IMMEDIATE EFFECT ON BENEFICIARIES The immediate effect on beneficiaries of the proposals to amend the Railroad Unemployment Insurance Act may be illustrated by reference to the effect they would have had on payments for the 1957-58 benefit year. Each of the proposals is discussed in turn. Except for a few thousand beneficiaries with earnings under $500 who would no longer be qualified, the benefits of all beneficiaries would have been increased substantially. Also, many employees who would not have been paid benefits at all under the present law would have been eligible, mainly for relatively small amounts. Increase in qualifying earnings requirement In 1957-58, 4,300 (1.4 percent) of the unemployment beneficiaries and 600 (0.4 percent) of the sickness beneficiaries had base-year earnings under $500 and so would not have been qualified. However, no employee currently on the benefit rolls would be denied benefits in this benefit year by the proposed change; it would be effective with the 1958 base year and so would not affect benefit payments until July 1959. Benefit rates The 1957-58 beneficiaries with base-year earnings of $500 or more would, it is estimated, have been paid at an average daily benefit rate of $9.40 for unemployment and $9.74 for sickness (prior to adjustment for receipt of other social insurance benefits). For each type of benefit the average benefit rate would be about one-fifth larger than under the present law. The increase in benefit rates for those with rates determined under the proviso with respect to the daily rate of pay would obviously be this much generally, since 60 percent is one-fifth larger than 50 percent. The new schedule in the bill, as shown in the table below, would cause an increase of from 8 to 25 percent, depending on the compensation range. However, increasing the limit on creditable earnings would add to this by shifting many beneficiaries to a higher compensation group, with a consequent higher benefit rate. Thus, for some beneficiaries, particularly in the higher compensation brackets, the total increase would be substantially more than 20 percent, and the average increase for those paid schedule rates would be about one-fifth also. It is possible under the present law for a beneficiary who was fully employed in the base year to qualify for a benefit rate approaching 60 percent of his rate of pay. Similarily, under the bill it would be possible for some beneficiaries to be paid at benefit rates nearly 70 percent of the daily rate of pay. For example, an employee paid at a rate of $14 a day, if employed 5 days a week without overtime for 50 weeks, would earn $3,500. This would qualify him for a benefit rate of $9.50 under the schedule in the bill, or 68 percent of his daily rate of pay. With respect to maternity benefits, even higher percentages of the daily rate of pay would be payable because of the nature of the maternity benefit formula. Comparison of benefit rates in schedule under RUIA with proposed schedule NOTE.-Since the compensation ranges of the 2 schedules differ, it was necessary, for this comparison, to divide some rate groups into 2 parts. Extended benefit periods It is estimated that, for 1957-58, extended benefit periods and early beginning dates of benefit years would have provided additional benefits to about 25,000 railroad employees, averaging over $500 each. Furthermore, about 2,500 of the 25,000 would have received additional sickness benefits, averaging nearly $200 each. Payment of additional sickness benefits could occur because providing extended benefit periods or beginning benefit years early lengthens the benefit year and so provides increased opportunity for payment of sickness benefits for the year up to the maximum specified in the law. Eliminating waiting period for unemployment and the Sunday and holiday disqualifications These two provisions together, in 1957-58, would have increased by about $12 million the unemployment benefits paid to about 250,000 beneficiaries who either did not exhaust benefit rights in that year, or would be entitled to extended benefit periods. In addition, thousands of employees who did not receive benefits in 1957-58 would have received small payments. In these cases the payments would have been made for claims with 5 to 7 days' unemployment which otherwise would not be compensable. The removal of the Sunday and holiday disqualification provision in the law would increase the number of such claims because, for a man normally working a 5-day week, any day of unemployment in a workweek could be a compensable day. The wage contracts for nonoperating employees now provide payment for holidays. Nevertheless, in the course of a year there will be a large number of employees who will not get paid for one or more holidays for one reason or another; in such cases, because any days of unemployment over four would be compensable, benefits might be paid for the holiday. It is estimated that the number of additional beneficiaries resulting from the two provisions may be in the provision would be $15 to $18 million. Temporary extension of duration for employees with under 10 years' service Additional benefits would have been paid to about 35,000 1957-58 beneficiaries with less than 10 years' service who exhausted benefit rights for that year under the temporary provision extending their duration of benefits a maximum of 13 weeks. Probably as many 1958-59 beneficiaries would also receive additional payments from this change. It is estimated that the total amount payable under the provision would be $15 to $18 million. Estimates of the additional benefits that would have resulted from the different provisions of the bill in 1957-58 are shown separately in the following table: 1 Net benefits payable for year, which differ slightly from published figures of actual amounts paid in the year. 2 $15,000,000 to $18,000,000 in 1 year only; not included in totals, and percentage not shown, because not a cost factor for later years. IMMEDIATE EFFECT ON BENEFITS AND FINANCING The immediate effect of the bill on benefit payments in this fiscal year would be larger than shown in the preceding table because retroactive payments for extended benefit periods starting in the preceding benefit year and payments under the provisions for temporary additional duration would be made in addition to increases applying to current benefit year claims. Also, payments under the present law may be somewhat larger this year than in 1957-58. Additional benefits The most recent estimates indicate that payments under the present law for 1958-59 will total between $220 million and $250 million. The bill, if enacted, would increase these payments by $90 million to $105 million, assuming that enactment would occur early enough for all the retroactive payments to be made by June 30, 1959. About $60 million of the increase would be additional benefits for unemployment or sickness which occurred before January 1, 1959. Effect on balance in the account Under the present law, it is expected that the balance in the railroad unemployment insurance account will be reduced to a figure between $20 million and $55 million by June 30, 1959. Income from contributions would be increased by no more than $10 million by that date, since collections would have been made by them for only the first quarter of calendar year 1959. Thus, the account would be depleted, with a deficit of $25 million to $75 million by June 30, 1959, and some provision for deficit financing would be necessary. The foregoing figures reflect what is considered the most probable range. If conditions next spring are considerably different from those assumed for the estimates, the deficit could be less than the low or more than the high estimate. Immediate cost to the railroads The bill would provide a maximum contribution rate of 3.5 percent and maximum taxable earnings of $400 a month, both of which would become effective on January 1, 1959. Under present law, which would not be changed, the effective rate for 1959 is based on the balance to the credit of the railroad unemployment insurance account at the close of business on September 30, 1958. Because that balance has already been determined and proclaimed by the Board to be less than $300 million, the amendment providing that the effective rate would be 3.5 percent when the balance is under $300 million would apply to cause the effective rate for 1959 to be 3.5 percent. The rate for 1959 is 3 percent under the unamended law. Thus, the increase in rate would be only one-half percent for compensation paid in calendar year 1959. As shown below in the section on future costs, it is doubtful that this would yield sufficient additional income to finance the additional benefits. The average increase in costs accruing for the railroads, as shown by the following table, would be over $40 million a year. NOTE.-Figures are estimates of contributions that would be payable on compensation paid in these years. FUTURE COSTS There is no adequate statistical basis for estimates of the exact cost of the changes proposed by this bill. The cost would be greatly influenced by such unpredictable things as the frequency and extent of cyclical fluctuations in railroad traffic, international conflicts, and technological developments. It appears, however, that the future cost of the proposals would be somewhat larger, relatively, than the cost for 1957-58. The more important reasons for this are as follows: 1. The cost of the extended benefit periods and of early beginning of benefit years would probably be larger than the estimate for 1957-58 indicates. Exhaustions in 1957-58 occurred later in the year than in most years, so the additional benefits in many cases would only replace payments made in following benefit year without increasing the total paid. The cost of this provision may be substantially higher this year, when exhaustions will occur earlier. 2. A substantial increase in daily benefit rates would probably be accompanied by some increase in the frequency with which benefits are claimed. For example, the sickness beneficiary rates (number of beneficiaries per 100 qualified employees) since the 1954 amendments are higher than those for earlier years. 3. Increases in pay rates in the future will tend to increase benefits more than taxable payrolls, because the effect of the benefit-rate proviso is limited only by the $10.20 maximum, while the increase in taxable payroll will be limited by the $400 maximum on creditable compensation. Also, rising wage rates will make even less significant the savings in benefits that would result from the increase in the qualifying earnings requirement to $500. 4. The cost of elimination of waiting periods for unemployment and removal of the Sunday and holiday disqualification would have more effect, relatively, in years in which there is less unemployment, with shorter duration of benefits and relatively more partial or intermittent unemployment. According to the latest estimates that have been made, benefits under the present provisions of the Railroad Unemployment Insurance Act will average about $145 million over a period of years, $94 million for unemployment and $51 million for sickness, including maternity. The esimate of taxable payrolls is $5.1 billion a year. Including admiinstrative expenses, the total cost of the present program is estimated at 2.9 percent of the taxable payroll. For the proposals contained in the bill it appears reasonable, and in accordance with a desire for sound financing, to assume for the future an increase of a little more than two-fifths in the average amount of unemployment benefits and an increase of one-third in the amount of sickness benefits. This results in an average annual benefit cost for the future, if the bill should be enacted, of $202 million, of which $135 million would be for unemployment and $67 million for sickness. At the same time, the $400 limit on creditable earnings would, it is estimated, increase the taxable payroll to $5.6 billion. Including an allowance of .2 percent of payroll for administration, and deducting .05 percent for interest on the balance in the account, the total cost of the program would then be about 34 percent of payroll. Costs for the present law and with the bill are summarized in the following table: These cost figures are, of course, only an approximation based on what appear to be reasonable interpretations of available data and on forecasts of the future of the railroad industry. With somewhat different assumptions, which may be just as reasonable, a variation of as much as one-fourth percent of payroll in either direction might be obtained. The figures can thus be interpreted as indicating that the cost of the benefit program under the Railroad Unemployment Insurance Act, if the bill is enacted, would be somewhere between 3 and 4 percent of payroll. Financing The bill provides the following schedule of contribution rates: If the balance on September 30 in the railroad unemployment insurance account is The contribution rate for the next calendar year shall be 11⁄2 percent 2 percent 22 percent 3 percent 32 percent The balance in the account on September 30, 1958, was $135 million. Thus, as stated, the maximum rate of 3% percent would become effective in January 1959. It appears, in view of the cost estimates, that the maximum rate of 32 percent provided by the bill would prove inadequate to finance the benefits. Also, as indicated in the discussion of immediate effects, the balance now in the account would not be sufficient to meet the immediate obligations that would be incurred. Furthermore, if some form of deficit financing is provided to meet the immediate obligations; it appears unlikely that money borrowed for this purpose could be repaid without some provision for a contribution rate higher than the 32 percent maximum in the bill. STATEMENT OF MR. HABERMEYER The bill would increase the amounts of benefits under the Railroad Retirement Act by some 10 percent and benefits under the Railroad Unemployment Insurance Act by some 20 percent, and would provide more favorable eligibility conditions to possible beneficiaries under both acts. The added costs to the railroad retirement system would be met by the revenues to be produced by the increase in the taxable compensation base and in the tax rates under the Railroad Retirement Tax Act provided for by the bill. The contribution base and rates under the Railroad Unemployment Insurance Act would be increased to provide for the additional costs to the unemployment insurance program. The increase in the tax base and rates under the Railroad Retirement Tax Act applicable to employees and employers alike would produce sufficient revenue to supply the added costs of the proposed increases and improvements and, for all practical purposes, would return the railroad retirement system to a sound financial basis by virtually removing the actuarial deficiency which now exists. This removal of the actuarial deficiency accords with the request made by the President of the United States when he signed S. 3616 (Public Law 1013, 84th Cong.) on August 7, 1956, providing an increase in benefits under the Railroad Retirement Act. According to the Board's actuary, the railroad retirement system fails today of being soundly financed by, on a level basis, 4.18 percent of taxable payroll, or about $213 million a year; but enactment of the bill would reduce the deficit for the system to 0.6 percent of taxable payroll, or about $34 million a year, even after taking into account the resulting increased and improved benefits. This small deficit is on a projected, not actual, basis founded on suppositions which may or may not materialize. Therefore, I believe that the bill would, for all practical purposes, restore the system to a sound financial basis, and the estimated small deficit that would exist after the enactment of the bill does not cause me to be seriously disturbed. To supply the increased costs to the railroad unemployment insurance program which would be entailed by the bill, rate of contributions, paid exclusively by employers, would be increased from the present maximum of 3 percent of taxable payroll, up to a maximum of $350 a month per employee, to 3 percent of payroll, on a monthly maximum of $400 a month per employee, should the balance in the railroad unemployment insurance account be found to be below $300 million. The Board's Director of Research has, however, in his cost analysis, indicated that the level cost would be almost 334 percent of taxable payroll, stating also as follows: "These cost figures are, of course, only an approximation based on what appear to be reasonable interpretations of available data, and on forecasts of the future of the railroad industry. With somewhat different assumptions, which may be just as reasonable, a variation of as much as one-fourth of 1 percent of payroll in either direction might be obtained. The figures can thus be interpreted as indicating that the cost of the benefit program under the Railroad Unemployment Insurance Act, if the bill is enacted, would be somewhere between 3 and 4 percent of payroll." Since the balance in the railroad unemployment insurance account is at a dangerously low level and our Director of Research calculates the costs of these provisions to be 34 percent, I, therefore, urge that if the bill receives favorable consideration, the maximum tax rate be established at 4 percent. The two factors which should determine the extent to which benefits are increased and otherwise made more favorable to beneficiaries are: (1) The reasonable requirements of the beneficiaries in the light of present economic conditions, and (2) the ability of the railroad industry to absorb the additional costs entailed thereby. These are matters which undoubtedly will be developed at |