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Table 3 reflects that under the benefit and financing provisions of the bill the combined regular and sunnlemental railroad retirement accounts will decline to a balance of $3,435 million in the vear 2000. Should the bill be amended per paragraph 1 above to change the definition of the wind fall amount for employees and spouses on the rolls, the fund will decline to a balance of $620 million in the year 2000:
(n) The previous discussion has been confined to static economic conditions for a number of practical considerations. Essentially, the future course of the railroad retirement system under “dynamic" conditions (i.e., where there are increases in wages and prices that would activate the automatic adjustment provisions of social security law) depends upon the nature of those future conditions. There is some reason to believe, however that under the most likely patterns of future wage and price increases the financial position of the railroad retirement fund will be improved. There are two major reasons for this view. First the dynamic increases in the railroad staff portion of the benefit are limited. Only four such increases are provided for in the bill. Even if the number of increases is raised, the increases will cover only certain portions of the railroad staff benefit and are only a fraction of the rise in prices reflected by the Consumer Price Index. Second, under dynamic conditions, taxable wages and hence tax income, will be increasing. Projections made by the Social Security Administration (in the 1974 Annual Report of the Trustees of OASDI) indicate that the rise in income will be appreciably greater than the rise in benefits produced by the cost-of-living adjustment formulas given in the bill.
(0) The cost figures presented make no allowance for the provisions of section 19 of the bill which extend to railroad retirement annuitants certain classes of benefit liberalizations if those liberalizations are made part of social security law. At the present time, there is no way to anticipate the nature of any such liberalizations.
TABLE 1.--COSTS IN EXCESS OF FINANCIAL INTERCHANGE REIMBURSEMENTS FOR NONRETIRED EMPLOYEES AND
FUTURE ENTRANTS UNDER THE RESTRUCTURED RAILROAD RETIREMENT SYSTEM, STATIC CONDITIONS
Equivalent level cost
Level annual Percent of amount payroll
1. Employees... ..
(0) Basic past benefit ....
per year for subsequent years of past service)...
Supplemental annuity (523 to 543).......... 2. Spouses 12 3. Survivors.............. (1) Aged widows (30 percent of the social security benefit on the employee's
combined earnings).. (0) Other survivors......
Insurance lump sums.
(0) Residual payments..
() Active employees...
(d) Survivors... 5. Costs in regard to a 100-percent overall minimum provision for active and inactive em
ployees and their families.. 6. Costs in regard to certain relationships between the railroad retirement and social se
curity systems .......
(a) Financial interchange for railroad retirement ineligible beneficiaries..
based on social security earnings......
during the 5-month waiting period....
in social security level benefits to spouses.
1 This cost is net after the reduction for the offset in the basic past service benefit for the ainount of the whole social security benefit in social security earnings before the changeover date.
* Includes the cost of allowing a reduced annuity to a spouse at 62 when the employee is 62.
* Does not include the cost of .05% of payroll or $3.000.000 per year that would result if a social security benefit were imputed (assuming the date of retirement were the closing date) to widows of occupational disability and 60 with 30 retirees.
Note: A minus sign indicates a cost reduction. The level taxable payroll is $5,840,000,000 per year year based on an $1,100 monthly ceiling. The term "full benefit' as used here orresponds to a disability freeze benefit, i.e., a social security benefit calculated using a retirement date computation point.
TABLE 2-ACTUARIAL BALANCE SHEET FOR THE RESTRUCTURED RAILROAD RETIREMENT SYSTEM (UNDER
Net costs with 110 percent overall minimum to survivors.....
cent for beneficiaries on the rolls.....
(3) Cost of continuing supplemental annuity to employees on the rolls........ c. Initial deficit (b minus a).... d. Benefits with respect to active and inactive employees and new entrants (from table 1,
item 7)......................... e. Administrative expenses... 1. Elimination of interchange with RUIA. .
Total cost of plan in excess of financial interchange reimbursements (c+d+e+1)....
(1) Net railroad retirement tax rate!....
(i) Applied to the railroad retirement account.
(ii) Applied to the supplemental annuity account..
(1) With respect to nonretired employees (from table 1, item 4).
(iv) For survivors of retired and deceased employees.... i Deficit under static conditions (g minus h) ........
1 The railroad tax rate of 9.5 percent of taxable payroll reduced by .25 percent. The reduction reflects that railroad retirement transfers to social security more than it collects in social security taxes because of the difference more than it collects in social security taxes because of the difference between the monthly and annual bases.
7 For employees and spouses on the rolls the windfall is defined in such a manner as to be identical with the dual benefit (.e., the social security benefit on social security earnings).
For survivors of retired and deceased employees, the windfall is the excess of the sum of the railroad for mula sur. vivor benefit and the social security benefit on the survivor's social security earnings over (ii) 130 percent of the social security survivor benefit on the employee's combined earnings.
See text (paragraph 1) for the financial implications of an alternative definition of the windfall for employees and spouses on the rolls.
Note: A minus sign indicates a cost reduction. The level taxable payroll is $5,840,000,000 per year based on an $1,100 monthly ceiling
TABLE 3.-PROJECTION OF COMPONENTS OF THE RAILROAD RETIREMENT SYSTEM, 1975-2000; ACCRUAL BASIS,
1 All benefits from both railroad retirement and social security earnings, including supplemental annuity and windfall amounts.
The tax rate of 19.40 percent applied to each year's taxable payroll. • The gain from financial interchange is social security benefits on combined earnings less social security taxes on railrood earnings. The financial interchange is on an accrual basis. • The combined regular and supplemental accounts. The fund begins at $
at the end of 1974 and will earn interest at the annual rate of 5% percent.
VIEWS OF THE BOARD
Serious questions were first raised as to the actuarial soundness of the railroad retirement system in 1970 at the time that consideration was being given to an increase in railroad retirement benefits. Congress established a Commission on Railroad Retirement to study the system and its financing for the purpose of making recommendations as to the measures necessary to provide adequate levels of benefits on an actuarially sound basis (Public Law 91-377). The Commission was to submit a report on its findings and recommendations by June 30, 1971, but subsequently received a one year extension to June 30, 1972.
Shortly after the Commission issued its report, which was received by Congress on September 7, 1972, Congress enacted Public Law 92-460, which contained a provision instructing representatives of railroad labor and management to enter into negotiations that would take into consideration the specific recommendations of the Commission on Railroad Retirement and to submit a report containing their mutual recommendations as to what measures should be taken to assure the receipt of sufficient revenues to finance the benefits provided by the Railroad Retirement Act. Pursuant to that directive, the representatives of labor and management submitted a report, dated February 27, 1973, calling attention to the complex issues involved and stating that substantial progress had been made in shaping mutually agreeable recommendations. The parties then jointly sponsored legislation which was enacted as Public Law 93-69, approved July 10, 1973. As a result of that legislation, the representatives of labor and management were directed to present to Congress their joint recommendations, in the form of a draft bill, for restructuring the railroad retirement system in a manner which will insure the long-range ac
tuarial soundness of the system. The bill S. 3612 implements the recommendations submitted by the Joint Labor-Management Railroad Retirement Negotiating Committee in accordance with the directive contained in Public Law 93–69.
Board Members Speirs and Quarles believes that the recommendations presented by the Joint Committee, as embodied in the provisions of the bill, meet the obligation imposed by the above-mentioned public law and commend the members of the Committee for their efforts in resolving the complex problems which confronted them. Accordingly, Board Members Speirs and Quarles recommend that the bill be enacted.
The Chairman of the Board feels that the bill is a step in the right direction and realizes the difficulties which the labor and management negotiators faced in arriving at the proposed revision. However, the bill contains features which affect individuals and groups outside of the railroad industry, mainly the provision which would require social security to finance the wind fall elements of the railroad retirement benefits. The recently released report of the Board of Trustees of the social security system indicates that the social security program may also be facing financial difficulties. In view of this, the Chairman defers to the Social Security Administration and the Office of Management and Budget with respect to this feature of the bill.
The Chairman would also like to bring out the complexities which will exist in the computation of annuities during the transition period from the old to the new program and the fact that this transition period will last for several decades. These complexities will increase the cost of administering the program and employees will probably be unable to understand and verify the computation of their annuities. After the end of the transition period, the program will be simple to administer and easy for railroad employees to understand how their annuities are computed. The Chairman is aware of the various interests that are involved in negotiations; namely, labor's desire to get the greatest benefits possible and still fulfill the requirement that the system be actuarially sound, management's wishes to minimize costs and at the same time give adequate benefits, and the necessity to keep benefits close to current levels for individuals who will retire in the near future. In the light of these conflicting interests, it would be virtually impossible to arrive at a simple program.
The coordination between the railroad retirement and social security program would be expanded by the provisions of this bill but would not be complete. Eligibility conditions under the two programs would continue to differ but duplication of benefit amounts would be eliminated for service after the date of conversion to the new program.
Lastly, the Board would have difficulty in adjusting its procedures in time to make a conversion to the new program by January 1. 1975.
The Chairman feels that the bill should be looked at carefully but can see difficulties in arriving at better solutions.
The Office of Management and Budget has advised us that there is no objection to the submission of this report and that enactment of S. 3612 would not be in accord with the program of the President. Sincerely yours,
R. F. BUTLER, Secretary.