RESTRUCTURING OF THE RAILROAD RETIREMENT

SYSTEM, 1974

TUESDAY, SEPTEMBER 10, 1974

U.S. SENATE,

SUBCOMMITTEE ON RAILROAD RETIREMENT

OF THE COMMITTEE ON LABOR AND PUBLIC WELFARE,
Washington, D.C.

The subcommittee met, pursuant to recess, at 9:35 a.m., in room 4232, Dirksen Senate Office Building, Hon. William D. Hathaway (subcommittee chairman) presiding.

Present: Senators Hathaway, Taft, and Beall.

Senator HATHAWAY. The subcommittee will come to order.

We will resume our hearings on the amendments to the Railroad Retirement Act.

The first witness is Mr. C. L. Dennis, international president, Brotherhood of Railway and Airline Clerks, in behalf of the Congress of Railway Unions and Railway Executives Association. Mr. Dennis, we are glad to see you again.

Would you identify the gentlemen who are accompanying you.

STATEMENT OF C. L. DENNIS, INTERNATIONAL PRESIDENT, BROTHERHOOD OF RAILWAY AND AIRLINE CLERKS, IN BEHALF OF THE CONGRESS OF RAILWAY UNIONS AND RAILWAY LABOR EXECUTIVES ASSOCIATION, ACCOMPANIED BY NED DAVIS, COUNSEL, MIAMI, FLA.; JIM KENNEDY, GENERAL LEGISLATIVE COUNSEL, WASHINGTON, D.C.

Mr. DENNIS. With me is Mr. Ned Davis, our counsel from Miami, counsel to the Brotherhood of Railway and Airline Clerks, and Jim Kennedy, our national legislative counsel here in Washington for the Brotherhood.

I am happy to be here. I have filed a written brief but, for the sake of preserving time, I intend to read just a brief version.

Senator HATHAWAY. Fine.

Your entire statement will be made a part of the record and inserted at the conclusion of your testimony.

Mr. DENNIS. Thank you.

Before I start, I want to say that I agreed with everything that Mr. Dempsey presented in the House, and I believe that I will be in agreement with everything he has to say following me, and also Mr. De Podwin, who, I understand, is going to testify, because I have read their testimony and concur in the written documents.

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My name is C. L. Dennis. I am international president of the Brotherhood of Railway and Airline Clerks; a vice president and member of the executive council of the AFL-CIO; and chairman of the Railroad Retirement Committee of the Congress of Railway Unions.

Previously, I served as labor member on the U.S. Commission on Railroad Retirement, a body which did a thorough examination of the system and made recommendations for reform.

For the past year, I have served as spokesman for the Joint Negotiating Committee of Railway Labor Unions, which was established pursuant to Public Law 93-69.

Our negotiating committee was under a mandate from Congress to make recommendations to assure the long-term soundness of the system while taking into account the recommendation of the Commission on Railroad Retirement.

These negotiations resulted in an agreement on fundamental principles which led to the drafting of S. 3612.

We believe that S. 3612 provides a method of restructuring the railroad retirement system that will restore its fiscal solvency while eliminating most of the inequities that previously existed.

We feel that this bill also complies in substance with the principal recommendations of the Commission on Railroad Retirement.

As the written statements of Mr. Cowen, chairman of the Railroad Retirement Board, and Mr. Dempsey, the chairman of the National Railway Labor Conference, go into great detail on this bill, my remarks will be directed toward summarizing its principal features with emphasis on how we substantially complied with the recommendations of the Commission on Railroad Retirement.

We did not strictly follow the Commission's recommendations of adopting a pure two-tier system, with the first tier being social security and the second tier being a supplementary plan administered under Federal law by the Railroad Retirement Board, floating on top of tier 1, because we felt it would be more equitable not to drastically disrupt the structure employees have been familiar with for the past 37 years.

However, we did, in substance, provide for a first tier which, in essence, would provide a social security benefit and a second tier floating on top that would be based on the new railroad retirement formula. Both components would be administered by the Railroad Retirement Board instead of the Board becoming a payment center and claims agents for first tier, as recommended by the Commission.

The Commission on Railroad Retirement recommended that the future accrual of the so-called dual benefit should be stopped because it involves a windfall element and excess cost to the Railroad Retirement Account.

The Commission did, however, agree that any plan to eliminate the windfall portion of dual benefits should protect the vested rights of existing employees and beneficiaries.

The cost of this windfall element exceeded $300 million last year, but as substantial equities were involved, the negotiations concerning its disposition were long and extremely difficult.

Nevertheless, we believe that we have complied with the Commission's strong recommendations to phase out dual benefits.

The essential features of these changes can be summarized as follows: Beneficiaries on the rolls will continue to receive their current dual benefits in full, but would receive only the nonwindfall portions of future social security benefit increases, a noncost item to the Railroad Retirement System under the financial interchange.

This, in effect, freezes the windfall portions as of December 31, 1974. For certain unretired employees who were vested in both systems, we followed the Commission's suggestions to preserve their equities. These unretired employees who are dually vested with either a current connection to the railroad industry on December 31, 1974, or the date of retirement, or those with 25 years of railroad service, will be entitled to receive a windfall dual benefit on retirement.

Unretired, inactive employees, with less than 25 years of railroad service, will be entitled to a windfall dual benefit on retirement only if they were dually vested by the close of the year in which they left railroad service.

This windfall amount would be subject to social security cost of living increases prior to the employees' retirement.

However, the windfall would be frozen on retirement. New railroad employees and current employees not meeting the requirements of dual vesting described above will never have the opportunity to accrue dual benefits.

In appropriate instances, current employees would receive tax rebates as suggested by the Commission. The Commission was critical of the old railroad retirement benefit formula and certain inequities that arose under it. They were particularly disturbed by the compounding effect that has been built into the formula.

As I stated earlier, the new formula would consist of a component based on both railroad and nonrailroad service which would be essentially equivalent to a social security benefit.

This component, or first tier, would be increased in the future as social security benefits are increased.

For service after 1974, the staff component, or second tier, would be composed basically of two elements-a flat dollar amount per year of service after the changeover date and a percentage of the employee's career railroad earnings multiplied by his years of future railroad service.

Those components contain a cost of living adjustment factor.

In addition, this staff component would continue to provide a supplementary annuity between $25 and $43 per month for long service employees. We also responded to a criticism of the Commission on Railroad Retirement by increasing survivors' benefits to 130 percent rather than 110 percent of their comparable social security levels. We corrected a technical item, as well, by providing supplemental annuities and unreduced spouses' benefits for employees who retired at age 60 with 30 years of service.

This technical correction was necessary to encourage the early retirements that had been negotiated by the parties in collective bargaining some year and a half ago.

Finally, we provided a grandfather clause assuring all employees retiring within the next 8 years that they will receive as much as they would under existing law, except for certain aspects of windfall dual benefits.

The final principal recommendation of the Commission on Railroad Retirement dealt with funding of the program during the crisis we now face and then beyond such period.

The Railroad Retirement Board advises us that we face a deficit currently of approximately 9.1 percent of taxable payroll calculated on a level basis.

In severely restricting dual benefits in the future and revising our benefit formula, we reduced this deficit by approximately 42 percent of taxable payroll. In addition, the bill provides for the transfer of dual benefit phaseout cost to the social security system.

We strongly support this position or, in the alternative, the absorptions of these phaseout costs by the General Treasury.

If that is accomplished, the remaining deficit will be less than 1 percent of covered payrolls.

In any event, the railroads have agreed to bear the full cost of the plan above the social security level except for these phaseout costs of dual benefits.

Last year, of course, their tax rate went up to 15.35 percent, and our tax rate came down to the social security level of 5.85.

Of course, that is a known fact and that is the cost carriers have been and will be required to provide for the future.

We feel that this certainly accomplishes the principal objectives that we set out to do.

In conclusion, I would like to say that railway labor urges your favorable consideration of this bill as we feel it does accomplish the task that you put before us of returning the Railroad Retirement System to financial solvency through its restructuring and providing a system of benefits reasonably geared to take care of the equitable needs of our group of beneficiaries presently on the rolls and who will come to the rolls in the future.

Thank you, Mr. Chairman.

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

Last year, I recall the Machinists Union was not in agreement with the plans that were worked out.

I wonder if this year there are any unions not in agreement?

Mr. DENNIS. If there is any, I am not familiar with it. They have not said anything to me about not being in agreement with the plan. Senator HATHAWAY. Good.

I take it from your testimony that what labor has given up is the dual benefits for relatively new employees, is that correct?

Mr. DENNIS. Well, we have given up a little bit more than that.

I could read a list rather hurriedly here.

The dual benefits was one thing, and then the revised formula was another thing.

We also agreed to take a dollar pass through on an offset basis on all social security increases for all dual beneficiaries on the rolls after December 31, 1974.

Although this did not result in a reduction of actuarial deficiency, in actual practice this will save the system tremendous amounts of money in the future.

For example, the across-the-board 11-percent increase of 1974 had a cost tag of some $60 million each year attached to it, because of this agreement not being in effect, so this was one thing.

Then, the other thing is we further agreed to a revised formula which will considerably benefit the railroad retirement plan in future years. This resulted in a 3.4 percent reduction in the actuarial deficit. We also agreed to freeze the railroad retirement residual benefits as of January 1, 1975, which has a small cost factor, when you figure in millions of dollars, but it does have a cost factor.

We agreed that limitations corresponding to social security principles on benefits in cases in which both husband and wife are railroad employees enter in service after December 31, 1974, and that has to do with spouses' benefits.

We agreed that lump-sum benefits were to be frozen as of January 1, 1975, for retired and active employees. We agreed that no proposal for support of any future changes in the Railroad Retirement Act were to become effective before January 1, 1978, resulting in a 3year moratorium. That 3-year moratorium would apply to the railroad retirement portion, so-called tier 2 portion. It would not apply to social security, whatever happens in social security, why we would get that, because employees are paying the same amount as anybody working under social security.

The above changes did not come about easily. We kept in mind our commitment to Congress and recommendations to the Railroad Retirement Commission to find a solution to the deficit problem that presently exists.

The Joint Committee of Railway Management and Railway Labor, consisting of Mr. William H. Dempsey and the other members of the National Railway Conference, seven members representing virtually all of railway labor, engaged in many hours of negotiations with concessions being made by both sides.

That is basically what we gave up and what management did was to agree to pick up the taxes that were cut from the railroad employees. We would now be paying $120 a month if we had not reduced our taxes down to the social security level. Instead, the maximum earning man is paying the same amount of social security, about $63 or $64 a month. That is something I thought we should do because the steelworkers and the auto workers and the truck drivers, who have good pension plans, were not paying any more, and we finally corrected that inequity last year. And now, this year, we are desirous of getting the plan on an actuarially sound basis.

We do not want to have a plan that is in danger of going in the hole. And our plan has been in effect for some 37 years.

Over that period of time, as the exhibit attached to my statement shows, a railroad employee has paid almost $7,000 more money into the Railroad Retirement Act than what his counterpart in social security has paid about 211⁄2 times as much money as his counterpart in social security has paid for pension rights.

I think that we, for the future now, have corrected that situation, at least from now on out.

Of course, we have many, many matters still pending we have got to work out before the end of the year-wages, cost-of-living clause in our wage contracts, and we have to get revised health and welfare plan, and our policy expires December 31.

We have section 6 notices served covering about seven or eight items and we are behind.