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Cost-of-living increases for the social security part will be in the same amounts as those provided under the general social security program, while those under the railroad part would have a different costof-living treatment. The windfall element would receive no cost-ofliving increases.

The bill provides for four cost-of-living increases in tier 2 benefits equal to 65 percent of the rise in the Consumer Price Index from one September to the next September with such increases being effective for retirees beginning with the following January.

The first of the four such increases will be effective for January 1978, with the remaining three being made annually thereafter.

Cost-of-living increases that occur after 1976 and before the employee retires will be adjusted to eliminate duplication because of increases in the formula and because of the crediting of higher earnings. The new program would pay benefits only to the same categories of beneficiaries who are currently entitled under the railroad retirement program. The differences between the eligibility conditions under the railroad retirement and social security programs, as spelled out in exhibit 6, would continue to exist.

The basic financial interchange transfers would be based on a more or less accrual basis. This would help the cash flow problem in which the program will find itself and will not really affect the overall financing.

Currently, interest is paid on financial interchange transfers from the accrual date of such money until the time when the transfer is made. Thus, it would make little difference whether the interest was paid from the social security trust funds (which receive this interest back as part of their investment income) or whether the general funds pay it as interest to the Railroad Retirement Account.

The bill also makes provision for the social security trust funds to increase the financial interchange transfers by amounts equal to the windfall element of the revised railroad retirement benefits. This is expected to amount to something in the order of 33 percent of taxable payroll, or 4 percent of taxable payroll, depending on the definition of what constitutes the windfall.

These figures are equivalent to $3.8 billion or $4.6 billion, respectively, in terms of present values. By present values is meant that if a sum equal to about $3.8 billion, or $4.6 billion, were to be made available today and invested at an interest rate of 534 percent per annum, there will be approximately enough money available to pay for the frozen windfall elements in the benefits provided by the proposed bill. At this time, I would like to say that plan administrators in their capacity as such are generally not concerned with the sources of the money made available for the payment of benefits so long as that money is forthcoming. Of course, the continued solvency of the companies making such payments is a requirement to insure that the money will be received.

In this instance, however, I realize that the proposal to have the social security program finance the windfall elements in the railroad retirement system is controversial.

Since the social security program covers more than 90 percent of the labor force of the United States, this passing off of part of the financing of the railroad retirement system affects the nation as a whole rather than just the railroad industry.

I am also aware that there may be some question as to the financial condition of the social security system and their ability to absorb either the additional $3.8 billion or the $4.6 billion, whichever is applicable.

Since I am not fully aware of the problems of that system and because of its national significance, I therefore defer to the opinions of the Office of Management and Budget and the Department of Health, Education, and Welfare in this area.

Another very significant consideration at this time is the temporary nature of benefit increases which were enacted for the railroad retirement program in 1970, 1971, and 1972. These temporary increases, which amount to almost one-third of the current benefit amounts, are scheduled to be removed at the end of 1974 unless there is some legislative action.

In order to protect benefits to elderly, disabled and dependent individuals in the current inflationary economy, it is necessary that some legislation be enacted during this session of Congress.

The bill takes some steps in the right direction. It extends the coordination between the railroad retirement and social security programs but does not make this coordination complete as was recommended by the Commission on Railroad Retirement.

The problems of dual benefits, the compounding effects of benefit increases in the formula and in the earnings base-maximum benefits and certain others have been recognized in the manner and to the extent described above.

My major concern is that the program, as provided by this bill, is extremely complicated and would be difficult to administer and to explain to the public.

These complications are, of course, because the proposed bill was developed as the result of collective bargaining and the divergent interests of the parties involved.

Today, we receive many complaints about people not being able to understand how their benefits are computed. This was one of the main criticisms of the Commission on Railroad Retirement.

Under the transition provisions, which may be with us for several decades, the new program will be even more complicated, and I doubt if many people will be able to understand how their benefits will be computed.

I believe that my positions regarding the various aspects of the proposed bill have been explained above. The papers which are attached as exhibits indicate the considerations which I think necessary and some views which I have held for some time.

Since the program developed by this committee must be acceptable to railroad labor and management who pay the bill, I feel that they should have a significant say in its provisions. However, in this instance, a significant part of the financing is to come from the general public through the social security system.

Thus, the needs of the general public, as expressed by the Office of Management and Budget and by the Department of Health, Education, and Welfare should be taken into account.

That completes my statement with respect to S. 3612.

With your permission, I would like to read the appendix to that statement which spells out the changes made by the House Committee on Interstate and Foreign Commerce in the bill, H.R. 15301. Senator HATHAWAY. Go ahead.

Mr. CowEN. This appendix is a joint appendix for myself and the other two Board members, whereas my statement on S. 3612, which I just completed, was only for myself.

The purpose of this appendix is to discuss briefly the amendments which the House Committee on Interstate and Foreign Commerce made to the bill, H.R. 15301, which is identical to the bill, S. 3612. It does not contain a discussion of those amendments which were strictly technical.

Under the bill as introduced, the Railroad Retirement Account would have been reimbursed by the social security trust funds, through the financial interchange program, for the costs of the so-called windfall duel benefits provided to certain employees, spouses and sur

vivors.

The bill, as amended by the House committee, authorizes level annual appropriations to the Railroad Retirement Account, from the general treasury, to reimburse the account for the expenses incurred due to the payment of windfall benefits.

The amount of such annual appropriation would be determined by the Board so that total payment would be received in the years 1975-2000 for the total costs to be incurred-both during and after those years because of the payment of such benefits.

The Board would reevaluate the yearly amount necessary for this purpose during the fiscal years 1979, 1984, 1989, 1994, and 1999.

The House committee adopted an amendment to section 15(e) of the proposed Railroad Retirement Act of 1974 to change the provisions for the investment of the funds in the Railroad Retirement and Railroad Retirement Supplemental Accounts. The original bill, like present law, provided that the Secretary of the Treasury may purchase interest-bearing obligations of the United States, or obligations guaranteed as to both principal and interest by the United States, other than the special obligations issued exclusively to the accounts if the Secretary determines that such purchases are in the public interest.

The amended section 15(e): (1) confers upon the Railroad Retirement Board the authority to request the Secretary of the Treasury to purchase such other obligations; (2) provides specific statutory authority permitting funds in the accounts to be invested in obligations which are lawful investments for trust funds of the United States, such as FNMA and Federal Home Loan Bank securities; and (3) confers on the Board the authority to determine what securities should be redeemed at any time and makes all requests of the Board, both as to purchases and redemptions, mandatory upon the Secretary of the Treasury.

These amendments are expected to increase the interest income earned by the funds in the accounts. It should be pointed out, however, that purchase of FNMA and FHLB securities counts as expenditures from the Government for purposes of the consolidated Federal budget.

Sections 7(c) (2) and 7(c) (3) of the proposed Railroad Retirement Act were amended to place the financial interchange between the railroad retirement account and the social security trust funds on a delayed annual basis, as under present law, rather than on a current estimated monthly basis, as was provided in the original bill.

As a result of this amendment, an initial transfer of about $1.5 billion, which would have been made from the social security trust

funds about August of 1975 under the provisions of the original bill, will not be made.

Actuarial estimates indicate that this change could cause the railroad retirement account to run out of funds in the late 1980's.

Under the provisions of the bill H.R. 15301 as introduced, an employee who had completed 10 years of service would not have been entitled to benefits based on his own earnings under both the Railroad Retirement Act and the Social Security Act even though he might have had earnings under both but, rather, would have received an annuity based on his combined railroad and nonrailroad earnings under the Railroad Retirement Act only.

Furthermore, the spouse of any such employee would have received a railroad retirement spouse's annuity based on the employee's combined earnings, but would not have been entitled to a social security wife's or husband's insurance benefit.

Finally, an employee who was the wife, or husband, of a person insured under the Social Security Act would have had her or his social security wife's or husband's insurance benefit reduced by the amount of the social security level component of her or his railroad retirement employee annuity.

Under amendments adopted by the House committee, the bill would permit a beneficiary or his dependents to be entitled to a social security benefit based on nonrailroad earnings. The amount of any such social security benefit will be subtracted from the social security component of the railroad retirement annuity-which will still be computed on the basis of the employee's combined earnings.

These changes will provide the same total income that would have been payable under the provisions of the original bill.

However, because of this change, it will take longer to award railroad retirement annuities than under either the original provision of the bill or under present law since the amount of such benefit will not be determinable until after the Social Security Administration makes its certification to the Board, as described in the next paragraph.

However, I am told that administrative procedures between social security and railroad retirement could probably be worked out which would minimize this delay.

For the cases discussed in the preceding paragraph, administrative coordination would also be changed.

The Social Security Administration would continue to pay social security benefits if the beneficiary was on the benefit rolls on December 31, 1974. However, if the beneficiary first became entitled to social security benefits after that date, the Social Security Administration would perform all necessary actions to adjudicate the case and would then certify the amounts of such benefits to the Board.

The Board would then make payment of such benefits, but the money would be taken directly from the social security trust funds.

Under the bill as introduced, if any member of the family group were entitled or potentially entitled to railroad retirement benefits, the Board would have determined entitlement to, and certified payment from the railroad retirement account-which would then have been reimbursed under the financial interchange-all benefits under the Social Security Act, regardless of whether such benefits are based on the earnings of a covered railroad employee.

40-239 (Pt. 1) O 74 12

Several amendments were proposed to the House committee by the members of the Joint Labor-Management Railroad Retirement Negotiating Committee. All of these amendments were adopted by the House committee.

Pursuant to these amendments:

(A) The amounts of windfall dual benefits will be increased only by the percentage of social security cost-of-living increases which occur prior to the employee's retirement or death, whichever occurs first, rather than by the percentages of any increases, including legislative increases, in social security benefits;

(B) Any reduction in the social security level component of a railroad retirement spouse annuity due to the spouse's receipt of a railroad retirement employee annuity will be added to the staff component of the spouse annuity;

(C) The so-called spouse minimum provision-which is intended to assure that the total annuity amounts, without regard to windfall amounts, payable to a widow or widower, will not be less than the annuity amounts which the widow or widower may have received under the act as a spouse in the month preceding the employee's death-is amended to insure that this purpose of the provision will be fully effectuated. This is really a technical amendment; and

(D) The staff component and windfall amounts of the annuities payable to employees and spouses who were receiving annuities under the present Railroad Retirement Act will be computed in the same manner as the comparable amounts payable to employees and spouses who first begin receiving annuities after the new Railroad Retirement Act becomes effective. The possibility of this change was pointed out in my statement and in the Board's report. In table 3 of the Board's report there are two projections on different versions of what would constitute the windfall. This change in the bill would make the righthand projection applicable rather than the left-hand section.

Finally, as a result of two other House committee amendments, the compensation attributable to an individual's military service creditable under the Railroad Retirement Act for months after 1974 will be the amount reported as wages for such military service-the serviceman's military pay-under section 209 of the Social Security Act rather than the previous flat $260 a month, and the work restriction provisions set forth in section 2(e) of the proposed act will not be applicable to an elected public officer.

Most individuals in military service today receive more than $260 per month and, in addition, this would be a way of automatically increasing the amount credited for military service.

The latter provision for elected public officers would permit individuals to continue to serve in an elected office they held before retirement after they retire from their regular jobs.

Thank you.

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

I notice that in your prepared statement for the House that you had some reservations about the effective date of the bill, which is January 1 of next year.

Would you state what your reservations are and suggest what alternative you might have?

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