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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 when a widow remarries after the age of 60.

h. Costs and cost reductions arise from other differences between sosial 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 security 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 earnines 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 securitt! paid during the years 1951 through 1974 inclusive under the prea

visions of section 6(d). i. In general, beneficiaries on the rolls on Dec. 31, 1974, will the same amount under the bill that they were receiving under the Railroad Retirement Act of 1937. Survivors, however, will be teed a total 1 of at least 130% of the amount social securi

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required to pay supplemental annuity benefits to emplovees retiring after Dec. 31, 1974, because of the lower benefit schedule of the present bill will be credited to the regular railroad retirement account rather than to the railroad retirement supplemental account.

k. Table 2 presents an actuarial balance sheet for the railroad retirement system under the provisions of the bill. In addition to financing from the funds on hand and income from investments, the financial interchange, and presently legislated taxes, the bill calls for an assumption of the cost of windfall benefits by the Social Security Administration. The cost of windfall benefits are defined in the bill (see paragraph 1 below) is estimated at 4.36% of taxable railroad payrolls or $254 million per year on a level basis. Expressed in terms of present value, the cost is $4.55 billion. On this basis, the actuarial deficiency of the railroad retirement system under static conditions is .24% of payroll or $16 million per year. Those figures may be compared with the actuarial deficiency of the present railroad retirement system which is estimated at 9.06% of payroll or $529 million per year.

1. It appears from correspondence exchanged between the railroad management and labor negotiating parties that serious consideration is being given to the parties jointly proposing certain amendments to the present bill. In particular, one amendment under consideration would change the definition of the windfall amount with respect to employees and spouses on the beneficiary rolls on Dec. 31, 1974, and would markedly lower the cost of windfall benefits to be assumed by social security.

The bill as presently drafted (section 204) defines the windfall benefit for most retired employees who are receiving a dual benefit as th: excess of the amount presently received over the sum of (i) an imputed social security benefit on combined railroad retirement and social security earnings and (ii) the railroad retirement benefit under the 1937 Act less the amount in (i) above. Consequently, the sum of (i) and (ii) is the railroad retirement benefit. Because the amount now being received by most such retired employees is the railroad retirement benefit and the dual benefit, the windfall amount is the same as the dual benefit. The situation is similar with respect to spouses on the rolls.

The amendment being contemplated will change the definition of the windfall in such cases to one more consistent with the definition of the windfall for non-retired persons. The windfall for the employees on the rolls who are receiving a dual benefit will be the excess of the amount presently received over the sum of (i) an imputed social security benefit on combined earnings and (ii) the railroad retirement benefit under the 1937 Act less an imputed social security benefit bosed on railroad retirement earnings only.

If that amendment were adopted, the cost of windfall dual benefits to be assumed by social security would be 3.64% of taxable payroll or $213 million per year. Expressed in terms of present value, the cost would be $3.80 billion. The actuarial deficiency of the railroad retire

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ment system under static conditions would then be .96% of payroll or

i million per year.

m. The twelfth valuation of the railroad retirement system and the nopport of the ('ommission 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/emplover ratio indicates the likelihood of a cash flow problem over the next 20 vears. For these reasons, table 3 shows a projection of components of the restructured railroad retirement system from the year 1973 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 aiyounts 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 wind fall 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) diepends upon the nature of those future conditions. There is some rrason 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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TABLS 1. COSTS IN EXCESS OF FINANCIAL INTERCHANGE REIMBURSEMENTS FOR NONRETIRED EMPLOYEES AND FUTURE EN TRANTS UNDER THE RESTRUCTURED RAILROAD RETIREMENT SYSTEM-STATIC CONDITIONS

Equivalent level cost

Level annual amount (million)

Percent of

payroll

Item

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Employees.........

(a) Basic past service benefit.
(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 benefil..

(d) Supplemental annuity ($23 to $43)... Spouses 11 Survivors. (a) Aged widows (30 percent of the social security benefi: on the employee's com

bined earnings). (b) Other survivors.... (c) Insurance lump sums..

(d) Residual payments.... Windfall benefits, gross amount before the offset against the basic past service benefi:.....

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(a) Active employees..

8) Inac ive employees.

(c) Spouses...

(d) Survivors... Costs in regard to a 100 percent overall minimum provision for active and inactive em

ployees and their families..

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

systems

(a) Financial interchange for railroad retirement ineligible beneficiaries...
(b) Providing social security benefits to railroad retirement ineligible beneficiaries

based on social security earnings....
> Imputing a full social security benefit to 60 with 30 retirees....
(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... ( imputing full social security benefits in total and permanent disability cases dur

ing the 5-month waiting period... (0) Allowing the railroad retirement rather than the social security age reduction in

social secunty level benefits to spouses... (h) Refund of excess taxes..

Total.

12. 48

1 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 ton 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 of 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** benefl, 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

CONDITIONS)

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Net costs with 110 percent overall minimum to survivors....
(2) Additional cost of raising overall minimum guarantee for survivors to 130

percent for beneficiaries on the rolls.
ost of continuing supplemental annuity to employees on the rolls.

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(c) Initial deficit (b-a)..
(6) Benefits with respect to active and inactive employees and new entrants (from

table l. item 7)......
(0) Administrative expenses..
(0Ehmination of interchange with RUIA.....

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

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(3) Reimbursement for windfall phase-out costs

(1) With respect to nonretired employees (trom table 1, item 4)..
(i) For employees on the rolls 1.
() For spouses of employees on the rolls

(Iv) For survivors of retired and deceased employees... Deficit under static conditions (-)..

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i 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 emplovees 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 (ii) 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

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