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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.

I. 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 Retirement 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.

11. 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.

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(b) The lerel of benefits under the near formula could be simplified amel, in the proce88 reduced. The new formula has become so complex

uring the process of bargaining that at least one of its purposes, namely, vrage replacement, has been minimized. The benefit now incum large components of fat monthly dollar awards related to length 16 truce, and an additional flat monthly award for longevity (the supplemental pension). Under this complex proposed formula, it is Alen porsible for a person to retire with a greater monthly benefit than he earned before his retirement. Under these circumstances, the level of benefits has become a bargaining issue concerning degrees of liberalization. Such liberalization may be proper when sufficient funding is available but not in the face of the present deficiency.

() Per liberalizations should be deferred until taxes are increased *** pay for them. The proposal contains a number of new benefit liberalizations. We take no position on their individual merit, and, if there were adequate funds available to pay for them, we would have no objection to their inclusion in the bill. But under deficiency conditions, We believe they should be of the lowest priority. For example: The Overall minimum guaranty for survivors on the benefit rolls would be increased in this bill from 110% of Social Security to 130%, costing 1. of payroll.

Another candidate for reconsideration is the provision which permits retirement on full annuity at age 60, costing 1.25% of payroll.

This provision was enacted in 1973, but without providing for its fund1114, presumably in the expectation that adequate funding would be provided in the 1974 revision of the Railroad Retirement system.

There are a number of additional costs deriving from the relationwhip between the Railroad Retirement system and the Social Security

sutom by which the Railroad Retirement system proposes to enrich the inputed Social Security benefits of its own beneficiaries. For euample. Railroad Retirement would pay full benefits (without actuarial reduction) to persons who retire at age 60 with 30 years of service. Social Security will not pay un reduced benefits to persons who retire 1» fore age 63. Therefore, it would be necessary for the Railroad Retirement system to pay the equivalent of unreduced Social Security benefits until the person reached age 62 and continue to pay the difference between benefits at age 62 and the reduced benefits thereafter. These enrichments would add another 1.26% of payroll costs.

III. THE NEED TO INCREASE REVENUES It has long been a principle of both the Federal Government and the industry that new benefits should not be introduced into the system unless funds were provided from within the industry to cover the ants. The only exceptions to this principle were the temporary benefit increases of 1970 through 1973 when it was understood that a revised retirement system would provide the resources to resolve the financing problem.

We believe that proposals for raising the necessary revenues from within the industry must be seriously considered. If the costs of the proposal were reduced to some degree, particularly those arising from the proposed liberalizations, we believe the remaining additional burden could be borne by the industry.

It may be argued that a tax on the industry would be immediately passed on to the consumer. We think, however, that the cost of the Railroad Retirement system should be a part of the industry's cost which its users should bear as is the case in other sectors of the economy and indeed other parts of the transportation industry. We believe that competition with other modes of transportation would provide a far better moderator of benefits and costs than the interjection of subsidy.

IV. FUNDING SOME OF THE COSTS FROM OUTSIDE THE INDUSTRY

A key element in the system proposed under H.R. 15301 is the suggestion that the protected amount of the windfall dual benefits should be financed by the Social Security trust funds. The arguments offered by the proponents of this proposal are without substance. They consist of such assertions as: (i) the wind fall is a “Social Security” benefit, (2) Railroad Retirement has absorbed the costs of this benefit up until now and it is not too much to ask Social Security to carry the remaining costs, (3) in other situations such as civil service retirement, the Social Security system has paid the whole cost of the second benefit and (4) the cost is negligible to the Social Security system. The response to these arguments is being furnished more fully to the Committee by HEW' and need not be repeated here. It is worth noting, however, that this proposal is inconsistent with the recommendations of the Commission on Railroad Retirement, and has met with objections from the Chairman of the House Ways and Means Committee and other individuals and organizations.

The alternative of a general fund contribution to cover the deficiency is equally unacceptable because it, too, would destroy the essential boundaries bet vreen an industry retirement system and general public financing and, therefore, levels and commensurate tax rates. The tax and benefit changes in the Railroad Retirement System which have developed historically out of collective bargaining in the industry between labor and management have not included the participation of any representative of the public. The Federal legislation which has established and changed the system has been not a public approval of the changes but rather the means for executing the program within the industry. Accordingly, it is not appropriate to attribute the deficiency to Federal participation in the shaping of the program.

The potential future exposure of Federal taxpavers under the proposed legislation is serious and distressing. Since the bargaining on changes in the system takes place between labor and management within the industry, and since the principal means proposed for handling costs in excess of revenues is a subsidy from outside the industry, there is essentially no restraint on the amount or the frequency with which Federal taxpayers may be asked to pay additional subsidies.

Finally, we see no basis for shifting the tax burden to the general public for a benefit which does not flow to the public.

V. OTTIER OBJECTIONS TO H.R. 15301

In addition to the unresolved problems of financing the system, the proposal contains other objectionable features of an administrative nature. Most critical of these objections are as follows: (1) The benefit formula is extremely complicated. It will be costly to administer and impossible to explain to the public. It is very likely that the compleivity of the formula is not worth the difference in benefit yield that a more simple formula would have produced. Moreover, experience has sioun that systems become even more complex with time. With such a start, within a few years it would surely be necessary to redesign the

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em all over again simply because the added complexity would have presented it from being effectively administered. (2) The proposal would authorize the Railroad Retirement Board to administer all benefits payable under the Railroad Retirement Act and the Social Security Act to any employee or the dependent or survivor of an employee who has been credited with 10 years of railroad service. The Board's determinations under this provision would not be subject to review by the Soial Security Administration. This would not only create extensive new paperwork for the Railroad Retirement Board, but without authority for review by Social Security, it would be confusing and diffi(ult to achieve uniform treatment under the same lav by two inde1*ndent agencies. This is particularly objectionable to persons who are m-ured in their own right under Social Security but are dependents nder the Railroad Retirement System. Social Security is the basic retatement system for the vast majority of the Nation's workers; no system for a particular occupational group should have final authority for determining the Social Security entitlement of its workers.

VI. RECOMMENDATIONS

In view of the comments above, we strongly recommend against the enactment of H.R. 15301, which is unacceptable in its present form.

As a minimum, in order to safeguard the public interest, the bill should be modified to eliminate the inappropriate device of outside subsidies, and to eliminate the actuarial deficit through some combination of the following alternatives:

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 ont windfall dual benefits could be reduced by any of the following:

. Outright termination rather than gradual phase-out;
--Restrictions on cost-of-living increases for dual beneficiaries

until the windfal element has been absorbed; or
--Restrictions on cost-of-living increases for all Railroad Re-

tirement beneficiaries until the cost of the windfall benefit

has been balanced. 3. Revenues could be increased by raising the payroll tax or by levying an earmarked tax on rail cargo. If the necessary modification of this bill cannot be accomplished by the statutory deadline of January 1, 1970), we would recommend that a temporary tax be imposed on the industry sufficient to finance any continuation of the present temporary benefits, pending the enactment of a sound, industry-tinanced system.

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