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Senator HATHAWAY. Our next witness is William H. Dempsey, chairman, National Railway Labor Conference, accompanied by Stephen Ailes, president, American Association of Railroads.

Mr. Dempsey, welcome back to the committee.

Mr. Ailes, it is nice to see you.

Would you identify the other gentlemen for the record?

STATEMENT OF WILLIAM H. DEMPSEY, CHAIRMAN, NATIONAL RAILWAY LABOR CONFERENCE, ACCOMPANIED BY STEPHEN AILES, PRESIDENT, ASSOCIATION OF AMERICAN RAILROADS; AND H. E. GREER, VICE CHAIRMAN, AND W. L. BURNER, JR., DIRECTOR OF RESEARCH, NATIONAL RAILWAY LABOR CONFERENCE

Mr. DEMPSEY. To my left is Mr. H. E. Greer, vice chairman of the National Railway Labor Conference, and on Mr. Ailes' right is Mr. William Burner, director of research for the conference.

Senator HATHAWAY. Fine.

Your entire statement will be made a part of the record and inserted at the conclusion of your testimony, you may proceed to summarize it or read it, whichever you prefer.

Mr. DEMPSEY. Thank you.

It would unduly entrench on the committee's time if I were to read the statement which, as you observed, is very detailed.

Accordingly, what I would like to do with the time available to me this morning is simply to discuss what appears to us to be the two or three key issues that are involved in the committee's and Senate's consideration of the bill before it.

Of those two or three key items, it seems to us that quite plainly the question of dual benefits we are phasing out and the question how they are financed is of preeminent importance and, accordingly, I would devote the bulk of my time to discussion of that area, the dual benefit

area.

Let me just take a moment to sketch very broadly some of what appear to us to be the relevant features of the immediately preceding history of this problem.

The matter was first strongly and clearly brought to the attention of the Congress in 1970 when the Chairman of the Railroad Retirement Board advised the committees of the Congress that if the then contemplated 15-percent increase in benefits were to be put into law without corresponding increases in financing, the fund might very well go bankrupt in approximately 25 years.

The Congress, as you know, responded to that warning in essentially two different ways.

In the first place, it made that 15-percent increase temporary in character and, in the second place, it directed the establishment of what is known as the Commission on Railroad Retirement to conduct an exhaustive study of all of the problems that were besetting the system.

The Commission was composed of three public representatives and one representative of management and one of railway labor.

Mr. Dennis, who testified this morning, was the union representative on that Commission.

The Commission was supposed to report in a year, roughly, but found it was unable to complete its task in the allotted time and sought an additional year. It ultimately did report to the Congress in late June 1972.

By that time, the Congress had enacted another benefit increase without corresponding financing, that one a 10-percent increase.

Again, the Congress made the increase temporary.

Then, shortly after the Commission filed its report, the Congress enacted yet a third temporary increase in the fall of 1972. This time, a 20 percent increase.

At that time, all of the increases were scheduled to expire on July 1, 1973. The Congress directed the parties, that is management and unions, to present their views to the Congress in light of the Commission's recommendations by March of last year, which we did.

But, as the committee knows, we were obliged to report that the problems were so inordinately complex, that we were unable to bring to the committee and to the Congress what we would consider informed judgment as to the broad range of the problems that the commission was faced with.

Now, in effect, stopgap legislation was enacted that gave the parties an additional period of time to negotiate, and accordingly, at the present time, the three temporary benefit increases which accumulate some 52 percent in the way of increases are scheduled to expire on December 31 of this year.

However, in the act of last summer, one important substantive change was made in the bill-two, I am sorry-one had to do with what Mr. Dennis referred to as the shift in financing, the shift in the tax burden from the employees to the employer, so that at the present time during this period the employers are paying the railroad retirement tax to the full extent that it exceeds the social security level, so that the employees are now paying 5.5 percent, employers are paying 15.35 percent, plus about 712 cents an hour for what we refer to as the supplemental annuities, or about 1.7 percent, so the carriers' total bill is slightly in excess of 17 percent of taxable payroll at the present time.

The second change that was made was the provision in the legislation that made available to railroad employees an opportunity for early retirement; that is, retirement at age 60, after 30 years of service. There are certain deficiencies in that provision which are addressed in present legislation, the pending bill, that I will return to in a few minutes.

That, then, brings us to date. The parties did meet many, many times over the period allotted to them. The recommendations that they jointly subscribed to are reflected in the bill that is being considered by the committee, S. 3612.

The key problem, of course, that the parties grappled with was the projected bankruptcy of the fund. Whereas, in 1970, as I indicated, the Chairman of the Board estimated that the fund might go bankrupt in 25 years, the current projection, primarily because of the additional temporary benefit increases, the current projection of the Board is that the fund will go bankrupt in 1980 or 1981 unless something radical is done.

The current projection of the deficiency puts it at 9.05 percent a year of taxable payroll, or $529 million a year. That is to say, unless something radical is done, if the system is unchanged, funds on the average of $529 million a year would have to be pumped into this system over an indefinite period of time to keep it from going under.

Now, sums of that magnitude are plainly beyond the capacity of either the railroads or of the railroad employees.

Accordingly, the parties devoted their principal energies to whatever avenues appeared to be available for reducing or eliminating that deficiency.

Among the various avenues that were and are available, none is as important as the restriction and eventual elimination of dual benefits.

So let me turn now to that subject, Mr. Chairman.

I would like to discuss briefly what dual benefits are, and their impact on the Railroad Retirement Fund, as those considerations are relevant to the question of phasing them out and who pays for the phaseout cost.

Before I do that, let me simply bring to your attention one figure as the outset that underscores the critical importance of the dual benefit problem.

As I indicated, the deficiency is projected at 9.05 percent of taxable payroll a year. Of that 9.05 percent, almost 8 percent-7.72 percent, to be precise-is attributable to dual benefits.

Of the $529 million a year, to put it differently, $451 million a year is attributable to dual benefits.

If we did not have dual benefits, we would not have a financial crisis besetting the Railroad Retirement Fund.

It is quite plain the only way to remedy our problem is to remedy the problem of dual benefits.

Now, we all know surely in a general way, at least, what dual benefits are.

Railroad employees are the only employees in the private American industry that can, in substance, qualify for two social security benefits, one as a component of their railroad retirement benefit, and second by virtue of their employment in nonrailroad industry, steel, or automobile, or whatever it might be.

The difficulty here at root lies in the fact that the social security formula has a social bent to it. It is a social insurance system and, accordingly, it confers a relative advantage upon short service and low wages.

Now, what that means, for example, is that if you take a 40-year segment of employment and, on the one hand, calculate a social security benefit under the social security formula covering the whole 40 years, you produce a certain figure.

If you take that same 40 years and whack it up into two segments, 20 years apiece, and make two calculations on the social security formula, one for the first 20 years and one for the second 20 years, and add them together, you come up with a much more sizable figure than if you made the single calculation. That is the root of the dual benefit problem.

So that the dual beneficiary receives what the Commission on Railroad Retirement referred to as a windfall benefit. The windfall benefit

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