they should be adopted, for those uniform paragraphs set forth above. We are particularly concerned with stopping pension fund trustees from engaging in "prohibited transactions"(1) and "activities which result in substantial diversion of its income or corpus to the creator of the pension trust". (1) The Internal Revenue Service is presently only empowered to deny further tax exemption in such cases. For example, as the law now stands, pension trustees could, under certain circumstances, with impunity, transfer the assets of a pension fund to, say, an "educational fund". Pension trust funds which are loosely drawn have permitted such a transfer of funds to the financial distress of those for whom the fund had been organized.

Finally, we recommend that Section 302 of the TaftHartley Act be amended so as to clarify the enforcement provisions applicable to the employer-union pension trusts for the reasons set forth on page 8 of this study.

(1) Sec. 503 of Internal Revenue Code.

Mr. DENT. The next witness is Mr. Greenough, Chairman of the Teachers Insurance and Annuity Association and College Retirement Equities Fund.

We are happy to have you with us, Mr. Greenough.

STATEMENT OF WILLIAM C. GREENOUGH, CHAIRMAN, TEACHERS INSURANCE AND ANNUITY ASSOCIATION AND COLLEGE RETIREMENT EQUITIES FUND

Mr. GREENOUGH. I think perhaps I can be responsive to some of the puzzlements your committee has and the things you are studying. I see them perhaps from a quite different vantage point.

Since I see I didn't do it in my statement and since TIAA and CREF is not that well known, I'd better identify them a little bit. The college world had the problem of pensions and they did something about it 60 years ago, or rather Andrew Carnegie did something about it, by giving $15 million of free pensions in 1906 to try to make the college professor's life a little more secure in his old age. Mr. DENT. You are dealing only with the college level, not the teachers in public schools?

Mr. GREENOUGH. Not the public schools, no public schools at all. I am not really going to talk about TIAA-CREF, except in one area. But I am just identifying it.

Then in 1918 the free money was just not enough. A cooperative venture of all the colleges was set up by the Carnegie Corp. to fund fully vested, portable pensions, the kind that you seem interested in. Then in 1952, (I refer to another comment that you made) we took cognizance of and tried to do something about inflation in pensions and set up the first variable annuity company in the country, CREF. And these now have plans for 2,200 educational employers, different type employers, small, large, private, public, with 300,000 persons with full portability, full funding, full vesting, and all those advantages in their pensions.

So in puzzling over the matters that your committee has been considering, I have done a good deal of thinking. I have been in this for a quarter of a century now. And I have thought a good deal about what are the strengths and what are the things that needed strengthening in the private pension world.

Obviously, when benefits are paid this is very good. They meet human needs. They meet the needs of persons who are retired. Retirement means unemployment, it frequently means sickness, it means all of those financial disasters that can hit people. Pension plans meet social needs so that the employers can be employing productive young members of society. They generate capital to increase productivity to pay benefits to people who need them. But a need of strengthening one area that I think has not been given enough attention is how to achieve wider coverage; how to achieve coverage for small employers; how to achieve coverage for people who seem to be under pension plans and then, because of a lack of vesting, aren't under them.

Is there something positive that we can do? Vesting: We have been talking about that a good deal this morning. Funding: There have been some rather unfortunate occurrences, although the many very good plans have no such problems, The integrity of management of

pension funds. Flexibility: Flexibility is something to be desired. Flexibility in retirement ages, in amounts saved, and type of investment. And, of course, underlying it all, as far as I am concerned, is portability.

Well, the measures we take in the public sector, depending upon whether they set the proper climate for healthy growth in the private pension sphere or whether they hamper private pensions by too narrowly attacking their specfic weaknesses at a particular moment without reinforcing their strengths, probably determines which of three routes we go. We are going to have legislative action. Which route are we going to take?

One, the Government can do the full job. As a society we have certainly accepted broad responsibility for income maintenance and various sorts of welfare programs. It is clear that as citizens we intend to undertake even greater programs-complete eradication of poverty, improvement of education, pollution control, and all the rest of it. Hence, in those areas, particularly segments where the private sector can lift part of a major job off the Federal Government, this would be highly commended. And this is very much the case, in my opinion, with private pensions.

Social security is extraordinarily effective in providing transfer payments for our people. It should be kept very strong. It necessarily has to be rather uniform across the country. I use the word "rather" advisedly. It does the transfer part of the job and can be the base for very strong private pensions. But should it do the whole job?

Second, the Government can legislate specific minimum provisions with respect to vesting, funding, portability, and reinsurance for the private sector. Even though I have been in this a good long while, I am not just sure what each of these minimum provisions should be; because, as you know, minimums, unfortunately, sometimes turn into maximums, or at least mediocre averages. Minimum provisions can lead to weakening strong pension systems in our efforts to strengthen weak ones. They all ought to be strong. So we must avoid that particular problem. Likewise, social policy that seems to meet the needs of one decade does not meet the needs of another. Social policy is helping people retire during periods of larger unemployment, helping them stay in the working force during periods of very full employment.

But it is clear that there is something about the existing governmental climate for private pensions that hasn't solved all the problems. So we need to try to find some other alternative.

And I have been trying to figure out a general approach that would encourage and not dictate the good trends and discourage the bad ones. That is a pretty tall order, but I have thought about it a good deal, and I would like to present, at least for discusion and thought, such a general approach.

And the first priority on it is a shift in what we are after. I was dictating something on this a couple of years ago and suddenly said "pensions are for people." That sounded rather obvious. But when you get to analyzing what we have done in the pension world, we have emphasized in our Federal regulations, our taxes and everything else, the corporation instead of the people.

So I would like to shift the emphasis to pensions are for peoplenot for corporations, not for investments, or anything of that

sort-but they are for people. It is rather obvious, but we don't act as if it is obvious a good deal of the time.

So perhaps what is called an earned retirement income tax deferral system could establish a positive, not a punitive climate for private pensions. To reinforce, not penalize, the private pension systems' strengths; encourage new plans, not discourage present plans; extend vesting, funding, and portability; try to set up something where everybody's self-interest is also the social interest.

Very simply, the ERITD, which is earned retirement income tax deferral, is a system that has in a sense been used before and rather effectively. You give tax deferral for individuals on a stated percentage of their earned income; let's say, 20 percent of their earned income could be set aside for retirement income in approved systems. You would, of course, accompany that with full disclosures of all pertinent information regarding investments, plan provisions, and so on.

Specifically, each employee or self-employed person, would be able to defer 20 percent, or up to that, of his earned income and the taxes on that income by participating in approved pension programs. The employer, whether a corporation, a college, or a self-employed person, would be required to set up a plan or to participate in a broader pool in order to qualify for this tax deferral. Now, my prepared statement gives detailed provisions for the ERITD system. For example, additional provisions would include strict funding requirements. The ERITD allowance for each member would apply to pension benefit contracts that are fully vested in the individual, or else there would be no tax advantage for anybody; noncashable, no loan value, so that they can only be used for pensions, not for some other purpose. And it would require a fully disclosed plan with all details available to the people who are covered by pension plans. And if so accepted, employer and employee contributions would not be taxed currently, but both would be taxed when received as retirement income.

Let's test this kind of an arrangement against some of your very worthwhile objectives, with all of which I agree completely. I am talking about different mechanisms; but the objectives are good.

One, we have talked about mobility of human resources. We just haven't had a society in history that is more mobile than ours. And this is a terribly important factor to take into account, both in allowing individuals to develop themselves to their fullest, and in allowing the greatest utilization of people where they can be most productive for themselves and for society. We need this movement; it is a good movement.

But one of the rigidities is the lack of immediate full vesting of pension benefits, which you have been talking about. If that can be solved, then you have better movement.

The proposed ERITD arrangement would encourage earlier vesting. Corporations could exclude from taxable income moneys paid into a pension plan only if and when they were allocated to and vested in an individual, a specific individual's accumulating retirement account. Yes, we need to have a transitional period, of course, in this as in most tax matters. But eventually we would arrive at the point where the only favorable tax treatment for

private pensions would occur when saving had really been made for an individual. This would encourage employers actually to make such contributions and would help the individual realize better that the retirement plan means little for him until vesting actually occurs.

It would enhance his interest in earlier vesting, and encourage him to seek it as a part of his employment opportunity, either where he is now or by shifting to an employer who offers early and complete vesting of retirement funds.

Earlier today, Mr. Chairman, you asked a question and this is responsive to it. Mobility with assured benefits, of course, calls for full funding of the vested benefits. There has got to be money there or else you don't really have mobility-whether that money is left in the previous employer's plan until the individual's retirement or shifted to a new account, either with a new employer or with some kind of a pooling arrangement.

Now, since the individual and the employer would receive their tax deferral or deduction at the time funds were actually paid in and ascribed to the individual's account, this proposal would lead to greater interest in adequate funding and would prevent even indirect employer recapture of contributions made. Since the contributions of each individual and the employer would have to be put into individual benefit accounts, the individual would be interested in the funding mechanism. This has happened in the college world, where a fully vested and fully funded benefit system is in effect. Such a system would help avoid a Studebaker situation, where persons involuntarily separated from the company in its waning years may be inadequately protected because the money is not in the pension fund for the individual.

Social Security provides full mobility. In private pension plans, the first job was to take care of the retired people, but it has been 25 years that we have been working on that. Now we can move to a first priority of earlier vesting and more and more pension plans are providing it.

You have heard testimony on other things, unionwide plans and so on, so I will not mention that.

Flexibility: I would specifically bring out the importance of flexibility in the private sector.

Diversity: There are very wide diversities in the private sector. Some plans are not as good as others. Some are fixed-benefit plans, some are defined-contribution plans; some are based on equity investments in an effort to protect the individual against inflation; some are arranged to protect the company from inflation and its costs; there are church plans, plans for welfare agencies, and so on. And this diversity is very good.

It can be best realized if the individual is the participant; if clearly it is part of the individual's compensation that is being set aside in an annuity vested in and owned by him, if the funds are being accumulated by and for him. And this is all part of the proposed new system.

Mr. BURTON. Mr. Chairman, may I interrupt to report something that may be of interest. Congressman Daniels' committee reported out the occupational health and safety bill.