Page images
PDF
EPUB

solely on railroad service, and the social security benefit to which the individual would have been entitled based solely on non-railroad service performed either by him or the person through whom his benefit is determined. To the extent that the total of these two amounts exceeds the amount to which the individual would have been entitled under the Social Security Act based on combined railroad and nonrailroad service, the excess will be frozen. The following chart illustrates this point.

FROZEN DUAL BENEFIT

[blocks in formation]

FUTURE COSTS

The Committee has reported a bill to the House which places the Railroad Retirement System on a sound financial basis. Current actuarial estimates are that the bill will lead to an actuarial deficit of less than one-half of 1 percent of taxable payroll. This is considered by the Committee to be well within the limits of actuarial tolerance.

During the hearings, Mr. William H. Dempsey, Chief Negotiator for the railroads, made a commitment to the effect that all future benefit liberalizations in the Railroad Retirement Act, other than those occurring as a result of amendments to the Social Security Act, will be financed 100 percent by the railroad industry. During the hearings Mr. Dempsey said:

Mr. DEMPSEY. The railroad industry is perfectly prepared to fund the Railroad Retirement System in every respect in which it bears a reasonable resemblance to any other private industry pension plan, and what that means is that if somehow these figures go askew and we run into difficulty in the future because we have not put enough money in with relation to the benefits that are being provided, we will fund that, we will take care of it, that is our responsibility.

The single exception is this 3.64 percent cost of phasing out dual benefits because in our view dual benefits are an anomaly, and in the view of the Commission on Railroad Retirement, they are a quirk in the law. They don't exist in any other industry. They never would have been the product of collective bargaining. In those circumstances we urge that this discrete element, this single feature of the Railroad Retirement System, is properly a Federal responsibility, but it is only in that respect that we seek Federal funding of this whole program.

THE EFFECT OF H.R. 15301 UPON THE FINANCIAL STATUS OF THE RAILROAD RETIREMENT SYSTEM

[blocks in formation]

INVESTMENT OF THE RAILROAD RETIREMENT ACCOUNT

Under current law, the Railroad Retirement Account is invested in obligations of the United States, or obligations guaranteed as to principal and interest by the United States. The rate of interest on these obligations ranges from a low of 3 percent to a high of 8% percent. The overall average rate of return on the obligations held by the Treasury for the Account amounts to approximately 6.57 percent.

Under present law, the Secretary of the Treasury determines the manner in which the Account will be invested. The Secretary is both a Trustee of the Railroad Retirement Account, as well as Chief Fiscal Officer of the United States. His responsibilities for handling the public debt raise obvious conflicts with his duties as Trustee of the various Trust Funds which he retains, such as the Social Security Trust Funds, the National Service Life Insurance Trust Fund, the Civil Service Retirement Fund, and numerous others.

The bill provides that hereafter the Railroad Retirement Board shall determine the manner in which the Railroad Retirement Account will be invested. This should lead to an increase in the earnings of the Account, estimated by the Committee to amount to approximately one-half of 1 percent of taxable payroll on a level basis. There will be no immediate impact from this change, but as securities mature in the future the Board should be able to make more advantageous investments. No securities held for the Account mature in 1974, but during 1975 $91,738,000 of securities will mature. Of this amount, $7 million is invested at 6 percent, $8.5 million at 7 percent, $36,114,000 at 8 percent, and the remainder at 83% percent. The following shows the holdings of the Account as of July 31, 1974.

RAILROAD RETIREMENT ACCOUNT, INVESTMENT HOLDING, JULY 31, 1974

[blocks in formation]

RAILROAD RETIREMENT SUPPLEMENTAL ACCOUNT, INVESTMENT HOLDINGS, JULY 31, 1974

[blocks in formation]

RAILROAD RETIREMENT HOLDING ACCOUNT, INVESTMENT HOLDINGS, JULY 31, 1974

[blocks in formation]

From its initial establishment until 1963, the rate of interest paid on investments of the Railroad Retirement Account was 3 percent. By 1963, the rate of interest on Government obligations was considerably above this amount, and by Public Law 88-133 the rate was changed to equal the current average market yield on long-term Government obligations. Investments of the Account have since been made on that basis.

Shortly after the enactment of Public 88-133, legislation was introduced providing for a similar increase in the rate of interest paid on Trust funds held for the various Veterans Administration insurance programs. By agreement with the Secretary of the Treasury, resulting from that introduced legislation, the rate of interest on these funds. was increased to approximate the current average market yield on long-term Government obligations. Soon thereafter similar action was taken with respect to the Civil Service Retirement Fund.

The Committee does not feel that the enactment of this bill should lead to action with respect to other Trust Funds similar to that which occurred after the enactment of Public Law 88-133, because the situation with respect to the Railroad Retirement Account has changed significantly, as it compares to other Federally held Trust Funds.

Last year, Public Law 93-69 was enacted, carrying out an agreement between management and labor reached through collective bargaining, under which the railroads assumed the responsibility for hereafter paying all taxes required to support the Railroad Retirement system in excess of the Social Security tax rate, which would be paid by the employees.

The enactment of that Act significantly changed the character of the Railroad Retirement system. Whereas it formerly was a Federal retirement system, supported, as is Social Security and Civil Service Retirement by equal amounts paid by the employers and the employees, the Railroad Retirement system is today, in essence, a company pension program administered, for historical reasons, by the Federal Government.

Tier I benefits hereafter paid to retirees, their dependents, and survivors will be a Social Security benefit, paid by the Social Security system through financial interchange; Tier II benefits will be based solely on railroad service, and will be paid for entirely by the railroads (except for the cost of phasing out dual benefits). Future changes in

Tier II benefits will arise out of collective bargaining between the railroads and the unions.

Under these circumstances, the character of the Railroad Retirement system differs substantially from other systems having a Trust Fund managed by the Secretary of the Treasury.

The Committee, therefore, feels that the Railroad Retirement Account should be treated similarly to trust funds established for the payment of other private pension plans, with investments being made. solely on the basis of the best return to the trust fund, and other considerations (such as the efficient management of the public debt) not being taken into account as they are today. And the Committee feels that this action should not be considered as a precedent for similar changes with respect to other trust funds, because of the unique character of the Railroad Retirement Account.

SUMMARY OF THE BILL

The present railroad retirement system was established by and operates under the Railroad Retirement Act of 1937. Title I of the bill would enact a Railroad Retirement Act of 1974 which would replace the 1937 Act. The new Act would provide all retirement and survivor benefits insofar as employees with ten years or more of railroad service, retiring after December 31, 1974, and their spouses and survivors, are concerned.

With relatively minor exceptions, the definitions in Section 1 of the bill have not been changed from similar provisions in the 1937 Act. This also is true of the provisions of Sections 5, 7-18, and 20 of the bill, which for the most part relate to the administration of the railroad retirement system by the Railroad Retirement Board. Section 21 of the bill simply names the new Acts as the Railroad Retirement Act of 1974. The eligibility provisions in Section 2 of the bill and the provisions in Section 6 of the bill for payment of lump-sum benefits also generally are similar to provisions in the 1937 Act, with certain exceptions. In two instances the eligibility requirements have been liberalized to make more effectual a 1973 amendment intended to encourage early retirement; and the bill would restrict the residual lump-sum benefit so that it would be based only on compensation and service prior to January 1, 1975, and would create a new lump-sum benefit for employees who, upon retirement, do not qualify for a benefit under the Social Security Act but who had some social security employment prior to January 1, 1975. Section 19 of the bill is entirely new. It would make future liberalizations of eligibility requirements under the Social Security Act for benefits, including medical benefits) and future additions of new classes of benefits under that Act automatically applicable to railroad employees under the 1974 Act, with certain exceptions generally intended to prevent duplications of benefits and to retain eligibility requirements not affected by such future amendments to the Social Security Act. The bill would not, however, operate to entitle divorced wives, surviving divorced wives, surviving divorced mothers, or children of living employees to annuities under the Railroad Retirement Act since any change in the conditions of entitlement to, or the amounts of, benefits payable to such persons under the Social Security Act would

« PreviousContinue »