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INVESTMENT OF INSURANCE FUNDS

TUESDAY, FEBRUARY 2, 1960

HOUSE OF REPRESENTATIVES,
COMMITTEE ON VETERANS' AFFAIRS,

Washington, D.C.

The committee met at 10:15 a.m., pursuant to notice, in room 356, Old House Office Building, Hon. Olin E. Teague (chairman) presiding. The CHAIRMAN. The committee will come to order.

We are meeting this morning to consider the bill H.R. 9378, which seeks to amend pertinent sections 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.

Without objection I will insert at this point in the record the text of the bill, together with a letter I have received from the Administrator of Veterans' Affairs, dated January 14, 1960, which includes considerable statistics on these trust funds, as well as the reports from the Veterans' Administration, the Bureau of the Budget, and the Treasury Department on this proposal. I would also like to include at this point the minutes of the meeting of the Treasury Department Committee on Investment Policy, dated January 13, 1960, and also a memorandum on the use of the ŎÁSI trust fund. Both of these were submitted to all members of the committee prior to this meeting. (The documents referred to are as follows:)

VETERANS' ADMINISTRATION,

OFFICE OF THE ADMINISTRATOR OF VETERANS' AFFAIRS,
Washington, D.C., January 29, 1960.

Hon. OLIN E. TEAGUE,

Chairman, Committee on Veterans' Affairs,
House of Representatives, Washington, D.C.

DEAR MR. TEAGUE: The following comments are submitted in response to your request for a report on H.R. 9378, 86th Congress. The bill proposes to amend sections 720 (b) and 755(b) of title 38, United States Code, to revise the method of investing the national service life insurance (NSLI) and U.S. Government life insurance (USGLI) trust funds. If enacted, the bill would

(1) Continue the present authority in the Administrator to set aside out of the NSLI and USGLI funds such reserve amounts as may be required under accepted actuarial principles to meet all liabilities under the insurance.

(2) Transfer from the Secretary of the Treasury to the Administrator the authority to invest and reinvest the USGLI and NSLI funds in interest-bearing obligations of the United States. The NSLI fund may also be invested in obligations guaranteed as to principal and interest by the United States, and in the case of

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the USGLI fund bonds of the Federal farm-loan banks may be purchased. Such obligations may be sold by the Administrator for the purposes of the funds.

(3) Require the Secretary of the Treasury, upon request of the Administrator, to issue to the Administrator interest-bearing obligations of the United States in the amounts and having the maturities requested by the Administrator.

(4) Require such interest-bearing obligations of the United States to bear annual interest from the date of acquisition at the higher of the following rates: (A) 3 percent on NSLI and 31⁄2 percent on USGLI, or (B) the rate of interest borne by 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.

(5) Permit assets of the NSLI fund to be invested in obligations guaranteed as to principal and interest by the United States only if the interest payable thereon is equal to or greater than the higher of the rates specified in (4), above.

(6) Permit assets of the USGLI fund to be invested in bonds of Federal farm-loan banks only if the interest payable thereon is equal to or greater than the higher of the rates specified in (4), above.

(7) Extend the purposes for which securities may be issued under the Second Liberty Bond Act to include the issue of obligations to the Administrator.

Section 1 of the bill authorizes the Administrator to set aside out of the NSLI fund "such reserve amounts as may be required under accepted actuarial principles to meet all liabilities" under the insurance (not just current payments) and to invest the "remainder" of such fund. The reserves on the insurance constitute over 90 percent of the assets of the fund and therefore must be invested to earn interest. Hence, it is assumed that the limiting of the investment authority to the remainder of the fund is clearly an oversight and not intended.

The bill would transfer from the Secretary of the Treasury to the Administrator the responsibility of investing the two insurance trust funds. Since the establishment of the funds the Secretary of the Treasury, as the fiscal officer of the Government, has been vested with this responsibility and his Department has trained personnel who are experts in monetary matters. The Veterans' Administration does not, of course, have such personnel. It is not believed that there is any necessity for or that any advantage would be gained by such a duplication of the investment functions of the Treasury.

You will recall my letter to you of January 14, 1960, in which I outlined the history of the investment policy regarding the two insurance trust funds and the factors considered in arriving at the fixed interest rates on the security holdings in each fund, as well as the effect on the funds if the going rate of interest had been paid over the past years. I am enclosing a copy of that letter (Committee Print No. 155) and believe it would be appropriate to consider it as a part of this report on the pending legislation.

It is my understanding that you have recently had a discussion of this subject with representatives of the Treasury Department and have been furnished details of a new formula for fixing interest rates

on the special obligations issued to the insurance trust funds. This formula resulted from a recent recommendation of the Department's Committee on Investment Policy.

In essence, the new Treasury formula provides a uniform conversion over a 15-year period of the existing 3- and 31⁄2-percent securities to investments yielding one-half of 1 percent less than the market yields at the time of conversion. Under no circumstances will interest rates on securities be less than 3 percent for the NSLI fund or 31⁄2 percent for the USGLI fund. This will produce an interest rate rising uniformly from the present 3- and 31⁄2-percent levels to approximately 44 percent (or higher if the present ceiling of 44 percent on Government bonds is removed) in 15 years if present market yields continue. Tables are enclosed showing the additional interest cost of the Treasury formula for the next 10 years.

H.R. 9378 would give the trust funds more income than the mentioned formula. It would maintain the 3- and 31⁄2-percent "floor" and guarantee the funds the increased rate when interest rates are higher. The Treasury formula, in a balancing of the equities, gives the funds the same interest floor as the bill and at the same time allows them to participate in higher rates of interest. In view of the substantial interest subsidies received by the trust funds in the past years and the desirability of maintaining a guaranteed rate of income, it is believed that the current Treasury approach is fair and equitable.

The rate of interest being paid by the Treasury on recent new investments is about 5 percent. If we assume that such rate of interest would be paid on the entire amount of the NSLI and USGLI trust fund investments the additional cost of the bill to the Government would be about $130 million a year.

After careful consideration of all factors involved, I believe that the Treasury formula should be followed in lieu of the proposal contained in H.R. 9378.

Advice has been received from the Bureau of the Budget that there would be no objection to the submission of this report to the committee. Sincerely yours,

SUMNER G. WHITTIER,

Administrator.

U.S. Government life insurance, U.S. Government security portfolio, fiscal years 1961-70

[Based on new Treasury formula for investment of funds]

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Prepared January 1960 by Office of Chief Actuary, Veterans' Administration.

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