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Social Security Act (where the employee has performed less than 10 years of railroad service), but not both, on the basis of the employee's combined railroad and social security credits.

In order to accomplish the above-mentioned purpose, the Railroad Retirement benefit formulas would be restructured to provide a social security level benefit, based on an employee's combined social security and railroad earnings, plus what is commonly referred to as a staff level benefit, which would be based on railroad service only. In addition, annuitants who were receiving benefits under both the Railroad Retirement and Social Security Acts on the basis of a railroad employee's earnings record prior to January 1, 1975, when the new Act would become effective, and non-retired persons with “vested rights" to benefits under both Acts, would receive a "windfall" amount in lieu of the social security benefits to which they would have been entitled under present law. This "wind fall" amount would be based entirely on service prior to 1975 so that, in effect, no dual benefits would accrue after the effective date of the new Act. Annuitants and active railroad employees would have a “vested right" to dual benefits for purposes of entitlement to a "windfall" amount if they had been credited with 10 or more years of service under the Railroad Retirement Act on December 31, 1974, and had sufficient social security credits to be fully insured under the Social Security Act on that date. Inactive railroad employees who had 10 years of service on December 31, 1974, must have had sufficient quarters of coverage to be fully insured under the Social Security Act as of December 31 of the year in which they kıst engaged in railroad employment in order to have had such a "vested rights to dual benefits as would entitle them to a “windfall" amount.

Another significant change which would be made by the new Act concerns a program contained in the present Act which is usually referred to as the financial interchange program. I'nder this program, the railroad retirement system pays annually to the social security system an amount equal to the total in social security taxes which would have been paid by railroad employees into the social security system if railroad employment were covered under the Social Security Act. In return for these payments, the social security system transfers to the railroad retirement system, each year, an amount equal to the total in additional social security benefits that would have been paid under the Social Security Act if railroad employment had been considered as covered employment under the Social Security Act. The financial interchange program would be retained in the new Act; however, transfers under that program would be placed on an accrual basis beginning with the fiscal year starting July 1, 1975, rather than a deferred (cash) basis as under present law. As a result of this change, the initial transaction under the revised program would cover the amounts to be transferred with respect to all periods prior to August 1, 1975. In addition, the proposed financial interchange provisions would place the cost of “windfall” amounts on the social security trust funds; this cost is borne by the Railroad Retirement Account under present law.

Entitlement to all benefits provided by the proposed Railroad Retirement Act would be determined by the Railroad Retirement Board as under present law. In addition, the Board would determine entitlement to, and certify payment of, all social security benefits, including old-age insurance benefits, regardless of whether such benefits are

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based on the earnings of the covered railroad employee, payable to (A) an employee who has 10 years of service, (B) the wife or husband of such an employee, (C) any survivor who is entitled, or on application could become entitled, to an annuity under the Railroad Retirement Act, and (D) any other person entitled to social security benefits on the basis of the social security earnings of an employee who has 10 years of service, except a survivor in a case where the employee lacked a current connection with the railroad industry at the time of his death.

A detailed, section-by-section analysis of the various sections of the bill has been prepared and published by the staff of the House Committee on Interstate and Foreign ('ommerce as Committee Print No. 25.

EFFECTS ON THE FINANCIAL CONDITION OF THE SYSTEM The bill provides for a major restructuring of the railroad retirement system. In addition to the revised benefit computation procedures, the restructing alters the relationship between the railroad retirement and social security systems. Because the enactment of the bill would create an essentially new system, cost figures are presented for the plan as a whole, and for its components, rather than in relation to the present system.

(a) The cost figures are based on data and assumptions used in connection with the twelfth actuarial valuation of the railroad retirement system. Employee salary scales were adjusted upward, however, because the valuation assumed a monthly taxable ceiling of $1,000 instead of the current ceiling of $1,100. Static conditions are assumed in that future increases in wages and prices are not considered.

(6) The employee benefit can be divided into the following six categories:

(1) The imputed social security benefit on combined railroad retirement and social security earnings provided by section 3(a);

(2) The basic past service benefit provided by section 3(b);

(3) The additional amount on past service provided by section 3(c) which is limited to persons with railroad service after Dec. 31, 1974;

(4) The future service benefit provided by section 3(d);

(5) The supplemental annuity in an amount ranging from $23 to $43 provided by section 3(e); and

(6) The windfall benefit provided by section 3(h) to eligible employees. The railroad retirement spouse benefit is half the employee benefit in categories (1) through (A) above, subject to a maximum. There is also a windfall benefit provided by section 1(e) to eligible spouses.

(c) Survivor annuities can be divided into the folloing three categories:

(1) The imputed social security benefit on the employee's combined railroad retirement and social security earnings provided by section 4(f);

(2) An additional 30% of the imputed social security benefit on the employee's combined earnings provided by section 4(g): and

V widows, a windfall benefit provided by section

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Insurance and residual lump-sum benefits to survivors are provided by sections 6(b) and 6(c), respectively.

(d) In addition to the provisions outlined above, the bill provides for certain maximums and minimums to be applied to benefits. There is a “100% overall minimum" in that retirement benefits paid under the bill cannot be less than 100% of the social security benefits that would be payable to the employee and his family on the basis of social Security law if all of his railroad and social security earnings were covered under social security.

Section 3(f) (1) provides for a maximum to be applied to the sum of employee and spouse benefits. Under static conditions, however, the provision is virtually inoperative. Section 3(f)(2) provides for an 8-year "guaranty" period. Employees who retire during that period and their spouses cannot receive less than they would have received under the Railroad Retirement Act of 1937 as in effect on Dec. 31, 1974, on the basis of the maximum monthly compensation creditable at that time. It is estimated that the cost of this guaranty provision will be negligible.

(e) Cost figures for components of benefits to nonretired employees and future entrants are shown in table 1. The costs shown are costs to the railroad retirement system in excess of the amounts that will be reimbursed to the railroad retirement system through the financial interchange with social security. In other words, the figures reflect the costs for providing the full benefit that the annuitant will receive less the social security benefit computed on the basis of combined railroad retirement and social security earnings.

(f) The bill will bring about a number of changes in the operation of the financial interchange. First, financial interchange transfers will be moved to an accrual basis which will accelerate the receipt of funds by the railroad retirement account. Second, there will no longer be any reduction in the financial interchange reimbursement to railroad retirement for dual benefits" (i.e., social security benefits received by railroad retirement annuitants based on social security earnings). Under the bill, all payments to railroad retirement annuitants under both the Railroad Retirement and Social Security Acts will be made by the Railroad Retirement Board. ('onsequently, social security will not be making any payments that would result in a deduction from the financial interchange. Third, there is the matter of how windfall benefits will be financed which will be discussed later.

(9) In most cases, individuals will not be able to earn credits toward a "dual benefit" based on wages after Dec. 31, 1974. Instead, an inputed social security benefit will be payable based on combined railroad retirement and social security earnings. Credit for social security earnings before Jan. 1, 1975, will be reflected in that benefit and in the windfall benefits provided. In certain instances, the Railroad Retirement Board will pay benefits to a person not eligible for railroad retirement benefits based on social security law and the social security earnings of an employee or spouse covered under railroad retirement. This may arise in cases where a retired employee has children eligible for a social security benefit, where a divorced wife is involved, and when a widow remarries after the age of 60.

(h) Costs and cost reductions arise from other differences between social security law and the provisions of the bill. From a cost standpoint, the principal areas are the following:

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(1) Employees with 30 or more years of service who retire after June 30, 1974, at the age of 60 or above ("60 with 30” employees) will be considered eligible for an unreduced social security benefit based on combined railroad retirement and social security earnings. Spouses of such employees will be entitled to an unreduced social security spouse annuity if they are age 60 or above.

(2) Occupational disability retirees are deemed to be totally and permanently disabled for the purpose of calculating their social security benefits on combined earnings.

(3) There is no 5-month waiting period for disability retirement benefits.

(4) The inputed social security spouse benefit based on the employee's combined earnings is subject to the railroad retirement age reduction factor of 1/180 for each month the spouse is below age 65 rather than to the social security age reduction factor of 1/144.

(5) Social security benefits based on the employee's combined earnings will not be paid to categories of beneficiaries not eligible for railroad retirement benefits under the bill. Such persons, however, may be eligible for benefits based on the social security earnings of the railroad employee or his spouse (see paragraph g above) or the 100% overall minimum provision may come into effect (see paragraph d above).

(6) Persons who have completed 10 years of railroad retirement service but who are not eligible for a windfall benefit may obtain a refund of excess social security taxes (assuming a part of the past railroad retirement taxes to be applicable to social security) paid during the years 1951 through 1974 inclusive under the

provisions of section 6(d). (i) In general, beneficiaries on the rolls on Dec. 31, 1974, will receive the same amount under the bill that they were receiving under the Railroad Retirement Act of 1937. Survivors, however, will be guaranteed a total benefit of at least 130% of the amount payable under social security law based on the employee's combined earnings. At present, the guarantee is 110% of that amount.

(j) Beneficiaries on the rolls on Dec. 31, 1974, who are eligible for a supplemental annuity under the 1937 Act will receive the supplemental annuity according to the $15 to $70 benefit schedule of the 1937 Act. ('ontributions for supplemental annuities will be made on a pay-as-you-go basis in amounts sufficient to pay benefits at the 1937 Act levels to all present and future recipients. However, those taxes which are not required to pay supplemental annuity benefits to employees retiring after Dec. 31, 1974, because of the lower benefit schedule of the present bill will be credited to the regular railroad retirement account rather than to the railroad retirement supplemental account.

(k) Table 2 presents an actuarial balance sheet for the railroad retirement system under the provisions of the bill. In addition to financing from the funds on land and income from investments, the financial interchange, and presently legislated taxes, the bill calls for an ncommision of the cost of windfall benefits by the Social Se.

m. The cost of windfall benefits as defined in the

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bill (see paragraph 1 below) is estimated at 4.36% of taxable railroad payrolls or $254 million per year on a level basis. Expressed in terms of present value, the cost is $1.55 billion. On this basis, the actuarial deficiency of the railroad retirement system under static conditions is .24% of payroll or $16 million per year. Those figures may be compared with the actuarial deficiency of the present railroad retirement system which is estimated at 9.06% of payroll or $529 million per year.

(1) It appears from correspondence exchanged between the railroad management and labor negotiating parties that serious considcration is being given to the parties jointly proposing certain amendments to the present bill. In particular, one amendment under consideration would change the definition of the windfall amount with respect to employees and spouses on the beneficiary rolls on Dec. 31, 1974, and would markedly lower the cost of windfall benefits to be assumed by social security.

The bill as presently drafted (section 204) defines the windfall benefit for most retired employees who are receiving a dual benefit as the excess of the amount presently received over the sum of (i) an imputed social security benefit on combined railroad retirement and social security earnings and (ii) the railroad retirement benefit under the 1937 Act less the amount in (i) above. Consequently, the sum of (i) and (ii) is the railroad retirement benefit. Because the amount now being received by most such retired emplovees is the railroad retirement benefit and the dual benefit, the windfall amount is the same as the dual benefit. The situation is similar with respect to sponses on the rolls.

The amendment being contemplated will change the definition of the wind fall in such cases to one more consistent with the definition of the windfall for non-retired persons. The windfall for employees on the rolls who are receiving a dual benefit will be the excess of the amount presently received over the sum of (i) an imputed social security benefit on combined earnings and (ii) the railroad retirement benefit under the 1937 Act less an imputed social security benefit based on railroad retirement earnings only.

If that amendment were adopted, the cost of windfall dual benefits to be assumed by social security would be 3.61% of taxable payroll or $213 million per year. Expressed in terms of present value, the cost would be $3.80 billion. The actuarial deficiency of the railroad retirement system under static conditions would then be .96% of payroll or $57 million per year.

(m) The twelfth valuation of the railroad retirement system and the report of the Commission on Railroad Retirement both stated that the current railroad retirement fund faced exhaustion in the not too distant future. In addition, the present and potential beneficiary/ employee ratio indicates the likelihood of a cash flow problem over the next 20 years. For these reasons, table 3 shows a projection of components of the restructured railroad retirement system from the year 1975 to the year 2000. To some extent, the projection utilized the one prepared in the course of the valuation, but extensive modifications were necessary to reflect the revisions contained in the bill. Certain additional assumptions over those used in the valuation were necessarv and they introduce a degree of roughness in the final figures.

40-239 (Pt. 2) 0 - 74 - 29

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