$ Billion

(Flows are in Dollars per Year; Fund is end of Fiscal Year)

5

5

3

2

1

1935

1940

1945

1950

1955

1960

1965

1970

*Excludes taxes collected for transfer to OASDI trust funds through financial interchange, but does not deduct benefit payment equivalent.

Source: Actual figures, Railroad Retirement Board; projected 1972 and 1973 figures from "Appendix to Budget of the U.S. Government, 1973", and Railroad Retirement Board.

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The costs of the staff pension and excess dual benefit costs borne by the Railroad Retirement Account were substantially less than these totals. In 1950, about 39% of the benefit total was reimbursed by the social security system; the ratio rose to roughly 62% in 1960, and 61% in 1971. These ratios are computed after the costs of dual benefits have been deducted, i.e., charged to the Railroad Retirement Account. On a gross basis the reimbursements are higher.

The volume of dual benefits has risen on the order of 20-fold since 1950 to a gross of about $400 million during the year 1971. A reasonable estimate is that about two-thirds of the gross dual benefit outlays were excess costs which would not have been paid if there had been complete coordination between the two systems. These excess costs are now about the same size as the entire amount contributed by the workers and retained by the railroad retirement system.

The Commission's actuarial model indicates that gross benefit expenditures will rise from $1.95 billion in calendar 1971 to a peak of $2.84 billion in 1995, and still be at a rate of $2.77 billion in the year 2000. This "central case" projection assumes declining railroad employment, wages increasing by 42% over 42 months (as negotiated in 1971) and thereafter by 5% a year, prices rising by 2.75% a year, as well as formulas that maintain benefits at about the current ratio to wages. The long-term interest rate was assumed to be 5%. The social security portions of the model assume the automatic adjustment of covered wages and benefit formulas provided in H.R. 1 as passed by the House in 1971, and such adjustments are also assumed for covered railroad wages and for cost-of-living increases for the railroad beneficiaries. On these assumptions, the gross tax collections (of which about half have to be transferred to OASDI in the financial interchange) are projected to rise from $950 million in 1971, to $1.47 billion in 1985, and to $2.38 billion by 2000. In calendar year 1971 the interest earnings on the fund were only $287 million, and such earnings will evaporate completely in 16 years if no corrective action is taken.1

The Prospect of Bankruptcy

The net effect of these interacting forces is that the size of the reserve has already declined sharply in relation to the rate of expenditures in recent years.

Railroad retirement taxes have always been higher than the rates under social security. In 1950 the combined employer-employee tax rate for railroad retirement was 12%; 3% for social security. In calendar 1972 (exclusive of 1.2% covered payroll for hospital insurance) the combined employee-employer tax rate was 18.7% on covered earnings of up to $750 a month. Of the 18.7%, 9.2% was for transfer to the

1 A Senate social security rider to H.R. 15390 was passed by the Congress on June 30, 1972, and approved by the President July 1 (P.L. 92-336). The amendment increased social security benefits by 20% and provided an automatic cost-of-living adjustment. It raised the total tax collections from railroad workers and employers for OASDI and HI after 1972 by applying a somewhat reduced total tax rate to an increased wage base; this higher wage base will also result in higher tax collections for retention by the Railroad Retirement Account. particularly because the tax rate for RR-retained taxes remains unchanged. These changes are not reflected in the figures cited in this summary because this Commission held its final meeting on June 28, 1972. But they are insufficient to change the substance of the Commission's findings.

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OASDI trust funds and the remaining 9.5% for retention by the Railroad Retirement Account. In addition, the carriers were paying the equivalent of 1.8% of covered payroll for supplemental benefits in the second half of 1972.

Nevertheless, from the beginning the taxes collected to support the railroad retirement system have fallen short of what was necessary to fund the system on a sound actuarial basis. Moreover, the tax rates have always been inadequate to amortize the unfunded past service liabilities which have been increased by successive amendments.

The Account did build up some reserves at the outset. Accumulations were most rapid in the decade 1945-1955 and were given a lift by the exceptionally high, but temporary, employment in the industry during World War II. But by calendar year 1972 the ratio of reserves to annual expenditures chargeable to the regular and supplemental railroad retirement accounts (after subtracting reimbursements from social security) had fallen to about 6 to 1 on an accrual basis, or 5 to 1 on a cash basis. The ratio should now be roughly twenty times outlays if this fully mature system funded all its accrued liabilities. In addition, the unfunded Railroad Retirement Supplemental Account created in 1966 has accrued projected benefit obligations of about $3.8 billion. Were the system to be terminated in 1972, it would fall many billions short of covering accrued benefits.

Chart 4 shows a widening gap between the projected receipts of the Railroad Retirement Account and its annual expenditures. Receipts include tax collections retained by the Account, the net financial interchange payment, and interest earnings (if any) on the fund. Expenditures include total benefit outlays of the system plus the projected cost of borrowing for benefits after the Account has gone broke.

In fiscal year 1971 the system had a sizable cash flow deficit. While the outlook is for a relative balance for a few years if benefits are not liberalized, by 1980 the annual cash deficit is projected at $330 million and $578 million in 1985. After the Account goes broke in 1988, the calculations assume that it will pay interest on the ensuing "debt". The projected cash deficit will rise to about $1 billion a year from 1995 to 2000. From 1971 to 2000 the cumulative deficits add up to $17 billion under the central case assumptions.

The effect of these cash deficits on the status of the Account will be devastating. The reserve, which stands at about $5.5 billion in 1972, will decline to an estimated $4.0 billion in 1980, to zero in 1988, and turn into a "debt" of nearly $12 billion by 2000 under central case assumptions of the actuarial model. Any increases in benefits provided without raising the taxes to pay for them will worsen the situation.

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CHART 4.-Projected Receipts, Disbursements, and Status of the Railroad

*Receipts include interest earnings when fund is positive; disbursements include interest cost when fund is in deficit. Taxes collected for transfer, to OASDI trust funds through financial interchange are excluded from both series, as are all Hospital Insurance transactions. Figures also exclude transactions of Railroad Retirement Supplemental Account.

Source: Commission on Railroad Retirement projections from computer model.

PRESENT PROBLEMS AND THE PRINCIPLES FOR THEIR SOLUTION

In efforts to keep ahead of OASDI, the railroad retirement system's serious problems have been aggravated by piecemeal amendments without a clear-cut plan to establish its proper relation to social security. Many of the past efforts to patch it up and to correct its inequities and anomalies by offsets and adjustments have been unsatisfactory. The failure of such efforts is in part due to inadequate advance understanding of their effects and costs. The prospect of success in applying piecemeal correctives is even less today because the system has grown more complex.

Viewed from the perspective of the overall United States income maintenance programs, the problems of the railroad retirement system include the following:

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• An immensely complex structure which consists of two systems within one, with different and sometimes conflicting objectivesand an attendant lack of clarity regarding the nature and purpose of the system.

• Numerous alternative, intricate formulas and provisions which, more often than not, require data from both Railroad Retirement Board and Social Security Administration records. The Railroad Retirement Act of 1935 consisted of 8 printed pages; the 1968 version had grown to 51 pages and by cross reference also encompassed the 149 pages of Title II of the Social Security Act.

• Costly and inequitable dual benefits and other anomalies; compounded, unstable benefit formulas; and benefit provisions very difficult to understand.

• A complicated financial interchange with social security which has made it difficult to sort out the financial obligations that are the sole responsibility of the Railroad Retirement Account.

• An impending threat of bankruptcy by 1988 or sooner-difficult to solve because taxes are already high but costs are even higher and growing.

Temporary benefit increases totaling 26.5% enacted in 1970 and 1971 without any provision to cover their cost-and proposals for further benefit increases and liberalizations which would add billions of dollars to the financial deficits of a system already headed into financial failure.

The end effect of these deficiencies becomes impossible to overlook in the financing of the system. In large measure the failure of the policy makers-and railway labor and management organizations which are the interested parties to establish and follow practices which would finance the system on an actuarially sound basis reflects the almost universal confusion over the philosophy, the nature and the structure of the system. The practice of financing the system by open-ended methods without accumulating an actuarially adequate reserve (appropriate for social security but not for a single-industry retirement plan) has neglected the one controlling fact: the Railroad Retirement Account depends primarily on the future trend of railroad employment, and that trend is downward. Because of the complicated financial interchange and the confusion over the true structure of railroad benefits, the finances of the system have been allowed to drift, while successively increased benefit levels were adopted. The practice of increasing benefits without providing taxes to finance them will bring the system to an early bankruptcy.

The first step toward solution of the problems of the railroad retirement system is to analyze and recognize the true nature of this system and to adopt performance criteria which will enable it to carry out its basic purposes effectively and at least cost. Any effort to place it on a sound long-term course must deal in a fundamental manner with the basic weaknesses which have grown up through the years.

The system must be modernized to bring it up to date with the developments of the last 35 years, particularly with respect to social security. The purposes of the system must be clarified. The structure of the railroad retirement system must be replanned and reordered. The benefit levels and formulas must be revised, so that adequate benefits will be provided on an equitable basis to the various groups of beneficiaries,