Hon. OREN HARRIS, EXECUTIVE OFFICE OF THE PRESIDENT, BUREAU OF THE BUDGET, Washington, D. C., March 16, 1957. Chairman, Committee on Interstate and Foreign Commerce, Washington, D. C. MY DEAR MR. CHAIRMAN: This is in reply to your requests for the views of the Bureau of the Budget on the following bills to amend the Railroad Retirement Act: H. R. 3855, H. R. 4194, H. R. 4195, H. R. 4677, and H. R. 5022. Aside from questionable features related to specific bills each bill would increase benefit outlays in the railroad retirement system without providing increased contributions. The existing actuarial deficiency of the railroad retirement system, estimated by the actuaries of the Railroad Retirement Board, is 3.20 percent of payroll. The Board estimates that each of these bills would increase the deficiency still further from 0.25 percent of payroll to 1.53 percent. In view of the increased financial deficiency resulting from these bills, you are advised that as reported by the Bureau of the Budget on March 7, 1957, on other bills which also increased the deficiency-the enactment of any of these bills would not be in accord with the program of the President. Sincerely yours, ROBERT E. MERRIAM, Assistant Director. RAILROAD RETIREMENT BOARD, Hon. OREN HARRIS, Chairman, Committee on Interstate and Foreign Commerce, House Office Building, Washington, D. C. DEAR MR. HARRIS: This is a report on the identical bills H. R. 3855, which was introduced in the House of Representatives by Mr. O'Konski on January 28, 1957, and H. R. 4677, which was introduced in the House by Mr. Byrd on February 11, 1957, and which were referred to your committee for consideration. The bills would in general increase retirement and survivor annuities under the Railroad Retirement Act by 10 percent. The bills would not increase (i) a minimum annuity which, under section 3 (e) of the act, is equal to the employee's "monthly compensation", (ii) a spouse's annuity which is now $54.30, (iii) a spouse's annuity by as much as 10 percent if such annuity is now over $49.36, (iv) any annuity which, after the enactment of the bill, would be payable under the social-security minimum, and (v) any annuity by as much as 10 percent if such annuity is now payable under the social-security minimum even though after the enactment of the bills such annuity would be payable under the regular formula. The amendments would be effective with respect to annuities, covered by the bills, accruing for months following the month of enactment of the bills, and with respect to pensions due in calendar months after the month of enactment. All recertifications required by the bills would have to be made by the Board without application therefor. The Board is opposed to the enactment of the bills for the following reasons: 1. The bills, if enacted, would increase the cost of the railroad retirement system by about 1.53 percent of payroll, or $81 million a year. 2. The bills make no provision for financing the additional cost which their enactment would entail. 3. The railroad retirement system cannot absorb the added cost because a recent actuarial estimate shows that the net level cost of benefits under the act is about 15.70 percent of taxable payroll. Since the actual tax rate is only 12.50 percent, the present benefit structure already involves an actuarial deficiency of 3.20 percent of payroll which is equivalent to about $170 million a year on a level basis. 4. The effect of the enactment of the bills would be to increase the deficiency to 4.73 percent of payroll or $251 million on a level basis. The Board, accordingly, recommends that no favorable consideration be given to these bills. The Bureau of the Budget has advised that there is no objection to the submission of this report to the committee. Sincerely yours, HOWARD W. HAREBMEYER, Chairman. Hon. OREN HARRIS, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE, Chairman, Committee on Interstate and Foreign Commerce, House of Representatives, Washington, D. C. DEAR MR. CHAIRMAN: This letter is in response to your requests for reports on H. R. 4101 and H. R. 4102, and four identical bills, H. R. 4353, H. R. 4354, H. R. 4530, and H. R. 4620, all of them bills to amend the Railroad Retirement Act of 1937, the Railroad Retirement Tax Act, and the Railroad Unemployment Insurance Act, so as to provide increases in benefits, and for other purposes. Additional bills, identical with the last-mentioned group have more recently been introduced. In view of the comprehensive analysis contained in the Railroad Retirement Board's report on H. R. 4353 and H. R. 4354 and the fact that these bills are identical with H. R. 4101 and H. R. 4102 except for the income-tax feature discussed below, we shall not burden this report with the customary summary of the proposed legislation. H. R. 4101 and H. R. 4102, while otherwise identical with the later bills, would exclude the amount of an employee's contributions under the Railroad Retirement Tax Act from his gross income for purposes of the Federal income tax. As you will recall, the same proposed income-tax exemption was deleted by your committee on jurisdictional grounds in reporting out last year's major proposal (H. R. 9065) but with the understanding that this feature would be considered in the form of a separate bill by the Committee on Ways and Means, with express recognition of the fact that this feature and the benefit and contribution increases were regarded by the railway labor organizations as "inseparable parts of a unified and integral program" and that these organizations would not favor enactment of the measure without the tax exemption (H. Rept. 2418, 84th Cong., pp. 10-12). And when the tax exemption failed to clear the other committee, an amended measure (actually S. 3616, as passed by the Senate) providing merely for a 10 percent benefit increase without any contribution increase was passed as interim emergency legislation (Public Law 1013). In view of this history, the pendency of the proposed income-tax feature before the Committee on Ways and Means in the present Congress, and the fact that one of the separate tax exemption bills (H. R. 3665) now before that committee is referred to as a part of the overall proposal in summary introduced in the Congressional Record in connection with a companion bill (S. 1313) identical with H. R. 4353 and H. R. 4354, we cannot ignore the tax exemption feature of H. R. 4101 and H. R. 4102 in appraising this entire group of bills. As stated by the President in approving last year's interim bill (Public Law 1013), prompt corrective action at the present session of the Congress to assure adequate financing of the system is imperative in view of the serious actuarial deficit in the railroad retirement account: And any additional increase in benefits calls for an increase in contribution rates great enough to make up both the existing deficit and the further costs such benefit increase would entail. This the present bills strive to do, and in that respect they are preferable to H. R. 9065 and other bills considered by your committee last year. But to finance the employees' share of the cost of the benefit increase, wholly or in part, out of general taxation by excluding employee retirement contributions from gross income for income-tax purposes, would in our view be ill advised. In the first place, we can see no justification for exempting from income-tax liability both the amount of employee contributions and the benefits that will later be paid on the basis of these contributions under a retirement system. As you know, benefits under the Railroad Retirement Act are already exempt from income tax, Moreover, the provision would give unjustifiable preferential treatment to employees covered under the railroad retirement system as compared with employees under the old-age and survivors insurance system, the civil service retirement system, and other public and private retirement and survivor benefit plans, and would set an undesirable precedent for extending like treatment to the latter. Indeed, such an extension of the present proposal is already included, as respects social security and civil service retirement contributions, in bills recently introduced (H. R. 5551; H. R. 5768). Apart from the income-tax exemption feature, two aspects of the proposed amendments to the railroad retirement program give rise to concern. In the first place, while the proposed benefit level, we believe, would not be out of line with benefits under private industry plans coupled with those paid under title II of the Social Security Act, the difficulty is that the contribution and benefit structure under the Railroad Retirement Act is neither the outgrowth of collective bargaining between management and labor nor employer-sponsored, but is imposed by legislation. We would certainly regard with serious concern any general attempt to impose such a benefit structure, with the consequent cost, on private industry by legislation. The problem is that the Railroad Retirement Act attempts to combine a statutorily regulated social insurance system with a staff retirement and survivor benefit system. While we are aware of the history which originally led to the enactment of this act, this aspect of the program is necessarily troublesome every time it is proposed to increase the benefits, and thus the cost of the system. Moreover, in comparing the proposed benefit structure with industry staff plans determined by collective bargaining, it becomes essential to resolve the question (not within our special competence) whether the railroad industry could bear the increased contribution rates proposed without undue strain, especially in view of the increases imposed at the same time under the Railroad Unemployment Insurance Act. In addition, one aspect of the actuarial calculations on which the Board's total estimate is based deserves to be specially noted. The Board estimates that, despite the proposed changes in the benefit provisions of the Railroad Retirement Act, the proposed increases in the railroad retirement taxes (including the deferred additional taxes contingent on old-age and survivors insurance rates) will reduce the actuarial deficiency of the system on a level-premium basis from 3.20 percent of payroll (as of December 31, 1956) to 0.37 percent of payroll. However, this estimate is based in part on a long-range estimate that the provision for financial interchange between the railroad retirement system and the old-age and survivors insurance system will yield the railroad system a net gain of 1.18 percent of payroll on a level-premium basis. Our chief actuary, on the other hand, estimates that in the long run there will be no significant net gain to either system from the operation of the financial-interchange provision. He emphasizes that, more than for any other provision of the Railroad Retirement Act, any estimate as to the long-range effect of the financial-interchange provision is necessarily subject to future variation since it rests largely on an assumption as to the stability of employment in the railroad industry. Should his estimate materialize, however, the actuarial deficiency of the railroad retirement system would be somewhat over 11⁄2 percent of payroll on a level-premium basis, which might eventually require a combined employer-employee contribution rate of 20 percent if the benefit increase now proposed should be enacted. This possibility should, we believe, be taken into account in considering the most costly of the proposed benefit increases. The proposed changes in the unemployment and sickness benefit and contributions structure of the Railroad Unemployment Insurance Act proposed by these bills would, as pointed out by the Board, be costly and far reaching. The provision (retroactive to January 1, 1957) for extended unemployment insurance benefits of varying duration after exhaustion of regular benefit rights, in cases of workers who have had 5 or more years of railroad service, would be a striking innovation for this country. As the Board puts it, under that provision “an unemployed man with 20 or more years of service could receive benefits, under special conditions, for as much as 42 years longer than he might otherwise." Such a provision deserves the most careful scrutiny and study, not only from the point of view of cost for this self-contained social insurance program, but also from the point of view of its consistency with generally accepted social insurance principles and its possible precedent-setting effect for this country. The other provisions also-including the elimination of the waiting period for unemployment benefits in virtually all cases (with benefits payable for even 1 day of un employment on a normal workday), and including the proposed benefit schedule under which, as the Board points out, "it would be possible for some beneficiaries to be paid at benefit rates near 70 percent of the daily rate of pay" (and even higher percentage in the case of maternity_benefits)-merit careful study in these respects. Finally, the estimates of the Board suggest that even the sharply increased employer taxes proposed by these bills may not, if all the proposed benefit changes are enacted, provide an adequate margin of safety for the railroad unemployment insurance account. To recapitulate: (1) We recommend against enactment of any legislation which as part of the same bill or as part of a "package," would exempt employee contributions to the railroad retirement system from the Federal income tax. (2) Without the income-tax exemption feature, and if the actuarial estimates of the Board are accepted, the proposed changes in the railroad retirement system would bring the system close to actuarial balance notwithstanding the benefit increases, but would still raise the question (not within our special competence) of the industry's ability to bear the cost. Moreover, on the basis of the above-noted estimate of our chief actuary (rather than that of the Board) with respect to the effect of the financial interchange, the legislation still would not be adequately financed. (3) While we have not, so far, reached definitive conclusions on proposed changes in the Railroad Unemployment Insurance Act, we believe that (a) any levels of benefits and contributions established should be such, and so interrelated, as to provide an adequate reserve for the system and to take account both of the needs of beneficiaries and of the capacity of the industry to bear the cost; (b) benefits should on the one hand be fully adequate and on the other not excessive in the light of generally accepted principles for this type of social insurance; and (c) unusual features of the proposal, particularly the provision for extended unemployment benefits for workers who have had 5 or more years of railroad service, should be carefully explored from the standpoints of their effects on the system, their consistency with generally accepted concepts of unemployment insurance in this country, their effect on incentives to move out of railroading into other lines of work if railroad employment is not available for the individual, and their soundness in the light of experience had in other countries with comparable provisions. The Bureau of the Budget advises that it perceives no objection to the submission of this report to your committee. Sincerely yours, M. B. FOLSOм, Secretary. RAILROAD RETIREMENT BOARD, Hon. OREN HARRIS, Chairman, Committee on Interstate and Foreign Commerce, House Office Building, Washington, D. C. DEAR MR. HARRIS: This is a report on the bill H. R. 4187 which was introduced in the House of Representatives on January 31, 1957, by Mr. Burdick, and which was referred to your committee for consideration. The bill would amend section 3 (e) of the Railroad Retirement Act so as to provide that the computation of annuities under the social security minimum formulas shall be made on the basis of railroad compensation only, without regard to concurrent social security benefits. Under present law, the amount guaranteed by the social security minimum provision is determined on the basis of railroad and social security credits combined, with a reduction for any concurrent social security benefit to which the beneficiary is, or on application would be, entitled, or which would be a deductible item under the provisions of the Social Security Act. The change would become effective the first of the month following the enactment date of the bill and all required recertifications would be automatic without application therefor. In order to analyze the effect of the changes proposed by the bill, it is necessary to consider sections 1 (a) and 1 (b) separately. Section 1 (a) taken by itself would disregard the simultaneous social security benefit for purposes of the social security minimum provision but would leave the method of computing benefits under that provision otherwise unchanged. The effect would be to increase annuities computed under the social security minimum formula in practically all cases where the beneficiary is entitled to a simultaneous benefit under the Social Security Act. In no case would benefits be reduced and this would be true for both retirement and survivor annuities. Thus, section 1 (a) of the bill would result in an additional cost to the railroad retirement system which is estimated to be in the neighborhood of $10 million a year on a level basis. On the other hand, section 1 (b) of the bill, which would eliminate socialsecurity credits from the computation of the social-security minimum amount, would have the effect of generally decreasing benefits so computed in cases where the retired employee had some social-security earnings, but there is no entitlement to benefits under the Social Security Act. Particularly in the area of survivor benefits, there would be a reduction in large numbers of cases where the deceased employee had social-security earnings, and the survivor is not entitled to a social-security benefit in his or her own right. It is estimated that the number of survivor benefits which would be so reduced would substantially exceed the number of cases where benefits would be increased. Thus, section 1 (b) of the bill, when considered by itself, would result in savings to the Railroad Retirement Account. It is estimated that the savings from section 1 (b) would about equal the additional costs from section 1 (a) of the bill. Thus, on the whole, the bill would not involve any net additional costs to the railroad retirement system; there is even a slight possibility of some savings. The Board is, however, opposed to the enactment of the bill for the following reasons: 1. It would destroy the real purpose and usefulness of the social-security minimum and coordination provisions of the Railroad Retirement Act. 2. It would single out for benefit increases cases where the individual is already receiving a more substantial income by means of two benefits from both the railroad retirement and social-security systems. 3. The increases in certain annuities would be accomplished at the expense of many thousands of individuals (mostly survivors) who are receiving only a single benefit under the Railroad Retirement Act and whose benefits the bill would reduce. In view of the foregoing, the Board recommends that no favorable consideration be given to the bill. The Bureau of the Budget has advised that there is no objection to the submission of this report to the committee. Sincerely yours, HOWARD W. HABERMEYER, Chairman. RAILROAD RETIREMENT BOARD, Chicago, Ill., March 8, 1957. Hon. OREN HARRIS, Chairman, Committee on Interstate and Foreign Commerce, DEAR MR. HARRIS: This is a report on the bill H. R. 4194 which was introduced in the House of Representatives by Mr. Davis on January 31, 1957, and which was referred to your committee for consideration. The bill would amend section 2 (e) of the Railroad Retirement Act of 1937, as amended, to eliminate the present restriction requiring the reduction of the spouse's annuity by the amount of any other annuity under the Railroad Retirement Act, or the monthly benefit under the Social Security Act (other than a wife's or husband's benefit), to which the spouse is entitled. The bill also would delete the whole of subsection (g) of section 5. This would remove the present restriction against payment of survivor benefits under both the Railroad Retirement Act and the Social Security Act on the basis of earnings of the same employee, and would eliminate the prohibition against payment of more than one survivor annuity to an individual. The bill would, also, strike out section 202 (1) of the Social Security Act which in effect contains the same provision as the last sentence of section 5 (g) (1) of the Railroad Retirement Act. The bill retains the present provisions of both the Railroad Retirement and the Social Security Acts by virtue of which survivor benefits are computed on the basis of the deceased employee's railroad and social-security earnings combined. There is, however, the anomaly that railroad compensation would be |