-8 Honorable Harrison A. Williams, Jr. S. 1867 for the 18-month extension provided by the temporary provisions part of the bill. When converted into a present value (at 5-3/4 percent), the figure becomes $630 million and this might be termed to be the total cost of the temporary extension. For the indefinite extension of the present benefit formulas provided by the bill as a whole, the level cost (on a static basis) would be nearly 8.75 percent of taxable payroll or $480 million per year. 3. Pass through of social security increases. --This amendment provides that in the case of an increase in social security benefits between now and the end of 1974, railroad retirement beneficiaries would be given an increase which, subject to the qualification discussed below, would equal dollarwise to what they would have gotten under social security if railroad service had been covered under that system. This type of increase is referred to as a pass through arrangement. However, the amendment contains certain features which would create cost problems that would not be present in a true pass through arrangement. The first and most important deviation from a genuine pass through procedure is the provision that in determining the amount of the increase, concurrent social security benefits received by the railroad retirement beneficiaries (dual benefits) shall be disregarded. This means that a dual beneficiary would receive two increases, the sum of which would be substantially greater than the increase he could have received from social security on the basis of his railroad and nonrailroad earnings combined. By comparison, the nondual beneficiary would receive only one increase (from the railroad retirement system) and in the great majority of cases, his increase would be significantly smaller than the one obtained by the dual beneficiary. The cost implications of this deviation from a true pass through arrangement are discussed below. Under a true pass through arrangement, the cost of paying the social security increases to railroad retirement beneficiaries would be almost wholly reimbursable under the financial interchange with the only exceptions being the 10-percent increment in the overall minimum cases, and the class of railroad retirement beneficiaries to whom the financial interchange does not apply because of lack of an actual or imputed eligibility under social security law. In the case of a dual beneficiary, the financial interchange would reimburse the railroad retirement system only for the difference between (a) the increase in the imputed gross social security benefit, i.e., the benefit computed on the basis of railroad and social security credits combined and (b) the increase in the dual benefit -9 Honorable Harrison A. Williams, Jr. S. 1867 actually paid by social security. Since, however, the bill provides for a full social security type of increase in all cases, the railroad retirement system will have to bear the cost of the increases in the dual benefits. Currently, dual benefits are paid at the rate of about $560 million per year. Thus, if there were to be, say, a 10-percent increase in social security benefits, the railroad retirement system would have to absorb 10 percent of this amount or $56 million a year besides the other costs associated with overall minimum and noninsured cases. Since an increase in social security benefits between now and the end of 1974 is not very likely, it was not considered necessary to develop formal cost figures for this particular amendment. However, if the kind of pass through provided in the bill becomes a permanent feature of railroad retirement law, the cost implications could be quite serious. This is because the incidence and amounts of dual benefits can be expected to increase with the passage of time, and because there would be a compounding of costs from one social security increase to the other. A corollary result would be a growing disparity between the treatment accorded nondual and dual beneficiaries, respectively. It should perhaps be added that a combination of an increase in social security benefits and an upward adjustment in the earnings base would have cost implications materially different from those for an increase in benefits alone. A combination of this kind might under certain conditions improve the actuarial condition of the railroad retirement system rather than aggravate it. However, the bill, H.R. 7200, does not call for cost estimates of this type. 4. New allocation of railroad retirement taxes. --According to the bill, the part of the railroad retirement plan which is in effect an addition to OASDI would become noncontributory effective October 1973. Were it not for the new tax discussed below, the combined rate of tax would have been the same as under present law and this change would have made no noticeable difference in the actuarial condition of the railroad retirement system. It might perhaps be added that the proposed change in allocation would shift about $300 million in railroad retirement taxes from employees to employers in the first year of operation, that is, from October 1973 through September 1974. 5. New financing.--The bill provides for an additional tax of 7-1/2 percent of taxable payroll to be paid in equal shares by employees and employers. However, this new tax would not become effective until January 1, 1975. According to preliminary cost estimates -10 Honorable Harrison A. Williams, Jr. S. 1867 recently completed, this additional tax would cover the cost of the 60 with 30 amendment and take care of the bulk of the actuarial deficiency of the railroad retirement system. It is further estimated that the additional tax income for 1975 would be about $450 million under static conditions and $490 million if there will be an upward adjustment in the 1975 earnings base as a result of wage increases. 6. Conclusion. --From a practical point of view, the cost of extending the benefit increases should be viewed as a part of the cost of the present benefit structure and not as an added cost. Similarly, although for different reasons, the figures quoted in connection with the special form of passing through social security increases should also not be regarded at this time as additional costs. This leaves the cost of the "60 with 30" amendment (1.25 percent Views of the Board The Board Members are unanimous in their support of H.R. 7200 as it was passed by the House. The chief differences between the House bill and S. 1867 relate to the requirement in the Senate bill that the negotiators identify themselves by name and position; that they keep minutes of their meetings; that they meet not less often than once a month, and that they make progress reports not less often than every two months. In the opinion of Board Members Speirs and Quarles, both of whom have had great experience in collective bargaining over many years, these provisions in section 107 of the Senate bill would seriously impede the free exchange of ideas between the negotiators. With regard to the provisions of section 121 of the Senate bill, which would increase tax rates on employers and employees by 3.75 percent of taxable payroll, effective with respect to compensation paid for services rendered after December 31, 1974, Board Members Speirs and Quarles feel that the financing of the railroad retirement system is a crucial issue which the parties are expected to negotiate and that the effect of the provisions of section 121 of the Senate bill would be to take this issue out of the hands of the negotiators who are expected to continue their negotiations. For this reason, they believe that the enactment of H.R. 7200, as it was passed by the House, would make their continued negotiations more meaningful and more substantive. -11 Honorable Harrison A. Williams, Jr. S. 1867 Mr. Cowen, Chairman of the Board, states as follows: "As I stated at the hearings in the House on H.R. 7200, I "The extension of the temporary increases on a permanent basis after December 31, 1974, and the corresponding tax increases would become effective only if the representatives of railroad labor and management could not reach an agreement which would be enacted into law by that time. Assuming that an agreement can be reached, these provisions would not become effective, and it would not cause any problem. "If no agreement were enacted into law by December 31, 1974, "As an actuary, I know that the longer corrective action is -12 Honorable Harrison A. Williams, Jr. S. 1867 Because of the short time between the introduction of the bill and the setting up of the hearings, there has been no opportunity to submit this report for clearance to the Office of Management and Budget. Copies of this report are being sent to that office immediately. Sincerely yours, 96-447 0-73-3 FOR THE BOARD R. F. Butler, Secretary |