EXPLANATION OF ESTIMATES OF APPROPRIATIONS TO AND DISBURSEMENTS FROM Section 15 (a) of the Railroad Retirement Act, if amended as proposed, calls The premiums were originally calculated on a calendar-year basis, but for fiscal purposes, both premium appropriations and disbursements have been translated to a fiscal-year basis. This change obscures somewhat the relative premiums indicated above, by reason of the fact that the dates of premium change are such as to make two rates apply to the same fiscal year. The premiums referred to provide only for annuity and other benefit payments. Administrative expenses are to be provided separately. Up to the end of the fiscal year 1937, these amounted to about $2,000,000. It is assumed that for the fiscal year 1938 and subsequently, administrative expenses will be $2,500,000. The following are the sources of data and the assumptions involved in the calculation of premiums and disbursements: 1. The primary data were collected by the Federal Coordinator of Transportation from the following 13 railroads: Atchison, Topeka & Santa Fe; Atlantic Coast Line; Baltimore & Ohio; Boston & Albany; Central of New Jersey; Chicago, Burlington & Quincy; Delaware & Hudson; Kansas City Southern ; Minneapolis, St. Paul & Sault Ste. Marie; Northern Pacific (Western Grand division); Oregon Short Line; Southern Pacific (Oakland division); and Texas & New Orleans. 2. Withdrawal rates were based on the experience of these 13 roads in the period 1925-28, inclusive. A separation from any of the above roads was counted as a withdrawal. While the shift of employees from one carrier to another has not been allowed for directly (except insofar as these were recorded, an infrequent occurrence), we believe that the withdrawal rates used are reasonable. The period covered was one when withdrawals were lower than they have been before or since. If an employee left.service prior to the end of 1928, and returned before the end of 1933, no withdrawal was recorded. 3. The rate of mortality in active service was based on the experience under group life-insurance plans on railroads in the period 1927-32. The rate of disability was taken from the same experience, but for the 5-year period 1930-34, inclusive. 4. The salary scale used was developed from the experience of the following railroads in 1929: Baltimore & Ohio; Boston & Albany; Delaware & Hudson; Kansas City Southern; Minneapolis, St. Paul & Sault Ste. Marie; Northern Pacific (Western Grand division); and Oregon Short Line. The actual scale used for the calculations was taken at 5 percent below the 1929 level. A salary scale was worked out for all 13 roads on a 10-year select and ultimate basis. For the seven roads the scale was select throughout; the latter is more easily used for valuation purposes than the former. The effect on cost of using either the one or the other is negligible. 5. For age retirements the mortality basis was the combined annuity table; for disability retirements the mortality basis was the experience among disabled lives under group life-insurance plans in all industries. These mortality rates follow closely the mortality experience with age and disability retirements under voluntary railroad pension plans in the period 1921–33. Had actual railroad experience been used the costs would be about 1 percent less (about 0.07 percent of pay roll). Since mortality experience has been improving, this slight sealing down of the mortality rates (and scaling up of cests) is clearly necessary. 6. The initial age and service distribution was based on that of the 13 roads on December 31. 1933. Service was counted from date of original entry. 7. It was assumed that the number of employees would remain constant and that new entrants to replace employees withdrawing, dying, and retiring would be distributed as to age as were entrants into the service of the seven railroads listed under item 4. in the period July 1. 1924-July 1. 1929. This distribution was used because, in using the 13 road data, tabulations were made on an annual census basisnd new entrants were not separately distinguished. The assumption was also made that the aggregate pay roll would be constant at the present level, $2,200.000.000 annually. (The total for 1936 was $2.050.000.000, but was rising throughout the year and is now running at a rate above $2 200.000,000 annually.) 8. Interest on accumulated funds at the rate of 3 percent per annum has been used. 9. Healthy employees who do not withdraw are assumed to retire from rail service at 70, disabled lives upon becoming disabled; annuities for those employees who leave railroad service before qualifying for an immediate annuity (those under age 65 or who are not 60 with 30 years of service or under 60, if disabled) have been started at 672, except for those who were disabled at or after leaving service, when 65 was taken as the commencement date. The accompanying table showing estimates of premium appropriations was based on a preliminary draft of the bill which provided for retirement from any gainful employment as a qualification for receiving an annuity and prescribed that prior service credits were to be allowed only to persons in employment or in an employment relation to an employer, as defined in the act, both on the date of enactment and upon attaining retirement age. The table showing estimates of disbursements, however, is based on the bill with all the amendments suggested by Mr. George M. Harrison at these hearings, and allows prior service credits, irrespective of whether or not a person was in an employment relation to an employer on reaching retirement age. The premiums were not recalculated. Premiums were calculated by the so-called level percentage method; that is, it was assumed that the premium appropriations were to be such that given relative premiums up to the year 1949, the premium thereafter would be a constant percentage of the pay roll on which annuity credits are based. This was subject to one exception, however, in that compensation received after the age of 65 was in all cases used in the pay-roll base which, it was assumed, would be the measurement of the aggregate appropriation. Mr. MARTIN. What is it in 1975? Mr. LATIMER. $231,390,000. Mr. MARTIN. That is the peak load, the highest you have then? Mr. LATIMER. Yes, sir; that is the highest. For 1974 it is $230,732,000. I would like to insert along with that, Mr. Chairman, a statement of the basis on which these calculations have been made. The CHAIRMAN. Very well, you may include that in connection with the table. Awhile ago you spoke about the amount of expenses that the Board had incurred up to this time. What period of time do those expenses cover? Mr. LATIMER. That covers the period of time from the passage of the first deficiency bill of 1936, and when the funds became available. I think it was about February 14, 1936. Prior to that time we had operated entirely on the basis of borrowed personnel. That figures does include, by the way, some expenses which we had been permitted to incur prior to February 14, such as salaries of Board members and a few other items. The CHAIRMAN. Has the experience of the Board been sufficient to justify it in making any recommendations for changes as to the correctness of the estimates on which the original legislation was founded? Mr. LATIMER. In one respect. The principle on which the original legislation was based, among other things, assumed that railroad employees would retire at ages such that there would be no substantial number of persons in the railroad service after the age of 65. It is pretty clear from the experience which we have had and the correspondence which we have had that that estimate was erroneous. It is unquestionably true that the reductions in annuity which were provided after the age of 65, or after 70, if an agreement to continue in service is filed will produce a considerable number of retirements. But there will not be uniform retirements at 65. Precisely what the average age would be, is not clear from the experience which we have had. Probably there would be relatively few people initially, at least, who would stay in service after the age of 70, because of the fact that there is a reduction after the age of 70, which, except for officials cannot be avoided. On the other hand, there is the possibility that it would be discovered-I shall put it this way: The annuities which are payable under this act are on the average a little less than half the wages the individuals are earning at the time of retirement. Now, at the age of 70 persons getting $1,800, let us say, will get an annuity of $75 a month on 30 years' service. In other words, he loses an income of $75 a month. Now if he stays in until 71, his annuity will be reduced by one-fifteenth of $75, or $5 a month. In other words, if he stays in until 71 his annuity would be reduced by $5 a month, or $60 a year. Now, it would be possible to take a part, perhaps less than half of the reduction of income-$900 and buy an annuity from an insurance company which would be larger than the $5 which he loses by staying in the service. So, if there is very much of that particular kind of practice, of course this provision would not be very effective in producing or promoting retirements. Mr. MARTIN. Mr. Chairman The CHAIRMAN. Mr. Martin. Mr. MARTIN. It strikes me that the dropping of the compulsory retirement feature will have the effect of reducing the pension load. A great many of them, I might say, a majority of them will not retire when they reach the retirement age, when they do not have to. They will continue in service as long as they can, even if they die next day. Under the company pension systems retirement is compulsory. Mr. LATIMER. Of course the postponement of the age of retirement resulting from eliminating inducements to retire does lower the annuity burden. In fact, we have calculated that it would probably lower the burden not less than $35,000,000 or $40,000,000 a year. Mr. BOREN. What percentage of the total would that number represent? Mr. LATIMER. I beg your pardon? Mr. BOREN. What percentage would that represent. Mr. LATIMER. You mean what percentage of people would retire earlier if there were a compulsory retirement age? Mr. BOREN. Yes. Mr. LATIMER. Of course that is hard to say-we have assumed, however, that around one-fifth of the employees who attain the age of 65 would be in service at 70 and continue for a longer or shorter period. That is based on a guess, Mr. Boren. We do not have any experience to base it on. Mr. BOREN. That answers my question. The CHAIRMAN. You are through? Mr. BOREN. Yes. The CHAIRMAN. Had you completed your statement, Mr. Latimer? Mr. LATIMER. Well, if you get on the subject of costs, I can go on indefinitely. If you are satisfied that you have enough I can stop here. The CHAIRMAN. Well, you have the privilege of extending your statement and presenting anything further that should be made to round out this information and we will be glad to have you insert it in the record. There is another question I think which was not covered in your testimony and that was as to the 112 employes who are not receiving compensation at the present time. Is not the deficiency appropriation money available for that purpose now? Mr. LATIMER. Yes; but those were the employees who were in the field collecting records from the carriers which the carriers have now agreed to supply. The CHAIRMAN. But the money is available? Mr. LATIMER. We did not get enough to carry them on. The CHAIRMAN. I believe that is all, then. We thank you. Mr. LATIMER. Thank you. The CHAIRMAN. The committee will adjourn. (Thereupon, the hearings were concluded, and at 11 a. m., the committee adjourned.) |