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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 P.L. 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. 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 Page 3 Page 6

if it continues on its present course.

This assumes (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 P.L. 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 benefit 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 ha's 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 rail

road retirement system.

Because railroad workers are excluded from full

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 rail

road beneficiaries is about 10 percent of covered payroll for the next

30 years.

About two-thirds of these costs are excess or windfall benefits.

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.

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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 $900

million by the year 2000.

4.

The railroad retirement system is probably the most complicated

pension system in the United States.

The

It is two systems within one.

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 rail

road 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

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part of the railroad retirement benefits that are social security and

the part that are staff benefits.

There is no reason why a percentage

rise in social security benefits should automatically be extended to the

staff portion of railroad retirement benefits.

Time does not permit further discussion of our report.

However, I

should like to offer you a series of fact sheets for inclusion in the

record.

These outline our major findings and also present factual

information bearing on s. 3852.

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.

It has no offsets for dual benefits,

already increased 20 percent by the amendments in P.L. 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 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

[blocks in formation]

receive excess benefits

would be costly and inequitable.

It would be

82-813 0 - 72 - 6

much better to include offsets, as was done in 1966, 1968, and 1970, to

eliminate double

eases for dual beneficiaries.

This would save a

needless expenditure of $60 million a 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 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.

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