tionally; or that even freezes of the OASI tax rates induced the Government to spend, or borrow, less. There is presumptive evidence, therefore, that the amounts of the reserve accumulation affect only the amounts the Government borrows from other lenders, and not the total amount of the Government's debt. A Government which owes $257,000,000,000 cannot afford to misunderstand the fiscal effects of OASI reserve accumulation.

Some members of the committee will remember that in 1944, in a report to the Senate, the Committee on Finance said that OASI's having, or not having, $50,000,000,000 of 3 percent Government bonds in 1980 would make no difference to the taxpayers of that time. The committee's report said in substance that, with OASI owning $50,000,000,000 bonds, the taxpayers must pay $1,500,000,000 interest, and that with OASI owning no bonds, the taxpayers must pay the same annual sums in "direct appropriations" to OASI; and it treated those alternative payments as being fiscal equals. They were not fiscal equals, however, because with OASI owning no bonds, the taxpayers will be required, not only to make the $1,500,000,000 of direct appropriations to OASI, but also to hire $50,000,000,000 from other lenders, and pay $1,500,000,000 interest thereon. The committee's mistake, I submit, amounted to $50,000,000,000 of principal amount as of 1980, and to $1,500,000,000 of annual cost thereafter.

I wish to quote the phrase in your 1944 statement, that is, I submit, responsible for the committee's error. When you report postulated OASI's owning $50,000,000,000 bonds, it spoke of $1,500,000,000 as being needed "to pay the interest on $50,000,000,000 Government bonds in a reserve fund." That phrase, namely, "to pay the interest on $50,000,000,000 bonds in a reserve fund," treated OASIS having $50,000,000,000 bonds as creating interest cost of $1,500,000,000a year.

The Government's interest cost is produced by the Government's owning bonds. Your report's phrase treated that interest cost as produced by OASI's owning Government bonds. That is the accounting error which has long plagued the OASI subject-the attributing of a borrower's debt or interest cost to a lender's lending. It is that error, moreover, that has persuaded many people that OASI's reserve accumulation forces the taxpayers to pay twice for their pensions. They would pay twice, to be sure, if the Government's borrowing from OASI created one cost, and the reverse side of the same transaction, i. e., OASI's lending to the Government, created a second cost. But lending does not create cost. It creates notes, or bonds receivable, i. e., assets, not debts.

The Brookings Institution book, by Meriam and Schlotterbeck, says (p. 155): "The obligations of the Government (liabilities) deposited in a trust account do not represent assets; they merely record future obligations which can be fulfilled only through the levy of future taxes, upon the economy in general." That passage, I submit, attributes to OASI's owning Government bonds taxation that will instead be produced by the Government's owning the bonds. Government will not pay bonds because they belong to CASI, but because it owes bonds to whoever owns them.

* *

The

I have examined dozens of versions of the accusations that OASI reserve accumulation of Government bonds lacks fiscal purpose and/or that OASI'S fund lacks substance. I have not seen a single version that is not founded in the accounting error I have described. Dr. Lewis Meriam repeated the error, indeed, in his testimony before the Committee on Finance, March 22, 1950. He said: "* we must pay interest on the bonds held by the fund in cash in order to meet our benefit costs." To be sure, we must pay interest on Government bonds in cash. But we must pay the same sums, whether the bonds belong to OASI or to others. We must pay because we owe the bonds, and without regard to the uses bond owners may make of the payments they receive. I do not say, of course, that the Committee on Finance was the author of the error. Its authors were certain influential actuaries, the published records show, spokesmen for the life-insurance companies and supporters of pay-as-you-go in OASI, who spoke about 1935.

In 1945 the life insurance indlustry's report, Social Security, declared OASI reserve accumulation of Government bonds to be fiscally purposeful (Social Security, pp. 36-37), having first, however, attributed to unnamed persons the accounting error the report abandoned. That error has now become, with the aid of certain of its own authors, anonymous. It is still influential, more is the pity.

The Meriam-Schlotterbeck book, I submit, also misquoted the Social Security Act. By misquotation, I mean making the act out to say things it does not say, by employing language that is at odds with the act's own language. Referring

* * *

to the passage I have quoted, I point out that it relates that Government bonds are 'deposited" in the trust fund, whereas in truth they are sold to the fund by the Government. The word "deposited" fails to take account of value's being paid for the bonds by OASI, and being received by the Government, whereas the statement that the bonds so "deposited do not represent assets; they merely record future obligations *" supports the theory of value's not being paid and received, but is in conflict with both the language of the statute, and with the fact that the said bonds are both valid assets of OASI and valid liabilities of the Government.

* *

It is indeed true that in a phrase preceding that in which the incorrect word "deposited" is employed, the authors say that the "trust fund is invested in Federal Government securities." This, however, does not excuse the later solecism, especially as it is just such casuistry as has misled innumerable readers vitally interested in the subject. I submit that obedience to the truth is a persistent imperative, and that even careless deviation is indefensible in those whose pretensions to scholarship and authority are as high as are those of the Brookings Institution.

A tragic feature of the Meriam-Schlotterbeck accounting error is that it holds OASI reserve accumulations to be fiscally purposeless, and OASI's Fund to be a fiction on grounds which have exclusive reference to the fund's moneys being invested in Government bonds. If those subversive findings were valid, all other funds which consist of Government bonds (bought for value paid) would also be fictions, and most banks and insurance companies would be insolvent now. The findings are not valid; but the critics have the Government on thin ice in the matter.

II

M. Albert Linton, president, Provident Mutual Life Insurance Co., and for many years ardent supporter of "pay-as-you-go" (and frozen tax rates) in OASI, proposed in a letter to the editor, the New York Times, published March 5, 1950, that another study of OASI be made.

What would now be studied? A program which, Mr. Linton said: “would bring the present aged retired immediately into the system, and pay them benefits. * * * Benefits would be paid out of the current OASI income, transforming the system into one that would be truly pay-as-you-go. The contentious reserve question would be solved, as benefits would probably take all of the 3-percent pay-roll taxes, and increases in the reserve fund would be greatly slowed down, or possibly halted."

Let OASI and Congress beware of this proposal, even though it be called "truly pay-as-you-go.' The method Mr. Linton described would "solve the contentious reserve question" by abandoning further reserve accumulation; and although that abandonment would be helpful to all insurance salesmen, it would be the opposite for the rest of us, including the policyholders of the insurance companies.

In 1943, John M. Powell, president of Loyal Protective Life Insurance Co., presiding at a forum on social security held by the Health and Accident Association, said that the 1 percent employee tax rate was more favorable to the sale of insurance than a 3-percent rate will be. On the other hand, however, abandoning or reducing OASI's reserve accumulation would increase OASI's deficit, and that deficit is a second governmental deficit that is additional to a public debt, which now itself equals $257,000,000,000; and those deficits are continuously attacking the value of the dollar, even though that may not always be obvious. The insurance companies have need to beware lest their long-standing advocacy of frozen tax rates and more Government debt in OASI, seldom plainer than in Mr. Linton's present suggestions, shall in due course not only destroy OASI's chance to provide an enduring program, but also do much harm to dollars, including those due to their policyholders. The companies would in that event pay a high price-in loss of public confidence for whatever additional insurance business employing pay-as-you-go in OASI is now obtaining for them. And so would others.

In 1938 Mr. Linton correctly treated OASI's reserve question as part of the Government's total fiscal question, and he should so treat it now. Mr. Linton said (Insuring the Future, the Atlantic Monthly, October 1938, p. 344):

"The ** * reserve plan in the Social Security Act (i. e., the act of 1935) may best be understood if it is looked upon as a device for solving the financial problem of the Government resulting from the existence side by side of a Gov

ernment debt approaching 40 billions, and an old-age insurance program entailing heavy financial burdens. Looking forward to the time when annual old-age pension benefits will have grown to exceed annual pay-roll tax receipts by 1.5 billions or even more, the country may well be concerned if the budgets of this day shall have to provide not only for a large subsidy (i. e., to OASI) but also for interest of more than a billion a year on the Government debt. The double burden would bear heavily on the taxpayers."

Although the "device" of which Mr. Linton spoke, i. e., "the reserve plan" of the act of 1935, was thus recognized in 1938 by Mr. Linton as available "for solving the financial problem of the Government," being specifically the problem of having "side by side" a costly old-age pension program and a public debt "approaching 40 billions," the public debt was permitted to increase to its present size, and OASI' benefits were increased also, without that device being employed, indeed with Mr. Linton periodically recommending instead the opposite action of OASI tax freezes.

If there shall be another study of OASI, it should enquire at the outset what has become of Mr. Linton's 1938 concern for the future taxpayers, and especially why his concern for them is less now than then, whereas obviously it should be much greater. The story of Mr. Linton's unused "device"-unused though the need for its use became measured by an increase in the public debt or more than $200,000,000,000-testifies that increasing the OASI reserve accumulation-and not reducing it as Mr. Linton has suggested-is now in order, and should have prompt attention in any present study.

OASI reserve accumulation of Government bonds reduces the Government's net bonded debt, i. e., the amoung of Government bonds owned by others than the Government's own branch (OASI). With the Government's gross bonded debt almost $260,000,000,000, there has long been good reason for that favorable effect of OASI reserve accumulation to be noticed and respected. Mr. Linton, it appears, has forgotten about it.

III

Testifying before the Committee on Ways and Means of the House of Representatives, April 7, 1949, I opposed H. R. 2893, because, in view of the increased benefits it proposed to enact, it provided for insufficient reserve accumulation. (See hearings on H. R. 2893, pt. II, pp. 1612-1623.) I oppose H. R. 6000 upon the same grounds.

Respectfully yours,

GEORGE BUCHAN ROBINSON.

(Whereupon, at 12: 15 p. m. the committee recessed to reconvene Thursday, March 23, 1950, at 10 a. m.)

60805-50-pt. 3—71

SOCIAL-SECURITY REVISION

THURSDAY, MARCH 23, 1950

UNITED STATES SENATE,
COMMITTEE ON FINANCE,
Washington, D. C.

The committee met at 10 a. m., pursuant to recess, in room 312, Senate Office Building, Senator Walter F. George (chairman) presiding.

Present: Senators George, Byrd, Johnson (Colorado), Kerr, Myers, Millikin, and Brewster.

Also present: Mrs. Elizabeth B. Springer, chief clerk, and F. F. Fauri, Legislative Reference Service, Library of Congress. The CHAIRMAN. The committee will come to order.

Senator Long?

STATEMENT OF HON. RUSSELL B. LONG, A UNITED STATES SENATOR FROM THE STATE OF LOUISIANA

Senator LONG. I did not bring a prepared statement, Mr. Chairman. I would just like to discuss one or two points in the present socialsecurity bill, H. R. 6000, which I expect to support.

I think this bill goes a long way toward correcting the inadequate provisions that we have at the present time for the needs of retirement and the other phases of social security. The only objection that I would have to benefits at the present time is that I believe they will still be too meager even after we work this program out. I note that the average benefits will be about $46 for retirement, and in my own State, the average public-welfare check is about $47.50 for people

over 65.

The CHAIRMAN. Old-age assistance?

Senator LONG. People who are on old-age assistance; and who are, you might say, in that respect wards of the State and the Federal Government. It seems to me we should try to work out a retirement program wherein the retirement benefits, the social insurance for retirement, would take up where the public-welfare program leaves off, so that at least a person who has paid for his own retirement could expect to live in a little bit better circumstances than a person who, for one reason or another, either was unable or failed to contribute to his own retirement. I feel that a minimum benefit, for example, of $25 for a person who has paid over a period of years for his own retirement is ridiculous, when a person on public welfare who could simply qualify as being needy could get twice that maximum. I know in your State, Senator Millikin, it even goes higher than $50 a month.