entitled to benefits, except that an employee who has established a first claim for benefits under the Temporary Unemployment Compensation Act of 1958 would not be entitled to benefits under this provision. 7. The maximum number of days of unemployment in the first registration period in a benefit year for which benefits may be paid would be increased from 7 to 10, the same as it is now with respect to all subsequent registration periods. 8. Sundays and other holidays would be treated the same as other days for unemployment benefit purposes. 9. To provide funds for the additional benefits that are proposed, the bill, in addition to raising the maximum taxable earnings for a month from $350 to $400 and increasing from $400 to $500 the minimum earnings in a base year which would qualify a worker for benefits in the benefit year, as stated above, would provide for a contribution or tax rate of not less than 1% percent when the money in the railroad unemployment insurance account totals $450 million or more, which rate would be raised, by steps, to 32 percent when the money in the account falls below $300 million. The provision for increase in the contribution rate would be effective as of January 1, 1959, and would apply only with respect to compensation paid for services rendered after December 31, 1958. IMMEDIATE EFFECT OF AMENDMENTS TO THE RAILROAD RETIREMENT ACT Employee annuities An estimated 355,000 employee annuities, averaging $117, in course of payment on January 1, 1959, would be increased by 10 percent to an average of almost $129. For an employee retiring on January 1, 1959, the maximum annuity that could be paid would rise from about $186 to $204. Subsequently, after the new $400 ceiling on taxable earnings goes into effect, the maximum would rise slowly up to the end of 1966. Thereafter, the maximum will rise more rapidly since more than 30 years of service will become creditable toward annuities. An estimated 44,500 retirement annuity awards, averaging about $139, would be made in calendar year 1959. These figures include about 500 awards to women employees aged 62-64 who would elect to accept a reduced annuity. Spouse annuities An estimated 129,000 spouses on the rolls on January 1, 1959, would also have their annuities increased by 10 percent. The average spouse annuity in currentpayment status on January 1, 1959, would be increased to about $57. The estimated 16,000 unreduced spouse annuities to be awarded in calendar year 1959 would average $56. The new maximum spouse annuity would be $65.50 in January 1959, and would increase to $66.60 in February 1959, and to $69.90 in February 1960. There are an estimated 36,000 spouses aged 62-64 who could elect to receive reduced spouse annuities. In the absence of specific experience and for the purposes of this report, it has been arbitrarily assumed that about three-fourths of them or 27,000 would choose to accept such reduced benefits. The reduced benefits would average about $50. Pensions An estimated 1,400 pensioners on the rolls on January 1, 1959, would receive 10-percent increases, bringing their average benefit to about $91 compared with the average of $82 under the present law. Survivor annuities The estimated 239,000 survivor benefits in current-payment status on January 1, 1959, would be increased at least 10 percent. The maximum basic amount possible on January 1, 1959, under the new formula would be $79, while the maximum family benefits would be $193.60 and $279 under the railroad retirement and social security guaranty formulas, respectively. An estimated 18,000 insurance lump-sum benefits would be paid in the calendar year 1959. The average lump sum would be $560. Disability work clause The immediate effect of the change in the disability work clause would be comparatively small. About 1,000 annuities are withheld each month under the present provision and the amount of annuities withheld in a year totals about $1 million. The proposed change in the disability work clause is estimated to reduce the amount withheld in the first year by about $200,000. Total benefit payments Total benefit payments under the provisions of the bill in calendar year 1959 are estimated at about $900 million, or $95 million more than would be payable under the present law. Of the additional $95 million, $81 million is attributable to the 10-percent increase in monthly and lump-sum benefits and the remaining $14 million to the new benefits for women employees and spouses aged 60-64. Tabular summary The two attached tables illustrate the effect of the proposed amendments. Table 1 shows the effect on benefits in course of payment on January 1, 1959, and table 2 covers benefit awards in calendar year 1959. TABLE 1.-Estimated number of monthly benefits in current-payment status on Jan. 1, 1959, and estimated average monthly amount before and after increases under the bill, by type of benefit 1 After adjustment for increases under 1958 Social Security Act amendments. Includes 7,000 disability annuitants aged 50-64. TABLE 2.-Estimated number of awards in calendar year 1959, and average benefit under present law and the bill, by type of benefit 1 There will be an estimated 36,000 spouses of retired employees, and 1,000 women employees with less than 30 years of service, aged 62-64, eligible to elect reduced annuities. It is assumed that 34 of the spouses and 1⁄2 of the women employees would make such elections. IMMEDIATE EFFECT OF AMENDMENTS TO THE RAILROAD RETIREMENT TAX ACT The bill proposes to amend the Railroad Retirement Tax Act, effective January 1, 1959, by raising the monthly limit on taxable earnings from $350 to $400, and by increasing the combined rate of tax from the present 122 percent to 131⁄2 percent in 1959-61 and to 141⁄2 percent in 1962-64. In addition, the rate of tax in 1965 and thereafter would be increased by the excess of future actual social security rates over 51⁄2 percent. Assuming that the railroad industry will be recovering from the low level of activity experienced during the 1957-58 economic recession with a consequent gradual increase in employment, and taking into consideration the increases provided in existing wage agreements, the effect of the proposed legislation on railroad retirement taxes in calendar years 1959-62 would be as follows: ACTUARIAL EFFECTS OF PROPOSED AMENDMENTS TO THE RAILROAD RETIREMENT AND RAILROAD RETIREMENT TAX ACTS As stated before the proposed amendments pertaining to the retirement and survivor programs would increase the benefit disbursements in 1959 by about $95 million to a total of about $900 million. Of this $81 million is attributable to the 10-percent increase in monthly and lump-sum benefits and the remaining $14 million to the liberalized eligibility requirements for women employees and spouses as well as to certain other provisions of a relatively minor nature. Costs of benefits, on a level basis, would be increased about $147 million a year. It is further estimated that the additional immediate and deferred taxes would bring in about an extra $115 million a year until 1962 when the amount would be about $175 million a year. In 1969, if the contingent increase in taxes becomes effective, as scheduled after 1964, the amount would reach about $370 million a year. A year-by-year estimate of the additional taxes on both employers and employees is shown in table 3. Of the $114 million in additional taxes ($57 million to be paid by the employers and an equal amount by the employees), in 1959, $63 million would be due to taxing compensation between $350 and $400 a month at the rate of 121⁄2 percent; and the remaining $51 million a year would be due to the additional 1 percentage point of tax on the total estimated taxable payroll of $5.1 billion for the year. The rise in 1962 would result mainly from the additional percentage point in the combined tax rate with similar situations occurring in later years. Considering both additional outgo and additional income, the estimates indicate that the added revenues would exceed the added disbursements by about $180 million a year on a level basis, which is equivalent to 3.21 percent of a $5.6 billion taxable payroll. Since the actuarial deficiency for the present law, calculated as of December 31, 1958, is estimated at 3.81 percent of that payroll (adjusted from 4.18 of a $5.1 billion payroll), the enactment of the amendments would leave the railroad retirement system with an actuarial deficiency of 0.60 percent of payroll (3.81 minus 3.21) or about $34 million a year. The derivation of the above actuarial deficiency figure is shown in table 4 together with a breakdown of the major cost figures for the proposed program by source of cost or of savings, as the case may be. An analysis of the cost effects of the proposed amendments considered by themselves is presented in table 5. As previously indicated, the total level additional disbursements are estimated at about $147 million a year, or 2.63 percent of taxable payroll, while the additional revenues come to 5.84 percent of payroll or $327 million a year on a level basis. The distribution of the added costs over the years would depend upon the nature of the amendment. Thus, the disbursements due to the increase in the limit on creditable compensation ($44 million a year after considering the proposed 10-percent increase in benefits) would be felt to only a very minor extent during the first several years following enactment of this provision. However, the additional income on the extra creditable compensation would begin to accrue in full almost immediately. On the other hand, the lowering of the retirement age for women on an elective basis would result in considerable additional disbursements in the immediate future, but these would later be largely offset by reductions in benefits payable after age 65. From an actuarial point of view, only the additional net costs of the change in the retirement age for women had to be considered. It is estimated that the net additional cost would come to some 0.03 percent of payroll or, in round figures, $1.5 million a year on a level basis. This figure is but a small fraction of the possible additional disbursements in the first year due to this amendment. For the proposed liberalization in the work clause for disability annuities, this estimate allows an additional cost of 0.02 percent of payroll, or about $1.0 million a year on the average. The smallness of the allowance is in conformity with the total work clause savings which has been estimated at about 0.05 percent of payroll. The present estimate assumes that the liberalization in the disability work clause would take up about one-half of the savings which would exist under the provisions of the present law. Whether this assumption will or will not be borne out by actual experience is not very important because of the relative smallness of the amounts involved. The cost figures here discussed are based on the seventh actuarial valuation as adjusted for the effect of the 1958 amendments to the Social Security Act and as subsequently revised to produce costs as of December 31, 1958. As indicated in table 4, the gross costs of the amended benefit program, including administrative expenses, would come to 20.91 percent of taxable payroll (approximately $1.2 billion a year on a level basis), and the reduction on account of funds on hand (which will produce interest equivalent to 1.96 percent of payroll estimated as $5.6 billion) and the financial interchange with social security (producing gains equivalent to 1.12 percent of payroll) would come to 3.08 percent ($173 million a year), thus leaving a net cost of 17.83 percent ($998 million a year) to be financed by future payroll taxes. The future tax income is estimated to be equivalent to a level rate of 17.23 percent ($964 million a year), thus leaving an actuarial deficiency of 0.60 percent of payroll, or about $34 million a year. Because of the very small margins for contingencies contained in the assumptions, there is very little likelihood that the actual future cost of the railroad retirement program after giving effect to the proposed amendments will be lower than estimated. An error in the opposite direction is considered to be much more likely although the extent of the probable error in the estimated costs for the proposed amendments could not be determined with any degree of accuracy. TABLE 3.-Estimated additional tax income under the amendments to the Railroad Retirement Tax Act contained in the bill Difference between combined employer and employee taxes at proposed rates on taxable payrolls for $400 limit and 121⁄2 percent of payroll with $350 limit. The taxable payroll for the $400 limit is estimated to be $500,000,000 a year higher than for the $350 limit on monthly compensation. 37456-59-2 TABLE 4.-Cost estimate for the railroad retirement program as it would be amended by the bill [Level cost figures are as of Dec. 31, 1958, and relate to a taxable payroll of $5.6 billion a year] Actuarial deficiency (excess of net costs over total future tax income). 20.91 1 14.22 1.40 3.94 .62 .20 .39 .14 3.08 21.96 1.12 17.83 17.23 14.42 2.81 .60 1 Includes 0.08 percent of payroll for benefits payable with respect to dependents of disability annuitants under the social security minimum provision. 2 Excludes an estimated $325,000,000 accrued under the financial interchange for the period July 1957December 1958 but not yet received. Had this amount been included, the 1.96 would have been increased to 2.13 and the next figure of 1.12 would have been correspondingly reduced to 0.95. TABLE 5.-Changes in actuarial deficiency due to the bill Item Actuarial deficiency under law before amendments (as of Dec. 31, 1958). Increase in benefits by 10 percent. Elective reduced benefits to spouses and women employees at age 62. Liberalization of work clause for disability annuitants.. Taxes at rate of 121⁄2 percent on additional taxable compensation Increase in schedule of taxes independent of OASDI rates.. Addition il taxes after 1964 dependent upon OASDI rates. Actuarial deficiency under law after amendments (as of Dec. 31, 1958). Percent of payroll ($400 limit) 13.81 +.71 +1.84 +.03 +.03 +.02 -1.11 -1.92 -2.81 .60 Equivalent to 4.18 percent of payroll with a $350 limit on monthly compensation. In both instances, this is equivalent to $213 million a year. EFFECT OF AMENDMENTS TO THE RAILROAD UNEMPLOYMENT INSURANCE ACT The bill would increase benefit rates about 20 percent, provide extended duration of unemployment benefits for employees with 10 years or more of railroad service, increase temporarily the duration of unemployment benefits for other employees, eliminate the unemployment benefit waiting period and the Sunday and holiday disqualifications, and provide a maximum contribution rate of 3.5 percent on compensation up to $400 a month. If it should be enacted soon enough for the retroactive payments that would result to be made by June 30, benefit payments for the current fiscal year would be increased by $90 million to $105 million. This would make total benefits for 1958-59 range from $310 to $355 million, and would create a deficit in the railroad unemployment insurance account by June 30, 1959, of $25 to $75 million. Furthermore, it appears that the maximum contribution rate of 32 percent of payroll contained in the bill would not be adequate, since it is estimated that the future cost of the program, if the bill is enacted, would be about 34 percent of payroll. Following is a detailed discussion of the effect of the bill on beneficiaries, benefits, and financing. |