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around $800 a month. On the basis of the employment level used in our current estimates (800,000) a monthly base of $625 would be sufficient.

Senator PELL. If an amendment was ever offered giving that as a base, then you would probably support all these amendments?

Mr. HABERMEYER. Well, you put me in somewhat of a bad position. I do not like to testify against the spouses. But the benefit that is really unduly low as far as we are concerned is that for the aged widow. We have a pie that can only be cut in so many pieces.

If we have an amount to spend, I would rather increase benefits to the aged widow who lives on her one benefit than to increase the benefit the spouse who has a husband also drawing benefits.

Senator PELL. I have no fixed views. I am wondering if the reason for the separate systems is that the employees get more benefits from the railroad retirement system. I wonder if it does not seem fair that their base would be higher.

Mr. HABERMEYER. I would like to go along with your amendment at the present time and possibly in a few years, if the base has to be higher, I would be for going higher.

Senator PELL. I understand the taxes are higher now under the railroad retirement system. Mr. HABERMEYER. Substantially.

Senator PELL. That is substantially the reason for the added benefits, the taxes being higher.

Mr. HABERMEYER. That is right.

Senator PELL. I must say personally I am inclined to see the two or an even basis.

Senator Fannin?

Senator FANNIN. Mr. Chairman, there is one matter which has come about that I would like to raise. Of course, I realize the railroads have been a very unique industry, thinking back over the years, and considering the service they have performed and what has taken place. But are they not becoming diverified? Are they not like more of American industries of today? Whereas, they were restricted in the past. Further, I think it is commendable what has been accomplished by the railroads in the development of our Nation.

Today, do you not find that the railroads are becoming more diversified and more like the other industries?

Mr. HABERMEYER. Well, in a certain sense, yes. But I do not believe the Government is removing regulations that have applied to the industry over the years.

Senator FANNIN. Of course, there are regulations being adopted for other industries, too, that perhaps would affect their competitive position with the railroads.

Now, understand I am not arguing one way or another in this regard. I am just talking about what the chairman was discussing as to bringing them all under the same program.

Mr. HABERMEYER. I am somewhat biased. I would like to see the railroads relieved of some of their regulations so that their employment instead of going down would start to increase.

Senator FANNIN. I can agree with you on some of those matters. But I do not think that is exactly what we are discussing. I do feel that as the industry becomes more diversified, as I said before, and is in a position of competing on an equal basis with the other in

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dustries—the transportation industries—then I would think they would come more in the line of being under social security and being in the same category as other industries.

Mr. HABERMEYER. Well, Senator, I should say, that if the employees and the employers are willing to pay the cost of sustaining this separate system I should think they would be allowed to do it. I cannot see where anybody is being hurt because of the existence of the separate system.

As a matter of fact, practically everybody benefits to a substantial extent because of the separate system.

Senator FANNIN. I think it is very commendable that you have been able to maintain these benefits for the people and it is certainly to your credit. But now we are talking about these deficits, and we are looking forward to what is going to take place.

Mr. HABERMEYER. Any proposal to merge the two systems would involve tremendous problems. We now have taken high taxes from these people that are working in the industry and it seems to me we have to give recognition to that, and I do not think we can take away benefits for which we are obligated. It is like unscrambling an egg, more or less.

Senator Fannin. With reference to your testimony on page 2 I am wondering how long you can maintain what we have under discussion here today.

You say:

I am sure we are all in agreement that it is of the utmost importance for the railroad retirement system to be in a sound financial condition. The consequence of a substantial deficiency in financing would be that at some point in the future sufficient funds would not be available for benefit payments.

Mr. HABERMEYER. I think the answer to that is that everybody concerned with this system has to realize that the benefits that we are obligated to pay have to be financed and the costs of any liberalizations require additional revenues.

If the point is reached where the tax burdens are too onerous, I think everybody will soon find out about it.

Senator FANNIN. You are talking about a point. Just when do you think that will be reached? Can you project into the future as to just what time outlook is involved?

Mr. HABERMEYER. We can very well handle the situation we are faced with today if we get the liberalization in the tax base that the Senator proposed this morning.

We may have to increase the wage base even more within the next few years. I do not think we can raise our tax rates much higher.

Senator PELL. What is the average salary of the people under your system, say, on an annual basis?

Mr. HABERMEYER. I do not have that figure. I could get that for the subcommittee.

Senator Pell. I think it would be interesting to submit it for the record.

(The figures referred to follows :)

AVERAGE MONTHLY-GROSS RAILROAD EARNINGS The average monthly gross railroad earnings are $520 for rank-and-file employees. However, if executive, supervisory, and similar positions are included, the average is $540. The figures are as of September 1964, as shown by the records of the Bureau of Labor Statistics and of the Interstate Commerce Commission.

Senator PELL. I agree with you, you cannot have a higher tax which is about double the social security system.

Mr. HABERMEYER. The rate is already scheduled to go higher, as you know.

Senator PELL. Right, and at the same time perhaps the only way of increasing it is to increase the base.

Mr. HABERMEYER. At some point the possibilities are exhausted.

As you stated this morning, an increase from $450 to $550 would raise the tax on the total payroll from 79 percent to some 87 percent. So that only leaves less than 13 percent which is not taxed. Of course, the situation will depend to some extent on what happens to wage rates.

If we continue to have wage increases, the total payroll will continue, of course, to go up.

Senator PELL. As it is now, it is a little depressing that the fellows with the smaller salaries are paying the full amount, while those, that 13 percent who are not taxed, still get the benefits.

Mr. HABERMEYER. They do not get any benefits from the earnings above the maximum.

Senator PELL. That is right-benefits on the earnings paid in.

Thank you, Mr. Habermeyer, for being with us. Our next witness is Mr. Gerald Finney, of the Association of American Railroads.

STATEMENT OF GERALD D. FINNEY, GENERAL ATTORNEY,

ASSOCIATION OF AMERICAN RAILROADS

Mr. FINNEY. Mr. Chairman, you may recall that I appeared here last year, took a position on behalf of the railroads in opposition to the bill that was then pending before your committee.

My statement is practically identical with what I said last year. I think it would be preferable if I did not read it but if it were put in the record as though I had read it.

Senator PELL. It will be put in the record in full as if presented here. (The prepared statement of Mr. Finney follows:)

PREPARED STATEMENT OF GERALD D. FINNEY, GENERAL ATTORNEY, AssociatION

OF AMERICAN RAILROADS Mr. Chairman and members of the subcommittee, my name is Gerald D. Finney. I am a lawyer with the title of general attorney of the Association of American Railroads. That association is an unincorporated association of substantially all of the class I railroads of the United States. It is a voluntary, nonprofit organization. Its members operate more than 95 percent of the total railroad mileage in the United States and have operating revenues of approximately 98 percent of the total railroad operating revenues of all railroads in the United States.

H.R. 3157 would amend the Railroad Retirement Act by deleting the provision in section 2(e) of the act that requires that a spouse's annuity be reduced by the amount of the spouse's own insurance benefit under the Social Security Act and by the amount of that spouse's retirement annuity under the Railroad Retirement Act. The railroads are opposed to H.R. 3157.

The actuary of the Railroad Retirement Board has estimated that the cost of the amendment to which I have referred would amount to $14.2 million a year, on a level basis.

The railroad retirement system is presently running at an annual deficit of $19.5 million a year. Enactment of H.R. 3157 would increase the actuarial deficiency to $33.7 million a year leaving the system in a substantially more precarious financial situation than it is at the present time. The railroads oppose

any measure providing for an increase in the actuarial deficit of the railroad system in which, of course, they are vitally interested.

The provision for the payment of annuities to spouses became a part of the Railroad Retirement Act as a result of the 1951 amendments to that act. That part of the Senate committee report accompanying the bill which became the law (S. Rept. No. 890, 82d Cong., 1st sess., p. 17), in dealing with the amendment providing for a spouse's annuity, made it perfectly clear that the reason for such an annuity was to provide additional income where two persons (a man and his wife) had to live largely on the benefits they received from the Railroad Retirement Act. In other words, it was thought that where two adult and aged persons had formerly had to live largely on the income from the man's annuity, it was desirable to provide an annuity for the man's wife rather than increase his annuity and also increase the annuity of all other men, whether or not married. However, the necessity for paying the full spouse's railroad annuity does not exist where that spouse has a separate social security benefit.

The present provision in section 2(e) of the Railroad Retirement Act for reducing a spouse's annuity by the amount of her own insurance benefit under the Social Security and Railroad Retirement Acts is the same in principle as that provision in the Social Security Act which reduces a wife's benefit under that act by the amount of her insurance benefit under the Social Security Act.

The financial condition of the railroad retirement system has for a long time been a matter of serious concern to those interested in maintaining the solvency of the system. Over the years various legislative measures providing for increases in benefit payments that exceeded increases in tax income were enacted, and as a result, the deficit in the railroad retirement account increased again and again until in 1961 it reached the staggering sum of more than $70 million a year. It was at this point that the President of the United States, in a statement with respect to a bill that he signed on September 22, 1961, pointed out that the railroad retirement system was in serious financial trouble. The President urged the Congress to take appropriate action in its next session to restore the retirement system to healthy financial self-sufficiency. Thereafter, representatives of the railroads and of the standard railway labor organizations had a number of conferences aimed at substantially reducing the railroad system's actuarial deficit, which by 1963 had risen, to $77 million a year. Management and labor agreed on a bill that was introduced passed by both Houses, and signed by the President on September 5 to become effected November 1, 1963, as Public Law 88-133. The bill provided a number of methods by which the deficit would be reduced, one of such methods being an increase in the taxes assessed against employers and employees. Such increased taxes amounted to $71 million a year. The various changes in the law did reduce the deficit until, as has been stated above, it is now running at about $20 million a year.

H.R. 3157, by increasing the acturial deficiency from $20 million a year to $33 million a year, is obviously a step in the wrong direction. Further, as has been stated, the spouse's annuity was made a part of the law to increase benefit payments in cases where two aged persons would otherwise have had to live on one annuity. If the wife has her own social security benefit, such a condition does not exist.

While H.R. 3157 does not provide for an increase in tax to cover the $14.2 million annual cost of the bill, we cannot mislead ourselves. If the bill is enacted, the railroads and their employees will eventually have to pay for it. The railroad retirement tax rates on the railroads as well as on the employees are already extremely high and are scheduled to go even higher in the near future. Moreover, the railroads bear alone extremely high taxes to support the railroad unemployment and sickness insurance system. The plain fact, we think, is that a saturation point has been reached, which does not permit further liberalization of retirement benefits such as those proposed in H.R. 3157

Mr. FINNEY. I shall now speak of your proposed amendment.

The railroads oppose your amendment. I should give a little bit of history.

As you know, the President of the United States, about 4 or 5 years ago, requested that the railroads and their employees look into the problem of the existing deficit in the Railroad Retirement Act. It was running at that time about $70 million a year. We did look into it, management and labor-and came up with a number of proposals

to reduce the deficit. One of them was to increase the taxable base from $400 to $450 a month. That increased the taxes by $70 million a year and did reduce the deficit.

It should be borne in mind that increasing the taxable base only provides about half of the money for a reduction in the deficit. In other words, the $70 million that was accumulated in additional taxes-of that $70 million-$35 million went to pay additional railroad retirement benefits by reason of increase in the creditable base for the employees.

Your amendment, Senator, would increase the tax base, presumably, to $6,600. That is, if the Senate Finance Committee's amendment passed. This would mean an increase in taxes of about $80 million a year.

That would not decrease the deficit by $80 million. This would only decrease it by about $40 million, because additional benefit payments would be made in the sum of about $40 million.

As I said in 1963, there was an agreed bill passed. It has been the thought of at least the management side of the railroad retirement scheme that when we find out what is going to happen to the social security bill that is now pending--and we do not know at the moment whether the base will go to $5,700 January 1 of next year or $6,600 in any event it will probably increase the deficit to perhaps $40 million.

The management and labor should sit down, as they did in 1963, and agree on a proposal that could be submitted to the Congress that would take care of at least a very substantial portion of the deficit, if there is one.

We think that is preferable to agreeing to your proposed amendment today.

Senator PELL. What is that again? Mr. FINNEY. Our proposition is that when we see what happens with respect to the social security legislation, management and labor should sit down together, as they did in 1963, and come up with some legislation which would place the system in a sound financial condition.

Senator PELL. But you do not agree with the idea of raising the base at this time?

Mr. FINNEY. No, sir; I do not. Our system, Mr. Chairman, is just about saturated from the standpoint of taxation. You mentioned a few minutes ago a comparison between social security taxes and our taxes. They are paying about on the maximum of $175 an employee now.

Senator PELL. I am not talking about increasing their rate. I am talking about increasing the base.

Mr. FINNEY. What I am saying, Senator, is that whether you increase the rate or the base, we are hard hit, that we are paying very, very substantially more taxes than the social security employers are now paying, and so are the employees.

Of course, too, bear in mind we pay a very substantially higher amount of taxes for unemployment benefits than do other employers.

What I am saying is that our purpose is to suggest that rather than passing your amendment and increasing the base and spending half of the money for additional benefits and only reducing the deficit by half of the additional tax money that is collected, that perhaps we can come up with a better scheme that will not increase taxes by the

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