of pay. The maximum daily benefit rate would be increased from $8.50 to $10.20. These increases would be effective with respect to benefits payable in general benefit years after the benefit year ending on June 30, 1957, and in extended benefit periods, described below, as early as January 1, 1957. 2. The maximum amount of compensation for a month, for which credit would be given and contributions required, would be increased from $350 to $400, effective with respect to compensation paid for service rendered in calendar months after June 1957. 3. The minimum amount of earnings in a "base" year which would qualify an employee for benefits would be increased from $400 to $500, effective with respect to "base" years after 1956. 4. An employee with 5 or more years of railroad service who is out of work through no fault of his own has exhausted current rights to normal unemployment benefits, would receive additional benefits during an extended benefit period. The duration of such extended benefit period would vary in accordance with the length of the employee's previous railroad employment, so that an unemployed man with 20 or more years of service could receive benefits, under special conditions, for as much as 41⁄2 years longer than he might otherwise, An extended benefit period could begin as early as January 1, 1957. 5. The maximum number of days of unemployment in the first registration period in a benefit year for which benefits may be paid would be increased from 7 to 10, the same as it is now with respect to all subsequent registration periods. 6. Sundays and other holidays would be treated the same as other days for unemployment-benefit purposes. 7. To provide funds for the additional benefits that are proposed, the bills, in addition to raising the maximum taxable earnings for a month from $350 to $400 and increasing from $400 to $500 the minimum earnings in a base year which would qualify a worker for benefits in the benefit year, as stated above, would provide for a contribution or tax rate of not less than 2 percent when the money in the railroad unemployment insurance account totals $450 million or more, which rate would be raised, by steps, to 4 percent when the money in the account falls below $300 million. The provision for increase in the contribution rate would be effective upon enactment of the bill and would apply only with respect to compensation paid after December 31, 1957. IMMEDIATE EFFECT OF AMENDMENTS TO THE RAILROAD RETIREMENT ACT AND THE RAILROAD RETIREMENT TAX ACT Employee annuities An estimated 332,000 employee annuities are expected to be in course of payment on July 1, 1957. Of these, about 318,000 would be increased by the full 10 percent, and 4,000 by less than 10 percent, while the remaining 10,000 would be unaffected. Those which would be increased by less than 10 percent are the minimum annuities now equal to $75.90, or to $4.55 multiplied by the years of service, in which a 10-percent increase would raise the annuity to an amount larger than the monthly compensation. For example, an annuitant receiving a minimum annuity of $75.90, based on monthly compensation of $80, would receive an increase of only 5.4 percent, to $80. The 10,000 annuities which would not be increased are already equal to the monthly compensation. The overall increase for the estimated 332,000 annuities in course of payment on July 1, 1957, would be 9.7 percent. For an employee retiring on July 1, 1957, the maximum annuity that could be paid would rise from about $185 to $203. Subsequently, the maximum would rise slowly up to the end of 1966 after the new $400 ceiling on taxable earnings goes into effect. Thereafter, the maximum will rise more rapidly, since more than 30 years of service will become creditable toward annuities. An estimated 39,000 retirement annuity awards, averaging about $135, would be made in fiscal year 1957-58. This includes somewhat less than 1,000 awards to women employees aged 62 to 64 who would elect to accept a reduced annuity. Spouse annuities Of the estimated 120,000 spouses on the rolls on July 1, 1957, 116,000 would have their annuities increased by 10 percent. The remaining 4,000 include 1,000 who would receive increases of less than 10 percent and 3,000 who would receive no increase because the employee annuities on which they are based are limited to the amount of monthly compensation. The average spouse annuity in current payment status on July 1, 1957, would be increased to about $53. The estimated 15,000 unreduced spouse annuities to be awarded in fiscal year 1957-58 would also average $53. The new maximum spouse annuity of $59.80, coupled with the maximum retirement annuity available on July 1, 1957, will make possible a combined maximum benefit of $263 to a retired employee and his eligible wife. There are an estimated 36,000 spouses aged 62 to 64 who could avail themselves of the opportunity of receiving reduced spouse annuities. In the absence of specific experience, and for the purposes of this report, it has arbitrarily been assumed that about three-fourths of them, or 27,000, would choose to accept such reduced benefits. The reduced benefits would average about $48. Pensions The estimated 2,000 pensioners on the rolls on July 1, 1957, would receive 10percent increases, bringing their average benefit to about $92, compared with the average of $84 under the present law. Survivor annuities Of the estimated 224,000 beneficiaries on the rolls July 1, 1957, all will receive an increase of at least 10 percent with the possible exception of some 2,000 widows now receiving the "spouse minimum." These 2,000 widows may receive either no increase or an increase of less than 10 percent. The maximum basic amount possible on July 1, 1957, under the new formula would be $78, while the maximum family benefits would be $193.60 and $220, under the railroad and social-security guaranty formulas, respectively. An estimated 31,000 insurance lump-sum benefits would be paid in the fiscal year 1957–58, slightly more than twice as many as would be expected under the present law. The average lump sum would be $580. The maximum of $750 under the proposal would have a negligible effect at the present time. Disability work clause The immediate effect of the change in the disability work clause is comparatively small. About 1,300 annuities are withheld each month under the present provision. The effect of this change would be to reduce this average by less than 100. Total benefit payments Total benefit payments under the provisions of the bills in fiscal year 1957–58 are estimated at about $806 million, or $93 million more than would otherwise be payable under the present law. Of the additional $93 million, $70 million is attributable to the 10-percent increase in monthly benefits and the remaining $23 million to the new benefits for women employees and spouses aged 62 to 64 and to the increase in insurance lump-sum payments. Tabular summary The two attached tables illustrate the effect of the proposed amendments. Table 1 shows the effect on benefits in course of payment on July 1, 1957, and table 2 covers benefit awards in fiscal year 1957-58. AMENDMENTS TO THE RAILROAD RETIREMENT TAX ACT The bill proposes to amend the Railroad Retirement Tax Act, effective July 1, 1957, by raising the monthly limit on taxable earnings from $350 to $400 and increasing the combined employee-employer tax rate from 12.5 to 15 percent. Assuming no substantial changes in the railroad employment picture, but taking into account the 1956 pay increases granted railroad employees which are to be spread over a 3-year period, the effect of the proposed legislation on railroad retirement taxes in fiscal year 1957-58 would be as follows: TABLE 1.-Estimated number of monthly benefits in current-payment status on July 1, 1957, and estimated average monthly amount before and after increases under H. R. 4353 and H. R. 4354, by type of benefit 1 Includes an estimated 10,000 minimum annuities not increased and 4,000 increased by less than 10 percent because of the provision limiting minimum annuities to the amount of monthly compensation. 2 Includes 3,000 spouse annuities not increased and 1,000 increased by less than 10 percent because the employee annuities on which they were based were affected by the minimum annuity provision limiting them to the amount of monthly compensation. TABLE 2.-Estimated number of awards in fiscal year 1957-58, and average benefits under present law and under H. R. 4353 and H. R. 4354 by type of benefit 1 There will be an estimated 36,000 spouses of retired employees, and 1,000 women employees with less than 30 years of service, aged 62-64, eligible to elect reduced annuities. In the absence of available data, it is assumed that 34 of them would make such elections. ACTUARIAL EFFECTS OF PROPOSED AMENDMENTS TO THE RAILROAD RETIREMENT AND RAILROAD RETIREMENT TAX ACTS It is estimated that the proposed amendments pertaining to the retirement and survivor programs would increase the cost of benefits by about $162 million a year on a level basis. It is further estimated that the additional immediate and deferred taxes would bring in an extra $312 million a year. Of this amount, $56 million a year would be due to taxing compensation between $350 and $400 a month at the rate of 12 percent; $144 million a year would be due to the additional 2.5 percentage points of tax on the total estimated payroll of $5.75 billion a year; and the remaining $112 million a year would be the equivalent of the deferred additional tax after 1969 contingent upon the then existing socialsecurity tax rates. Considering both additional outgo and additional income, the estimates indicate that the added revenues would exceed the added disbursements by about $150 million a year which is equivalent to 2.61 percent of a $5.75 billion payroll. Since the actuarial deficiency for the present law, calculated as of December 31, 1956, is estimated at 2.98 percent of that payroll, the enactment of the amendments would leave the railroad retirement system with an actuarial deficiency of 0.37 percent of payroll (2.98 minus 2.61) or $21 million a year. The derivation of the above actuarial deficiency figure is shown in attached table A-1 together with a breakdown of the major cost figures for the proposed program by source of cost or savings as the case may be. An analysis of the cost effects of the proposed amendments considered by themselves is presented in attached table A-2. As previously indicated, the total level additional disbursements are estimated at $162 million a year, or 2.81 percent of payroll. The distribution of the added costs over the years would depend upon the nature of the amendment. Thus, the disbursements due to increase in the limit on creditable compensation ($52 million a year after considering the proposed 10-percent increase in benefits) would be felt to only a very minor extent during the first several years following enactment of this provision. However, the additional income on the extra creditable compensation would begin to accrue in full almost immediately. On the other hand, the lowering of the retirement age for women on an elective basis would result in considerable additional disbursements in the immediate future, but these would later be largely offset by reductions in benefits payable after age 65. From an actuarial point of view, only the additional net costs of the change in the retirement age for women had to be considered. It is estimated that the net additional cost would come to some 0.025 percent of payroll or, in round figures, $1.5 million a year. This figure is but a small fraction of the possible additional disbursements in the first year due to this amendment. For the proposed liberalization in the work clause for disability annuities, this estimate allows an additional cost of 0.025 percent of payroll, or about $1.5 million a year. The smallness of the allowance is in conformity with the total work clause savings which was in the sixth valuation estimated at about 0.05 percent of payroll. The present estimate assumes that the liberalization in the disability work clause would take up about one-half of the savings which would exist under the provisions of the present law. It should perhaps also be stated that the cost figures here discussed are based on the sixth actuarial valuation as adjusted for the effect of the 1956 amendments to both the Railroad Retirement and Social Security Acts and subsequently revised to produce costs as of December 31, 1956. As indicated in table A-1, the gross costs of the amended benefit program including administrative expenses would come to 20.38 percent of payroll, and the reductions on account of funds on hand and the financial interchange with social security would come to 3.06 percent, thus leaving a net cost of 17.32 percent. The future tax income is estimated to be equivalent to a level rate of 16.95 percent, thus leaving an actuarial deficiency of 0.37 percent of payroll, or about $21 million a year. Should the proposed amendments become law, all the above cost figures will be reexamined in the course of the seventh actuarial valuation, the results of which should be available some time in 1958. (There is another bill, H. R. 3665, which would amend the Railroad Retirement Tax Act by exempting employee contributions to the railroad retirement system from Federal income tax. This amendment would not affect the financial condition of the system in any way whatsoever, and because of that, this bill has not been considered in the actuarial cost estimates.) TABLE A-1.-Actuarial cost estimate of the railroad retirement system if amended as proposed in H. R. 4353 and H. R. 4354 as of Dec. 31, 1956 (Level annual payroll assumed at $5.75 billion. Limit on creditable and taxable compensation $400 a month per individual) Cost item A. Gross costs--. Percent of payroll 1 20. 381 1 Includes an allowance of 0.05 for the change in the disability work clause (0.025) and for elective benefits to women employees and spouses at age 62 (0.025). TABLE A-2.—Analysis of level cost figures for H. R. 4353 and H. R. 4354 (Figures are based on revised estimates for the present acts as of Dec. 31, 1956, and relate to an assumed taxable payroll of $5.75 billion) Liberalization of disability work clause--. Allowing lump sums in cases where there are survivors eligible for .15 02 Earlier elective benefits to women with reduction_. 1.03 Change in residual payment formula adjusted for savings because of .04 Additional revenues:-- 5. 42 Increasing tax rate from 12.5 to 15.0 percent-- Taxes on compensation between $350 and $400 a month at the rate .97 Deferred additional tax contingent upon OASI rates__ 2.50 1.95 Effect of amendments on actuarial status: Actuarial deficiency for present act__. Excess of additional revenues over additional costs due to pro- 2.98 Remaining actuarial deficiency (2.98 minus 2.61)_. 2. 61 .37 1 Actually, 0.025 percent of payroll was allowed for each of these items. |