National service life insurance, U.S. Government security portfolio, fiscal years 1961-70 Prepared January 1960 by Office of Chief Actuary, Veterans' Administration. EXECUTIVE OFFICE OF THE PRESIDENT, BUREAU OF The Budget, Hon. OLIN E. TEAGUE, Washington, D.C., February 1, 1960. Chairman, Veterans' Affairs Committee, Washington, D.C. MY DEAR MR. CHAIRMAN: This is in reply to your request for a report on H.R. 9378, a bill to amend sections 720 and 755 of title 38, United States Code, to provide for the investment of the national service life insurance fund and the U.S. Government life insurance fund in obligations bearing current rates of interest, and for other purposes. For many years the national service life insurance and U.S. Government life insurance funds have been invested by the Treasury Department in special obligations on which a fixed interest rate of 3 and 31⁄2 percent per annum, respectively, was set by administrative action. H.R. 9378 would change this investment procedure by authorizing the Administrator of Veterans' Affairs to invest the funds in public debt issues whenever the interest rate on such issues at the date nearest to acquisition exceeds 3 percent in the case of the national service life insurance fund and 31⁄2 percent in the case of U.S. Government life insurance. It would also retain the 3 and 3% percent rates as a guaranteed minimum rate of return to the funds. In summary, therefore, H.R. 9378 provides a flexible investment policy only when the going rate exceeds the specified minimum or floor. Interest rates on these funds need to be considered in the light of the general policy applicable to other major governmental trust funds which, together with the veterans' life insurance funds, bave over $43 billion invested in special Treasury issues. This administration favors a policy of flexible interest rates and has proposed it for the Federal old-age and survivors insurance, the Federal disability insurance and the civil service retirement and disability trust funds. Enactment of this flexible standard (the average yield on marketable Treasury issues with maturities of 3 or more years) for the social security trust funds was recommended to the Congress by the Departments of the Treasury and Health, Education, and Welfare last August. Last November a similar proposal for the civil service fund was transmitted to Congress by the Civil Service Commission and the Bureau of the Budget, and the Congress was advised that the proposal was in accord with the program of the President; its enactment was also recommended in the President's 1961 budget message. The Bureau of the Budget believes that the flexible standard has considerable merit and equity from the standpoint of both the veterans' trust funds and the general taxpayer. However, the policy set forth in H.R. 9378 differs significantly from the administration's recommended flexible rate standard inasmuch as it also includes a floor on the rate of return. The bill would therefore give the veterans' funds all the advantages of risk investment with none of the disadvantages. Furthermore, these funds are in excellent financial condition, more than able to finance the benefits provided, and for this reason any subsidy that might be provided at the expense of the general taxpayer by the floor provision of the bill is not needed to assure the fiscal soundness of the funds. In this connection it is relevant to note that these funds have received the benefit of substantial subsidies over the years. Contrary to the practice with most other Federal trust funds, all administrative costs have been paid by the Government since the inception of the programs. Further, a total of over $700 million has been paid to the funds in interest, over and above what would have been paid if a flexible standard had been in effect. We also note that the bill includes a provision which would shift responsibility for investment of the funds from the Secretary of the Treasury to the Administrator of Veterans' Affairs. Such a transfer would be contrary to sound principles of public debt management and organization. Finally, the Bureau of the Budget points out that a flexible interest rate policy for these funds can be established by administrative action. Because legislation is not needed in order to bring the interest policy applicable to the veterans' trust funds in line with that supported by the administration for other trust funds, and because of its objection to the provisions of the proposed bill specified above, the Bureau of the Budget is strongly opposed to H.R. 9378 and recommends against its enactment. Sincerely yours, ELMER B. STAATS, Washington, February 2, 1960. OFFICE OF THE SECRETARY OF THE TREASURY, Hon. OLIN E. TEAGUE, Chairman, Committee on Veterans' Affairs, MY DEAR MR. CHAIRMAN: Reference is made to your request for the views of this Department on H.R. 9378, to amend sections 720 and 755 of title 38, United States Code, to provide for the investment 51030-60- -2 of the national service life insurance fund and the U.S. Government life insurance fund in obligations bearing current rates of interest, and for other purposes. The purpose of the bill is to place interest rates on investments of the veterans life insurance funds in special public debt obligations more in line with current rates on Treasury marketable obligations. During the past year the Treasury has been moving in the direction of reappraising interest rates on special public debt obligations issued to the major Government trust funds. Interest rates on special issues to several of the major funds are based upon statutory specifications. In the case of the veterans life insurance funds there are no special provisions of law prescribing interest rates on Treasury obligations issued to these funds. The Secretary of the Treasury fixes the interest rates under his broad authority to issue public debt obligations. The rates now in effect were fixed many years ago at 31⁄2 percent for the Government life insurance fund and 3 percent for the national service life insurance fund. These are the same rates provided in the law for establishing the actuarial bases of the funds. The board of trustees of the Federal old-age and survivors insurance trust fund and the Federal disability insurance trust fund (the Secretary of the Treasury, managing trustee; the Secretary of Health, Education, and Welfare; and the Secretary of Labor) recommended last summer that the present statutory formula for fixing interest rates on special obligations issued to these funds be changed to a formula based upon current market yields rather than coupon rates, as recommended by the Advisory Council on Social Security Financing. The board of trustees proposed that the interest rate on special Treasury obligations issued to the trust funds be equal to the average of market yields on outstanding Treasury marketable issues not due or callable until after the expiration of 3 years from the end of the month prior to the issuance of the special obligations. A bill to give effect to this recommendation is currently pending before the House Committee on Ways and Means. In anticipation of congressional approval of this recommendation, the special obligations held by the old-age and the disability insurance trust funds were replaced last June with special issues having equal maturities distributed over a period from 1 to 15 years. The Senate report on the Independent Offices Appropriation Act for 1959 requested the Civil Service Commission and the Budget Bureau to submit recommendations to the Legislative and Appropriations Committee of the House and Senate for keeping the civil service retirement fund current and for providing on a sound basis for the future liabilities of that fund. The report submitted by the Chairman of the Civil Service Commission and the Director of the Bureau of the Budget contains a recommendation that the interest rate on special Treasury obligations issued to this fund be based upon a formula similar to that recommended for the old-age and disability insurance funds. In anticipation of congressional approval of this recommendation, the special issues held by the civil service retirement fund have been replaced with special issues having equal maturities ranging over a period of 1 to 15 years. Consideration is also being given to recommending a change in the statutory provision which fixed an interest rate of 3 percent on special issues acquired by the railroad retirement account. With regard to the veterans life insurance funds, the law places full responsibility in the Secretary of the Treasury for the investment of such funds. The Treasury Department Committee on Investment Policy for Trust Funds has recommended, and the Secretary of the Treasury has approved, the adoption of a formula for fixing interest rates on the special obligations issued to these funds based upon current market yields. The transition to the new interest rates will follow the pattern adopted for the Federal old-age and survivors insurance trust fund, the Federal disability insurance trust fund, and the civil service retirement fund. The Treasury is prepared to place the formula that has been approved in effect immediately, but we are holding our action in abeyance until the committee has had an opportunity to consider the matter. Under the formula, the special obligations will bear interest at a rate of one-half of 1 percent lower than a rate equal to the average market yield computed as of the end of the calendar month next preceding the date of issue borne by all marketable interest-bearing obligations of the United States then forming a part of the public debt that are not due or callable until after the expiration of 3 years from the end of such calendar month rounded to the nearest one-eighth of 1 percent, provided, however, that the special obligations issued to the Government life insurance fund shall be at rates not less than 31⁄2 percent and obligations issued to the national service life insurance. fund shall be at rates not less than 3 percent. However, unless the Congress removes the 4 percent interest ceiling on Treasury bonds, it will not be possible to use rates in excess of 4% percent on the special obligations having maturities beyond 5 years. If the formula were now in effect, the interest rate on current special issue investments would be 4% percent. In view of the historic basis used for establishing rates of interest of 31⁄2 and 3 percent on special obligations issued to these two funds, which takes into consideration the rates established by the Congress for fixing premiums and for use in other calculations in connection with such insurance, these present rates will be considered as a floor for the rates on such special obligations, to protect the funds against any subsequent drop in market yields below these rates. In consideration of this guarantee against such contingency, the rates based upon current market yields will be reduced by one-half of 1 percent. This formula will provide a substantial improvement in rates for current investments in these two funds. If current market rates continue at levels in excess of 3 or 31⁄2 percent, the earnings of the funds will increase from year to year during a long future period. The transition to the new formula will be made gradually. The maturity distribution of the special obligations held in the funds will be rearranged in accordance with the needs of the funds and the principles of sound and equitable trust fund management. This objective will be accomplished by rearranging investments of the special issues presently held with securities having equal maturities, ranging over a period of from 1 to 15 years. This will result in an average maturity of about 71⁄2 years for investments in these funds, compared to an average maturity of about 20 years for bond investments held by American life insurance companies. At the end of each year beginning with the fiscal year 1960 the amount of special issues maturing will be refunded with new special issues so arranged as to maintain approximate equal maturities of the funds from 1 to 15 years. The new securities will carry rates of interest based upon the new formula, subject to a maximum of 4 percent for issues with maturities beyond 5 years, so long as the present interest rate ceiling is in effect. Current receipts not needed for current payments will be invested in special issues maturing on June 30 of each year. Whenever it is necessary to redeem securities to cover current benefit or other payments from the funds, this will be accomplished by redeeming obligations of earliest maturity beginning with those bearing the lowest rate of interest. In view of the changes that the Treasury proposes to make in the investment practices related to the veterans life insurance funds, it appears that the purposes sought to be accomplished by H.R. 9378 are not necessary. Accordingly, the Treasury Department recommends against its enactment. The Department has been advised by the Bureau of the Budget that there is no objection to the submission of this report to your committee. Very truly yours, JULIAN B. BAIRD, JANUARY 14, 1960. Hon. OLIN E. TEAGUE, Chairman, Committee on Veterans' Affairs, Washington, D.C. DEAR MR. TEAGUE: Your understanding as to the manner of handling insurance premiums and the life insurance trust funds is correct. The investment holdings of the insurance trust funds as of December 31, 1959, are as follows: The annual rate of return (earned interest rate from all sources) on the investment of the USGLI fund since the inception of the fund is set forth in a table attached to this letter. The annual rate of return on the NSLI fund since its inception is 3 percent on funds. invested by the Treasury. Prior to 1947, the Treasury Department bought and sold eligible securities for the account of the USGLI trust fund in the open market. In the years 1944-46, the Treasury after consultation with the VA, |