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increase under the Social Security Act. This increase would also represent a continuation of the costly practice of compounding the railroad retirement formula by applying the social security percentage increases to the much larger benefits of the Railroad Retirement Act. Assuming a simultaneous compound increase of 20% in both social security and railroad retirement benefits, accompanied by a change in the tax base to $10,200 ($850 monthly) and the dynamic effects of H.R. 1, the Commission's staff estimates an increase in the deficiency for 1973-2000 on a level basis of 2.2% of the wage base. The debt in the year 2000 would rise to $21 billion, $9 billion more than under the Commission's central projection. The total level deficit for the 30year-period-not counting the costs of the early retirement proposal would then be about 6.1% of payroll, or $473 million a year short of the minimal standard of financial soundness proposed by the Commission. The required tax increase of 6.1 percentage points in the payroll tax would be an increase of over 50% in the combined second tier tax rate of 11.3% of covered payroll on a level basis under present law for the period 1973-2000.

The Commission recommends that any extension of temporary benefits or any future benefits increases be accompanied by timely tax increases adequate to finance them according to the principle that the present fund not be depleted and the ratio of reserves to the rate of expenditures not be further impaired.

The Commission also recommends that, until the Congress has considered a plan to restructure the railroad retirement system, any increases in social security benefits the Congress may enact be "passed through" to railroad retirement beneficiaries in the same dollar amounts. A "pass through" will be financed by the OASDI system and will not adversely affect the Railroad Retirement Account. The railroad retirement tier-two benefits, tax rates, and covered wages should not be changed.

The Transition From the Old System to the New

The Commission stresses that immediate action is necessary to work out and enact legislation for changeover from the present mixed system heading for insolvency to a restructured and solvent one. Successful transition will require the cooperation of the Executive Office of the President and the Congress, and the continuing assistance of the Railroad Retirement Board and the Social Security Administration.

The Commission has made many recommendations and observations in its main report. However, there are many significant points relating to the railroad retirement system which the Commission has not been able to resolve, or even study. These should be immediately taken in hand by a task force working through the Executive Office of the President, because they involve issues that cannot be resolved solely by either the Railroad Retirement Board or the Social Security Administration. To help provide a carry-through for the transition, the labor and management members of this Commission, or their designees, might well be invited to participate in the effort.

Principal guidelines for the transition should, in the view of the Commission, include the following. As much of the transition as possible should be accomplished "as of" the date of changeover. After changeover the new, separate OASDI and staff tier formulas should

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prevail, except for the guaranteed vested "grandfather" benefits and rights mentioned earlier. The new formulas will apply to all future beneficiaries.

The combined dollar benefits already awarded to current beneficiaries by the railroad retirement and social security systems should be guaranteed by the "saving clause." Their totals should be recomputed into (a) a basic tier one equal to OASDI based on combined railroad and social security service and (b) the remaining residual comprising the tier two staff benefit, including any dual benefits which are legally vested and guaranteed. Any cost-of-living or other adjustments by social security should thereafter be made only on the "OASDI equivalent" benefit. The "staff tier equivalent benefit" as affected by any saving clause would be recorded as a guaranteed amount; but a not yet retired worker or his survivors would get benefits under the new staff tier formula if the latter were higher. Accrued legally vested rights of current or withdrawn workers would be computed in similar fashion as of changeover, based on years of service and average pay, even though they were not yet eligible to receive the guaranteed

amounts.

The central principle underlying the whole changeover or transition is that the dollar benefits of no current beneficiary or legally vested benefit rights of any current worker should be reduced by virtue of the changeover to the restructured system. The restructured system of the future would provide more equitable treatment to the various groups of beneficiaries of the system than the present system, without impairing any vested rights to present benefits.

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In conclusion, the railroad retirement system is now in a most serious condition; it has structural deficiencies and is heading for bankruptcy in the 1980s. However, if the remedies proposed by this Commission in this report are adopted forthwith. the future of the system and the rights of the railroad workers and families who depend on it can be preserved-on a basis which will retain continued financial support from the railroad community and acceptance by the general public.

STATEMENTS BY INDIVIDUAL COMMISSIONERS

Separate statements by Messrs. Charles L. Dennis, Louis W. Menk, George E. Leighty, and Theodore O. Yntema, follow.

QUALIFYING COMMENTS BY COMMISSIONER CHARLES L. DENNIS

This statement represents my individual viewpoint as the labor member of the Commission on Railroad Retirement. It is directed at specific parts of the Major Findings and Principal Recommendations of the Commission on Railroad Retirement.

I am presenting these views to establish my position on specific issues, which vary from the majority report.

At this time I want to reaffirm my agreement with the basic report and recommendations of the Commission, notwithstanding the following:

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I. Two public and one industry member have recommended that railroad workers receive an increase equivalent to the dollar increase received by Social Security beneficiaries under pending legislation. Since Social Security and Railroad Retirement beneficiaries have received the same percentage increases in the past and since, under present law, railroad workers contribute at approximately twice the Social Security rate, such infringement will affect future collective bargaining on tier two benefits. For this reason I strongly object to its inclusion in the report.

II. In the section dealing with Rising Benefits, Average and Total certain impressions are given which tend to distort the actual fact situation.

The report stresses the fact that Railroad Retirement benefits are greater than benefits paid to most people on Social Security and other pension programs. This is misleading in that it avoids a comparison with comparable, highly unionized industries.

The report also compares costs of fringe benefits in the railroad industry with other industries. I strongly object to the comparison of fringe benefit costs when pensions are obviously only an undefined portion of all fringe benefit costs.

III. One of the basic recommendations to which I fully subscribe is a restructuring into a two-tiered system. This, as the Commission agrees, implies a restructured relation between labor and management as regards collective bargaining.

The report neglects to point out that the collective bargaining process in comparable heavy industries has assumed a posture wherein the employer contributes all of the costs of a staff pension program. Organized labor strongly recommends that management assume the full cost of the second-tier level of benefits.

IV. The management member of the Commission, Mr. Menk, in a separate statement, makes an issue of the carrier's "ability to pay." This, of course, is the traditional position used by the railroad industry before every Federal fact-finding board or public tribunal established under the Railway Labor Act. I do not believe it is the function of this Commission to delve into the basic collective bargaining posture of the parties.

If we were to consider ability to pay, we would also need to consider all of the traditional arguments which form the circumstances behind every collective bargaining dispute. For example, we would need to examine clear cross-comparability; we would need to examine fantastic productivity increases which have occurred in the railroad industry; we would need to examine savings effected by past, present, and future trends in automation (as projected by the Commission's report); and, we would need to look into labor savings made as a result of mergers, abandonment of lines, facilities, and services and so on.

I believe these issues should be handled through collective bargaining by both parties and consequently take strong exception to the relevance of so-called "ability to pay" influencing this report.

V. Finally, there runs throughout the Commission's report a continuing thought implicitly suggesting that the benefits and conditions of the whole pension package for railroad employees should be improved. I believe this implicit suggestion should be brought forth and recognized as reality.

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Railroad workers cannot stand still on pension issues. If we were simply to reconstitute the present plan under a new structure it would not be enough. We must improve while we reform. We must increase benefits. We must reform present features of the law which discriminate on the basis of sex, we must bring about changes to make our plan comparable to other pension systems by instituting early retirement with full annuities for career service railroad employees. We need a plan which provides for retirement on a full annuity at age 55 after 30 years of service. The Congress is aware of this and I believe it is a subject which will have to be acted on as part and parcel of the entire effort to reform the railroad retirement program.

SUPPLEMENTARY AND QUALIFYING COMMENTS BY COMMISSIONER LOUIS W. MENK

Financing the Railroad Retirement system necessarily requires consideration of the railroad industry's financial situation and outlook and its limited ability to sustain added cost burdens. Increased levels of tax support for rising levels of benefits are a matter of serious concern to both employers and employees.

Confronted with strong and increasing competition from other modes of transportation, railroads have been unable to meet rising costs by making commensurate increases in rate levels. The result has been low and receding net earnings and general conditions of financial stringency. Inflation has aggravated this condition.

In 1955 net income from operations of Class 1 line-haul railroads. amounted to $1.1 billion and in 1966 to $1.0 billion. Last year (1971) operating earnings were only $0.7 billion. Moreover, this net operating income is before interest charges which in 1971 amounted to more than $0.5 billion.

The significance of low earnings is reflected in rate of return on net investment. For the railroads, rates of return have been far below those of other regulated industries. In their best year of the past twenty-1955-their rate of return on net investment was only 4.22 percent, and the best showing in the past ten years was a return of 3.90 percent in 1966. For the past five years, the average rate of return was only 2.29 percent.

The low state of railroad earnings sets them apart from other industries and restricts their ability to compete effectively for capital funds. Ranked according to return on net worth, railroads have consistently been at or near the bottom of the list of groups of leading business corporations. In 1971 the railroads rate of return on this basis was only 2.1 percent as compared with averages of 10.5 percent for public utilities and 10.8 percent for manufacturing corporations. At this time, six major railroad companies--almost one-fifth of the industry in terms of revenues are in reorganization proceedings under the Bankruptcy Act, and another dozen which failed to earn their fixed charges in 1971 are in perilous financial condition. These most seriously troubled roads are important segments of an integrated industry, 70 percent of whose traffic moves over two or more railroads

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between origin and destination. Fortunately, not all of the railroads are in desperate straits. But when essential segments of the railroad system are in financial trouble, the effective operation of the entire integrated system is affected adversely.

The industry is failing by a wide margin to generate the capital needed to replace, augment and modernize plant and equipment, resulting in declining working capital and mounting debt. Capital expenditures actually made have exceeded retained income and depreciation charges in each of the past nine years, and the aggregate deficiency has amounted to $4.8 billion. The full deficiency, including needed expenditures which could not be made, was much greater. Both the Department of Transportation and the Interstate Commerce Commission have recognized the seriousness of the railroads' capital needs to serve present and prospective demands of a growing national economy. Yet, despite these urgent needs and despite the shrinking value of a dollar, capital expenditures declined from about $2.0 billion in 1966 to less than $1.2 billion in 1971. Continuation of such a trend in this capital-intensive industry would be disastrous not alone to the railroads but to their employees and to the Nation's economy which they serve.

In light of the above, it is evident that any suggestion that the railroad industry make disproportionate contributions to the railroad retirement fund must be viewed from the standpoint of its ability to pay. The state of health of the industry is such that it is not now able, nor will it in the foreseeable future, be able to stand major increases in its contribution to the fund. Any restructuring of tax contributions is a matter to be directed to collective bargaining and, when there considered, must be an element of future wage-benefit negotiations. The Commission in its "Major Findings and Principal Recommendations" appropriately observes that "Adequacy [of benefits] is always relative to ability to pay and to willingness to pay." And it properly counsels also that "Railroad retirement must restrict its staff tier and dual benefit outlays to fit within its capacity to raise taxes from the railroad community."

I believe those statements deserve to be emphasized for they signify that there are limits to the "ability to pay" of the industry as well as its employees.

In these "Major Findings and Principal Recommendations" the Commission takes no position on how the costs of tier two should be divided as between employers and employees, considering that this question should be determined in collective bargaining by the parties. However, the labor member, Mr. Dennis, in his qualifying comments recommends that management assume the full cost of the second-tier level of benefits.

With this recommendation and its proposed departure from longstanding provisions, I do not agree, for it overlooks the financial condition of the industry and its limited ability to bear such costs alone. It is the position of the industry, which I represent on this Commission, that the costs of the second tier should be shared equally, in accordance with terms of the 1937 agreement between representatives of labor and management.

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