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September 1992

***

/

1002 L l d3S

TIIE
FEDERAL
RESERVE
RANK of
ST. I/H 1S

Should Government Continue To Subsidize Farmers?
Pension Insurance: Is There a Crisis on the Horizon?
The Changing Face o f Life Insurance



THE EIGHTH FEDERAL RESERVE DISTRICT

CONTENTS
CONTENTS______________________________________________________________________________________
Agriculture
Is There Still a Farm Problem?..................................................................................................................................1
Business
Pension Insurance: A Crisis on the Horizon?.......................................................................................................... 5
Banking and Finance
Is There Less Assurance in Life Insurance?.......................................................................................................... 10
Statistics .................................................................................................................. .................................................. 14
Pieces of Eight—An Economic Perspective on the 8th District is a quarterly summary of agricultural, banking and
business conditions in the Eighth Federal Reserve District. Single subscriptions are available free of charge by writing:
Research and Public Information Department, Federal Reserve Bank of St. Louis, Post Office Box 442, St. Louis,
MO 63166-0442. The views expressed are not necessarily official positions of the Federal Reserve System.



1

Is There Still a
Farm Problem?
by Kevin L. Kliesen
Kevin B. Howard provided research assistance.

Misleading statistics—or statistics that are abused
by politicians—are the source o f much o f the
“farm crisis ” o f the last half century.
—James Bovard1

A
the above quotation suggests, not
everyone is convinced that the agricultural sector
has been beset by serious problems. Nonetheless,
for almost six decades, the federal government has
formulated policies to increase the welfare of the
farm sector relative to the nonfarm sector. These
policies were originally implemented because farm
income levels substantially trailed nonfarm income
levels, a dilemma that came to be known as the
“ farm problem.”
This article examines the current economic sta­
tus of the farm sector to determine what indicators
of farm income might suggest about the future
course of governmental policies to assist this sec­
tor. In addition, the article briefly examines the
underpinnings of increased government assistance
to agriculture and the evolution of the agriculture
sector since the 1930s.

The Economic and Political Basis
for Government Involvement in
Agriculture
The farm problem has traditionally been as­
sociated with the tendency of market-determined
farm prices to decline over time. This downward
pressure on commodity prices reflects a tendency
for the supply of agricultural products to have in­
creased faster than the demand for them. In turn,
“ low” commodity prices caused farm income to
grow more slowly than nonfarm income. As a
result, the federal government has implemented
policies to redistribute income back to the farm
economy.
Prior to 1933, government intervention in the
agricultural sector was minimal and focused
primarily on policies to expand overseas markets
or provide adequate bank credit to farmers. Begin­
ning with the Agricultural Adjustment Act of




1933, however, the federal government assumed a
more active role in agriculture. Its policies have
included various price support and production con­
trol initiatives, as well as various credit subsidiza­
tion measures.2
Although intended to remedy the farm
problem, the rationale for government intervention
into agriculture stemmed from a broader context,
based principally on the ideals of “ Jeffersonian
agrarianism” and the “ agricultural creed.” These
two pillars of agricultural interventionism rest on
the notions that (1) all commerce evolves from
agriculture, (2) the rural way of life is superior to
all others and (3) a democratic society is best an­
chored on a foundation of small, independent
farmers.3 Given the predominant agrarian history
of our country, many argued that farming was a
way of life that deserved special protection. In the
years since the Depression, however, the agricul­
tural sector has changed dramatically.

The Changing Nature o f the
Agricultural Sector
For much of U.S. economic history, agricul­
ture was a relatively important sector in terms of
employment and output. Over time, however, the
U.S. economy has evolved from being agriculturalbased to industrial-based to, currently, servicebased. This changing composition of output has
precipitated a movement of economic resources out
of agricultural production. For example, farm em­
ployment as a percent of total employment has
steadily fallen over the years, from about 13.5 per­
cent in 1947 to 2.5 percent in 1991. Over the
same period, the number of farms declined by
more than one-half, to its current 2.1 million.
Further evidence of agriculture’s relative
decline in economic importance can be seen by ex­
amining farm output as a percent of the nation’s
total output (measured as gross domestic product).
From 1929 to 1990, inflation-adjusted (or real)
farm output as a percent of total real output has
decreased from about 7.7 percent to 1.9 percent.4
Thus, while the domestic food and fiber industry
may account for as much as 20 percent of total
output and slightly more than 20 percent of total
labor force employment, its actual production
aspect—that is, the growing and harvesting of farm
commodities—accounts for substantially less.5

Fewer Farmers Feeding More People: The
Benefits o f Increased Productivity
Increases in productivity allow more output to
be produced with fewer resources. Agriculture is a
good example of this fundamental principle:

2

Figure 1

Index of Farm and Nonfarm Productivity

rising productivity in agriculture has likely affected
the relative growth of farm income vs. nonfarm in­
come since the 1970s.

(1982=100)

Characterizing the Farm Problem

Figure 2

Index of Real Prices Received by Farmers
(1982=100)

Productivity advances in the farm sector have ena­
bled fewer people to produce a larger quantity of
output, freeing redundant resources to migrate to
other sectors. In fact, since 1970, farm productivi­
ty growth has outpaced nonfarm productivity
growth, rising at a 2.2 percent annual rate, while
nonfarm productivity has grown at a 1.2 percent
rate. This gap has widened further since 1980, as
farm productivity grew at a 2.9 percent rate, while
nonfarm productivity grew at a 1.1 percent rate
(see figure 1).
Productivity is a key determinant of the in­
come received by a specific resource. This insight
reflects the fact that more productive resources
tend to receive higher pay. As discussed below,




Figure 2 illustrates one of the key elements of
the farm problem—declining real farm commodity
prices. Relative to the gross national product
(GNP) implicit price deflator, commodity prices
received by farmers have fallen steadily over the
years. While the broad index of nominal farm
prices received by farmers has risen at an annual
rate of 2.3 percent since 1910, the broad measure
of aggregate prices has risen at an annual rate of
3.5 percent. Thus, in real terms, farm commodity
prices have fallen at an annual rate of about 1.2
percent per year. This trend, which may be dis­
concerting to some, is a direct consequence of the
continual productivity advancements made by the
agricultural sector over time and should, thus, be
viewed in the context of this development.
Table 1 illustrates the other primary charac­
teristic of the farm problem—the level of farm in­
come relative to nonfarm income. The nominal
median farm household and nonfarm household in­
comes are shown for selected years since 1945.
During much of the post-World War II period,
median farm household income averaged approxi­
mately one-half of median nonfarm household in­
come. Not until the late 1960s and early 1970s did
farm income reach 70 percent of nonfarm income
on a sustained basis. Median farm income has con­
tinued to grow faster than median nonfarm in­
come, so that it is now 6 percent higher than
nonfarm income (see table l) .6
Certainly, increased expenditures on federal
farm programs since 1983 have narrowed the
difference between farm and nonfarm household
income. For example, from 1945 to 1982, govern­
ment payments constituted 8.4 percent of net cash
income (NCI).7 With the onset of the farm crisis
in the early 1980s, however, government payments
as a percent of nominal NCI jumped to 30.3 per­
cent in 1987 and have averaged 17.8 percent since
1983. This is only a partial answer, though. The
primary reason for increased farm income relative
to nonfarm income is a direct result of faster
growth in farm productivity. In stark terms, in­
creased productivity means fewer farmers and larg­
er incomes.

The Fallacy of Low Farm Incomes
Although comparisons of median farm and
nonfarm income are instructive, they are somewhat
inadequate for comparing actual levels of farm and

3

Table 1
Median Money Income of Farm vs. Nonfarm Households, 1945-90
Population

1945

1955

1965

1975

1985

1986

1987

1988

1989

1990

Farm
($/year)

1,291

2,111

4,122

10,845

20,166

21,655

24,978

24,222

28,824

31,589

Nonfarm
($/year)

2,595

4,840

7,060

13,829

23,703

24,979

26,086

27,280

28,908

29,901

Farm/nonfarm
(percent)

49.7

43.6

58.4

78.4

85.1

86.7

95.8

88.8

99.7

105.6

SOURCE: U.S. Department of Commerce: Bureau of the Census, Money Income and Poverty Status of Families and
Persons in the United States (Washington, D.C.: U.S. Government Printing Office, various years).

nonfarm income.8 This is primarily because farms
come in many sizes. Table 2 details the breakdown
of average farm household income by size during
the period 1987-90.9 Clearly, farm size is directly
associated not only with the farm’s net cash in­
come, but with the farmer’s equity position as
well. Three additional points can be gleaned from
table 2.
First, according to the USDA, there were ap­
proximately 2.1 million farms in 1990.10 This is
somewhat misleading, however, because nearly 85
percent of these farms sell less than $100,000 in
commodities in a year. In fact, the vast majority of
these, a little more than 1.5 million, are essentially
small, part-time farmers—also known as “ hobby
farmers.” The remaining farms in this category,
those with $40,000 to $99,999 in sales, are essen­
tially what we know as the small, full-time, family
farmers. While farms with sales less than
$100,000 represent the bulk of the nation’s farms
in numerical terms, they are relatively minor in
terms of production, generating about 18 percent
of total farm income.
The nation’s most important producers of food
and fiber, on the other hand, are those farms that
grow and sell more than $100,000 in a year.
These are the largest and most efficient producers
of U.S. farm output, and, accordingly, they garner
over 80 percent of total farm income.
Second, a common misconception is that the
sale of agricultural commodities is the sole source
of income for the farm household. As table 2 sug­
gests, off-farm income (for example, from a work­
ing spouse or investment income) significantly
adds to farm household income. Therefore, when
properly included, farm household income is sub­
stantially above the median nonfarm household in­
come. For instance, the small, full-time farmer
(those in $40,000 to $99,999 sales class) earned
about $47,000 per year, while the larger, family
farmer (sales between $100,000 and $250,000)



earned nearly $88,000 per year during the 1987-90
period. By this measure, the family farmer still earns
significantly more than their nonfarm counterparts.
Moreover, this conclusion would hold even if gov­
ernment income support payments were excluded."
Finally, the equity position of each farm size
is substantial. Although the largest farms have the
largest net worth per farm, even the part-time
farmers have considerable equity. For the broadly
defined, full-time, family farmer (assuming com­
modity sales of between $40,000 and $250,000),
their net worth is substantially above the median
household net worth of $72,768. which represents
the median net worth of all U.S. owner-occupied
households as of 1988. In contrast, the median net
worth for all U.S. households in 1988, including
those who do not own their own homes, was
$35,752.

Conclusion
Since 1933, government assistance to the
agricultural sector has been predicated on the no­
tion of not only preserving our agricultural
heritage—by preserving the “ family farmer” —but
also on the notion that farmers did not earn in­
comes comparable to their nonfarm counterparts.
While this may have been the case during much of
this period, the evidence presented here suggests
that the “ farm problem” —at least the latter aspect
of it—no longer holds. Moreover, this conclusion
would hold even if government farm payments
were excluded. This fact, while often overlooked,
reflects productivity growth in the farm sector,
which has allowed fewer farmers to produce an
ever-increasing share of our nation’s output of
agricultural products. Thus, governmental policies
to bolster farm incomes may be both anachronistic
and unnecessary.

Table 2
Number of Farms, Farm Income, Off-Farm Income and Farm Equity by Sales Class, 1987-90

Sales class

Number of
farms1

Less than $20,000
$20,000 to $39,999
$40,000 to $99,999
$100,000 to $249,999
$250,000 to $499,999
$500,000 to $999,999
$1,000,000 and over

1,254,000
259,000
306,000
214,000
64,000
27,000
16,000

Sales class

Government
payments
per farm2

Less than $20,000
$20,00 to $39,999
$40,000 to $99,999
$100,000 to $249,999
$250,000 to $499,999
$500,000 to $999,999
$1,000,000 and over

$

469
3,887
9,150
21,262
37,809
45,172
42,787

Net cash
income per
farm2
$

-2 9 6
10,186
26,896
70,442
152,393
273,187
1,358,956

Total farm
income less
government
payments
$

30,090
33,130
37,524
66,677
141,157
253,661
1,343,419

Off-farm
cash income
per farm2
$30,856
25,831
19,778
17,497
26,573
25,646
28,250

Total farm
household
income3
$

30,559
37,017
46,674
87,939
178,966
298,833
1,386,206

Equity
per farm
household2’4
$ 190,000
368,750
468,000
758,750
1,194,250
1,653,250
3,857,250

1Measured as of 1990.
2Measured as the average of the years 1987 to 1990 in nominal dollars.
3Sum of net cash income and off-farm income.
4lncludes operator households.
SOURCE: Economic Indicators of the Farm Sector: National Financial Summary, 1990 (United States Department of
Agriculture, November 1991).

1The Farm Fiasco (Institute for Contemporary Studies,
1991), p. 43.
2See Clifton B. Luttrell, The High Cost of Farm Welfare
(Cato Institute, 1989), for a discussion of the recent his­
tory of U.S. farm programs.
3Ronald D. Knutson, J.B. Penn and William T. Boehm,
Agricultural and Food Policy (Prentice-Hall, 1983), chap­
ter 1.
4See Economic Report of the President (Government
Printing Office, February 1991), Table B-9.
5The food and fiber industry is broadly defined here to
“ embrace all activities from the provision of farm inputs
through commodity production and onto final consump­
tion.’’ See Economic Report of the President (Govern­
ment Printing Office, February 1987), p. 148.
6D. Gale Johnson has estimated that, because of factors
such as consumption of home-produced products and a
rural lifestyle, farm and nonfarm incomes will be approx­
imately equal when farm incomes reach 75 percent to
80 percent of nonfarm incomes. See D. Gale Johnson,
“ Agricultural Policy Alternatives for the 1980s,” in Food
and Agricultural Policies for the 1980s, D. Gale Johnson,
ed. (American Enterprise Institute, 1981), p. 189.




7Net cash income (NCI) is the difference between gross
cash income and cash expenses. This measure is
analogous to household income because farmers use
NCI to purchase farmland and farm equipment, retire
debt and meet family expenses.
8See Jeffrey D. Karrenbrock, “ Potential Pitfalls of Inter­
preting Farm Income Data,” Pieces of Eight, Federal
Reserve Bank of St. Louis (June 1990), pp. 10-13.
9For consistency, 1987 is used as the initial period be­
cause that is when USDA began to include measures of
farm income by sales class of $1 million and over. Be­
fore 1987, the largest classification was $500,000 and
up. This break in the data, therefore, causes a substan­
tial income decline in the $500,000 to $999,999 sales
class between 1986 and 1987.
10The U.S. Department of Agriculture (USDA) defines a
farm as an establishment that sold or would have sold
$1,000 worth of agricultural products in one year. At
current yields and prices, this represents production
from about four acres of corn.
11The total farm household income number listed in table
2 is only an approximation and not an actual number.
This is because off-farm income is derived from esti­
mates published by the Bureau of Census.

Pension Insurance: A
Crisis on the Horizon?
by Adam M, Zaretsky
Thomas A. Pollmann provided research assistance.

‘ ‘I f we are not to ignore the lessons o f the past,
the time to act is now, before inaction increases
dramatically the cost o f [the] PBGC’s losses. ”
—Lynn Martin, U.S. Secretary of Labor

w

y
y ith current attention focused on the
government’s bailout of the savings and loan in­
dustry, it is easy to overlook other industries where
the potential for a similar failure exists. Actually,
whenever a government agency insures the actions
of private firms, the possibility of a taxpayer
bailout is present. One such industry is pension in­
surance.
Since 1974, the U.S. federal government,
through an agency of the Department of Labor,
has been insuring private pension plans against ter­
mination and underfunding. The government origi­
nally engaged in pension insurance, as it did deposit
insurance, with the intention of protecting partici­
pants against firm abuse. This well-intentioned
regulation, however, can result in the abuse being
transferred from the insured parties to the insurer,
the federal government.

ticipants with either severely reduced or no
benefits.2
To reduce the uncertainty associated with pos­
sible termination or underfunding, ERISA estab­
lished the Pension Benefit Guaranty Corporation
(PBGC), a government-sponsored enterprise charged
with overseeing and insuring pension plans. Essen­
tially, the PBGC guarantees workers that, should
their insured pension plans terminate, they will
receive the basic benefits—regular retirement,
death and disability—promised under the plan up
to a prescribed monthly cap (about $2,300), even
if the plan is underfunded. Currently, the PBGC
insures approximately 95,000 pension plans cover­
ing nearly 40 million American workers and
retirees.3
The PBGC’s growing losses have eclipsed the
revenues it collects from premium payments, as
more and larger firms have declared bankruptcy
with underfunded pension plans. The program’s
steadily increasing deficits, shown in the figure on
page 7, reflect this trend. (The large spike in 1986
results from the terminations of the LTV Corpora­
tion’s largely underfunded pension plans. Without
LTV’s terminations, the 1986 deficit probably
would have been about $1.3 billion.) In addition,
more firms today with active pension plans have
low funding ratios than before, exposing the PBGC
to potentially severe losses.
This growing tendency of firms relying on the
PBGC to salvage their underfunded pensions wor­
ries many at the PBGC and the Labor Department,
the PBGC’s jurisdictional director. As implied by
Secretary Martin’s comment, the potential for
another S&L type crisis exists, because, ultimately,
any monies paid out by the PBGC in excess of its
collections must be provided by U.S. taxpayers.
To fully understand the operations and poten­
tial problems of the PBGC, a knowledge of the
types of pension plans available is necessary. With
this as a foundation, we can then describe the na­
ture and evolution of the PBGC’s worries.

Pension Insurance Background
The Employee Retirement Income Security Act
(ERISA) of 1974 created standardized funding and
vesting guidelines for private pension plans operat­
ed by firms. (See the shaded insert on page 6 for
definitions of terms related to pension plans.) Be­
fore ERISA, there were no standards, creating
much uncertainty among workers. For example, in
1965, 40 percent of pension participants were in
plans that awarded vesting only at normal retire­
ment age, usually 65. This meant that if the wor­
ker was fired just before retirement, which
occurred frequently, he lost all of his expected
benefits.1 Firms could also simply terminate their
pension plans, leaving participants without any
benefits. Underfunding was another problem, espe­
cially at unionized organizations, leaving par-




Private Pension Plans: A Primer
Pensions are a means through which firms
defer a portion of their employees’ compensation
for the employees’ use in retirement.4 Firms defer
compensation through either defined contribution
or defined benefit pension plans. Defined contribu­
tion plans guarantee an annual contribution into the
employee’s account by the firm. Defined benefit
plans guarantee the employee an annuity at retire­
ment, the amount of which usually depends on the
worker’s average salary and final tenure.
By their nature, defined contribution pension
plans accrue assets at the same rate they accrue
liabilities. Each additional year a worker is with

Business

5

6

Terminations:

Pension Plan Terminology and
Definitions
Defined benefit A pension plan stating
either (1) the benefit to be received upon retire­
ment or (2) the method used in calculating the
retirement benefit.
Defined contribution: A pension plan under
which an annual contribution is made with no
promise for a specific retirement benefit—
sometimes known as a tax-deferred savings
plan.
Funding: The employer’s contribution of
assets into the pension fund to cover the liabili­
ties accrued by the plan’s participants. A plan is
“ underfunded” when there are not enough assets
in it to cover the accrued liabilities.
Multiemployer plans: Collectively bargained
(union) plans involving more than one unrelated
employer.
Single-employer plans: A one-company
plan covering only workers at that company.
The majority of plans in the United States, and
the plans to which this article refers, are of this
type.

the firm adds an extra year’s worth of liabilities to
the worker’s account, which is then exactly offset
by the firm’s contribution of funds. Thus, defined
contribution pension plans are always fully funded.
The employee’s final benefit depends only upon
the amount of the firm’s and, possibly, the em­
ployee’s contributions into the plan, adjusted for
the rate of return earned on the assets into which
these funds are invested. Consequently, participants
encounter market risk but not termination or underfunding risk; as a result, defined contribution pen­
sion plans are not subject to the funding guidelines
under ERISA. These plans, however, are regulated
by ERISA's vesting requirements.
Defined benefit pension plans also accrue lia­
bilities over time, but these liabilities are actuarial
(statistically calculated) rather than fixed-dollar.
Contributions of assets to compensate for the lia­
bilities are made less regularly, as only a portion
of the total liabilities ever need to be funded at any
particular time. Although ERISA requires manda­
tory funding, the law gives firms considerable lati­
tude in selecting the values of the actuarial param­
eters, such as the interest rate, retirement age and
mortality assumptions, used to determine the re­
quired minimum contribution. The actual benefit



Distress: A termination by the firm because of
bankruptcy or necessity of survival; must be
proven to either the PBGC or the bankruptcy
court.
Involuntary: A termination by the PBGC to pro­
tect the plan’s participants from losses due to
severe underfunding.
Standard: A termination of a fully funded plan
after the firm has complied with all legal re­
quirements regarding notification of plan par­
ticipants and the PBGC and has paid all benefits
earned by participants.
Vesting:
The plan participant’s non-forfeitable legal
right to all accrued benefits (under defined
benefit plans) or accrued balances (under de­
fined contribution plans) of the pension by com­
pleting a specified number of years of service,
even if the participant leaves the firm before the
minimum age specified by the plan.
Cliff vesting: Full (100 percent) vesting after a
fixed number of years with no (0 percent) vest­
ing before that time.
Graduated vesting: Increasing levels of vesting
with increasing years of service.

the worker receives, however, is determined by
the firm’s pension benefit formula—hence, a de­
fined benefit—regardless of the return the plan's
assets receive from their investment. This accounts
for the regulation of funding.
The vesting rights of defined benefit plans are
also regulated by ERISA because, by their nature,
these plans can affect worker turnover at a firm.
Under defined benefit pension plans, the amount of
the annuity received at retirement is directly relat­
ed to tenure with the firm, creating an incentive
for workers not to change jobs too often. Without
standardized guidelines, firms may delay vesting to
encourage long tenures, converting the pension
claim into a reward for service rather than recog­
nizing it as a part of total compensation. As we
have already seen, however, before ERISA, the
promise of a reward did not guarantee its existence
at retirement.
This vesting and tenure argument also suggests
that workers indefinitely laid off from jobs lose not
only their current compensation, but also the ex­
pected increase in their deferred compensation
commensurate with tenure. Even if the employees
are vested, the portability of the pension—the abili­
ty to transfer liabilities from one plan to another—

S in g le -E m p lo y e r P ro g ra m D e fic it

Millions of dollars

Year ending September 30.

determines the amount of the loss incurred. If the
pension rights are not portable, the financial losses
can never be recouped in a new pension plan.
Nevertheless, recent modifications of the vesting
rules, legislated by the Tax Reform Act of 1986
(see shaded insert on page 8 for a summary of
these amendments), created an implicit separation
cost for the firm, the pension liability, thereby
decreasing the probability of a firm-initiated sepa­
ration after vesting.

Some Basic Problems Facing the
PBGC
According to the PBGC’s 1991 Annual
Report, “ This year has seen the largest losses
from terminations in our 17-year history.” 5 These
losses included $700 million from seven Eastern
Air Lines pension plans and more than $900 mil­
lion from Pan American World Airways. At the
end of fiscal 1991 (September 30, 1991), the



PBGC had a deficit in the single-employer insur­
ance fund of about $2.5 billion, with projections of
up to $18 billion by the end of the decade. Offset­
ting the current deficits were surpluses in the mul­
tiemployer insurance fund of only $187 million.
According to the PBGC’s 1991 survey of its
top 50 firms with underfunded plans, the first 10
have funding ratios below 50 percent. The total
amount of underfunded liabilities, which the PBGC
classifies as “ probable” or “ reasonably possible,”
approximate $21.5 billion, a greater than 50 per­
cent increase between 1989 and 1990.6 This
represents an overall underfunding ratio of 25 per­
cent. The PBGC continually monitors the progress
of firms in these categories.
One problem facing the PBGC is the moral
hazard associated with any insurance scheme.7 A
firm generally will underfund its pension plans as
its financial situation deteriorates. Oftentimes, a
firm, foreseeing a bankruptcy, will purposely al­
low its pensions’ assets to dwindle, knowing that
the PBGC will have to assume the losses.
The most prominent example of this strategy is
the LTV Corporation, which had three pension

8

Minimum Vesting Requirement
Reforms Under the Tax Reform
Act of 1986 (Amending ERISA)
Single-employer plans:
Cliff. The participant has a non-forfeitable right
to 100 percent of the accrued benefit derived
from employer contributions upon the par­
ticipant’s completion of five years of service.
Graduated: The participant has a non-forfeitable
right to at least 20 percent of the accrued
benefit derived from employer contributions af­
ter three years of service, increasing by 20 per­
cent with each additional year of service until
100 percent after seven years of service.
Special rule: Eligibility cannot be conditioned
on more than two years of service; should this
rule exist at a firm, full and immediate vesting
must occur after two years of service.
Multiemployer plans:
Full (100 percent) vesting must occur after
10 years of service.

The above rules became effective for all
plan years beginning after December 31, 1988.

SOURCE: U.S. Congress. Joint Committee on Taxa­
tion. Summary of Conference Agreement on H.R. 3838
(Tax Reform Act of 1986), (Government Printing Office,
1986).

plans, underfunded by about $2.5 billion, terminat­
ed by the PBGC in 1987. Subsequently, LTV es­
tablished new, almost identical, plans in their
place. The PBGC sued LTV, arguing that the
follow-on plans constituted a clear abuse of the
system. The PBGC also restored the terminated
plans to full active status after an improvement in
LTV’s financial condition, making LTV again
responsible for them. The New York District
Court, in a decision upheld by the State Court of
Appeals, disallowed this restoration and ruled that
the follow-on plans did not constitute an abuse of
the system. Then, in June 1990, the U.S. Supreme
Court overturned this decision and ordered the
lower court to issue a new ruling.8
Adding to the legal complications, a U.S. Dis­
trict Court, in September 1991, denied the PBGC
bankruptcy priority status, which would have al­
lowed it the same rights as the IRS in recovering
claims, and ruled that LTV may not be forced to



fund a fourth terminated pension plan while in
bankruptcy.9 This ruling still stands, although
legislation has been proposed to overturn it. This
example demonstrates the moral hazard faced by
the PBGC from any firm that chooses to declare
bankruptcy, especially when one of the firm’s
goals is to eliminate its pension liabilities. The
next example also demonstrates this.
Continental Airlines Holdings, Inc. (formerly
Texas Air) is the parent company of Continental
Airlines and the now-defunct Eastern Air Lines.
When Eastern declared bankruptcy and had seven
pension plans terminated, the PBGC was able to
hold Continental jointly responsible for the pension
liabilities with Eastern and negotiated a settlement
plan. After making an initial payment in Septem­
ber 1990, however, Continental was unable to pro­
vide adequate collateral to meet its remaining
obligations. In December 1990, it filed for
bankruptcy. This action resulted in the PBGC be­
ing responsible not only for Eastern’s pensions,
but also for an additional $183 million shortfall
from Continental’s own underfunded plans.10
As a response to the moral hazard, the Pen­
sion Protection Act of 1987 required for the first
time that firms with underfunded pensions pay a
variable-rate premium based on the degree of un­
derfunding. The Act also increased the fixed-rate
premium for all plans (fully funded and underfund­
ed). The cap for the total premium (fixed- plus
variable-rate) was increased again in 1991 to $72
per plan participant from $50. The PBGC fears,
though, that any further increase in its premium
may “ eventually drive out the least risky, better
funded plans. [The] PBGC has already seen a
large exodus of small plans.” 11 Thus, it is possible
that the insurance can make it too costly for a firm
to maintain a defined benefit pension, resulting in
its termination and replacement with a defined con­
tribution pension plan. In addition, because most
covered pension plans are well-funded and because
the PBGC’s revenues come from collected premi­
ums, the well-funded plans are, in effect, subsidiz­
ing the underfunded plans. This could lead to a
second problem at the PBGC, adverse selection,
where only firms that underfund keep their defined
benefit plans.12

Where Do We Go From Here?
While the potential losses from underfunded
pension plans amount to only a fraction of the
losses experienced from savings and loan institu­
tions, the likelihood for a burdensome bailout does
exist. James Lockhart III, Executive Director of
the PBGC, testified to Congress in February 1991
that, while the PBGC has enough cash to last for a
decade, it will need to acquire more assets if it has

9

to continue salvaging the pensions of large compa­
nies.13 If such losses cannot be contained, in­
dividuals will likely lose some of the income
promised to them under the original employment
agreement and owed as compensation for work al­
ready performed. Couple this with workers’ in­
creasing dependence on pensions as their sole
retirement income (except for Social Security), and
this predicament becomes all the more serious.

The basic problems facing the PBGC, moral
hazard and adverse selection, are the same as for
any other insurance company; however, it is the
taxpayer who ultimately incurs any losses not recov­
ered from the defunct plans or through premiums
suffered by this insurance company. Therefore,
firms, government and, especially, workers, must
maintain a watchful eye on pension plans to ensure
that each party keeps its part of the bargain.

1See Richard A. Ippolito, “ A Study of the Regulatory Ef­
fect of the Employee Retirement Income Security Act,”
Journal of Law and Economics (April 1988), p. 101.

while reasonably possible means that a firm has an un­
derfunded plan and is experiencing significant financial
problems.

2ln an October 1985 Journal of Law and Economics arti­
cle, “ The Economic Function of Underfunded Pension
Plans,” Richard A. Ippolito argued that firms purposely
underfunded their pension plans before ERISA to gain
an edge when bargaining with unions.
3See the PBGC’s press release, “ Top 50 List Shows In­
creased Underfunding,” November 25, 1991.
4For our purposes, retirement means any separation of
the worker from the firm after vesting. Minimum age re­
quirements must be satisfied to receive the benefits.
5See PBGC, Annual Report, p. 3.
6The terms “ probable” and “ reasonably possible” are
Financial Accounting Standards Board (FASB) nomen­
clature. Probable signifies that a loss is likely to occur,




7Moral hazard is an increase in the chance of a loss
brought about by a change in behavior because of in­
surance. Insurance companies usually require deducti­
bles and copayments to offset moral hazard.
8PBGC 1990 Annual Report, p. 13.
9PBGC 1991 Annual Report, pp. 18-19.
10lbid, p. 19.
111bid, p. 14.
12Adverse selection occurs when only risky clients opt
into an insurance program and safer clients opt out.
This results in higher premiums because the insurance
company expects larger losses.
13See “ The Protector of Pensions Develops Its Biceps,”
Business Week (March 11, 1991), p. 80.




10

Is There Less
Assurance in Life
Insurance?
by Michelle A. Clark

the industry’s $1.41 trillion in assets.1 Most of the
industry’s largest companies, like Prudential and
Metropolitan Life, are organized as mutuals.
Regardless of organization, however, all life insur­
ance firms have transformed the way they do
business—on both sides of the balance sheet.
New Products

Thomas A. Pollmann provided research assistance.

„
mencan life insurance companies es­
caped much of the financial trauma experienced by
other financial institutions during the 1980s. It ap­
pears, however, that financial problems in the in­
dustry may have just been delayed rather than
avoided. Several large life insurance companies
have been taken over by regulators in the past year,
leaving consumers uncertain about the security of
their policies and investments. Many of the indus­
try’s problems can be traced to changes in its busi­
ness practices during the past two decades. These
changes have cast doubt on the quality of industry
assets, the adequacy of regulation and the sound­
ness of policy and benefit guaranty funds—the
same issues at the heart of recent thrift and banking
shakeouts.

A

The Transformation of an Industry
The essential function of life insurance firms
has changed little since their inception: They collect
premiums from policyholders in exchange for pro­
tection (for the policyholder and designated others)
against the risk of financial loss in case of death,
disability or old age. Life insurance firms invest
the excess of annual premiums paid by policy­
holders (and investment income) over annual pay­
outs to policyholders and beneficiaries in the
nation’s money and capital markets. This invest­
ment is significant: Life insurance companies were
the source of about one-fifth of net funds to the
U.S. money and capital markets in 1990, just
slightly less than the amount provided by commer­
cial banks. Almost 400 million life insurance poli­
cies were in force in the United States in 1990,
with an estimated value of $9.39 trillion. The
average amount of life insurance per U.S. house­
hold was $98,400 in 1990. Americans are estimat­
ed to spend slightly more than 6 percent of their
disposable income on life insurance products.
In 1990, the U.S. life insurance industry com­
prised about 1,200 active, chartered companies.
Mutual insurance companies are about 5 percent of
that total, yet they account for about one-half of

Until the post-World War II era, life insurance
companies’ major business was the sale of perma­
nent (or whole life) insurance policies.2 As stock
prices increased and fears of another stock market
crash dissipated in the 1950s, term life insurance
policies became popular; they were cheaper per
dollar of coverage than whole life insurance, leav­
ing consumers more dollars to invest in stocks and
other financial products that could be used to
finance retirement.3 A popular slogan of the period
was “ buy term and invest the rest.” 4
Insurance firms responded to the changing
economic climate by establishing non-insurance
units, like mutual fund subsidiaries, and offering
policies, like variable annuities, to satisfy con­
sumer demand for higher-yielding products.5 These
new business lines allowed consumers to reap gains
from the rejuvenated stock market while mitigating
the risk associated with individual stock purchases.
Similar innovations resulted in enormous growth in
the pension component of the life insurance busi­
ness. In 1969, life insurance products made up
69.4 percent of the industry’s liabilities while an­
nuities and pension products contributed another
26 percent; by 1989, the share of life insurance
products declined to 29.9 percent while that of an­
nuities and pensions had risen to 66.6 percent.
These changes in product mix had correspond­
ing effects on industry income. In just two decades,
income from annuity products rose from 8 percent
to about one-third of the total, while life and
health insurance premiums shrank from two-thirds
to one-third of industry income over the period.
Over the 1980-89 period, premium income from
group annuities increased four-fold, accounting for
the largest portion of premium income; income
from various individual annuities increased almost
eight-fold over the period.
Another important change on the liabilities
side of the business has been the movement from
fixed-dollar to interest-sensitive products. The
roots of this change lie in the high inflation and
high interest rate environment of the late 1970s
and early 1980s. Double-digit inflation caused
policyholders to doubt the future purchasing power
of their fixed-dollar policies, making the bill and
bond markets relatively more attractive. Insurance
firms, recognizing that inflation and interest rate
uncertainty would severely damage their profitabil­
ity, began offering policies with terms and benefits
tied to movements in interest rates. These products—

11

C o m p o s itio n o f U.S. Life
In s u ra n c e In d u s try A s s e ts
1970
Miscellaneous
5.3%
Government Securities
5.3%
Real Estate
3.0%
Corporate Bonds
35.3%

Mortgages
35.9%
Corporate Stocks
7.4%

Total Assets: S207 billion

1990
Miscellaneous
7.8%
Policy Loans
4.4%
Real
3.1

Government Securities
15.0%

Mortgages
19.2%

Corporate Stocks
9.1%

Corporate Bonds
41.4%

Total Assets: $1,408 billion
SOURCE: American Council of Life Insurance, 1991 Life Insurance
Fact Book Update

universal life, variable life and flexible premium
variable life—made the size of the death benefit or
annual premium flexible over the life of the policy,
depending on the investment performance of indus­
try assets.
On the annuity side of the business, products
such as guaranteed investment contracts (GICs) be­
came popular, especially with corporate pension
plans. GICs promise investors a specific interest
rate over a set period of years, much like a bank
certificate of deposit; GICs usually pay a higher
interest rate but lack the deposit insurance of bank
products. Because their payout structures were less
predictable than their traditional counterparts, their
growth led to changes in the asset side of the in­
dustry, which are detailed below.
In Search o f Higher Yields
The switch toward interest-sensitive products
required dramatic changes in the industry’s invest­
ment strategy. The biggest concern was the indus­
try’s mismatch of assets and liabilities: Liabilities
were becoming increasingly short-term and more



liquid, but were being funded by assets that were
predominantly long-term and illiquid. At the same
time, other financial institutions competed for the
accounts of investment-oriented customers, pinch­
ing profit margins on interest-sensitive products
and making the industry’s payout structure even
less predictable.
To solve these problems, life insurance firms
changed the way they invested their premiums.
Previously, their strategy was to buy long-term
securities in the capital market (preferably bonds,
mortgages and some stock), then hold these assets
until maturity. The new strategy entailed investing
in assets with shorter maturities (like government
securities). To accommodate an increasingly uncer­
tain payout schedule, life insurance companies pur­
chased more securities in the open market, rather
than the private placement market, providing them
with more liquid instruments.6 The quest for higher
yields entailed investing in riskier assets, like com­
mercial real estate and below-investment-grade
bonds.
The move toward higher-yielding, more liquid
investments by life insurance companies is illustrat­
ed in the figure at left, which shows the composi­
tion of industry assets in 1970 and 1990. Mortgages
and corporate bonds continue to make up the bulk
of industry assets, but their relative importance has
declined: Their combined share dropped from 71
percent in 1970 to 61 percent in 1990. The decline,
however, was concentrated in mortgage holdings,
which fell by roughly half to 19 percent; corporate
bond holdings rose slightly, from about 35 percent
to 41 percent over the period.
The decline in mortgage holdings can be par­
tially attributed to the desire to hold more liquid
assets. As with other financial intermediaries, in­
surance companies have substituted the mortgagebacked securities of such government agencies as
Fannie Mae and Freddie Mac for mortgages, a
trend which largely explains the tripling of govern­
ment securities in the industry’s asset portfolio
since 1970. Because of this substitution, insurance
firms have been left with a higher concentration of
nonresidential mortgages in their portfolios. Nonresidential mortgages—on office buildings, hotels
and other commercial real estate—have experienced
much higher delinquency rates over the last decade
than their residential counterparts. Indeed, the in­
creasing concentration of commercial real estate
mortgages combined with a trend toward higheryielding, but more risky, equity investments in
commercial real estate projects are at the root of
many of the life insurance industry’s current
problems.
The taking on of additional risk in the hope of
higher returns also occurred in the industry’s bond
portfolio, as a number of companies invested heav­
ily in non-investment-grade bonds, more popularly
known as junk bonds. Excessive concentrations of

12

junk bonds led to insolvency and regulatory take­
overs of parts of two of the industry’s giants. The
California and New York units of the Executive
Life Insurance Company and the California and
Virginia holding units of the First Capital Life In­
surance Group were closed by state regulators in
1991; in both cases, the firms held about 50 per­
cent of their investment assets in junk bonds.

The State of Regulation
The nation’s life insurance companies are
regulated by the states in which they are licensed
(or domiciled). State insurance commissioners are
charged with monitoring sales practices and the
adequacy of liquid assets to cover losses, as well
as restricting the amount of risky assets that firms
can hold. Insurance laws can vary substantially
across states; however, the vast majority of state
insurance laws conform to those of New York
state.7 The National Association of Insurance Com­
missioners (NAIC), a trade group for state insur­
ance regulators, works to coordinate the standards
and laws of individual states.
From 1975 through 1990, 176 life insurance
firms failed, but 80 percent of these failures oc­
curred after 1982. And the recent regulatory
takeover of the nation’s 18th-largest insurance
firm—Mutual Benefit Life—has heightened fears
about the financial health of the whole industry
and the ability of state regulators to deal with any
large-scale runs or failures. Critics point to infre­
quent and outdated financial exams, low levels of
capital and surplus relative to premiums, and a
lack of consistency among state insurance laws as
key industry problems.
Making Good on a Guaranty
One of the areas of greatest regulatory concern
is the adequacy of the industry’s guaranty funds.
Since the early 1970s, life insurance firms have
had their own form of “ deposit insurance” through
state insurance guaranty funds. These funds were
designed to satisfy the benefit claims of policy­
holders and annuitants that exceed the liquidated
value of assets of an insolvent firm. Only the Dis­
trict of Columbia lacks a state guaranty fund. All
licensed firms within a state are assessed an
amount proportional to their market share in the
state to cover the deficiency; however, individual
states place annual limits on the amount that can
be assessed (usually a percentage of premium in­
come), making it possible that payments to claim­
ants could be delayed by several years in the event
of a large failure.
The takeovers of large firms like Mutual
Benefit Life have drawn attention to other inade­



quacies of the current guaranty fund system. The
General Accounting Office (GAO) documented
many of these drawbacks in a recent report.8 One
of the GAO’s greatest concerns is the system’s un­
equal coverage of claimants across states. It is en­
tirely possible that policyholders of the same failed
multistate company may be treated differently; this
can occur because state funds vary regarding the
circumstances under which coverage is provided, the
types of policies protected, and ceilings on claims
and benefit payments. To illustrate, table 1 high­
lights the provisions of state guaranty funds for
Eighth District states.
Scope of Coverage. Nationally, as of October
1991, funds in only six states provided coverage to
all policyholders (regardless of where they live) of
failed insurers licensed in the fund’s state.9 The
vast majority of funds, including those of all Dis­
trict states, conform to an NAIC model that pro­
vides coverage only to state residents; nonresidents
of many states are covered only when certain con­
ditions are met. Although noncoverage has rarely
occurred, the specter of increased failures has
many policyholders—and policymakers—worried.
Product Coverage. Most insurance products
are covered similarly across states. The major ex­
ception is unallocated annuities—annuities that are
not issued to or owned by individuals. Life insur­
ance GICs, which make up a substantial portion of
the defined contribution plans of U.S. companies,
are often unallocated. Because defined contribution
plans do not provide a specified benefit to individual
participants and are not guaranteed by the Pension
Benefit Guaranty Corporation, employees partici­
pating in plans that invest in the GICs of failed in­
surers will see proportionate losses in the value of
their retirement savings if the contracts are not co­
vered by guaranty funds or are subject to some
maximum. Three District state funds do not cover
these investment contracts; outside the District, 13
states specifically exclude these GICs from fund
coverage. Another 15 states make no provision,
hence, coverage is uncertain.
Coverage Limits. The maximum coverage for
various insurance products of District firms is also
outlined in table 1. While coverage limits on life
and other benefits, annuities and policy cash values
are fairly uniform throughout the District (and the
nation), the limits on unallocated annuities, where
applicable, vary substantially across states. Resi­
dents of Indiana, for example, would receive a
maximum benefit of just $100,000 on an unallocat­
ed annuity of a failed insurer, while residents of
Illinois and Mississippi could receive $5 million.

Conclusion
U.S. life insurance companies, like other
financial intermediaries, have undergone major

13

Table 1
Basic Provisions of State Life Guaranty Funds in Eighth D istrict States
Lim its of Guaranty Fund Liability

State

Unallocated
annuities
covered?

Life
benefits

All
annuities

Benefits

Policy cash
value

Unallocated
annuities

Yes
Yes
Yes1
No
Yes
No
No23
5
4

$100,000
300,000
Not specified
300,000
300,000
300,000
300,000

$100,000
100,000
Not specified
100,000
100,000
100,000
100,000

$300,000
300,000
300,000
Not specified
300,000
300,000
300,000

$100,000
100,000
100,000
100,000
100,000
100,000
100,000

$1,000,000
5,000,000
100,000
N/A
5,000,000
N/A
N/A

Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee
N/A = not applicable.

1Guaranty fund law is silent on coverage of unallocated annuities. Guaranty fund coverage was ordered by court decision.
According to the NAIC, unallocated annuities are covered only if qualified under provisions of the Employee Retirement and
Income Security Act.
SOURCE: National Association of Insurance Commissioners and the National Organization of Life and Health Insurance Guaranty
Associations.

changes during the last two decades. More volatile
inflation and interest rates combined with a more
competitive business climate have forced the indus­
try to offer more sophisticated insurance and pen­
sion products to consumers and businesses. To
meet the liquidity demands of its customers, the
industry has substituted short-term for longer term
assets. To earn an adequate rate of return, the in­
dustry has increased its investments in high-yielding
but riskier assets like commercial real estate and
junk bonds. Downturns in both of these markets in
the latter half of the 1980s led to losses for many

1Stock companies make up the other 95 percent of U.S.
life insurance companies.
2Whole life insurance policies have a constant premium
for the duration of the policy. In the policy’s early years,
the size of the premium exceeds the amount required to
insure against death because the probability of death is
low. The policy thus builds up a cash value, which is
depleted in later years when the constant premium falls
below the amount needed to insure against death,
whose probability is now higher. Whole life policy­
holders can borrow against the cash value of the policy
or claim it by canceling the policy.
3Term insurance policies, unlike whole life policies, do
not build up a cash value (and thus have no savings
component) because the premium in any given year is
exactly equal to the amount necessary to insure against
death during the term.
4See Richard W. Kopcke and Richard E. Randall, eds.,
The Financial Condition and Regulation of Insurance
Companies: Proceedings of a Conference Held in June
1991 for a thorough analysis of industry changes.
5An annuity policy will pay out either death benefits or
living cash benefits and can be purchased for an in­




firms and an increased number of insolvencies.
The recent failures of several of the industry’s
largest companies have sparked legislative reform
efforts in several states and proposals for federal
oversight of the industry. Of particular concern to
policymakers is the lack of uniformity in state in­
surance laws and the possibility that consumers
who depend on life insurance investments for retire­
ment may suffer losses. While the scope of indus­
try reform is uncertain at this point, most observers
expect consumer protection to be at the forefront
of regulatory and legislative changes.

dividual or a group. The purpose of an annuity is to
guarantee income at some point in the future, such as
retirement. Interest earned by the annuity holder is taxdeferred until withdrawal. Variable annuities are denomi­
nated in variable units, rather than fixed dollar amounts.
The units are then invested in a pool of common stock.
Annuity payments thus rise and fall with the value of
the underlying stock and dividend flows.
6A private placement is a transaction in which the bor­
rower and the (insurance) firm directly negotiate a loan.
7New York passed the first comprehensive insurance law
in 1849 and set up the nation’s first state insurance
department in 1859. New York became a model for
other states, largely because companies that wanted to
sell insurance to New York residents were required to
abide by the state’s laws.
8See “ Insurer Failures: Life/Health Insurer Insolvencies
and Limitations of State Guaranty Funds,” United
States General Accounting Office, March 1992.
9These states also cover their own residents when an
out-of-state insurer fails, if the insurer’s home state
does not provide such coverage.

14

Eighth D istrict Business
Level

Q/3

Payroll Employment (thousands)
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis
Manufacturing
Employment (thousands)
United States
District
Arkansas
Kentucky
Missouri
Tennessee
District Nonmanufacturing
Employment (thousands)
Mining
Construction
FIRE2
Transportation3
Services
Trades
Government

11/1992

11/199111/1992

19911

19901

108,435.0
6,908.9
960.6
258.9
1,484.0
488.6
2,287.7
1.154.5
2.176.6
471.0

1.1%
-1 .7
1.2
-1 .3
-1 .4
-1 .7
- 2 .5
-1 .2
-2 .2
-2 .4

0.2%
0.8
3.1
1.0
1.1
0.4
- 0 .2
-0 .4
0.6
-1 .7

-1 .3 %
-0 .8
1.4
1.6
0.0
1.9
-2 .1
-1 .9
-0 .8
0.8

1.3%
1.8
3.4
3.2
2.7
2.7
1.3
0.6
1.2
1.0

18,259.0
1,434.4
239.1
282.8
410.5
502.0

-0 .5 %
-1 .0
1.2
1.2
-2 .1
-2 .4

-1 .0 %
0.8
2.6
2.1
- 0 .9
0.8

- 3.5%
-3 .3
0.6
-2 .7
- 5 .2
-3 .7

1.7%
0.1
0.8
1.2
0.5
0.8

44.1
275.3
339.3
404.3
1,637.4
1,625.8
1,148.7

-5 .3 %
-7 .2
-1 .7
-1 .8
0.0
-0 .6
-3 .7

-6 .0 %
-0 .1
-0 .4
- 0 .3
1.9
0.7
0.0

-8 .6 %
- 6 .8
- 0 .5
- 0 .3
1.8
-1 .2
1.0

1.8%
0.4
1.1
1.7
4.5
1.0
2.6

IV/19911/1992

1/19911/1992

1/1992

Real Personal Income4 (billions)
United States
District
Arkansas
Kentucky
Missouri
Tennessee

C om pounded Annual R ates of C hange
1/199111/1992

$3,556.6
198.4
26.4
43.2
68.4
60.4

2.4%
3.9
9.6
3.8
2.4
3.4

1.2%
2.3
2.7
3.3
1.3
2.4

1991

-1 .1 %
-0 .4
0.8
0.0
-1 .5
0.2

1990

1.1%
0.8
1.2
1.7
0.0
0.9

L evels
11/1992

)




Unemployment Rate
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis

7.5%
6.4
7.4
6.3
5.7
4.8
6.4
6.7
6.5
6.0

1/1991

7.2%
6.6
7.1
6.2
6.9
5.4
5.7
6.3
7.1
6.1

1991

6.7%
6.8
7.3
6.3
7.4
6.1
6.6
6.8
6.5
5.5

1990

5.5%
5.8
6.9
5.9
5.9
5.1
5.7
5.9
5.2
4.5

1989

5.3%
5.8
7.2
6.3
6.2
5.5
5.5
5.5
5.1
4.7

Note: All data are seasonally adjusted . On this page only, the sum of data from Arkansas, Kentucky, Missouri and Tennessee
is used to represent the District.
1Figures are simple rates of change comparing year-to-year data.
2Finance, Insurance and Real Estate
transportation, Communications and Public Utilities
4Annual rate. Data deflated by CPI-U, 1982-84 = 100.

15

U. S. Prices
Level

C om pounded Annual R ates of Change

11/1992

1/199211/1992

11/199111/1992

1991’

1990’

140.3
137.5

4.1%
0.6

3.6%
0.5

4.5%
2.9

5.3%
5.7

140.7
156.3
123.7

- 0.8%
5.3
10.8

- 6.6%
-4 .9
-9 .5

-2 .3 %
-5 .3
2.4

1.1%
6.4
-5 .4

174.0
191.0

7.2%
4.3

-0 .6 %
1.1

1.5%
2.7

2.3%
3.4

Consumer Price Index
( 1 9 8 2 -8 4 = 1 0 0 )

Nonfood
Food
Prices Received by Farmers
(1 9 7 7 = 1 0 0 )

All Products
Livestock
Crops
Prices Paid by Farmers
( 1 9 7 7 = 100 )

Production items
Other items2

Note: Data not seasonally adjusted except for Consumer Price Index.
’ Figures are simple rates of change comparing year-to-year data.
2Other items include farmers’ costs for commodities, services, interest, wages and taxes.

Eighth D istrict Banking
Changes in F inancial P osition fo r the y e a r ending
June 30, 1992 (by Asset Size)
Less than
$100 million

SELECTED ASSETS
Securities
U.S. Treasury &
agency securities
Other securities1
Loans & Leases
Real estate
Commercial
Consumer
Agriculture
Loan loss reserve
Total Assets
SELECTED LIABILITIES
Deposits
Nontransaction accounts
MMDAs
Large time deposits
Demand deposits
Other transaction accounts2
Total Liabilities
Total Equity Capital

1.6%
3.1
-4 .3
- 2 .3
1.9
-9 .6
-7 .4
2.5
1.4
-1 .9
-2 .2 %
- 4 .9
15.1
- 1 3 .3
1.6
10.0
- 2 .2
1.0

$100 million $300 million

11.1%
14.9
-0 .8
-1 .7
1.6
- 1 0 .0
-3 .4
18.6
0
2.1
1.9%
-0 .6
12.2
- 1 1 .7
4.2
14.3
1.6
7.7

$300 million $1 billion

More than
$1 billion

20.7%

49.8%

27.7
- 2 .8
3.4
10.1
-7 .9
5.4
18.1
10.0
6.4

61.5
14.2
11.3
20.4
6.0
10.8
44.0
24.1
17.6

5.9%
5.4
15.8
- 1 5 .6
-1 .5
16.7
6.0
10.8

16.4%
12.0
32.8
- 2 3 .6
24.2
34.5
17.4
20.1

Note: All figures are simple rates of change comparing year-to-year data. Data are not seasonally adjusted. Note that some
changes are inordinately large because of thrift acquisitions by large District banks in 1991.
’ Includes state, foreign and other domestic, and equity securities,
includes NOW, ATS and telephone and preauthorized transfer accounts.




16

P erform ance Ratios (by Asset Size)
___________ Eighth District___________
II/92

11/91

EARNINGS AND RETURNS
Annualized Return on Average
Assets
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks

1.23%
1.23
1.09
1.03
1.07
1.32

Annualized Return on Average
Equity
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks

13.77%
14.52
13.46
15.24
15.96
13.78

9.40%
12.53
12.58
14.46
12.52
12.26

4.62%
4.49
4.58
4.24
4.06
4.50

1.36%
1.43
1.39
1.37

Net Interest Margin 1
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks
ASSET QUALITY 2
Nonperforming Loans3
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks
Loan Loss Reserves
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks
Net Loan Losses4
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $5 billion
$5 billion - $15 billion
Agricultural banks

____________United States

II/90

II/92

1 .070/0

11/91

II/90

1.29

.95%
.83
.78
.57
.33
1.07

.83%
.96
.82
.61
.58
1.05

11.69%
13.18
13.23
13.37
11.13
12.32

11.420/0
13.08
12.87
11.75
16.32
13.70

10.73%
10.43
10.34
8.47
5.47
11.58

9.160/o
11.97
11.07
8.96
9.90
11.40

4.31%
4.25
4.39
4.30
3.65
4.23

4.29%
4.25
4.47
4.15
3.67
4.19

4.910/0
4.82
4.84
4.60
4.70
4.57

4.61 0/0
4.61
4.58
4.44
4.22
4.31

4.61%
4.66
4.67
4.38
4.25
4.33

1.65%
1.76
1.44
1.46
2.23
1.79

1 .880/0
2.06
2.35
2.96
3.38
1.79

2 .22 %
2.21

1.61

1.60%
1.81
1.62
1.65
2.62
1.79

2.03%
1.98
2.33
2.49
3.05
1.95

1.56%
1.62
1.63
1.96
2.29
1.62

1.47%
1.59
1.53
1.83
1.94
1.60

1.46%
1.51
1.39
1.81
1.63
1.64

1.720/0
1.73

.31%
.41
.50
.76

.53%
.52
.67
.69
1.06
.35

2.02

.88
.34

.83%

1.02
.98
.97
.78
1.15

1.03%
1.08
.98
.87

1.06
1.05

.88

1 .1 1

.72
1.15

.170/0

.20
.25
.37
.37
.13

2.64
3.44
4.79
1.87

2.74
2.94
1.84

1.65%
1.64
1.85
2.44
2.89
1.83

.49%
.54
.75
1.33
1.30
.34

. 66 %
.71
.90
1.44
1.67
.32

2.00

1.65%
1.49
1.71

1.88
2.29

1.88
.26%
.28
.38
.51
.80

.20

Note: Agricultural banks are defined as those banks with a greater than average share of agriculture loans to total loans.
interest income less interest expense as a percent of average earning assets
2Asset quality ratios are calculated as a percent of total loans.
3Nonperforming loans include loans 90 days or more past due and nonaccrual loans.
“Loan losses are adjusted for recoveries and are annualized.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102