TABLE 25.-Life insurance companies: Net increases in reserves, mortgage acquisitions, and holdings of assets, 1952-59; projection of net increases in reserves, funds available for net acquisitions of mortgages, and potential holdings of assets, 1960-70

[Amounts in millions of dollars; current dollars for 1952-59; 1959 dollars for 1960-70]

1952-59: Col. 1: Institute of Life Insurance, "1960 Life Insurance Fact Book", p. 59. Col. 2: Derived from col. 1 (year-to-year changes).

Col. 3: Col. 1 as a percent of col. 4.

Cols. 4, 5, 6, 8, 9, and 12: Institute of Life Insurance, ibid., pp. 64-65. Col. 5 consists
of United States and foreign government and State, Provincial, and local bonds. Col. 12
consists of real esate, policy loans, and miscellaneous assets.

Cols. 10 and 11: Institute of Life Insurance, ibid., p. 71. Includes railroad, public
utility, industrial and miscellaneous bonds and all stocks.

1960-70: Col. 1: Derived by addition of net increase during year (in col. 2).

Col. 2: From appendix table IV-A, col. 1.

Col. 3: Projected at 83.0. For 6 preceding years of 1954-59 the annual ratios ranged between 82.7 and 83.9, averaging 83.06.

Col. 4: Derived from cols. 1 and 3 by setting policy reserves equal to 83 percent of
total assets (col. 4-col. 1÷.83).

Col. 5: Derived by applying projected percentage of total assets in mortgages (col. 6)
as a percentage of col. 4.

Cols. 6, 9, and 11: Projected on basis of trends indicated by data for recent years.
Col. 7: Derived from col. 5 (year-to-year changes).

Cols. 8 and 10: Derived by applying projected percentages of total assets in cols. 9 and
11, respectively.

Col. 12: A residual of col. 4 minus cols. 5, 8 and, 10.

Projected availability and distribution of private (noninsured) pension funds

A relatively new but rapidly growing form of savings is in private (noninsured) pension funds which are administered predominantly by pension fund trustees. That part of the private pension funds which are known as insured pension funds and are administered by life insurance companies have been treated in the distribution of life insurance company assets.

A distinctly different pattern of portfolio investments appears, however, for the noninsured private pension funds. Between 90 percent and 95 percent of these noninsured pension funds are in corporate pension funds and the balance consists of multiemployer funds, nonprofit organizations, and union-administered plans. The trends indicated by the data for corporate pension funds in recent years have been extended, in the projection of the asset distribution of all private noninsured pension funds (in table 26). Available data showing the distribution of assets of corporate pension funds for 1954-59 indicate a heavy concentration of assets in corporate bonds and stocks. In the last 3 years (1957-59), however, the combined investments in corporate bonds and stocks as a proportion of total assets has tended to level off at about 83 percent. Since 1954 there has been a steady decline in the proportion of assets represented by U.S. Government securities and a smaller decline in the proportion of assets represented by cash, deposits, and other assets. The latter constitute about 51⁄2 percent of the total. The proportion of assets invested in mortgages has risen from 1 percent in 1955 to 2.3 percent in 1959.53

With respect to the proportion of assets represented by mortgages, the increase in this relative share of assets has been projected at a moderately accelerated rate. In this instance, account has been taken not only of the trends of the past few years, but also of the reports of increasing activities by various organizations such as the American Bankers Association, the AFL-CIO, and Government agencies to promote the investment of pension funds in mortgages. In the light of these efforts to increase pension funds investment in mortgages, the projection, which shows that mortgages as a percent of total assets of noninsured private funds would increase from 2.3 percent in 1959 to 9.5 percent in 1970, may be on the conservative side. As projected, the net annual increase in mortgage holdings by these pension funds would rise from about $0.3 billion in 1960 to about $0.9 billion in 1970.

A continuing decline, though at a more moderate pact than in recent years, has been projected in the proportion of assets represented by U.S. Government securities. Under this projection, U.S. Government securities as a percent of total assets would decline from 8.5 percent in 1959 to 5.5 percent in 1970, but the amount of such securities held would increase from $2.3 billion in 1959 to $4.1 billion in 1970. Since the total amount of outstanding U.S. Treasury securities would not increase under the assumed balanced budget, the increase in holdings of U.S. Government securities would represent primarily securities of Federal agencies which do not enter into the budget or the national debt.

53 See appendix table IV-C.

TABLE 26.-Private (noninsured) pension funds,

1959

estimated distribution of assets for 1959 and projected for 1960-70, including net acquisitions of mortgages

NOTE.-Totals may not add to sum of components due to rounding.

NOTES ON COLUMNS

1959: Col. 1: Total of noninsured corporate pension funds ($25.3 billion) plus other
noninsured funds ($1.9 billion) which include multiemployer funds, nonprofit organiza-
tions and union-administered plans. Securities and Exchange Commission, Statistical
Bulletin, June 1960, p. 7, table 6. The amount shown, plus that included in insured
pension funds in the SEC compilation, is substantially in agreement with the total of
private pension funds assets which is the basis of the projected increase in total private
pension fund savings shown in table 21 and in appendix table IV-B.

Cols. 3, 6, 8, and 10: Derived by application of percentage in following column as a
percent of total assets (col. 1).

Cols. 4, 7, 9, and 11: Percentage distributions for appropriate groupings of assets shown in appendix table IV-C for corporate noninsured funds which constitute about 93 percent of all noninsured pension fund assets.

Col. 5: Derived from col. 3 (year-to-year changes).

1960-70: Col. 1: Addition of net increase during year (col. 2) to total assets held at end of preceding year.

Col. 2: From appendix table IV-B, col. 5.

Cols. 3, 6, 8, and 10: Derived by application of percentage in following column as a percent of total assets (col. 1).

Col. 4: Projected on basis of trend shown in last few years (see appendix table IV-C) and expectation that it will continue in view of reports of increasing investment activity by pension funds in the mortgage field.

Col. 5: Derived from col. 3) year-to-year changes).

Col. 7: Judgment projection which indicates that the major part of new pension
funds will continue to flow into corporate bonds and stocks, but that the proportion
total assets represented by this category will decrease moderately as more diversified
portfolios are developed through a relative increase in mortgage investments.

Cols. 9 and 11: Projected to reflect continuation in trend of recent years of slight relative decline in these categories of assets.

The proportion of total assets represented by cash, deposits, and other miscellaneous assets has been projected to show a slight decline from 5.5 percent in 1959 to 5 percent in 1970, but the amount of funds in such assets would increase from $1.5 billion to $3.7 billion over this period. The bulk of the assets, as projected, would continue to be in corporate securities. The proportion of total assets in such securities has been projected to decline, however, from about 84 percent in 1959 to 80 percent in 1970. It is felt that as these funds continue to grow they will develop greater diversification, primarily through relatively more investment in mortgages and there will be some decline in the proportion represented by corporate securities, although the dollar amount of corporate securities would increase substantially from about $23 billion in 1959 to about $60 billion in 1970.

Commercial banks projected funds available for net investments in mortgages and other assets

A projection of the funds for investment that will be available from commercal banks probably is subject to greater error than in the case of any other type of institution. The great range within which commercial banks may increase their total loans and investments in a given year arises from the power of the commercial banks to issue credit far in excess of their net cash inflows. Actually, it is only the savings represented by the net increase in time deposits (plus the net savings or undistributed profits of the banks) which measure the basic net inflow of loanable funds into commercial banks. Increases in demand deposits really are increases in working capital of depositors. Traditionally, however, the commercial banks have increased their total loans and investments by amounts substantially in excess of the net inflow of time deposits in most years in order to accommodate the growth of the economy with additional credit, primarily short-term credit.

The commercial banks have wide latitude as to the amount of increase in total loans and investments in excess of the net increase in time deposits since they have to have a reserve against demand deposist equal to only about one-fifth or one-sixth of the total demand deposits. Therefore, they can create credit by making loans in the form of credits to demand deposits.

Thus there are two basic elements which will determine the total net annual increase in loans and investments by commercial banks. One is the net increase in time deposits and the second is the amount in excess of time deposits or, in effect, the amount of credit created by the commercial banks. The latter would be to a large extent a function of the demands for credit in the economy. (Presumably the Federal Reserve Board would permit an expansion of credit commensurate with stable growth of the economy.)

During the period 1952-59, which included the Korean war year of 1952 and the 1954 and 1958 years of recovery from recessions, the average net expansion of credit was about $3,700 million per year. The projection for 1960-70 is at an average of about $3,100 million per year on the assumption that stable growth will not involve excessive expansion in particular years, such as occurred in the previous decade with recessions and recoveries.

A small annual expansion has been projected for 1960 based on partial data available for the year and thereafter a gradual increase in the net annual increase in loans and investments in excess of the net inflow of time deposits has been projected (table 27, col. 7).54 The addition of the net increase in time deposits, plus the net increase in loans and investments in excess of time deposits, provided the basis of the projection of total loans and investments of commercial banks. The latter, in turn, was calculated to be 77 percent of the total assets of commercial banks for the 1960-70 period, in line with experience of recent years to derive a projection of total assets.55

In recent years there has been a rise in the proportion of assets represented by mortgages. In the projection a slight decline in this proportion is shown for the first few years of the decade, in light of the expectation that net mortgage requirements will be relatively low, and competition from other mortgage lenders should be strong. On the other hand, there should be increasing demand for short-term types of credit to which the banks presumably would be responsive. Therefore, the nonmortgage loans and investments as a percent of total assets are projected to increase slightly in the first few years of the forthcoming decade. These trends are reversed during the latter part of the decade when mortgage credit requirements are expected to rise to more substantial magnitudes. On this basis, the potential net increases in mortgage investments by the commercial banks would range between about $600 and $700 million per year during the first 3 years of the 1961-70 period and thereafter would range upward from about $1 billion in 1964 to about $1.4 to $1.6 billion per year in 1966-70. (See table 27.)

Projected net increases in mortgage holdings by individuals and others

The net increases in mortgage holdings by consumers and nonprofit organizations, which have been projected previously (table 21, line 18), include the personal mortgage holdings of individuals, personal trusts, and nonprofit organizations such as foundations, private schools, hospitals, and charitable, welfare, and religious organizations. As projected, the net annual increases in mortgage holdings of this sector of the economy, which had been $2.3 to $1.9 billion in 1959 and 1960, would range from $2 billion in 1961 to $3.2 billion in 1970.

In addition, there are some State and local government investments in mortgages. The net annual increases of these investments has been running at between $0.2 and $0.4 billion per year in recent years and have been projected at $0.4 billion in 1961, increasing gradually to $0.6 billion in 1970.

54 The projection of the annual net increases in loans and investments in excess of time deposits is used only to provide a rational basis for projecting total loans and investments and total assets, and the proportion represented by mortgages. Such "creation" of credit by the banks is not included among the basic supply of funds to meet market demands for credit, however, since the "creation" of credit by the banks arises only in response to credit stringency in the market, or in segments of it, particularly the short-term segment. 55 The comparable ratio averaged about 76 percent for all of the 1951-59 and 76.8 percent for 1954-59. the latter period the range of loans and investments to assets was between 75.9 percent and 77.8 percent.

In