Page 7 5. 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 P.L. 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! In 1974 the covered pay would be $12,000 under P.L. 92-336. And it would rise in future years, as Chart XII (page 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. Page 8 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 relative 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%) 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 RR benefit increases should apply to both RR 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 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 unions are willing to pay the taxes required to fund these benefits. Consequently, this act will Page 9 speed the bankruptcy of the railroad retirement system. It will add to An Alternative to S. 3852 About 28% of railroad beneficiaries, most of whom receive their benefits under the 110% OASDI guaranty, have already been granted an increase in benefits by P.L. 92-336. The remaining 72% 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 or. 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 Page 10 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 bankruptcy. I thank you for the opportunity to present these views. CROSS RECEIPTS, GROSS EXPENDITURES, AND STATUS OF THE RAILROAD RETIREMENT Other Central Case Assumptions (Flows at Annual Rates; Fund at End of Year) -2 1970 Source. Commission on Railroad Retirement al Receipts include interest earnings, expenditures includes interest on Jebt. Taxes collected for transfer to ODI trust fund through financial interchange are excluded from both series, as are all Hospital Insurance transactions. Figures exclude transactions of Railroad Retirement Supplemental Account. |