-3 Honorable Harrison A. Williams, Jr. S. 1867 such time as their current labor contracts expire, or at such earlier time as the parties to these labor contracts agree. Under present law, the 15 percent increase in railroad retirement benefits provided in 1970 by Public Law 91-377, the 10 percent benefit increases provided in 1971 by Public Law 92-46, and the 20 percent benefit increase provided in 1972 by Public Law 92-460 are all due to expire on June 30, 1973. These benefit increases were provided on a temporary basis because, due to the cost of permanent increases of this magnitude, it was believed further consideration had to be given to the nature and extent of the measures necessary to finance the desired benefit levels before such benefit increases could be provided on a permanent basis. Section 103 of the bill would amend the aforementioned public laws to extend the expiration date of the benefit increases to December 31, 1974. In this regard, in accordance with section 107 of the bill, representatives of employees and carriers would be selected within 30 days after the enactment of the bill and would be required to meet at least once a month to consider all matters relating to the restructuring of the railroad retirement system in a manner which will assure the long-term actuarial soundness of the system, taking into account the specific recommendations of the Commission on Railroad Retirement. This group would be required to keep minutes of their meetings, to submit progress reports to Congress every two months, and to submit a final report to Congress not later than March 1, 1974, setting forth their joint recommendations. The report submitted would have to include a draft of a bill suitable for introduction and a copy of the minutes of each meeting held by the group. Sections 104 and 105 of the bil, would provide for increases in railroad retirement benefits (other than annuities computed under the first proviso of Section 3(e) of the Railroad Retirement Act of 1937 which are automatically increased whenever social security benefits are increased) in the period July 1, 1973 through December 31, 1974, if social security benefits should be increased in that period. The amount of any such increase in railroad retirement benefits would be determined through computations made pursuant to the first proviso of Section 3(e) of the Railroad Retirement Act, which is generally referred to as the social security minimum guaranty provision. This provision guarantees that the combined monthly railroad retirement benefits which an individual and a dependent deriving benefits from him will receive under the Railroad Retirement Act and the Social Security Act (based on the individual's earnings record) would be no less than 110 percent of the amount which would have been payable to that family under the Social Security Act on the basis of the -4 Honorable Harrison A. Williams, Jr. S. 1867 individual's combined railroad and non railroad earnings if his railroad service after 1936 had been covered under the Social Security Act. In accordance with this guaranty provision, annuities are computed under the social security formulas whenever they produce a higher rate than the regular railroad retirement formulas, and, therefore, annuities payable under the guaranty provision are automatically increased whenever social security benefits are increased. These sections would, with certain exceptions, provide individuals whose railroad retirement annuities are computed under the regular railroad retirement formulas with the same increase they would have received if their annuities had been computed under the guaranty provision with the differences noted in the next paragraph. In no case, however, would a spouse's annuity be increased to an amount in excess of the maximum spouse's annuity provided in the first sentence of Section 2(e) of the Railroad Retirement Act. The spouse maximum provision referred to specifies that the maximum annuity payable under the Railroad Retirement Act to a spouse cannot exceed 110 percent of the maximum possible wife's insurance benefit payable to any wife under the Social Security Act. - As has been noted, there are several exceptions to the general statement that individuals whose annuities are computed under the regular railroad retirement formulas would receive the same increase they would have received if their annuities had been computed under the guaranty provision. These exceptions are: (1) any increases provided by these sections 104 and 105 would be equal to 100 percent, rather than 110 percent, of the amount of the increase the individual would have received under the Social Security Act; (2) only the social security benefits which would have been payable to the annuitant himself if railroad service had been creditable under the Social Security Act are taken into account in determining the amount of any annuity increase generally, in determining the amount of an annuity under the guaranty provision, certain individuals, particularly children of living employees, who are not themselves eligible for railroad retirement benefits must be taken into account, and, therefore, the annuity payable to an employee (and, in some cases, to his spouse) under the guaranty provision may include the amount that would have been payable to his children under the Social Security Act; (3) any social security benefits which the annuitant may actually be receiving would be disregarded in computing the amount of any increase provided by this bill, and, therefore, his railroad retirement annuity increase would not be reduced by the increase he received in his social security benefit; and (4) certain railroad retirement beneficiaries who would not meet the eligibility requirements for benefits under the Social Security Act even if railroad service after 1936 were covered thereunder would be deemed to meet the social security benefit requirements in order to provide an increase in such cases. -5 Honorable Harrison A. Williams, Jr. S. 1867 In computing annuity increases provided by this bill, it would be assumed that the eligibility conditions for benefit entitlement and the proportions of the primary insurance amounts payable at the time of any social security benefit increase were also present in the law as in effect prior to July 1, 1973. Accordingly, the annuity increase in a particular case can be computed, on the basis of the eligibility conditions, etc., in effect at the time of a social security increase, by comparing the social security primary insurance amounts table (contained in section 215 of the Social Security Act) in effect immediately after the benefit increase with the tables in effect on June 30, 1973. The differences between the two primary insurance amounts applicable to a given case would, after any appropriate proportions of primary insurance amounts are applied, be the amount of the increase. This increase would then be reduced by any appropriate age reduction factors provided by the Railroad Retirement Act any social security age reduction factors which would otherwise be applied in making guaranty provision computations would be disregarded. In this regard, it may be noted that, since the Railroad Retirement Act contains no age reduction factors for age annuities payable to widows or widowers who are under age 65, the increases in the annuities of such widows or widowers would not be subject to age reductions under the provisions of this bill despite the fact that age annuities payable to widows and widowers under the Social Security Act are subject to reductions for age if the beneficiaries are under age 65. - Part B Permanent Provisions Subsection (a) of section 120 of the bill would make permanent the provisions of section 101 of the bill, which provide unreduced annuities for men at age 60 with 30 years of service. Section 108(a) of the bill would, without the amendment thereto by section 120 (a), terminate this liberalization in annuity eligibility conditions as of December 31, 1974. Subsections (b), (c), and (d) of section 120 would make permanent the temporary increases in railroad retirement benefits, the expiration date of which was extended to December 31, 1974, by section 103 of the bill. The provisions of the Railroad Retirement Tax Act which levy taxes for railroad retirement purposes on covered employers, employees and employee representatives, would be amended by section 121 of the bill to increase the tax rates by a total of 7-1/2 percent of taxable payroll, effective with respect to compensation paid for services rendered on or after January 1, 1975. The 7-1/2 percent increase would be equally divided between employers and employees 3.75 percent on each; the tax rate on employee representatives, who pay both the employer and the employee shares, would be increased by the full 7-1/2 percent. -6 Honorable Harrison A. Williams, Jr. S. 1867 Title II Amendments to the Interstate Commerce Act Section 201 of the bill would establish a new procedure whereby railroads could obtain increases in interstate and intrastate freight rates to offset increases in their expenses because of increases in their taxes under the Railroad Retirement Tax Act as a result of the enactment of section 102 of the bill. Financial Effects on the Railroad Retirement Program 1. Full annuities at age 60 for 30 years of service.-- For purposes of estimating the cost of this amendment, it was assumed that the rates of early retirement for long-service railroad men would be approximately the same as those used in the 1965 valuation of the Federal Civil Service Retirement System (CSR). The calculation made on this basis produced a cost figure of 1.25 percent of taxable payroll or nearly $70 million per year on a level basis. The above-quoted cost figure, based on data developed for the twelfth valuation (at 5-3/4 percent interest), is static in the sense that future increases in wages and prices were not considered. It was also assumed that the railroad retirement and social security benefit formulas now in effect would remain unchanged. Under such conditions, the automatic adjustment provisions of the Social Security Act would obviously be inoperative. It should be noted that the rates used in the last CSR valuation (as of June 30, 1970) were almost double the earlier rates and that current rates are even higher. (Latest actuarial report of the CSR system, House Document No. 93-37, page 12.) Based on these higher rates, a substantially higher cost figure would emerge. It is doubtful, however, whether the rates of retirement under this amendment will be as high as those currently experienced by the Civil Service Retirement System but it is reasonable to assume that moderate rates of early retirement will prevail also among railroad workers. The railroad retirement system's own experience in the area of early nondisability retirement could not be used as a basis for estimating the cost of this amendment. While women with 30 years of railroad service have throughout the years been permitted to begin drawing full annuities at age 60, their numbers have been too small to be analytically significant. For example, in calendar year 1971, there were only about 750 female employees in this category and 155 of them (21 percent) had actually retired -7 Honorable Harrison A. Williams, Jr. S. 1867 during that year. The experience with men (at least in respect to numbers eligible for early retirement) has been much larger but the rather severe actuarial reductions men had to take made this experience totally inapplicable to a situation where actuarial reductions would no longer be required. It might be noted in this connection that the reduction for railroad men retiring on age and service before age 65 has been 1/180 for each month before age 65 and this amounts to a 20-percent reduction for retirement at age 62 and to as much as 33-1/3 percent for retirement at age 60. The elimination of these reductions, coupled with the much higher benefit levels now prevailing, would in all likelihood induce large numbers of long-service railroad men to start drawing an annuity from the Board at an early date. An added incentive would be the desire to acquire enough social security credits to qualify for a concurrent social security benefit. It should also be remembered that for retirement benefits, the work clause of the Railroad Retirement Act is very liberal since any employment other than work for a railroad or the last employer is permitted regardless of the amount of earnings. The amendment would apply only to new retirements after June 1974. By June 1974, there will be between 45,000 and 50,000 nonretired male employees age 60 to 64 with 30 or more years of railroad service, and the initial rate of retirement among these employees could be as high as 20 percent. After the first year, the rates of early retirement would in all likelihood recede to significantly lower levels. 2. Extension of benefit increases. --The expiration of the 15-, 10- and 20-percent increases on June 30, 1973, would have resulted in substantial reductions in practically all benefits computed under the regular railroad retirement formulas. The maximum reduction would be 34 percent while for benefits now just slightly above the 110percent social security minimum, the reduction would be minimal since the benefit could not go below the minimum amount. In fact, large numbers of benefits in the employee and spouse annuity categories would change from regular formula to overall minimum amounts and this would significantly mitigate the extent of the reductions in railroad retirement benefits. It is estimated that for all categories of benefits combined, the immediate average reduction would have been about 18 percent. When related to the current level of benefit disbursements, such a reduction would amount to $36.7 million per month or about $660 million |