19 CHART 4.-Projected Receipts, Disbursements, and Status of the Railroad Receipts include interest earnings when fund is positive; disbursements include interest cost when fund is in deficit. Taxes collected for transfer to OASDI trust funds through financial interchange are excluded from both series, as are all Hospital Insurance transactions. Figures also exclude transactions of Railroad Retirement Supplemental Account. Source: Commission on Railroad Retirement projections from computer model. PRESENT PROBLEMS AND THE PRINCIPLES FOR THEIR SOLUTION In efforts to keep ahead of OASDI, the railroad retirement system's serious problems have been aggravated by piecemeal amendments without a clear-cut plan to establish its proper relation to social security. Many of the past efforts to patch it up and to correct its inequities and anomalies by offsets and adjustments have been unsatisfactory. The failure of such efforts is in part due to inadequate advance understanding of their effects and costs. The prospect of success in applying piecemeal correctives is even less today because the system has grown more complex. Viewed from the perspective of the overall United States income maintenance programs, the problems of the railroad retirement system include the following: 20 • An immensely complex structure which consists of two systems within one, with different and sometimes conflicting objectivesand an attendant lack of clarity regarding the nature and purpose of the system. Numerous alternative, intricate formulas and provisions which, more often than not, require data from both Railroad Retirement Board and Social Security Administration records. The Railroad Retirement Act of 1935 consisted of 8 printed pages; the 1968 version had grown to 51 pages and by cross reference also encompassed the 149 pages of Title II of the Social Security Act. • Costly and inequitable dual benefits and other anomalies; compounded, unstable benefit formulas; and benefit provisions very difficult to understand. • A complicated financial interchange with social security which has made it difficult to sort out the financial obligations that are the sole responsibility of the Railroad Retirement Account. • An impending threat of bankruptcy by 1988 or sooner-difficult to solve because taxes are already high but costs are even higher and growing. Temporary benefit increases totaling 26.5% enacted in 1970 and 1971 without any provision to cover their cost-and proposals for further benefit increases and liberalizations which would add billions of dollars to the financial deficits of a system already headed into financial failure. The end effect of these deficiencies becomes impossible to overlook in the financing of the system. In large measure the failure of the policy makers and railway labor and management organizations which are the interested parties to establish and follow practices which would finance the system on an actuarially sound basis reflects the almost universal confusion over the philosophy, the nature and the structure of the system. The practice of financing the system by open-ended methods without accumulating an actuarially adequate reserve (appropriate for social security but not for a single-industry retirement plan) has neglected the one controlling fact: the Railroad Retirement Account depends primarily on the future trend of railroad employment, and that trend is downward. Because of the complicated financial interchange and the confusion over the true structure of railroad benefits, the finances of the system have been allowed to drift, while successively increased benefit levels were adopted. The practice of increasing benefits without providing taxes to finance them will bring the system to an early bankruptcy. The first step toward solution of the problems of the railroad retirement system is to analyze and recognize the true nature of this system and to adopt performance criteria which will enable it to carry out its basic purposes effectively and at least cost. Any effort to place it on a sound long-term course must deal in a fundamental manner with the basic weaknesses which have grown up through the years. The system must be modernized to bring it up to date with the developments of the last 35 years, particularly with respect to social security. The purposes of the system must be clarified. The structure of the railroad retirement system must be replanned and reordered. The benefit levels and formulas must be revised, so that adequate benefits will be provided on an equitable basis to the various groups of beneficiaries, 21 both at a given point in time and among the generations. The inequities and the waste resulting from excessive costs of dual benefits and other anomalies must be eliminated. The limited resources of the system must be used most effectively, with equity and fairness. The administration of the system can be made more efficient by simplifying the formulas, the structure, and the processes. These steps can also enable workers and beneficiaries to understand what their rights are and how to get them. Finally, the system must be made financially selfsupporting and solvent by raising taxes and assuring a reasonable financial reserve, so benefits can be paid 20, 30, and 50 years hereafter. These principles cannot be implemented by ad hoc, patch-up changes. The effort to do so in 1951 was only partially successful, because neither the beneficiaries nor the policy makers could understand the equities and issues involved. The system was too complex. Since 1951 more complexities and more inequities have developed. Railroad workers understandably have a great emotional feeling for their system: it represents their hope of economic security in old age. However, the preservation of their rights for the future is basically dependent on solving the present problems in a way that will place the system on a solvent course for the decades to come. This requires fundamental reforms. Reforms to make future rights secure can and must be achieved without abridging any legally-vested present rights, even the right to dual benefits vested up to the date of changeover. THE COMMISSION'S RECOMMENDATIONS The main goal of the Commission's recommendations is to preserve and make secure the rights of the railroad beneficiaries and railroad workers to their benefits through a pension structure which will be selffinancing on a sound basis for the decades ahead. The Commission intends that the proposed changeover to the restructured system be accomplished without taking away any present benefits from current beneficiaries, or any legally vested benefits from the present workers. The recommendations are designed to make the railroad retirement system structurally sound in relation to social security. They are intended to restore the system to a self-supporting and financially solvent basis both for the crisis period and beyond. Action is proposed to correct certain inequities now present. The objective is more equitable and fairer treatment of the different groups of beneficiaries. The proposals are designed also to simplify this system, to make it more understandable, and capable of more effective and economical administration. This section discusses only the main recommendations, and these only in summary, without all the analysis which led to them. The underlying analyses, the principles, and more detailed proposals are presented at greater length in the Commission's main report and in the supporting working papers. A Restructured Two-Tier System The fundamental structural defect of the railroad retirement system today is that ever since 1935 railroad workers have been excluded from regular social security coverage, but since 1951 the equivalent of social security benefits has been financed indirectly through the railroad retirement system. As a result, the two systems overlap each other and yet are intricately interlocked. 22 Structurally the railroad retirement system is two systems within one. The basic tier of benefits, corresponding to OASDI benefits, has been financed through the social security trust funds since 1951 and the adjustments have been made retroactive to 1937. All rairoad beneficiaries are guaranteed a benefit equivalent to social security plus 10%. However, the social security provisions are still enveloped by the original railroad staff retirement approach. Second tier benefits above OASDI are geared essentially to years of service; and for career workers, who typically retire under the regular railroad retirement formula, the total benefits are about double those of social security. Although railroad beneficiaries have the guaranty of 110% of social security, railroad workers may also obtain direct OASDI coverage for other social security employment. In this event they get the OASDI dual benefit plus railroad retirement under alternative formulas which include some partial offsets for the dual benefits. Only the coverage and benefit provisions for survivors are coordinated to a major extent, and the majority of these benficiaries draw benefits under the 110% guaranty. As a result, the formulas and benefit provisions of the system are extremely complex. The lack of structural coordination reflects confusion about the purposes and objectives of the railroad retirement system. The system has been called "social insurance". Yet analysis indicates that the primary function of the Railroad Retirement Account is to support the staff tier benefits, which are geared to length of service and are primarily for retirement purposes. Philosophically and structurally the railroad retirement system has tried to straddle both the social security and the staff retirement concepts. This confusion has helped to perpetuate questionable benefit provisions and approaches to financing. The extent of interlocking of the railroad retirement and social security systems is already great, but unsatisfactory. About 90% of all the workers who enter the railroad industry end up with their credits transferred to social security because they have fewer than 10 years of railroading and about 70% leave before completing two years. In the process they lose most of the value of their higher contributions toward the second tier railroad retirement benefits. On the other hand, in 1971 about 38% of all railroad beneficiaries also received OASDI dual benefits (which involve excess cost to the Railroad Retirement Account); and this ratio will rise to about 48% by the year 2000 under present provisions, according to Commission projections. In practically all other industries in the country, the OASDI system is now the base or foundation for retirement, disability, and survivor protection. Almost all of the company and industry staff pension systems are integrated with social security-they supplement it. The benefits are administered separately, paid out by independent organizations. Their provisions are adjusted to conform with those of social security so they fit together sensibly, but the staff plans are separatenot "merged" with social security. This is precisely the pattern which the Commission envisions for the railroad retirement system. The Commission believes it is time to bring the design of railroad retirement up to date by eliminating the commingling of its social security and staff retirement functions. Railroad workers should be assured the full benefits of social security protection now and in the future on the same terms as all other workers and families. Their rights 23 to social security benefits, which already are really financed by the social security system, would be more completely assured by direct payment of ŎASDI benefits to railroad beneficiaries by the Social Security Administration, with the Railroad Retirement Board serving as its agent. The Commission therefore recommends that the railroad retirement system be restructured to provide: (1) a basic or first tier of benefits under the OASDI system, precisely as for other industries; and (2) a second tier of benefits through a separate, supplementary railroad staff pension system fully supported by contributions from the railroad community with taxes and benefits set under Federal law administered by the Railroad Retirement Board. The present difference between the social security level of benefits and railroad retirement plus supplemental benefits will initially be the tier-two benefits, which will float on top of social security benefits and be changed only as a result of negotiation and/or legislative action. The Commission does not recommend that this staff pension system be merged into social security. Railroad workers should receive their additional staff retirement benefits from their own separate, special program. Under this plan, railroad workers need have no fear that their railroad retirement system is being merged into the social security system. Adequacy, Equity, and the Dual Benefits Problem The railroad retirement system provides good benefits to the individuals and families of the railroad industry, benefits generally superior to those available to the great majority of Americans. A significant proportion of railroad couples receive tax-free retirement benefits which are 70, 80 or even 90 percent of their total average annual earned income in the last five years of employment. However, railroad workers and railroads pay retirement taxes at double the social security tax rates. Adequacy is always relative to ability to pay and to willingness to pay. The fact that railroad retirement taxes are twice as high as social security taxes does not mean that railroad retirement benefits must be, or can be, double those under social security. At this stage in its development the capacity of the social security system to pay benefits is much greater relative to its tax base than the capacity of the railroad retirement system. In fact, the ratio of workers to families on the beneficiary rolls in social security is more than four times as high as in the railroad retirement system. Social security draws upon the expanding economy for its annual expenditures (now roughly equivalent to its annual income). Railroad retirement depends on the restricted and declining employment of its own industry. Because the ratio of retired people to active workers in the railroad industry is very high, social security reimburses the railroad retirement system about 211⁄2 times as much for basic benefits as social security now receives in taxes from railroad workers. Railroad retirement must restrict its staff tier and dual benefit outlays to fit within its capacity to raise taxes from the railroad community. The first priority problem of the railroad retirement system today is to finance the benefit levels that were enacted in 1970 and 1971 for a temporary period and are generally expected to become permanent. restructuring the system, greater equity can also be achieved in |