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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—712 percent on workers and 1112 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—614 percent on workers and :944 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,

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 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 application 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 712 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 712 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 614 to 712 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 1212 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.

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, 1937, 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 442 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 com. pensation 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 pensioner: “ he rolls on July 1, 1957, would receive 10 percent increases, bringing their average benefit to about $92, compared with the average of $81 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 snread over a 3-year period, the effect of the proposed legislation on railroad retirement taxes in fiscal year 1957–58 would be as follows:

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$5.2
650

1. Taxable payroll (billions)....
2. Taxes at 12.5 percent (millions)..
3. Taxes at 15 percent (millions)-----
4. Total additional taxes under dual proposal (millions)

(a) Due solely to higher tax base (millions)----
(6) Due to higher tax rate on new base (millions).

$5.7
712
855
205

62 143

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

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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 195758, and average benefits

under present law and under H. R. 4353 and H. R. 1354 by type of benefit

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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

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