Page images
PDF
EPUB
[ocr errors]

EXECUTIVE OFFICE OF THE PRESIDENT,
OFFICE OF MANAGEMENT AND BUDGET,

Washington, D.C., August 3, 1974.
Hon. HARRISON A. Williams, Jr.,
Chairman, Committee on Labor and Public Welfare, U.S. Senate,

Dirksen Senate Office Building, Washington, D.C. Dear Mr. CHAIRMAN : This is in response to your request to June 13, 1974, for the views of this Office on S. 3612, a bill “To amend the Railroad Retirement Act of 1937 to revise the retirement system for employees of employers covered thereunder and for other purposes."

The Administration is fundamentally opposed to S. 3612 in its present form. In our view, this bill does not properly address the basic issue which must be faced at this time. That issue, in its most straightforward form, is : Who should pay the cost of restoring the Railroad Retirement fund to a position of financial solvency?

S. 3612 attempts to deal with the problem by providing for a series of payments from the Social Security trust fund to the Railroad Retirement fund totalling more than $41/2 billion over the next 25 years or so. This rests on the assertion that the Social Security system is somehow responsible for the existence of the "windfall dual benefit," the cost of which, coincidentally, roughly equals the estimated actuarial deficit. This would require millions of wage-earners covered by Social Security to finance benefits enacted in the Railroad Retirement Act and available only to retired railroad employees and their dependents. Those paying the bill would earn no benefits and receive no payments.

The Administration is firmly opposed to any device which treats the problems of the Railroad Retirement fund as being the responsibility of the Social Security taxpayers or anyone else other than the employers and employees of the railroad industry.

The Congress created the Railroad Retirement System as an independent, self-supporting retirement system for one particular industry. It is inappropriate and highly inequitable to levy the costs of that System on taxpayers who cannot hope to benefit from its existence.

The responsibility for overcoming the problems of this System must be with the industry it serves and the individuals who have benefitted from it in the past and will continue to receive its benefits in the future.

There are two obvious ways in which this responsibility can be satisfied. One is by increasing revenues, the other by limiting benefits. S. 3612 contains some features which limit benefits. Unfortunately, these changes do not go far enough to solve the problem and they are coupled with liberalizations which actually increase the costs of the fund. The bill provides no increases in revenues except for the proposal that the System be subsidized by Social Security.

In our view, the bill fails to meet the obligation imposed on the industry by the Congress in Public Law 93–69, to develop a proposal for placing the System on a sound actuarial footing.

In our view, Congress now has the responsibility, working with the interested parties, to solve the problems of the Railroad Retirement System without resorting to the inappropriate device of outside subsidies. There are a number of possibilities which should be explored :

1. The proposed liberalizations could (and, in our view, should) be deferred until taxes are increased to pay for them.

[ocr errors]

TIS.

2. The proposed new formula could be simplified and the level of benefits reduced.

3. The amount protected under the old formula could be reduced.

4. The costs of phasing out windfall dual benefits could be reduced by any of the following:

Outright termination rather than gradual phaseout;

Restrictions on cost-of-living increases for dual beneficiaries until the windfall element has been absorbed; or

Restrictions on cost-of-living increases for all Railroad Retirement beneficiaries until the cost of the windfall benefit has been balanced. 5. Revenues could be increased by raising the payroll tax or by levying an earmarked tax on rail cargo. Some combination of these changes could restore the System to the proper condition of being financed by the industry which it is designed to serve.

If a comprehensive bill which would produce a sound, industryfinanced system cannot be enacted within the time remaining in this Session, the Administration strongly recommends that the Congress enact a temporary tax sufficient to finance any further extension of the present temporary benefits.

While the financing provisions are the most prominent unacceptable feature of S. 3612, there are several other seriously objectionable provisions of the bill. First, the proposed new benefit formula is inordinately complex. This complexity will seriously impede efficient administration of both the Railroad Retirement and Social Security systems. In addition, it will be impossible for the individual beneficiary to understand the workings of the system, thus undermining its credibility and public support. In our view, the benefits formula can, and should, be greatly simplified.

Second, the bill provides for the Railroad Retirement Board, in effect, to administer the provisions of Title II of the Social Security Act with respect to any person eligible for benefits under the Railroad Retirement Act, with no provision for review by the Social Security Administration.

Having two separate agencies simultaneously administering the same statutory provisions will inevitably lead to confusion and loss of efficiency. In addition, it will be difficult to explain this arrangement to beneficiaries who are entitled to Social Security benefits in their own right and whose connection to the railroad industry is only marginal. These individuals would normally look to the Social Security Administration for their benefits. In our view, the Board should not administer Social Security benefits with respect to dependents and survivors. Any determinations of the Board affecting Social Security benefits should be subject to review by the Social Security Administration.

Our objections to S. 3612 in its present form, and the Administration's recommendations for change, are set forth in greater detail in the attached supplement to this report.

In view of these considerations, the Administration considers S. 3612 to be unacceptable in its present form. Its enactment would not be in accord with the program of the President. Sincerely,

Director. Enclosure.

[ocr errors]

S. 3612–SUPPLEMENT TO S. 3612 REPORT TO THE SENATE COMMITTEE ON

LABOR AND PUBLIC WELFARE BY THE OFFICE OF MANAGEMENT AND BUDGET

Most revisions in the Railroad Retirement system have originated in collective bargaining processes within the industry. Since the Railroad Retirement system provisions are written into Federal law, these industry proposals must be submitted to ('ongress for enactment. Recognizing the difficult process of negotiation on the part of railroad labor and railroad management which precede any new proposals, the Administration usually does not object to such changes unless a proposal upsets the financial balance of the system or adversely affects other important public interests. S. 3612 represents a case in which the Administration must object to the proposal because of its seriously adverse impact.

The plan set forth in S. 3612 depends for its solvency on a series of payments from the Social Security trust funds totalling more than $11., billion. This action would impose a tax burden on mostly middle and lower income workers to whom the Railroad Retirement system will not provide benefits. In this important respect, therefore, the plan is clearly unfair. This unwarranted burden arises from a basic financial imbalance in the proposal which must be corrected within the Railroad Retirement system itself.

The Department of Health, Education, and Welfare is strongly opposed to the proposal for increased payments to Railroad Retirement from the Social Security trust funds and we concur with the Department's position.

The Office of Management and Budget recommends that further consideration be given to climinating or reducing some of the costs of the proposal, or to providing additional resources from within the industry, or to some combination of these.

1. THE STRUCTURE AND THE COST OF THE PROPOSAL

The Railroad Retirement system under present law is operating with an actuarial deficiency of about 9% of taxable payroll. If the benefit structure and the funding in S. 3612 were adopted, the actuarial deficiency would be reduced to 0.24%. It would be inseful, therefore, to summarize the changes proposed to achieve this objective.

The present Railroad Retirement benefit may be conceived of as having three elements: (1) An amount which would have been paid to the retireee by Social Security if railroad employment had been covered under Social Security. The Railroad Retirement system is reimbursed from the Social Security trust funds for the additional amounts that Social Security would have paid if railroad employment had been covered by Social Security. (2) The balance of the the regular Railroad Retirement benefit is financed entirely from within the industry through a payroll tax on employers. (3) In addition, there is a supplemental pension consisting of a flat monthly amount paid according to length of service for service exceeding 25 years, also financed through a payroll tax, paid entirely by the employers.

[ocr errors]

2. The proposed new formula could be simplified and the level of benefits reduced.

3. The amount protected under the old formula could be reduced.

4. The costs of phasing out windfall dual benefits could be reduced by any of the following:

Outright termination rather than gradual phaseout;

Restrictions on cost-of-living increases for dual beneficiaries until the windfall element has been absorbed; or

Restrictions on cost-of-living increases for all Railroad Retirement beneficiaries until the cost of the windfall benefit has been balanced. 5. Revenues could be increased by raising the payroll tax or by levying an earmarked tax on rail cargo. Some combination of these changes could restore the System to the proper condition of being financed by the industry which it is designed to serve.

If a comprehensive bill which would produce a sound, industryfinanced system cannot be enacted within the time remaining in this Session, the Administration strongly recommends that the Congress enact a temporary tax sufficient to finance any further extension of the present temporary benefits.

While the financing provisions are the most prominent unacceptable feature of S. 3612, there are several other seriously objectionable provisions of the bill. First, the proposed new benefit formula is inordinately complex. This complexity will seriously impede efficient administration of both the Railroad Retirement and Social Security systems. In addition, it will be impossible for the individual beneficiary to understand the workings of the system, thus undermining its credibility and public support. In our view, the benefits formula can, and should, be greatly simplified.

Second, the bill provides for the Railroad Retirement Board, in effect, to administer the provisions of Title II of the Social Security Act with respect to any person eligible for benefits under the Railroad Retirement Act, with no provision for review by the Social Security Administration.

Having two separate agencies simultaneously administering the same statutory provisions will inevitably lead to confusion and loss of efficiency. In addition, it will be difficult to explain this arrangement to beneficiaries who are entitled to Social Security benefits in their own right and whose connection to the railroad industry is only marginal. These individuals would normally look to the Social Security Administration for their benefits. In our view, the Board should not administer Social Security benefits with respect to dependents and survivors. Any determinations of the Board affecting Social Security benefits should be subject to review by the Social Security Administration.

Our objections to S. 3612 in its present form, and the Administration's recommendations for change, are set forth in greater detail in the attached supplement to this report.

In view of these considerations, the Administration considers S. 3612 to be unacceptable in its present form. Its enactment would not be in accord with the program of the President.

Sincerely,

Director.

Enclosure.

[ocr errors]

S. 3612-SUPPLEMENT TO S. 3612 REPORT TO THE SENATE COMMITTEE ON

LABOR AND PUBLIC WELFARE BY THE OFFICE OF MANAGEMENT AND BUDGET

Most revisions in the Railroad Retirement system have originated in collective bargaining processes within the industry. Since the Railroad Retirement system provisions are written into Federal law, these industry proposals must be submitted to ('ongress for enactment. Recognizing the difficult process of negotiation on the part of railroad labor and railroad management which precede any new proposals, the Administration usually does not object to such changes unless a proposal upsets the financial balance of the system or adversely affects other important public interests. S. 3612 represents a case in which the Administration must object to the proposal because of its seriously adverse impact.

The plan set forth in S. 3612 depends for its solvency on a series of payments from the Social Security trust funds totalling more than $11. billion. This action would impose a tax burden on mostly middle and lower income workers to whom the Railroad Retirement system will not provide benefits. In this important respect, therefore, the plan is clearly unfair. This unwarranted burden arises from a basic financial imbalance in the proposal which must be corrected within the Railroad Retirement system itself.

The Department of Health, Education, and Welfare is strongly opposed to the proposal for increased payments to Railroad Retirement from the Social Security trust funds and we concur with the Department's position.

The Office of Management and Budget recommends that further consideration be given to eliminating or reducing some of the costs of the proposal, or to providing additional resources from within the industry, or to some combination of these.

HOMILIOII.

1. THE STRUCTURE AND THE COST OF THE PROPOSAL The Railroad Retirement system under present law is operating with an actuarial deficiency of about 9% of taxable payroll. If the benefit structure and the funding in S. 3612 were adopted, the actuarial deficiency would be reduced to 0.21%. It would be useful, therefore, to summarize the changes proposed to achieve this objective.

The present Railroad Retirement benefit may be conceived of as having three elements: (1) An amount which would have been paid to the retireee by Social Security if railroad employment had been covered under Social Security. The Railroad Retirement system is reimbursed from the Social Security trust funds for the additional amounts that Social Security would have paid if railroad employment had been covered by Social Security. (2) The balance of the the regular Railroad Retirement benefit is financed entirely from within the industry through a payroll tax on employers. (3) In addition, there is a supplemental pension consisting of a flat monthly amount paid according to length of service for service exceeding 25 years, also financed through a payroll tax, paid entirely by the employers.

« PreviousContinue »