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roll, if these are continued, as they certainly will be. I think the recommendation speaks for itself. Gentlemen,
we do recommend the pass-through of the 20 percent increase, but if I may speak for myself I simply do not see how this legislation in its present form can be reported favorably to the Senate.
Thank you for your time.
Senator CRANSTON. Thank you very much, Mr. Yntema, for a very suocinct statement. You reduced a complicated matter to a very concise and clear statement. I appreciate that very much. .
How much money and how much staff are involved in the Commission study?
Mr. YNTEMA. The total budget was $893,000.
Mr. March. There were about a dozen permanent professional staff members, and we had some 20 part-time consultants, Mr. Chairman.
Senator CRANSTON. Could you tell us something about the qualifications of the Commission members and the staff members?
Mr. MARCH. That would take some time.
Mr. March. Yes. I think your committee already has the biographies on the Commission members, and we will be very glad to send you additional information on the staff.
I must say, Mr. Chairman, if you will permit me, that the Commission assembled and consulted with and used in our work some of the most eminent acturaries in the United States. They were recommended to us by the American Academy of Actuaries. They included largely actuaries from private practice, although several have had governmental experience.
It would be hard to assemble a panel of actuaries more qualified than the panel that we brought in to study this matter.
To a man they stated that the present status of the railroad retirement system is actuarially unsound. Also the report which they have written for the Commission, and which will be in our formal report when it is presented to the Congress and the President, indicates that the actuarial methodology which has been used in the past for costing the railroad retirement system and financing it, has not really been fully appropriate to a staff-pension system such as the railroad retirement system really is.
Mr. YNTEMA. May I speak to your questions?
In the past I was director of the Cowles Commission. I have been director of research for the Committee for Economic Development, and I have been chairman of the National Bureau of Economic Research, which probably is the most eminent organization in research. I have been in charge of some research as vice president of finance of the Ford Motor Co. I have some capability to appraise the work of these people, and it has been excellent.
Senator CRANSTON. What is your view with respect to the effect on our ability to consider the Commission report if we now add a 20-percent increase on a temporary basis?
Mr. YNTEMA. If it is a pass-through, there will be no effect. That is what we strongly urge.
If it is not a pass-through, what will happen is you will have problems in making a transition to a two-tier system, because there are going to be some adjustments in that that are going to cost some money.
Senator CRANSTON. If the pending bill is enacted in its present form, what would be the effect then on the Commission's recommendation?
Mr. YNTEMA. It will make the transition more difficult, Mr. Chairman. I am saying in order to make the transition from this system to a two-tier system, which we strongly urge, there is going to have to be some give and take, some adjustment in formula and costs. It will make the transition more difficult.
Senator CRANSTON. Make it more difficult in your opinion, but not impossible!
Mr. YNTEMA. Not make it impossible, but make it much more difficult. But you still have to face the problem of where the money comes from before we get out of the woods.
Senator CRANSTON. Could you review in some detail for us exactly how much of a tax increase on railroad worker payrolls as a total would be needed to fully finance the 15 percent, 10 percent and 20 percent increases if they were made permanent, and could you explain what such a tax increase would do to the total tax rate for the system?
Mr. March. Mr. Chairman, if I may take that one, the system after we took account of the increase in the wage base under Public Law 92–336, shows a level deficit for the period 1973 to the year 2000, of 2.7 percent of covered payroll.
The cost of S. 3852 would be an additional 2.2 percent of covered payroll, so that the total deficiency would be 4.9 percent on the basis that the Commission used.
Let me say that that method which we used was a minimal approach. The system has a big expenditure hump coming in the period 1975 to the
year 2000. It was plainly impractical to follow the recommendations that actuaries offer to fund it fully, so what the Commission developed was a sort of modified pay-as-you-go approach which would maintain the same ratio of reserve to the rate of annual outlays in the future as we have today. The reserve is now roughly $5 billion, namely about five times the annual outlay for staff for benefits.
On that basis we come to this 4.9 percent, which is something about $440 million a year short, assuming our dynamic assumptions which are considerably different, incidentally, from the ones that the Railroad Retirement Board uses.
The chief actuary, Mr. Cowen, of the board estimates a deficiency of 6.7 percent, which is reached on the basis of his static assumptions and the level payroll that he calculates. Needless to say both sets of figures indicate that the system is in really bad shape.
What is so clear, however, and probably rather new, with respect to illuminating the condition of the system, are the projections that we have brought before you.
You can see for yourself that if the system runs to the point where we have a $1 billion a year deficit toward the end of this century, you are going to have a real problem.
Mr. YNTEMA. May I add, Mr. Chairman, the total tax would amount to 27 percent of the covered payroll. This is a very high tax.
Mr. March. To fully fund it, you would have to raise it substantially above that.
Senator CRANSTON. Could you give us some effect of the passthrough approach if that were actually put into effect. For example, under that approach what increase would the average railroad beneficiary receive?
Mr. YNTEMA. What would happen is from social security and from railroad, an increase equal to the OASDI increase on combined service.
Senator CRANSTON. What would the average recipient get, however?
Mr. March. I think the average railroad beneficiary presently gets about, if I recall correctly, something like $222 a month across the board. That is the railroad portion. The social security level is about three-fifths of that. If we took three-fifths of $222, which would be, say, something like $150, we would end up with a 20-percent increase on $150, about $30.
Mr. YNTEMA. Mr. Chairman, I think Mr. Cowen can answer that because he has more familiarity with details.
Senator CRANSTON. Is that the same thing as saying it is about a 12-percent increase?
Mr. CoWEN. It is about a 12- or 13-percent increase.
Senator CRANSTON. What would be the situation if we enacted a temporary 20-percent increase now, and then next June 30 the 15- and 10-percent increases were made permanent, but the 20-percent increase was not etxended ?
Mr. YNTEMA. The difference would be a little more than 2-percent difference in the deficiency. This 20 percent adds another 2-plus percent.
Senator CRANSTON. What if the 10 and 15 percent were continued ? What would be the situation?
Mr. YNTEMA. The difference would be 2.2 percent of the covered payroll.
Senator CRANSTON. For 9 months. Between now and June 30 ?
Senator CRANSTON. No; I meant if you allowed it to expire next June, what then would be the situation?
Mr. MARCH. You would have a heavy deficit of roughly 2.7 percent on the dynamic assumptions, which is $241 million a year on the average for the next 27 years.
Senator CRANSTON. Would you explain how the pass-through approach would differ from the Commission recommendation to eliminate the receipt of nonvested dual benefits by railroad beneficiaries?
Mr. MARCH. Mr. Chairman, those are two completely separate items. The elimination of the nonvested dual benefits is a recommendation of the Commission to stop future accrual of these duplicate benefits. The Commission recommended, of course, that past rights earned should be recognized and should be preserved.
On the other hand, the pass-through relates to how much you increase benefits, and on what layer of benefits you increase them. To sort out that I would have to think a little bit, but basically these are two separate propositions.
Let me say, however, that if you eliminate accrual of future benefits, you would save enough money over the period between now and the year 2000 to roughly pay for the 20-percent increase that S. 3852 would provide.
Senator CRANSTON. You consider the two approaches somewhat complementary in philosophy and both do rely on the social security underlying system.
Mr. MARCH. Yes; the entire philosophical underpinning for the approach is that what the Commission felt it important to do was to give railroad workers the protection of full social security coverage, but on terms that would prevent the railroad workers from being able to dip into the social security pool and get extraordinary, dual benefits.
Then the second part of it would be to revise the system in order to provide a rational social security layer. As a matter of fact, when you provide complete social security coverage that automatically eliminates accrual of future excess dual benefits, and the only problem you have is what you do about past rights. We have some very specific suggestions on what to do about those.
Senator CRANSTON. Mr. Yntema, do you have something to add to that?
Mr. YNTEMA. No; I think that is a fair statement of the situation.
Some of these matters are quite technical. You have to be very careful in dealing with them. The basic idea of the pass-through, if I can make that very clear, is that the railroad worker would get via his social security increase or railroad benefits an increase equal to the total increase he would have received if all his service had been under social security. You get it one way or the other, but neither account would be injured by that.
Senator CRANSTON. Regarding those technical amendments to H.R. 15922, how important do you feel it is for the Congress to act on those amendments now rather than waiting to consider them in the context of the overall review of the system as we fully consider and study the Commission's report?
Mr. YNTEMA. I am not an expert on that. It is not a major matter as far as we are concerned.
Senator CRANSTON. Is there anyone on the Commission who has any strong views on that?
Mr. YNTEMA. No strong views on that. Senator CRANSTON. Counsel has a question on that, and then you will be excused.
Mr. MITTELMAN. Just for the record, we talked about a 12- to 13-percent increase if you used the pass-through. In terms of actual dollars what does that mean to the average railroad beneficiary as opposed to the average social security beneficiary?
Mr. Cowen. The pass-through will give an average increase of about $27 per month; for a new retiree it will be about $31 a month.
Mr. MITTELMAN. What would the average benefit be?
Mr. Cowen. The average benefit is now $223; 20 percent of that would be about $44.
Mr. MITTELMAN. I have no further questions.
FOR RELEASE ON DELIVERY
STATEMENT OF THEODORE 0. YNTEMA
RELATING TO A PROPOSED 20 PERCENT
Mr. Chairman and Members of the Committee:
I am pleased to present to you the findings of the Commission on
Railroad Retirement that have a bearing on
This bill, as
you know, would provide a 20 percent increase in benefits under the
Railroad Retirement Act.
My statement is divided into two parts: First, a summary of the
Commission's findings as they relate to the present bill.
The Commission's Findings:
The Coming Crisis of the Railroad Retirement
The 5-member Commission on Railroad Retirement was created by Congress
by P.L. 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.