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5. S. 3852 would create a very unfavorable tax situation for rail

road 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 Retire

ment Account is building up.

It is approaching because beneficiaries are

at a peak and benefit costs are being increased by big liberalizations.

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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 yeår 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 post

ponement 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

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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

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speed the bankruptcy of the railroad retirement system.

It will add 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 :«illion a year (1973) in duplicate increases

for dual benefits.

It would make the restructuring of the railroad retire

ment system, which is urgently recommended by our Commission, more diffi

cult because it would preempt the leeway needed for the adjustments in

the transition to the two-tier system.

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

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model would not further deepen the huge prospective deficit of the

Railroad Retirement Account.

This part of the increase 18 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.

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CROSS RECEIPTS, GROSS EXPENDITURES, AND STATUS OF THE RAILROAD RETIREMENT

ACCOUNT ASSUMING 20% BENEFIT INCFEASE, 1970-2000
Modified Central Case Employment; H.R. 15390 Wage Base,

Other Central Case Assumptions
(blows at Annual Rates; Fund at End of Year)

* Billions

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1970
1975
1980
1985
1990
1995

2000
Source: Couunissiqit qin maiiroad netirement
al Receipts include interest earnings; expenditures includes interest on
Lebt. Taies collecteu for iransfer tó CDI trust fund through financial
interchange are excluded from both series, as are all Hospital Insurance
transactions. Figures exclude transactions of Railroad Retirement
Supplemental Account.

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