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ment system under static conditions would then be .96% of payroll or 857 million per year.

m. The twelfth valuation of the railroad retirement system and the report of the Commission on Railroad Retirement both stated that the current railroad retirement fund faced exhaustion in the not too distant future. In addition, the present and potential beneficiary/employee ratio indicates the likelihood of a cash flow problem over the next 20 years. For these reasons, table 3 shows a projection of components of the restructured railroad retirement system from the year 1975 to the year 2000. To some extent, the projection utilized the one prepared in the course of the valuation, but extensive modifications. were necessary to reflect the revisions contained in the bill. Certain additional assumptions over those used in the valuation were necessary and they introduce a degree of roughness in the final figure.

Table 3 reflects that under the benefit and financing provisions of the bill the combined regular and supplemental railroad retirement accounts will decline to a balance of $3.435 million in the year 2000. Should the bill be amended per paragraph 1 above to change the definition of the windfall amount for employees and spouses on the rolls. the fund will decline to a balance of $620 million in the year 2000.

n. The previous discussion has been confined to static economic conditions for a number of practical considerations. Essentially, the future course of the railroad retirement system under "dynamic" conditions (i.e., where there are increases in wages and prices that would activate the automatic adjustment provisions of social security law) depends upon the nature of those future conditions. There is some reason to believe, however, that under the most likely patterns of future wage and price increases, the financial position of the railroad retirement fund will be improved. There are two major reasons for this view. First, the dynamic increases in the railroad staff portion of the benefit are limited. Only four such increases are provided for in the bill. Even if the number of increases is raised, the increases will cover only certain portions of the railroad staff benefit and are only a fraction of the rise in prices reflected by the Consumer Price Index. Second, under dynamic conditions, taxable wages and hence tax income, will be increasing. Projections made by the Social Security Administration (in the 1974 Annual Report of the Trustees of OASDI) indicate that the rise in income will be appreciably greater than the rise in benefits produced by the cost-of-living adjustment formulas given in the bill.

o. The cost figures presented make no allowance for the provisions of section 19 of the bill which extend to railroad retirement annuitants certain classes of benefit liberalizations if those liberalizations are made part of social security law. At the present time, there is no way to anticipate the nature of any such liberalizations.

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TABLE 1.-COSTS IN EXCESS OF FINANCIAL INTERCHANGE REIMBURSEMENTS FOR NONRETIRED EMPLOYEES AND FUTURE ENTRANTS UNDER THE RESTRUCTURED RAILROAD RETIREMENT SYSTEM-STATIC CONDITIONS

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(b) Additional amount on past service ($1.50 per year for the 1st 10 years, $1 per year for subsequent years of past service).

(c) Future service benefit.

2.56

(d) Supplemental annuity ($23 to $43).

Spouses a

Survivors.......

1.60

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45

150

51

37

94

(a) Aged widows (30 percent of the social security benefit on the employee's combined earnings)..

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Windfall benefits, gross amount before the offset against the basic past service benefit.

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Costs in regard to a 100 percent overall minimum provision for active and inactive employees and their families..

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213

28

13

33

5

12

7

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Costs in regard to certain relationships between the railroad retirement and social security systems 3.

1.26

74

(a) Financial interchange for railroad retirement ineligible beneficiaries.

(c) Imputing a full social security benefit to 60 with 30 retirees.

(b) Providing social security benefi's to railroad retirement ineligible beneficiaries based on social security earnings.

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(d) Imputing a full social security spouse benefit at age 60 to spouses of 60 with 30

retirees...

(e) Imputing a full social security benefit in occupational disability cases.

(1) Imputing full social security benefits in total and permanent disability cases during the 5-month waiting period.

.12

(g) Allowing the railroad retirement rather than the social security age reduction in social security level benefits to spouses.

.04

(h) Refund of excess taxes...

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399

12

33

19

32

19

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7

03

2

Total.....

12.48

730

This cost is net after the reduction for the offset in the basic past service benefit for the amount of the whole social security bene t on social security earnings before the changeover date.

* Includes the cost of allowing a reduced annuity to a spouse at 62 when the employee is 62.

> Does not include the cost of 0.05 percent of payroll or $3,000,000 per year that would result if a social security benefit were imputed (assuming the date of retirement were the closing date) to widows of occupational disability and 60 with 30

retirees.

Note: A minus sign indicates a cost reduction. The level taxable payroll is $5,840,000,000 per year based on an $1,100 monthly ceiling. The term "full" benefit as used here corresponds to a disability "freeze" benefit, ie., a social security benefit calculated using a retirement date computation point.

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TABLE 2-ACTUARIAL BALANCE SHEET FOR THE RESTRUCTURED RAILROAD RETIREMENT SYSTEM (UNDER STATIC

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(1) Net costs with 110 percent overall minimum to survivors..

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(2) Additional cost of raising overall minimum guarantee for survivors to 130
percent for beneficiaries on the rolls....

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(d) Benefits with respect to active and inactive employees and new entrants (from table 1 item 7)....

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Total cost of plan in excess of financial interchange reimbursements (c+d+
+1....

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The railroad tax rate of 9.5 percent of taxable payroll reduced by 0.25 percent. The reduction reflects that railroad retirement transfers to social security more than it collects in social security taxes because of the difference between the monthly and annual bases,

* For employees and spouses on the rolls the windfall is defined in such a manner as to be identical with the dual benefit (ie, the social security benefit on social security earnings).

* For survivors of retired and deceased employees, the windfall is the excess of (i) the sum of the railroad formula survivor benefit and the social security benefit on the survivor's social security earnings over (1) 130 percent of the social security survivor benefit on the employee's combined earnings.

* See text (par. 1) for the financial implications of an alternative definition of the windfall for employees and spouses

on the rolls

Note: A minus sign indicates a cost reduction. The level taxable payroll is $5,840 million per year based on an $1,100 monthly ceiling.

40-23 (Pt. 2) O 74-6

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TABLE 3-PROJECTION OF COMPONENTS OF THE RAILROAD RETIREMENT SYSTEM, 1975-2000; ACCRUAL BASIS, STATIC CONDITIONS

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1 All benefits from both railroad retirement and social security earnings, including supplemental annuity and windfall amounts. The tax rate of 19.40 percent applied to each year's taxable payroll.

The gain from financial interchange is social security benefits on combined earnings less social security taxes on railroad earnings. The financial interchange is on an accrual basis.

The combined regular and supplemental accounts. The fund begins at $5,495,000,000 at the end of 1974 and will earn interest at the annual rate of 54 percent.

VIEWS OF THE BOARD

Serious questions were first raised as to the actuarial soundness of the railroad retirement system in 1970 at the time that consideration was being given to an increase in railroad retirement benefits. Congress established a Commission on Railroad Retirement to study the system and its financing for the purpose of making recommendations as to the measures necessary to provide adequate levels of benefits on an actuarially sound basis (Public 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 Commission issued its report, which was received by Congress on September 7, 1972, Congress enacted Public Law 92460, 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 bill H.R. 15301 implements the recommenda

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.

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