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The Commission on Railroad Retirement stated in its report that these dual benefits illustrated by column A above are inequitable in the sense that a minority of railroad employees receive an advantage not available either to the majority of career railroad employees those who spend their entire working life in the railroad industry-or to employees in other private industries. But the Commission also was of the view that any plan to eliminate these dual benefits should include protection of the equities of existing beneficiaries and employees with claims upon such benefits. Dual beneficiaries cannot fairly be criticized, since they have merely secured the benefits to which they are entitled under existing law. That is why their equities should be preserved.

RESOLUTION OF THE DUAL BENEFIT PROBLEM

Resolution of the so-called "dual benefit" problem is central both to insuring the fiscal soundness of the railroad retirement system and to establishing equitable retirement benefits for all railroad employees.

The fundamental step contained in the bill is to place the social security level of benefits for railroad employees under a single combined retirement system. Under the bill the Tier I benefits payable will include a social security component which will be equivalent to the benefit that would be payable under the Social Security Act if based upon the employee's combined railroad and non-railroad service and compensation. Concomitantly, the employee's non-railroad service and compensation no longer will entitle him to a separate benefit under the Social Security Act. As a result, dual benefits will be eliminated, appropriate credit will be given to the employee's nonrailroad (as well as to his railroad) service and compensation in calculating his retirement benefit, and a “windfall” no longer will be possible except insofar as the bill expressly preserves benefits for those beneficiaries and employees whose equities entitle them thereto.

The most difficult problem in this regard involves the manner in which dual benefits should be phased out on an equitable basis. The bill provides as follows:

First, the dual benefits of beneficiaries on the rolls as of January 1, 1975 would continue to be paid in full. However, the portion of those dual benefits which a beneficiary would not receive had a single social security benefit previously been calculated on the basis of his combined railroad and non-railroad service and earnings would not be subject to future increases in the level of social security benefits. In effect, therefore, the amount of that portion will be frozen as of December 31, 1974. This is the approach recommended by the Commission on Railroad Retirement.

Second, employees without sufficient railroad and non-railroad seryice and compensation by December 31, 1974 to have fully qualified under both systems would not be entitled to a dual benefit. All such employees, upon retirement, would receive a single benefit calculated on the basis of their railroad and non-railroad service and compensation. In addition, however, such an employee upon retirement (or his survivors if he should die before retirement) would be entitled to a lump-sum refund of employment taxes paid under the Railroad Re12

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tirement and Social Security Acts prior to January 1, 1975 in excess of what he would have paid if all of his employment prior to that date had come under the Railroad Retirement Act. Again, this is what the Commission on Railroad Retirement recommended.

Third, employees who have sufficient service and compensation to be fully qualified under both systems but who have not retired prior to January 1, 1975, would be divided into two classes or groups.

The first group would be comprised of those employees with a "cur. rent connection" with the railroad industry-12 months of railroad service out of the previous 30 months, as defined in the 1937 Act and in the bill either as of December 31, 1974 or as of the date of retirement, and also of those employees with 25 years or more of railroad service even though without such a "current connection." This group also would receive, upon retirement, a dual benefit based upon service and compensation prior to January 1, 1975. The amount thus determined to be in excess of the amounts which would have been received if the employee's railroad service and non-railroad service had been combined in determining the Social Security portion of his benefit would be subject to increase prior to retirement by reason of cost-of-living increases in the level of social security benefits during that intervening period, but would be frozen upon retirement, as would be done in the case of dual beneficiaries retired as of December 31, 1974.

The second group would be comprised of employees who, after qualifying for benefits under the Railroad Retirement Act, left the railroad industry without having 25 years of railroad service and who do not now have a current connection to the railroad industry. Under the bill they would not receive a dual benefit, upon retirement, unless they also had fully qualified under Social Security by the close of the year prior to 1975 in which they left railroad service (although they would be entitled to the lump-sum benefit refunding excess employment taxes paid). If they had so qualified under both systems at that point, however, they would receive dual benefits, upon retirement, calculuıed as of the time they left railroad service, and subject to cost-of-living increases in the level of social security benefits after 1974 and prior to retirement. The excess benefit would be frozen upon retirement, as in the case of other dual beneficiaries.

The bill also contains generally similar provisions for terminating or phasing out dual benefits of spouses and survivors of railroad employees.

FREEZING A PORTION OF DUAL BENEFITS

As was mentioned above, a portion of the dual benefits to which any individual may be entitled will be “frozen" under the bill. Future costof-living increases under the Social Security Act will be applicable to Tier I benefits, and future cost-of-living increases will be applicable to Tier II benefits under the new Railroad Retirement Act of 1974.

In the case of individuals who are permitted under the bill to receive Social Security benefits in addition to Railroad Retirement benefits, the bill provides that a portion of those benefits will not be subject to future cost-of-living increases. To determine the amount subject to the freeze, the Railroad Retirement Board will compute the Social Security benefit to which the individual would have been entitled based

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solely on railroad service, and the social security benefit to which the individual would have been entitled based solely on non-railroad service performed either by him or the person through whom his benefit is determined. To the extent that the total of these two amounts exceeds the amount to which the individual would have been entitled under the Social Security Act based on combined railroad and nonrailroad service, the excess will be frozen. The following chart illustrates this point.

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FUTURE COSTS

The Committee has reported a bill which places the Railroad Retirement System on a sound financial basis. Current actuarial estimates are that the bill will lead to an actuarial deficit of less than one-half of 1 percent of taxable payroll. This is considered by the Committee to be well within the limits of actuarial tolerance.

During the hearings, Mr. William H. Dempsey, Chief Negotiator for the railroads, made a commitment, as he had in testimony before the House Committee, to the effect that all future benefit liberalizations in the Railroad Retirement Act, other than those occurring as a result of amendments to the Social Security Act, will be financed 100 percent by the railroad industry. During the hearings Mr. Dempsey read into the record a portion of his statement to the House Committee as follows:

Mr. DEMPSEY. The railroad industry is perfectly prepared to fund the Railroad Retirement System in every respect in which it bears a reasonable resemblance to any other private industry pension plan, and what that means is that if somehow these figures go askew and we run into difficulty in the future because we have not put enough money in with relation to the benefits that are being provided, we will fund that, we will take care of it, that is our responsibility.

The single exception is this 3.64 percent cost of phasing out dual benefits because in our view dual benefits are an anomaly, and in the view of the Commission on Railroad Retirement, they are a quirk in the law. They don't exist in any other industry. They never would have been the product of collective bargaining. In those circumstances we urge that this discrete element, this single feature of the Railroad Retirement System, is properly a Federal responsibility, but it is only in that respect that we seek Federal funding of this whole program.

INVESTMENT OF THE RAILROAD RETIREMENT ACCOUNT

Under current law, the Railroad Retirement Account is invested in obligations of the United States, or obligations guaranteed as to principal and interest by the United States. The rate of interest on these obligations ranges from a low of 3 percent to a high of 838 percent. The overall average rate of return on the obligations held by the Treasury for the Account amounts to approximately 6.57 percent.

Under present law, the Secretary of the Treasury determines the manner in which the Account will be invested. The Secretary is both · a Trustee of the Railroad Retirement Account, as well as Chief Fiscal Officer of the United States. His responsibilities for handling the public debt raise obvious conflicts with his duties as Trustee of the various Trust Funds which he retains, such as the Social Security Trust Funds, the National Service Life Insurance Trust Fund, the Civil Service Retirement Fund, and numerous others. The following shows the holdings of the Account as of July 31, 1974.

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RAILROAD RETIREMENT ACCOUNT, INVESTMENT HOLDING, JULY 31, 1974

Maturity

Face amount

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Special issues:

Certificates of indebtedness: 8% percent.......
Special notes:

64 percent.....
548 percent...
6X percent..

8 percent...
Public issues:
U.S. Treasury notes:

6 percent.
7 percent...
6% percent.
74 percent
7% percent.
6X percent...
6 percent.

6% percent.
U.S. Treasury bonds:

4 percent...
3% percent.
6 percent..

percent.
percent.
Dercent.

percent..
A percent...
4 percent.

4 percent.
3 percent.

345 percent. Agency securities: 5.20

Total holdings..........

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I'nder the House-passed bill the authority over investments now exercised by the Secretary of the Treasury would be vested in the Railroad Retirement Board and any additional income earnings produced by this arrangement would be used, in effect, to reduce the payments out of general revenues authorized to meet the cost of phasing out dual benefits.

The Committee was informed that under the House-passed provision the Railroad Retirement Board, by retiring low-interest-earning invest ments and making new investments at higher interest rates, anticipated additional income over the long-run equal to one-half of 1 percent of taxable payroll. IIowever, the formula used to determine the amount to be transferred to the Treasury as an offset for general revemue payments might result in transfers in excess of the additional interest earnings. Accordingly, the committee has modified the House bill so that the additional interest earnings as actually determined by the Board will be deducted from the authorization for general revenue contributions under the bill. This changes the method, but not the intent, of this House-passed provision.

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