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amounts are often viewed as being comparable to benefits paid

under private plans.

To again increase the tax burden on retired

and disabled railroad workers only two years after this previous

increase is, in our view, totally unsupportable at a time when

the general policy is to reduce the Federal tax burden on indi

viduals, particularly those in the lower income brackets.

Not only must we object to any further tax increase imposed

on railroad retirement annuities alone rather than on all personal

income generally, but we must also strongly object to considering

this one tax proposal as a means of reducing the Federal budget deficit. To do so is directly contrary to the accepted Administration

and Congressional policy of dealing with all tax measures in connec

tion with the tax simplification and reform proposal.

If this

proposal were dealt with in that forum, at least the harsh, and

in our view unwarranted, impact of a tax increase on railroad retirement annuitants might be ameliorated to some extent by

revisions to other parts of the Internal Revenue Code which lessen the tax burden on lower income taxpayers. We respectfully submit

there is no justification in equity or fairness for now enacting a tax increase on elderly and disabled railroad workers while

deferring to some uncertain future date the question whether

highly profitable corporations should pay any tax at all.

We strongly urge that the Administration's tax increases

proposal be rejected.

Thank you for this opportunity to present these views of

rail labor and the active and retired employees we represent.

Mr. DOWNEY. Thank you, Mr. Snyder.
Mr. Duncan.
Mr. DUNCAN. Thank you, Mr. Chairman.

I want to thank you. Under the President's budget those railroad retirement benefits which are not identical to Social Security benefits will be taxed under rules that apply to all other payments under the Railroad Retirement System.

But under the President's proposal, a number of currently nontax benefit payments include intangible income, not that I agree with them, but do you think it would be more appropriate to delay action on this particular provision until we can consider the President's tax reform?

Mr. SNYDER. Congressman, that is a very good point. Absolutely. We are dealing here with a budget. This committee I understand is dealing with tax reform. We wholeheartedly agree with it.

Mr. DUNCAN. Thank you.
Mr. Reuther, Mr. Klinefelter, do you care to add anything?
Thank you very much.
Mr. Coyne.
Mr. COYNE. I have no questions.
Mr. DUNCAN. Thank you, gentlemen, for your testimony.

The committee will next hear from the American Association of Retired Persons.

Mr. Certner, would you begin. Mr. HURST. Mr. Chairman, I should like to correct the record. Mr. Certner is with me, as is Chris McEntee, but I am Victor Hurst, H-u-r-s-t. I am a volunteer with the American Association of Retired Persons. My position is vice president, and I am making this presentation this morning.

Mr. DUNCAN. That is fine. If you would proceed, I would appreciate it.

STATEMENT OF VICTOR HURST, VICE PRESIDENT, AMERICAN AS

SOCIATION OF RETIRED PERSONS, ACCOMPANIED BY DAVID CERTNER AND CHRIS McENTEE

Mr. HURST. Mr. Chairman, gentlemen, the American Association of Retired Persons, the Nation's largest aging organization with over 19 million members, appreciates the opportunity to appear before this committee regarding user fees and other revenue issues.

AARP's members and volunteer leadership continue to view the large and growing deficits as the chief economic concern of older persons. The association believes it inevitable that in order to help get the deficit under control, revenues must be raised somewhere. AARP hopes to help clarify some of those areas in which revenue raising efforts have thus far focused. The association will

address the following items in its testimony: The Pension Benefit Guaranty Corporation (PBGC] fund, the cigarette excise tax, the extension of Medicare to State and local government employees, and railroad retirement benefits.

PENSION BENEFIT GUARANTY CORPORATION FUND AARP supports increasing the single employer insurance premium rate from $2.60 to $7.50 per participant per year. Given the size

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of PBGC's accumulated deficit, it is vital to the interest of all defined benefit plan participants that the corporation be placed on sound financial grounds.

There are currently over 30 million workers participating in single employer defined benefit plans guaranteed by the PBGC. These workers are assured that in the event their pension plan terminates with insufficient assets to pay guaranteed benefits, the PBGC would step in as plan trustee, and provide participants with at least a substantial portion of their pension benefits. While only a small percentage of these participants will ever require the financial assistance of the PBGC, the insurance it provides to all is invaluable. Current retirees who are paid benefits directly by the Corporation are even more cognizant of the essential service the PBGC provides.

The BBGC finances the insurance plan primarily through premiums paid by ongoing plans. The current premium rate of $2.60 per yea was set in 1978 in the belief that it would provide sufficient revenues to meet future obligations from terminated plans. However, the rate of increase in both the number and size of new claims greatly exceeded predicted levels, creating a sizable deficit. Benefit payments have increased to an annual rate of over $180 million, almost double the payments of 1982, and almost five times the payments made in 1980. The PBGC projects that by the end of 1985, about 90,000 beneficiaries will receive payments. The present value of the Corporation's liabilities has grown to over $1.5 billion which, when compared with PBGC's assets of almost $1.1 billion, leaves a deficit of over $400 million for 1984. PBGC projects that, absent an increase in the premium, the deficit will be over $1.3 billion by the end of 1989. While there are sufficient assets to maintain benefit payments to participants in the short term, there is the risk that absent congressional action, the PBGC will become a pay-as-you-go entity, which over time will be unable to meet its obligations.

This situation is not a new one. Proposed legislation in the past 2 years has attempted to address the serious problem of the Corporation's deficits and restore solvency to the system. Had the premium been raised earlier, a smaller increase would now be needed.

As we now approach the end of the second quarter of 1985, the PBGC has acquired funding obligations so large that an increase in the premium to $7.50 is necessary to provide revenues sufficient to reduce the PBGC deficit. Congress was warned of this possibility by the GAO November 1983 report on the need to strengthen the PBGC, and congressional delay now has made it necessary for the PBGC to seek a higher premium.

While increasing the insurance premium would be a major step towards restoring solvency to the program, there remain defects in the system which should be corrected. The problem of plan sponsors dumping unfunded pensions on the PBGC and the current waiver provisions of ERISA are two such defects which must also be corrected to insure the premium increase will go no higher.

THE FEDERAL EXCISE TAX ON TOBACCO PRODUCTS

Congress has been considering several proposals to increase the Federal excise tax on tobacco products. Without enactment of these

proposals, the Federal tax on cigarettes will drop from 16 cents per pack to 8 cents per pack this October, the same level of taxation as in 1951 when the tax was enacted. AARP has long supported proposals to increase the Federal tax on cigarettes as a means to reduce the large budget deficit. In addition to increasing the tax for budgetary purposes, AARP urges Congress to earmark a portion of the generated revenue from an increased tax on cigarettes to the Medicare Program. Such a step would both reduce the Federal deficit and provide an appropriate source of revenue to the financially troubled Medicare Program. The increased incidences of certain disabilities and diseases among users of tobacco products is evidence of a high correlation between the use of tobacco products and increased health care costs. In 1981, the total health and economic costs associated with tobacco use was estimated to be $38 billion, with the cost to Medicare estimated to be nearly $4 billion.

Since users of tobacco products use a disproportionate share of Medicare resources, AARP believes that it is only fair and equitable to ask them to pay a user fee to offset these increased costs. Moreover, in this era of budgetary cutbacks, revenues from an increased tax on cigarettes is a preferable alternative to continued shifts in health costs to Medicare beneficiaries.

It is difficult to understand how in this time of tightened budgets and rising health costs, this Congress can allow the cigarette tax to decrease. AARP, therefore, strongly urges this committee to at the very least maintain the 16 cents per pack tax, and to strongly consider raising this tax to an even higher rate.

MANDATORY MEDICARE COVERAGE FOR STATE AND LOCAL EMPLOYEES

Following the precedent by Congress in 1983 to impose the hospital insurance [HI] portion of the Social Security tax on Federal employees, support has been growing to extend the tax to all current State and local government employees as well. Under existing law, Medicare coverage of State and local government employees is on a group option basis.

AĀRP supports mandatory coverage of current State and local government employees under the HI Program. Mandatory Medicare coverage of these employees would increase fairness in the program, improve health coverage for those State and local employees who never gain Medicare coverage, and raise significant revenue for the ailing HI trust fund.

Despite the fact that Medicare coverage is currently optional for State and local employees, 85 to 90 percent of these employees eventually become eligible for Medicare even though they may have contributed very little to the system. Consequently, these employees who receive full Medicare coverage but do not pay the HI tax for their entire working careers are unfairly subsidized by other retirees who have worked under Social Security and paid the HI tax their entire working careers. Imposing the HI tax on State and local employees would redress this inequity.

Extending the HI tax to State and local employees would likely improve health coverage for those 10 to 15 percent of State and local employees who never gain Medicare coverage and for those retired State and local employees who receive health insurance coverage from State and local plans. Evidence exists that Medicare provides more comprehensive health insurance coverage than State and local plans can afford to provide their retirees. Moreover, Medicare coverage is portable. State and local employees who change jobs and would lose eligibility for benefits under State and local plans would find Medicare coverage advantageous.

According to the Congressional Budget Office, mandatory Medicare coverage for all State and local employees would raise $6.3 billion for the HI trust fund over the next three years. A large influx of revenues would be a significant boost to the financially distressed HI fund and lessen the need for Medicare benefit cuts.

If Congress decides to mandatorily impose the HI tax on current State and local employees, AARP urges Congress to allow a transition period similar to that provided when the HI tax was extended to Federal employees. Whenever the HI tax is imposed, some older State and local employees will not have enough years of service left before age 65 to be able to gain the full number of required quarterly credits to become fully insured under Medicare.

As was done for Federal employees, AARP believes that Congress should blanket-in these State and local employees by allowing them to use their State and local employment to meet the quarterly credit requirement. Since general funds were used to finance benefits for Federal employees

protected by such a transition provision, AARP recommends the use of general funds to finance the costs of benefits payable under the transitional provision for State and local employees as well. The cost can be expected to be small. Only 10 to 15 percent of State and local employees attain age 65 without being fully insured under Medicare through their earnings records in non-State and local employment.

In addition to this blanket-in provision, AARP recommends a provision to prevent double payment for health benefits by State and local workers. In those instances where State and local governments and their employees pay contributions to finance retirement health plans, payment of the HI tax would be a second payment. In these cases, a transition provision would be necessary to prevent double payments.

TAXING A PORTION OF TIER I RAILROAD RETIREMENT BENEFITS AS

PRIVATE PENSION BENEFITS

AARP opposes the proposal to tax certain railroad retirement benefits which are not similar to Social Security benefits and are not tier II benefits, as if they were private pension benefits. Under this scheme, early retirement-60-30-benefits and disability benefits will be taxable to recipients under the general principle that benefit amounts received in excess of employee contributions are income.

The burden of the new tax would fall primarily on two groups. Retirees receiving early retirement benefits for reaching age 60 with 30 years of service would find all of their tier I benefits subject to tax for the first time. The Senate Aging Committee estimates that 40,000 retirees would be affected by this law.

The second group bearing the brunt of this proposal would be those receiving occupational disability benefits. Approximately

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