us, would not be moved at the sight of "strangers bearing gifts." And lastly, we were a "closely held" corporation and traditionally should have been too grasping to part with any of our substance easily.

We had broken the ice in the direction of employee benefits as far back as 1925, when a group life insurance plan and a group health and accident plan were put into effect. We started gathering information on pension plans in late 1941. However, it was not until 1944 that a formal plan was actually introduced. The intervening period was spent in reviewing many different types of plans, none of which seemed to meet the rather stiff requirements of our operation. After long study we developed a plan which we feel is sound and can be carried by the company under all foreseeable business conditions.

The plan is, of course, geared to the Federal social security system. All employees, whether production workers or officers of the company, are eligibleafter 2 years' service. All are on the same basis and have the same scale of benefits. They receive, entitrely at company expense, a basic pension at age 65 based on their length of service with the company and their earnings.

I should mention that the company pays for all past service.
Senator MILLIKIN. I did not quite understand that.

Mr. O'BRIEN. I forgot to include in here the fact that all of the past service of any employee with the company is included in his pension and paid for entirely at company expense.

Employees who wish to, may contribute a fixed percentage of their earnings to secure life-insurance coverage and at retirement a larger pany, are eligible after 2 years' service. All are on the same basis and pension. At the present time 97 percent of those in our plan have chosen to contribute and receive the insurance coverage and higher pension. The individual employee may always secure a refund of his total contributions upon leaving the company for any reason; and after a stipulated period of service is also fully vested as to the employer's contribution.

The plan is of the funded type and is a combination of insurance and a self-administered trust, with a New York bank as the corporate trustee. The level of benefits, including social security, compares favorably with plans recently enacted under union pressure. In addition, should social-security benefits be increased, such increase will accrue to our employees and not be used to reduce our liability.

I have described our experience in some detail because I feel that there is a distinct place for private pension plans as a supplement to the basic minimum underlying layer of security which Federal pensions should provide. Some twelve-thousand-odd private plans were in existence prior to the Supreme Court ruling on the Inland Steel case, making it mandatory to bargain collectively on pensions. I think this Supreme Court ruling was most unfortunate for the future growth of private pension plans.

Pensions are by their nature long-term commitments of a highly technical sort. The recent labor disturbances arising from the pension issue with their hastily conceived plans are a product of this decision. I feel that private plans are an important and necessary supplement to Federal benefits and that their growth will be sounder and as fast if removed from the turbulent arena of mandatory collective bargaining.

THE FEDERAL ROLE IN FINANCING OLD AGE

(a) The economic problem-size of Federal pension

Throughout the ages humanity has sought security of many types. Today, in our complex industrial society, one of the most general desires seems to be for economic security in old age. "Old age. which is admittedly a vague term in many of its meanings, has, for this specific discussion, been generally accepted as being age (i5. Economic security cannot be guaranteed by the promise of a certain number of dollars at some future time unless we also are assured of a degree of stability in the whole economic system. The problems of financing old age on a Federal basis are so great that extreme care must be taken lest the very attempt to provide individual economic security does not in itself disturb the whole economic system. If in a laudable and humanitarian effort we attempt to promise too much to those retiring we are liable, through heavy taxation, to reduce incentives; and through inflation to reduce the value of the pension to those retiring.

It might be profitable for a moment to consider the load that we are imposing upon a future work force. For many years we have been marching in a direction which has directly reduced both the proportion of the total population in the work force, and the number of hours which each worker has worked. One of the first efforts in this direction was the elimination of child labor, so that gradually we have cut out of the work force large numbers at the lower end of the life scale.

Senator MILLIKIN. Was there not a large increase in the work force. in the war years; was it not practically doubled?

Mr. O'BRIEN. Yes; I believe that is correct. I was speaking, though, of a more normal progress.

Then, with the acceptance of the principle of retirement, we have similarly removed many workers from the upper end of the life scale. While these two processes were operating to limit those in the work force, there was at the same time a steady reduction of the number of hours worked by those still working. From a common 60- or 70-hour workweek we have dropped to a rather general 40-hour week, and in some cases a 35-hour workweek. Simultaneously, through advances in the field of medicine and public health, average life expectancy increased and the relative proportion of those age 65 and over to the total population increased steadily. All of these developments represent distinct advances in our way of life, and I am very much in favor of them, but we should not lose sight of the fact that they have an impact on the rate of productivity required of the remaining work force if our standard of living is not to decline. In essence, at any time the goods and services, i. e., the standard of living of the entire population, is dependent upon the prod tion of the work force. If we somewhat arbitrarily take the work force as being those aged 20 to 64, the proportion of those above age 65 to the work force has increased sharply. In 1900 there were 13 people in the work force as defined above for each person over 65. Today there are 8 people in the work force for each person over 65, and it is predicted that within the next 50 years this ratio may drop to less than 5 to 1.

Obviously, the only way that this smaller work force working a shorter number of hours can produce the goods and services to maintain the standard of living for the entire population is to increase their unit productivity by means of better tools and equipment. This, of course, means greater investment per job. To stimulate such investmen there must be strong incentives. Such incentives disappear under too heavy a tax load.

It therefore seems obvious that if we are not to delude ourselves with false promises of security, we should be careful to see that the Federal Government limits itself to the provisions of a minimum layer of basic protection to as large a group of the work force as can be administratively covered, the whole to be supported by equal employer-employee pay-roll taxes. The Federal Government should confine itself to the problem of old-age benefits and not venture into other fields, such as total and permanent disability which can best be handled at the State and local level.

(b) The method, OASI versus OAA

When the original Social Security Act was enacted in 1935, it provided for two systems of old-age benefits; a contributory system for covered workers, which in 1939 was amended to include survivors and dependents-familiarly referred to as OASI; and a noncontributory system financed equally by the State and the Federal Government through grants-in-aid, and distributed on the basis of need-abbreviated to OAA.

It is clear from the Congressional Record that one of the main reasons for the enactment of the contributory system of old-age benefits was to relieve the Federal Government from the heavy burden of general relief. The OAA program was thought of as a temporary program to carry the load until such time as the contributory program could pick it up. Yet today there are 2.6 million aged receiving an average of $43.60 monthly from OAA. The OASI at the same time (June 1949) covers 1.8 million aged for an average monthly benefit of approximately $22.50.

Senator MILLIKIN. That figure represents combined Federal and State contributions, does it not, of $22.50?

Mr. O'BRIEN. Yes, sir, that is correct. I believe the Federal contribution averaged approximately $25.

It is evident from this experience that the grants-in-aid system is clearly out of hand and must be checked at once.

The grants-in-aid system is fundamentally wrong for most purposes. It creates the illusion that Federal funds are free. To a large degree, the responsibility of raising funds is removed from those at the State level who are authorizing the expenditure. It makes State and local governments subservient to the Federal Government and generally tends to break down our Federal principle.

The matching formulas used to determine the extent of Federal assistance have yielded to continuous pressure. Originally on an equal basis, they have now been "refined" to a point where, as Mr. Reinhard Hohaus, actuary of the Metropolitan Life Insurance Co., has recently pointed out (speech delivered before the Ohio Chamber of Commerce) a State may actually add many citizens to their old-age assistance rolls, thereby attracting considerable Federal sums into the State, while actually reducing the State expenditures for this same purpose.

Such political "manna from Washington" will no doubt be promptly picked up by political practitioners among the various States. As evidence of the widely varying standards of need adopted by the States, in June of 1949, 81.9 percent of the population over age 65 in Louisiana were receiving old-age assistance, while the comparable figure in New Jersey was 612 percent.

Senator MILLIKIN. How do you account for that difference in the percentage of population over age 65 receiving old-age assistance in Louisiana and the 62 percent receiving old-age assistance in New Jersey?

Mr. O'BRIEN. It seems to me, Senator, that that would be largely based upon the definition of need within the respective States. Senator MILLIKIN. Being an industrial State, are you getting more money in New Jersey via the contributory insurance system?

Mr. O'BRIEN. I think undoubtedly that would have some bearing. I read with considerable interest the discussion between yourself and Mr. Altmeyer on this subject, and it seemed to me that while there was some partial explanation due to the higher industrial activitiy in New Jersey, I still think that the major portion results from the State administration.

From the foregoing it seems quite clear that the Federal Government should as quickly as possible withdraw from the old-age-assistance program and concentrate its efforts in the old-age field in OASI. Such a suggestion may seem somewhat naive in view of the practical pressures involved. However, if steps are not taken immediately to reverse the trend, it may later prove impossible. The only sound reason for Federal grants-in-aid is to cover situations of national interest which the State and local governments are not able to handle. However, before the argument of financial inability is accepted, it would be well for the Federal Government to return certain taxing areas to the States so that they may carry out what are properly State and local functions. The funds in the final analysis come from the same

source.

Specific comments on provisions of H. R. 6000:

1. Coverage: I am in favor of extending coverage to all those gainfully employed if it can be shown that such coverage is administratively practicable. For instance, in the case of farm operators who would not be covered under provisions of H. R. 6000 it seems to me there would be great question as to when a farm operator actually retires. I notice, however, from Mr. Altmeyer's testimony that they feel these and other questions offer no barrier.

2. Level of benefits: I would favor an increase of benefits of the order suggested in the bill since they would restore the approximate purchasing power of the original benefits. However, as noted in more detail below, I believe the wage and benefit base should be retained at $3,000.

Third. Wage and benefit base: As stated above, I think the base upon which contributions are made and benefits calculated should be retained at $3,000 a year. Under our present schedule the benefits in relation to salaries taxed are much greater at the lower salary levels than at the higher. To raise this base would simply increase the discrimination against those in the higher wage brackets. Also, a stated earlier, it is my feeling that the Federal pension should be at a

minimum level. Use of a $3,000 base would amply cover a minimum pension.

Fourth. Federal grants in aid for old-age assistance: As stated earlier, I feel that the most constructive action which Congress could take in this important and complex field, would be one designed to withdraw the Federal Government as rapidly as possible from the grants-in-aid program for public assistance.

Fifth. Contribution schedule. If and when benefits are increased, I would favor an increase in the contribution rate to 2 percent from the present 1/2 percent. I believe it is important psychologically to relate increases in benefits to increased taxation. In place of the balance of the rate schedule which would produce an estimated peak fund of $75,000,000,000 shortly after 1990, I would recommend a stepped rate designed to stabilize the fund at the peak which would be produced by the 2-percent rate, if this is actuarially and practically feasible.

I would like to interject I have no basis or bias for the 2-percent rate. If actuaries should find that 22 or 234 produced a more proper fund in their opinion, I certainly would not quarrel with that.

This would avoid some of the questions inherent in a fund reaching $75,000,000,000 with its investment problems and their impact on the economy, as well as the strong temptation to demand higher benefits as the fund continued to grow. I realize that such a recommendation may involve a somewhat higher leveling off of rate than would result from the proposed schedule, but the benefits might offset such an increase.

Sixth. Appropriations from general revenues: I am in favor of the provision which would repeal the Murray amendment of 1943 permitting Congress to appropriate from general funds for the support of the OASI program.

Seventh. Lump-sum death-benefit payment: I would favor provision of the present law which would pay death benefits only where there is no survivor eligible for monthly benefits.

Senator MILLIKIN. May I ask the reason for your point 6?

Mr. O'BRIEN. The appropriations from general revenues?
Senator MILLIKIN. Yes.

Mr. O'BRIEN. It is my feeling, Senator, that this program should be kept, so far as possible, on a self-sustaining basis-that is, that the pay-roll taxes should support it-and I would be in favor of trying to set up a level of taxes that would do that.

Senator MILLIKIN. But if it did not, how would you cover it?

Mr. O'BRIEN. Well, perhaps I can answer that question this way. My reason for feeling that we should be on a self-supporting basis is that unless we are, I feel that the pressure to continuously increase the benefits will be almost irresistible; and if it is closely geared to the tax imposed, it will offer some restraint.

8. Permanent and total disability insurance: I do not believe that this coverage should be included in any Federal program. Private insurance companies have had most unsatisfactory experience insuring this contingency and if it is to be covered at all it should be financed and administered by State and local agencies who can properly check applicants and, most important, give them help toward rehabilitation.

9. Permitted earnings: I am in favor of the provision raising retirees' permitted earnings from $14.99 per month to $600 per year.

60805-50-pt. 352