[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Program Descriptions]
[Section 2. Railroad Retirement System]
[From the U.S. Government Printing Office, www.gpo.gov]






 
[1996 Green Book] SECTION 2. RAILROAD RETIREMENT SYSTEM

                                CONTENTS

Overview
Annuity Structure
  Tier 1 and Tier 2
  Dual Benefit Payments
  Supplemental Annuities
  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
Legislative History
References

                                OVERVIEW

    The Railroad Retirement System is a federally legislated 
program which provides retirement, disability and survivor 
annuities to workers whose employment was connected with the 
railroad industry for at least 10 years. The system, in 
existence since 1936, was substantially modified by the 
Railroad Retirement Act of 1974 (RRA) 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.
    Retirement and survivor benefit payments during fiscal year 
1995 totaled $8.059 billion. These payments were made to 
847,000 beneficiaries. Retired employee and spouse annuitants 
constituted 582,000 of these beneficiaries and received $6.043 
billion. Survivor beneficiaries received a total of $2.016 
billion, consisting of $2.009 billion in monthly benefits and 
$7 million in lump-sum payments. Information on the number of 
beneficiaries and average benefit amounts for January 1996 is 
shown in table 2-1.
    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 adopted 
for the 104th 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 to that act 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 of 
1986). 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.

TABLE 2-1.--MONTHLY RAILROAD RETIREMENT CASH BENEFITS IN CURRENT-PAYMENT
                          STATUS, JANUARY 1996                          
------------------------------------------------------------------------
                                                        Percent  Average
                                               Number      of    monthly
                                                         total   benefit
------------------------------------------------------------------------
Retired workers............................    314,300     39.8   $1,143
Disabled workers \1\.......................     35,000      4.4    1,440
Spouses of retired and disabled workers....    188,700     23.9      470
Divorced spouses...........................      3,700      0.5      290
Aged widows and widowers...................    210,400     26.6      699
Disabled widow(er)s........................      6,500      0.8      622
Widowed mothers and fathers................      1,600      0.2      865
Remarried widow(er)s.......................      6,100      0.8      477
Divorced widow(er)s........................      8,500      1.1      502
Children...................................     15,300      1.9      605
Parents....................................        100    (\2\)      535
                                            ----------------------------
      Total monthly benefits...............    790,100    100.0     $846
------------------------------------------------------------------------
\1\ Under age 65.                                                       
\2\ Less than 0.05 percent.                                             
                                                                        
Note.--Includes tier 1, tier 2, and vested dual benefits. Excludes      
  166,100 supplemental employee annuities averaging $44. Total includes 
  fewer than 50 survivor option annuities averaging $77, payable under  
  laws in effect before August 1946.                                    
                                                                        
 Source: Railroad Retirement Board.                                     

                           ANNUITY STRUCTURE

    The 1974 Railroad Retirement 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.

                           Tier 1 and Tier 2

    The benefits are based on the Social Security 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 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, 
receive 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 out of the general 
revenue fund through an annual appropriation rather than from 
the Social Security or railroad retirement trust funds, and are 
subject to reduction during any year in which the appropriation 
is less than required for full benefit payments. The fiscal 
year 1995 appropriation was $254,000,000 including income tax 
transfers. The fiscal year 1996 appropriation was $239,000,000, 
including income tax transfers. Currently paid to about 19 
percent of the Railroad Retirement Board's beneficiaries, the 
average vested dual benefit is $130 per month.

                         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.

                        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 2-2 summarizes railroad retirement benefits paid and 
the number of recipients in selected fiscal years 1950-95. The 
table shows that the number of beneficiaries increased until 
about the mid-1980s and declined somewhat thereafter. 
Similarly, as shown by the constant dollar column in table 2-2, 
after rapid increases between 1950 and about 1975, benefits 
increased at a modest rate until the early 1980s. Since then, 
total benefit payments have actually declined by about $1 
billion.
    Table 2-3 presents data on new awards for January 1996.

                          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; (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 1996 annual tier 1 and 
tier 2 wage bases are $62,700 and $46,500, respectively. 
Beginning in 1994, there is 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 2-4.

          TABLE 2-2.--TOTAL BENEFIT PAYMENTS AND NUMBER OF BENEFICIARIES, SELECTED FISCAL YEARS 1950-95         
----------------------------------------------------------------------------------------------------------------
                                           Benefit payments (in millions) \1\       Beneficiaries (in thousands)
                                     ---------------------------------------------              \2\             
                                              Total                               ------------------------------
             Fiscal year             -----------------------                                                    
                                                  Constant   Retirement  Survivor                               
                                       Current      1995                            Total   Retirement  Survivor
                                       dollars  dollars \3\                                                     
----------------------------------------------------------------------------------------------------------------
1950................................    $301.6    $2,418.7      $248.2      $53.4      458        272        189
1955................................     549.7     3,999.6       424.5      125.2      700        452        252
1960................................     925.7     5,159.7       711.5      214.2      873        584        299
1965................................   1,117.7     5,526.9       834.0      283.7      980        650        340
1970................................   1,593.5     6,362.3     1,177.0      416.5    1,051        702        366
1975................................   3,060.3     8,428.4     2,222.4      837.9    1,094        733        380
1980................................   4,730.6     8,727.3     3,389.8    1,340.8    1,084        731        367
1981................................   5,286.6     8,862.2     3,779.9    1,506.7    1,074        726        363
1982................................   5,725.5     8,964.9     4,097.9    1,627.6    1,067        722        359
1983................................   6,041.1     9,020.3     4,354.2    1,686.9    1,056        715        357
1984................................   6,099.8     8,759.6     4,417.8    1,682.0    1,040        705        351
1985................................   6,250.9     8,666.1     4,539.3    1,711.6    1,023        694        343
1986................................   6,329.5     8,520.0     4,608.1    1,721.4    1,007        684        339
1987 \4\............................   6,520.3     8,544.2     4,773.6    1,746.7      994        675        333
1988................................   6,675.9     8,443.3     4,915.0    1,760.9      981        666        328
1989................................   6,938.5     8,408.6     5,140.9    1,797.6      967        659        322
1990................................   7,194.6     8,356.5     5,357.0    1,837.6      951        650        315
1991................................   7,490.8     8,330.6     5,593.2    1,897.6      932        638        307
1992................................   7,693.9     8,275.5     5,754.0    1,939.9      913        626        301
1993................................   7,872.3     8,244.1     5,896.0    1,976.2      898        615        298
1994................................   7,978.9     8,160.1     5,978.9    1,999.9      874        599        288
1995................................   8,059.2     8,059.2     6,042.9    2,016.3      847        582        282
----------------------------------------------------------------------------------------------------------------
\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 1995, about 17,000 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.                                                                              

    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 provided 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.

    TABLE 2-3.--NUMBER AND AVERAGE AMOUNT OF NEW AWARDS, JANUARY 1996   
------------------------------------------------------------------------
                                                                 Average
                  Beneficiary type                     Number    amount 
------------------------------------------------------------------------
Employee annuities:                                                     
  Retired...........................................       653    $1,531
  Disability (under age 65).........................       456     1,580
  Supplemental......................................       442        41
Spouse annuities....................................       704       486
Divorced spouse annuities...........................        31       293
Survivor benefits:                                                      
  Aged widows and widowers..........................       634       851
  Disabled widows and widowers......................        24       834
  Widowed mothers and fathers.......................        17       924
  Divorced and remarried widows.....................        94       556
  Children..........................................        60       769
  Parents...........................................  ........  ........
  Insurance lump sums...............................       575       859
  Residual payments.................................        13     3,379
                                                     -------------------
      Total.........................................     3,703  ........
------------------------------------------------------------------------
Source: Railroad Retirement Board.                                      

    Generally, under the interchange, for a given fiscal year 
there is computed the revenue that would have been collected by 
the Social Security trust funds if railroad employment had been 
covered directly by Social Security. This amount 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 2-5 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 2-4.--SCHEDULED TAX RATES FOR TIER 1 AND TIER 2, SELECTED YEARS 1975-2001                
----------------------------------------------------------------------------------------------------------------
                                     Tier 1                          Tier 2                      Combined \2\   
                              --------------------  Wage base -------------------- Wage base -------------------
                               Employer  Employee      \1\     Employer  Employee             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      65,100     16.10      4.90     48,300     23.75     12.55
1998.........................      7.65      7.65      68,100     16.10      4.90     50,700     23.75     12.55
1999.........................      7.65      7.65      71,100     16.10      4.90     52,800     23.75     12.55
2000.........................      7.65      7.65      74,100     16.10      4.90     54,900     23.75     12.55
2001.........................      7.65      7.65      76,800     16.10      4.90     57,000     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.--1997-2001 wage bases are projected.                                                                      
                                                                                                                
Source: Railroad Retirement Board.                                                                              


    TABLE 2-5.--AMOUNTS TRANSFERRED TO OR FROM (-) THE SOCIAL SECURITY EQUIVALENT BENEFIT ACCOUNT \1\ AND THE   
                 VARIOUS SOCIAL SECURITY TRUST FUNDS IN SELECTED FISCAL YEARS 1954 THROUGH 1995                 
                                            [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
                                                             ---------------------------------------------------
        Total...............................................       57,449.1     1,239.5    -7,020.9     51,667.7
----------------------------------------------------------------------------------------------------------------
\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 in 
the 1974 act through the year 2000. The total appropriated for 
the first 20 fiscal years 1976-95 for which these benefits were 
payable was $6.120 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 into 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 1993.

                              Other Income

    Funds not needed immediately for benefit payments are 
invested in interest-bearing securities. During fiscal year 
1995, the Railroad Retirement Account and Social Security 
Equivalent Benefit Account received $1.146 billion in 
investment income. This represents an annualized interest yield 
of 7.36 percent.
    A cents-per-hour tax is used to fund the supplemental 
annuity benefit. This tax is levied solely on employers. The 
rate, 34 cents per work hour in January 1996, 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 2-6 below.

            TABLE 2-6.--RAILROAD INDUSTRY EMPLOYMENT, 1940-95           
------------------------------------------------------------------------
                                                                Number  
                                                             (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.......................................................         264 
------------------------------------------------------------------------
Source: Railroad Retirement Board.                                      

    While the trust funds currently have a reserve of over $14 
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 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 1994, the U.S. Railroad Retirement Board 
transmitted to Congress its 19th 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 20 years. The annual report required by the 1983 solvency 
act (section 502) transmitted to Congress on June 25, 1996 (see 
U.S. Railroad Retirement Board, 1996) raises the cash flow safe 
period to 25 years. The long-term stability of the system, 
however, depends on actual railroad employment levels over the 
coming years.

                          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 plan terminations, 
which were frequent, pension funds were chronically 
underfinanced, and most funds could not stand the financial 
exigencies 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 represented a 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 $14 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.
    The railroad retirement payroll tax is a mechanism for 
distributing the system's burdens among the industry's major 
interests, primarily railroad workers and their employers/
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 (1990) 
for the purpose of conducting a comprehensive study of the 
issues pertaining to the long-term financing of the Railroad 
Retirement System. The Commission unanimously concluded that 
the program ``. . . is financially sound in the intermediate 
term.'' However, the report adds that it is not unlikely that 
the system would remain sound over the 75-year period used for 
actuarial valuations without further tax increases.
    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 I 
earnings subject to the Medicare payroll tax, and, for those 
with higher incomes, made a larger amount of Social Security 
and railroad retirement tier I 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.

                               REFERENCES

Commission on Railroad Retirement Reform. (1990, September). 
        Final report. Washington, DC: Author.
Executive Office of the President. (1996). Budget of the United 
        States Government: Fiscal Year 1997 (Historical Tables 
        volume). Washington, DC: U.S. Government Printing 
        Office.
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. (1994, August). Nineteenth 
        actuarial valuation of the assets and liabilities under 
        the Railroad Retirement Acts as of December 31, 1992. 
        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.