APPENDIX C

[EXCERPT FROM THE REPORT OF THE COMMISSION ON RAILROAD RETIREMENT, JUNE 30, 1972]

MAJOR FINDINGS AND PRINCIPAL RECOMMENDATIONS OF THE COMMISSION ON RAILROAD RETIREMENT

SUMMARY

The railroad retirement system was created in 1935 as a special benefit system for railroad workers. It is federally-administered but has always been self-supporting from contributions by the workers and the railroads.

Since 1935 the economic situation of the railroad industry and the structure of Federal social insurance and retirement programs have undergone major changes. The railroad retirement system has been adjusted many times to meet the changing situation; but the system remains beset by serious problems. The Commission on Railroad Retirement was created by the Congress to make a thorough study of the system and to recommend solutions.

The Commission has concluded that the system needs a thorough overhaul to make it consistent with a carefully defined set of objectives, to up-date it to meet current conditions and to make it financially solvent. The system has lacked a clear set of objectives, delineating between the socially-weighted benefits provided under a social insurance scheme and those appropriated to a private industry supplementary person plan. This confusion of pension objectives has created a system with structural deficiencies. It needs to be fully coordinated with the basic social security system. Otherwise, excessive costs for overlapping benefits results. The present benefit provisions are both complicated and costly. The system faces a financial crisis. Unless corrective action is taken promptly there will be large cash flow deficits, and the system will be broke in about 16 years.

The Congress directed the Commission to recommend changes to provide adequate levels of benefits on an actuarially sound basis and specified in detail the topics to be studies. The Commission has found that past efforts to patch up the system, though helpful, have failed to solve the long-range problems. It is recommending four major changes in the law which are designed to preserve and make secure the rights of railroad workers and their families to benefits in the coming period of crisis and for the years that lie beyond. These fundamental reforms will solve the serious problems of the system and can be carried out so as to guarantee that no current beneficiary and no worker whose rights are legally vested will lose any benefits he has accrued to date. In summary form the recommendations are as follows:

1. The railroad retirement system should be restructured into two separate tiers of benefits. Tier one should provide regular social security benefits, financed and paid under the social security laws, and represented by a separate social security check. In relation to tier one, the Railroad Retirement Board should function as a social security claims agent and payment center for claims-taking, adjudiction, and

certification for payment of social security benefits for railroad beneficiaries in accordance with policies set by the Social Security Administration. Tier two should be a completely separate supplementary retirement plan administered by the Railroad Retirement Board under Federal law, structured to fit with and augment social security and float on top of tier one. This structure conforms with the pattern that works well in many other industries. It utilizes fully the strength of the social security system which now covers 90% of all jobs in the country. The separation of tier two will permit it to be negotiated by labor and management in keeping with their special needs.

This separation of tier one and tier two-in objectives, in benefits structure, and in financing-must be unmistakably clear to all involved; to the special interests represented by labor, management, and beneficiaries; and to the public interest represented by Congress and the executive branch of the Government.

2. Legally-vested rights of railroad workers and railroad retirement beneficiaries to benefits based on social-security-covered nonrailroad service should be guaranteed, but future accrual of these dual benefits should be stopped. Dual benefits are based on social security coverage for only part of a work career. They involve a windfall element and excess cost to the Railroad Retirement Account. Their future accrual will cease automatically when railroad employment is covered by social security on a full basis.

3. A firm financial plan should be adopted forthwith to finance the second tier of supplementary benefits through the Railroad Retirement Account on an assured, fully self-supporting basis by contributions from the railroad community through the crisis period of the next 20 to 30 years and then beyond.

The plan must provide for immediate sizable tax increases whichtogether with the future savings from curtailing dual benefits and some gain in earnings-will be sufficient to cover fully the projected cash flow deficits of up to $1 billion a year by the end of the century. The higher taxes must accompany the extension of the temporary 1970 and 1971 benefit increases and shall be sufficient also to finance any other liberalizations that may be made. As a minimal safeguard for future benefits the basic criterion should be that the Railroad Retirement Account should not be drawn down below its present $5.5 billion balance (December 31, 1971, accrual-basis), and as tier two benefit outlays rise in future years the reserve should be maintained at not less than five times the annual rate of such expenditures.

The tax rates required to carry out the financial plan should be determined by the Railroad Retirement Board pursuant to explicit statutory criteria regarding this reserve ratio. A detemination should take place within 90 days after any major change in the program, or at least biennially. It should be transmitted to the Congress by the President, and should go into effect after 60 days unless the Congress enacts legislation within that period to set alternate rates.

Beyond the crisis period, when a reasonable degree of normality in the ratio of beneficiaries to railroad workers is attained, the Account should be financed according to the generally accepted standards of actuarial soundness appropriate to supplementary staff pension plans.

4. The benefit formulas and provisions of the system should be restructured and revised to assure that the overall benefits in the future continue to bear a reasonable relationship to wages in a dynamic economy and to make benefits more equitable among the various groups of beneficiaries. A continuation of the past practice of compounding the percentage factors in the railroad retirement formula and increasing the base of covered wages will escalate costs to an untenable extent. Various other anomalies are also present.

The foregoing are the Commission's principal recommendations. They stem from an independent study by the Commission and its staff, consultants, and advisory groups, compressed within the past 17 months. Highlights of the findings and general conclusions follow. The Commission's complete report contains all of the specific recommendations, and is supplemented by extensive staff studies. It also suggests necessary follow-up action to achieve the transition from the present system to the new, improved system.

APPENDIX D

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3 of rule XIII of the Rules of the House of Representatives, changes in existing law made by the bill, as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, existing law in which no change is proposed is shown in roman):

RAILROAD RETIREMENT ACT OF 1937

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ANNUITIES

SEC. 2. (a) The following-described individuals, if they shall have been employees on or after the enactment date, and shall have completed ten years of service, shall, subject to the conditions set forth in subsections (b), (c), and (d), be eligible for annuities after they shall have ceased to render compensated service to any person, whether or not an employer as defined in section 1(a) (but with the right to engage in other employment to the extent not prohibited by subsection (d)):

1. Individuals who on or after the enactment date shall be sixty-five years of age or over.

2. [Women] Individuals who will have attained the age of sixty and will have completed thirty years of service.

3. [Men who will have attained the age of sixty and will have completed thirty years of service, or individuals] Individuals who will have attained the age of sixty-two and will have completed less than thirty years of service, but the annuity of [such men or] such individuals shall be reduced by 1/180 for each calendar month that he or she is under age sixty-five when the annuity begins to accrue.

4. Individuals having a current connection with the railroad industry, and whose permanent physical or mental condition is such

as to be disabling for work in their regular occupation, and who (i) will have completed twenty years of service or (ii) will have attained the age of sixty. The Board, with the cooperation of employers and employees, shall secure the establishment of standards determining the physical and mental conditions which permanently disqualify employees for work in the several occupations in the railroad industry, and the Board, employers, and employees shall cooperate in the promotion of the greatest practicable degree of uniformity in the standards applied by the several employers. An individual's condition shall be deemed to be disabling for work in his regular occupation if he will have been disqualified by his employer because of disability for service in his regular occupation in accordance with the applicable standards so established; if the employee will not have been so disqualified by his employer, the Board shall determine whether his condition is disabling for work in his regular occupation in accordance with the standards generally established; and, if the employee's regular occupation is not one with respect to which standards will have been established, the standards relating to a reasonably comparable occupation shall be used. If there is no such comparable occupation, the Board shall determine whether the employee's condition is disabling for work in his regular occupation by determining whether under the practices generally prevailing in industries in which such occupation exists such condition is a permanent disqualification for work in such occupation. For the purposes of this section, an employee's "regular occupation" shall be deemed to be the occupation in which he will have been engaged in more calendar months than the calendar months in which he will have been engaged in any other occupation during the last preceding five calendar years, whether or not consecutive, in each of which years he will have earned wages or salary, except that, if an employee establishes that during the last fifteen consecutive calendar years he will have been engaged in another occupation in one-half or more of all the months in which he will have earned wages or salary, he may claim such other occupation as his regular occupation; or

5. Individuals whose permanent physical or mental condition is such that they are unable to engage in any regular employment. Such satisfactory proof shall be made from time to time as prescribed by the Board, of the disability provided for in paragraph 4 or 5 and of the continuance of such disability (according to the standards applied in the establishment of such disability) until the employee attains the age of sixty-five. If the individual fails to comply with the requirements prescribed by the Board as to proof of the continuance of the disability until he attains the age of sixty-five years, his right to an annuity by reason of such disability shall, except for good cause shown to the Board, cease, but without prejudice to his rights to any subsequent annuity to which he may be entitled. If before attaining the age of sixty-five an employee in receipt of an annuity under paragraph 4 or 5 is found by the Board to be no longer disabled as provided in said paragraphs his annuity shall cease upon the last day of the second month following the month in which he ceases to be so disabled. If after cessation of his disability annuity the

employee will have acquired additional years of service, such additional years of service may be credited to him with the same effect as if no annuity had previously been awarded to him.

(b) An annuity shall be paid only if the applicant shall have relinquished such rights as he may have to return to the service of an employer and of the person by whom he was last employed; but this requirement shall not apply to the individuals mentioned in subdivision 4 and subdivision 5 of subsection (a) prior to attaining age sixty-five.

(c) An annuity shall begin to accrue as of a date to be specified in a written application (to be made in such manner and form as may be prescribed by the Board and to be signed by the individual entitled thereto), but

(1) not before the date following the last day of compensated service of the applicant, and

(2) not more than twelve months before the filing of the application.

(d) No annuity shall be paid with respect to any month in which an individual in receipt of an annuity hereunder shall render compensated service to an employer or to the last person by whom he was employed prior to the date on which the annuity began to accrue. Individuals receiving annuities shall report to the Board immediately all such compensated service.

No annuity under paragraph 4 or 5 of subsection (a) of this section shall be paid to an individual with respect to any month in which the individual is under age sixty-five and is paid more than $100 in earnings from employment or self-employment of any form: Provided, That for purposes of this paragraph, if a payment in any one calendar month is for accruals in more than one calendar month, such payment shall be deemed to have been paid in each of the months in which accrued to the extent accrued in such month. Any such individual under the age of sixty-five shall report to the Board any such payment of earnings for such employment or self-employment before receipt and acceptance of an annuity for the second month following the month of such payment. A deduction shall be imposed, with respect to any such individual who fails to make such report, in the annuity or annuities otherwise due the individual, in an amount equal to the amount of the annuity for each month in which he is paid such earnings in such employment or self-employment, except that the first deduction imposed pursuant to this sentence shall in no case exceed an amount equal to the amount of the annuity otherwise due for the first month with respect to which the deduction is imposed. If pursuant to the third sentence of this subsection an annuity was not paid to an individual with respect to one or more months in any calendar year, and it is subsequently established that the total amount of such individual's earnings during such year as determined in accordance with that sentence (but exclusive of earnings for services described in the first sentence of this subsection) did not exceed $2,400, the annuity with respect to such month or months, and any deduction imposed by reason of the failure to report earnings for such month or months under the fifth sentence of this subsection, shall then be payable. If the total amount of such individual's earnings during such year (exclusive of