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TABLE 3.-PROJECTION OF COMPONENTS OF THE RAILROAD RETIREMENT SYSTEM, 1975-2000; ACCRUAL
BASIS, STATIC CONDITIONS
fin millions of dollars)
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 5% 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 sound. ness 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,
RAILROAD RETIREMENT BOARD,
Chicago, I., August 9, 1974. Ilon. HARLEY O. STAGGERS, Chairman, Committee on Interstate and Foreign Commerce, Ray
burn House Office Building, Washington, D.C. DEAR Mr. ('HAIRMAX: 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,
EXECUTIVE OFFICE OF THE PRESIDENT,
Washington, D.C., July 31, 1974.
of Representatives, Washington, D.C. DEAR MR. CHAIRMAX: 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 H.R. 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 $11, 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 ('ongre-s 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 lope 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. 1,3301 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;
aries until the windfall element has been absorbed; or
tirement 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,
Roy L. Ash, Director. Enclosure.
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 $412 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.