Argument for the proposal Pros and Cons Currently, some individuals such as Armed Forces reservists do not receive social security credit for their earnings. Elimination of these exemptions from covered employment would provide more equitable coverage of such individuals. Argument against the proposal The administrative burden involved in extending FICA taxes to these groups outweighs the equity in coverage of these types of earnings. 4. Treatment of Group-Term Life Insurance as Wages Under FICA Present Law The cost of group-term life insurance provided by an employer to an employee is excluded from the definition of wages for purposes of the FICA tax. In 1987, the first $43,800 of wages is subject to a total FICA tax of 14.3 percent. One-half of this tax (7.15 percent) is paid by the employee and one-half is paid by the employer. For income tax purposes, in general, the cost of employer-provided group-term life insurance is includible in an employee's income to the extent that the coverage exceeds $50,000. Employer-provided group-term life insurance also is included in an employee's income if the coverage is provided under a plan that fails to satisfy nondiscrimination and qualification requirements. President's Budget Proposal Under the Administration proposal, employer-provided groupterm life insurance would be included in wages for FICA tax purposes to the extent such insurance is includible in income for income tax purposes. This proposal would be effective January 1, 1988. Arguments for the proposal Pros and Cons 1. The exclusion from wages of employer-provided group-term life insurance can result in taxpayers having the same economic income paying different amounts of FICA tax because of the form in which their compensation is received. In addition, the exclusion from wages of employer-provided group-term life insurance narrows the FICA tax base, thereby requiring higher tax rates to generate a given amount of revenues. 2. The proposal would allow low- and middle-income employees to earn credit toward social security benefits by virtue of compensation received in the form of group-term life insurance. Arguments against the proposal 1. The exclusion from wages of employer-provided group-term life insurance is justified, as a matter of social policy, by the fact that the nondiscrimination requirements for such exclusion encourage the provision by employers of group-term life insurance to low- and middle-income employees who otherwise might not purchase such insurance. 2. If the proposal were enacted, employers would be less likely to provide group-term life insurance to low- and middle-income employees. In addition, many of such employees would not purchase life insurance on their own. Accordingly, their survivors may in some cases need public assistance, since social security survivor benefits often are inadequate. The cost of providing this assistance may well exceed the cost of retaining the present-law exclusion of employer-provided group-term life insurance from wages. 5. Railroad Retirement Tax Proposals a. Increase in railroad retirement payroll tax Present Law The primary source of income to the railroad retirement account is payroll taxes levied on covered employers and their employees. Currently, both employers and employees pay a Tier I tax which is equivalent to the social security tax rate. In addition, a Tier II tax is paid by both rail employers and employees. These taxes are applied to compensation paid to employees, up to a maximum annual amount. Under present law, the Tier II tax rate is 14.75 percent for employers and 4.25 percent for employees. The Tier II wage base in 1987 is $32,700. Pursuant to the Railroad Retirement Solvency Act, the Railroad Retirement Board on June 16, 1987 submitted an actuarial report on the status of the railroad retirement system. As part of this report, the Chairman of the Board recommended a 3 percent increase in the tier 2 tax rate as of January 1, 1988. The Board's Chief Actuary submitted a recommendation to increase the tier 2 tax rate by 4.5 percent on January 1, 1988. The Actuary also suggested the establishment of a body to study the merits of a tax on operating funds to underwrite a portion of railroad retirement benefit costs. The Chief Actuary's report was not supported by the Management Member of the Board but was supported by the Labor Member who additionally suggested that the entire increase be borne by the rail employers. President's Budget Proposal The President's budget proposal would increase the railroad retirement Tier II taxes by 3.0 percentage points. This increase would be achieved in two steps-a 1.5 percentage point increase, effective January 1, 1988, and an additional 1.5 percentage point increase effective January 1, 1989. (The proposal does not describe how this increased tax would be apportioned between emloyers and employees. Pros and Cons Argument for the proposal Additional revenues are needed to ensure the medium- and longrange solvency of the Rail Industry Pension Fund. Argument against the proposal Increases in the level of pension contributions by both employers and employees will present an even greater barrier to employment in an aging yet important national industry. b. Partial rail sector financing of vested dual benefits Present Law Under present law, vested dual benefits are payable to retired rail workers who had the equivalent of 10 years' coverage under both railroad retirement and social security prior to 1975. These benefits, which phase out over time, are financed by general reve nues. President's Budget Proposal The President's budget proposal would require the rail industry to finance 25 percent of the cost of vested dual benefits. This financing would be derived from the rail industry pension fund, which is funded by Tier II payroll taxes. The proposal would include an increase in the Tier II payroll taxes to finance the cost borne by the rail industry pension fund. (This increase would be in addition to the 3.0 percent increase in Tier II taxes described above.) The proposal does not describe how the increase of Tier II taxes would be apportioned between employers and employees. Argument for the proposal Pros and Cons General revenue financing of vested dual benefits amounts to a taxpayer subsidy of railroad retirees, and should be partially offset by rail sector contributions. Argument against the proposal Vested dual benefits are a product of non-railroad employment, rather than railroad employment and thus, should be financed by general revenues, as was originally established in 1974. c. Extend FUTA tax to railroad employment Present Law Under present law, railroad employment is not covered by the Federal-State unemployment insurance system. Instead, railroad employees are covered by a separate Railroad Sickness and Unemployment Insurance Fund, which is financed by payroll taxes levied on rail employers. The railroad unemployment insurance (RRUI) program has permanent authority to borrow from the railroad retirement program in order to pay RRUI benefits. The Railroad Retirement Solvency Act of 1983, as modified by the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), established a loan repayment tax, beginning at 4.3 percent on July 1, 1986, and changing to 4.7 percent for 1987, 6.0 percent for 1988, 2.9 percent for 1989, and 3.2 percent for 1990. The tax expires after September 30, 1990. COBRA further provided that an automatic surcharge of 3.5 percent on the loan repayment tax base will be levied if the RRUI program has to borrow from the retirement program. The surtax proceeds are to be used to repay such loans made after September 30, |