400

CHART 1.-Indexes of Actual and Projected GNP, Railroad Revenue Traffic Units, and Railroad Employment, 1935-2000

400

0

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Based on the foregoing assumptions, employment as defined by the Railroad Retirement Act is projected to decline from the 640,000 in 1970 to 503,000 in 1980, 397,000 in 1990, 327,000 in 2000, and to 300,000 by 2015 where it would remain through 2044. Chart 1 shows the actual and projected trends for GNP, for railroad traffic units, and for railroad employment for the period 1935 to 2000.

A Heavy, Rising Beneficiary Load

High levels of employment in the past account for the large number of railroad retirement beneficiaries now. Declining employment increases the ratio of beneficiaries to active workers and raises benefit costs as a percentage of payroll.

At its inception the railroad retirement system assumed responsibility for pensions to the retirees then on the company rolls and also granted up to 30 years of credit for railroad service prior to the Federal law. These generous provisions resulted in a rapid growth in the number of beneficiaries and in higher monthly benefit awards. During 1940 there were 173,000 individuals on the beneficiary rolls. After benefits were initiated for spouses and widows, the number of beneficiaries rose to 461,000 in 1950, then to 883,000 in 1960 and 985,000 at the end of June 1971. Of the latter, 444,000 were aged or disabled retirees and 541,000 were principally spouses and aged widows, plus other survivors. In 1971 those 985,000 individuals represented 740,000 households.

The rapid decline of employment coupled with the rapid increase in beneficiaries has made it încreasingly difficult to support the system from current taxes. In 1940 there were approximately seven active workers to each beneficiary family unit. By 1950 the ratio had dropped to about 4 to 1; and by 1971 there was only 0.8 of a worker for each family drawing benefits. In contrast, in 1971 the social security system had 73 million active workers paying taxes for benefits to 21 million families, a ratio of 312 to 1. Thus, the ratio of families on the benefit rolls in railroad retirement in relation to active workers was more than 4 times that in the social security system.

The number of railroad retirement beneficiaries is now nearing its peak. Despite a substantial projected decline it will continue to exceed employment until well beyond 2000. For the year 2000 the Commission projects 442,000 beneficiaries as against 327,000 active workers in the industry, as chart 2 indicates.

CHART 2.-RR Employment and Beneficiaries: Actual, 1937-69, and CRR Central Case Projections,

*Employment: average of 12 monthly figures; beneficiaries in current payment status on 12/31. Source: Actual data from Railroad Retirement Board, projected data from CRR computer model.

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Rising Benefits, Average and Total

A third set of important trends affecting finances is the substantial and rapid increase of monthly benefits. Average railroad retirement benefits for a married couple increased by 120% from 1951 to 1970 in current dollar terms, while their real purchasing power rose by 47%. This average includes supplemental benefits where payable. It does not measure the full benefits received by railroad beneficiaries, for it does not include the increase in the dual OASDI benefits paid directly to them by the social security system, which have also risen. As a group, railroad retirement beneficiaries receive higher benefits and total income than most people dependent on social security and/or other pension programs. Career railroad workers and their spouses receive better benefits than at least three-fourths of all the aged people in the country. Only a small proportion of railroad beneficiaries, particularly aged widows, can be said to be in poverty. Contributions by railroad workers are higher than in other industries, but the employer costs of fringe benefits are also a higher percentage of payroll than in the great bulk of manufacturing or other industries.

Only about half of the workers in private employment in the United States are covered by private pension plans, and in the retirement area railroad workers do better than most of them. Analysis of pension plans indicate that in 1969 a 30-year career railroader whose monthly earnings would correspond to typical wages in blue collar industries covered by private pension plans already had considerably better retirement benefits than those in other private pension plans. Moreover, since 1969 railroad benefits have been raised (temporarily) 26.5%. Also, a study of income data shows that in 1970 the benefits of an unmarried retired railroad worker were higher than the benefits received by 8 out of every 10 single retirees from any type or combination of public and/or private plan benefits in the country, including social security. The benefits of a married retired railroader and his wife were higher than benefits received by 9 out of any 10 retired couples from any combination of similar benefits.

Some private pension plans in heavy industries, notably the recently negotiated auto and steel industry agreements, provide higher formula benefits (counting social security) than railroad retirement. However, comparisons with such plans are difficult because railroad retirement has other attractive features-10-year vesting, full portability within the industry, no requirement regarding continuous service, spouse benefits, occupational disability benefits, a liberal work rule, and a 110% OASDI minimum guaranty to survivors and to the worker.

The rapid improvement in benefits under the Railroad Retirement Act in the last couple of decades is partly the product of automatic increases in benefits for the group of railroad retirement beneficiaries whose benefits are computed under the "overall minimum guaranty of 110% of OASDI." Every time social security benefits are raised this produces immediate demands for corresponding percentage increases in the higher railroad retirement benefits computed under the other formulas of the system.

Successive increases have also led to the compounding of the factors in the railroad retirement formula. The original factors were set in 1935 at 2.0% of the first $50 of average monthly compensation, 1.5%

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of the next $100, and 1.0% of the remainder. Repeated percentage increases to match social security increases have escalated these factors. By early 1972 the effective ratios had more than doubled (i.e., to 4.84%, 3.63%, and 2.42%, respectively). These increases were made largely with an eye to beneficiaries already on the rolls at the time of each adjustment. However, for new retirees, this effect has been coupled with increased wage levels to which these percentages were applied, so their benefit awards have contained two factors of increase with a compounded effect. Continuation of such compounding in an economy with ever-rising wages and prices will produce an upward propulsion of benefits that will outstrip full final pay if no corrective action is taken. The implications of the compounding have escaped public attention.

Until 1967 workers could have a maximum of 30 years' railroad service credited toward benefits. Since then, the maximum has been increasing by one year annually. In 1972 it was up to 35 (36 after June 1), and ultimately service will be creditable without limit. This factor, in conjunction with the above effects, has been further increasing new benefit awards.

Growth in the numbers of beneficiaries multiplied by increasing average benefits, has produced a rapid spurt in benefit outlays from $302 million in fiscal year 1950, to $926 million in 1960, to $1,910 million in 1971. And this does not include the dual OASDI benefits. Except for the period 1945 to 1955 the margin of receipts in the system over expenditures has been narrow, as chart 3 indicates; and in 1971 expenditures exceeded receipts.