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AMENDING THE RAILROAD RETIREMENT ACT OF 1937

TUESDAY, JUNE 29, 1965

U.S. SENATE
SUBCOMMITTEE ON RAILROAD RETIREMENT OF THE
COMMITTEE ON LABOR AND PUBLIC WELFARE,

Washington, D.C. The subcommittee met at 10 a.m., pursuant to call, in room 4200, Senate Office Building, Senator Claiborne Pell (chairman of the subcommittee) presiding.

Present: Senators Pell (presiding) and Fannin.

Committee staff members present: Stewart E. McClure, chief clerk; E. George Pazianos, counsel to the Subcommittee on Railroad Retirement; and Frank Cummings, minority labor counsel.

Senator PELL. The Subcommittee on Railroad Retirement opens its hearings on H.R. 3157. The provisions of this bill before us today are substantially the same as the provisions of the bill H.R. 12362, 88th Congress, 2d session.

That bill was not acted upon by this subcommittee last year because of the limitation of time during the last days of the session. That bill was opposed by the Railroad Retirement Board and the Association of American Railroads because the railroad retirement system had at that time an actuarial deficit of close to $19.5 million a year, and the enactment of that bill would have increased that deficit by $14 million a year to a total of about $33.5 million a year;

Today, however, the picture is considerably worse. The social security amendments bill, H.R. 6675, was passed by the House and approved by the Senate Finance Committee with certain amendments. As so amended, the social security maximum tax base would be increased, beginning January 1966 from the present $4,800 a year to $6,600. The maximum taxable monthly compensation under the Railroad Retirement Tax Act is now $450 or $5,400 a year. If the $6,600 a year should be adopted for the social security system, and this bill is enacted, the acturial deficit of the railroad retirement system would be increased, according to the actuary of the Railroad Retirement Board, to about $61.1 million a year.

The additional increase in the deficit would result from increases in maximum annuities to spouses and in annuities computed under the overall social security minimum provision of the Railroad Retirement Act. It follows that any increase in the railroad retirement monthly taxable base would reduce this deficit. Without such increase the railroad retirement system would be confronted with serious financial problems.

While I am inclined to look favorably on the bill before us today, which was my view last year on a similar bill, I cannot shut my eyes to the newly developed financial problems. To approve this bill without at the same time providing for an increase in the present railroad retirement maximum taxable base of $450 a month to an amount equal at least to one-twelfth of the maximum annual wages taxable under the Social Security Act, would be to pile on increase upon increase in the deficit of the railroad retirement system.

This, in my judgment, would be legislating the railroad retirement system to an amount equal to one-twelfth of the maximum annual wages taxable for the social security system.

According to the Railroad Retirement Board's actuary, this would result in a gain to the railroad retirement account of roughly $39 million a year and thus reduce the deficit from what it would be, with H.R. 3157, without my amendment, plus H.R. 6675, to about $22.3 million a year.

It is important to emphasize that except for a relatively short period in the late 1950's, the railroad retirement maximum monthly tax base has always equaled or exceeded the social security equivalent monthly taxable wages.

In fact, the maximum railroad retirement tax base now is $450 a month, or $5,400 a year, while the maximum social security taxable wage base is now only $4,800 a year. My proposed amendment, therefore, would be merely an affirmation of the general relationship between the maximum taxable and creditable amounts under the two systems.

It is also important to emphasize that when the railroad retirement system was established in 1937, 98 percent of the gross railroad payroll was taxable on only a $300 monthly maximum; but only 79 percent of the gross payroll is now taxable on the present $450 monthly limit; and by increasing the monthly limit to $550, only 87.7 percent of the gross payroll will be taxable about 10 percent lower than was the case when the system was first established.

In view of the amendment which I just offered, I hope that the witnesses who have been notified of this possibility last week will direct their testimony to both the bill and to my proposed amendment.

We will insert the bill in the record at this point. (The bill referred to follows:)

ST. CONGRESS H. R. 3157

89TH CONGRESS

1st SESSION

IN THE SENATE OF THE UNITED STATES

JUNE 8 (legislative day, JUNE 7), 1965 Read twice and referred to the Committee on Labor and Public Welfare

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AN ACT To amend the Railroad Retirement Act of 1937 to eliminate

the provisions which reduce the annuities of the spouses of

retired employees by the amount of certain monthly benefits. 1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That subsection (e) of section 2 of the Railroad Retirement 4 Act of 1937 (45 U.S.C. 228b (e)) is amended by changing 5 the colon before the last proviso to a period and by striking 6 out all that follows down through the period at the end of 7 such subsection. 8 SEC. 2. This Act shall take effect with respect to an9 nuities accruing in months after the month in which this 10 Act was enacted, and shall apply also to annuities paid in

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1 lump sum equal to their commuted value because of a re2 duction in such annuities under section 2 (e) of the Railroad 3 Retirement Act of 1937, as in effect before the amendments 4 made by this Act, as if such annuities had not been paid 5 in such lump sums: Provided, however, That the amounts 6 of such annuities which were paid in lump sums equal to 7 their commuted value shall not be included in the amount 8 of annuities which become payable by reason of section 1 9 of this Act.

Passed the House of Representatives June 7, 1965.
Attest:
RALPH R. ROBERTS,

Clerk.

UNITED STATES OF AMERICA RAILROAD RETIREMENT BOARD,

Chicago, Ill., June 23, 1965. Hon. LISTER HILL, Chairman, Committee on Labor and Public Welfare, U.S. Senate, Washington, D.C.

DEAR SENATOR Hill: This is a report on the bill H.R. 3157 which was passed by the House of Representatives on June 7, 1965, and referred to your committee for consideration.

The provisions of this bill are identical to those of the bill S. 1978, which was introduced by Senator Dominick on May 17, 1965. Accordingly, our report on this bill is like the report on S. 1978.

The bill H.R. 3157 would amend the Railroad Retirement Act of 1937 by repealing the present provision in section 2(e) of the act which requires the reduction of a spouse's annuity by the amount of the spouse's own insurance benefit under the Social Security Act (except for a wife's or husband's insurance benefit) and by the amount of an annuity under section 2(a) or 5(d) of the Railroad Retirement Act for which the spouse is eligible. The change would be effective with respect to spouses' annuities accruing in months after the month of enactment of the bill. The amendment would apply to annuities paid in lump sums equal to their commuted value because of a reduction under section 2(e) of the act as now in effect.

It is estimated that the additional costs of the amendment proposed by the bill would come to approximately 0.32 percent of taxable payroll, or $14 million a year, on a level basis. Of this, 0.30 percent of taxable payroll, or $13 million a year would be attributable to the removal of the reduction because of social security benefits, and 0.01 percent of taxable payroll or $400,000 a year to the removal of the reduction because of railroad retirement benefits.

There is now an actuarial deficit in the financing of the railroad retirement system of approximately 0.44 percent of taxable payroll, or $19.5 million a year, on a level basis. Enactment of the bill would increase this actuarial deficiency to approximately 0.76 percent of taxable payroll, or $33.5 million a year. 1

1 The slight inconsistencies between figures are due to rounding procedures.

The Board is opposed to the bill for the following reasons:

(1) The bill makes no provision for additional revenue to meet the increase in the costs of benefits which the bill would provide. Even if it were considered feasible to provide for additional revenue in an amount sufficient to cover the added costs of the bill, the Board's position would not change for new income could better be used for improvements in other areas where the need seems greater.

(2) The present provision in section 2(e) of the Railroad Retirement Act for reducing a spouse's annuity by the amount of the spouse's own benefit under the Social Security Act is the same, in principle, as the provision in the Social Security Act for reducing a wife's benefit under that act by the amount of such wife's primary benefit under that act. In view of the reduction in a wife's benefit, the reduction of the spouse's annuity under section 2(e) of the act is only in the amount, if any, by which her benefit under the Social Security Act exceeds the wife's benefit under that act to which she would be entitled except for her other benefit.

(3) More than 1 of 5 women entitled to spouses' benefits under the Railroad Retirement Act are also entitled to primary old-age benefits under the Social Security Act (a total of about 40,000 spouses whose benefits were either reduced or eliminated), and the costs to the railroad retirement system for the nonreduction proposed by the bill now and for the future would be about $14 million a year, as previously stated.

The Social Security Act does not require a reduction in a wife's benefit by the amount of her retirement annuity under the Railroad Retirement Act; however, there are only about 1,000 of the 2,800,000 women entitled to a wife's benefit under the Social Security Act who are also entitled to an employee annuity under the Railroad Retirement Act, and by reason of the financial interchange between the 2 systems, the loss to the social security system for this nonreduction is zero. The railroad retirement account thus absorbs the cost of the failure to reduce the wife's benefit under the Social Security Act by the amount of her railroad retirement annuity. The estimated cost to the railroad retirement account from this absorption is 0.01 percent of taxable payroll, or $500,000 a year.

(4) Before the 1951 amendments to the Railroad Retirement Act, there was no provision, in that act, for a spouse's annuity. The reason for providing a spouse's annuity by such amendments is stated in the Senate committee report (S. Rept. 890, 82d Cong., 1st sess., p. 17) as follows:

If the finances were adequate to permit doing all the other things that need to be done and also to increase all retirement annuities by, say, 65 percent, one might well consider that as an alternative to providing a spouse's annuity. But since such a course is obviously out of the question, the spouse's annuity affords a means of doing substantially that in cases of greatest need, i.e., where two adult and aged people rather than just one must live on the annuity.”

The provision for a spouse's annuity was, therefore, in substitution for an increase in employee annuities in cases where two persons had to live largely on the income from the one annuity under the Railroad Retirement Act. For this very reason, the 1951 amendments provided that where a spouse has an income from a railroad retirement annuity or a social security benefit, the spouse's annuity would not be paid except to the extent by which it exceeds such annuity or benefit.

(5) There is a general misunderstanding about the "purchase" of a spouse's annuity through railroad retirement taxes. A railroad employee with a wife entitled to a spouse's annuity paid no more in taxes than he would have paid if he had no such wife. A spouse's annuity is no more "purchased" than is a wife's benefit under the Social Security Act; yet a wife's benefit under that act is reduced by the amount of her own primary benefit.

In view of the foregoing, the Board recommends that the bill H.R. 3157 not be reported favorably by your committee.

The Board's report of April 26, 1965, to the House Committee on Interstate and Foreign Commerce on the bill H.R. 3157 (the bill as introduced in the House of Representatives is essentially like the bill now before your committee), which is like this report, was cleared with the Bureau of the Budget. That Bureau had no objection to the presentation of the report from the standpoint of the administration's program. Sincerely yours,

HOWARD W. HABERMEYER, Chairman.

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