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ent level and (b) should-as its outlays rise-be maintained at not less than five times the annual rate of expenditures for the second or staff tier of the system.

The Commission's projections indicate that continuation of benefit payments at the levels of wage replacement they represented in 1971 would require a tax increase of about 4 percent of level covered payroll during the period 1973-2000. This assumes rising wages and prices and continuation of the minimal standard of the present reserve relative to outlays for tier-two benefits.

The Railroad Retirement Board should be granted statutory authority, subject to explicit criteria (along the lines of the two criteria mentioned above) set by the Congress, to determine the tax rate necessary to keep the Railroad Retirement Account at the levels required by these criteria. The Board's determination should be made not more than 90 days after any major change in the program, or at least biennially. After transmittal to the Congress through the President, the new rates should go into effect after 60 days unless the Congress enacts alternate rates.

This proposal for the interim, crisis period is not up to professionally-accepted standards of actuarial soundness. It is a pragmatic approach designed to finance the system on essentially a pay-as-you-go basis, without reducing the present degree of safety provided by the reserve now in hand. The proposal is predicated on the assumption that a firm 30-year plan will be adopted forthwith to raise taxes to provide the needed monies to carry out the plan.

Because of the uncertain economic situation on which this system now depends, the advice of the Commission's Actuarial Advisory Panel merits particularly serious attention. The Commission therefore recommends that a financing plan providing a more substantial degree of actuarial soundness be adopted as soon as some degree of normality in the system's finances makes it at all possible.

The Consequences of a Depleted Fund.-The Commission is aware that there will be constant temptation to throw overboard the whole concept of a reserve. No provision has yet been made for actuarially funding the supplementary railroad benefits adopted in 1966 and made permanent in 1970. These already involve commitments for the next 75 years with a present value of $3.8 billion. The Commission's actuarial advisors unanimously regard this approach as actuarially unsound. To follow in this direction would be to invite future pension

cuts.

Proposals for unfinanced benefit increases which would countenance drawing down the present reserve for the regular system would be open to severe criticism because they would undermine the rights of the workers who have contributed. Although present workers may have "contributed" to the system for 20 or even 30 years or more, they do not have individual savings accounts. They have been taxed, and much of the money has already been spent for benefits to past and present beneficiaries. Their rights are only as good as the continuing overall finances of the system.

Based on current cost estimates, the present reserve is not big enough to pay off the benefits to current beneficiaries. Present workers should be entitled to at least as much assurance of future benefit payments through reserves as are present beneficiaries. To use any sub

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stantial portion of the present reserve to pay current beneficiaries will shortchange the economic security of active workers who depend on the system for their future benefits and increase the future tax burden. If the system draws down its present reserves, the payment of future benefits will be in even more serious jeopardy than they are now. Efforts to finance the benefits on a purely pay-as-you-go basis will be more difficult if the reserve is exhausted, because that will deprive the system of its present interest earnings of some $300 million a year, or about 5 percent of current payrolls.

Actuarial Valuations.-The Commission considers that fundamental changes must be made in the actuarial techniques for evaluating the system. During the crisis period, valuations should be made annually, and they should be based on dynamic as well as static assumptions. Alternative sets of assumptions should be used to disclose the effects of impending or possible changes.

Long-range projections of cash flows should also be made and published, because traditional present value calculations are not easy to grasp. In any case, they are insufficient for a system in such severe. financial difficulty. Presentations should fully and clearly separate the financial status of the staff tier of the system, as distinct from the basic layer financed by social security.

In addition, the valuations should be accompanied by economic analyses of the impact of rising pension costs on the total compensation and cost structure of the railroad industry and its productivity trends. Financing Present Temporary or Possible Future Benefit Increases The Commission's central case projection, which shows a huge financial deficit, assumes that the temporary 1970 increase of 15% and the additional 10% increase in 1971 will be continued after June 30, 1973. These increases plus the decline in railroad employment, are the immediate cause of the present system's prospective bankruptcy. Even without them, the system would still go broke in 1992 and accumulate a debt of $4.9 billion dollars by 2000, if it can borrow the

money.

Accordingly, the Commission recommends that extension of the 1970 and 1971 benefit increases must be accompanied by tax increases sufficient to keep the present reserve from being drawn down and from going below a ratio of five times the net benefit outlays financed by the Railroad Retirement Account in the future.

The Commission has also examined various current proposals for major benefit liberalizations. Among these have been proposals for retirement at age 55 or 60, after 30 years of service, and changes in the formula to raise benefit levels substantially. According to the estimates of the Commission's staff, enactment of retirement at age 55 with 30 years of service would require a very large increase in the level tax rate of the system for the period 1973-2000. Although the amount of this increase is necessarily uncertain, it could be of the order of 7% of payroll and could raise the combined necessary increase in the level tax rate to 11.5% of payroll. This would double the present tax rate for staff tier benefits.

The Commission has likewise carefully analyzed the effect of pending proposals for a further percentage increase of 20% on total railroad benefits and for formulas to match a possible similar percentage

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increase under the Social Security Act. This increase would also represent a continuation of the costly practice of compounding the railroad retirement formula by applying the social security percentage increases to the much larger benefits of the Railroad Retirement Act. Assuming a simultaneous compound increase of 20% in both social security and railroad retirement benefits, accompanied by a change in the tax base to $10,200 ($850 monthly) and the dynamic effects of H.R. 1, the Commission's staff estimates an increase in the deficiency for 1973-2000 on a level basis of 2.2% of the wage base. The debt in the year 2000 would rise to $21 billion, $9 billion more than under the Commission's central projection. The total level deficit for the 30year-period-not counting the costs of the early retirement proposal-would then be about 6.1% of payroll, or $473 million a year short of the minimal standard of financial soundness proposed by the Commission. The required tax increase of 6.1 percentage points in the payroll tax would be an increase of over 50% in the combined second tier tax rate of 11.3% of covered payroll on a level basis under present law for the period 1973–2000.

The Commission recommends that any extension of temporary benefits or any future benefits increases be accompanied by timely tax increases adequate to finance them according to the principle that the present fund not be depleted and the ratio of reserves to the rate of expenditures not be further impaired.

The Commission also recommends that, until the Congress has considered a plan to restructure the railroad retirement system, any increases in social security benefits the Congress may enact be "passed through" to railroad retirement beneficiaries in the same dollar amounts. A "pass through" will be financed by the OASDI system and will not adversely affect the Railroad Retirement Account. The railroad retirement tier-two benefits, tax rates, and covered wages should not be changed.

The Transition From the Old System to the New

The Commission stresses that immediate action is necessary to work out and enact legislation for changeover from the present mixed system heading for insolvency to a restructured and solvent one. Successful transition will require the cooperation of the Executive Office of the President and the Congress, and the continuing assistance of the Railroad Retirement Board and the Social Security Administration.

The Commission has made many recommendations and observations in its main report. However, there are many significant points relating to the railroad retirement system which the Commission has not been able to resolve, or even study. These should be immediately taken in hand by a task force working through the Executive Office of the President, because they involve issues that cannot be resolved solely by either the Railroad Retirement Board or the Social Security Administration. To help provide a carry-through for the transition, the labor and management members of this Commission, or their designees, might well be invited to participate in the effort.

Principal guidelines for the transition should, in the view of the Commission, include the following. As much of the transition as possible should be accomplished "as of" the date of changeover. After changeover the new, separate OASDI and staff tier formulas should

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prevail, except for the guaranteed vested "grandfather" benefits and rights mentioned earlier. The new formulas will apply to all future beneficiaries.

The combined dollar benefits already awarded to current beneficiaries by the railroad retirement and social security systems should be guaranteed by the "saving clause." Their totals should be recomputed into (a) a basic tier one equal to OASDI based on combined railroad and social security service and (b) the remaining residual comprising the tier two staff benefit, including any dual benefits which are legally vested and guaranteed. Any cost-of-living or other adjustments by social security should thereafter be made only on the "OASDI equivalent" benefit. The "staff tier equivalent benefit" as affected by any saving clause would be recorded as a guaranteed amount; but a not yet retired worker or his survivors would get benefits under the new staff tier formula if the latter were higher. Accrued legally vested rights of current or withdrawn workers would be computed in similar fashion as of changeover, based on years of service and average pay, even though they were not yet eligible to receive the guaranteed

amounts.

The central principle underlying the whole changeover or transition is that the dollar benefits of no current beneficiary or legally vested benefit rights of any current worker should be reduced by virtue of the changeover to the restructured system. The restructured system of the future would provide more equitable treatment to the various groups of beneficiaries of the system than the present system, without impairing any vested rights to present benefits.

In conclusion, the railroad retirement system is now in a most serious condition; it has structural deficiencies and is heading for bankruptcy in the 1980s. However, if the remedies proposed by this Commission in this report are adopted forthwith. the future of the system and the rights of the railroad workers and families who depend on it can be preserved-on a basis which will retain continued financial support from the railroad community and acceptance by the general public.

STATEMENTS BY INDIVIDUAL COMMISSIONERS

Separate statements by Messrs. Charles L. Dennis, Louis W. Menk, George E. Leighty, and Theodore O. Yntema, follow.

QUALIFYING COMMENTS BY COMMISSIONER CHARLES L. DENNIS

This statement represents my individual viewpoint as the labor member of the Commission on Railroad Retirement. It is directed at specific parts of the Major Findings and Principal Recommendations of the Commission on Railroad Retirement.

I am presenting these views to establish my position on specific issues, which vary from the majority report.

At this time I want to reaffirm my agreement with the basic report and recommendations of the Commission, notwithstanding the following:

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I. Two public and one industry member have recommended that railroad workers receive an increase equivalent to the dollar increase received by Social Security beneficiaries under pending legislation. Since Social Security and Railroad Retirement beneficiaries have received the same percentage increases in the past and since, under present law, railroad workers contribute at approximately twice the Social Security rate, such infringement will affect future collective bargaining on tier two benefits. For this reason I strongly object to its inclusion in the report.

II. In the section dealing with Rising Benefits, Average and Total certain impressions are given which tend to distort the actual fact

situation.

The report stresses the fact that Railroad Retirement benefits are greater than benefits paid to most people on Social Security and other pension programs. This is misleading in that it avoids a comparison with comparable, highly unionized industries.

The report also compares costs of fringe benefits in the railroad industry with other industries. I strongly object to the comparison of fringe benefit costs when pensions are obviously only an undefined portion of all fringe benefit costs.

III. One of the basic recommendations to which I fully subscribe is a restructuring into a two-tiered system. This, as the Commission agrees, implies a restructured relation between labor and management as regards collective bargaining.

The report neglects to point out that the collective bargaining process in comparable heavy industries has assumed a posture wherein the employer contributes all of the costs of a staff pension program. Organized labor strongly recommends that management assume the full cost of the second-tier level of benefits.

IV. The management member of the Commission, Mr. Menk, in a separate statement, makes an issue of the carrier's "ability to pay." This, of course, is the traditional position used by the railroad industry before every Federal fact-finding board or public tribunal established under the Railway Labor Act. I do not believe it is the function of this Commission to delve into the basic collective bargaining posture of the parties.

If we were to consider ability to pay, we would also need to consider all of the traditional arguments which form the circumstances behind every collective bargaining dispute. For example, we would need to examine clear cross-comparability; we would need to examine fantastic productivity increases which have occurred in the railroad industry; we would need to examine savings effected by past, present, and future trends in automation (as projected by the Commission's report); and, we would need to look into labor savings made as a result of mergers, abandonment of lines, facilities, and services and so on.

I believe these issues should be handled through collective bargaining by both parties and consequently take strong exception to the relevance of so-called "ability to pay" influencing this report.

V. Finally, there runs throughout the Commission's report a continuing thought implicitly suggesting that the benefits and conditions of the whole pension package for railroad employees should be improved. I believe this implicit suggestion should be brought forth and recognized as reality.

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