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AMENDING THE RAILROAD RETIREMENT ACT OF 1937

STATEMENT OF HOWARD W. HABERMEYER, CHAIRMAN, UNITED

STATES OF AMERICA RAILROAD RETIREMENT BOARD, CHICAGO, ILL.

Mr. HABERMEYER. Mr. Chairman, members of the subcommittee, I have a statement here that directs testimony entirely to the bill and then I will speak a bit on the amendment that you have offered, Mr. Chairman.

My name is Howard W. Habermeyer and I am chairman of the Railroad Retirement Board. I have been associated with the board since 1936, and I have been chairman of the board since November 1956. I appear here on behalf of the board in opposition to the bill H.R. 3157. During hearings on the bill in the House I testified to the same effect.

Section 2(e) of the Railroad Retirement Act would be changed by H.R. 3157 to remove from that subsection the provisions which require that the annuity of a spouse be reduced by the amount of monthly benefits for which she is eligible from her own employment credits under the Social Security Act and the Railroad Retirement Act.

The board is opposed to the bill for the following reasons:

(1) The railroad retirement system is, of course, financed basically by payroll taxes on railroad employers and employees. At the present time the tax rate on each is 8 percent, applicable to compensation up to $450 a month. The railroad retirement account now has an actuarial deficit of approximately $19.5 million a year, or .44 percent of taxable payroll.

The loss to the railroad retirement system from the enactment of H.R. 3157 by itself would be approximately $14 million a year, or 0.32 percent of taxable payroll; when considered in conjunction with H.R. 6675, the extra net costs would be even somewhat greater.

The enactment of both H.R. 3157 and H.R. 6675 would bring about a deficiency of almost $58 million a year, or roughly 195 percent of taxable payroll. Further, if the social security wage base is increased to $6,600 a year effective as of the beginning of 1966, in accordance with the Senate Finance Committee's amendment to H.R. 6675, the deficiency would be almost $61 million a year or 1.42 percent of taxable payroll

. Even if H.R. 6675 is not taken into account, although as a practical matter it must be, the enactment of H.R. 3157 would increase the deficit to about $33 million a year, or to three-fourths of 1 percent of taxable payroll. The bill would so increase the deficit because there is no provision for new income to cover the costs that it would entail.

Even if the bill did provide for financing, the board would still oppose it because of the belief that any spendable additional income could better be used to give some benefit increase in areas where the need is greater than in the cases of spouses for whose benefit the bill is intended.

There is cause for grave concern because the figures which I have just cited disclose a very serious situation. I am sure we are all in agreement that it is of the utmost importance for the railroad retirement system to be in a sound financial condition. The consequence of a substantial deficiency in financing would be that, at some point

worse.

in the future, sufficient funds would not be available for benefit payments.

The projected deficit for the combination of H.R. 6675 and H.R. 3157 would come close to the deficit which existed when President Kennedy asked for the development of a program to restore our system to a sound financial condition.

Such a program was, as you know, put into effect by legislation enacted in 1963. It is, in my opinion, the obligation of all parties concerned with the financial well-being of the railroad retirement system to guard against a recurrence of the unfavorable situation that existed before the 1963 amendments.

The figures I have mentioned disclose an actuarial condition that is already rather unsatisfactory but the actual situation may even be

This is because all our present cost figures are based on the last actuarial valuation which used a payroll assumption associated with a future railroad labor force of 800,000.

As of the early part of this year, employment was down to 741,000. Actually, an assumption of a future employment level of only 700,000 would seem to be justified. Under such an assumption, the actuarial deficiency would obviously be considerably larger, and this is a strong possibility which we must not overlook.

(2) The provision for a spouse's annuity was enacted for the first time as a part of the 1951 amendments to the Railroad Retirement Act. The reason for providing such an annuity was that it was obviously impossible to provide sufficient benefit increases across the board. It was thought that the spouse's annuity is a proper substitute for a large general increase because it would take care of the cases of greatest need, that is, where two aged people rather than one must live on the retirment income.

Following the general premise to its logical conclusion, the 1951 amendments provided that where a spouse has an additional income from a railroad retirement annuity or a social security benefit, it would be justifiable to reduce her railroad retirement spouse's annuity to an amount which is in excess of her other benefit.

We believe that this premise is as valid today as it was in 1951. The provision for reducing a spouse's annuity by the amount of her own retirement benefit is similar, in principle, to the provision in the Social Security Act for reducing a wife's benefit by the amount of her own old-age benefit.

(3) Many railroad employees, no doubt, base their objection to the reduction of the spouse's annuity by the amount of certain other benefits on a mistaken belief that they have purchased a full spouse's annuity through their railroad retirement taxes. This is actually not the case because all railroad employees pay taxes at the same rates regardless of whether or not they have a wife who will become entitled to a spouse's annuity.

From the point of view of equity, the increase in the cost of spouses' annuities due to the enactment of H.R. 3157 would have the undesirable effect of increasing the tax burden of the majority of employees who do not stand to benefit from the changes made by the bill.

(4) Our spouse population on the rolls is now about 175,000. The elimination of the dual benefit reduction from our act would affect as many as 40,000 women, the vast majority of whom are receiving retirement benefits in their own right from social security.

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AMENDING THE RAILROAD RETIREMENT ACT OF 1937

As I have indicated previously, the cost consequences of this liberalization would be substantial. I should also like to add that no part of the additional cost would be recouped under the financial interchange with the social security system.

(5) Aside from the specific considerations which I have just discussed, the Railroad Retirement Board has, with few exceptions, always objected to any proposal for liberalization of benefits which did not provide for adequate financing of such liberalization. The bill H.R. 3157 comes within this category of bills since it does not provide for additional revenues to finance the extra costs which it would impose on the system.

Now, Mr. Chairman, I was very much interested in the amendment that you offered this morning. I would say as a practical matter that the wage base for tax purposes should always be at least as high for the railroad retirement system as the wage base for the social security system.

As you know, the two systems are very closely coordinated. We actually have reinsurance by social security. We pay each year to the social security system the taxes that they would have collected had railroad service been employment under the social security system. We in turn collect from the social security system the benefits that they would have had to pay if railroad service was under their system. This is commonly known as the financial interchange provision of the Railroad Retirement Act.

Now, if the tax base under social security is higher than ours, we have to compute and credit to the social security system taxes on compensation which is not taxable by us. If our base is not kept in line, the effect on our system is very drastic and could eventually be disasterous.

Some years ago it was realized that the tax rates had to be coordinated; so today we have a provision where by the social security tax rate, as it goes up, has the effect of increasing our tax rate.

We do not have a similar provision with respect to the tax base and I am very pleased that you propose in your amendment to this bill to coordinate the taxable base.

Even though the Board still does not favor the passage of H.R. 3157, certainly if 3157 passes I hope that it is with your amendment.

Regardless of H.R. 3157, we are going to have to have the amendment soon anyway.

Thank you very much.
Senator PELL. I have one general question and one specific question.

I think the general question is more the one that the record should show: What is the general reason for the whole railroad retirement system? Why would not perhaps the most efficient thing in the end be to amalgamate all railroad workers under social security?

Mr. HABERMEYER. Well, I think there are several things that could be said in that regard.

One, of course, is that Congress over the years has always regarded the railroad industry as separate and apart generally from other industry.

For example, you have the Railway Labor Act.

Senator PELL. Excuse me. I did not mean to go into the history of why we all like our own separate bailiwicks. It is nice for the chairman of this subcommittee and nice for the chairman of the

to pay

Railroad Retirement Board. But I think the record should show why there should be two completely different systems.

Mr. HABERMEYER. I think this goes back-maybe, we ought to go farther back.

The railroad industry was the first to show concern for its employees by establishing two pension programs for them. By the 1920's I think some 83 to 85 percent of railroad employees in the country were covered by a company pension system. As you recall we had the depression in the 1930's, and many of these pensions were financed out of current company earnings. As company earnings disappeared, the pension systems suffered and in some instances had to either reduce benefits or eliminate benefits entirely.

It was at that point that the railroad labor group came to the Congress and said they wanted a system that would provide retirement benefits for the employees in the railroad industry and they would be willing

half the cost. The first Railroad Retirement Act was passed in 1934 before any social security legislation was ever passed in the Congress of the United States.

That piece of legislation was ruled unconstitutional by the Supreme Court. Another bill was passed in 1935, and finally an agreed bill in 1937 established the basic railroad retirement system. A railroad retirement system was first established when there was no social security system.

Senator Pell. But as of 1965, and looking ahead to 1975 and 1985, I do believe the railroad industry will have a resurgence. The question that comes to my mind is: Are not the long term and best interests of the country served by having the whole system under one roof? What is the advantage of the separate systems?

Mr. HABERMEYER. I think you cou d probably argue that both ways.

Senator Pell. I am interested in the argument against this view.

Mr. HABERMEYER. In effect, railroad employees receive benefits in excess of those payable under social security. These excess benefits are in effect, supplemental benefits. Together the railroad system provides much larger benefits than they would get under the social security system.

Senator PELL. What are the supplemental benefits?

Mr. HABERMEYER. At the present time our maximum benefit for retired employees is $216 a month; whereas, under the Social Security Act it is $127. Our maximum will continue to increase substantially after 1966 when we start counting more than 30 years of service; so that in about 1980, our maximum benefit could be as much as $350 a month. Under the Social Security Act, unless it is amended, the maximum will remain $127.

Senator Pell. Now, another question. To bring it into complete actuarial soundness, what would the base have to be raised to? Do you have any figure offhand?

Mr. HABERMEYER. I have not computed that figure.
Senator PELL. Would you be willing to give a rough estimate?

Mr. HABERMEYER. I would say if we took into consideration the passage of H.R. 3157 and H.R. 6675, as well as our present deficit of $19,4 million, and the drop in the employment level to 700,000 from the 800,000 we are using, we would probably have to have a base of

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AMENDING THE RAILROAD RETIREMENT ACT OF 1937

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around $800 a month. On the basis of the employment level used in our current estimates (800,000) a monthly base of $625 would be sufficient.

Senator PELL. If an amendment was ever offered giving that as a base, then you would probably support all these amendments?

Mr. HABERMEYER. Well, you put me in somewhat of a bad position. I do not like to testify against the spouses. But the benefit that is really unduly low as far as we are concerned is that for the aged widow. We have a pie that can only be cut in so many pieces.

If we have an amount to spend, I would rather increase benefits to the aged widow who lives on her one benefit than to increase the benefit the spouse who has a husband also drawing benefits.

Senator PELL. I have no fixed views. I am wondering if the reason for the separate systems is that the employees get more benefits from the railroad retirement system. I wonder if it does not seer that their base would be higher.

Mr. HABERMEYER. I would like to go along with your amendment at the present time and possibly in a few years, if the base has to be higher, I would be for going higher.

Senator PELL. I understand the taxes are higher now under the railroad retirement system.

Mr. HABERMEYER. Substantially.

Senator PELL. That is substantially the reason for the added benefits, the taxes being higher.

Mr. HABERMEYER. That is right.

Senator PELL. I must say personally I am inclined to see the two or an even basis.

Senator Fannin?

Senator FANNIN. Mr. Chairman, there is one matter which has come about that I would like to raise. Of course, I realize the railroads have been a very unique industry, thinking back over the years, and considering the service they have performed and what has taken place. But are they not becoming diverified? Are they not like more of American industries of today? Whereas, they were restricted in the past. Further, I think it is commendable what has been accomplished by the railroads in the development of our Nation.

Today, do you not find that the railroads are becoming more diversified and more like the other industries?

Mr. HABERMEYER. Well, in a certain sense, yes. But I do not believe the Government is removing regulations that have applied to the industry over the years.

Senator FANNIN. Of course, there are regulations being adopted for other industries, too, that perhaps would affect their competitive position with the railroads.

Now, understand I am not arguing one way or another in this regard. I am just talking about what the chairman was discussing as to bringing them all under the same program.

Mr. HABERMEYER. I am somewhat biased. I would like to see the railroads relieved of some of their regulations so that their employment instead of going down would start to increase.

Senator FANNIN. I can agree with you on some of those matters. But I do not think that is exactly what we are discussing. I do feel that as the industry becomes more diversified, as I said before, and is in a position of competing on an equal basis with the other in

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