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. FOLSOM, 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. 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 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 |