Note further that the Railroad Retirement Board is, under section 15 of the Railroad Retirement Act, required to make estimates of the amounts needed to pay for the benefits provided by the railroad retirement system, and to make determinations of the system's liabilities; and the Board is required also to make annual reports to the Congress of the status and operations of the railroad retirement account. The Board's actuarial reports and estimates must be reviewed, under the statute, by an independent actuarial advisory committee consisting of 3 actuaries, 1 appointed by railroad managament, 1 by railroad labor, and the third by the Secretary of the Treasury. The reports and estimates so required to be made must, of course, take into account amounts accruing to the Railroad Retirement Account pursuant to section 4 (n) of the Railroad Retirement Act as to the Government's liability for military service creditable under the Railroad Retirement Act, and also the provision of section 15 for interest at not less than 3 percent. These actuarial computations have relied, and properly so, on these well established and considered congressionally enacted provisions and have determined, as they must, the amounts of revenues available on the basis thereof. In view of this, it seems highly inappropriate to ask the Congress now to reconsider and determine that those provisions of long standing, and on which all concerned had a right to rely on, and did rely on, were unwise and should be changed. Sincerely yours, HOWARD W. HABERMEYER, Chairman. (By direction of the chairman, the following is made a part of the record:) Hon. LISTER HILL, RAILROAD PENSION CONFERENCE, Chairman, Committee on Labor and Public Welfare, DEAR SENATOR HILL: We are writing relevant to enactment of railroad retirement legislation. We urge support of the Langer bill, S. 360, which provides 30-year retirement at half-pay annuities. However, a bill similar to the Zelenko bill, H. R. 3545, in the House would also be acceptable at this time. It provides full annuities at age 60 after 30 years' service, and reduced annuities from age 55 to 59 after 30 years' service. Annuities to be one-half of taxable earnings based on the 5 years of highest earnings. The maximum annuity now at $184.25 a month would not be increased or decreased. However, the average annuity could increase to as much as $175 a month. Some Senate bills (S. 1313) call for a 10-percent annuity increase and other fringe benefits and an increase in taxation. While we are in accord with most of its provisions, we do not favor the tax increase which seems unnecessary in view of the unduly "conservative" actuarial valuations adopted by the Railroad Retirement Board. The 10-percent annuity hike is insufficient as it would raise the average annuity to only approximately $33 a month. Increasing taxes each time benefits are raised is not the answer to providing new benefits. And surely we do not believe that Congress nevermore intends to improve the railroad retirement system. Instead, Congress should enact legislation eliminating the so-called unfunded liability, and consider it a "social" obligation of the Government, as suggested on page 8 of the enclosed report50 Percent Pensions After 30 Years, the Need and the Possibility. We further recommend that Congress should make a study of the actuarial method and valuations adopted by the Railroad Retirement Board. And that the actuaries should be requested to immediately revise its mortality tables, assumptions, and valuations to be in accord with present-day actual experience as recommended in our report. Most sincerely, C. B. CARTER. 50 PERCENT PENSIONS AFTER 30 YEARS, THE NEED AND THE POSSIBIITY-A REPORT OF THE RAILROAD PENSION CONFERENCE, NEW HAVEN, Conn. Summary. CONTENTS The fund can afford the higher benefits proposed. Cost of pension conference proposals. What is wrong with calculations of Railroad Retirement Board? Level costs and history of conservative forecasts. Raw deal for railroad workers. Financing pension conference proposals and ability of fund to pay 50 percent pensions. Appendix. SUMMARY A. The Railroad Pension Conference calls for full retirement after 30 years of service regardless of age as provided by H. R. 2165. Annuities to be one-half of taxable earnings based on the 5 years of highest earnings, maximum annuity $200 a month. Taxes would be collected on the first $400 of each month's earnings, instead of first $350 as now provided. However, compromise bill H. R. 3545 would be acceptable at this time. It provides full annuity at age 60 after 30 years' service, and a reduced annuity of one one-hundred-and-eightieth for each calendar month that he or she is under age 60 when annuity began to accrue. Annuity to be one-half of taxable earnings based on 5 years of highest earnings. There would be no increase, or decrease, in present maximum annuity, now about $184 a month. However, the "average" annuity would be increased, and could rise to $175 a month. Higher benefits are needed because the present annuities have not kept up a proper relationship with the earnings of employed railroad workers. Instead of 50 percent, they amount to approximately 26.4 percent, or, including the spouses' supplementary benefits, to 29.8 percent of earnings of employed workers. Higher benefits are needed because annuities have not kept up with living costs, falling behind at least 20 percent since 1940. Full-age annuities now average $119.87 a month, less than $28 a week. But in terms of the prewar dollar, the purchasing power of this average monthly sum is roughly equal to approximately $59.94 a month, or only $14.97 a week. Railroad workers are getting lower annuities, in comparison with the taxes they pay, than workers under the Federal old-age and survivors insurance system. One railroad worker pays more than the combined tax paid by three industrial workers, under OASI, who, along with their spouses, may receive a total of $488 a month. (The maximum amount a retired railroad worker and his spouse can receive under railroad retirement is approximately $239 a month.) (However, the "average" amount received is roughly $163 a month for the retired worker and his spouse.) Even more discrepant is the length of service required by both systems. To receive the current maximum railroad retirement benefits the employee must have earned $300 a month from 1926 through June 1954, and $350 a month thereafter for a total service of 30 years. The industrial worker under OASI, retiring at age 65, to receive the present total maximum benefit needs only 18 months coverage if he earned $350 a month since January 1, 1955, regardless of prior earnings less than $350 a month. The annuities of the railroad workers are in sharp contrast with the luxurious pensions set up by the railroads for company executives. Legislators in other countries provide their senior citizens with retirement at age 50, 55, and 60 upon completion of 20, 25, or 30 years of service, many at half pay, others even a higher amount. The railroad retirement fund can provide the benefits proposed by the Railroad Pension Conference were the Railroad Retirement Board actuaries less consevative and more realistic in their actuarial valuations and assumptions. B. The railroad retirement fund can pay the higher pensions proposed. The actuarial calculations used to keep benefits low follow the principles of private insurance companies, seeking profit and accumulation of financial power. The public railroad retirement fund should be guided by a different motive, that of providing maximum security to railroad workers. The actuarial valuations of the Railroad Retirement Board do not allow for future increases in payrolls, therefore departing from realism, and grossly exaggerating the estimated costs of pensions as a percentage of payrolls. In other ways, also, the actuarial valuations adopt unduly conservative assumptions, which have the effect of artificially raising costs. Even so, the actuarial valuation shows that the fund could afford to increase pensions 60 percent for all employees entering the industry since 1947. The so-called unfunded liabality for pensions to earlier employees should be a social obligation, and not one of the newer employees. C. Reasonable assumptions show that the proposals of the Railroad Pension Conference could in fact be financed with a 10-percent tax, rather than the 122percent tax now in effect, for all employees entering the industry since 1947. The extra taxes collected from these employees, together with the reserves in the fund, can be used to complete pension liabilities to older employees. THE FUND CAN AFFORD THE HIGHER BENEFITS PROPOSED Hon. Paul H. Douglas, chairman of the Joint Committee on Railroad Retirement, and Senator from Illinois, is a known expert in his own right and the author of the constructive 1951 amendments. Speaking before the Senate on August 3, 1953, Senator Douglas said: "*** I believe substantially better benefits are possible by means of more profitable investment of the railroad retirement reserve and other methods. Increasing tax rates will not be necessary." He listed a series of eight possible improvements that had been recommended, and expressed the opinion that a "sound program" of improvements could be enacted, although this could not include all the items on the list. This position is consistent with that of the Railroad Pension Conference, because the Senator, iln addition to listing most of the conference's recommendations, had certain additional ones, such as a minimum annuity of $100 monthly; and did not suggest any raise in taxes, whereas the Railroad Pension Conference does not object to limited tax increases, if necessary to finance the improvement. However, Congress, in 1954, while markedly liberalizing benefits under the OASI system, made only certain fringe liberalizations in railroad retirement, the total amount of which is less than the increase in taxes which was enacted at the same time. COST OF THE PENSION CONFERENCE PROPOSALS The Railroad Retirement Board advised the 83d Congress that the proposals of the Railroad Pension Conference would increase costs by over $175 million annually. This estimate is likely to be high, as the Railroad Retirement Board tends to be unduly conservative in its financial evaluations. However, even if the estimate of $175 million is accurate the facts show that the system can afford to pay it. The amendments enacted in 1954 have had the immediate effect of increasing employee annuities by roughly $15 million yearly (in addition to the increases in survivor annuities.) Over the long run, it will add another $25 million to railroad employee annuities, owing to the higher wage base. Thus the total long-run gain may be figured at roughly $40 million. Presumably the Board's $175 million estimate exceeds its estimate of immediate cost, and refers to its actuarial long-range estimate. Therefore the entire $40 million should be subtracted to obtain the net cost in comparison with the present situation. This indicates a net cost of $135 million per year. (It must be noted that our present bill, H. R. 2165, increases the tax base from $350 to $400 a month. And compromise bill H. R. 3545 is less costly than H. R. 2165, inasmuch as full annuities are paid from age 60 upward, and reduced annuities are paid to those who retire before age 60. Our previous bills did not raise the tax base.) WHAT IS WRONG WITH THE CALCULATIONS OF THE ACTUARIES? Railroad workers are told that higher benefits are impossible because the actuaries show that they would bankrupt the fund. The cost calculations of the Railroad Retirement Board are based on actuarial valuations which are made every 3 years. These calculations are made by skilled actuaries, masters of complicated mathematical formulas. However, the calculations depend not only on knowledge of mathematics, but on what actuaries think will happen for many decades in the future. These opinions, or assumptions, of the actuaries, concern a wide variety of happenings-how many railroad workers will be employed and at what wages, how many railroad workers will leave the industry after a short period, how many will die in service, how many will remain employed until retirement age, at what ages will they choose to retire, how long will they live after retirement, and so on. None of these happenings can be predicted exactly by mathematical formulas. Some of them-such as how many railroad workers will die in service-can be predicted more or less accurately on the basis of past experience. Others, such as wages of railroad workers, involve economic and political judgments on which actuaries have no special competence. Wrong guesses, or assumptions, on such matters can render the calculations of the actuaries valueless and misleading, for all their technical skill in handling mathematical formulas. Their assumptions are usually conservative. That is, their guesses are such as to indicate high expenses and low receipts. Therefore, their calculations end up by showing a "need" for comparatively high taxes and the "possibility" of paying only comparatively low benefits. PRIVATE INSURANCE COMPANIES AND THE RAILROAD RETIREMENT BOARD The whole tradition and training of the actuaries make it inevitable that their methods be of this character. The actuarial profession developed as an adjunct to the insurance companies. The insurance companies were organized or taken over by the most powerful financiers, with the object of deriving profit, especially from the accumulation of huge supplies of capital. That they have succeeded in this is evident from the fact that the assets of life-insurance companies alone are now well over $80 billion, and are increasing at the rate of over $5 billion a year. These funds are piled up by charging high premiums and paying low benefits. Each year the life-insurance companies collect more than twice as much in premiums as they pay out in benefits. This is justified by the formulas of the actuaries. The catch is that the actuaries use a mortality table that is hopelessly out of date, so that most policyholders live longer than the actuaries figure. The insurance companies collect the premium and the interest for all the extra years of life. If the premiums were based on actual death rates, they would be much lower. Now let us suppose the policyholder wishes to get around this, and secure his money's worth by buying an annuity. Then the longer he lives, the more money he collects from the insurance company. But the insurance companies are a step ahead of him. For annuities, they use a different mortality table than for regular insurance, one which says that people will live much longer than they actually do. The premiums for annuities are calculated on this mortality table, and again are much higher than they would have to be to pay the actual cost of annuities. This, and other devices with similar effect, constitute the "conservative" framework of actuarial technique. And the actuaries, trained for a lifetime in this approach, carry it over to the calculation of benefits and tax rates for the railroad retirement system. But the railroad retirement system is not a private moneymaking proposition. Its main function is to supply adequate pensions to retired railroad workers and their dependents and survivors. Conceivably it could be financed out of ordinary Federal revenues, without the establishment of any special fund. The fund merely exists to give an additional guaranty to the railroad workers, to assure them a proprietary interest in their pensions. There is no need to build it up to the monstrous proportions of the private insurance funds. Yet there is this following comparison. At the end of 1953 there were 90 million policyholders in private insurance (life) companies. Some $78 billion of assets existed to guarantee their future claims, or roughly $870 per policyholder. In June 1954 there were some 2.5 million workers who had either paid taxes for railroad insurance during this past year, or were receiving (including their survivors) benefits under the system. A fund of $3.4 billion had been set up to guarantee their future claims, or roughly $1,360 per railroad worker. (In 1990 the railroad retirement fund is expected to reach $7.5 billion.) Of course, this is not exact or scientific. It doesn't take account of differences in benefits provided by the average private insurance policy and the average railroad retirement "policy." But it does show how, in general, the railroad retirement fund has been built up by the principles comparable to the funding of profitmaking private insurance companies. "LEVEL COSTS" AND THE HISTORY OF "CONSERVATIVE FORECASTS" The actuarial evaluations are expressed in terms of "level costs." This is what level costs mean. If payrolls are taxed at a fixed rate, and the interest at 3 percent accumulated on the taxes until benefits are due, the fund will either grow enormously, or become bankrupt, depending on the tax rate and the scale of benefits. If the tax rate is set "just right," at a certain time in the future, tax collections and interest income will exactly match benefit payments, and will continue to do so indefinitely. Experience has invariably shown the estimated level costs of the actuarial valuations to be too high. In each case the actuaries have been forced to cut their previous level-cost estimates, but because of changes in benefits, they have remained just as far as ever out of touch with reality. This is illustrated by the following table: Compiled from Retirement Policies and the Railroad Retirement System, Report of the Joint Committee on Railroad Retirement Legislation, pt. 1, 83d Cong., 1st sess., S. Rept. No. 6, pt. 1, pp. 309-315. Omits preliminary estimates presented other than by the regular actuarial valuations. Between the first and the third valuations, the estimated costs under the original act were cut 17 percent. In just 3 years, between the third and fourth valuation, the level costs under the 1946 liberalizing amendments were cut 19 percent, The estimated costs under the much more liberal 1948 amendments were put by the fourth valuation at hardly any more than the third valuation placed the level costs under the 1946 amendments. The 1951 amendments increased overall benefits by perhaps 25 percent. Yet the fifth valuation showed an increase of level costs of only 6 percent over the fourth valuation. If the actuaries had used the same tables and assumptions as in the previous valuation, they would have shown a level cost of 15 to 16 percent, but were forced by outside pressures to make slightly less conservative assumptions. This is more or less conceded by the actuaries themselves, in the introductory statements to the fifth valuation of the Actuarial Advisory Committee: "The committee was advised that various interested groups had challenged the use of the old tables on the ground that they did not reflect actual experience. The Advisory Committee had favored the use of the old tables on the ground that current experience could be greatly changed by a deflationary shift in the economic cycle. However, the committee feels that rather than remain in the position of having the basic assumptions used considered too conservative, it would be preferable to use the new tables which are closer to current experience." However, even reluctantly revised tables are still far from experience. Even they set a "conservative" standard which exaggerates likely percentage costs, and covers up the possibilities for greatly expanded benefits. WRONG ASSUMPTIONS ABOUT PAYROLLS The most important wrong assumption of the actuaries is that taxable payrolls will be frozen forever at $5 billion per year, slightly less than payrolls in 1951 and 1952. This, also, has been the main wrong assumptions of the actuaries in the earlier valuations. Here is why this is important. The railroad retirement system provides pension rights for the future to employees based in part on earnings before any taxes were collected, and also for many years when taxes were lower than they are now. Because taxes were not collected against that part of the pension rights, they are called "unfunded liabilities." If payrolls are doubled, the same amount is needed to meet the unfunded liabilities, but as a percentage of payrolls, the cost is cut in half. If not for these "unfunded liabilities," the benefits could admittedly be sharply increased with present taxes. |