to have been done either unwisely or in self-interest.

There is enough law to show that you cannot use the pension fund to your own advantage. There could be prosecution, and there could be investigation by the Secretary of Labor, if a rapid turnover were somehow being engineered to put dollars into the pockets of pension trustees. But if it is merely stupidity or bad management, we have no approach to it. And this is the basic reason why I would suggest the establishment of the "prudent man" rule that I spoke of before, and to give at least to the Secretary of Labor the power to enforce that standard.

Now, what would that mean? It would mean that if financial experts could justify the disposition of the portfolio that Congressman Patman points to, then even the Secretary of Labor would not fault the management.

It would also mean that if they had behaved badly they would be forced to restore the funds that had been lost to the trust as a result of their bad management.

Chairman GRIFFITHS. I would like to ask you one last question. Do you consider pensions inflationary, stabilizing or anti-inflationary?

Mr. HARBRECHT. My judgment is that they tend to be stabilizing. Going back to the issue that I raised, which I think is a very difficult one, whether or not they have an inflationary effect on the stock market, whether or not they actually drive prices up, what effect they have in a situation like this, I think that generally they have a stabilizing effect on markets. They also segregate and sequester a large number of dollars under expert management.

Chairman GRIFFITHS. But what do they do to prices?

Mr. LERNER. I would suggest that they probably drive them down, and they are probably deflationary. I base that on the fact that we have to change the frame of reference a little bit and talk about total savings in the economy versus total investment, and things like this. The evidence that was developed years ago by the National Bureau of Economic Research says the people tend to ignore the fact that they have something in the pension fund and that they continue to save. This suggests that perhaps savings are higher than they otherwise would be. And to the extent that the savings are in turn invested in industries which give rise to further capital goodsand we have something of a capital goods shortage in this country-it helps fund the capital goods. These goods ultimately will result in more consumer goods and services being produced. In that sense pension funds in the long run have a deflationary impact.

So I would say that the savings now plus the future investment that comes down the pike probably make them stabilizing to deflationary.

Chairman GRIFFITHS. There have been a good many people who suggested that one of the problems of the pension fund, or with social security, is that people generally do not save, they rely upon those funds. In Japan at the present time aren't the people generally saving about 17.6 percent of their money? I read something

on that the other day. They are really fueling Japan's wonderful economy with their own savings.

Mr. DIETZ. I have no idea about Japan, but I think the National Bureau study was quite conclusive. And as you may know, the results, since they go against what we would tend to think, were rather shocking to them when they first did it. And so they reran the entire study doing it in a different way, and they still came up with the same conclusions.

On the general question I would be inclined to agree with the analysis just made by Professors Lerner and Harbrecht, and really have nothing to add.

Chairman GRIFFITHS. Thank you very much.

And I want to thank all of you again. I enjoyed hearing you tremendously. And I enjoy the exchange of ideas. I hope you all keep us advised as to the further information you have on the effects of these funds.

The hearing is now adjourned.

Thank you very much.

(Whereupon, at 12:05 p.m., the subcommittee adjourned, to reconvene at 10 a.m., Thursday, April 30, 1970.)