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RAILROAD RETIREMENT SUPPLEMENTAL ACCOUNT, INVESTMENT HOLDINGS, JULY 31, 1974
June 30, 1975
RAILROAD RETIREMENT HOLDING ACCOUNT, INVESTMENT HOLDINGS, JULY 31, 1974
.... June 30, 1975
$220,000 3,799,000 4,019,000
From its initial establishment until 1963, the rate of interest paid on investments of the Railroad Retirement Account was 3 percent. By 1963, the rate of interest on Government obligations was considerably above this amount, and by Public Law 88–133 the rate was changed to equal the current average market yield on long-term Government obligations. Investments of the Account have since been made on that basis.
Shortly after the enactment of Public 88-133, legislation was introduced providing for a similar increase in the rate of interest paid on Trust funds held for the various Veterans Administration insurance programs. By agreement with the Secretary of the Treasury, resulting from that introduced legislation, the rate of interest on these funds was increased to approximate the current average market yield on long-term Government obligations. Soon thereafter similar action was taken with respect to the Civil Service Retirement Fund.
The Committee, like the House Committee, does not feel that the enactment of this bill should lead to action with respect to other Trust Funds similar to that which occurred after the enactment of Public Law 88–133, because the situation with respect to the Railroad Retirement Account has changed significantly, as it compares to other Federally held Trust Funds.
Last year, Public Law 93–69 was enacted, carrying out an agreement between management and labor reached through collective bargaining, under which the railroads assumed the responsibility for hereafter paying all taxes required to support the Railroad Retirement system in excess of the Social Security tax rate, which would be paid by the employees.
The enactment of that Act significantly changed the character of the Railroad Retirement system. Whereas it formerly was a Federal retirement system, supported, as is Social Security and Civil Service Retirement by equal amounts paid by the employers and the employees, the Railroad Retirement system is today, in essence, a company pension program administered, for historical reasons, by the Federal Government.
Tier I benefits hereafter paid to retirees, their dependents, and survivors will be a Social Security benefit, paid by the Social Security system through financial interchange; Tier II benefits will be based solely on railroad service, and will be paid for entirely by the railroads (except for the cost of phasing out dual benefits). Future changes in
Tier II benefits will arise out of collective bargaining between the railroads and the unions.
Under these circumstances, the character of the Railroad Retirement system differs substantially from other systems having a Trust Fund managed by the Secretary of the Treasury.
The Committee, therefore, feels that the Railroad Retirement Account should be treated similarly to trust funds established for the payment of other private pension plans, with investments being made solely on the basis of the best return on investments, and other considerations (such as the efficient management of the public debt) not being taken into account as they are today.
SUMMARY OF THE BILL
The present railroad retirement system was established by and operates under the Railroad Retirement Act of 1937. Title I of the bill would enact a Railroad Retirement Act of 1974 which would replace the 1937 Act. The new Act would provide all retirement and survivor benefits insofar as employees with ten years or more of railroad service, retiring after December 31, 1974, and their spouses and survivors, are concerned.
With relatively minor exceptions, the definitions in Section 1 of the bill have not been changed from similar provisions in the 1937 Act. This also is true of the provisions of Sections 5, 7-18, and 20 of the bill, which for the most part relate to the administration of the railroad retirement system by the Railroad Retirement Board. Section 21 of the bill simply names the new Act as the Railroad Retirement Act of 1974.
The eligibility provisions in Section 2 of the bill and the provisions in Section 6 of the bill for payment of lump-sum benefits also generally are similar to provisions in the 1937 Act, with certain exceptions. In two instances the eligibility requirements have been liberalized to make more effective a 1973 amendment intended to encourage early retirement; and the bill would restrict the residual lump-sum benefit so that it would be based only on compensation and service prior to January 1, 1975, and would create a new lump-sum benefit for employees who, upon retirement, do not qualify for a benefit under the Social Security Act but who had some social security employment prior to January 1, 1975. Section 19 of the bill is entirely new. It would make future liberalizations of eligibility requirements under the Social Security Act for benefits, including medical benefits, and future additions of new classes of benefits under that Act automatically applicable to railroad employees under the 1974 Act, with certain exceptions generally intended to prevent duplications of benefits and to retain eligibility requirements not affected by such future amendments to the Social Security Act. The bill would not, however, operate to entitle divorced wives, surviving divorced wives, surviving divorced mothers, or children of living employees to annuities under the Railroad Retirement Act since any change in the conditions of entitlement to, or the amounts of, benefits payable to such persons under the Social Security Act would
not create a “class of beneficiaries” not entitled to social security benefits prior to January 1, 1975.
Section 3 specifies the benefits that will be payable to railroad employees who retire after December 31, 1974 and Section 4 specifies the benefits that will be payable to their spouses and survivors. Those benefits will include a social security component equivalent to what would be paid under the Social Security Act upon the basis of the employee's combined railroad and non-railroad service and compensation, an additional "staff” component based on the employee's railroad service and earnings, and certain cost-of-Jiving adjustments and other features. Dual benefits under this Act and the Social Security Act will be eliminated except as they would be preserved for employees, spouses and survivors equitably entitled thereto by reason of their existing qualifications. The staff component of employee benefits generally will be based on the 1937 Act insofar as service prior to January 1, 1975 is concerned, and spouse benefits generally will be 50% of the benefits of the employee to whom the spouse is married as is true under the 1937 Act. Survivor benefits generally will be 130% of the comparable benefits payable under the Social Security Act, while under the 1937 Act such benefits generally are only 110% of comparable social security benefits.
Title II of the bill provides for the benefits to be payable to beneficiaries already on the rolls railroad employees, and their spouses and survivors, who retired prior to January 1, 1975. As provided therein, those benefits would be payable under the applicable provisions of Sections 3 and 4 of Title I, would be similarly divided into social security and staff components, etc. However, since all of the railroad service and compensation upon which such benefits are based will have occurred prior to January 1, 1975, the entire staff component will be based on the benefits payable under the 1937 Act, and the bill will insure that the benefits payable will not be less than those payable under the present law (including the Social Security Act as well as the 1937 Act). In addition, all such existing beneficiaries who presently are receiving a dual social security benefit will have that benefit (as of December 31, 1974) preserved.
Titles III, IV and V of the bill would amend various provisions of the Social Security Act, the Railroad Unemployment Insurance Act and the Railroad Retirement Tax Act (as included in the Internal Revenue Code of 1954). Most of these amendments are pro forma, such as changing references to the 1937 Act so as to refer to the 1974 Act which Title I of the bill would enact.
Title VI of the bill contains effective dates-generally January 1, 1975.
A NEW BENEFIT FORMULA AND THE TWO TIER SYSTEM The Commission on Railroad Retirement recommended that a new benefit formula be adopted, including a so-called “two tier" system under which railroad employees would be brought directly under the social security system—the first "tier”—and would receive in addition a supplemental retirement benefit calculated on a different basis the second "tier."
Although the bill would not adopt the "two tier" system in form, essentially it does so in substance. One major component of the new railroad retirement benefit formula which the bill would establish is in essence a social security benefit. That component would be calculated on the basis of the formula provided in the Social Security Act as applied to all of the employee's wages and service, non-railroad as well as railroad. All future increases in the level of social security benefits would be applied to this component of the new railroad retirement formula, both to people who retire after the increases become effective and to people on the retirement rolls, in the same way as if they were social security beneficiaries.
Under the financial interchange between the railroad retirement and social security systems, which the bill would retain, this social security component would be financed by the social security system as at present, and that portion of both employer and employee railroad retirement taxes that are the equivalent of social security taxes would be transmitted to the social security system as at present.
Consequently, when taken together with the phaseout of dual benefits, these provisions of the bill should accomplish the principal goal of the Commission's "two tier” recommendation—a clear and permanent isolation of the social security component of railroad retirement benefits based upon combined railroad and non-railroad service and compensation, from the additional component riding on top of social security which is based on railroad service and compensation alone and is financed by the railroad industry.
In regard to that additional component—the part that would ride above the social security level of benefits and is commonly called a “staff” level of benefits—the Commission on Railroad Retirement believed that the existing formula under the 1937 Act is unduly complex and also that, projecting results over the next 30 years or so, the formula would produce benefits having an unrealistic relationship to wage levels.
The bill revises the formula substantially. The bill provides that the staff component of the new railroad retirement formula basically will be calculated upon two factors, career railroad earnings and a flat dollar amount per year of service. In addition, a supplemental annuity would be paid to employees who have 25 years or more of railroad service and a current connection with the industry when they retire, substantially as is done under the 1937 Act.
The bill provides that benefits based on service prior to the effective date of the new Act (January 1, 1975) will be computed under the old formula provided in the 1937 Act, so that the new formula will make no change in that regard. The bill also would provide two transitional elements a special credit for service prior to January 1, 1975, and an eight-year "grandfather clause" applicable to all retirement benefits except the frozen portion of dual benefits. Taken together, these features of the bill would insure that no employee retiring within the next eight years will receive less than he would under the formula as it exists today computed under the current limit on creditable compensation. Indeed, most career railroad employees retiring in the next several years should receive somewhat more benefits if the bill is enacted than they would have received under the old formula as so computed.
It should be noted that the bill in effect would make permanent three increases in the level of railroad retirement benefits under the 1937 Act which the Congress, commencing in 1970, put into effect on a temporary basis pending a restructuring of the railroad retirement system. Those temporary increases, which were respectively 15%, 10% and 20% of then existing benefits, will expire at the end of this year unless new legislation is enacted. They increased the benefits by about 52% on a cumulative basis. They would continue to be taken into account under the bill, however, in computing that part of the "staff" component based on service prior to January 1, 1975, and for purposes of the "grandfather clause." Beneficiaries on the rolls prior to January 1, 1975 will be assured under the bill that their benefits as of Demember 31, 1974 will not be reduced, so that those temporary increases also will in effect become a permanent part of their benefits if the bill is enacted.
The new benefit formula which the bill would establish contains another feature which has no counterpart in the 1937 Act-cost-of-living adjustments in the level of benefits. Since the social security component of the formula will be the equivalent of benefits payable at the time under the Social Security Act, the level of that component will be increased at the same time and in the same amount as the level of social security benefits is increased, including increases resulting from the automatic cost-of-living adjustments under Section 215(i) of the Social Security Act. This not only will maintain a congruence between the level of the social security component and the level of benefits under the Social Security Act, but also will insure retired railroad employees of at least as much protection against inflation as the Social Security Act affords to retired employees in other industries.
In addition, moreover, the bill would provide for a cost-of-living escalation in the level of the “staff” component of the new benefit formula. There would be four such cost-of-living adjustments during the six-year period commencing January 1, 1975. For beneficiaries on the rolls at the time, the first such adjustment would become effective as of June 1, 1977, and would be calculated on the basis of 32.5% of the increase in the Consumer Price Index between the first quarter of the prior year and the first quarter of that year. Similar adjustments would be made effective June 1 of each of the following three years. For employees in active service, the staff part of the benefit formula would initially be adjusted as of January 1, 1978, which adjustment would be calculated on the basis of 65% of the increase in the Consumer Price Index between September of 1976 and September of 1977, with an offset for increases in maximum creditable compensation. There would then be three similar adjustments as of January 1 of each of the following three years, and each such adjustment would benefit all employees (and their spouses) who retire after the effective date of the adjustment.
The committee has been informed by the Railroad Retirement Board that a substantial increase (about 10 percent) in the number of Board employees may be necessary to effect the changes the bill would make. It is the committee's hope that the Board will receive favorable consideration by the Appropriations Committee's and the Office of Management and Budget for anthorization to hire whatever additional employees are needed to assure prompt payment of rail. road annuities.