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TABLE 2. PROJECTION OF COMPONENTS OF THE RAILROAD RETIREMENT SYSTEM, 1975-2000; ACCRUAL

BASIS, STATIC CONDITIONS
fin millions of dollars

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luvad returement and social security earnings, incuding supplemental annuity and windfall 4 ephed each year's Larable payroll,

is sowal security benefits on combined earnings less social security taxes on rail** $ of an accrual basis. boletal accounts. The fund begins at $5,495,000,000 at the end of 1974 and will o percent,

VIEW OF THE BOARD

Stipus quam is were first raised as to the actuarial soundness of the l'in bad retteniment system in 1970 at the time that consideration Wat beslag given to an increase in railroad retirement benefits. Congress establishad Commission on Railroad Retirement to study the system and its tanning for the purpose of making recommendations as to the measures nertssary to provide adequate levels of benefits on an actuarially sound bots (Publie Law 91 377). The Commission was to submit a report on its findings and recommendations by June 30, 1971, but subsequently received a one year extension to June 30, 1972.

Shortly after the ('ommission issued its report, which was received by Congress on September 7, 1972, Congress enacted Public Law 92– 460, which contained a provision instructing representatives of railroad labor and management to enter into negotiations that would take into consideration the specific recommendations of the Commission on Railroad Retirement and to submit a report containing their mutual recommendations as to what measures should be taken to assure the receipt of sufficient revenues to finance the benefits provided by the Railroad Retirement Act. Pursuant to that directive, the representatives of labor and management submitted a report, dated February 27, 1973, calling attention to the complex issues involved and stating that substantial progress had been made in shaping mutually agreeable recommendations. The parties then jointly sponsored legislation which was enacted as Public Law 93–69, approved July 10, 1973. As a result of that legislation, the representatives of labor and management were directed to present to Congress their joint recommendations, in the form of a draft bill, for restructuring the railroad retirement system in a manner which will insure the long-range actuarial soundness of the system. The H.R. 1580 implewer the recommenda

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tions submitted by the Joint Labor-Management Railroad Retirement Negotiating Committee in accordance with the directive contained in Public Law 93–69.

Board Members Speirs and Quarles believe that the recommendations presented by the Joint Committee, as embodied in the provissions of the bill, meet the obligation imposed by the above-mentioned public law and commend the members of the Committee for their efforts in resolving the complex problems which confronted them. Accordingly, Board Members Speirs and Quarles recommend that the bill be enacted.

The Chairman of the Board feels that the bill is a step in the right direction and realizes the difficulties which the labor and management negotiators faced in arriving at the proposed revision. However, the bill contains features which affect individuals and groups outside of the railroad industry, mainly the provision which would require social security to finance the windfall elements of the railroad retirement benefits. The recently released report of the Board of Trustees of the social security system indicates that the social security program may also be facing financial difficulties. In view of this, the Chairman defers to the Social Security Administration and the Office of Management and Budget with respect to this feature of the bill.

The Chairman would also like to bring out the complexities which will exist in the computation of annuities during the transition period from the old to the new program and the fact that this transition period will last for several decades. These complexities will increase the cost of administering the program and employees will probably be unable to understand and verify the computation of their annuities. After the end of the transition period, the program will be simple to administer and easy for railroad employees to understand how their annuities are computed. The Chairman is aware of the various interests that are involved in negotiations; namely, labor's desire to get the greatest benefits possible and still fulfill the requirement that the system be actuarially sound, management's wishes to minimize costs and at the same time give adequate benefits, and the necessity to keep benefits close to current levels for individuals who will retire in the near future. In the light of these conflicting interests, it would be virtually impossible to arrive at a simple program.

The coordination between the railroad retirement and social security program would be expanded by the provisions of this bill but would not be complete. Eligibility conditions under the two programs would continue to differ but duplication of benefit amounts would be eliminated for service after the date of conversion to the new program.

Lastly, the Board would have difficulty in adjusting its procedures in time to make a conversion to the new program by January 1, 1975.

The Chairman feels that the bill should be looked at carefully but can see difficulties in arriving at better solutions.

Because of the short time between the introduction of the bill and the setting up of the hearings, there has been no opportunity to submit this report for clearance to the Office of Management and Budget. Copies of this report are being sent to that office immediately. Sincerely yours,

FOR THE BOARD,
R. F. BUTLER, Secretary.

Insurance and residual lump-sum benefits to survivors are provided by sections 6(b) and 6(c), respectively.

d. In addition to the provisions outlined above, the bill provides for certain maximums and minimums to be applied to benefits. There is a “100% overall minimum" in that retirement benefits paid under the bill cannot be less than 100% of the social security benefits that would be payable to the employee and his family on the basis of social security law if all of his railroad and social security earnings were covered under social security.

Section 3(f) (1) provides for a maximum to be applied to the sum of employee and spouse benefits. Under static conditions, however, the provision is virtually inoperative. Section 3(f) (2) provides for an 8-year "guaranty” period. Employees who retire during that period and their spouses cannot receive less than they would have received under the Railroad Retirement Act of 1937 as in effect on Dec. 31, 1974, on the basis of the maximum monthly compensation creditable at that time. It is estimated that the cost of this guaranty provision will be negligible.

e. Cost figures for components of benefits to non retired employees and future entrants are shown in table 1. The costs shown are costs to the railroad retirement system in excess of the amounts that will be reimbursed to the railroad retirement system through the financial interchange with social security. In other words, the figures reflect the costs for providing the full benefit that the annuitant will receive less the social security benefit computed on the basis of combined railroad retirement and social security earnings.

f. The bill will bring about a number of changes in the operation of the financial interchange. First, financial interchange transfers will be moved to an accrual basis which will accelerate the receipt of funds by the railroad retirement account. Second, there will no longer be any reduction in the financial interchange reimbursement to railroad retirement for "dual benefits” (i.e., social security benefits received by railroad retirement annuitants based on social security earnings). Under the bill, all payments to railroad retirement annuitants under both the Railroad Retirement and Social Security Acts will be made by the Railroad Retirement Board. Consequently, social security will not be making any payments that would result in a deduction from the financial interchange. Third, there is the matter of how windfall benefits will be financed which will be discussed later.

g. In most cases, individuals will not be able to earn credits toward a "dual benefit" based on wages after Dec. 31, 1974. Instead, an imputed social security benefit will be payable based on combined railroad retirement and social security earnings. Credit for social security earnings before Jan. 1, 1975, will be reflected in that benefit and in the wind fall benefits provided. In certain instances, the Railroad Retirement Board will pay benefits to a person not eligible for railroad retirement benefits based on social security law and the social security earnings of an employee or spouse covered under railroad retirement.

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This may arise in cases where a retired employee has children eligible for a social security benefit, where a divorced wife is involved, and win a widow remarries after the age of 60.

h. (osts and cost reductions arise from other differences between sowial security law and the provisions of the bill. From a cost standpoint, the principal areas are the following:

(1) Employees with 30 or more years of service who retire after June 30, 1974, at the age of 60 or above ("60 with 30” employees) will be considered eligible for an unreduced social security benefit based on combined railroad retirement and social serurity earnings. Spouses of such employees will be entitled to an unreduced social security spouse annuity if they are age 60 or above.

(2) Occupational disability retirees are deemed to be totally and permanently disabled for the purpose of calculating their social security benefits on combined earnings.

(3) There is no 5-month waiting period for disability retirement benefits.

(4) The imputed social security spouse benefit based on the employee's combined earnings is subject to the railroad retirement age reduction factor of 1/180 for each month the spouse is below age 65 rather than to the social security age reduction factor of 1/144.

(5) Social security benefits based on the employee's combined earnings will not be paid to categories of beneficiaries not eligible for railroad retirement benefits under the bill. Such persons, however, may be eligible for benefits based on the social security earniners of the railroad employee or his spouse (see paragraph g above) or the 100% overall minimum provision may come into effect (see paragraph d above).

(6) Persons who have completed 10 years of railroad retirement service but who are not eligible for a windfall benefit may obtain a refund of excess social security taxes (assuming a part of the past railroad retirement taxes to be applicable to social security) paid during the years 1951 through 1974 inclusive under the pro

visions of section 6(d). i. In general, beneficiaries on the rolls on Dec. 31, 1974, will receive the same amount under the bill that they were receiving under the Railroad Retirement Act of 1937. Survivors, however, will be guaranteed a total benefit of at least 130% of the amount payable under social security law based on the employee's combined earnings. At present, the guarantee is 110% of that amount.

j. Beneficiaries on the rolls on Dec. 31, 1974, who are eligible for a supplemental annuity under the 1937 Act will receive the supplemental annuity according to the $45 to $70 benefit schedule of the 1937 Act. Contributions for supplemental annuities will be made on a pay-asyou-go basis in amounts sufficient to pay benefits at the 1937 Act levels to all present and future recipients. However, those taxes which are not

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Insurance and residual lump-sum benefits to survivors are provided by sections 6(b) and 6(c), respectively.

d. In addition to the provisions outlined above, the bill provides for certain maximums and minimums to be applied to benefits. There is a “100% overall minimum" in that retirement benefits paid under the bill cannot be less than 100% of the social security benefits that would be payable to the employee and his family on the basis of social security law if all of his railroad and social security earnings were covered under social security.

Section 3(f) (1) provides for a maximum to be applied to the sum of employee and spouse benefits. Under static conditions, however, the provision is virtually inoperative. Section 3(f)(2) provides for an 8-year “guaranty” period. Employees who retire during that period and their spouses cannot receive less than they would have received under the Railroad Retirement Act of 1937 as in effect on Dec. 31, 1974, on the basis of the maximum monthly compensation creditable at that time. It is estimated that the cost of this guaranty provision will be negligible.

e. Cost figures for components of benefits to non retired employees and future entrants are shown in table 1. The costs shown are costs to the railroad retirement system in excess of the amounts that will be reimbursed to the railroad retirement system through the financial interchange with social security. In other words, the figures reflect the costs for providing the full benefit that the annuitant will receive less the social security benefit computed on the basis of combined railroad retirement and social security earnings.

f. The bill will bring about a number of changes in the operation of the financial interchange. First, financial interchange transfers will be moved to an accrual basis which will accelerate the receipt of funds by the railroad retirement account. Second, there will no longer be any reduction in the financial interchange reimbursement to railroad retirement for “dual benefits" (i.e., social security benefits received by railroad retirement annuitants based on social security earnings). Under the bill, all payments to railroad retirement annuitants under both the Railroad Retirement and Social Security Acts will be made by the Railroad Retirement Board. Consequently, social security will not be making any payments that would result in a deduction from the financial interchange. Third, there is the matter of how windfall benefits will be financed which will be discussed later.

g. In most cases, individuals will not be able to earn credits toward a "dual benefit" based on wages after Dec. 31, 1974. Instead, an imputed social security benefit will be payable based on combined railroad retirement and social security earnings. Credit for social security earnings before Jan. 1, 1975, will be reflected in that benefit and in the windfall benefits provided. In certain instances, the Railroad Retirement Board will pay benefits to a person not eligible for railroad retirement benefits based on social security law and the social secur earnings of an employee or spouse covered under railroad retirer

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