RESTRUCTURING OF THE RAILROAD RETIREMENT

SYSTEM

WEDNESDAY, JULY 31, 1974

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C. The committee met at 10 a.m.. pursuant to notice, in room 2133, Rayburn House Office Building, Hon. Harley O. Staggers, chairman, presiding.

The CHAIRMAN. The committee will come to order.

Mr. Cowen, it is good to have you as chairman of the Railroad Retirement Board with us. And Mr. Speirs, Mr. Quarles, and would you give us the other gentlemen's names that are with you and identify them for the record, please, all of them, if you would?

STATEMENT OF JAMES L. COWEN, CHAIRMAN, RAILROAD RETIREMENT BOARD, ACCOMPANIED BY NEIL P. SPEIRS, LABOR MEMBER; WYTHE D. QUARLES, JR., MANAGEMENT MEMBER; DALE ZIMMERMAN, ASSISTANT GENERAL COUNSEL; AND ABRAHAM BENJAMIN, DIRECTOR OF RESEARCH

Mr. COWEN. I will, Mr. Chairman.

On my immediate left is Mr. Dale Zimmerman, Assistant General Counsel of the Railroad Retirement Board.

On my immediate right is Mr. Neil P. Speirs, the labor member of the Board.

To Mr. Spiers' right is Mr. Abraham Benjamin, the Director of Research of the Railroad Retirement Board; and on the far right, is Mr. Wythe D. Quarles, Jr., the management member of the Board. The CHAIRMAN. Fine, thank you. The time is yours and you do with it as you see fit.

If you have a statement which you want to put in the record, we would be glad to have you put it in the record, and you summarize it or whatever you wish. We are trying to save time but we want to get the full story.

Mr. CowEN. Thank you, Mr. Chairman.

My statement will be for myself and when I am through, Mr. Speirs will present a joint statement for himself and Mr. Quarles.

The CHAIRMAN. Good.

Mr. CowEN. I have a prepared statement which is fairly extensive and which I would like to have appear in the record.

The CHAIRMAN. It shall appear [see p. 252.]

Mr. CowEN. For the sake of brevity, I will start reading on page 8 of that statement.

The CHAIRMAN. All right.

Mr. CowEN. The bill, H.R. 15301, which was introduced by the chairman of this committee, has been agreed to in negotiations between railroad labor and railroad management. The preliminary cost estimates which are all on the basis of static economic assumptions were prepared by the Board's actuarial office and indicate that its enactment would reduce the actuarial deficiency of the railroad retirement program from approximately 9.1 percent of the taxable payrolls or $529 million per year on a level basis to 4.6 percent of taxable payrolls or $270 million per year on a level basis.

These estimates are before consideration of the proposed additional transfers from social security trust funds for the so-called windfall element of the proposed new benefits. The proposed additional transfers from social security would be about either 3.6 percent of 4.4 percent of taxable payrolls which are equivalent to either $213 million or $254 million per year on a level basis. This would leave a net deficit of either 0.96 or 0.24 percent of taxable payrolls which are equivalent to $57 million per year and $16 million per year, respectively, on a level basis.

The reason for the two sets of figures is that there is some uncertainty as to what will constitute the windfall elements of benefits in some

areas.

In evaluating the provisions of this bill, it must be remembered that they were developed in collective bargaining. In collective bargaining on pensions, management wants to minimize costs, and at the same time, wants to provide adequate benefits while labor wants to maximize benefits while taking into consideration what the company can afford

to pay.

Because this bill calls for a restructuring of the railroad retirement program, there was an additional consideration, that is, that benefit amounts under the new program should not differ significantly from those under the old program for individuals who will retire in the near future.

The bill, H.R. 15301, would restructure the computations of retirement benefits under the retirement program into three parts: (a) a basic benefit which would be computed under the Social Security formulas; (b) an additional part which would be based on railroad service only; and (c) a windfall element which would allow for the advantages of dual benefits which had accrued for service to the changeover date to the new program (see exhibit 4).

Survivor benefits would be computed also in three parts: (a) a basic social security portion; (b) a part equal to 30 percent of the social security survivor benefit to which the individual would have been entitled; and (c) a windfall element.

The benefit formulas would be extremely complicated and difficult to explain. The second tier benefits for retirement annuities would consist of the following elements:

1. A railroad retirement benefit would be computed based upon current railroad retirement law but limited to service prior to 1975. This would continue all of the complexities of present law.

2. From item 1 above would be substracted a social security benefit based only on railroad earnings where such railroad service was per

formed before 1975. In the computation of this social security benefit, there would be 18 benefit computation years as defined in the Social Security Act.

3. In addition to the above, there would be an increment of $1.50 for each of the first 10 years of railroad service prior to 1975 and $1.00 for each year of service in excess of 10 years which was performed before 1975. This increment would be given only to those individuals who have some railroad service after 1974.

4. For each year of railroad service after 1974, there would be added $4.

5. An added benefit for service after 1974 would be equal to one-half of 1 percent of the employee's average earnings after 1974 times the years of such service.

6. For employees who have sufficient social security service before the end of 1974 to qualify for a social security benefit when they reach age 65 and who, in addition, have at least 10 years of railroad service prior to 1975, there would be added an additional so-called windfall element. This additional windfall element would require the computation of three social security benefits based on different earnings but all computed as of the date when the employee will reach his 62d birthday.

The first two of these benefits would be added together and would, then, be reduced by the third in order to determine the windfall element. The first social security benefit would be that based on social security earnings alone which were earned prior to 1975 and the second would be based on railroad earnings alone which were earned before 1975.

The third, and substractive item, would be the social security benefit based on the combined railroad and nonrailroad earnings which were earned prior to 1975.

7. For employees who have 25 or more years of service and a current connection with the railroad industry there would be added a supplemental annuity ranging from $23 per month to $43 per month.

For new entrants in the railroad industry after 1974, the only steps needed to compute a retirement benefit would be those of steps four, five, and seven in the paragraph above. These are relatively easy to compute and cause little difficulty in either understanding or in the administration of the program. The same cannot be said of the other steps which are really for transitional purposes. However, since they would apply with respect to individuals who are currently active in the railroad industry, they could be with us for several decades.

I would like to point out that with respect to survivor benefits, the benefit to the widow of a railroad employee who spent his entire working career in the railroad industry would be the same as the benefit to the widow of an employee who split his career between covered and noncovered employment.

Beneficiaries on the rolls would have the benefit amounts they currently receive from social security and railroad retirement combined and the total would be divided into: (1) a tier 1 social security benefit; (2) a tier 2 railroad benefit; and (3) a windfall benefit.

The total amount of the three components would be the same as that which the individuals are currently receiving. The purpose of making the change would be to make future cost-of-living increases easier to administer because the current benefits could then be treated the same as future benefits and also to prevent increases in the windfall elements.

Cost-of-living increases for the social security part will be in the same amounts as those provided under the general social security program, while those under the railroad part would have a different costof-living treatment. The windfall element would receive no cost-ofliving increases.

The bill provides for four cost-of-living increases in tier 2 benefits equal to 65 percent of the rise in the Consumer Price Index from one September to the next September with such increases being effective for retirees beginning with the following January.

The first of the four such increases will be effective for January 1978, with the remaining three being made annually thereafter.

Cost-of-living increases that occur after 1976 and before the employee retires will be adjusted to eliminate duplicate increases in the formula and because of the crediting of higher earnings.

The new program would pay benefits only the same categories of beneficiaries who are currently entitled under the railroad retirement program. The differences between the eligibility conditions under the railroad retirement and social security programs as spelled out earlier in my statement and in exhibit 6 which is attached and these would continue to exist.

The basic financial interchange transfers would be based on a more or less accrual basis. This would help the cash flow problem in which the program will find itself and will not really affect the overall financing.

Currently, interest is paid on financial interchange transfers from the accrual date of such money until the time when the transfer is made. Thus, it would make little difference whether the interest was paid from the social security trust funds-which receive this interest back as part of their investment income-or whether the general funds pay it as interest to the railroad retirement account.

The bill also makes provision for the social security trust funds to increase the financial interchange transfers by amounts equal to the windfall element of the revised railroad retirement benefits. This is expected to amount to something of the order of 3% percent of taxable payroll or 43 percent of taxable payroll depending on the definition of what constitutes the windfall. These figures are equivalent to $3.8 or $4.6 billion, respectively, in terms of present values. By present values is meant that if a sum equal to about $3.8 billion-or $4.6 billion-were to be made available today and invested at an interest rate of 534 percent per annum, there will be approximately enough money available to pay for the frozen windfall elements in the benefits provided by the proposed bill.

At this time, I would like to say that plan administrators in their capacity as such are generally not concerned with the sources of the money made available for the payment of benefits so long as that money is forthcoming. Of course, the continued solvency of the companies making such payments is a requirement to insure that the money will be received.

In this instance, however, I realize that the proposal to have the social security program finance the windfall elements in the railroad retirement system is controversial. Since the social security program covers more than 90 percent of the labor force of the United States, this passing off of part of the financing of the railroad retirement system affects the Nation as a whole rather than just the railroad industry.