MAJOR FINDINGS AND PRINCIPAL RECOMMENDATIONS OF THE COMMISSION ON RAILROAD RETIREMENT

SUMMARY

The railroad retirement system was created in 1935 as a special benefit system for railroad workers. It is federally-administered but has always been self-supporting from contributions by the workers and the railroads.

Since 1935 the economic situation of the railroad industry and the structure of Federal social insurance and retirement programs have undergone major changes. The railroad retirement system has been adjusted many times to meet the changing situation; but the system remains beset by serious problems. The Commission on Railroad Retirement was created by the Congress to make a thorough study of the system and to recommend solutions.

The Commission has concluded that the system needs a thorough overhaul to make it consistent with a carefully defined set of objectives, to up-date it to meet current conditions and to make it financially solvent. The system has lacked a clear set of objectives, delineating between the socially-weighted benefits provided under a social insurance scheme and those appropriate to a private industry supplementary pension plan. This confusion of pension objectives has created a system with structural deficiencies. It needs to be fully coordinated with the basic social security system. Otherwise, excessive costs for overlapping benefits result. The present benefit provisions are both complicated and costly. The system faces a financial crisis. Unless corrective action is taken promptly there will be large cash flow deficits, and the system will go broke in about 16 years.

The Congress directed the Commission to recommend changes to provide adequate levels of benefits on an actuarially sound basis and specified in detail the topics to be studied. The Commission has found that past efforts to patch up the system, though helpful, have failed to solve the long-range problems. It is recommending four major changes in the law which are designed to preserve and make secure the rights of railroad workers and their families to benefits in the coming period of crisis and for the years that lie beyond. These fundamental reforms will solve the serious problems of the system and can be carried out so as to guarantee that no current beneficiary and no worker whose rights are legally vested will lose any benefits he has accrued to date. In summary form the recommendations are as follows:

1. The railroad retirement system should be restructured into two separate tiers of benefits. Tier one should provide regular social secu rity benefits, financed and paid under the social security laws, and represented by a separate social security check. In relation to tier one, the Railroad Retirement Board should function as a social security

(3)

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claims agent and payment center for claims-taking, adjudication, and certification for payment of social security benefits for railroad beneficiaries in accordance with policies set by the Social Security Administration. Tier two should be a completely separate supplementary retirement plan administered by the Railroad Retirement Board under Federal law, structured to fit with and augment social security and float on top of tier one. This structure conforms with the pattern that works well in many other industries. It utilizes fully the strength of the social security system which now covers 90% of all jobs in the country. The separation of tier two will permit it to be negotiated by labor and management in keeping with their special needs.

This separation of tier one and tier two-in objectives, in benefit structure, and in financing-must be unmistakably clear to all involved: to the special interests represented by labor, management, and beneficiaries; and to the public interest represented by Congress and the Executive Branch of the Government.

2. Legally-vested rights of railroad workers and railroad retirement beneficiaries to benefits based on social-security-covered nonrailroad service should be guaranteed, but future accrual of these dual benefits should be stopped. Dual benefits are based on social security coverage for only part of a work career. They involve a windfall element and excess cost to the Railroad Retirement Account. Their future accrual will cease automatically when railroad employment is covered by social security on a full basis.

3. A firm financial plan should be adopted forthwith to finance the second tier of supplementary benefits through the Railroad Retirement Account on an assured, fully self-supporting basis by contributions from the railroad community through the crisis period of the next 20 to 30 years and then beyond.

The plan must provide for immediate sizable tax increases whichtogether with the future savings from curtailing dual benefits and some gain in earnings-will be sufficient to cover fully the projected cash flow deficits of up to $1 billion a year by the end of the century. The higher taxes must accompany the extension of the temporary 1970 and 1971 benefit increases and should be sufficient also to finance any other liberalizations that may be made. As a minimal safeguard for future benefits the basic criterion should be that the Railroad Retirement Account should not be drawn down below its present $5.5 billion balance (December 31, 1971, accrual-basis), and as tier two benefit outlays rise in future years the reserve should be maintained at not less than five times the annual rate of such expenditures.

The tax rates required to carry out the financial plan should be determined by the Railroad Retirement Board pursuant to explicit statutory criteria regarding this reserve ratio. A determination should take place within 90 days after any major change in the program, or at least biennially. It should be transmitted to the Congress by the President, and should go into effect after 60 days unless the Congress enacts legislation within that period to set alternate rates.

Beyond the crisis period, when a reasonable degree of normality in the ratio of beneficiaries to railroad workers is attained, the Account should be financed according to the generally accepted standards of actuarial soundness appropriate to supplementary staff pension plans. 4. The benefit formulas and provisions of the system should be re

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structured and revised to assure that the overall benefits in the future continue to bear a reasonable relationship to wages in a dynamic economy and to make benefits more equitable among the various groups of beneficiaries. A continuation of the past practice of compounding the percentage factors in the railroad retirement formula and increasing the base of covered wages will escalate costs to an untenable extent. Various other anomalies are also present.

The foregoing are the Commission's principal recommendations. They stem from an independent study by the Commission and its staff, consultants, and advisory groups, compressed within the past_17 months. Highlights of the findings and general conclusions follow. The Commission's complete report contains all of the specific recommendations, and is supplemented by extensive staff studies. It also suggests necessary follow-up action to achieve the transition from the present system to the new, improved system.

BACKGROUND OF THE COMMISSION'S STUDY

The Commission's Assignment

This 5-member Commission on Railroad Retirement was created by Public Law 91-377, approved by the President on August 12, 1970. Its main assignment was to study the railroad retirement system and recommend changes in it to provide adequate levels of benefits on an actuarially sound basis.

This broad directive was amplified by a further statutory specification of the subjects to be studied. They included: (a) the adequacy of benefits and their adjustment in relation to increases in social security and in the cost of living; (b) the relationship between the railroad retirement and social security (Old-Age, Survivors, and Disability Insurance, or OASDI) systems and the restructuring of the former or possible merger of the two; (c) changes in the financing of the system; and (d) other related matters, including topics the Commission considered necessary.

The study was intended to provide the President and the Congress with the results of a thorough, independent review of the railroad retirement system. Its immediate impetus was the 1970 testimony of the Chairman of the Railroad Retirement Board that the Railroad Retirement Account would be exhausted in 20-25 years if the 15% benefit increase enacted in 1970 were to be permanent. The Congress made this increase-and the 10% increase of 1971-temporary, pending the report of the Commission.

The Commission began work on January 20, 1971. Public Law 92-46, approved July 2, 1971, extended its reporting date to no later than July 1, 1972. The temporary benefit increases were extended by one year to June 30, 1973, to give the Congress an opportunity to consider the Commission's report and recommendations.

In its work, the Commission explored the various issues specified in the enabling legislation. Some of the possibilities turned out to be inconsistent, others appeared to be unproductive. Hence the staff work was directed toward the most potentially productive areas and the Commission's report focuses on these topics. Some of the staff studies, however, also deal with various broader approaches which were examined in the earlier phases of the Commission's discussions.

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The Origins and Nature of the Railroad Retirement System

The railroad retirement system was created by the Railroad Retirement Act of 1935. It is the only federally-administered pension plan for the workers of a single private industry. As a major heavy industry and a strongly unionized one, railroading has long been a leader in providing benefits for its workers. Railroad company and union pension plans grew on a substantial scale until they ran into financial difficulties early in the Great Depression of the 1930's. Then the railway labor organizations began to look to the Congress for a more satisfactory solution.

The Congress first acted in 1934 with a plan calling for federallyadministered pensions supported by contributions from the workers and the employers and administered by an independent Railroad Retirement Board. This Act was declared unconstitutional by the Supreme Court in 1935 under the narrow construction then accorded the authority of the Federal Government to regulate interstate commerce. The Railroad Retirement Act of 1935 was largely similar to its predecessor, except that it took its authority from the general welfare clause of the Constitution and the taxing power of the Federal Government. Benefit provisions under this second Act were separated from taxing provisions. The latter were simultaneously enacted in the Carriers' Taxing Act. In June 1936 the carriers won a District of Columbia District Court judgment that the new legislation, too, was unconstitutional. However, the Railroad Retirement Board started payment of benefits to former company pensioners on July 13, 1936. The following December President Franklin D. Roosevelt took a hand and secured a formal, signed agreement between the representatives of the unions and of management on February 18, 1937.

The 1937 agreement provided in principle that: (a) the carriers and the employees would support the retirement system on an "equal tax burden" principle and the parties would not depart from this arrangement; (b) both sides would support the existing legislation and would not contest the constitutionality of legislation putting the plan into operation; (c) beneficiaries on the rolls of private pension plans would be transferred to the new system; and (d) railroad employment would be excluded from coverage under the Social Security Act. The 50/50 cost sharing has been preserved for the regular Railroad Retirement Account, but in 1966 the carriers agreed to pay the full cost of certain supplemental benefits for long-term employees through a separate Railroad Retirement Supplemental Account. The present total railroad retirement "package" costs the employees 46% of total contributions, the employers, 54%.

The Railroad Retirement Act of 1935 removed railroad employment from the coverage of the Social Security Act of 1935, then two weeks old. One reason was that the railroad labor and management wanted immediate payment of benefits to retired railroad workers, and monthly social security payments were not originally scheduled to begin until 1942. In historical perspective, this step established a precedent of exemption from social security coverage and led to the mixing of social insurance and private pension principles which created many of the problems that confront the railroad retirement system today. The Development of the Railroad Retirement System, 1935–1971

At the outset the railroad retirement system was almost solely a career employee retirement program and this emphasis remains the

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primary thrust of the system to this day. The main emphasis was on retirement and disability benefits. The retirement benefit formula was structured primarily to reward length of career service in the railroad industry; benefits were computed on average covered lifetime wages. Computation was by a formula in which a basic amount (derived by three different percentage factors applied to wages) was multiplied by years of service. Except for a joint-and-survivor option and certain temporary death benefits under the 1935 Act, there was no protection for survivors.

The social security system has developed along lines which emphasize social adequacy rather than career service. Its benefit formulas provide a significantly higher replacement ratio for lower wages. New start provisions have enabled many workers to qualify for relatively full benefits after coverage of only a portion of their careers. Benefits have been extended not only to the aged retired, but to their dependents, to survivors, later to the disabled, and then to their dependents. Thus, family protection has become an important function of the system.

As the social security system grew in scope and adequacy, the railroad retirement system has been adjusted to keep abreast. In 1939 social security added survivor benefits; in 1946 the railroad retirement system followed suit. In the early years railroad retirement benefits were several times larger than their OASDI counterparts. However, the Social Security Amendments of 1950 raised OASDI benefits by an average of about 77% and greatly broadened the coverage of the system by blanketing-in millions of new workers and simplifying eligibility requirements. This action was followed by the Railroad Retirement Amendments of 1951 which raised railroad retirement benefits and made other very important changes in the system. Thereafter, whenever social security benefits were raised, railroad retirement amendments soon followed.

All told, the Congress has enacted 12 major amendments to the Railroad Retirement Act since 1935, mostly in response to social security amendments that broadened the scope of the benefit protection and increased the benefit levels substantially. Benefits for retired railroad workers have increased substantially faster than the cost of living. For example, from 1951 to 1970 the average monthly benefit for a retired single worker has increased from $90 to $194, or 116%. Adjusted for inflation, the real purchasing power of the benefit for the unmarried retiree has improved 44% since 1951. For a worker and wife, the average monthly benefit has increased from $141 in 1951 to $310 in 1970, or 120%. In constant purchasing power terms, the improvement has been 47% for the couple.

The Interlinking of Railroad Retirement and Social Security

The numerous amendments in the railroad retirement and social security programs in the last 35 years have had several important effects on the character and status of the railroad retirement system.

First, the nature of the system has been fundamentally changed. Significant amendments in 1951 provided that all railroad retirement benefits were to be at least equal to those payable under OASDI based on combined railroad and social security service, and further amendment in 1959 raised this guarantee to 110%. This changed the railroad retirement system into a family income maintenance program by estabhing the entire social security benefit structure as a floor within the