RAILROAD RETIREMENT BOARD, Hon. HARLEY O. STAGGERS, Chairman, Committee on Interstate and Foreign Commerce, Rayburn House Office Building, Washington, D.C. DEAR MR. CHAIRMAN: The Office of Management and Budget has informed the Railroad Retirement Board that there is no objection to the submission of the Board's report on H.R. 15301, dated July 17, 1974, and that enactment of H.R. 15301 would not be in accord with the program of the President. Sincerely yours, FOR THE BOARD, R. F. BUTLER, Secretary. EXECUTIVE OFFICE OF THE PRESIDENT, Hon. HARLEY O. STAGGERS, DEAR MR. CHAIRMAN: This is in response to your request of June 18, 1974, for the views of this Office on H.R. 15301, a bill "To amend the Railroad Retirement Act of 1937 to revise the retirement system for employees of employers covered thereunder and for other purposes. The Administration is fundamentally opposed to HR. 15301 in its present form. In our view, this bill does not properly address the basic issue which must be faced at this time. That issue, in its most straightforward form is: Who should pay the cost of restoring the Railroad Retirement fund to a position of financial solvency? H.R. 15301 attempts to deal with the problem by providing for a series of payments from the Social Security trust fund to the Railroad Retirement fund totalling more than $1 billion over the next 25 years or so. This rests on the assertion that the Social Security system is somehow responsible for the existence of the "windfall dual benefit", the cost of which, coincidentally, roughly equals the estimated actuarial deficit. This would require millions of wage-earners covered by Social Security to finance benefits enacted in the Railroad Retirement Act and available only to retired railroad employees and their dependents. Those paying the bill would earn no benefits and receive no payments. The Administration is firmly opposed to any device which treats the problems of the Railroad Retirement fund as being the responsibility of the Social Security taxpayers or anyone else other than the employers and employees of the railroad industry. The Congress created the Railroad Retirement System as an independent, self-supporting retirement system for one particular industry. It is inappropriate and highly inequitable to levy the costs of that System on taxpayers who cannot hope to benefit from its existence. The responsibility for overcoming the problems of this System must be with the industry it serves and the individuals who have benefited from it in the past and will continue to receive its benefits in the future. There are two obvious ways in which this responsibility can be satisfied. One is by increasing revenues, the other by limiting benefits. H.R. 15301 contains some features which limit benefits. Unfortunately, these changes do not go far enough to solve the problem and they are coupled with liberalizations which actually increase the costs of the fund. The bill provides no increases in revenues except for the proposal that the System be subsidized by Social Security. In our view, the bill fails to meet the obligation imposed on the industry by the Congress in Public Law 93-69, to develop a proposal for placing the System on a sound actuarial footing. In our view, Congress now has the responsibility of solving the problems of the Railroad Retirement System without resorting to the inappropriate device of outside subsidies. There are a number of possibilities which should be explored: 1. The proposed liberalizations could (and in our view, should) be deferred until taxes are increased to pay for them. 2. The proposed new formula could be simplified and the level of benefits reduced. 3. The amount protected under the old formula could be reduced. 4. The costs of phasing out windfall dual benefits could be reduced by any of the following: -Outright termination rather than gradual phaseout; -Restrictions on cost-of-living increases for dual beneficiaries until the windfall element has been absorbed; or -Restrictions on cost-of-living increases for all Railroad Retirement beneficiaries until the cost of the windfall benefit. has been balanced. 5. Revenues could be increased by raising the payroll tax or by levying an earmarked tax on rail cargo. Some combination of these changes could restore the System to the proper condition of being financed by the industry which it is designed to serve. If a comprehensive bill which would produce a sound, industryfinanced system cannot be enacted within the time remaining in this Session, the Administration strongly recommends that the Congress enact a temporary tax sufficient to finance any further extension of the present temporary benefits. While the financing provisions are the most prominent unacceptable feature of H.R. 15301, there are several other seriously objectionable provisions of the bill. First, the proposed new benefit formula is inordinately complex. This complexity will seriously impede efficient administration of both the Railroad Retirement and Social Security systems. In addition, it will be impossible for the individual beneficiary to understand the workings of the system, thus undermining its credibility and public support. In our view, the benefit formula can, and should, be greatly simplified. Second, the bill provides for the Railroad Retirement Board, in effect, to administer the provisions of Title II of the Social Security Act with respect to any person eligible for benefits under the Railroad Retirement Act, with no provision for review by the Social Security Administration. Having two separate agencies simultaneously administering the same statutory provisions will inevitably lead to confusion and loss of efficiency. In addition, it will be difficult to explain this arrangement to beneficiaries who are entitled to Social Security benefits in their own. right and whose connection to the railroad industry is only marginal. These individuals would normally look to the Social Security Administration for their benefits. In our view, the Board should not administer Social Security benefits with respect to dependents and survivors. Any determinations of the Board affecting Social Security benefits should be subject to review by the Social Security Administration. Our objections to H.R. 15301 in its present form, and the Administration's recommendations for change, are set forth in greater detail in the attached supplement to this report. In view of these considerations, the Administration considers H.R. 15301 to be unacceptable in its present form. Its enactment would not be in accord with the program of the President. Sincerely, Enclosure. ROY L. ASH, Director. SUPPLEMENT TO H.R. 15301 REPORT TO THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE OF THE HOUSE OF REPRESENTATIVES BY THE OFFICE OF MANAGEMENT AND BUDGET Most revisions in the Railroad Retirement system have originated in collective bargaining processes within the industry. Since the Railroad Retirement system provisions are written into Federal law, these industry proposals must be submitted to Congress for enactment. Recognizing the difficult process of negotiation on the part of railroad labor and railroad management which precede any new proposals, the Administration usually does not object to such changes unless a proposal upsets the financial balance of the system or adversely affects other important public interests. H.R. 15301 represents a case in which the Administration must object to the proposal because of its seriously adverse impact. The plan set forth in H.R. 15301 depends for its solvency on a series of payments from the Social Security trust funds totalling more than $4 billion. This action would impose a tax burden on mostly middle and lower income workers to whom the Railroad Retirement system will not provide benefits. In this important respect, therefore, the plan is clearly unfair. This unwarranted burden arises from a basic financial imbalance in the proposal which must be corrected within the Railroad Retirement system itself. The Department of Health, Education, and Welfare is strongly opposed to the proposal for increased payments to Railroad Retirement from the Social Security trust funds and we concur with the Departments position. The Office of Management and Budget recommends that further consideration be given to eliminating or reducing some of the costs of the proposal, or to providing additional resources from within the industry, or to some combination of these. 1. THE STRUCTURE AND THE COST OF THE PROPOSAL The Railroad Retirement system under present law is operating with an actuarial deficiency of about 9% of taxable payroll. If the benefit structure and the funding in H.R. 15301 were adopted, the actuarial deficiency would be reduced to 0.24%. It would be useful, therefore, to summarize the changes proposed to achieve this objective. The present Railroad Retirement benefit may be conceived of as having three elements: (1) An amount which would have been paid to the retiree by Social Security if railroad employment had been covered under Social Security. The Railroad Retirenient system is reimbursed from the Social Security trust funds for the additional amounts that Social Security would have paid if railroad employment had been covered by Social Security. (2) The balance of the regular Railroad Retirement benefit is financed entirely from within the industry through a payroll tax on employers. (3) In addition, there is a supplemental pension consisting of a flat monthly amount paid according to length of service for service exceeding 25 years. Also financed through a payroll tax, paid entirely by the employers. The factors which caused the current deficiency are not attributable to any single benefit, but rather to the total structure of benefits and taxes. Generally, benefit increases (except those provided in 1970 and Inter while the Commission on Railroad Retirement was studying the system and since the completion of that study) had been presumed to be adequately funded according to what was known about the economic conditions of the railroad industry at the time. The fundamental problem is that the industry itself has declined from earlier expectations and the smaller payroll tax base is not now able to support the present built-in costs. In recent years, it has been known that in order to bring the current system within balance, it would be necessary either to reduce benefits or to increase Railroad Retirement taxes. The Commission on Railroad Retirement and later the intra-industry study group of labor and management representatives, agreed that the most likely savings could be achieved by eliminating windfall dual benefits. The cost of these dual benefits has been estimated at almost 12% of taxable payroll. Elimination of windfall dual entitlement is the single element in H.R. 15301 which is intended to restore the financial balance in the proposed system. However, the entire 12%-of-payroll cost of the present dual benefit provisions would not be recovered under the proposal. For example, annuitants with dual entitlement already on the rolls would continue to receive dual benefits, and employees who had not yet retired, but who had vested in both Social Security and Railroad Retirement coverage, would receive dual benefits when they retired. The new proposal would only eliminate further vesting in dual benefits after the effective date of the new system. As a result, there would be a residual cost for the "windfall dual benefits" totalling about 434% of payroll. H.R. 15301 makes certain other changes in the benefit structure, increasing some categories and decreasing others. But as with dual benefits, vesting up to the date of changeover is protected. The new structure contains: -A component equivalent to the Social Security benefit which the retiree would have received under Social Security and which is reimbursed by Social Security (an "imputed" Social Security benefit), but safeguarded against dual benefits. -A component equivalent to a pure staff-pension Railroad Retirement benefit based on average salary and length of service with accrual beginning on the changeover data. -A component equivalent to the old supplemental pension based on longevity. -A component designed to protect vesting which was accrued prior to the changeover date. This component has three separate elements making the overall new retirement benefit a six-layer benefit. The net result is that except for the savings produced by eliminating new accruals toward dual benefits, further savings in benefits. under this proposal have been offset by further liberalizations in benefits. At the tax rates provided in the bill, there is still a 4.6% deficiency in the system. To fund these costs, the legislation proposes no new taxes upon the industry. In fact, the level of taxes on the industry will be slightly reduced. The legislation proposes that 4.36% of the deficiency be covered by an increased reimbursement through the financial interchange from Social Security to cover the costs of protecting accrued windfall dual benefits. As indicated previously, we oppose this proposed subsidy from Social Security, and recommend instead that the Congress consider some combination of reducing the costs of the benefit package and increasing revenues from within the industry. Some possible means of doing this are outlined in the subsequent sections of this report. II. OPPORTUNITIES FOR REDUCING BENEFIT COSTS (a) The amount to be protected by the old formula could be reduced. This includes, of course, much of the windfall dual benefit that has been "vested" by employees not yet retired, as well as the more favorable wage replacement under the old formula than under the new formula. Although it can be anticipated that persons nearing retirement will seek to protect their accrued vested benefits at as high a level as possible, it should be remembered that the old formula could not be supported by existing resource base. Therefore, the degree to which the system can afford to protect new retirees in terms of the old benefit formula depends on how much can be taken away from future benefit levels or how additional taxes can be raised. The Congress could appropriately consider belt-tightening in this area, particularly since the benefits proposed for protection are at levels that could not be supported under the old system. |