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I prepared the paper which appears as Exhibit 3 shortly after the Commission filed its report and this was distributed to some labor and management representatives. This paper contains the recommendations of the Commission and raises several questions which were not covered by the recommendations. Alternative answers to the questions and general considerations are discussed and these may be of help to the Congressional committees during their deliberations on bill S. 3612.

Major Problems

Dual Benefits One of the major problems facing the railroad retirement program is that relating to so-called "dual benefits". These are concurrent social security and railroad retirement benefits received by the same individual. Because of the existence of these dual benefits, the individuals who receive them have a proportionately greater return for their taxes than others, and this is the source of the so-called windfall. All parties agree that these are problems which need to be solved, and I believe the proposed bill does do this with respect to future service. Chapter 9 of the Commission's report, which begins on page 343, discusses this rather thoroughly.

The paper presented as Exhibit 4 may give the Congressional committees some useful information for their deliberations on restructuring the railroad retirement program. It was submitted to the Commission on Railroad Retirement in 1972 so the figures contained in it are out of date but the principles are still the same.

Compounding Effect of Wage and Benefit Formula Increases One of the major problems affecting all pension and insurance programs today concerns the handling of inflation. Social considerations require that benefits be increased periodically so that retirees can maintain an adequate standard of living. Thus, any new program must look ahead to how future benefit increases will be introduced.

One of the reasons that the current railroad retirement program is in trouble has been how benefit increases have been handled in the past. Current and future retirees receive the advantage of increases in wage levels, whereas beneficiaries on the rolls do not. In addition, benefit formulas have been increased in the same way for people already on the benefit rolls and for those who are retiring in the future. Thus, current and future retirees, in effect, receive a double increase; one on the basis of benefit formula increases which were designed in such a way as to keep benefits for people then on the rolls at an adequate level and a further increase because of higher wage levels on which the benefits are based.

This leads to the conclusion that the treatment of inflation which occurs prior to retirement should be handled in a different way from inflation which occurs after an individual enters upon the beneficiary rolls. The paper presented as Exhibit 5 was sent to the Commission before it filed its report as an explanation of this and may also be of use to the Congressional committees.

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Maximum Benefits

Proper pension planning requires that benefits after retirement should not be more than an individual's take home pay prior to retirement or the earnings which are the basis for the benefit. То do otherwise would encourage these individuals to retire from their present jobs and obtain other work. Because they have a retirement income, this could be at a substandard level or on a part-time basis. This would not be in the best interest of the Nation.

This principle when related to earnings subject to taxation for the railroad retirement program has not been followed by the railroad retirement program. When wives' benefits are included, a significant proportion of current retirees under the railroad retirement program receive more in benefits (including dual benefits) than their taxable income just prior to retirement. In the future, the proportion receiving such excess benefits will increase because of the compounding of wage and benefit formula increases.

The table to be inserted in the record here indicates the relationship between benefits and taxable pay for retirees during 1973.

Comparisons with Social Security Although the railroad retirement and social security programs provide much the same types of benefits, there are several significant differences. These do cause some difficulty in the administration of the railroad retirement system because of the social security minimum guarantee contained in that program. These differences also raise some questions of equity. For ready reference, the differences between the two programs are given in tabular form as Exhibit 6.

The Bill S. 3612

The bill S. 3612 which was introduced by Senator Hathaway has been agreed to in negotiations between railroad labor and railroad management. The preliminary cost estimates which are all on the basis of static economic assumptions were prepared by the Board's actuarial office and indicate that its enactment would reduce the actuarial deficiency of the railroad retirement program from approximately 9.1 percent of the taxable payrolls or $529 million per year on a level basis to 4.6 percent of taxable payrolls or $270 million per year on a level basis. These estimates are

before consideration of the proposed additional transfers from social security trust funds for the so-called windfall element of the proposed new benefits. The proposed additional transfers from social security would be about either 3.6 percent or 4.4 percent of taxable payrolls which are equivalent to either $213 million or $254 million per year on a level basis. This would leave a net deficit of either .96 or .24 percent of taxable payrolls which are equivalent to $57 million per year and $16 million per year, respectively, on a level basis. The reason for the two sets of figures is that there is some uncertainty as to what will constitute the windfall element of benefits in some areas.

Family retirement Income compared with average taxable earnings before retirement among recent employee age retirees 3/

earnings?

U.S. Railroad Retirement Board
Office of Director of Research
June, 1974

80 to 89

90 to 99--

100 or more

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In evaluating the provisions of this bill, it must be remembered that they were developed in collective bargaining. In collective bargaining on pensions, management wants to minimize costs and labor to maximize benefits. Because this bill calls for a restructuring of the railroad retirement program, there was an additional consideration, i.e., that benefit amounts under the new program should not differ significantly from those under the old program for individuals who will retire in the near future.

The bill S. 3612 would restructure the computations of retirement benefits under the retirement program into three parts: (a) a basic benefit which would be computed under the social security formulas; (b) an additional part which would be based on railroad service only; and (c) a windfall element which would allow for the advantages of dual benefits which had accrued for service prior to the changeover date to the new program (see Exhibit 4). Survivor benefits would be computed also in three parts: (a) a basic social security portion; (b) a part equal to 30 percent of the social security survivor benefit which the individual would have been entitled; and (c) a windfall element.

The benefit formulas would be extremely complicated and difficult to explain. The second tier benefits for retirement annuities would consist of the following elements:

1.

2.

3.

A railroad retirement benefit would be computed based upon current railroad retirement law but limited to service prior to 1975. This would continue all of the complexities of present law.

From item 1 above would be subtracted a social security benefit based only on railroad earnings where such railroad service was performed before 1975. In the computation of this social security benefit, there would be 18 benefit computation years as defined in the Social Security Act.

In addition to the above, there would be an increment of
$1.50 for each of the first 10 years of railroad service
prior to 1975, and $1.00 for each year of service in excess
of 10 years which was performed before 1975. This incre-
ment would be given only to those individuals who have
some railroad service after 1974.

4.

5.

For each year of railroad service after 1974, there would
be added $4.00.

An added benefit for service after 1974 would be equal to one-half of one percent of the employee's average earnings after 1974 times the years of such service.

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6.

7.

For employees who have sufficient social security service
before the end of 1974 to qualify for a social security
benefit when they reach age 65 and who, in addition, have
at least 10 years of railroad service prior to 1975, there
would be added an additional so-called windfall element.
This additional windfall element would require the compu-
tation of three social security benefits based on different
earnings but all computed as of the date when the employee
will reach his 62nd birthday. The first two of these benefits
would be added together and would then be reduced by the third
in order to determine the windfall element. The first social
security benefit would be that based on social security earn-
ings alone which were earned prior to 1975, and the second
would be based on railroad earnings alone which were earned
before 1975. The third, and subtractive item, would be the
social security benefit based on the combined railroad and non-
railroad earnings which were earned prior to 1975.

For employees who have 25 or more years of service and a
current connection with the railroad industry there would be
added a supplemental annuity ranging from $23 per month to
$43 per month.

For new entrants in the railroad industry after 1974, the only steps needed to compute a retirement benefit would be those of steps four, five and seven in the paragraph above. These are relatively easy to compute and cause little difficulty in either understanding or in the administration of the program. The same cannot be said of the other steps which are really for transitional purposes. However, since they would apply with respect to individuals who are currently active in the railroad industry, they could be with us for several decades.

I would like to point out that with respect to survivor benefits, the benefit to the widow of a railroad employee who spent his entire working career in the railroad industry would be the same as the benefit to the widow of an employee who split his career between covered and non-covered employment.

Beneficiaries on the rolls would have the benefit amounts they currently receive from social security and railroad retirement combined, and the total would be divided into: (1) a tier 1 social security benefit; (2) a tier 2 railroad benefit; and (3) a windfall benefit. The total amount of the three components would be the same as that which the individuals are currently receiving. The purpose of making the change would be to make future cost-of-living increases easier to administer because the current benefits could then be treated the same as future benefits and also to prevent increases in the windfall elements.