The increased tax on railroad workers would be immediately offset under another provision of this legislation which exempts the employees' contributions from gross wages in the computation of their income tax. This exemption is considered fair and equitable since the employers already receive credit on their corporate taxes for the amounts paid into the retirement fund. Mr. Chairman, it is my hope that your committee will take prompt and favorable action on the legislation before you. Your approval of the proposal will be sincerely appreciated by the thousands of railroad workers and their families. Mr. HARRIS. Thank you, Mr. Zablocki. The next witness will be Col. Raymond J. Kelly, who is Chairman of the Railroad Retirement Board. We also have other members of the Board present. We have Mr. Horace W. Harper and Mr. Thomas M. Healy, members of the Board here. I assume, Colonel, in view of the report that I have received over the weekend, the three of you will probably have statements to make. STATEMENT OF RAYMOND J. KELLY, CHAIRMAN OF THE RAILROAD RETIREMENT BOARD Mr. KELLY. That is correct, sir. Mr. HARRIS. Very well, you may proceed. Mr. HARRIS. Colonel Kelly, I fully realize you obviously have a difficult assignment this morning if you are going to report the views of the Board on all of the bills that are pending before this committee. I would not personally, and I am sure the other members of the committee would not expect you to take the time to comment on all of the bills because I assume now that there are about 120 or 130 bills pending before the committee. I fully realize that many of them are similar. I know that we have here on this bill, H. R. 9065, some 69 cosponsors and on other bills there are many cosponsors. But there are a number of other bills, of course, that your Board has reported on, and I have already included those reports in the record. But we would like to have you report on any major items which this committee has to consider. Mr. KELLY. Mr. Chairman and gentlemen, I have an 11-page statement together with a list of all of the bills which have been introduced in the 84th Congress to amend the Railroad Retirement Act, and which have been referred to us for reports. Now copies of this list have been distributed to the members of this committee and, unless the committee wishes otherwise, I will try to summarize briefly the statements in a very few sentences. Mr. HARRIS. Very well. We would be glad to have you do that. I notice that you have with your statement a summary of the provisions of all the railroad-retirement bills pending before the committee. Without objection, it will be included in the record with your statement, and all of your statement may be included in the record. (The statements referred to are as follows:) STATEMENT OF RAYMOND J. KELLY, CHAIRMAN OF THE RAILROAD RETIREMENT BOARD, ON RAILROAD RETIREMENT LEGISLATION PENDING BEFORE THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE Mr. Chairman and gentlemen of the committee, my name is Raymond J. Kelly; I am Chairman of the Railroad Retirement Board. I appear here to present the views of the Railroad Retirement Board on bills to amend the Railroad Retirement Act introduced in the 84th Congress, and now pending before this committee. I am excluding from this present statement H. R. 9065, 9066, 9068, and identical bills. On these, the three members of the Board have differing views which will be presented separately. On 1 or 2 other bills, the Board has not yet had an opportunity to act. I have with me a list of all bills, which shows also the dates on which the Board filed a report on each where reports had been filed when the list was prepared. Copies of this list have been distributed to the committee. You will note that some of the cost figures given are based on the sixth actuarial valuation and some on the fifth. The sixth actuarial valuation has been completed only very recently and there has not been time to recalculate costs on all of these bills on the basis of that valuation. We have done the best we could and supplied new estimates so far as possible. The effect of the sixth valuation would be generally to increase the costs which were estimated according to the fifth valuation to a relatively small degree. I shall not take time this morning to discuss any individual bill specifically. The members of the Board and members of the staff who are present will be very glad to answer any questions that you may have about any of these bills. My presentation this morning is very similar to the one I made before your committee on June 2, 1954, when a similar large group of bills was under consideration. I should like to make some general observations and then to discuss certain major proposals which together will cover most of the important items of all the bills. My first general comment is that it has been the general policy of the Board not to approve any bill which incurs additional cost without providing additional revenue to offset this cost. In isolated instances where the Board has departed from this policy, it has only been because the Board believed that the financial soundness of the system would not be endangered and because there were other overriding reasons for approval. My next general comment relates to the financing of the railroad-retirement system. The financing of this system is on a level tax rate basis. Under such a method, tax income is larger than the benefit disbursement during the early years of operation. The excess is accumulated in a reserve fund which permits the retention of the level tax rate even after disbursements begin to exceed the tax income. The excess of outgo over tax income is then made up by the interest earned on the reserve. Such would be the situation if the level tax rate were sufficient to finance the system indefinitely on a reserve basis. However, when the level tax rate is smaller than what the system actually requires, the growth of the reserve is impaired and a point is reached when the then current tax income plus the interest on the reserves becomes smaller than expenditures. From that point on, the reserve begins to decline until it is totally exhausted, provided, of course, that no remedial action is taken before then. The railroad-retirement system has already reached a point where benefit disbursements are very close to the tax income. In the very near future, benefit disbursements are expected to begin to exceed the tax income at the present combined rate of 121⁄2 percent of taxable payroll. However, it will still take a number of years before the interest on the reserves will become less than the excess of outgo over the tax income. Because of this, and also because of expected short-term gains from the financial interchange, the railroad-retirement account will continue to grow for a number of years. This growth will be only temporary because, according to the sixth actuarial valuation recently completed, the railroad-retirement system is under present law operating at an actuarial deficiency of 1.63 percent of payroll. This deficiency has been determined after considering the effect of the balance now in the account and after allowing for the expected gains from the financial interchange with the social-security system. In view of the rather substantial excess of level costs over the existing tax rate, the Board does not approve further additions to benefits without provision for additional revenues to finance them. If any of the various proposals in the bills we are considering, which are generally so extensive in their nature as to add very materially to the cost, were adopted, the reserve would begin to decline at a vastly accelerated rate. For example, one of the bills would cost about $235 million a year or 4.7 percent of the taxable payroll of both employers and employees. This would result in a situation where the balance in the railroad-retirement account would begin to decrease almost immediately. When the account becomes totally exhausted, it would become necessary either to make a very substantial increase in tax rates or a very substantial reduction in benefits or find some other source of income. The Congress and the Board and the railroad industry, as represented by railroad management and railroad labor, have consistently agreed that the tax rate should be an actuarially sufficient level raté which would not require increases in the future. The enactment of any of the bills now pending before your committee would necessitate larger increases in the tax rates and at an earlier date. The retirement account at the present time has a balance of over $3.5 billion. In the light of what I have said, however, it is obvious that it is much less than what the system should now have in order to enable it to operate at a 12.5 percent tax rate indefinitely. The balance in the account can, therefore, not be looked upon as a surplus to be used for additional benefits. Analysis of the various bills shows that the major proposals fall into several well-defined categories. To simplify the discussion, I shall present the principal categories and discuss each of them. To some extent there is overlapping between them. That is, some bills contain proposals which fall in two or more of the categories. However, my discussion will cover the major points in all of the bills. The four main categories of bills are: 1. Those which provide for an earlier date of eligibility for retirement. For example, some of them provide for retirement at age 60 with 30 years of service, some with 35 years of service regardless of age, and so on. Some of the bills in this group combine with such provisions a provision for an additional minimum, such as 50 percent of the average monthly compensation during the 5 years of highest earnings. 2. Those which would remove some or all of the remaining restrictions on dual benefits. One group would permit wives to receive full annuities under the Railroad Retirement Act without regard to any social-security benefits which they may be receiving at the same time. The second group would permit simultaneous receipt of survivor benefits under both the Railroad Retirement Act and the Social Security Act on the basis of the same individual's earnings, even dual survivorship annuities under the Railroad Retirement Act on the basis of more than one wage record. 3. Those which provide flat increases in benefits. 4. Two bills which would remove the "last person" clause of the Railroad Retirement Act. I shall take these categories up in order. 1. At numerous times over the years proposals have been made to Congress to reduce the age of eligibility for a full retirement annuity, such as to age 60 with 30 years of service. The objections of the Board to all such proposals are based upon the same considerations. First, they would be very expensive. For example, an amendment which would permit retirement at age 60 upon completion of 30 years of service or upon 35 years of service regardless of age, coupled with a provision for a different method of computing earnings for prior service would cost about $115 million a year. Consequently, it is essential to ask ourselves, Is this amendment desirable? Is there any reason why we should permit full retirement at age 60, after 30 years of service, or even earlier after 35 years' service when the employee is able bodied and capable of further service? The law now permits full retirement at any age of a regular employee who has only 20 years of service, or at age 60 if he has 10 years of service, if he is disabled and cannot work in his regular occupation. Again, the law permits a man to retire on a full annuity at any age if he has only 10 years of service, if he is totally and permanently disabled for all regular employment. With all this existing protection for the man who is no longer able to work, such an amendment would it seems, serve no useful purpose at least insofar as the railroad-retirement system, a social-insurance system, is concerned. Under this type of proposal a man could leave the railroad industry with full benefits at a relatively young age and then go out and get another job. If that job is under social-security coverage, as would usually be the case, he could then build up credits for a socialsecurity benefit under the new start provisions. It is the purpose of the rail road-retirement system or any other social-insurance system to provide partial replacement of lost income resulting from such economic hazards as old age or disability. There appears to be no good reason to encourage the comparatively young railroad workers to leave the railroad industry before they are ready to retire from all work. Certainly if such a proposal were adopted it would operate unfairly and work a serious hardship on the employees who remain in the industry until what is generally considered the normal retirement age or later. Such employees would be paying taxes for a longer period, would receive benefits for a correspondingly shorter period, and would thus be subsidizing the benefits of the employees taking advantage of the proposal. The enactment of such a proposal would impose a wholly unfair burden on the rank and file of the workers in the railroad industry and on the railroad industry itself. Let me illustrate what I have just said by an example. Assume 2 men, both 60 years of age with 30 years of railroad service and with steady earnings of $300; assume further that both live out their normal life expectancy, and that both are in good health so as to be able to continue to work. The first one, whom I shall call A, retires now at age 60 on an annuity of $165.60 a month. The second one, whom I shall call B, will retire 5 years from now at age 65 on the same annuity. During the 5 years after the retirement of A, and before the retirement of B, A will receive in benefits $9,936. During the same 5 years B will receive no benefit but will pay additional taxes of $1,125. Actually, if the proposals were adopted, taxes would have to be increased, and a person like B would have to pay even more. The gross amount by which B suffers as compared with A is $11,061, and none of this includes interest. A at 60 may get a job under social-security coverage and build up credits toward socialsecurity benefits at 65 when he retires. The monthly benefit may be as much as $108.50, exclusive of the wife's benefit. This social-security benefit would not reduce the railroad-retirement annuity. Thus B and others like him would have to pay extra taxes to subsidize additional benefits for A and men like him who get out more from the railroad-retirement system and, in addition, manage to get a very substantial social-security benefit besides. The Now if A were permanently disabled, either totally or only for his own occupation, we all agree that he should not have to wait until age 65 to get his annuity. The present act provides that he can get his full annuity at age 60; in fact, he could have gotten it much earlier if he had then been disabled. Board sees no reason why a man under 65 who is in good health and able to work should be allowed to draw benefits at the expense of others who continue to work longer in the railroad industry. In this connection, it may be well to state that the average age of retirement for age annuitants is between 67 and 68, indicating that most employees do not wish to retire even at age 65. If A wishes to retire at 60 after 30 years of railroad service, he may do so under the present act. However, the act provides that his annuity shall be reduced one one-hundred-and-eightieth for each month he is under age 65 at the time he retires; in the case of A this would amount to one-third of his annuity. This approximately equalizes the worth of the annuities which A and B would receive if A retires at age 60 and B at age 65. In this illustration I have discussed only the proposal for retirement at age 60 after 30 years of service. Some of the bills under consideration propose, in addition, other extensive liberalizations. One of those would cost well over $200 million a year, which would add about 4 percent of payroll to the combined tax of employers and employees. 2. This category includes bills which propose to remove the existing restriction which prevents the wife of a railroad-retirement annuitant from receiving her full railroad-retirement wife's annuity without reduction because of a social-security old-age benefit in her own right. A similar restriction with regard to widows' annuities was removed by Congress last year. However, the same considerations which prompted the Congress to remove these restrictions on widows' annuities do not apply in the case of a wife. In order for a wife to receive an annuity, the husband must also be in receipt of an annuity and, therefore, there is a substantial retirement income to the couple. In the case of an aged widow, however, there is no other member of the family on whose benefit she can depend. We believe, therefore, that the provision preventing the payment to the same dependent (that is, a wife) of two full benefits under separate acts should be retained. I might add that a proposal like this would involve a cost of approximately $9 million a year to the railroad retirement account. The bills which would permit dual survivor benefits strike at the very heart of the principle of coordination between the railroad retirement and social security survivor benefit systems. The present law already recognizes credits earned under both systems whenever a survivor benefit is paid under either act. Therefore, there is no need to add any more benefits in this area. 3. This category of bills includes those which provide for a flat percentage increase in benefits. The percentage increases vary from 10 percent for some types of benefits to 25 percent for all benefits. The cost of these bills would vary depending on the types of benefits included. The table which you have shows that the cost will range from $17 million to $200 million a year on a level basis. The lowest cost would be 0.32 and the highest 3.76 percent of payroll. The cost argument is the principal argument against such proposals. No one objects to increasing benefits as much as possible within the limits of available funds. However, as I have stated previously and the Board has stated many times, there are no available additional funds at present. 4. The fourth group includes bills to remove the "last person" clause from the Railroad Retirement Act. In our report on the bills which would remove this clause, we said among other things the following: “*** the amendment proposed by the bill would restore the provisions as they were in effect in the Railroad Retirement Act of 1935, insofar as working for a person other than an employer is concerned. During the hearings in 1937 on the bill to amend the Railroad Retirement Act of 1935, it was stated by a witness for the Association of American Railroads and the standard railway labor unions that the provisions in the 1935 act in this respect discriminated against career railroad workers who stayed in the railroad industry all their lives, and favored those railroad workers who left the railroad industry before retirement age and engaged in other employment ***. The latter, upon attaining age 65, could receive their annuities under the Railroad Retirement Act in addition to their salaries for services for a nonemployer, while the career workers, upon attaining retirement age, had only the annuities to rely upon. The purpose of the provisions, which the bill would eliminate, was to avoid the discrimination above referred to. Congess then apparently accepted the views in support of these provisions and has continued them in effect ever since although amending the act in other respects on many occasions." We estimate that the additional cost of such an amendment would be $8.5 million per year or .16 percent of payroll. In summary, the Board opposes all of the bills to which this discussion relates (excluding, as I have pointed out, H. R. 9065, 9066, 9068 and identical bills) first on the general principle that none of them provides the additional revenue necessary to pay the cost and, second, because of the various other objections which I have enumerated. |