with two exceptions. All industries studied had an average return on net assets of 10.6 percent. Manufacturing industries averaged 12.8 percent, wholesale and retail trade 10.9 percent, mining and quarrying 9.7 percent, and public utilities 9.6 percent. While 70 of the 73 industries and groups showed average returns of from 4.7 to 24 percent, the railroads' return on net assets was only 4.4 percent. The only two industries having a return less than the railroads were meatpacking and fire and casualty insurance.

I have already shown in table VI how sharply railroad employment was cut in 1958. Other economies affected in 1958 are shown by the record of railroad expenditures for capital improvements and for the purchase of fuel and other materials and supplies required to operate and maintain the railroads. Such expenditures were cut by about $11 billion in 1958 under those of the previous year. According to the latest estimates of the ICC, railroad capital expenditures amounted to about $740 million in 1958, a reduction of $654 million or 47 percent under the 1957 total. Other purchases are estimated at $1.2 billion in 1958, down by more than $600 million, or about onethird from the 1957 level.

Such curtailment of spending by the railroads has an adverse effect, of course, on the general economy of the Nation, but it was only by virtue of such curtailment that the railroads were able to protect against even more severe financial distress in 1958.

Recent trends in railroad traffic are shown in table VII. Senator MORSE. Table VII will be copied into the record. (Table VII follows:)

TABLE VII.-Traffic trends-Class I railroads, 1955-58

Mr. LOOMIS. Railroads hopefully expect improvement in their traffic volume in 1959. In the first 6 weeks of 1959, however, carloadings of revenue freight were only 1.8 percent greater than the depressed level of loadings in the corresponding period of 1958.

As Mr. Schoene pointed out in his appearance before this committee on February 10, the railroads in the postwar years have enjoyed a volume of freight traffic which has been about one-third greater than that of the late 1920's. In fact, railroad gross revenues have shown an even greater relative increase than the increase in freight traffic. In the 8-year period 1951 to 1958, gross operating revenues averaged $10.2 billion a year, an increase of 65 percent over the average of $6.2 billion realized in the 1925-29 period. Despite this increase of about $4 billion in annual operating revenue, and despite an increase of about $4 billion in railroad net investment, earnings have not increased, but in fact have declined.

Net railway operating income of the class I railroads averaged $1,165 million in 1925-29, equivalent to a return of 5.11 percent on

their average net investment. Railroads have not earned that amount of net railway operating income in any postwar year, and their highest rate of return in the postwar period was that of 4.31 percent earned in 1948.

The decline in railroad earnings has been accompanied by, and is almost directly attributable to, an increase in the ratio of wage costs to operating revenues. Such costs took 42.6 cents per dollar of revenue in 1929, and this ratio was 52.7 cents in 1957, an increase of 10.1 cents per dollar of gross. This increase in the wage ratio was accompanied by a corresponding decrease in net earnings, as the ratio of net railway operating income per dollar of gross revenue fell from 19.9 cents in 1929 to 8.8 cents in 1957, and dropped further to 8 cents in 1958. In other words, the margin of profit has dropped by nearly 12 cents on the dollar since 1929, and the increase in labor costs has accounted for about 85 percent of the decline. The railroad stockholders have realized nothing from their increased investment or from increased revenues but in fact have suffered a loss.

Many economists believe, and many indicators suggest, that economic conditions in the United States will gradually improve in 1959. Railroad freight business this year may increase from 5 to 10 percent, provided there is sustained recovery from the recession levels in heavy goods. Even if a traffic increase of as much as 10 percent should materialize, however, carloadings would still be less than 94 percent of what they were in 1957. In other words they would be less than in 1957 by some 6 or 7 percent, and that volume of traffic cannot eliminate or even alleviate the railroads' present need to control their operating costs.

Operations in 1959, of course, will be affected by the full impact of the $886 million aggregate increases in annual operating wage costs shown in table IV. About $699 million of those costs were actually experienced by the railroads in 1958; the additional $187 million of known increases in annual costs will apply in full in 1959.

Mr. Healy, member of the Railroad Retirement Board, showed that benefits available under the railroad retirement system are already more liberal than those under the social security system. Notwithstanding the increase in taxes provided in the 1958 amendments to the Social Security Act, the railroads, with no change in the law, will in 1959 pay more than twice as much in taxes per employee as will employers, including the railroads' competitors, covered by social security. It is true that the social security law provides for future increases in taxes, but even when they reach their maximum they will be only one-half of what the railroads will be paying if S. 226 becomes the law.

Railroad unemployment benefits are now much higher than those paid under the State systems, and railroad taxes for unemployment benefits are much higher than those paid by other employers. Mr. Calhoun, who appears later, will deal in detail with this situation.

To give some idea of the magnitude of the retirement system, according to the seventh actuarial valuation of the railroad retirement system by the Railroad Retirement Board, the total capitalized liability for former and present employees was $23.3 billion. If the liability for future entrants be included the total capitalized liability of the system becomes $33.5 billion. If S. 226 becomes law, the total

capitalized liability of the system would become $39.1 billion or an increase of $5.6 billion in the capitalized liability.

Some idea of the magnitude of this figure may be gained by indicating that it is 1410 times the total net investment in railroads plant and equipment.

The realities of the railroad situation which I have outlined clearly show that the railroad industry is not in a position to assume unwarranted increases in operating costs. It simply cannot afford unjustifiable expenses. We do, however, propose an adjustment in retirement benefits and taxes provided favorable consideration is given certain badly needed adjustments in the Railroad Unemployment Insurance Act.

It is our proposal that the retirement act be amended to provide a 5 percent increase in benefits. Such an increase in benefits to railroad retirees will provide a larger dollar increase for annuitants than the 7 percent increase which the last Congress provided for workers under the Social Security Act. The 1958 amendments to the Social Security Act increased maximum annuities from $108.50 per month to $116 per month, or by $7.50. The suggested increase to railroad annuitants of 5 percent will increase the present railroad maximum from about $186 per month to $195.30 per month, or an increase of $9.30.

Based on old-age benefits actually awarded in September 1958, the 7 percent increase legislated by the Congress for social security workers increased the average award from $75.92 per month to $81.23, or by $5.31 per month. Old-age benefits awarded by the Railroad Retirement Board in September 1958 averaged $131.49 per month, which if increased 5 percent would become $138.06, an increase of $6.57 per month.

You will recall that in 1956, the President of the United States signed a bill granting a 10 percent increase in railroad retirement benefits with the understanding that provision would be made to finance those increased benefits. We took the position in hearings before this committee in 1957 that the railroads stood ready to assume their proportion of the burden of the cost of that 10 percent increase. Our proposal today will do just that and also provide for financing of a substantial part of the suggested new 5 percent increase in benefits. The 5 percent increase now proposed by the railroads would be 5 percent on top of the 10 percent increase made effective in 1956.

The railroads, and their employees alike, are presently paying for retirement benefits a tax of 614 percent on employee compensation up to $350 per month per employee.

S. 226 would provide an increase in total retirement tax rates (onehalf paid by the railroads and one-half by the employees) ranging upward from 1311⁄2 perecent for 1959 to 18 percent in 1969. Furthermore, it would raise the taxable compensation base from $350 to $400 per month.

We propose that the total tax rate for retirement be increased from the present rate of 1212 percent to 1312 percent and that the compensation base for the retirement tax be increased from $350 to $400 per month. The increase in the tax rate would conform to the rate would conform to the rate proposed to be effective over the next 3 years under S. 226. The increase in the tax base would conform

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to the similar percent amendment to the Social Security Act, as well as the proposal in S. 226. Such an increase in the tax rate and base will provide $118 million of increased income to the railroad retirement fund and will finance the cost of the 10 percent increase in benefits granted in 1956 plus a substantial contribution to the cost of the proposed further increase in benefits of 5 percent.

This is a burden which the industry can ill afford. However, the industry stands ready to assume that burden provided the Congress will revise the railroad unemployment insurance system to cure a number of substantial defects in that system.

I should point out that S. 226 provides for the imposition of retroactive payroll taxes from January 1, 1959, and that retroactive feature applies both to the tax increase to be paid by the railroads and by their employees. We propose that the payroll tax increase be made effective from July 1, 1959, or some other future date, so as to eliminate any retroactive payment.

Take, for example, an employee who terminates his service with the industry subsequent to January 1, 1959, and before any bill becomes law. There are many thousands of such terminations. Will the railroad industry be expected to be responsible for the increase in the payroll tax which should have been paid by such employees?

Then consider, for simplicity, an employee who earns $400 per month and who had already paid $21.88 per month as his retirement tax. Assume also that the proposal to increase retirement taxes becomes law on May 1, in which event the withholding tax would become $27 per month, or $5.12 over the withholding that had actually occurred during each of the preceding 4 months. It would mean that employees then in service would have to be assessed an additional $20.48 just to take care of the retroactive tax not previously withheld. For these and other reasons, it is important any increase in payroll taxes not be made retroactive.

Attention has been directed to the trend of benefits paid under the Railroad Retirement Act compared with the trend in cost of living. Such a comparison was contained in the report of the Joint Committee on Railroad Retirement Legislation to the Congress, dated January 9, 1953, printed as Report No. 6.

At page 515 of that document there appears a tabulation comparing the trend in the average benefit per year of service with the trend in the Consumer Price Index from 1937 to 1951. It is there shown that the full age annuity per year of service for employee only, excluding wife's benefit, increased by 55 percent from 1937 to the end of 1951. Including spouse annuities the increase was 80.3 percent. During the same period the Consumer Price Index increased by 80.7 percent.

The report further pointed out, however, that such a comparison indicates only the measure of increases in the level of benefits to employees already retired and does not reflect the increase in value of overall protection to new employees and their survivors by reason of amendments such as those providing benefits for surviving widows, widows with dependent children and dependent parents. Recognizing these additional benefits, the report then presented an actuarial calculation to show the trend in the "relative value of protection" afforded by the Railroad Retirement Act. That calculation showed that the relative value of employee protection increased 119 percent between

1937 and 1951, as compared with an increase in the Consumer Price Index of 81 percent.

Increased annuities made effective since 1951 have further added to the value of protection. Between 1951 and December 1958, the Consumer Price Index has risen from an index of 111.0 for 1951 (19471949=100) to an index of 123.7 in December 1958, an increase of 11.4 percent. On the other hand, according to the Railroad Retirement Board, the full age annuity per year of service, for employee only, increased by 19.7 percent, and including spouse annuity, by 20.5 percent.

Yesterday on the House side Mr. Schoene criticized my statement on the ground that some of the annuities were not concurrent but were successive, such as survivors, dependent children. The figures I have just given here for the employees annuity and for that including the spouse annuity, of course, are concurrent annuities that enter into the income at the same time. And they are not successive.

To proceed: Increases in retirement benefits have thus outdistanced the increase in the cost of living. The somewhat greater increase for the employee-wife annuity is due to spouse annuities awarded under the larger social security maximum. This maximum was further increased by the social security amendments of 1958.

The proposal to further increase retirement annuities by 5 percent coupled with a rise in the compensation base to $400 rather than $350, will further widen the increase in benefits over the cost of living. The proposed 5 percent increase in benefits alone would bring the percentage increase since 1951 in the single employee annuity to 25.7 percent, and in the combined employee and wife annuity to 26.5 percent, as compared with the cost-of-living increase of 11.4 percent.

Mr. Calhoun will discuss those features of S. 226 which would amend the Railroad Unemployment Insurance Act, will show how extreme and capricious our present unemployment system is, and will recommend for your favorable consideration certain amendments that should be made in the present act to eliminate certain unjust payments. In summary, he will, among other things, recommend that benefit and base year definitions be revised, that an employee be required to work at least one-third of his base year to qualify for benefits, that benefits be equal to 60 percent of pay after tax withholdings instead of one-half of gross pay, that strikers and those fired for cause, voluntary quits, etc., be disqualified, and that maternity benefits be eliminated. He will further recommend that a special fund be established to finance the payment of sickness benefits, one-half of which would be borne by the employees.

Mr. Calhoun will also show there is no reason to increase the taxable base for unemployment taxes which is already $350 per month, whereas most State systems are on a base which averages $250 per month.

It will be clear from Mr. Calhoun's testimony that there can be no justification for providing increased unemployment benefits such as proposed by S. 226.

So, we respectfully request that S. 226 be amended to limit increased retirement benefits to an increase of 5 percent, to peg the total tax rate at 13.5 percent on taxable payrolls up to $400 per month per employee and to incorporate our suggested amendments to the Unemployment Insurance Act so as as to eliminate the inequities presently

in that act.