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TITLE III-SEPARABILITY 2. SEC. 301. If any provision of this Act or the applica3 tion thereof to any person or circumstances should be held 4 invalid, the remainder of such Act or the application of 5 such provision to other persons or circumstances shall not 6 be affected thereby.

Senator HATHAWAY. These two bills are substantially similar, in fact, are identical in many respects. The major differences between the bills are, first, that my bill shortens the time period for negotiation of the final solution and places certain requirements on the negotiating committee designed to insure prompt and serious attention to the problem.

Second, my bill contains a new tax provision effective January 1, 1975, which would be shared equally by the railroad employees and employers, and which would be sufficient under present circumstances to put the system on a sound financial basis.

It is the purpose of this provision to provide financing for the system should the parties be unable to reach a mutually agreeable solution. In the interests of time, I hope that the witnesses will briefly summarize the contents of their prepared statements, and direct their comments particularly to the differences between the two major bills before the committee.

Finally, I would like to express a sincere welcome to all those present. I am looking forward to the testimony and hope that these hearings will fulfill their purpose of mutual education as we grapple with a very complex and important problem.

Senator Beal], would you like to make a statement at this time?

Senator BEALL. No, Mr. Chairman. I have no statement to make. I look forward to hearing from the witnesses.

Senator HATHAWAY. Our first witness is Mr. James L. Cowen, Chairman, the Railroad Retirement Board. Mr. Cowen, would you come to the witness table, please?

STATEMENTS OF HON. JAMES L. COWEN, CHAIRMAN, THE RAIL

ROAD RETIREMENT BOARD; HON. WYTHE D. QUARLES, JR., MANAGEMENT MEMBER, THE RAILROAD RETIREMENT BOARD; AND HON. NEIL P. SPEIRS, LABOR MEMBER, THE RAILROAD RETIREMENT BOARD

Senator HATHAWAY. Mr. Cowen, it is nice to see you, and you may proceed with your statement. Are these other gentlemen going to sit with you? Mr. COWEN. Yes, sir.

Senator HATHAWAY. Identify them, please, for the purpose of the record.

Mr. CoWEN. The man on my immediate right is Mr. Neil P. Speirs, the labor member of the Board, who will present a separate statement for himself and the other gentleman who is Mr. Wythe D. Quarles, Jr., management member of the Railroad Retirement Board.

Senator HATHAWAY. You may proceed. Mr. CowEN. I will summarize my statement on S. 1867, and I will also present my statement on S. 1886.

Senator HATHAWAY. Without objection, your entire statement will be placed in the record following your testimony

Mr. COWEN. Before commenting on the specifics of this bill, I feel it incumbent on me to review certain other items. First, the Commission on Railroad Retirement and the Board's actuaries have estimated that the railroad retirement account will be exhausted by 1985 or 1986

if the temporary 15-percent, 10-percent, and 20-percent increases enacted in the years 1970, 1971 and 1972, are extended indefinitely, even without additional liberalizations.

Secondly, the increases were made temporarily because the enacting legislation which introduced them lacked provisions for financing. The 15-percent increase enacted in 1970 has already been extended once.

On March 7, representatives of railroad, labor, and management initialed a tentative agreement which was a landmark in that it was reached well in advance of the expiration date of the old labor contract. It contained the provisions of H.R. 7200 as introduced in the House, and regular labor contract provisions not in this bill. Therefore, H.R. 7200 must be considered in this context. The Senate version of the bill (S. 1867) which is being considered at these hearings, differs somewhat from the House version.

At this point I am going to omit the descriptions of the bills which is contained in my statement. I would like to comment, however, that H.R. 7200 as passed by the House makes no provision for reducing the present actuarial deficit. I believe that it would be unthinkable to terminate the temporary increases. S. 1867 has a part A which keeps these increases temporary, but part B extends them permanently.

Additional tax income equivalent to 712 percent of the taxable payroll is also provided in part B by having employees and employers each pay additional taxes equal to 3.75 percent of that part of the employee's earnings subject to taxation.

Such additional taxes will become effective on January 1, 1975, the date on which the bill would make the benefits permanent.”

The extension of the temporary benefit increase on a permanent basis after December 31, 1974, and the corresponding tax increases are probably intended only if the representatives of the railroad, labor and management, cannot 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 would not cause any problem. If no agreement were enacted into law by December 31, 1974, we would again be in the position of having to terminate the temporary increases if it were not for part B of title I of S. 1867.

This would be just as undesirable at that time as it is now. However, by that time, the financial condition of the railroad retirement program would be extremely serious.

As an actuary, I know the longer corrective action is delayed, the more serious the situation becomes, and the more drastic will be the solutions to the financial problems of the program. Therefore, providing additional income beginning in January, 1975, will help to alleviate the situation.

Further, the additional taxes provided in the bill would go a long way toward putting the program back into a sound actuarial position. On this basis, I believe it desirable to have the provision which would provide additional income of 712 percent of taxable payroll to the railroad retirement program, but I take no position as to how these should be apportioned between the employees and employers.

I realize the difficulties that this might cause, but as Chairman of the Railroad Retirement Board, I must consider the ability of the program to meet its obligations.

The provisions shifting part of the employees' taxes to the employers really has no effect on the railroad retirement program, since the total income received under the Railroad Retirement Tax Act would be the same. This is really an element of collective bargaining, rather than an element affecting the administration of the Railroad Retirement Board.

The provision for full annuities to men retiring at age 60 or over with 30 or more years of service will add costs of about $70 million a year or 114 percent of taxable payroll. However, the 712 percent additional taxes provided by the bill, S. 1867, would be sufficient to pay for this liberalization as well as to eliminate most of the present actuarial deficiency.

The provision which would grant automatic increases whenever there are social security increases is only contingent upon enactment of social security legislation before the end of 1974. Under H.R. 1, there are no scheduled, automatic cost-of-living increases during this period. However, this provision is only for the contingency that the Congress will enact social security legislation during that period. It ignores any increases in concurrent social security benefits. By ignoring these concurrent increases, there will be added costs to the railroad retirement program. Our actuaries tell me if there were to be a 10-percent increase in social security benefits during this period, it would add $56 million per year to the railroad retirement costs.

In closing, I would like to state my feeling that the March 7 agreement shows the willingness and ability of railroad labor and management to work in harmony. It also wish to reiterate that in my judgement it would be unthinkable to permit the expiration of the temporary benefit increases on June 30, 1973, the date scheduled in present law. Since this date is rapidly approaching, I would like to urge that Congress take prompt action on this bill.

Senator HATHAWAY. Mr. Cowen, thank you very much.

Mr. COWEN. As I stated, I have a statement on S. 1886, but this is a technical bill which would generally grant conforming ammendments to those which were enacted for social security under H.R. 1, and I think I can omit reading this statement.

Senator HATHAWAY. All right. Without objection that statement will be placed in the record following your testimony.

Mr. Cowen, thank you very much for your statement. The proposed legislation seems to be justified on the grounds that it would be unconscionable to allow temporary increases to expire at the end of next month. Has there ever been a situation where the annuities were reduced ?

Mr. Cowen. Not after they were introduced, no. There are provisions in law which require a reduction in individual cases because of a change in formula, or because the individual becomes entitled to social security benefits.

There is a social security minimum provision in the Railroad Retirement Act. Under this provision, every individual, or I should say every family, is guaranteed that they will get at least 110 percent of the amount they would have received from social security had railroad earnings been creditable under that act. In determining this amount, the social security benefits and the railroad retirement benefits are combined, to see if this minimum is applicable.

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Therefore, if an individual is first entitled to railroad benefits, and subsequently becomes entitled to social security benefits, the benefit under this minimum must be recomputed.

Senator HATHAWAY. You mentioned in your statement the financial difficulty in which the fund is now finding itself. I understand that at the present rate of paying out benefits, with the contributions being made at the present rate, the fund would go broke sometime in the 1980's, is that correct?

Mr. Cowan. That is correct. This is the estimate of the Board's actuaries and the Commission on Railroad Retirement.

Senator HATHAWAY. As an actuary, could I ask you about the tax increase in 1975 proposed in my bill, S. 1867 ? It is my understanding that the additional amount on both the employer and the employee would place the system in approximate long-range actuarial balance. Is that correct?

Mr. COWEN. It would not be too far off.

Senator HATHAWAY. Well, let me ask you a second question. From an actuarial point of view, what are the practical alternatives to this approach?

Mr. COWEN. This is really a matter of judgment. There are many different possibilities. The Commission on Railroad Retirement recommended a complete restructuring of the program, both on the benefit side and on the income side. This approach was for a two-tier program where the first tier would be identical to social security, and the second tier would be a benefit based on railroad earnings alone.

Senator HATHAWAY. There is an essential difference between the bill which I have introduced and the bill that has been passed by the House. My bill requires a report by the committee that would be set up to come up with a solution to the financial problem by March 1 of next year. The House bill has July 1 of next year as the deadline. Do you think that a restructuring of the system along the general lines proposed by the Commission could be done before March 1 of next

year?

Mr. Cowen. This would depend on the knowledge of the negotiators of the problems and how close they are to an agreement at this time, which I am not in a position to evaluate.

Senator HATHAWAY. Senator Schweiker.
Senator SCHWEIKER. Thank you, Mr. Chairman.

How much time do we have before the fund would theoretically go broke?

Mr. Cowen. Without the provisions for additional income which are in S. 1867, both the Railroad Retirement Board's actuaries and the Commission on Railroad Retirement have estimated that it would be about 1985.

Senator SCHWEIKER. That is on the basis of paying the current benefit level ?

Mr. Cowen. Yes; that is correct.

Senator SCHWEIKER. The temporary benefits and the permanent ones, by 1985 ? Mr. COWEN. That is correct.

Senator SCHWEIKER. To avoid that happening, how much additional payment woud have to be made in terms of percentage of payroll, or whatever other way you calculate it?

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