credited under the Social Security Act only when the survivors are not eligible for benefits under the Railroad Retirement Act, whereas social-security wages would be credited under the Railroad Retirement Act even though survivor benefits based on the same wages would also be available under the Social Security Act. It is difficult to see why social-security wages should be credited twice in cases where survivor benefits would be payable under both acts. Under present law, survivor benefits are paid by either the Railroad Retirement Board or the Social Security Administration but not by both at the same time. However, regardless of which agency pays the survivor benefits, the credits earned under both systems are combined. The Board is opposed to the enactment of the bill also for the following reasons: 1. The bill, if enacted, would increase the cost of the railroad retirement system by about 0.65 percent of payroll, or $34 million a year. 2. The bill makes no provision for financing the additional cost which its 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 bill would be to increase the deficiency to 3.85 percent of payroll or $204 million a year. The Board, accordingly, recommends that no favorable consideration be given to this 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, House Office Building, Washington, D. C. DEAR MR. HARRIS: This is a report on the bill H. R. 4195 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 (a) 4 of the Railroad Retirement Act to permit payment of an annuity as early as age 50, instead of age 60, to a railroad employee who has a current connection with the railroad industry and who becomes permanently disabled for work in his regular occupation. The present provision for such an annuity at any age to such an employee with 20 years of creditable service would not be affected. The Railroad Retirement Board is opposed to the enactment of the bill for the following reasons: 1. The bill, if enacted, would increase the cost of the railroad retirement system by about 0.11 percent of payroll, or $6 million a year. 2. The bill makes no provision for financing the additional cost which its 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 bill would be to increase the deficiency to 3.31 percent of payroll or $176 million a year. The Board, accordingly, 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. Hon. ORIN HARRIS, EXECUTIVE OFFICE OF THE PRESIDENT, BUREAU OF THE BUDGET, Washington, D. C., March 16, 1957. Chairman, Committee on Interstate and Foreign Commerce, House of MY DEAR MR. CHAIRMAN: This is in reply to your requests for the views of the Bureau of the Budget with respect to H. R. 4353, H. R. 4354, H. R. 4530, and H. R. 4620, identical bills amending the Railroad Retirement Act, the Railroad Retirement Tax Act, and the Railroad Unemployment Insurance Act. These bills liberalize and increase the retirement, survivor, and unemployment and sickness benefits; provide for extended unemployment benefits; increase the compensation base for benefit and tax purposes from $350 to $400 a month; increase the combined rate of retirement taxes from 122 percent to 15 percent and ultimately to 18 percent; and increase the employer contribution to the railroad unemployment insurance account up to a maximum rate of 4 percent. The railroad retirement system is at present confronted with an actuarial deficiency of 3.20 percent of payroll. As was recognized by your committee and by the administration last year, this serious deficiency must be remedied at an early date if the system is to be maintained on a sound reserve basis. Under these bills the additional revenues which would be provided for the railroad retirement system through increases in the tax rate and a higher wage base would reduce the actuarial deficit to 0.37 percent of payroll, according to actuaries of the Railroad Retirement Board. On the basis of their estimates, this would meet the financing problem and would make the railroad retirement system almost completely self-financed. The estimated reduction in the actuarial deficiency from 3.20 percent to 0.37 percent, however, is based upon many assumptions, including several which could turn out to be too optimistic. First, the Board's actuaries estimate that as a result of the financial interchange with the OASI trust fund the railroad system costs will be reduced by 1.18 percent of payroll. The actuaries of the Social Security Administration believe that this is on the high side and that no net reduction will accrue to the railroad system. In that event the actuarial deficiency of 0.37 percent would be correspondingly greater. Second, the estimates assume a level annual taxable wage base of $5.75 billion. Whether this will be realized will, of course, depend upon developments in the industry, although as you know there has been evidence of a long-term downward trend in railroad employment. We believe that these are points on which the committee might want to develop further information. In addition, the financial improvement of the railroad retirement system under these bills would depend substantially (1.95 percent of payroll) on future tax increases. These tax increases are needed to prevent the railroad net portion of the taxes from declining as increased OASI contribution rates, now scheduled by law, go into effect. Accordingly, to provide the tax rate needed for railroad benefits which are supplemental to OASI benefits, the bills require additional tax increases contingent upon increases in the OASI contributions. The combined tax rate would rise from 15 percent to 17 percent in 1970 and then 18 percent in 1975 when the OASI rate rises to 7.5 percent and then to 8.5 percent. We believe that it is a sound principle to gear further increases in railroad retirement rates to increases in the OASI rates because of the existing financial interchange between the two systems. We note, however, that this principle is not carried out with respect to the OASI contribution increases scheduled for 1965. We suggest therefore increases in railroad rates in 1965 (to 16 percent) when the OASI rate rises to 6.5 percent. These bills would increase benefits substantially both under the Railroad Retirement Act and under the Railroad Unemployment Insurance Act. Under the Railroad Retirement Act, benefit rates would be raised by 10 percent and other substantial liberalizations would be made at a total level premium cost of 2.81 percent of payroll, according to the Board's estimates. Under the Railroad Unemployment Insurance Act, the cost of unemployment benefits compared to the 1955-56 benefit year would be increased by 50 percent and the cost of sickness benefits by 26 percent. The percentage increase in future years would be even higher, according to the Railroad Retirement Board. Among the proposed provisions to liberalize the Railroad Retirement Act meriting particular notice are the following: 90453-57-4 1. Under the existing law an individual cannot receive disability benefits for any month in which he is paid more than $100 in earnings. Under these bills this would be modified so that the disability benefit would be denied for any month in which earnings exceed $100 only if his annual earnings exceed $1,250. This proposed annual earnings criterion would seriously weaken the existing test for determining whether disability continues to exist. Under the proposed bill an individual could earn $300 a month for 4 months (which raises a serious question as to his continued disability) and still draw his monthly disability benefits for the entire year. Under the existing law his benefits would be withheld for these 4 months. While this annual criterion is found in the OASI program, it is not applicable to the disability benefits' part of that program. Moreover, since the railroad program provides benefits under considerably less stringent conditions in occupational disability cases, it would appear most undesirable to weaken the disability test by liberalizing the earnings provisions. 2. The insurance lump-sum payment would be extended so that it would be payable even though there were survivors eligible for immediate monthly benefits. While this proposal is similar to that contained in the Social Security Act, it should be noted that the proposed limit ($750) is three times higher than that provided under OASI. Furthermore the railroad system also provides residual lump-sum payments which are not provided under OASI. The risk protected by this insurance payment is significantly less important than monthly annuity or survivor benefit payments and it is not clear that additional costs should be incurred to increase these benefits. 3. Under the existing law annuities are based upon either the railroad formula or the OASI formula-whichever yields the higher amount. This particularly affects survivor cases, two-thirds of which now draw benefits under the OASI formula. These bills would provide a 10-percent increase in annuities determined under the OASI formula, as well as a 10-percent increase in annuities determined under the railroad formula. As the use of the OASI formula is designed to assure that railroad benefits will not be lower than social-security benefits, it is questionable that the benefit resulting from the OASI formula should be increased when applied to railroad cases. Similarly, proposed amendments to the Railroad Unemployment Insurance Act raise important questions: 4. The duration of unemployment benefits would be extended from the present effective duration of 26 weeks to from 12 to 41⁄2 years for employees having 5 or more years of railroad service. Benefits for such a protracted period are inconsistent with the basic purpose of unemployment compensation and would impair incentives to move into other lines of work. In our present period of high employment it is particularly important to avoid provision of benefits which may encourage workers not to seek productive employment. 5. Provisions of the bills would virtually eliminate any waiting period for unemployment benefits. An individual would be entitled to benefits even though he was out of work for only 1 day. Experience has shown that there are significant reasons for a waiting period. It is not necessary to compensate every small case of wage loss which is often attendant upon normal and smooth adjustments between labor demand and supply. Few eligible unemployed workers lack sufficient funds to tide them over a few days of unemployment. In addition, the waiting period minimizes administrative costs involved in processing and paying very small claims, and serves to conserve the fund so that it can be used for benefit payments for more significant unemployment risks. 6. The present maximum limit on unemployment benefits which range up to 60 percent of gross pay would be raised to nearly 70 percent of gross pay, with corresponding increases in maximum daily benefits from $8.50 to $10.20. Inasmuch as these percentages would be substantially higher if unemployment benefits were related to take-home pay, there is need for serious consideration of the question whether the proposed levels of benefits may be so high as to appreciably reduce incentive for workers actively to seek employment. These provisions with respect to the Railroad Unemployment Insurance Act are estimated by the Railroad Retirement Board to account for a significant part of the increased costs and the required increased employer contribution rate. As has been noted in the Board's report, it appears likely that the maximum tax rate of 4 percent specified in the bill will fall short of covering the cost of these benefits. The above provisions, in our opinion, should receive the most careful scrutiny because they involve serious questions of social policy and possible precedents for other programs. The additional costs of these benefits should also be considered in relation to the pressing problem of assuring a sound financial base for existing benefits as increased last August. Altogether the proposed benefit liberalization, when added to the needed steps which these bills take toward eliminating the present serious financial deficiency in the railroad retirement system, would entail a substantial increase in railroad retirement and railroad unemployment taxes. The immediate effect of these bills would be to raise the railroad retirement rate to 15 percent and the unemployment rate to about 4 percent, or a combined total of 19 percent of covered payroll-71⁄2 percent on workers and 112 percent on the carriers. In 1975 the railroad retirement tax rate could be further increased to 18 percent, thus leading to a combined total of 22 percent of covered payroll-9 percent on employees and 13 percent on the employers. These rates would compare with the present railroad retirement rate of 12.5 percent and unemployment rate of nearly 3 percent, a combined total of approximately 15.5 percent-64 percent on workers and 94 percent on the carriers. The desirability and the feasibility of the proposed substantial liberalizations in benefits for workers in this industry at these payroll tax rates must, of course, be judged in terms of the industry's long-term prospects and its competitive position with other forms of transportation. The addition of several hundred million dollars to the operating expenses of railroads must also be appraised from the standpoint of possible effects on traffic rates and ultimately on our ability to achieve stabilization of general price levels. Your committee may desire to obtain information from qualified sources on these aspects of the bills. Finally, the increase in the employee contribution rate required to finance the existing program, as well as the increase required by the benefit increases in the proposed bills, have led to proposals to offset the contribution by exempting it from existing withholding and income tax provisions. Three bills now before your committee on which the Bureau of the Budget reported on March 7, 1957, (H. R. 583, 850, and 2164) include such an exemption, as does H. R. 3665 now pending before the House Committee on Ways and Means. Tax exemption on payroll contributions of railroad employees would mean that the rest of the community would be subsidizing one particular industry group. Furthermore, the exemption would serve as a precedent for similar proposals affecting other social insurance (or even private pension) programs which, if enacted, would have serious adverse effect on the Government's revenues. Such (exemption provisions would not be in accord with the program of the President. In view of the bills to amend the Railroad Retirement Tax Act now pending before the House Committee on Ways and Means, a copy of this report is being sent to the chairman of that committee. 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 the report of the Railroad Retirement Board on the identical bills H. R. 4353 and H. R. 4354, and any other bill identical thereto, which were referred to your committee for consideration. The bills would amend the Railroad Retirement Act, the Railroad Retirement Tax Act, and the Ralroad Unemployment Isurance Act in the following respects: RAILROAD RETIREMENT ACT 1. Annuities, pensions, and lump sums (other than the residual lump sum) would be increased generally by 10 percent. The increase would be slightly more than that for most employee retirement annuities and survivor annuities computed under the regular railroad retirement formulas (as much as 1.4 percent more for some survivor benefits) because the increased percentages proposed by the bills in these formulas reflect rounding out the result after applica tion of an exact 10 percent increase in the computation factors. 2. No change is proposed to be made by these bills with respect to that provision of the minimum-annuity formula which, in certain cases, now fixes the minimum annuity payable to a retired annuitant at the amount of the individual's monthly compensation; therefore, no increase or an increase of less than 10 percent would result in annuities computed under this provision. The spouse of an annuitant whose annuity would not, for this reason, be increased 10 percent, would also receive no increase or an increase of less than 10 percent in the spouse's annuity, since spouses' annuities are computed at one-half of the employee's annuity. 3. The maximum amount of compensation creditable under the Railroad Retirement Act for a month would be increased from $350 to $400 effective with respect to service rendered after June 30, 1957. 4. The privilege now available to any employee with 30 years of service of electing to receive a reduced annuity to begin after age 60 and before age 65 would be available to women employees with 10 years of service at age 62, and, at the same age, to wives of annuitants. The reduction would be by one one-hundred-eightieth for each calendar month the beneficiary is under age 65. 5. The earnings test now applicable to disability annuitants, under which any disability annuitant under age 65 does not receive an annuity for any month in which he is paid more than $100 in earnings, would be modified by the addition of a provision that if the annuitant's earnings in any calendar year do not exceed $1,200, the annuity otherwise not payable because of his earnings in any month in that year would become payable. Earnings from employment with an "employer" under the act or for the annuitant's "last employer" before he retired, would not count toward this $1,200 maximum. (No annuities are payable for months of such earnings by virtue of another provision of section 2 (d) of the Railroad Retirement Act.) Even if the annuitant's earnings exceed $1,200 in. any year, loss of annuity would not exceed 1 month's annuity for each $100 or less (if more than $50) that the annuitant earned in excess of $1,200. 6. The "insurance" lump sum now payable on the death of an employee only if no annuity is payable on application to a survivor, would be payable irrespective of this circumstance, but would be subject to a maximum of $750. 7. The formula for computing the "residual" lump sum would be amended in conformity with amendments proposed to the Railroad Retirement Tax Act (increasing the tax rate on employees to 71⁄2 percent and the maximum amount of compensation subject to the tax after June 30, 1957, to $400) by increasing the percentage factor applicable to compensation after 1956 to 71⁄2 percent and to 8 percent after 1957, and increasing the maximum amount of compensation for any month to which such factors are applicable from $350 to $400 for any month after June 30, 1957. 8. The changes made by the bills would be effective with respect to all annuities payable for months after June 1957, to pensions due in calendar months after July 1957, and to lump sums payable with respect to deaths occurring after June 1957. RAILROAD RETIREMENT TAX ACT The bills would increase the tax rate on employees and employers from 64 to 72 percent and make the tax applicable to $400 instead of $350 of the employee's compensation earned in any month after June 1957. The tax rate would be increased with respect to compensation paid after 1969 by the same number of percentage points (or fractions of percentage points) by which the then current social security tax rate exceeds 234 percent, the rate scheduled to be increased in 1965. The tax rate on employee representatives would be increased from 121⁄2 to 15 percent and the tax base also raised to $400. This tax rate would also be increased with respect to compensation paid after 1969, just as in the case of the employer and employee, but this increase would be by twice the number of percentage points (or fractions of points) that the then current social security tax rate exceeds 234 percent. RAILROAD UNEMPLOYMENT INSURANCE ACT 1. A new schedule of daily benefit rates ranging from $0.50 to $1.70 higher than present rates would be provided. The alternative rate, which is now 50 percent of the employee's daily rate of pay in his last employment with an employer in the "base" year, would be increased to 60 percent, of such daily rate. |