sold all of this fund's bondholdings and realized a capital gain of some $40 million. From then until the present, the investments of this fund have been in special Treasury certificates of indebtedness (nonmarketable) bearing 31⁄2 percent interest. The reasons for this change in investment policy were the same as those given for investing the NSLI funds in special certificates.

Since inception, investments of the NSLI trust fund have been made in special nonmarketable obligations bearing 3 percent interest. The reasons for the establishment of the 3-percent rate were set forth in the following two paragraphs excerpted from a letter to the President under date of February 1, 1941, from the then Acting Secretary of the Treasury:

For many years outstanding bonds and notes of the United States have been selling in the market at substantial premiums and at the present time are yielding investors from one-eighth to a maximum of approximately 2 percent, depending upon maturity. Consequently, the Treasury has difficulty in making satisfactory investments for statutory trust accounts through market purchases. Also as the volume of moneys available to this and other funds increase the investment of such moneys in the market has a tendency to enhance the demand for Government securities and acts to increase the premiums which must be paid therefor with a resultant decrease in the investment yields.

The National Service Life Insurance Act provides that the premium rates for insurance shall be the net rates based upon the "American Experience Table of Mortality" and interest at the rate of 3 percent per annum, and that all cash, loan, paid up, and extended values, and all other calculations in connection with such insurance, shall be based upon the "American Experience Table of Mortality" and interest at the rate of 3 percent per annum. It is further provided that the United States shall bear the excess mortality cost and the cost of waiver of premiums on account of total disability traceable to the extra hazard of military or naval service, as such hazard may be determined by the Administrator of Veterans' Affairs. In view of this situation it seems advisable to have the investments of the national service life insurance fund made in special series of certificates of indebtedness and Treasury notes bearing interest at the rate of 3 percent per annum, payable on June 30 of each year or on prior redemption. This rate will correspond to the rate fixed by the statute for reserve purposes, etc. ***.

After your letter was received, your staff requested by phone that there be included in my reply a table showing the effect on the funds if the going rate of interest had been paid over the past 10 years. Such a table is attached for the years 1941-60 in the case of the NSLI fund and 1945-60 in the case of the USGLI fund. It can be seen from this comparison that the financial advantage to date is clearly on the side of the trust funds.

There is no statutory provision to prohibit the two trust funds receiving a higher rate of interest than those specified in sections 702 and 743.

You ask whether the VA during my term as Administrator has made any effort to adjust interest rates. The answer is "Yes." Not only does VA have its own actuaries, it calls upon an advisory board of the top actuaries in America from private industry. That board, at their last meeting (last November), suggested that the VA attempt to secure a more favorable and realistic rate of return on its investment. Since then, VA officials have been working on various proposals, considering which would be the best course of action. I am sure you can appreciate this is a very complex matter involving a number of factors, not the least of which is consultation with other Federal departments.

It is important to weigh all factors to insure that the veterans' savings will not in any way be endangered.

Just as quickly as a final decision is reached, we will be glad to notify you or to discuss it with you or your committee staff.

Sincerely,

SUMNER G. WHITTIER, Administrator.

U.S. Government life insurance trust fund-Earned interest rate for years indicated

USGLI trust fund-Comparison of interest earnings

321⁄2 actual rate versus rate on proposed social security and other trust fund basis; namely, (1) average rate each year equals average yield on outstanding marketable securities not due or callable until after expiration of 3 years, rounded to the nearest % of 1 percent

NSLI trust fund-Comparison of interest earnings

3 percent actual rate versus rate on proposed social security and other trust fund basis; namely, (1) Average rate each year equals average yield on outstanding marketable securities not due or callable until after expiration of 3 years, rounded to the nearest % of 1 percent

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 United States Government Life Insurance Fund in obligations bearing current rates of interest, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 720(b) of title 38, United States Code, is amended to read as follows:

"(b) The Administrator is authorized to set aside out of such fund such reserve amounts as may be required under accepted actuarial principles to meet all liabilities under such insurance. The remainer of such fund shall be invested and reinvested by the Administrator in interest-bearing obligations of the United States, or in obligations guaranteed as to principal and interest by the United States, having such maturities as the Administrator shall determine with due regard for the needs of the fund. The Administrator may sell such obligations for the purposes of the fund. The Secretary of the Treasury, upon request by the Administrator, shall issue to him interest-bearing obligations of the United States in the amounts and having the maturities requested by the Administrator. The purposes for which securities may be issued under the Second Liberty Bond Act are extended to include the issue of obligations to the Administrator under this section. Each such obligation of the United States shall bear interest from the date of its acquisition by the Administrator at whichever is the higher rate, (1) 3 per centum per annum, or (2) the rate of interest borne by the interest-bearing obligations of the United States most recently issued before such acquisition which form a part of the Public Debt and which had, as of the date of their issue, a comparable maturity. Assets of the fund may not be invested or reinvested in obligations guaranteed as to principal and interest by the United States unless interest is payable on such obligations from the date of their acquisition at a rate equal to or greater than the higher of the rates of interest specified in clauses (1) and (2) of the preceding sentence."

SEC. 2. Section 755(b) of title 38, United States Code, is amended to read as follows:

"(b) The Administrator is authorized to set aside out of the funds so collected such reserve funds as may be required, under accepted actuarial principles, to meet all liabilities under such insurance. The Administrator shall invest and reinvest the United States Government Life Insurance Fund, or any part thereof, in bonds of the Federal farm-loan banks or in interest-bearing obligations of the United States which have such maturities as the Administrator shall determine with due regard for the needs of the fund. The Administrator may sell such bonds or obligations for the purposes of the fund. The Secretary of the Treasury, upon request of the Administrator, shall issue to him interest-bearing obligations of the United States in the amounts and having the maturities requested by the Administrator. The purposes for which securities may be issued under the Second Liberty Bond Act are extended to include the issue of obligations to the Administrator under this section. Each such obligation shall bear interest from the date of its acquisition by the Administrator at whichever is the higher rate, (1) 3% per centum per annum, or (2) the rate of interest borne by the interestbearing obligations of the United States most recently issued before such acquisition which form a part of the public debt and which had, as of the date of their issue, a comparable maturity. Assets of the fund may not be invested or reinvested in bonds of Federal farm-loan banks at any time unless the interest is payable on such bonds from their date of acquisition at a rate equal to or greater than the higher of the rates of interest specified in clauses (1) and (2) of the preceding sentence."

MINUTES OF MEETING OF THE TREASURY DEPARTMENT COMMITTEE ON INVESTMENT POLICY JANUARY 13, 1960

The Treasury Department Committee on Investment Policy for Trust Funds, met in the office of the Under Secretary for Monetary Affairs January 13, 1960. The Under Secretary, Mr. Baird, presided as chairman of the meeting and Mr. William T. Heffelfinger, Fiscal Assistant Secretary, acted as secretary. Mr. Robert P. Mayo, Assistant to the Secretary, was invited to sit with the committee. Mr. Baird stated that in line with the committee's practice of reviewing the investment policies governing the trust funds administered by the Treasury, the purpose of the meeting was to consider the veterans' insurance funds. Mr. Baird pointed out that the Treasury should follow insofar as possible a consistent investment policy with respect to all of its trust-fund operations.

Mr. Baird called attention to the fact that the committee, in its meeting of June 29, 1959, decided to recommend to the Secretary that steps be taken with the objective of lengthening the maturities of special issues in the Federal oldage and survivors insurance trust fund, and the Federal disability insurance trust fund by rearranging investments of the special issues with equal maturities ranging over a period of from 1 to 15 years. This action was taken in anticipation of the approval by Congress of the recommendation by the Board of Trustees (the Secretary of the Treasury, the Secretary of Health, Education, and Welfare, and the Secretary of Labor) 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. A bill to give effect to this recommendation is currently pending before the House Committee on Ways and Means.

The independent offices appropriation bill for 1959 contains a provision requiring the Civil Service Commission and the Bureau of the Budget to submit recommendations to the Legislative and Appropriations Committees 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 the Government to the beneficiaries of that fund. The report submitted by the Chairman of the Civil Service Commission and the Director of the Bureau of the Budget, pursuant to this requirement, 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 Federal old-age and survivors insurance trust fund-namely, that the rate be equal to the average market yields on outstanding issues not due or callable until after the expiration of 3 years from the date of issue of such special obligations. In anticipation of congressional approval of this recommendation, the special obligations held by the civil service retirement fund were recently

replaced with special issues having equal maturities ranging over a period of from 1 to 15 years.

Mr. Baird stated he had also discussed a few months ago with the members of the Railroad Retirement Board the question of increasing the interest rate now payable pursuant to law on the special obligations issued by the Treasury to the railroad retirement account. The Commissioners pointed out that the present 3 percent statutory rate has been substantially lower than market yields on Treasury obligations for some time and they thought some change should be made to bring their earnings more in line with the present market rates. As a result of these discussions the Treasury has notified the Director of the Bureau of the Budget that it would have no objection to a change in the law to base the interest rate on special obligations issued to the railroad retirement account on a formula similar to that proposed for the Federal old-age account and the civil service retirement fund. The Commissioners were also advised of the Treasury's position in the matter.

Mr. Baird stated that the principal remaining long-term trust funds, similar to the foregoing, which require attention are the two veterans' insurance fundsthe Government life insurance fund and the national service life insurance fund. The Government life insurance fund was established in connection with life insurance policies issued to veterans during World War I. Prior to 1944, the Government life insurance fund was invested in marketable Treasury obligations and 421⁄2 percent special adjusted service bonds. At that time the average interest rate on all securities in the Government life insurance fund was 3.61 percent and the Administrator of Veterans' Affairs was concerned with the impact on the fund which the reinvestments of $500 million of the 41⁄2 percent bonds maturing in 1946 at the prevailing 21⁄2 percent rate would have on interest earnings. At that time the President approved a recommendation of the Secretary of the Treasury that the special obligations issued to this fund bear interest at the rate of 31⁄2 percent. The World War Veterans' Act specifies that the basis of calculation of the reserves and all other values under the Government life insurance policies issued to veterans of World War I shall be the American Experience Table of Mortality and interest at 31⁄2 percent. This provision of law was used as a guide for fixing a 31⁄2 percent interest rate on the special obligations.

The special obligations issued to the Government life insurance fund have been in the form of 1-year certificates of indebtedness. This fund does not hold any marketable Treasury obligations and the total holdings of special 31⁄2 percent certificates, as of December 31, 1959, amount to $1,100,235,000. This fund will continue at somewhat near its present level for many years in the future before it is substantially reduced as its insurance obligations are eventually extinguished. The national service life insurance fund was established in 1941 in connection with the insurance policies issued to military personnel during World War II. For many years prior thereto outstanding bonds and notes of the United States were selling in the market at substantial premiums and in February 1941 were yielding investors from one-eighth of 1 percent to a maximum of approximately 24 percent, depending upon maturity. In view of the fact that the National Service Life Insurance Act provides that the premium rates for insurance shall be the net rates based upon the American Experience Table of Mortality and interest at the rate of 3 percent per annum, the Secretary of the Treasury, with the approval of the President, on February 11, 1941, determined to have the investments of this fund made in special series of Treasury obligations and bear interest at the rate of 3 percent. In fixing a 3 percent interest rate, the Secretary of the Treasury

stated:

"It is therefore proposed to make investments on account of the national service life insurance fund in special series of 3 percent certificates of indebtedness and Treasury notes until such time as, in the discretion of the Secretary of the Treasury, investments for the fund can be made more advantageously in the interest of the Government by the purchase of obligations in the market or on direct subscription to new issues of public debt obligations.”

The national service life insurance fund is entirely invested in 5-year special 3 percent Treasury notes. At December 31, 1959, the fund held these notes maturing annually from 1960 to 1964 and in an aggregate amount of $5,691,548,000. This fund will also continue for many years in the future.

Mr. Baird stated that although yields on marketable obligations have been in excess of 3 percent in recent years, it would not have been in the interest of the Government to invest all its trust funds in marketable obligations. However, to the extent possible, there have been substantial market purchases for certain accounts.

51030-60-3