The Commission's Findings: The Coming Crisis of the Railroad Retirement System: The 5-member Commission on Railroad Retirement was created by Congress by Public Law 91-377, which your committee helped draft. The Commission was ordered to make a study of the railroad retirement system and report to the President and the Congress on how to provide adequate benefits on an actuarially sound basis.

The Commission first met on January 20, 1971, and it held its 19th and last meeting on June 28, 1972. During this period of about 17 months we investigated the topics stipulated in Public Law 91-377 and developed our recommendations. Our report is now at the printers. We have, however, forwarded to your committee advance copies of part I, which is now mostly set in type.

For this study we developed a computerized actuarial model of the railroad retirement system, which for the first time gives capability to project the cash flows for the system year-by-year for many years ahead. We also made an economic study of the future of the railroad industry and of railroad employment with the assistance of the National Planning Association. Then we ran more than 20 tests with our model on alternate sets of assumptions.

The Commission's findings that are directly relevant to S. 3852, which you now have under consideration, are the following:

1. The railroad retirement account will be bankrupt in 16 or 17 years if it continues on its present course. This assumed (a) that the temporary 1970 and 1971 increases of 26.5 percent will be continued, (b) that no further liberalizations except cost-of-living increases will be made, (c) that present tax rates for funds retained by the railroad retirement account will be continued, and (d) it takes into account the higher wage base enacted by Public Law 92-336 as it became law July 1, 1972.

Our projections show that, unless remedial measures are taken, the present reserve of about $5 billion in the railroad retirement account will be gone by 1989. The total projected deficits from 1973 to the year 2000 add up to $16 billion. The railroad retirement account would thus have a debt of at least $11 billion in the year 2000-if the program is still in existence. This projection, it should be noted, does not allow for the 20-percent increase in benefits provided in S. 3852.

2. The 15-percent benefits increase in 1970 and the 10-percent increase in 1971, which multiply out to an increase of 26.5 percent, have not been covered by tax increases. They cause the bulk of the deficiency in the system as it now is. Our Commission has recommended that any extension of these temporary increases be accompanied by a tax increase sufficient to finance them.

3. Dual OASDI benefits are a major and needless cost to the railroad retirement system. Because railroad workers are excluded from full and direct social security coverage, they are able to qualify for disproportionate OASDI benefits by contributing for a relatively short time to social security. The vast majority of workers in the United States who are under OASDI cannot qualify for dual benefits in this

manner.

The projected gross cost of all dual OASDI benefit payments to railroad beneficiaries is about 10 percent of covered payroll for the next 30 years. About two-thirds of these costs are excess or windfall bene

fits. They would not have to be paid if railroad retirement and social security were fully coordinated, as staff pensions and social security are for most other workers in the country.

The railroad retirement account has to bear the full cost of these excess benefits. The dual benefits are received largely by shorter-service railroad workers. To finance them, all railroad workers must pay higher taxes, including the full career workers who are much less likely to qualify for dual benefits. The excess cost of dual benefits in 1971 was $265 million and this amount will increase sharply to about $700 million by the year 2000.

4. The railroad retirement system is probably the most complicated pension system in the United States. It is two systems within one. The initial staff benefit provisions have been retained, but the entire structure of social security benefits was also incorporated by cross reference in 1951.

Our Commission has recommended that the railroad retirement system be restructured into two tiers: (1) a basic tier consisting of OASDI and (2) a separate, second tier of staff benefits, related primarily to service and financed by the RR community. This second tier would be completely separate from OASDI and would float on top of it. Such restructuring, in our opinion, is absolutely essential to eliminate the existing confusion and to preserve the financial integrity of the railroad retirement system.

Because confusion now prevails in regard to the objectives of the railroad retirement system, confusion also prevails in regard to benefits, costs, and the financing of the system. The bill presently before your committee reflects this confusion: it fails to distinguish between the part of the railroad retirement benefits that are social security and the part that are staff benefits. There is not reason why a percentage rise in social security benefits should automatically be extended to the staff portion of railroad retirement benefits.

Instead of continuing with a further discussion of the report, I would like to offer you a series of fact sheets for inclusion in the record. I think copies have been supplied to the committee, and I would like to offer this one for the record if I may, Mr. Chairman.

Senator CRANSTON. This will go in the record. We will also print your report and recommendation summary, along with dissenting and individual views, as an appendix to this record.

Mr. YNTEMA. The fact sheets outline our major findings and also present factual information bearing on S. 3852.

You might also want to take a moment to glance at the charts that are appended to the statement I have read.

The first chart shows the size of the annual deficit year by year, and the second chart shows the expenditures, and you can see how very rapidly the fund begins to drop beginning about 1975, and disappears by approximately 1985.

THE IMPLICATIONS OF A 20-PERCENT INCREASE AS PROPOSED BY S. 3852

S. 3852 would provide a percentage increase of 20 percent in benefits under the Railroad Retirement Act across the board. It has no offsets for dual benefits, already increased 20 percent by the amendments in Public Law 92-336 (H.R. 15390) to the Social Security Act. The increases would expire June 30, 1973.

My analysis of the consequences of S. 3852 is as follows:

1. Temporary benefits once paid are very likely-I will say practically certainly-to become permanent. When our Commission considered the temporary 1970 and 1971 increases there was great resistance to any suggestion that they be rolled back. The same will be true of the new 20-percent increase, which will be on top of the early unfinanced increases. This will mean compounded increases amounting to 51.8 percent in 3 years-all without financing.

2. In particular, the increases for dual beneficiaries who already receive excess benefits-would be costly and inequitable. It would be much better to include offsets, as was done in 1966, 1968, and 1970, to eliminate double increases for dual beneficiaries. This would save a needless expenditure of $60 million the first full year.

3. The proposed increase of 20 percent would raise both the basic OASDI tier of railroad retirement benefits and the additional layer which constitutes the staff pension tier of benefits. For a career worker with a wife who together now receive $325 monthly under social security, the 20-percent increase would be $65 a month. For a married career railroad worker with a $570 railroad benefit, including $500 from the railroad retirement account and the rest in supplemental benefits, the 20-percent increase would be $100 a month. The extra increase on his second tier would be $35 a month.

4. The railroad retirement account must bear the entire cost of the staff tier increase and of the doubled up increase for dual beneficiaries. OASDI pays for the basic tier through the financial interchange. In calendar year 1973 this net extra cost to the railroad retirement account will be $134 million, according to our projections.

From 1973 to the year 2000 the additional expenditures will add up to $12 billion. S. 3852 does not provide any additional taxes to cover these costs.

As a result-assuming these benefits will be extended-as I think everyone concerned knows they will be the railroad retirement account will go broke in the year 1985 and by the year 2000 will run up a debt of $23 billion. The size of the annual deficits is shown on the two charts which are attached. Indeed, by the year 2000 the annual deficit will be at the rate of $1.9 billion if the bill is enacted.

Senator CRANSTON. I am sorry to interrupt. I was hoping we might be able to complete your testimony, but we must leave at this point. for another rollcall.

(Recess.)

Senator CRANSTON. The hearing will reconvene.

Please proceed, Mr. Yntema.

Mr. YNTEMA. S. 3852 would create a very unfavorable tax situation for railroad workers and employers. In the second half of 1972 the railroad retirement taxes collected and retained by the railroad retirement account are 9.5 percent of covered payroll shared equally by workers and employers, plus an additional 1.8 percent of covered payroll by employers for the supplemental benefits enacted in 1966. Thus the total for staff tier benefits is 11.3 percent. In addition, in 1972 9.2 percent of covered payroll goes to OASDI plus 1.2 percent

to HI.

To maintain merely the present ratio of reserves to staff tier outlays for the period 1973 to 2000, the 11.3-percent tax rate will have to be raised to 16.2 percent of covered payroll on railroad workers and employers together. This would be an increase of 4.9 percent of covered payroll, of which 2.2 percentage points would result from S. 3852. Under Public Law 92-336 the new OASDI rates in 1973 would be 9.2 percent plus 1.8 percent for HI.

Thus, in calendar 1973 the combined employee-employer tax burden would be 27.2 percent of covered pay up to $10,800 a year. In 1974 the covered pay would be $12,000 under Public Law 92-336. And it would rise in future years, as chart XII (p. 27) in our fact sheets indicates. Even these high tax rates would not make the system actuarially sound according to the criteria usually employed by actuaries.

6. The financial problem which S. 3852 will create will not go away with time. It will get worse. The crisis of the railroad retirement account is building up. It is approaching because beneficiaries are at a peak and benefit costs are being increased by big liberalizations. But meanwhile the tax base of the system is not growing significantly because railroad employment is declining. Employment dropped from an average of 1.4 million in 1950 to below 600,000 at present. Our study showed employment is likely to decline to 327,000 by the year 2000.

The railroad retirement system confronts a big "hump" of benefit outlays to covered payroll in the period 1975 to 1990. It is important to raise taxes immediately, and level them out because postponement would make the future burden unbearable.

If staff tier benefits are to be increased, taxes for the railroad retirement account must be raised. The railroad system has reserves of only $5 billion. If S. 3852 becomes law, staff tier benefit disbursements in the period 1973-2000 will total $60 billion, of which $23 billion (or 38 percent) will not be covered by available assets or projected receipts.

It is often argued that since railroad workers pay payroll taxes about double those paid by workers under social security, the railroad benefit increases should apply to both railroad tiers or should be double those under OASDI. This does not follow logically. The railroad system is a high cost system for a high cost group. The staff tier benefits can only be increased if the system has the money-and it simply does not have money now.

From the foregoing I conclude that enactment of S. 3852 at this time would be most undesirable. It promises benefits for which there are no funds in sight. Neither the carriers nor the union members are willing to pay the taxes required to fund these benefits. Consequently, this act will speed the bankruptcy of the railroad retirement system. It will add further to the Federal budget deficit. It is financially unsound and unfair to the present railroad workers who look to this system for their future economic security.

It would waste $60 million a year (1973) in duplicate increases for dual benefits. It would make the restructuring of the railroad retirement system, which is urgently recommended by our Commission, more difficult because it would preempt the leeway needed for the adjustments in the transition of the two-tier system.

AN ALTERNATIVE TO S. 3852

About 28 percent of railroad beneficiaries, most of whom receive their benefits under the 110 percent OASDI guaranty, have already been granted an increase in benefits by Public Law 92-336. The remaining 72 percent can be given a corresponding benefit increase without significantly worsening the financial condition of the railroad retirement account.

The precedent for this was set in 1968. Then the railroad beneficiaries were given the full increase on the basic OASDI tier of their benefits based on their railroad and nonrailroad creditable service under social security-but not on the staff tier portion of their railroad benefits. Duplicate increases for dual beneficiaries were also offset. This was a practical and realistic recognition that the system could not afford further increases on the staff tier and that taxes on railroad workers and the carriers were already high.

The OASDI trust funds reimburse the railroad retirement account for the basic OASDI tier of railroad benefits. Hence an increase on the 1968 model would not further deepen the huge prospective deficit of the railroad retirement account. This part of the increase is justified.

The majority report of the Commission on Railroad Retirement recommends that the "pass through" approach used in 1968 be used in solving the problem of the 20 percent increase. Such an increase would avoid spending money the railroad retirement account does not have. It would give increases to the railroad beneficiaries on their basic OASDI layer and treat all of them fairly. It would keep the door open for remedial action which the Commission on Railroad Retirement has recommended to save this failing system from a bankruptcy.

I thank you for the opportunity to present these views.

For the record, I should add that the majority of the Commission recommending the pass-through consists of the chairman, the vice chairman, Dr. Black, both public members, and the management member.

The labor member of the Commission does not concur in this recommendation. He does, however, concur in most of the recommendations of the Commission, and especially in the urgent need for restructuring of OASDI

If I may, I shall like to conclude by reading an excerpt from the report of the House Committee on H.R. 15927, the corresponding bill in the House. I quote:

The reason the increases contained in this legislation are temporary is that the cost of a permanent 20 percent increase when added to the costs of the temporary 15 percent increase enacted in 1970, and the temporary 10 percent enacted in 1971-both of which are scheduled to terminate as of June 30, 1973-would create such a serious actuarial deficiency estimated at $129 million a year, or 2.18 percent of future payroll in the railroad retirement system, that Congress must give further consideration to the structure of the system before providing benefit increases on a permanent basis.

By providing the benefit increases on a temporary basis, the creation of such an actuarial deficiency is avoided.

I would like to point out two things. First of all, the $129 million and the 2.18 percent assumes that the 15 percent and the 10 percent increases will expire. The real deficiency reported by the Railroad Retirement Board is approximately $400 billion or 6.70 percent of level pay