TABLE 2.-Estimated number of awards and average benefit under present law and S. 987, by type of benefit, July 1959–June 1960 1 Includes an adjustment for awards before February 1960 to allow for increase in spouse maximum to $63.50, effective that month. IMMEDIATE EFFECT OF AMENDMENTS TO THE RAILROAD RETIREMENT TAX ACT The bill proposes to amend the Railroad Retirement Tax Act, effective July 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 121⁄2 to 13% 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, the effect of the proposed legislation on railroad retirement taxes in fiscal years 1960-63 would be as follows: ACTUARIAL EFFECTS OF PROPOSED AMENDMENTS TO THE RAILROAD RETIREMENT AND RAILROAD RETIREMENT TAX ACTS It is estimated that the changes in the amounts of creditable compensation and in the benefit formulas would increase the benefit costs by 1.50 percent of payroll, or $84 million a year on a level basis. The additional revenues would amount to an estimated 2.08 percent of payroll, or $116 million a year on a level basis. The above percentages relate to an assumed taxable payroll of $5.6 million a year with a $400 limit on creditable and taxable monthly compensation. In arriving at the above cost figures, consideration was given to the fact that the effective date would be July 1, not January 1, 1959. The additional benefits which would have been payable during the first 6 months of 1959 are estimated at about $15 million. This is a saving as compared with a January 1, 1959, effective date and is equivalent to 0.01 percent of payroll. On the other hand, the loss of additional taxes during the same period would amount to an estimated $57 million which is equivalent to 0.03 percent of payroll. The cost of the 1956 amendments to the Railroad Retirement Act was then estimated at 1.57 percent of payroll with a $350 limit on monthly compensation. This is equivalent to 1.43 percent of taxable payroll with a $400 limit on monthly compensation. Since the additional tax revenues amount to 2.08 percent of payroll, it might be stated that they would pay in full for the 1956 amendments to the Railroad Retirement Act and would leave 0.65 percent of payroll to partially finance the additional benefits which, as stated before, would cost 1.50 percent of payroll. The proposed changes would leave the railroad retirement system with an actuarial deficiency as of December 31, 1958, of 3.23 percent of payroll (with a $400 limit on monthly compensation) which is equivalent to $181 million a year on a level basis. This is $32 million a year less than the $213 million a year deficiency under present law. The derivation of the new deficiency figure is shown in table 1 while a more detailed presentation of level costs by source is shown in table 2. The impact of the 5-percent increase in the benefit formulas would be felt immediately. The vast majority of employee benefits would be increased by a full 5 percent and considerable numbers of spouses' and widows' benefits would also be so increased. However, at the beginning the effect of crediting up to $50 more a month in compensation would be almost negligible since the additional retirement annuity based on 1 year of service under the higher limit on creditable compensation would be $0.80 a month or $9.60 per year. As time goes on, the effect would become progressively greater since an employee re tiring, say, 30 years from now could have an additional annuity of as much as $24 a month (30 times $0.80) or $288 a year. At that time there would be on the rolls large numbers of retirements in previous years who would have been affected in varying degrees by the increase in creditable compensation. Therefore, the total additional disbursements would then be perhaps several hundred times higher than in the first year following the enactment of the bill. As stated before, the level cost of the increase in creditable compensation is estimated at $40 million a year (0.71 percent of payroll) before the 5-percent increase. After allowing for the 5-percent increase, the annual level figure would come to approximately $42 million. The additional retirement taxes proposed by the bill would amount to $116 million a year on a level basis if valued as of December 31, 1958, and to $118 million a year if valued as of June 30, 1959, the proposed effective date for the new provisions. These figures relate to level payroll assumptions of $5.1 billion a year for the present $350 limit on monthly compensation and of $5.6 billion a year for the proposed new $400 limit. The year-by-year figures may be somewhat different depending on the short-range payroll estimates for the particular years. The differences would, however, be relatively minor. TABLE 1.-Changes in actuarial deficiency due to S. 987 Actuarial deficiency under law before amendments (as of Dec. 31, 1958). Increase in benefits by 5 percent 2. Increase in residual benefit Taxes at rate of 122 percent on additional taxable compensation. Actuarial deficiency under law after amendments (as of Dec. 31, 1958). 13.81 .71 3.78 .01 3 -1.09 3-.99 3.23 1 Equivalent to 4.18 percent of payroll with a $350 limit on monthly compensation. In both instances, this is equivalent to $213,000,000 a year on a level basis. ? Increase would not apply to social security minimum and to spouse maximum amounts. 3 Includes small reductions for the July 1, 1959 effective date. TABLE 2.-Cost estimate for the railroad retirement program as it would be amended by S. 987 [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).. 1.29 3.70 .56 . 19 .37 .14 3.08 2 1.96 1. 12 16.70 13. 47 3.23 1 Includes 0.08 percent of payroll for benefits payable with respect to dependents of disability annuitants under the social securit mini num provision. 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 3 and the next figure of 1.12 would have been correspondingly reduced to 0.95. 13.50 ninus 0.03 for the July 1, 1959 effective date. EFFECT OF AMENDMENTS TO RAILROAD UNEMPLOYMENT INSURANCE ACT The net effect of the changes that would be made by the bill would be to reduce by $30 million to $40 million the annual amount of benefits payable under the Railroad Unemployment Insurance Act while adding to the taxes paid by railroad employees a new tax that would total about $25 million a year. Because of the present low balance in the railroad unemployment insurance account there would be no immediate reduction in costs for the railroads. In the long run, however, there would probably be a reduction in costs for the railroads amounting to perhaps $50 million a year. IMMEDIATE EFFECT ON BENEFICIARIES The bill contains modifications of the present Railroad Unemployment Insurance Act of such a character that it is not possible to develop from the available Board records of beneficiaries and benefit payments any adequate report on its effect on beneficiaries and on the financing of the railroad unemployment insurance system. To make such a report would require extensive tabulations, and detailed, time-consuming investigations of employment histories and last rates of pay. The difficulty of estimating the effect of the bill arises to a large extent from the fact that it would change the system from one with a uniform benefit year starting July 1, and a base year ending 6 months earlier, to one with individual benefit years and individual base years immediately preceding the beginning of the benefit year. To determine eligibility under the bill, the most important information needed is the employment record in the 6 months preceding the beginning of the employee's unemployment or sickness. This information has not been obtained under the present act because it is not needed. In addition, the bill would make changes in the existing disqualification provisions and add a number of disqualifications not now in the law. There are no basic data available for determining the effect of these. Analysis of data on operations under the present law, however, makes possible some general approximations of the effect of some provisions of the bill even though the net total effect cannot be determined accurately. It must be emphasized that the figures given are very rough estimates. They show the effect certain provisions in the bill would have had on benefits in 1957-58 when the number of beneficiaries and amount of benefits under the Railroad Unemployment Insurance Act were as follows: However, the figures cannot be added together to get a total effect because a considerable number of beneficiaries would be disqualified by more than one provision. The number of beneficiaries and the amount of benefits paid would have been substantially smaller. Some of the ways in which this would have happened are as follows: 1. The change in the definition of a qualified employee would have prevented payment to many employees. A very rough estimate indicates that about 40,000 of the unemployment beneficiaries and 6,000 of the sickness beneficiaries would not have had the necessary service or earnings to be qualified. The amount of benefits that would not have been payable would have been between $20 million and $25 million. Those not qualified would have included employees with long periods of unemployment or sickness who received payments for a second benefit year in 1957-58, many of whom had more than 5 years of railroad service. On the other hand, the change to individual benefit years would have made it possible to pay some $11 million in benefits to about 22,000 employees with recent railroad employment who for some reason did not work enough in the base year to be currently qualified under the present law. 2. The disqualification due to eligibility for or receipt of full retirement, disability, or pension benefits under either the Railroad Retirement Act or the Social Security Act would have prevented payment of over $13 million to 27,000 sickness beneficiaries and 3,000 unemployment beneficiaries, assuming they could all meet the proposed qualifying requirements. 3. The 3,900 maternity beneficiaries could have received benefits in the maternity period only if disabled by some illness not related to pregnancy. This might have reduced the amount of benefits by about $3,600,000, and thus virtually eliminated payments for the maternity periods of this group. 4. Other disqualifications would have affected many of the beneficiaries whose separation from a railroad job resulted from: The extent to which these benefits would have been reduced cannot be determined. 5. Still other disqualifying provisions, such as the longer disqualification for failure to accept suitable work, the extension of unemployment disqualifications to prevent payment of sickness benefits in the period of disqualification, and the sickness benefit disqualification for any illness starting more than 90 days after the employee's last railroad work, would have reduced benefits further by an amount which cannot be readily estimated. 6. Benefit rates for those who could meet the qualifying requirements would in some cases have been lower and in some higher than under the present law. As compared with the present law, the benefit rate would generally have been smaller for those with few dependents and larger for those with many dependents, excluding, of course, those eligible for the maximum rate under both sets of provisions. A single man, for example, would get generally 50 to 60 cents less per day from 60 percent of the net pay after withholding taxes as specified in the bill than from 50 percent of the gross as in the present act; for a man with a number of dependents, the reverse would be true. Also, beneficiaries whose benefit rates were determined from the schedule in the present law were generally paid at a rate higher than 50 percent of the gross daily rate of pay. The bill would remove this schedule, and this would in some cases have resulted in lower benefit rates. In 1957-58, 70 percent of the sickness benefit rates, and 47 percent of the unemployment benefit rates were determined from the schedule. 7. Increasing the unemployment and sickness waiting period from 7 days to 9 days, and requiring a minimum of 7 days of unemployment in order for a subsequent period to be compensable would, exclusive of other provisions, have reduced the amount of benefits about $7,900,000. As stated above, the estimates of the effects of the various provisions of the bill cannot be added together because they overlap and the duplication between them is unknown. With a reasonable allowance for such duplication and for the effect of the provisions for which no separate figure has been shown, it appears that the net effect might have been to reduce the number of beneficiaries under the program, including both unemployment and sickness, by about 70,000, and the amount of benefits by $40 million to $50 million. IMMEDIATE EFFECT ON BENEFITS AND FINANCING The 1957-58 benefit year was not a typical one. Railroad unemployment was at an unusually high level because of the 1958 recession, and the amount of benefits paid was the largest in any benefit year to date. For the first year after the effective date of the proposed changes, the bill if enacted would probably reduce benefits by $25 million to $30 million, since it is anticipated that in this year, 1959-60, benefit payments will be somewhat below the average level. The bill would provide a separate account from which sickness benefits would be paid and about half of the income to this account would be derived from the taxes collected from employees under the proposed Railroad Sickness Benefit Tax Act. However, neither this, nor the substantial reduction in the amount of benefits that would be paid each year could cause an immediate reduction in the amount of contributions paid by the railroads. The contribution rate schedule in the present act requires collection at the maximum rate of 3 percent as long as the September 30 balance in the railroad unemployment insurance account is, as defined for this purpose, under $250 million. Because of the low present balance in the unemployment account it might be 5 years before the contribution rate could be reduced. The bill would make no change in the amount of earnings taxable. The bill would add to the Internal Revenue Code a new subchapter to be known as the Railroad Sickness Benefit Tax Act. This would impose on employees a new tax of 0.5 percent of compensation up to $350 a month, effective after June 30, 1959, and thus would add to the taxes paid by employees about $25 million a year, as follows: Fiscal year 1959-60_ 1960-61. 1961-62. Amount of accrued taxes $23, 000, 000 24, 000, 000 25, 000, 000 1962-63. FUTURE COSTS 25, 500, 000 For the future, as nearly as can be determined, it appears likely that the bill, if enacted, would reduce the amount of unemployment and sickness benefits paid by at least $30 million and perhaps by as much as $40 million. A comparison of the cost under the present law with the cost if the bill is enacted is as follows: |