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H.R. 15301 eliminates this situation for the future by providing for the computation of railroad retirement Tier I benefits under the Social Security formula based on both railroad and non-railroad service.

The question before the Committee was who should bear the cost of continuing these benefits to persons already retired and those with vested rights protected under the bill, this cost estimated to represent 3.64 percent of table payroll.

The Office of Management and Budget has suggested that this cost can be met by simply cutting benefits under the bill. The Committee rejected this suggestion for three reasons: First, cutting off the benefits of those already receiving or legally entitled to them would clearly be inequitable. These individuals have a right to receive those benefits the law has led them to rely upon or expect.

Secondly, more than half of the long range cost of putting the overall system in actuarial balance under this bill is accomplished through significant reductions in benefits payable to future retirees. These reductions include the prohibition of future dual benefits as well as Finally, changes in the benefit formula since accruial of future dual benefit rights is prohibited under the bill, it seems unfair to assign this cost to present employees who will not be able to collect such benefits.

It should be noted that these reductions in future payments are offset in part by three liberalizations in benefits designed to make fully effective the early retirement provision which was enacted last year. The three liberalizations which the bill would provide have a level cost of 3.1 percent of taxable payroll and would provide:

(A) People who retire at age 60 with 30 years of service could receive supplemental annuities at age 60, rather than at age 65; (B) The spouse of an individual who retires at age 60 with 30 years of service could qualify for a spouse's annuity at age 60, rather than at age 65; and

(C) The benefits generally payable to survivors (most widows) would be increased from 110% of the comparable social security benefit to 130% of the comparable benefit.

On the other hand, the railroads had no part in the creation of the current situation. The lost reimbursement to the Railroad Retirement System arising out of individuals becoming entitled to Social Security benefits arises out of non-railroad employment performed by these individuals employment which has not benefitted the railroad industry in any fashion. A further factor leading to lost reimbursement arises in part out of provisions contained in the Social Security Act, and the formula for the computation of benefits thereunder again matters over which the railroad industry has no control. With respect to legislation enacted repealing restrictions on dual benefits (discussed hereafter), the railroads have consistently opposed such legislation.

The Committee feels that it would therefore be unfair to the rail road industry to saddle the carriers with the costs of phasing out dua benefits.

But these costs must be met-by someone. The Committee has there fore authorized appropriations to meet the costs for the future o phasing out dual benefits. A precedent exists for this approach. Con

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H.R. 15301 eliminates this situation for the future by providing for the computation of railroad retirement Tier I benefits under the Social Security formula based on both railroad and non-railroad service.

The question before the Committee was who should bear the cost of continuing these benefits to persons already retired and those with vested rights protected under the bill, this cost estimated to represent 3.64 percent of table payroll.

The Office of Management and Budget has suggested that this cost can be met by simply cutting benefits under the bill. The Committee rejected this suggestion for three reasons: First, cutting off the benefits of those already receiving or legally entitled to them would clearly be inequitable. These individuals have a right to receive those benefits the law has led them to rely upon or expect.

Secondly, more than half of the long range cost of putting the overall system in actuarial balance under this bill is accomplished through significant reductions in benefits payable to future retirees. These reductions include the prohibition of future dual benefits as well as Finally, changes in the benefit formula since accruial of future dual benefit rights is prohibited under the bill, it seems unfair to assign this cost to present employees who will not be able to collect such benefits.

It should be noted that these reductions in future payments are offset in part by three liberalizations in benefits designed to make fully effective the early retirement provision which was enacted last year. The three liberalizations which the bill would provide have a level cost of 3.1 percent of taxable payroll and would provide:

(A) People who retire at age 60 with 30 years of service could receive supplemental annuities at age 60, rather than at age 65: (B) The spouse of an individual who retires at age 60 vith 30 years of service could qualify for a spouse's annuity at age 60, rather than at age 65; and

(C) The benefits generally payable to survivors (most widows) would be increased from 110% of the comparable social security benefit to 130% of the comparable benefit.

On the other hand, the railroads had no part in the creation of the current situation. The lost reimbursement to the Railroad Retirement System arising out of individuals becoming entitled to Social Security benefits arises out of non-railroad employment performed by these individuals-employment which has not benefitted the railroad industry in any fashion. A further factor leading to lost reimbursement arises in part out of provisions contained in the Social Security Act, and the formula for the computation of benefits thereunder again matters over which the railroad industry has no control. With respect to legislation enacted repealing restrictions on dual benefits (discussed hereafter), the railroads have consistently opposed such legislation.

The Committee feels that it would therefore be unfair to the rail road industry to saddle the carriers with the costs of phasing out dua benefits.

But these costs must be met-by someone. The Committee has there fore authorized appropriations to meet the costs for the future of phasing out dual benefits. A precedent exists for this approach. Con

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gress provided in 1940 that military service would be creditable under the Social Security Act, without any contributions being made by the serviceman. A similar provision was made for the Railroad Retirement Act. Appropriations were authorized to meet the costs of these wage credits, provided by Congressional action, and each year since. 1956, appropriations have been made for that purpose, and such appropriations continue to be made.

The deficit in the Railroad Retirement system has occurred in part because of Congressional action (1) liberalizing benefit eligibility under the Social Security system and (2) repealing restrictions upon dual benefits contained in the Railroad Retirement Act. Following the precedent set with respect to military service free wage credits, the committee proposes that appropriations be made to cover the costs of phasing out dual benefits which have been provided by Congressional action. Current estimates are that appropriations of $285 million a year on a level cost basis through the year 2000 will be sufficient to meet these

costs.

The Committee realizes that this method of financing the costs of phasing out dual benefits will not be a popular one; however, the Committee is not aware of an alternative method which would be fairer than the method selected.

THE EFFECT OF THE PROPOSED ACT UPON THE FINANCIAL STATUS OF THE RAILROAD RETIREMENT SYSTEM

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This figure represents costs calculated into perpetuity. The actual figure authorized by the bill would be $285,000,000 per year for 25 years.

ECONOMIC IMPACT OF THE BILL

Whether changes in a program like the Railroad Retirement system can be expected to have an inflationary effect in any period depends on an evaluation of a rather sophisticated economic analysis. In the end the changes will be considered inflationary if they contribute to a situation which favors generally rising prices.

If present law were to be continued, railroad taxes would need to be increased (with consequent increases in costs to users of rail services) to meet the costs of the program. The committee bill, on the otherhand, is financed without increasing railroad taxes and in the

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long run total payments from the Railroad Retirement Account are decreased. Thus the long-range effect of the bill, as compared with present law is actually deflationary.

In the course of the Committee's hearings on the bill, Horace J. De Podwin, Dean of the Graduate School of Business at Rutgers University, testified on behalf of the National Railway Labor Conference that the provisions of bill for meeting the costs of phasing out duel benefits would have a minimal inflationary effect. Summarizing his findings, Dean De Podwin said:

"Overall, the financing of windfall railroad dual benefit costs from General Treasury funds would appear superior, from an inflationary standpoint, to financing through higher railroad freight rates. Moreover, the inflationary impact of Treasury financing would appear minimal in absolute terms, and there is reason to believe such financing could even have a net deflationary effect, albeit small. The reasons are these:

(a) Under Treasury financing, the transfer of funds (i.e.. from taxpayers to retired railroad workers) is more direct than in financing through higher freight rates (even if possible).

(b) Reduced intermodal competition, with consequent higher freight rates for all forms of transport cause a 'ripple' effect on the prices of many commodities which is averted.

(c) An increased tax burden borne by the railroads would make them less competitive than competing modes of transportation and could reduce their investment in capital equipment with a consequent adverse impact on the nation's transportation capacity.

(d) The small size of the subsidy at issue, which, when spread over the entire economy, can be expected to have negligible, or even no, impact on the level of government spending.

(e) The key causes of the inflation now being experienced in the United States, and the nature of the measures required to reduce it effectively and equitably do not argue against the transfer proposed.

(f) The characteristics of the recipients of the subsidy. i.e.. their modest spending on essentials and their low use of debt, would tend to render a transfer from the public at large to retired families, at least in part, a deflationary measure."

The committee realizes that the bill would be even more deflationary in its effect if the cost of phasing out dual benefits were financed through reducing benefits under the bill, but the Committee is unwilling to make such a recommendation to the Senate, in view of the extent to which reductions in benefits under existing law are presently contained in the bill.

Imposition of additional taxes upon the carriers to finance the cost of phasing out dual benefits would add to the costs of the railroads. leading to justifiable applications for freight rate increases to cover these costs. In the committee's view, such a course of action, though recommended by the Office of Management and Budget as an alternative method of financing these costs, would prove more inflationary in its effect than the provisions of the bill as reported.

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