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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).
(6) 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.
(1) 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 fami
lies, 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.
DUAL BENEFITS UNDER OTHER ACTS OF CONGRESS It must be recognized that the bill actually takes benefits away from certain railroad employees—those who have not already qualified for Social Security benefits. Under existing law, these individuals can qualify for railroad retirement benefits and for social security benefits, and receive the full amount of both. This will hereafter be prohibited under the bill.
It can be argued that this is unfair to railroad employees. There is no restriction upon an individual qualifying for Civil Service retirement benefits and full Social Security benefits. The same is true of military retirement (except for certain offsets established under Public Law 92-425 in the case of survivor benefit elections), as well as retirement from the Foreign Service and other Federal plans.
The answer to the above arguments is that none of the other plans are re-insured with the Social Security system. The program of financial interchange has led to a net transfer from the Social Security system to the Railroad Retirement system of over $8.2 billion, and current transfers are running in excess of $900,000,000 annually. If it were not for the financial interchange program, railroad retirement benefits would have had to have been set at a much lower level than they presently are. The railroad employees are therefore already benefitting under the Social Security Act, and to permit future accruals of social security benefits in addition to railroad retirement benefits computed under existing law would permit these employees to receive, in effect, a “double dip” out of the railroad retirement fund and the social security fund.
It is true that individuals already on the rolls under both systems may continue to receive both benefits, and some individuals with vested rights will be permitted to receive both benefits in the future. It could be argued that this discriminates against individuals who will not be permitted to qualify for both benefits in the future. And the excess benefits of persons receiving dual benefits are to be frozen under the bill, thereby depriving these individuals of a part of the cost-of-living increases they otherwise could expect to receive in the future.
If, however, the existing system is permitted to continue, the Railroad Retirement system will be bankrupt by 1981, and there will be insufficient funds available to pay benefits at the present level to anyone-past, present, or future beneficiaries.
For the above reasons, the Committee wishes to point out to those who might suggest cutting benefits as a method of helping solve the deficit in the Railroad Retirement Account, that that is exactly what this bill does, both as to present and future dual beneficiaries and as to present railroad employees, their dependents, and survivors. The actuarial saving to the Account arising out of elimination of future dual benefits amounts to 4.08 percent of taxable payroll, whereas the costs of phasing out existing dual benefits, proposed to be funded through appropriations, amounts to only 3.64 percent of taxable payroll. In other words, present employees, through reduced benefits, are funding a greater portion of the costs of ending dual benefits than is proposed to be funded from general revenues. It should also be mentioned at this point that the railroads are currently paying taxes at the rate of 17.15 percent of taxable payroll to finance the Railroad Retirement system (including supplemental annuities), and current employees are paying the Social Security tax rate (presently 5.85 percent of taxable wages).
The deficit in the Railroad Retirement Account at present is almost equal to the lost reimbursement to the Account arising out of receipt of Social Security benefits by persons who are also receiving Railroad Retirement benefits. As was stated earlier in this report, this lost reimbursement amounts to 7.72% of taxable payroll, out of a total defict of 9.05%, or $451 million a year loss out of a total deficit of $529 million. In other words, were it not for the problem of dual beneficiaries, the railroad retirement system would be almost completely solvent.
COST IMPACT OF DUAL BENEFITS
Restriction on future receipt of dual benefits incorporated in proposed act..........
Cost of dual benefits under present act.......
The problem of dual beneficiaries has not occurred overnight. In 1953, when the problem was discussed in the report of the Joint Committee on Railroad Retirement established under Sen. Con. Res. 51, 82d Cong., approximately 15 percent of railroad retirement beneficiaries were also entitled to social security benefits. The report stated "With regard to persons with ten years or more of service the problem of dual benefits is not now serious, and if this ever should become a problem in the future, it could be solved by amendment to the Railroad Retirement Act, or the Social Security Act, without integration." (S. Rept. 6, Part 1, 83d Cong. 1st Sess., p. 6.)"
Today approximately 40 percent of railroad retirement beneficiaries are also entitled to social security benefits. This has resulted from liberalizations in eligibility requirements for social security benefits being enacted, and from acts repealing restrictions on railroad retirement benefits for persons also receiving social security benefits.
The former restrictions, in effect, provided that when a person eligible for benefits under the Railroad Retirement Act worked and paid taxes under the Social Security system, for all practical purposes he forfeited the Social Security he had worked and paid for, because his railroad retirement annuity was reduced by his full social security benefit. In other words, the employee, survivor, or spouse would have worked and paid taxes to the Social Security system and then wound up receiving nothing in return. Since these restrictions were almost impossible to defend, they were repealed in laws enacted in 1954, 1955, and 1965.
The present bill avoids this problem with respect to future beneficiaries, by providing that Tier I of an individual's benefit will be computed on the basis of both railroad and non-railroad service under the provisions of the Social Security Act, thereby avoiding the forfeiture effect of the former restrictions contained in the Railroad Retirement Act.
Another factor leading to the increase in dual beneficiaries arises out of the "new start" provisions contained in the Social Security Act by reason of amendments adopted in 1950 and subsequent legislation liberalizing eligibility for benefits under that Act. Up to 1950, the Social Security Act required a sufficient number of quarters of coverage for a person to become fully insured to make it difficult for a person to qualify for benefits under both Acts. Since 1950, the required number of quarters of coverage for many individuals to become eligible for Social Security benefits is much less than was formerly the case, so that the number of dual beneficiaries nas grown through this liberalization.
In other words, the increase in dual beneficiaries from 15 percent of railroad retirees to 40 percent is, in large measure, attributable to Acts of Congress which have made it possible for individuals to qualify under both Acts. Each year the problem has grown just a bit greater than it was the year before, but it was not until the Commission on Railroad Retirement submitted its report in 1972 that the full dimensions of the problem became apparent.
From the point of view of equity among recipients of Social Security benefits, the present situation cannot be permitted to continue. Railroad retirement benefits are set at the levels they are at today because of the financial benefits to the system arising out of the financial interchange. In other words, each railroad retirement benefit contains a Social Security component-however, the social weighing of the Social Security formula provides proportionally greater benefits arising out of this Social Security component for persons also receiving Social Security benefits than would be the case if all the employment of the individual concerned had been employment covered under the Social Security Act.
The following chart illustrates this point, with Column A representing the total of the Social Security component contained in each present railroad retirement benefit, plus Social Security benefits based on non-railroad earnings, and Column B representing the amount which would be paid under the Social Security Act if both the railroad and non-railroad service used in Column A had been combined in computing the Social Security benefit.