[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Program Descriptions]
[Section 5. Earned Entitlements for Railroad Employees]
[From the U.S. Government Printing Office, www.gpo.gov]


[1998 Green Book] 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.