SECTION 5. EARNED ENTITLEMENTS FOR RAILROAD EMPLOYEES
CONTENTS
Overview
The Retirement and Survivor Annuity Structure
Tier 1 and Tier 2 Benefits
Dual Benefit Payments
Disability Annuities
Spouse Annuities
Supplemental Annuities
Survivor Benefits
Lump-Sum Death Benefits
Program Data
Financing the System
Payroll Taxes
Financial Interchange
General Revenue Appropriations
Other Income
Income Taxation of Railroad Retirement Benefits
Financial Status of the Railroad Retirement Account
The Railroad Unemployment Insurance Program
Overview
Benefits and Eligibility Requirements
Financing
Legislative History
References
OVERVIEW
Retirement, unemployment compensation, sickness,
disability, and death benefits for railroad employees are
administered by the Railroad Retirement Board (RRB), a Federal
agency headquartered in Chicago. That these entitlement
benefits for a particular private industry are a function of
Federal authority follows from actions taken during the 1930s,
when threats to the stability of the nation's railroads caused
Congress to pass legislation placing the industry's primary
employee benefit programs under Federal law. Federal
involvement in the rail industry was not unprecedented. Indeed,
much of the foundation underlying the enormous success the
industry enjoyed was in place because the Federal Government
provided numerous incentives for early development of this
first great industrial giant.
The RRB, which refers both to the agency that administers
the Federal benefits earned in industry employment and to the
3-member governing board that oversees its operations,
maintains records on 11.6 million present and former railroad
employees. During fiscal year 1996, the RRB disbursed $8.1
billion in retirement and survivor benefits to 817,000
annuitants, $40.7 million in daily compensation to about 17,000
unemployed workers, and $25.8 million in sickness benefits to
20,000 employees. About $6 million was paid in lump-sums to
survivors of deceased workers. Table 5-1 provides an overview
of cash benefits received by various categories of
beneficiaries in January of 1997. Through its payroll and
beneficiary recordkeeping system, the RRB verifies the
collection of taxes on payroll and benefits with the Internal
Revenue Service, which in fiscal year 1996 collected $4.3
billion in taxes on railroad payrolls and $238 million in taxes
on railroad retirement beneficiary payments.
In the House of Representatives, jurisdiction over Railroad
Retirement and Unemployment Benefit Programs is divided between
two standing committees. Under the Rules of the House for the
105th Congress, the Transportation and Infrastructure Committee
has jurisdiction over legislation pertaining to ``railroads . .
. and railroad retirement and unemployment (except revenue
measures related hereto).'' The Subcommittee on Railroads of
the committee has primary responsibility for the Railroad
Retirement Act and amendments affecting railroad retirement.
The Committee on Ways and Means has jurisdiction over all
revenue measures, including the Railroad Retirement Tax Act
(chapter 22 of the Internal Revenue Code; see Research
Institute, 1997). Within the Committee on Ways and Means,
jurisdiction over employment taxes and trust fund operations
relating to the Railroad Retirement System lies within the
Subcommittee on Social Security.
THE RETIREMENT AND SURVIVOR ANNUITY STRUCTURE
The Railroad Retirement System provides retirement,
disability and survivor annuities to workers whose employment
was connected with the railroad industry for at least 10 years.
The program is governed by the Railroad Retirement Act (RRA),
Federal legislation enacted by Congress with input from all
affected segments of the rail industry system. Railroad
retirement came into existence in 1936, and was substantially
modified by the Railroad Retirement Act of 1974 (Public Law 93-
445) which provided for closer coordination with the Social
Security System. Credits are primarily secured by employment in
the railroad industry, although any Social Security credits
earned during employees' work careers are included in the
benefit computation. Benefits are financed through a
combination of employee, employer, and Federal Government
contributions.
The 1974 act established three benefit components. The
ongoing benefit system was divided into two ``tiers,'' one of
which approximates Social Security (tier 1) while the other
provides a retirement benefit specifically for railroad workers
(tier 2). The third component, a vested dual benefit, preserved
certain benefits for employees who had qualified for both
railroad retirement and Social Security benefits prior to the
1974 act. About 182,000 spouses of retired or disabled workers
receive railroad retirement benefits. About 252,000 survivors
are on the RRB annuity rolls.
TABLE 5-1.--MONTHLY RAILROAD RETIREMENT CASH BENEFITS IN CURRENT-PAYMENT
STATUS, JANUARY 1997
------------------------------------------------------------------------
Percent Average
Category of beneficiary Number of monthly
total benefit
------------------------------------------------------------------------
Retired workers............................ 303,600 39.7 $1,188
Disabled workers \1\....................... 36,400 4.8 1,499
Spouses of retired and disabled workers.... 181,800 23.7 486
Divorced spouses........................... 3,700 0.5 301
Aged widows and widowers................... 202,300 26.4 730
Disabled widow(er)s........................ 6,300 0.8 645
Widowed mothers and fathers................ 1,500 0.2 908
Remarried widow(er)s....................... 6,100 0.8 502
Divorced widow(er)s........................ 8,800 1.1 522
Children................................... 15,000 2.0 626
Parents.................................... 100 (\2\) 534
----------------------------
Total monthly benefits............... 765,500 100.0 $882
------------------------------------------------------------------------
\1\ Under age 65.
\2\ Less than 0.05 percent.
Note.--Includes tier 1, tier 2, and vested dual benefits. Excludes
159,600 supplemental employee annuities averaging $43. Total includes
fewer than 50 survivor option annuities averaging $77, payable under
laws in effect before August 1946.
Source: Railroad Retirement Board.
Tier 1 and Tier 2 Benefits
Railroad retirement tier 1 benefits are based on the Social
Security benefit formula, using the employee's combined
railroad earnings and nonrailroad Social Security covered
earnings up to the Social Security maximum wage base. The tier
1 benefit is roughly equal to what the Social Security benefit
would have been had the worker's railroad employment been
covered by the Social Security Program. Because the tier 1
benefit is based on both Social Security and railroad
employment, any Social Security benefit to which the Railroad
Retirement System beneficiary is also entitled is subtracted
from the tier 1 benefit amount. Tier 1 benefits are adjusted
for the cost of living by the same percentage as Social
Security benefits.
Tier 2 benefits are based entirely on the employee's
service in the railroad industry and are payable in addition to
the tier 1 benefit amount. For current retirees, the tier 2
benefit is equal to seven-tenths of 1 percent of the employee's
average monthly earnings in the 60 months of highest earnings,
times the total number of years of railroad service, less 25
percent of any employee vested dual benefit also payable. Tier
2 benefits are automatically adjusted annually at a rate equal
to 32.5 percent of the Social Security cost-of-living
adjustment.
Dual Benefit Payments
One of the chief purposes of the Railroad Retirement Act of
1974 was to coordinate railroad retirement and Social Security
benefit payments to eliminate certain dual benefits considered
to be a ``windfall'' for persons receiving benefits under both
systems. This ``windfall'' was a result of the fact that the
total benefit these retirees received from both systems was
higher than the benefit they would have received if their
benefit were based on their total career earnings but paid only
under railroad retirement. The total benefit was higher in
these cases since the Social Security benefit formula favors
workers who have low average earnings throughout their careers.
Low career average earnings result from a career of low wages
or from a relatively short career in Social Security covered
employment. Workers who spend a period of time in employment
not covered by Social Security, such as railroad employment,
received the benefit of this ``tilt'' in the benefit formula,
even though they may very well not have had low career
earnings.
As a result of the 1974 act, ``windfall'' benefits were
eliminated for any railroad employees not qualified for such
benefits as of January 1, 1975. The benefits were generally
preserved for those individuals who were vested under both the
Railroad Retirement and Social Security Systems before 1975.
These vested dual benefits are financed by the general revenue
fund through an annual appropriation rather than from the
Social Security or railroad retirement trust funds. They are
subject to reduction during any year in which the appropriation
is less than the amount required for full benefit payments. The
total appropriation for the dual benefits payments account
includes an estimation of the amount collected from income
taxes on the dual benefit, with the implication that dual
benefits are partially financed by income taxes on dual
benefits. The fiscal year 1996 appropriation was $239,000,000,
including the income tax transfers. The fiscal year 1997
appropriation was $223,000,000, including income tax transfers.
Currently paid to about 18 percent of the Railroad Retirement
Board's beneficiaries, the average vested dual benefit is $132
per month.
Disability Annuities
Disabled workers are potentially eligible for annuities
under tiers 1 and 2. A worker totally and permanently disabled
for all employment, and who has 10 years of creditable railroad
service, is eligible for tier 1 and tier 2 benefits. As with
other workers whose work histories include periods of
employment under both Social Security and railroad retirement,
totally disabled workers whose railroad service is less than 10
years will have their rail service employment credits
transferred to Social Security, with eligibility for Social
Security disability insurance payments determined under that
program's rules.
Workers at age 60 with at least 10 years service, and
workers at any age with at least 20 years service, are also
eligible for an occupational disability benefit if they become
totally disabled for their regular railroad occupation. The
worker must also have a current connection to the industry,
which generally means he has worked for a railroad during at
least 12 months in the immediately preceding 30-month period.
Spouse Annuities
Spouses of retired or disabled railroad retirement
beneficiaries may also qualify for benefits, the amount of
which may depend on such factors as the spouse's age and work
history, and the age, date of retirement, and years of railroad
service of the railroad worker. Spouses may also qualify for
benefits based on caring for a rail worker's unmarried or
disabled child. Tier 1 spouse benefits are governed by the same
rules that apply to Social Security spouse benefits. Tier 2
spouse benefits are equal to 45 percent of the retired or
disabled worker's tier 2 benefit. Divorced spouses may also be
eligible for benefits from tier 1, but not from tier 2, unless
a divorce decree so specifies.
Supplemental Annuities
Supplemental annuities, provided under the 1974 act, equal
$23 for 25 years of service plus $4 for each additional year up
to a maximum of $43 per month. However, as a result of the 1981
Omnibus Budget Reconciliation Act, employees first hired after
October 1, 1981, are not eligible for supplemental annuities
when they retire.
Survivor Benefits
Annuities may be payable under both tiers to surviving
spouses, children, and certain other beneficiaries. With the
exception of the lump-sum death benefit (discussed below),
eligibility for survivor benefits depends on whether the
employee was insured under the RRA at the time of death. An
employee is insured if she has completed at least 10 years
railroad service and has a current connection to the rail
industry. Generally, a tier 1 survivor benefit is based on the
worker's combined Social Security and railroad retirement wage
credits, and is payable under the same conditions and is
equivalent to a similar benefit payable from Social Security.
The tier 2 survivor benefit is generally equal to 50 percent of
the deceased worker's tier 2 retirement benefit.
Lump-Sum Death Benefits
Lump-sum death benefits are paid when there is no person
eligible for a monthly survivor benefit in the month in which
the worker died. Generally, 10 years of railroad service and a
current connection with the railroad industry are required for
eligibility. For employees with 10 or more years of railroad
service before 1975, the amount of the benefit is based on the
1937 act. For all other railroad workers, the amount is
equivalent to that which would be paid under the Social
Security Act (unless survivor benefits are paid).
A residual lump-sum payment is, in effect, a refund of the
employee's pre-1975 railroad retirement taxes plus an allowance
in lieu of interest, less benefits already paid. This payment
is not made as long as monthly benefits are payable either at
the time of the employee's death or in the future. However, a
widow(er) or parent under age 60 can waive rights to future
monthly benefits in order to receive a residual payment.
PROGRAM DATA
Table 5-2 summarizes railroad retirement benefits paid and
the number of recipients in selected fiscal years 1950-96. The
table shows that the number of beneficiaries increased until
about the mid-1970s and declined somewhat thereafter.
Similarly, as shown by the constant dollar column in table 5-2,
after rapid increases between 1950 and about 1975, total
benefit payments increased at a modest rate until the early
1980s and then actually declined by about $1 billion over the
next 15 years.
TABLE 5-2.--TOTAL BENEFIT PAYMENTS AND NUMBER OF BENEFICIARIES, SELECTED FISCAL YEARS 1950-96
----------------------------------------------------------------------------------------------------------------
Benefit payments (in millions) \1\ Beneficiaries (in thousands)
--------------------------------------------- \2\
Total ------------------------------
Fiscal year -----------------------
Constant Retirement Survivor
Current 1996 Total Retirement Survivor
dollars dollars \3\
----------------------------------------------------------------------------------------------------------------
1950................................ $301.6 $1,963.5 $248.2 $53.4 458 272 189
1955................................ 549.7 3,218.2 424.5 125.2 700 452 252
1960................................ 925.7 4,906.8 711.5 214.2 873 584 299
1965................................ 1,117.7 5,567.2 834.0 283.7 980 650 340
1970................................ 1,593.5 6,443.8 1,177.0 416.5 1,051 702 366
1975................................ 3,060.3 8,924.9 2,222.4 837.9 1,094 733 380
1980................................ 4,730.6 9,007.7 3,389.8 1,340.8 1,084 731 367
1981................................ 5,286.6 9,125.1 3,779.9 1,506.7 1,074 726 363
1982................................ 5,725.5 9,309.1 4,097.9 1,627.6 1,067 722 359
1983................................ 6,041.1 9,516.6 4,354.2 1,686.9 1,056 715 357
1984................................ 6,099.8 9,211.3 4,417.8 1,682.0 1,040 705 351
1985................................ 6,250.9 9,114.9 4,539.3 1,711.6 1,023 694 343
1986................................ 6,329.5 9,061.1 4,608.1 1,721.4 1,007 684 339
1987 \4\............................ 6,520.3 9,005.6 4,773.6 1,746.7 994 675 333
1988................................ 6,675.9 8,854.2 4,915.0 1,760.9 981 666 328
1989................................ 6,938.5 8,779.4 5,140.9 1,797.6 967 659 322
1990................................ 7,194.6 8,636.8 5,357.0 1,837.6 951 650 315
1991................................ 7,490.8 8,629.3 5,593.2 1,897.6 932 638 307
1992................................ 7,693.9 8,604.2 5,754.0 1,939.9 913 626 301
1993................................ 7,872.3 8,547.8 5,896.0 1,976.2 898 615 298
1994................................ 7,978.9 8,447.3 5,978.9 1,999.9 874 599 288
1995................................ 8,059.2 8,297.2 6,042.9 2,016.3 847 582 282
1996................................ 8,113.6 8,113.6 6,089.1 2,024.4 817 565 272
----------------------------------------------------------------------------------------------------------------
\1\ Retirement benefits include tier 1 and tier 2 employee and spouse benefits, employee and spouse vested dual
benefits, and supplemental employee annuity payments. Survivor benefits include tier 1 and tier 2 benefits,
vested dual benefits and lump-sum payments. Total benefits include hospital insurance benefits for services in
Canada.
\2\ Number of beneficiaries represents all individuals paid benefits in each year. In the total number for each
year, beneficiaries are counted only once, even though they may have received more than one type of benefit.
In fiscal year 1996, about 19,000 individuals received both retirement and survivor benefits. Figures are
partly estimated.
\3\ 1995 dollars were calculated using the Office of Management and Budget's composite deflator; see Executive
Office of the President (1996), table 1.3.
\4\ Benefits paid for fiscal years beginning 1987 are not strictly comparable to those for prior years due to a
change in accounting systems.
Source: Railroad Retirement Board.
Table 5-3 presents data on new awards for January 1996.
TABLE 5-3.--NUMBER AND AVERAGE AMOUNT OF NEW AWARDS, JANUARY 1997
------------------------------------------------------------------------
Average
Beneficiary type Number amount
------------------------------------------------------------------------
Employee annuities:
Retired........................................... 612 $1,581
Disability (under age 65)......................... 551 1,578
Supplemental...................................... 418 41
Spouse annuities.................................... 745 534
Divorced spouse annuities........................... 59 299
Survivor benefits:
Aged widows and widowers.......................... 918 885
Disabled widows and widowers...................... 29 733
Widowed mothers and fathers....................... 21 978
Divorced and remarried widows..................... 95 599
Children.......................................... 90 788
Parents........................................... 3 528
Insurance lump sums............................... 590 874
Residual payments................................. 11 2,499
-------------------
Total......................................... 4,142 ........
------------------------------------------------------------------------
Source: Railroad Retirement Board.
FINANCING THE SYSTEM
Railroad retirement and survivor benefits are financed by
five sources of income: (1) payroll taxes on railroad earnings
paid by covered employees and employers up to a certain maximum
wage base; (2) income from the Social Security financial
interchange; (3) appropriations from general revenues
(including transfers of income taxes collected on benefits);
(4) income from investments; and (5) a cents-per-hour tax
levied on carriers only.
Payroll Taxes
The primary source of income to the railroad retirement
account is payroll taxes levied on covered employers and their
employees. These taxes are imposed on wages below an annual
maximum amount, known as the ``wage base.'' Currently, both
employers and employees pay a ``tier 1'' tax which is
equivalent to the combined Social Security (old-age, survivors
and disability insurance) and hospital insurance (part A of
Medicare) tax rate. In addition, a tier 2 tax is paid by both
rail employers and employees. The 1997 annual tier 1 and tier 2
wage bases are $65,400 and $48,600, respectively. Since 1994,
there has been no wage limit for the hospital insurance portion
of the tax (1.45 percent on employers and employees, each).
Thus, this tax is imposed on all wages. The scheduled tax rates
for both tier 1 and tier 2 are shown in table 5-4.
TABLE 5-4.--SCHEDULED TAX RATES FOR TIER 1 AND TIER 2, SELECTED YEARS 1975-2002
----------------------------------------------------------------------------------------------------------------
Tier 1 Tier 2 Combined \2\
---------------------------------------------------------------------------------
Year Wage base
Employer Employee \1\ Employer Employee Wage base Employer Employee
----------------------------------------------------------------------------------------------------------------
1975.......................... 5.85 5.85 $14,100 9.5 0 $14,100 15.35 5.85
1980.......................... 6.13 6.13 25,900 9.5 0 20,400 15.63 6.13
1985.......................... 7.05 7.05 39,600 13.75 3.50 29,700 20.80 10.55
1986.......................... 7.15 7.15 42,000 14.75 4.25 31,500 21.90 11.40
1987.......................... 7.15 7.15 43,800 14.75 4.25 32,700 21.90 11.40
1988.......................... 7.51 7.51 45,000 16.10 4.90 33,600 23.61 12.41
1989.......................... 7.51 7.51 48,000 16.10 4.90 35,700 23.61 12.41
1990.......................... 7.65 7.65 51,300 16.10 4.90 38,100 23.75 12.55
1991.......................... 7.65 7.65 53,400 16.10 4.90 39,600 23.75 12.55
1992.......................... 7.65 7.65 55,500 16.10 4.90 41,400 23.75 12.55
1993.......................... 7.65 7.65 57,600 16.10 4.90 42,900 23.75 12.55
1994.......................... 7.65 7.65 60,600 16.10 4.90 45,000 23.75 12.55
1995.......................... 7.65 7.65 61,200 16.10 4.90 45,300 23.75 12.55
1996.......................... 7.65 7.65 62,700 16.10 4.90 46,500 23.75 12.55
1997.......................... 7.65 7.65 65,400 16.10 4.90 48,600 23.75 12.55
1998.......................... 7.65 7.65 68,700 16.10 4.90 51,000 23.75 12.55
1999.......................... 7.65 7.65 71,400 16.10 4.90 53,100 23.75 12.55
2000.......................... 7.65 7.65 74,100 16.10 4.90 55,200 23.75 12.55
2001.......................... 7.65 7.65 76,800 16.10 4.90 57,000 23.75 12.55
2002.......................... 7.65 7.65 79,800 16.10 4.90 59,400 23.75 12.55
----------------------------------------------------------------------------------------------------------------
\1\ The wage base for the 1.45-percent hospital insurance tax, included in the 7.65-percent tier 1 rate, is
$125,000 in 1991, $130,200 in 1992, $135,000 in 1993, and no limit in 1994 and later.
\2\ These rates apply only up to the tier 2 maximum wage base.
Note.--1998-2002 wage bases are projected.
Source: Railroad Retirement Board.
The tier 1 wage base is equal to the Social Security wage
base and automatically increases with wage growth in the
economy. The tier 2 wage base is equal to what the Social
Security wage base would have been without regard to the ad hoc
increases in the wage base which were created by the Social
Security Amendments of 1977 (Public Law 95-215).
Financial Interchange
The Railroad Retirement System and the Social Security
Programs have been coordinated financially since 1951. The
purpose of the financial interchange is to place the Social
Security trust funds in the same position they would have been
in if railroad employment had been covered under Social
Security since its inception.
Generally, under the interchange, for a given fiscal year
the revenue that would have been collected by the Social
Security trust funds if railroad employment had been covered
directly by Social Security is netted against the amount of
benefits Social Security would have paid to railroad
beneficiaries based on railroad and nonrailroad earnings during
that period. Where Social Security benefits that would have
been paid exceed income to the trust funds that would have been
due, the excess, plus an allowance for interest and
administrative expenses, is transferred from the Social
Security trust funds to the Railroad Retirement Board's (RRB)
Social Security equivalent benefit account. If income exceeds
benefits, the transfer would be from the RRB's Social Security
equivalent benefit account to the Social Security trust funds.
(Before 1985, transfers were to or from the railroad retirement
account.)
The determination of the amount to be transferred through
the financial interchange for a given fiscal year is made no
later than June of the year following the close of the
preceding fiscal year. Table 5-5 shows the actual operation of
the financial interchange for selected years as it relates to
each of the three major Social Security trust funds.
TABLE 5-5.--AMOUNTS TRANSFERRED TO OR FROM (-) THE SOCIAL SECURITY EQUIVALENT BENEFIT ACCOUNT \1\ AND THE
VARIOUS SOCIAL SECURITY TRUST FUNDS IN SELECTED FISCAL YEARS 1954-96
[In millions of dollars]
----------------------------------------------------------------------------------------------------------------
Old age and
Fiscal year survivors Disability Hospital Total
insurance insurance insurance
----------------------------------------------------------------------------------------------------------------
Through June 30, 1954....................................... -$21.1 .......... .......... -$21.1
1955........................................................ -7.4 .......... .......... -7.4
1960........................................................ 318.4 -$4.9 .......... 313.5
1965........................................................ 435.6 23.6 .......... 459.3
1970........................................................ 578.8 10.4 -$63.5 525.7
1975........................................................ 981.8 28.5 -132.5 877.8
1980........................................................ 1,442.0 -12.1 -244.3 1,185.6
1981........................................................ 1,584.9 29.4 -276.5 1,337.9
1982........................................................ 1,793.3 26.4 -351.4 1,468.2
1983........................................................ 2,250.8 27.8 -357.7 1,920.9
1984........................................................ 2,404.0 21.6 -350.6 2,075.0
1985........................................................ 2,310.2 42.7 -371.4 1,981.5
1986........................................................ 2,585.1 67.7 -364.4 2,288.4
1987........................................................ 2,557.3 56.9 -368.0 2,246.2
1988........................................................ 2,790.0 61.3 -363.8 2,487.5
1989........................................................ 2,845.3 88.2 -378.8 2,554.7
1990........................................................ 2,969.3 79.9 -367.4 2,681.8
1991........................................................ 3,374.6 82.1 -352.2 3,104.5
1992........................................................ 3,148.4 58.0 -374.5 2,831.9
1993........................................................ 3,352.5 82.8 -400.5 3,034.9
1994........................................................ 3,419.6 106.0 -412.9 3,112.6
1995........................................................ 4,052.3 67.8 -396.1 3,724.1
1996........................................................ 3,554.1 2.2 -401.3 3,154.9
---------------------------------------------------
Total................................................... 61,003.2 1,241.7 -7,422.2 54,822.6
----------------------------------------------------------------------------------------------------------------
\1\ Before 1985, transfers were to or from the railroad retirement account.
Source: Railroad Retirement Board.
In order to make funds available to the Social Security
equivalent benefit account from the forthcoming financial
interchange on a more current basis, the Railroad Retirement
Solvency Act of 1983 provided for transfers from general
Treasury funds to the Social Security equivalent benefit
account each month. The amount transferred each month equals
the Social Security level benefits paid from the account during
the month less the Social Security level taxes received by the
account in that month. The amount so transferred for a
particular month is repaid when the Social Security System
makes reimbursement for that month under the financial
interchange program.
General Revenue Appropriations
Vested dual benefits are funded solely through general
revenue appropriations. The Congress authorized such funding
through the year 2000 in the 1974 act that substantially
reformed the Railroad Retirement System. The total appropriated
for the first 21 fiscal years 1976-96 for which these benefits
were payable was $6.89 billion.
The Omnibus Budget Reconciliation Act of 1981 (Public Law
97-35) established a dual benefits payments account. Each year
an amount which is appropriated for the payment of vested dual
benefits is placed in this account. If the amount appropriated
is insufficient to pay the full vested dual benefits to all
eligible beneficiaries for a full year, the Railroad Retirement
Board is authorized to prorate payments from the dual benefits
account so that the amounts paid do not exceed the amounts
appropriated.
In addition to amounts transferred to the dual benefits
payments account through the regular appropriations process,
the Railroad Retirement Solvency Act of 1983 provided for the
appropriation of approximately $1.7 billion to the railroad
retirement account in three installments paid on January 1,
1984, 1985, and 1986. These three appropriations were to
reimburse the railroad retirement account for prior shortfalls
in annual appropriations. The actual amounts received,
including interest, totaled $2.128 billion. This amount is not
included in the figure given above for total appropriations
between 1976 and 1996.
Other Income
Funds not needed immediately for benefit payments are
invested in interest-bearing securities. During fiscal year
1996, the railroad retirement account and Social Security
equivalent benefit account received $0.907 billion in
investment income.
A cents-per-hour tax is used to fund the supplemental
annuity benefit. This tax is levied solely on employers. The
rate, 35 cents per work hour in January 1997, is determined
quarterly by the Railroad Retirement Board and is set at a
level necessary to fund the benefit on a pay-as-you-go basis.
INCOME TAXATION OF RAILROAD RETIREMENT BENEFITS
Prior to 1984, railroad retirement benefits, with the
exception of supplemental annuities, were not subject to
Federal income taxation. However, as a result of the Railroad
Retirement Solvency Act (Public Law 98-76) and the Social
Security Act Amendments of 1983 (Public Law 98-21), tier 1,
tier 2, and vested dual benefits received after December 31,
1983, are subject to taxation. The taxation provisions were
subsequently amended by the Consolidated Omnibus Budget
Reconciliation Act of 1985, the Tax Reform Act of 1986, and the
Omnibus Budget Reconciliation Act (OBRA) of 1993. Under current
law, the Social Security equivalent portions of tier 1 benefits
are taxed in a manner identical to Social Security benefits.
The proceeds derived from the taxation under pre-OBRA 1993
rules of those tier 1 benefits which are equivalent to Social
Security benefits are deposited in the Social Security
equivalent benefit account and credited to the Social Security
trust funds through adjustments in the financial interchange.
The additional income taxes attributable to OBRA 1993 are
deposited in the hospital insurance trust fund. Tier 1 benefits
in excess of Social Security equivalent levels (including early
retirement benefits payable at ages 60-61 and occupational
disability annuities) and tier 2 benefits are taxed in a manner
identical to private and public service pensions and the
proceeds deposited in the railroad retirement account. Vested
dual benefits are taxed like private and public service
pensions with the proceeds deposited in the dual benefits
payments account.
FINANCIAL STATUS OF THE RAILROAD RETIREMENT ACCOUNT
One of the most important factors affecting the financial
status of the Railroad Retirement System is the level of
employment in the industry. The recent history of industry
employment is shown in table 5-6.
While the trust funds currently have a reserve of over $15
billion, the continuing decline in railroad employment has
often prompted questions about the financing of the Railroad
Retirement System after the year 2000. Section 502 of the
Railroad Retirement Solvency Act of 1983 requires a report each
year on the Railroad Retirement System's actuarial status, and
financing recommendations when appropriate. Because of the
decline in employment, the U.S. Railroad Retirement Board's
(1987) Chief Actuary recommended in his 1987 report that a
commission be established to study financing issues and that
tier 2 taxes be increased until any tax adjustments recommended
by the commission become effective.
The 1987 budget law authorizing the Commission study also
increased tier 2 payroll tax rates in January 1988 by a total
of 2 percent. This tax increase is still in force. This
legislation also allowed revenues from Federal income taxes on
tier 2 railroad retirement benefits to be returned to the
Railroad Retirement System until October 1, 1989; later
legislation extended the date to October 1, 1990, and then to
October 1, 1992. Subsequent legislation in 1994 extended these
transfers on a permanent basis, which had been the
recommendation of the 1990 Commission report.
In August 1997, the U.S. Railroad Retirement Board (1997a)
transmitted to Congress its 20th triennial actuarial valuation
of the Railroad Retirement Program's assets and liabilities.
The report projected income and outgo under three employment
assumptions. The valuation concluded that, barring a sudden,
unanticipated, large drop in railroad employment, the Railroad
Retirement System will experience no cash flow problems for at
least 25 years. The long-term stability of the system, however,
depends on actual railroad employment levels over the coming
years.
TABLE 5-6.--RAILROAD INDUSTRY EMPLOYMENT, SELECTED YEARS 1940-96
------------------------------------------------------------------------
Number
Year (thousands)
------------------------------------------------------------------------
1940....................................................... 1,195
1945....................................................... 1,085
1950....................................................... 1,421
1955....................................................... 1,239
1960....................................................... 909
1965....................................................... 753
1970....................................................... 640
1975....................................................... 548
1976....................................................... 540
1977....................................................... 546
1978....................................................... 542
1979....................................................... 554
1980....................................................... 532
1981....................................................... 503
1982....................................................... 440
1983....................................................... 395
1984....................................................... 395
1985....................................................... 372
1986....................................................... 342
1987....................................................... 320
1988....................................................... 312
1989....................................................... 308
1990....................................................... 296
1991....................................................... 285
1992....................................................... 276
1993....................................................... 271
1994....................................................... 266
1995....................................................... 265
1996....................................................... 256
------------------------------------------------------------------------
Source: Railroad Retirement Board.
THE RAILROAD UNEMPLOYMENT INSURANCE PROGRAM
Overview
The Railroad Unemployment Insurance (RUI) System has been
in existence since 1938. Railroad workers were initially
covered by the unemployment provisions of the Social Security
Act of 1935. However, the Railroad Unemployment Insurance Act
(Public Law 75-722) was passed in 1938 to provide a uniform
unemployment insurance system for all railroad workers,
regardless of the State in which they worked or lived. This
action was taken largely because of administrative problems in
handling claims for railroad workers who earned wages in a
number of States and as a result of the railroad unions' desire
that individuals throughout the industry be treated the same
for purposes of unemployment compensation.
In late 1996, Congress enacted H.R. 2594, the Railroad
Unemployment Insurance Amendments Act of 1996 (Public Law 104-
251). Among other provisions, this law raised daily benefit
rates for retirement and sickness benefits and revised the
formula for indexing future rates. The act shortened the
waiting period for initial unemployment and sickness benefits,
cut the weeks of extended benefits payable to rail workers with
more than 15 years' service, and established an earnings test
for workers with days of employment as well as unemployment or
sickness during each 2-week registration period.
Table 5-7 summarizes program characteristics of the
Railroad Unemployment Program for selected years between 1970
and 1997. The table also contains projected statistics for
1998.
Benefits and Eligibility Requirements
A new benefit year for unemployment and sickness benefits
begins every July 1. To qualify in the benefit year beginning
July 1, 1997, a worker must have base year railroad earnings of
at least $2,162.50 in the preceding calendar year, not counting
earnings over $865 per month. Under the indexing provisions of
the law reflecting growth in average national wages, a worker
must have base year earnings of $2,225 in calendar year 1997,
not counting earnings of more than $890 per month, to qualify
in the benefit year beginning July 1, 1998. If the base year
was the first year of railroad service, the worker also must
have worked in 5 months of that year (see table 5-8).
No benefits are payable for the first 7 days of the first
claim (or claims) for unemployment and sickness in a benefit
year. This generally results in a 1-week waiting period. A
claimant is normally paid for days of unemployment or sickness
over 4 in 14-day registration periods. The maximum daily
benefit payable in the benefit year which began July 1, 1997,
is $43, and maximum benefits for biweekly claims is $430 for
the benefit year.
The program offers ``normal'' and ``extended'' benefits.
Qualified workers can receive normal benefits for up to 130
days or 26 weeks, but the total may not exceed their creditable
wages in the base year. Workers with at least 10 years of
railroad service may receive up to 65 additional days or 13
additional weeks of extended benefits.
The average duration of benefits fluctuates with the
unemployment rate. In the 1940-96 period, it ranged from 7.4 to
19.1 weeks and averaged 12.1 weeks.
In 1946, a program of cash sickness benefits was
established for railroad workers as part of the unemployment
compensation system. Sickness benefits are financed out of the
same employer paid payroll taxes used to finance unemployment
compensation benefits. A qualified railroad worker may receive
sickness benefits if he files a ``statement of sickness''
signed by a doctor that is mailed within 7 days of the first
day for which a day of sickness is claimed.
TABLE 5-7.--RAILROAD UNEMPLOYMENT AND SICKNESS INSURANCE PROGRAM STATISTICS, SELECTED YEARS 1970-98
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Benefit year ending in
----------------------------------------------------------------------------------------------------------------------------------
Program statistic 1998
1970 1975 1980 1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 (est.)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Insured unemployment (percent) \1\........................... 11 12 17 18 18 14 10 9 9 8 7 6 6 6 6 6
Coverage (thousands of qual. employees)...................... 748 640 609 459 420 393 366 349 336 322 311 302 295 289 285 278
Unemployment (average daily benefit):
Current dollars.......................................... 12.61 12.68 24.94 24.98 \2\ 24.
76 \3\ 24.
75 NA \4\ 30.
16 30.85 30.97 32.86 33.16 35.78 35.89 NA NA
In 1995 dollars \5\...................................... 46.99 35.13 46.76 35.19 33.08 31.74 NA 35.17 34.51 33.65 34.65 34.09 35.78 NA NA NA
Sickness (average daily benefit):
Current dollars.......................................... 12.66 12.69 24.97 24.99 \2\ 24.
71 \3\ 24.
76 NA \4\ 30.
25 30.81 30.98 32.84 33.25 35.75 35.95 NA NA
In 1995 dollars \5\...................................... 47.18 35.17 46.82 35.20 33.02 31.75 NA 35.27 34.48 33.65 34.63 34.19 35.75 NA NA NA
Number of beneficiaries:
Unemployment (thousands)................................. 79.2 77.9 101.6 81.7 75.2 54.4 35.2 29.9 30.5 26.4 20.7 18.6 18.7 16.8 16.5 16.1
Sickness (thousands)..................................... 91.4 67.4 76.8 51.6 45.2 41.7 33.7 28.2 25.6 23.6 21.8 21.6 21.0 20.4 19.9 19.4
Benefit exhaustions, normal benefits:
Unemployment (thousands) \6\............................. 6.3 4.8 11.2 16.1 17.0 10.6 6.6 5.6 5.9 5.9 4.3 4.0 2.9 3.4 3.4 3.4
Sickness (thousands)..................................... 16.8 7.9 9.5 8.0 9.1 8.4 7.6 6.1 5.4 5.3 4.6 4.7 4.3 4.4 4.4 4.4
Amount paid:
Unemployment (millions) \7\.............................. 35.0 37.5 112.7 125.8 118.6 85.8 60.8 57.2 60.1 55.1 49.2 40.4 37.4 40.7 42.5 48.6
Sickness (millions)...................................... 57.9 29.6 60.0 43.8 55.7 24.8 32.1 32.6 32.6 12.0 21.5 25.4 24.2 25.8 31.3 31.3
Total tax collection:
Benefits account (millions).............................. 122.7 109.4 173.3 223.1 192.6 186.9 181.9 192.5 165.7 134.7 66.0 10.5 5.6 4.9 9.0 31.7
Administration (millions)................................ 8.2 7.3 12.9 15.2 12.9 12.7 13.9 17.2 17.4 20.5 14.8 16.5 17.4 18.0 17.1 17.8
Outlays:
Benefits (millions) \6\.................................. 93.0 67.1 172.7 169.6 174.3 110.6 92.9 89.8 92.7 67.1 70.7 65.9 61.6 66.4 73.8 79.9
Administration (millions)................................ 6.6 7.3 11.2 14.8 14.3 14.2 13.5 14.6 14.5 16.8 16.1 17.2 15.9 16.8 16.1 16.3
Account balance (millions) \8\............................... 81.3 113.9 40.8 50.8 98.8 135.7 223.8 188.4 288.0 368.9 212.4 220.2 177.5 128.8 71.5 27.4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Unemployment beneficiaries divided by qualified employees; does not include sickness insurance beneficiaries.
\2\ Benefit amounts for registration periods beginning on August 1 through September 17, 1986, were reduced 7.4 percent under the Gramm-Rudman-Hollings Act.
\3\ Benefit amounts for claims processed on or after November 20, 1987, were reduced 8.5 percent under the Gramm-Rudman-Hollings Act. Benefit payments were restored to previous levels in late
December 1987 and refunds of previously withheld amounts were made in the first week of January.
\4\ Benefit amounts for registration periods beginning on or after October 1, 1989, were originally reduced by 5.3 percent under the Gramm-Rudman-Hollings Act. On February 10, 1990, the final
fiscal year 1990 Gramm-Rudman-Hollings sequestration rate of 1.7 percent was implemented for all days of unemployment and sickness after September 30, 1989. Refund payments were issued on
February 13, 1990. Cumulative averages do not reflect these refunds.
\5\ Calculated using the fiscal year CPI-X1 price index.
\6\ Excludes supplemental extended benefits financed from general revenues.
\7\ Includes benefits under title V of the Emergency Unemployment Compensation Act of 1991, as amended, which has provided extended unemployment benefits, regardless of years of service.
\8\ Account balances do not reflect amounts due the railroad retirement account. Loans were repaid in full with a $180.2 million cash repayment from the railroad unemployment insurance account
on June 29, 1993.
NA--Not available.
Source: Railroad Retirement Board.
TABLE 5-8.--BENEFITS UNDER THE RAILROAD UNEMPLOYMENT INSURANCE SYSTEM,
BENEFIT YEARS 1996-97 AND 1997-98
------------------------------------------------------------------------
Benefit category Benefit amount
------------------------------------------------------------------------
Qualifying wages:
Base year 1995............ $2,125.00
Base year 1996............ $2,162.50
Base year 1997............ $2,225.00
Daily benefit rate: Basic rate 5 percent of base year monthly
compensation base
Maximum:
Benefit years 1996-97. $42.00
Benefit years 1997-98. $43.00
Minimum guarantee......... $12.70
Maximum normal benefits: \1\
For 14-day period:
Benefit years 1996-97. $420
Benefit years 1997-98. $430
For benefit year:
Duration.............. 130 compensable days.
Amount: \1\
Benefit years 1996- $5,460
97.
Benefit years 1997- $5,590
98.
Maximum extended benefits:
10 or more years' service:
Duration.............. 65 compensable days.
Amount:
Benefit years 1996- $2,730
97.
Benefit years 1997- $2,795
98.
------------------------------------------------------------------------
\1\ Not to exceed the employee's taxable earnings in the base year
counting earnings up to $1,098 a month for benefit years 1996-97 (base
year 1995) and $1,117 a month for benefit years 1997-98 (base year
1996).
Note.--Some net sickness benefits payments are somewhat less than the
above amounts since they are subject to tier 1 railroad retirement
taxes.
Source: Railroad Retirement Board.
A rail worker who is unemployed due to a strike not in
violation of the Railway Labor Act of 1926 can receive
unemployment compensation benefits after a 14-day waiting
period. Unemployment benefits cannot be paid to individuals
participating in a strike that is in violation of the Railway
Labor Act, and is therefore ``illegal.'' Individuals who are
unemployed due to an ``illegal'' strike, but who are not
actually participating in the strike, are eligible for
unemployment compensation benefits but are subject to the 14-
day waiting period.
Total expenditures for unemployment and sickness payments
were $66 million in benefit years 1995-96, which was 0.5
percent of total wages paid by the industry during the same
period. This compares to a peak of 5.1 percent in 1959. It is
also much lower than in benefit year 1983, a recession year,
when the figure was 3.9 percent. Since the beginning of
sickness benefits, unemployment benefits have comprised over
two-thirds of total payments. In 1996, unemployment benefits
accounted for 61 percent of the total.
Benefit payments vary directly with the insured
unemployment rate, covered employment, average weekly benefit
amount, and average duration of benefits. The insured
unemployment rate is the percentage of workers qualified under
the Railroad Unemployment Compensation System Program who drew
benefits in a particular benefit year. The railroad insured
unemployment rate has been high and volatile since the
beginning of the program, averaging 13 percent. Since 1946 it
has ranged from a relatively low 6 percent to 30 percent in
benefit years 1982-83.
Changes in covered employment have short-run and long-run
effects on the unemployment program. In the short run, when
layoffs cause employment to decline, the insured unemployment
rate and benefits paid increase. In the long run, when
employers have fewer workers to lay off, benefits decline and
the program shrinks. Since the peak of 1,680,000 workers in
calendar year 1945, average railroad employment declined to
256,000 in 1996. Two-thirds of this decline occurred in the 21
years between 1945 and 1966. Thus, the average annual decline
through 1966 was 45,000, but after 1966 it was 16,000.
Financing
The Railroad Unemployment and Sickness Benefit Programs are
financed by payroll taxes on railroad employers (see U.S.
Railroad Retirement Board, 1996). Employees do not pay railroad
unemployment taxes. The taxable earnings base in calendar year
1997 is the first $890 of each employee's monthly earnings. The
earnings base is indexed each year by a rate which is equal to
approximately two-thirds of the annual rate of increase in the
maximum base for railroad retirement tier 1 taxes.
Experience-based tax rates, phased in on a partial basis in
1991 and 1992, became fully effective in 1993 with a minimum of
0.65 percent and a maximum of 12 percent. The future maximum
rate could be 12.5 percent if a maximum surcharge is in effect.
Railroad unemployment taxes are collected by the Railroad
Retirement Board. Of each year's tax receipts, an amount equal
to 0.65 percent of taxable payroll is set aside for
administration. Excess funds allocated but not needed for
administration are transferred to the railroad unemployment
insurance account at the end of each fiscal year.
The railroad unemployment insurance and railroad
unemployment insurance administration accounts are part of the
Federal unemployment trust fund. This trust fund has 53 State
UC Program accounts, 4 Federal accounts, and the 2 railroad
accounts.
Since 1959, the railroad unemployment trust fund has been
able to borrow funds from the railroad pension fund when
employer taxes have not been sufficient to cover the costs of
unemployment and sickness benefits. The RRUC Program became
depleted for the first time in 1960 after a long decline from
peak reserves of nearly 18 percent of total annual wages in
1948. By 1963, it owed the retirement account $314 million, or
5.9 percent of total annual wages paid in the industry that
year. The program gradually recovered during the 1960s until it
had positive reserves again in 1974. The reserves were depleted
again in 1976-78 and loans were again required beginning in
1981.
A rapid decline in 1981-82 in railroad employment during a
recession resulted in substantial borrowing from the pension
system. The borrowing reached a peak level of over $850 million
at the end of 1986. This debt was repaid in full with a $180.2
million cash repayment from the railroad unemployment insurance
account on June 29, 1993. Interest on the loan during the debt
period was charged at the average rate earned by U.S. Treasury
securities held by the retirement account so that the
retirement account did not lose any investment earnings as a
result of the loan.
Financial measures to assist the railroad unemployment
insurance account were included in the Railroad Retirement
Solvency Act enacted August 12, 1983. The Solvency Act raised
the taxable limit on monthly earnings and the base-year
qualifying amount. The waiting period for benefits during
strikes was increased from 7 to 14 days. A temporary repayment
tax on railroad employers began July 1, 1986, to initiate
repayment of the loans made by the railroad retirement account.
The 1983 legislation also mandated the establishment of a
Railroad Unemployment Compensation Committee (1984) to review
the unemployment and sickness benefit programs and submit a
report to Congress. The Committee reviewed all aspects of the
Railroad Unemployment Insurance System, in particular repayment
of the system's debt to the railroad retirement account, and
the viability of transferring railroad unemployment benefit
payments to State programs.
The Consolidated Omnibus Budget Reconciliation Act of April
1986 (Public Law 99-272) amended the temporary unemployment
insurance loan repayment tax beginning July 1, 1986, continued
authority for borrowing by the railroad unemployment insurance
account from the railroad retirement account, and provided a
contingency surtax on rail employers if further borrowing took
place.
The 1988 Technical and Miscellaneous Revenue Act Railroad
Unemployment Insurance Amendments were based on the
recommendations of the Railroad Unemployment Compensation
Committee. The 1988 amendments improved financing by indexing
the tax base to average national wages and experience rating
employer contributions. Repayment of the unemployment system's
debt to the retirement system was assured by fixing the loan
repayment tax at 4 percent of the contribution base and
retaining this elevated tax rate until the debt was fully
repaid with interest on June 29, 1993.
A contingency surtax (3.5 percent), effective in the event
of further borrowing by the railroad unemployment insurance
account, was eliminated in 1991. Instead, a surcharge will be
added to employers' unemployment insurance taxes for a calendar
year if the balance in the unemployment insurance account on
the previous June 30 goes below $100 million. The surcharge
rate would be 1.5, 2.5, or 3.5 percent depending on how low the
balance had fallen. If a 3.5-percent surcharge goes into effect
for a given year, the maximum rate for any employer would be
12.5 percent rather than 12 percent. If the account balance on
the preceding June 30 is above $250 million, the excess will be
refunded to the employers in the form of a rate reduction for
the year through a pooled credit.
The 1988 amendments require the Board to make annual
financial reports to Congress beginning July 1989 on the status
of the Unemployment Insurance System. The reports must include
any recommendations for financing changes which might be
advisable, specifically with regard to rates of employer
contributions.
The 1997 report (U.S. Railroad, 1997b) states that
experience-based contribution rates, phased in during 1991-92,
will keep the system solvent, even under the most pessimistic
employment assumptions. Maximum daily benefit rates increase 40
percent, from $42 to $59, from 1995 to 2006 and average
employer contribution rates were below 1.5 percent during 1997.
The report also projected that during the 11-year projection
period (fiscal years 1996-2007), average employer contribution
rates would remain well below the maximum, even under the most
pessimistic assumptions. The Board therefore recommended no
changes to the system.
LEGISLATIVE HISTORY
In the final quarter of the 19th century, railroad
companies were among the largest in America. It was in the rail
industry that the first industrial pension was established in
1874. By the mid-1920s more than 80 percent of all rail workers
were covered by pension plans. In the early 1930s these pension
plans began to face enormous financial problems. The commercial
success of the rail industry peaked in the period between 1900
and 1920, and rail employment decreased significantly in the
1920s.
Rail pension plans were for the most part poorly
constructed. There was no regulation of railroad pensions and
plans were frequently terminated, pension funds were
chronically underfinanced, and most funds could not survive the
financial pressures of the depression. These problems plus a
tradition of Federal regulation of the railroads led to the
enactment of the Railroad Retirement Act of 1934.
The original Railroad Retirement System was structured to
provide annuities to retirees based on rail earnings and length
of service. Benefits were disbursed for retirees at age 65,
although workers with 30 years of service could retire at 60,
with a reduction in payments. The original disability
provisions were very stringent. Little was provided for
dependents, and nothing for spouses.
Throughout its history, the Railroad Retirement System has
been modified many times by Congress. In the late 1940s and
1950s benefits were liberalized, and the Railroad Retirement
System was brought into closer conformity with Social Security.
For instance, in 1946, benefits were extended to survivors,
based on combined railroad and Social Security covered
employment. This extension demonstrated congressional concern
for the social goal of providing income security in old age, or
social insurance, rather than simply rewarding career
performance.
In the 1970s and 1980s, the Railroad Retirement System
encountered recurrent financial crises as a result of
employment declines in the industry, inflation, and the
increase in the number of beneficiaries. Major legislation was
enacted in 1974, 1981, 1983, and 1987 to prevent the system
from becoming insolvent.
The Railroad Retirement Solvency Act of 1983 (Public Law
98-76) increased payroll taxes on employers and employees,
deferred cost-of-living increases, reduced early retirement
benefits, subjected benefits to Federal income taxes, and
provided other measures designed to improve railroad retirement
financing. Without the enactment of this legislation, the
Railroad Retirement Board would have been required to
substantially reduce benefit payments in 1983. Since enactment
of the 1983 legislation, the trust funds have accumulated a
reserve of over $15 billion.
The Omnibus Budget Reconciliation Act of 1987 (Public Law
100-203) increased tier 2 tax rates in January 1988 by a total
of 2 percent: 1.35 percent on employers and 0.65 percent on
employees. In addition, the law extended for 1 year, until
October 1, 1989, the time during which revenues from Federal
income taxes on tier 2 railroad retirement benefits could be
transferred from the general fund of the U.S. Treasury to the
railroad retirement account for use in paying benefits.
Railroad retirement amendments were included with railroad
unemployment insurance amendments in the Technical and
Miscellaneous Revenue Act of 1988 (Public Law 100-647). This
legislation assured repayment of the railroad unemployment
insurance account's debt to the railroad retirement account by
extending a temporary unemployment insurance tax until the debt
was fully repaid with interest in 1993. Public Law 100-647 also
eased work restrictions and the crediting of military service
in certain cases and provided more equitable treatment of
severance pay for railroad retirement purposes.
The Omnibus Budget Reconciliation Act of 1989 (Public Law
101-239) included a number of railroad retirement and Social
Security provisions which affected payroll taxes and benefits
beginning in 1990. The law increased the amount of earnings
subject to Social Security and railroad retirement payroll
taxes by including contributions to 401(k) deferred
compensation plans in the measure of average wages, which is
used to index the wage base. It also extended for 1 additional
year, until October 1, 1990, the time during which revenues
from Federal income taxes on tier 2 railroad retirement
benefits may be transferred to the railroad retirement account
for use in paying benefits.
The Omnibus Budget Reconciliation Act of 1990 (Public Law
101-508) further extended the date of this transfer until
October 1, 1992, and also permanently exempted supplemental
annuities from reductions under the Gramm-Rudman deficit
reduction measures adopted by Congress.
The Omnibus Budget Reconciliation Act of 1993 (Public Law
103-66) made all Social Security and railroad retirement tier 1
earnings subject to the Medicare payroll tax, and, for those
with higher incomes, made a larger amount of Social Security
and railroad retirement tier 1 benefits subject to Federal
income tax. A provision in the Social Security Administrative
Reform Act of 1994 (Public Law 103-296) extended on a permanent
basis the transfer to the railroad retirement trust funds of
Federal income taxes on tier 2 railroad retirement benefits and
a retroactive payment was made, covering the period October 1,
1992 through September 30, 1994.
The railroad retirement payroll tax is a mechanism for
distributing the system's burdens among the industry's major
interests, primarily railroad workers, employers, and
stockholders. The relationship between generosity and payroll
tax rates and shares is negotiated between management and
labor, with the outcome reviewed and modified by Congress as
necessary to determine the rate's adequacy, as well as its
fairness to the various interests involved. While retirement
costs are relatively fixed and predictable, total industry
revenues reflect broader economic conditions and are thus more
volatile. The payroll tax mechanism forces the various railroad
unions and companies to consider retirement obligations when
negotiating a distribution of industry revenues.
Although the railroad industry financial outlook has
improved in recent years, rail employment has continued to
decline. Because railroad retirement is financed by a tax on
industry payroll, such declines can eventually force
consideration of a rate increase to maintain adequate revenues
to the retirement system. That employment declines may prompt
tax rate changes does not necessarily mean that railroad
retirees are an increasing burden on a decreasing population of
workers. On the contrary, if revenue remains constant, a
decrease in the number of railroad workers is a productivity
increase that may permit reinforcing the financing of the
system without provoking sustained resistance from the railroad
payroll taxpayers, either labor or management. Provided that
the changes are reflected in a total compensation package that
is bargained to the satisfaction of the relevant interests,
rate increases necessary to retain system financial stability
are ultimately supported by a labor/management coalition.
The continuing decline in rail employment has raised
questions concerning the practicality of relying on payroll tax
funding in the next century. The Committee on Ways and Means
included in the 1987 reconciliation bill a provision which
established a Commission on Railroad Retirement Reform for the
purpose of conducting a comprehensive study of the issues
pertaining to the long-term financing of the Railroad
Retirement System. The Commission (1990) unanimously concluded
that the program ``. . . is financially sound in the
intermediate term.'' The report adds that it is not unlikely
that the system would remain sound for the next 75 years.
REFERENCES
Commission on Railroad Retirement Reform. (1990, September).
Final report. Washington, DC: Author.
Executive Office of the President. (1996). Budget of the U.S.
Government: fiscal year 1997 (Historical Tables
volume). Washington, DC: U.S. Government Printing
Office.
Railroad Unemployment Compensation Committee. (1984, June).
Report of the Railroad Unemployment Compensation
Committee. Washington, DC: Author.
Research Institute of America. (1997). Complete internal
revenue code. New York: Author.
U.S. Railroad Retirement Board. (1987, June 16). Letter to the
Speaker of the House of Representatives and to the
Majority Leader of the Senate, submitting a report in
compliance with section 502 of the Railroad Retirement
Solvency Act of 1983. Washington, DC: Author.
U.S. Railroad Retirement Board. (1996, June). Annual actuarial
report required by Railroad Retirement Act of 1974 and
Railroad Retirement Solvency Act of 1983. Washington,
DC: Author.
U.S. Railroad Retirement Board. (1997a, August). Twentieth
actuarial valuation of the assets and liabilities under
the Railroad Retirement Acts as of December 31, 1995.
Washington, DC: Author.
U.S. Railroad Retirement Board. (1997b, June 25). Annual Report
(on the financial status of the Railroad Unemployment
Insurance System) as required by the Technical and
Miscellaneous Revenue Act of 1988. Washington, DC:
Author.