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reimbursement which will arise out of the provisions of the bill continuing payment of both Railroad Retirement and Social Security benefits to certain individuals is an additional $412 billion.
A principal factor leading to this $812 billion loss to the Railroad Retirement Account ($4 billion in the past and $412 billion in the future) arises out of the manner in which benefits are computed under the Social Security Act. That Act grants proportionately greater benefits to persons with relatively short periods of covered service and relatively low wages. In computing the amounts to be transferred to the Railroad Retirement System under financial interchange arising out of the service of any individual employee, the amounts to be transferred are computed on the basis of both his railroad employment and his non-railroad employment. When that individual then begins to draw benefits from the Social Security System based upon his nonnailroad employment, the amounts by which the financial interchange reimbursement are reduced are disproportionate to the individual's total employment, railroad and nonrailroad. The following chart will illustrate this situation.
FINANCING DUAL BENEFITS
RAILROAD EMPLOYEE WITH
35 YEARS OF SERVICE NO SOCIAL SECURITY EMPLOYMENT
RAILROAD EMPLOYEE WITH
35 YEARS OF SERVICE
INCOME TO SOCIAL SECURITY
45 years of SS employer foxes
COST OF DUAL BENEFIT TO RAILROAD RETIREMENT FUND ? $200
1 Certain offsets are made against RR retirement benefits where the individual is entitled to Social Security benefits.
* $250 reduction in financial interchange less $50 reduction described in footnote 1.
H.R. 15301 eliminates this situation for the future by providing for the computation of railroad retirement Tier I benefits under the Social Security formula based on both railroad and non-railroad service.
With respect to persons presently on the rolls of both the Railroad Retirement and Social Security systems, and those with vested rights protected under the bill, the cost for the future of continuing these beneficiaries on the rolls at current levels of benefits amounts to 3.64 percent of taxable payroll. The question with which the Committee has wrestled is: Who should pay this 3.64 percent?
The Office of Management and Budget has suggested to the Committee, among other alternatives, that this deficit be met by cutting the benefits of persons presently on the rolls. The Committee has rejected this suggestion.
The Committee feels that it would be unfair to impose additional taxes upon current and future employees of the railroad industry to finance these benefits, on the grounds that since current employees will not (except where vested rights are involved) be permitted to receive dual benefits, it would be unfair to require that they pay the costs of other people's benefits.
The railroads had no part in the creation of the current situation. The lost reimbursement to the Railroad Retirement System arising out of individuals becoming entitled to Social Security benefits arises out of non-railroad employment performed by these individuals employment which has not benefitted the railroad industry in any fashion. A further factor leading to lost reimbursement arises in part out of provisions contained in the Social Security Act, and the formula for the computation of benefits thereunder-again matters over which the railroad industry has no control. With respect to legislation enacted repealing restrictions on dual benefits (discussed hereafter), the railroads have consistently opposed such legislation.
The Committee feels that it would therefore be unfair to the railroad industry to saddle the carriers with the costs of phasing out dual benefits.
But these costs must be met-by someone. The Committee has therefore authorized appropriations to meet the costs for the future of phasing out dual benefits. A precedent exists for this approach. Congress provided in 1940 that military service would be creditable under the Social Security Act, without any contributions being made by the serviceman. A similar provision was made for the Railroad Retirement Act. Appropriations were authorized to meet the costs of these wage credits, provided by Congressional action, and each year since 1956, appropriations have been made for that purpose, and such appropriations continue to be made. $21,645,000 was appropriated for this purpose for fiscal 1973, $22.478,000 was appropriated for fiscal 1974, and the current budget contains an item of $3,516,000 for this purpose.
The deficit in the Railroad Retirement system has occurred because of Congressional action (1) liberalizing benefit eligibility under the Social Security system and (2) repealing restrictions upon dual benefits contained in the Railroad' Retirement Act. Following the precedent set with respect to military service free wage credits, the commit
tee proposes that appropriations be made to cover the costs of phasing out dual benefits which have been provided by Congressional action.
('urrent estimates are that appropriations at the level of $285 million a year through the year 2000 will be sufficient to meet these costs.
The Committee realizes that this method of financing the costs of phasing out dual benefits will not be a popular one; however, the Committee feels that those who may choose to oppose this method of financing these costs should supply an alternative method which will be fairer than the method selected by the committee.
THE LONG-RANGE EFFECT OF THE BILL WILL BE DEFLATIONARY Whether changes in a program like the Railroad Retirement system can be expected to have an inflationary effect in any period depends on an evaluation of a rather sophisticated economic analysis. In the end the changes will be considered inflationary if they contribute to a situation which favors generally rising prices. It is the committee's opinion, given the present situation and the alternatives available, that the reported bill should have no inflationary effect. Over the longrange future expenditures under the bill will be less than under present law. In contrast to present law, it should have a tendency to hold down price increases which would otherwise occur, and in contrast to the alternatives suggested of raising additional revenues from the railway community, it does not create a situation which would favor generally increased prices. In this connection, the committee would point out that increases in cost to railway employers require increases in railway shipping charges which are passed along at nearly all stages of production with a compounding effect on prices which may be many times the rate of increase in railway shipping costs.
The Railroad Retirement system is today operating at an overall deficit of 9.05 percent of taxable payroll on a level basis. Through restructuring of benefits, and phasing out dual benefits, the bill will save 7.51 percent of taxable payroll on a level basis (4.08 percent from restrictions on dual benefits, and 3.43 percent from the restructuring of the benefit formula). This is equal to $439 million per year on a level basis, savings under the bill below the amounts which would be paid out if existing law remained unchanged.
Initially, the amounts paid out under the bill will be slightly higher than is the case under existing law, through the benefit eligibility liberalizations, through the increases in benefits based on pre-1975 service provided employees retiring after December 31, 1974, and through the guaranty contained in section 3(f) (2) of the bill preserving the existing system of computing benefits where to the retiree's advantage) for retirements prior to 1983.
If present law were to be continued, railroad taxes would need to be increased (with consequent increases in costs to users of rail services) to meet the costs of the program. The committee bill, on the otherhand, is financed without increasing railroad taxes and in the long run total payments from the Railroad Retirement Account are decreased. The long-range effect of the bill, as compared with present law and the alternatives presented to the committee, is therefore deflationary.
The bill provides for appropriations through the year 2000 to meet the cost of phasing out dual benefits. Current estimates are that $285 million a year on a level basis will accomplish this purpose. These appropriations do not increase expenditures in any way. Moreover, they will have no inflationary effect for at least ten years, since they will be retained in the Railroad Retirement Account, and will not need to be used until that time for payment of benefits, assuming financial interchange (discussed hereafter) is put on a current basis.
Current estimates are that the total of benefits payable under the bill in the future under both the Railroad Retirement and Social Security Acts to Railroad Retirement beneficiaries will rise to a maximum of $3,850,000,000 by 1980 (the current level is $3,800,000,000), decreasing gradually thereafter as beneficiaries leave the rolls to $3,420,000,000 by 1990, and to $2,470,000,000 by the year 2000.
The committee realizes that the bill would be even more deflationary in its effect if the cost of phasing out dual benefits were financed through reducing benefits under the bill, but the Committee is unwilling to make such a recommendation to the House, in view of the extent to which reductions in benefits under existing law are presently contained in the bill.
Imposition of additional taxes upon the carriers to finance the cost of phasing out dual benefits would add to the costs of the railroads, leading to justifiable applications for freight rate increases to cover these costs. In the committee's view, such a course of action, though recommended by the Office of Management and Budget as an alternative method of financing these costs, would prove more inflationary in its effect than the provisions of the bill as reported.
DUAL BENEFITS UNDER OTHER ACTS OF CONGRESS It must be recognized that the bill actually takes benefits away from certain railroad employees—those who have not already qualified for Social Security benefits. Under existing law, these individuals can qualify for railroad retirement benefits and for social security benefits, and receive the full amount of both. This will hereafter be prohibited under the bill.
It can be argued that this is unfair to railroad employees. There is no restriction upon an individual qualifying for Civil Service retirement benefits and full Social Security benefits. The same is true of military retirement (except for certain offsets established under Public Law 92-425 in the case of survivor benefit elections), as well as retirement from the Foreign Service and other Federal plans.
The answer to the above arguments is that none of the other plans are re-insured with the Social Security system. The program of financial interchange has led to a net transfer from the Social Security system to the Railroad Retirement system of over $8.2 billion, and current transfers are running in excess of $900,000,000 annually. If it were not for the financial interchange program, railroad retirement benefits would have had to have been set at a much lower level than they presently are. The railroad employees are therefore already benefitting under the Social Security Act, and to permit future accruals of social security benefits in addition to railroad retirement
benefits computed under existing law would permit these employees to receive, in effect, a "double dip” out of the railroad retirement fund and the social security fund.
It is true that individuals already on the rolls under both systems may continue to receive both benefits, and some individuals with rested rights will be permitted to receive both benefits in the future. This discriminates against individuals who will not be permitted to qualify for both benefits in the future. And the excess benefits of persons receiving dual benefits are to be frozen under the bill, thereby depriving these individuals of a part of the cost-of-living increases they otherwise could expect to receive in the future.
If, however, the existing system is permitted to continue, the Railroad Retirement system will be bankrupt by 1981, and there will be insufficient funds available to pay benefits at the present level to anyone-past, present, or future beneficiaries.
For the above reasons, the Committee wishes to point out to those who might suggest cutting benefits as a method of helping solve the deficit in the Railroad Retirement Account, that that is exactly what this bill does, both as to present and future dual beneficiaries and as to present railroad employees, their dependents, and survivors. The actuarial saving to the Account arising out of elimination of future dual benefits amounts to 4.08 percent of taxable payroll, whereas the costs of phasing out existing dual benefits, proposed to be funded through appropriations, amounts to only 3.64 percent of taxable payroll. In other words, present employees, through reduced benefits, are funding a greater portion of the costs of the program than is proposed to be funded from general revenues. It should also be mentioned at this point that the railroads are currently paying taxes at the rate of 17.15 percent of taxable payroll to finance the Railroad Retirement system (including supplemental annuities), and current employees are paying the Social Security tax rate (presently 5.85 percent of taxable wages).
The deficit in the Railroad Retirement Account at present is almost entirely due to the lost reimbursement to the Account arising out of receipt of Social Security benefits by persons who are also receiving Railroad Retirement benefits. As was stated earlier in this report, this lost reimbursement amounts to 7.72% of taxable payroll, out of a total deficit of 9.05%, or $451 million a year loss out of a total deficit of $3:29 million. In other words, were it not for the problem of dual beneficiaries, the railroad retirement system would be almost completely solvent.
COST IMPACT OF DUAL BENEFITS
Intriction on future receipt of dual benefits incorporated in proposed act.......
Cost of dual benefits under present act......