Mr. WILLIAMS. We do represent many of the largest writers of compensation in the United States, sir.

Senator ANDERSON. And if you do not, some others will cover it?

Mr. WILLIAMS. They will take care of their own position in due course, Senator.

Incidentally, I am also vice president of the HIA, which is the Health Insurance Association, and I believe they will support this position in the latter part of the week.

The CHAIRMAN. Thank you very much, gentlemen.

Now, next is Mrs. Elizabeth Boggs. Is she here?

(No response.)

The CHAIRMAN. If not, I will next call Mr. Armand Stalnaker, president of the General American Life Insurance Co., St. Louis, on behalf of the American Life Convention, and Life Insurance Association of America.

STATEMENT OF ARMAND C. STALNAKER, PRESIDENT, GENERAL AMERICAN LIFE INSURANCE CO., OF ST. LOUIS

Mr. STALNAKER. For the record, my name is Armand C. Stalnaker. I am president of the General American Life Insurance Co., of St. Louis.

I appear today on behalf of the American Life Convention, the Life Insurance Association of America, and the Life Insurers Conference. These three associations have an aggregate membership of 407 life insurance companies accounting for 93 percent of the life insurance in force in the United States. These companies also hold 99 percent of the reserves of insured pension plans in the United States. We appreciate this opportunity to express our views on H.R. 17550.

Since the social security system first began, Congress has not seemed to intend that it be the only means for providing retirement security for Americans. Rather, social security has been designed to provide individuals with basic income protection in their retirement.

It is important that the social security system not be structured or expanded so as to impede the ability of individuals and their employers to provide additional retirement income through private savings media.

For the economy as a whole, maintenance of a strong private retirement income system is also important as a source of investment capital. The social security system, quite properly, does not generate capital but simply redistributes most of the tax revenue received.

Within this frame of reference, I would like now to discuss three of the major provisions of H.R. 17550. My formal statement covers these provisions in more detail and also comments on certain other provisions of the bill.

H.R. 17550 would increase benefits by 5-percent across the board in January 1971. We recognize that this increase will reasonably represent the increase in the cost of living since January 1970, the effective date of the 15-percent increase enacted last year.

It should be noted, however, that the 15-percent increase came at the time when the Consumer Price Index had risen only 10.8 percent over its level in February 1968, the date of the prior increase.

We would further note that the combined cost of the 15-percent and the 5-percent increases, when added to the cost of the other proposed benefit liberalizations, as well as increased medicare costs, will exert serious pressures on the financing mechanism. Most certainly, the increase should not exceed 5 percent at this time.

We do not favor the automatic adjustment provisions applicable to benefit levels, the taxable wage base, and the retirement test. We believe that the extent and timing of changes in either benefits or taxes are of such importance that prior review by Congress is necessary in order to tailor the changes to fit the economic situation prevailing at that time. We are confident that Congress will, as part of its periodic reviews of the social security system, continue to make necessary adjustments to reflect cost-of-living increases.

Also, we believe the automatic adjustment provisions would be interpreted by many as an explicit acknowledgment of the inevitability of continued inflation.

H.R. 17550 would increase the earnings base, that is, the base on which the social security benefits and taxes are computed, from the present level of $7,800 to a level of $9,000 effective January 1, 1971. We believe this increase would be premature.

We believe the average earnings of regularly employed male workers represent an appropriate dividing line between the area in which the Government should have responsibility to provide basic retirement benefits, and the area in which the individual and his employer should have responsibility to provide retirement security through private media.

Under our estimates, the average earnings of regularly employed male workers will not reach the $9,000 wage base contained in H.R. 17550 until 1974 or 1975. An increase to $9,000 on January 1, 1971. would bring the earnings base to a level substantially in excess of the estimated average earnings at that time.

Moreover, using an increase in the earnings base as a mechanism for financing across-the-board benefit increases is an inefficient process. This is so because part of the additional revenue which is raised will be drained off into providing benefits on the newly included higher earnings for those with above-average incomes.

Until the level of average earnings justifies an increase in the taxable base, increases in social security benefits should be financed through any favorable actuarial balance in the present program, and beyond that the social security tax rates should be adjusted to provide the necessary funds.

Adherence to these principles will insure that the social security system remains self-supporting while at the same time financing its benefit increases efficiently and retaining its designed relationship to private retirement media.

Again, let me express appreciation for this opportunity to present the views of our three associations.

Thank you.

(The prepared statement of Mr. Stalnaker follows. Hearing continues on page 918.)

STATEMENT OF THE AMERICAN LIFE CONVENTION, LIFE INSURANCE ASSOCIATION OF AMERICA, AND LIFE INSURERS CONFERENCE, PRESENTED BY ARMAND C. STAL

NAKER

My name is Armand C. Stalnaker. I am President of the General American Life Insurance Company of St. Louis.

I appear today on behalf of the American Life Convention, the Life Insurance Association of America and the Life Insurers Conference. These three associations have an aggregate membership of 407 life insurance companies accounting for 93 percent of the life insurance in force in the United States. These companies also hold 99 percent of the reserves of insured pension plans in the United States. We appreciate this opportunity to express our views on H.R. 17550.

SOCIAL SECURITY'S ROLE

It has been the clear policy of Congress since the inception of the Social Security system that it is not intended to be the sole means for providing retirement security for American workers and their families. Rather, Social Security has properly been designed to be a vehicle for providing individuals with basic economic protection in their retirement. Individuals have been able to obtain retirement income above this level by using various private savings media, including insurance company products.

Private plans offer flexible arrangements which can be designed to fit an individual's particular needs. The necessity for providing nearly universal coverage does not permit the Social Security system to offer this flexibility. Another difference between Social Security and the private system is that the latter offers products with benefits fully geared to the level of contributions. Thus, an individual in the private market is able to determine for himself on the basis of his own spending priorities—the level of retirement income he desires and to provide accordingly. Individual choice of this nature is an integral part of a free economy. Consistent with this framework, it is important that the Social Security system not be structured or expanded so as to impede the ability of individuals to provide income for their retirement through private savings media over the Social Security floor of protection.

Maintenance of a strong private retirement income system is also important for the economy as a whole. It is generally agreed that, if our economy and productivity are to grow in the years ahead, there must be an increasing supply of new investment capital. Savings through life insurance and pension funds and other private savings media make a major contribution to this supply of capital. If Social Security benefits are expanded at the expense of private pension funds and savings, there will be a reduction in the generation of capital, since, in contrast to private savings, the Social Security system, quite properly, does not generate capital but redistributes each year most of the tax revenue received.

We believe Congress should review from time to time not only the benefit levels under the Social Security system but also the other aspects of the system to determine whether it is properly carrying out its role. Proposals to increase Social Security benefits must be considered, however, not only in terms of broad social need but also in terms of their cost and the proper relationship between public and private programs. While necessary changes and improvements should be made, we cannot stress enough the fact that undue expansion of the Social Security system would have a far-reaching impact on voluntary private mechanisms and, in turn, on our economy as a whole.

Within this frame of reference, I would now like to discuss the major provisions of H.R. 17550 and certain other proposals which have been made to amend the Social Security system.

ACROSS-THE-BOARD INCREASE

H.R. 17550 would increase benefits by 5 percent across the board in January 1971. We recognize that this increase will reasonably represent the increase in the cost of living since January 1970, the effective date of the 15 percent increase enacted last year. We would note, however, that the 15 percent increase came at a time when the consumer price index had risen only 10.8 percent over its level in February 1968, the date of the last prior increase, so that there is some question as to the necessity for the 5 percent increase. We would further note that the combined cost of the 15 percent and the 5 percent increases, when added

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to the cost of the other proposed benefit liberalizations, as well as increased Medicare costs, will exert serious pressure on the financing mechanism. Most certainly, the increase should not exceed 5 percent at this time.

AUTOMATIC ADJUSTMENTS FOR FUTURE CHANGES IN THE COST OF LIVING AND AVERAGE WAGE LEVELS

H.R. 17550 includes provisions for automatic adjustment of benefits and the taxable earnings base to reflect future changes in the cost of living and average wage levels. These provisions were not included in the bill reported by the House Committee on Ways and Means but were added on the House floor.

We do not favor automatic adjustment provisions. Social Security benefits and taxes are a very important part of the economy. Both the system and its finaneing have become increasingly complex as additional types of benefits have bee added. We believe that the extent and timing of changes in either benefits or taxes are of such importance that prior review by Congress is necessary in order to tailor the changes to fit the economic situation prevailing at the time.

Additionally, inclusion of automatic adjustments in the Social Security Sys tem would be interpreted by many as an explicit acknowledgement of the inevitability of continued inflation. Any such belief on the part of the American public would be highly undesirable in that it would add to the dangerous psychology of inflation which already prevails in our economy.

We are confident that Congress will, as part of its periodic reviews of the Social Security system, continue to make necessary adjustments to reflect cost-of-living increases. These periodic reviews-and adjustments, if necessary-will help to keep the issue of inflation, and its effect on our older citizens, before Congress and the American public.

INCREASE IN EARNINGS BASE

H.R. 17550 would increase the earnings base-that is, the base on which the Social Security taxes as well as benefits are computed-from the present level of $7,800 to a level of $9,000, effective January 1, 1971. We believe this increase would be premature.

Let me be more specific :

We believe that the average earnings of regularly employed male workers represent an appropriate dividing line between the area in which the government should have responsibility to provide basic retirement benefits and the area in which the individual and his employer should have responsibility to provide retirement security through private media. In our opinion, the Social Security system clearly reaches beyond its role of providing basic economic protection when it provides benefits based on above-average earnings, as would be done under H.R. 17550. Likewise, when the system raises revenues through taxes at these above-average earnings levels, it drains off financial resources which the individual and his employer might otherwise put into private savings. In each situation, the freedom of individual choice is eroded.

Under our estimates, the average earnings of regularly employed male workers will not reach the $9,000 wage base contained in H.R. 17550 until 1974 or 1975. Thus, this increase to $9,000-to be effective on January 1, 1971-would bring the earnings base to a level substantially in excess of the estimated average earnings at that time. This increase would entitle workers with above-average earnings to additional Social Security benefits based on their earnings included in the newly covered wage band. Likewise, it would require younger workers at these earnings levels to pay additional Social Security taxes in an amount far in excess of the cost of the new benefits they will receive. In both these respects, the proposed earnings base increase would seriously impede the ability of an undermine the incentive for-the affected individuals and their employers to provide for retirement income through the many types of private media available.

Moreover, using an increase in the earnings base as a mechanism for financing across-the-board benefit increases, or otherwise carrying out the provisions of H.R. 17550, is an inefficient process. This results from the fact that part of the additional revenue which is raised will be drained off into providing benefits on earnings above the level presently appropriate for Social Security. Thus, only s portion of the increased revenues will be available for meeting the cost of the benefit increases and other changes which are the primary objective of II.R.

These same problems would arise in any instance in which the taxable earnings base is increased above average wage levels as a means for financing benefits unrelated to the retirement needs of the workers who would pay the increased taxes. Thus, for example, if the wage base were to be increased to finance increases in the minimum benefits under the Social Security retirement program, the by-product would be an increase in Social Security benefits-and taxes-for workers with above-average earnings. This, in turn, would leave only a part of the revenues available for the intended purpose. Moreover, by imposing taxes and providing benefits on above-average earnings, the Social Security system would be pre-empting an area properly left to the private retirement system. At this point, although the issue is not raised directly by H.R. 17550, I would like to make a few additional comments with respect to the minimum benefit aspect of Social Security in view of past efforts to raise these benefits significantly. Even aside from the question of the method of financing such benefits, we believe that it is undesirable to provide minimum benefits under the Social Security retirement program which significantly exceed the benefits otherwise payable under the present benefit computation formula. This conclusion is based on the view that Social Security was intended to be, and should remain, a wagerelated system, and is an improper vehicle for attempting to cure the problems of poverty. More specifically

(A) The fact that there is a relationship under the Social Security retirement program between the amount of wages (and thus taxes) paid with respect to an employee and the amount of his benefits provides a rational framework for determining the level of taxes and benefits. The inclusion of large minimum benefits under this program-which are far out of proportion to the wages on which payroll taxes were paid on behalf of the recipients-would seriously undermine this highly desirable aspect of the Social Security system.

(B) A flat increase in the minimum benefit would accrue to the benefit of many people who are clearly not in a poverty status. These include individuals who have worked only a minimum period under Social Security, but have spent a large part of their working career with the federal government or a state or local government or else in some other business or profession that was not always covered by Social Security, but which provides its own retirement system. Thus, an increase in the minimum benefit represents a very expensive and inefficient means for trying to alleviate poverty in the elderly age group. Moreover, we do not think it would be possible to structure a minimum benefit formula within the framework of the Social Security retirement system that would not have this aspect of inefficiency in it.

(C) Finally, we think the problems of the elderly poor should be considered, and resolved, as part of an overall revision of the wefare system as it applies to all age groups within our society and not solely in the context of revisions to the Social Security retirement provisions.

To return to the issues raised by H.R. 17550, we believe that until the level of average earnings justifies an increase in the earnings base, increases in Social Security benefits should be financed through any favorable actuarial balance in the present program, and beyond that the Social Security tax schedule should be drawn upon as a source of funds. Adherence to these principles will insure that the Social Security system remains in a self-supporting posture while at the same time financing its benefit increases in an efficient manner and in a manner that is consistent with its role in relation to private retirement media. These, we think, are extremely important objectives which should be followed by the Social Security system.

LIBERALIZATION OF THE RETIREMENT TEST

We support the provisions in H.R. 17550 for increasing the amount an individnal may earn without a reduction in Social Security benefits and for revising the formula for reducing Social Security benefits when earnings exceed the exemption level. We believe that these changes are not inconsistent with a sound retirement test. On the other hand, we oppose any provision for automatically raising the exemption level to reflect future increases in wage levels. We take this position for basically the same reasons we oppose automatic adjustments in the benefit levels and the earnings base.