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This is true and this is the part I want to emphasize

one might suppose that both the social security component of his railroad retirement benefit and the outside industry dual benefit would be paid for by social security.

Why must one suppose that? That supposition does not automatically follow for me. Let us try it a different way. If you would refer to the rough draft that we gave you entitled, "Operation of Financial Interchange, Dual Benefit Cases," and go to the center of that under the heading, "Under Present Law," let us try to review one more time, if you will, this hypothetical case of the worker who had dual employment, paid dual taxes, premiums, call them what you will. [The two charts furnished follow:]

EFFECTS of the FINANCIAL INTERCHANGE

BETWEEN SOCIAL SECURITY and the RAILROAD RETIREMENT SYSTEM

Present Interchange: RR Fund

(to date)

If there were no

SS Fund

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$8.4 billion LOSS

interchange the SS Fund would! now be $8.4 billion ahead. The RR

Fund would be exhausted by now.

Proposed in HR.15301: RR Fund

SS Fund

(over next 25 yrs.)

$4.5 billion GAIN

$4.5 billion LOSS

The $4.5 billion would be over and above what the SS Fund will pay the RR Fund under present law. (currently $1 billion amuelty),

A. NO of FIGHTOWL INTERCHANGE... DUAL DEREFIT CASES 26 koefit which would be payable on combined rr and as employment =*240

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afictitious benefit based on
employment alone
is $340 -- $100

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tre cest to as of these two heavily weighted benefits is than under present law although no more taxes received byss than under present law

Mr. CARDWELL. In this case in an effort to make it as clear as we could we picked the man who had 15 years of one kind of coverage and 15 years of another kind of coverage-we made everything as equal as we know how to make it.

The interchange principle, as it now exists, says that we will make a payment to the railroad retirement system on behalf of that individual at the time of his retirement computed just as if that employee-and this is one of the "ifs"-had worked the full 30 years under social security coverage.

Under this example that benefit, looking at his earnings record on that basis, turns out to be $240. We pay that amount to the railroad retirement account after subtracting however the actual benefit that we pay to that man for his 15 years of social security coverage which turns out to be $170.

Now, the $170 is not half of the $240, as you can see. The reason that it is not half is that under the social security formula 15 years' worth of coverage will entitle you to a relatively higher benefit for 15 years than 30 years of coverage will entitle you to.

That is where the weighting comes in. That leaves $70. We pay the man $170. We computed his benefit rights under the interchange as $240 as if he had worked for us for 30 years. We paid the railroad retirement system a net difference of $70. They say that is unfair. It is that $70 increase to $170 that would account for the figure of $4 billion that they would obtain from social security.

Their argument is that if we had to pay him twice as a social security beneficiary with each benefit being based on 15 years rather than one benefit based on 30 years, it would have cost us $340. If we had had to do that under the law it would have cost us $340. But the law does not call for that. It did not envision it, it would not tolerate it.

The whole concept of the system would not tolerate the idea, no retirement system would, that one worker could come at the system twice and obtain weighted benefits both times. It says no, you come to the system for your full employment period. It is what that this whole system is based on.

If we were required to pay two weighted benefits we would have to pay $340 rather than $240.

Under that situation if we had the interchange we would owe them $170 rather than $70. We would pay out $340 rather than $240.

The point I want to emphasize is that we would pay out $100 more on behalf of that beneficiary than we would have collected in taxes on his behalf directly from him or from him through the interchange with the railroad retirement system.

If that makes sense to you, gentlemen, fine. We just can't agree. Mr. SHOUP. Frankly, Mr. Cardwell, it seems as though that makes about as much sense as most of the explanations I get on social security, and it is not deriding you. It is just my difficulty in understanding some of these interchanges.

You know, your simple social security by itself is difficult enough until we start talking about railroad retirement.

Mr. CARDWELL. One could argue over whether the weighting itself is sound policy. We could debate that all by itself.

Mr. SHOUP. So as to move along on this, the thrust of this bill, is still a two-tier system, and you feel it is the correct approach. Am I correct on that?

Mr. CARDWELL. Yes, sir.

Mr. SHOUP. But you feel the shortcoming is because they would administer it? It would be more efficient if you would administer the first tier?

Mr. CARDWELL. No, I think the primary shortcoming is that social security taxpayers, non-railroad-working social security taxpayers, would finance a part of the second tier and I think that is wrong.

Mr. SHOUP. In what way would they finance part of the second tier?

Mr. CARDWELL. By putting up this additional $100 in this case I just described.

Mr. SHOUP. My understanding is that within the first tier railroad workers shall be taxed and shall receive the same benefit as every other worker under the social security system.

Mr. CARDWELL. Yes. That is literally true if you ignore the workings of the financial interchange and financing the cost of phasing out dual benefits.

Mr. SHOUP. Right. We are talking of two different things.

No. 1, I would like to establish the fact that this approach of two tiers, will be a fair, equitable arrangement?

Mr. CARDWELL. The concept of two tiers is a sound concept in our opinion; yes, sir. Equitable, sound, sensible.

Mr. SHOUP. At what time do you encumber your funds for the transfer of benefits in the interchange that you say is taking place every 18 months?

Mr. CARDWELL. About 1 year after the end of a fiscal year—on the average, an 18-month lag.

Mr. SHOUP. It is not encumbered until that time?

Mr. CARDWELL. That is correct. This proposal would have us encumber it monthly.

Mr. SHOUP. You say this would be in advance?

Mr. CARDWELL. No, sir.

Mr. SHOUP. I thought that was the expression you used, you would advance the cash for this monthly.

Mr. CARDWELL. I guess you could reason that is the concept of accrual accounting, you are making an estimate of what the actual costs for a long period will be during segments of that period.

The technique may not be entirely precise but in theory you are paying over the cash when it comes due; it would not be an advance. However, during the first year in which the adjustment occurs social security would pay out more cash to the railroad retirement system in order to shift over to the accrual system than we would otherwise pay in that year.

Mr. SHOUP. Did Congress in formulating the railroad retirement law create this conversion problem we are now considering?

Mr. CARDWELL. I think it is the result of the formulation of the law; yes, sir.

41-299-7425

Mr. SHOUP. Then there would be some responsibility for the Federal Government to pick up some of the cost of the conversion.

Mr. CARDWELL. I do not mean to say that. It depends on one's own reasoning and what he wants to do.

Under any philosophical concept of how to fashion a retirement system or how to correct this problem, as I said, I can see the choices as being either assessing the cost against the taxpayer at large, which is taking it out of the general fund, out of the Treasury, or assessing the cost against those special beneficiaries and the employers directly

involved.

I think those are the two proper choices. I don't see any basis for reaching over into another program and say, "You put in a share.” I don't think the workings of prior law create any liability to do that; if that is your question.

Mr. SHOUP. That was my question whether the previous law caused the present fund to be nonviable?

Mr. CARDWELL. No. I would take issue with anyone who suggested to you that it did.

Mr. SHOUP. Fine. Thank you.

The CHAIRMAN. The gentleman from Washington, Mr. Adams. Mr. ADAMS. Thank you, Mr. Chairman.

I have gone over your charts and I have read Mr. Carlucci's testimony. What bothers me about your presentation is this, and I think it goes directly to the social security system. Isn't it true that you pay more in benefits than you get in taxes to the shorter term person and then this balances out to the longer term person as he works for a longer period of time?

In other words, his taxes catch up with his benefits. I think you described it as a delay.

Mr. CARDWELL. I think most of your statement is correct. There is one part I would like to comment on, if I could.

The tax system of social security provides for the collection of enough taxes to pay a weighted benefit to the individual with a shortterm work record or low income so that individual will be able to obtain more by way of benefits than his single share of the total tax. However, the tax structure makes up for this to some extent because it is a straight percentage of earnings (up to a maximum) regardless of the level of a person's earnings. But the taxes themselves will bring enough money to finance the weighted benefit.

Mr. ADAMS. Right.

Mr. CARDWELL. The higher worker pays a benefit to the lower worker.

Mr. ADAMS. Not only that but the long-term person, and you base it on a 65-year-old retirement, so when the person works for 30 years in social security that person makes up for the fact that people are in the system and qualified on a very short period and have qualified for higher benefits for their lower income. You have a total model that does that.

Mr. CARDWELL. Yes. It is a functioning of the long-term employment and the higher wage, a combination of those two.

Mr. ADAMS. Right.

Mr. CALDWELL. Also, it is a combination of the employer's share as well as the employee's share.

Mr. ADAMS. Right. This is what we have here and I want you to tell me how we can correct it.

Your chart bases the social security employment on 30 years but you use your tax and benefit payment based on 15, or with most railroad employees on a short period of time. So they in this interchange system receive benefit under your formula and make low taxpayments into the fund which means that the interchange has been absolutely even as far as the social security system is concerned. In other words, you receive taxes in and benefits paid out, but that, in terms of the operation of our total formula because you take the total railroad employment, means that the railroad trust fund is having to pay out based on 30 years social security benefit rather than on 15 and therefore it receives in the interchange less taxes but has to pay higher benefits. Now, you come out even because you pay your benefits directly on 15 years of employment, taxes collected, 15 years of benefits to go out. But with most railroad employees it is much worse. You have 5 years maybe of taxes collected or I forget the number of quarters now you have to have to qualify under social security, but it is a very limited number.

And you have collected taxes from that man for a very limited period. But the benefits paid out to him because they are based on his total employment, adding in the railroad employment, means that the total high benefit is paid to him and that is why the railroad retirement fund has got to make that additional amount up, because we have taken only half of your total statistical model.

Mr. CARDWELL. Sir, I would say to you that that is why I think you are articulating the reason that the

Mr. ADAMS. I am not articulating the reasoning they come up with. Your total statistical model is weighted at this end. You even it out by your long-term employment wherein your man or woman retires at 65 and by then under the social security system they have worked 30 years and your people in that last 15 years balance out the shortterm benefits of those who are only working a short period of time but receive rather high benefits.

But when you take that model and you wedge it into the railroad retirement fund you have wiped out your older employee, or the Congress has done this, and so the railroad retirement fund has to make up for what in your other model are your later people.

I am not criticizing you for it. I am just trying to get fundamentally what is happening.

Mr. CARDWELL. I think you have a fundamental misunderstanding of what happens.

Mr. ADAMS. Suppose everybody in your system only work 10 years, paid the taxes in and paid the benefits you have now, your fund would go broke, would it not? Just answer it.

Mr. CARDWELL. Yes, unless we raised taxes but I don't think that proves the point.

Mr. ADAMS. I mean under the tax system we have now and the benefit we pay out if everybody in your system worked 10 years or less your system would go broke.

Mr. CARDWELL. Tax system, no. The system is designed to tax rate to cover that. The rate would have to be changed.

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