it would have been if the system had earned the same rate as the socialsecurity system from July 1, 1939, to June 30, 1956. The excess amounted to approximately $15 million in 1956.

As stated in our report we recommend that the Congress establish an interest rate for special obligations for the railroad retirement system consistent with that recently established for the civil-service retirement and social-security systems.

Our fifth point relates to an earlier investment practice which resulted in the Federal Government paying higher interest then considered necessary. Until 1952 a procedure was in effect which enabled the Railroad Retirement Board to invest appropriations which were received in advance of, and sometimes in excess of, actual tax collections.

Although this procedure was prospectively corrected by the Congress in 1952, the Board has been permitted to retain approximately $40 million of interest earned by investment of these advances prior to actual receipt of the taxes. We have no recommendation for corrective action but consider it advisable to have the Congress aware of this situation when considering remedial action on the other points contained in our report.

We are glad to be afforded an opportunity to bring these matters to the attention of the committee. We urge their serious consideration in connection with any pending legislation affecting the railroad retirement system. We will endeavor to answer any questions you may have, or supply any additional information you may desire.

I would say that a good share of the weight of our report, Mr. Chairman, is that there has been Federal support to the railroad retirement system.

Senator MORSE. Let the record show that the two reports of the Comptroller General of the United States will be made a part of the record.

(The reports referred to follow :)

Hon. SAM RAYBURN,

COMPTROLLER GENERAL OF THE UNITED STATES,
Washington, February 10, 1955.

Speaker of the House of Representatives.

DEAR MR. SPEAKER: There is presented herewith one copy of the General Accounting Office report on the audit of the Railroad Retirement Board for the fiscal year ended June 30, 1953. This audit was made by the Division of Audits pursuant to the Budget and Accounting Act, 1921 (31 U. S. C. 53), and the Accounting and Auditing Act of 1950 (31 U. S. C. 67).

Particular attention is invited to the recommendations that legislation be enacted (1) to recover a substantial portion of the amounts appropriated to the Railroad Retirement Board out of the general funds of the Treasury for the purpose of crediting military service as railroad employment and (2) to recover an interest windfall of $3 million which accrued to the Railroad Retirement Board in the fiscal year 1953 and to recover any similar future windfalls. Attention is invited also to the comments on (1) the actuarial condition of the railroad retirement account and (2) the extent to which certain provisions of law and amendments to the Railroad Retirement Act of 1937 have resulted in the Federal Government and the social-security system contributing to the maintenance of the railroad retirement system.

The report is also being sent today to the President, United States Senate. Sincerely yours,

Enclosure.

FRANK H. WEITZEL, Assistant Comptroller General of the United States.

REPORT ON AUDIT OF RAILROAD RETIREMENT BOARD FOR THE FISCAL YEAR ENDED JUNE 30, 1953

The Division of Audits, General Accounting Office, has made an audit of the Railroad Retirement Board for the fiscal year ended June 30, 1953. This audit was made pursuant to the provisions of the Budget and Accounting Act, 1921 (31 U. S. C. 53), and the Accounting and Auditing Act of 1950 (31 U. S. C. 67). Of particular significance in this report are our recommendations to the Congress and our observations which are summarized below.

RECOMMENDATIONS TO THE CONGRESS

Recovery of substantial portion of prior appropriations

We recommend the recovery of a substantial portion of the amounts appropriated to the Railroad Retirement Board out of the general funds of the United States Treasury for the purpose of crediting military service as railroad employment. The Board has received in appropriated funds and accrued interest thereon approximately $324 million more than is estimated to be required to meet the related benefit payments. (See p. 13.)

Recovery of interest windfall

We recommend that the Railroad Retirement Board be required to pay into the general funds of the United States Treasury an interest windfall of $3 million which accrued to it in the fiscal year 1953 under the provisions of the financial interchange arrangement with the social-security system and to make a payment for each year after June 30, 1953, in which a similar windfall occurs. (See p. 18.)

OTHER SIGNIFICANT OBSERVATIONS

Actuarial condition of the railroad retirement account

In the latest triennial valuation of the railroad retirement account the unfunded accrued liability of the account was established at $10,475 million before considering the effect of legislation whereby a substantial portion of this liability was transferred to the social-security system. It is estimated that $5,915 million of this liability was transferred, leaving an unfunded accrued liability of $4,560 million to be borne by the railroad retirement system.

The valuation report concluded that a tax rate of 13.41 percent would be required to finance the system indefinitely without any increase in the existing unfunded accrued liability. On the basis of the present tax rate of 121⁄2 percent, the unfunded accrued liabilities are increasing at the rate of $45 million a year.

Self-sufficiency of the railroad retirement system

Although the legislative history and provisions of the Railroad Retirement Acts show that the railroad retirement system was intended to be self-supporting and the Railroad Retirement Board purports that the system is selfsupporting, certain provisions of law and amendments to the Railroad Retirement Act of 1937 have resulted in the Federal Government and the social-security system contributing to the maintenance of the railroad retirement system. These factors are summarized on pages 25 to 29 of this report.

ORIGIN AND PURPOSE

The Railroad Retirement Board was created to administer a system of retirement insurance for railroad employees under the Railroad Retirement Act of 1935 (49 Stat. 967). It also administers a system of unemployment insurance for railroad employees under the Railroad Unemployment Insurance Act, approved June 25, 1938 (45 U. S. C. 351–367).

ORGANIZATION AND MANAGEMENT

The Railroad Retirement Board is an independent agency in the executive branch of the Federal Government. It is composed of three members appointed by the President of the United States, by and with the advice and consent of the Senate. One member is appointed from recommendations made by representatives of the employees and one member is appointed from recommendations made by representatives of the carriers. The third member, who is chairman of the Board, is appointed without recommendation by either carriers or

employees and may not be employed by or otherwise interested in any employer or organization of employees. The term of office of each member is 5 years. The membership of the Board as of June 30, 1953, was as follows:

1 Mr. Kennedy resigned, effective Aug. 31, 1953, and Raymond J. Kelly was appointed chairman on Sept. 1, 1953, to fulfill the unexpired term.

2 Mr. Harper's reappointment was confirmed on Aug. 11, 1954.

The principal offices of the Board are located in Chicago, Ill. As of June 30, 1953, the Board had 9 regional offices and 98 district and branch offices. The regional offices were located in Atlanta, New York, Cleveland, Chicago, Dallas, Kansas City, Minneapolis, Denver, and San Francisco. The number of employees of the Board totaled 2,178 at June 30, 1953. Of these, 1,195 were in the headquarters offices in Chicago and 983 were in the regional and field offices. The Board's regional offices at Minneapolis and Denver were closed as of November 16, 1953.

Each regional office has a regional office division which receives, adjudicates, audits, and certifies or denies claims for unemployment, sickness, and maternity benefits under the Railroad Unemployment Insurance Act, and a field service division operating district, branch, and base point offices for performing a variety of duties relating to both the Retirement and Unemployment Insurance Acts, such as:

1. Rendering assistance to applicants filing claims.

2. Training claims agents.

3. Operating an employment service.

4. Disseminating information to employers and employees.

5. Making investigations.

The expenses of the regional offices are allocated between the railroad retirement system and the railroad unemployment insurance system. A schedule of these expenses is included in the financial statements in this report. The adjudication and award of retirement and survivor benefits under the Railroad Retirement Act are made at the headquarters office.

Establishment

RAILROAD RETIREMENT SYSTEM

The railroad retirement system was established by the Railroad Retirement Act of 1935, approved August 29, 1935 (49 Stat. 967). This act was amended by, and incorporated in, the Railroad Retirement Act of 1937, approved June 24, 1937 (45 U. S. C. 228a-228r). The 1935 act was continued in effect with respect to individuals granted annuities prior to enactment of the Railroad Retirement Act of 1937. The Carriers Taxing Act of 1935, which provided revenue to finance the railroad retirement system, was repealed by the Carriers Taxing Act of 1937 (now the Railroad Retirment Tax Act (26 U. S. C. 1500)).

A prior act, the Railroad Retirement Act of 1934 (48 Stat. 1283), was declared unconstitutional and its provisions nullified after its constitutionality had been challenged by the railroads. The Railroad Retirement Act of 1935 and the Carriers Taxing Act of 1935 which, taken together, contained the substance of the 1934 act were also challenged by the railroads, and the District Court of the District of Columbia held the Taxing Act to be unconstitutional as violating the due-process clause of the fifth amendment. The court also held that a portion of the 1935 Retirement Act was unconstitutional. However, by a memorandum of agreement dated February 18, 1937, railroad and employee representatives agreed to seek new legislation which they would recommend to the Congress and further agreed that they would not question, and they have not questioned, in the courts the authority of Congress to enact the law or laws putting the plan into operation.

The Railroad Retirement Act, as amended, provides for the payment of benefits to aged or permanently disabled railroad employees and their wives and to the widows, widowers, children, and parents of deceased employees.

Sources of funds

A. Payroll taxes and employers' contributions.-The railroad retirement system is financed principally by a payroll tax on employees and an equal contribution by employers provided for in the Railroad Retirement Tax Act. The present tax on employees is 64 percent of each employee's earnings up to $300 a month. Taxes and contributions have been assessed since January 1, 1937. The payroll taxes and employers' contributions are collected by the Internal Revenue Service and are paid into the Treasury of the United States as internal revenue collections.

Under procedures established in the Railroad Retirement Board Appropriation Act, 1952 (65 Stat. 222), the Secretary of the Treasury is authorized to credit currently to the railroad retirement account the actual amount of taxes as collected to provide for payment of all annuities, pensions, and death benefits under the Railroad Retirement Acts of 1935 and 1937. In previous years Congress appropriated annually an amount based on an estimate of the taxes expected to be collected during the year. Adjustments were made in later appropriations for any underestimate or overestimate of the tax collections.

As of July 1, 1951, the exess of prior years' appropriations over tax collections, together with interest earned thereon by the Board, was estimated at $39,008,951. Of this amount, $19,827,800 was returned to the general funds of the Treasury in November 1951. The balance of $19,181,151 was required to be held in reserve by the Bureau of the Budget. After adjustment for administrative expenses, tax refunds, and interest, the remainder, $18,656,682, was carried to the surplus of the Treasury in accordance with the provisions of the Railroad Retirement Board Appropriation Act, 1954, approved July 31, 1953 (67 Stat. 258), and the difference, $524,469, was released to the railroad retirement account.

B. Interest on investments.-The Railroad Retirement Act of 1937 provides that the Secretary of the Treasury, at the request and direction of the Board, shall invest such amounts credited to the railroad retirement account as, in the judgment of the Board, are not immediately required for the payment of annuities, pensions, and death benefits in interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States. The Secretary is authorized to issue at par special obligations to the account which shall bear interest at the rate of 3 percent per annum. Other obligations may be acquired only on such terms as will provide a yield of not less than 3 percent per anum.

Under present procedures, all amounts credited to the railroad retirement account are immediately invested in special 3 percent Treasury notes, which are redeemable at the request of the Board at par plus accrued interest as funds are needed for benefit payments, administrative expenses, or reinvestment in securities bearing a higher interest rate.

At June 30, 1953, $3,127,803,000 was invested in these 3 percent special Treasury notes and $15 million was invested in 34 percent Treasury bonds, comprising a total investment of $3,142,803,000. Interest earned in the fiscal year ended June 30, 1953, amounted to $89,295,185.

C. Appropriations by the United States Government for Military Service.— The Railroad Retirement Act authorizes the appropriation to the railroad retirement account, for each fiscal year beginning with the fiscal year ended June 30, 1941, (1) an amount sufficient to meet the additional cost of crediting military service rendered prior to January 1, 1937; and (2) the amount of the taxes on employers and employees which would have been payable during the preceding fiscal year for military service after December 31, 1936, by considering such military service as service rendered as an employee.

The act provides that military service during any war service period shall be included as years of service in determining eligibility for and in computing an annuity. However, entrance into military service must be preceded by railroad service in the same or next preceding calendar year (45 U. S. C. 228c-1).

Appropriations to June 30, 1953, for this purpose have amounted to $334,429,100, of which $299,577,100 was received prior to that date and $34,852,000 was made available in fiscal year 1954.

D. Funds to be received from the social security system.-The Railroad Retirement Act of 1937 was amended by the act of October 30, 1951 (65 Stat. 683), to provide for correlation of the railroad retirement system and the social security system. The amendments established an arrangement whereby the social security system in effect reinsures certain of the risks of the railroad retirement system. Under this arrangement the railroad retirement system will be liable to the

Federal old-age and survivors' insurance trust fund for the taxes that would have been paid under the social security system, and the social security system will be liable to the railroad retirement account for the benefits which would have been payable under the Social Security Act if railroad employment had been covered thereby.

So far the applicable taxes have exceeded the benefits and consequently the railroad retirement system is indebted to the Federal old-age and survivors' insurance trust fund. Under the law the Railroad Retirement Board and the Secretary of Health, Education, and Welfare were required to determine by January 1, 1954: "*** the amount which would place the Federal old-age and survivors' insurance trust fund in the same position in which it would have been at the close of the fiscal year ending June 30, 1952, if service as an employee after December 31, 1936, had been included in the term 'employment' as defined in the Social Security Act and in the Federal Insurance Contributions Act." The amount of this liability was determined to be $488,200,000 as of June 30, 1952. This is to be reduced at the end of any year in which the benefits to be assumed by the social security system exceed the taxes to be credited to the Federal old-age and survivors' insurance trust fund for that year. The principal amount was reduced to $424,500,000 as of June 30, 1953.

If the taxes plus accrued interest on the principal amount exceed the benefits in any year, the difference will be transferred from the railroad retirement account to the trust fund. However, the Railroad Retirement Board estimates that future benefit payments will exceed taxes and that the initial liability eventually will be exhausted. From that time on actual transfers of money will be made from the trust fund to the railroad retirement account.

Actuaries of the Railroad Retirement Board have estimated that the railroad retirement system will benefit to the extent of an average of $29,500,000 annually in perpetuity under this financial interchange arrangement.

Another provision of the 1951 amendment provides that the social security system will assume responsibility for the payment of benefits to railroad employees who, at time of retirement or death, have less than 10 years of railroad service. While this provision will not result in transfers of funds between the systems, the Board's actuaries have estimated that as a result of this arrangement the railroad retirement system will be relieved of the payment of $89,500,000 annually.

Appropriations from the general fund of the Treasury for military service credits Through June 30, 1953, the Railroad Retirement Board had received appropriations of $334,429,100 pursuant to section 4 (n) of the Railroad Retirement Act, which authorizes appropriations to the railroad retirement account for military service credits. This amount has been augmented by interested income of $50 million. Against this the Board had disbursed only $3,500,000 at June 30, 1953, and the present value of future payments on awards at that date was $1,500,000. The present value of future payments with respect to awards that may be made after June 30, 1953, on account of military service prior to that date was estimated at $55 million. Consequently, the Board has received, in appropriated funds and accrued interest thereon, approximately $324 million more than it estimates will be needed to pay benefits to veterans based upon their miiltary service credits.

Following is a summary of the appropriations through June 30, 1953.

No appropriations have been requested to cover military service credits for service after June 14, 1948, but the Board has estimated that the following amounts were due as of June 30, 1953.

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