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1974/10/12 HR15301 Railroad Retirement Act of 1974 (vetoed) (1)
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1974/10/12 HR15301 Railroad Retirement Act of 1974 (vetoed) (1)
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This file contains material on the act that was overridden on 10/16/1974.
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The original documents are located in Box 9, folder "1974/10/12 HR15301 Railroad
Retirement Act of 1974 (vetoed) (1)" of the White House Records Office: Legislation Case
Files at the Gerald R. Ford Presidential Library.
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The copyright law of the United States (Title 17, United States Code) governs the making of
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States of America his copyrights in all of his unpublished writings in National Archives collections.
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Exact duplicates within this folder were not digitized.
Digitized from Box 9 of the White House Records Office Legislation Case Files at the Gerald R. Ford Presidential Library
VETOELIZIT
THE WHITE HOUSE
WASHINGTON
ACTION
Last Day - October 12
cheaked
OF 174 to THE:35pm THE Houst
October 10, 1974
MEMORANDUM FOR:
THE PRESIDENT
FROM:
KEN COLY
SUBJECT:
Enrolled Bill H.R. 15301
Railroad Retirement Act
of 1974
H.R. 15301 completely revises the benefit and financing structure
of the railroad retirement system by:
--authorizing a 25 year federal subsidy for the system
eliminating future dual benefits from social security
and railroad retirement
shifting from the Secretary of the Treasury to the
Railroad Retirement Board responsibility for investing
trust fund assets
-providing a new formula for vesting and more liberal
benefits schedule
BACKGROUND
If the Railroad Retirement system continues its current actuarial
deficiencies ($529 million per year) it will have exhausted its assets
by the mid - 1980's. Congress established the Commission on
Railroad Retirement to study ways in which the system can be made
actuarially sound. Taking into account the results of the study,
railroad labor and management negotiated an agreement improving
the retirement system which would be implemented by signing of
this Bill. The Bill differs only slightly from the Labor-Management FORD
agreement.
GERALD LIBRARY
-2-
ARGUMENTS FOR SIGNING
The biggest reason for signing this is the previous action of the
Government in originally setting up this fund improperly. The
Bill would eliminate future accrual of dual benefit levels upward
with better relationship to wages. The investment policy changes
might generate revenues offsetting any additional subsidy requests.
As a compromise between railway labor and management, with
management agreeing to fund a much greater proportion than
in the past and blessed by the Congress, it is unlikely that an
improved package could ever be agreed upon. Failure to implement
these provisions might seriously impair difficult negotiations cur-
rently under way between carriers and unions on the existing
contract covering over 500,000 employees and terminating January
1, 1975. The railroads are critical to the health of our nation
and we should be strengthening the entire system including employee
benefits.
There is a very strong possibility that a veto would be overridden.
ARGUMENTS FOR VETO
A $7.1 billion subsidy by the federal taxpayers of a private pension
system which was created to be independent and self supporting is
improper. The proposed liberalized benefits almost equal the
proposed subsidy which makes the fund dependant on the federal
treasury for these and increased benefit amounts. Under this bill
the Railroad Retirement System has the benefit of being, in essence
a federal plan with little government control. The benefit formulas
and administrative provisions are complex and will generate juris-
dictional problems with the Social Security Administration.
The preferential investment provisions are unprecedented and un-
desireable. Such power in the Government securities markets should
not be given to an agency with no responsibility for performance
in those markets (Railroad Retirement Board). This concept was
rejected by Congress in the 1970 railroad retirement legislation.
This Bill would not increase trust fund tax revenues in a way that
would make it more self sustaining, rather it adds a subsidy to
the trust fund in the estimated amount of $285 million per year
through the year 2000, while not eliminating the annual deficits
GERALD
-3-
THE FOLLOWING HAS NO OBJECTION TO APPROVAL
Greenspan
OPTIONS
Sign
Recommended by Railroad Retirement Board,
Timmons, Counsel's Office (Chapman). .
Veto
Recommended by Ash, Cole and Treasury
If veto, sign veto message attached at Tab A.
FORD is LIBRARY 078839 8788
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
October 7, 1974
MEMORANDUM FOR THE PRESIDENT
Subject: Enrolled Bill H.R. 15301 - Railroad Retirement
Act of 1974
Sponsor - Rep. Staggers (D) W. Va.
Last Day for Action
October 12, 1974 - Saturday
Purpose
Revises the structure of the Railroad Retirement System
to implement a collective bargaining agreement between
railway labor and management; authorizes a 25-year Federal
subsidy for the retirement system and shifts responsibility
for trust fund investment policy from Treasury to the
Railroad Retirement Board.
Agency Recommendations
Office of Management and Budget
Disapproval (Veto
message attached)
Department of the Treasury
Disapproval
Railroad Retirement Board
Approval
Department of Labor
No objection to approval
Council of Economic Advisers
No objection
Department of Health, Education,
and Welfare
Defers to other agencies
Department of Transportation
No position
Discussion
H.R. 15301 would provide for a complete revision of the
benefit and financing structure of the railroad retirement
system. The bill is the result of a four-year effort by
the Congress and the Executive Branch to resolve the
nearly bankrupt condition of the railroad retirement trust
fund. It is based on joint recommendations of railroad
labor and management after extensive negotiations, and
does not reflect the recommendations of the Executive
Branch and a study commission established in 1970 that
the system be self-financed.
2
Major provisions
The railroad retirement system is currently operating
under an actuarial deficiency of 9.05 percent of taxable
payroll, the equivalent of $529 million a year. If
uncorrected, the system will exhaust its assets in the
mid-1980s. H.R. 15301 proposes to reduce and finance
the deficiency by:
(1) providing a lower level of pension benefits
for future service under a new formula,
(2) eliminating so-called "dual benefits" (i.e.,
social security and railroad retirement) arising
out of future service,
(3) authorizing payments from the Treasury general
fund estimated at $285 million a year over the
next 25 years, and
(4) authorizing the Railroad Retirement Board to
engage in a preferential investment program for
the assets in the trust fund.
These provisions are intended to reduce the deficit to
0.96 percent of payroll (equivalent to $57 million a
year) while still permitting new benefit liberalizations
costing $165 million a year.
A brief discussion of the effect of these four major
provisions follows. A more detailed discussion of all
the bill's provisions is contained in the attached views
letter from the Railroad Retirement Board (RRB) on the
FORD
enrolled bill.
(1) New formula. The new formula would protect
benefits vested under the old formula for employment
through December 31, 1974 (the changeover date). All
wage credits earned after that date would vest in benefits
at the lower rate. The savings resulting from this pro-
vision would be about 3.43 percent of taxable payroll or
$201 million a year.
(2) Eliminate future "dual benefit". Under existing
law, the railroad retirement benefit may be conceived as
a social security benefit combined with an additional
pension benefit earned from railroad service. The "dual
benefit" occurs since the social security system reinsures
3
the railroad retirement system for benefits that an
individual would have received if his railroad service
had been under the social security system. Under present
law, individuals who have worked long enough under each
system to qualify for both, in effect, receive social
security benefits twice.
H.R. 15301 would restrict the future accrual of "dual
benefits" essentially to what has already been vested
under both systems. This would save 3.80 percent of
taxable payroll or $222 million a year.
(3) Federal subsidy for vested "dual benefits".
Individuals whose pension rights have already vested
would be protected under the enrolled bill. The cost
of these dual benefits is estimated to be 3.64 percent
of taxable payroll or $213 million. H.R. 15301 would provide
for general fund appropriations of such sums as may be
necessary to meet this cost. Current estimates on a "level-
cost" basis are that $285 million a year for 25 years--
totaling over $7 billion--would be required to cover that
cost.
(4) Preferential investment policy. Under present
law, the Secretary of the Treasury determines the manner
in which railroad retirement trust funds are invested,
as he does for social security and other trust funds
managed by the Federal Government. The rate of interest
paid on trust fund investments is so managed as to equal
the average market yield on longer-term marketable
Treasury obligations.
Under H.R. 15301, RRB, rather than the Secretary of the
Treasury would have the authority over the type, maturities,
and redemptions of the railroad retirement trust fund's
investments. All requests by RRB as to purchases and
redemptions would be mandatory on the Secretary of the
Treasury. This shift of investment authority is designed
to enable RRB to obtain higher yields than are provided
under the present Treasury investment policy.
The resulting added interest earnings--currently estimated
at 0.6 percent of taxable payroll ($35 million a year)
are required by the bill to be repaid to the general fund
each year until the year 2,000.
4
Benefit liberalizations.
Although the changes described above have been designed
to reduce the deficiency in the system, the bill provides
for the liberalization of benefits in three areas:
-- People who retire at age 60 with 30 years of
service could receive supplemental annuities at age 60,
rather than at age 65,
-- The spouse of an individual who retires at age 60
with 30 years of service could qualify for a spouse's
annuity at age 60, rather than at age 65; and
-- The benefits generally payable to survivors (mostly
widows) would be increased from 110 percent to 130 percent
of the comparable social security benefit.
The combined cost of these liberalizations is 2.82 percent
of taxable payroll or $165 million a year.
In addition to these benefit liberalizations, H.R. 15301
would provide for four specified cost-of-living adjust-
ments during the six-year period commencing January 1, 1975.
The bill would also provide that whenever social security
recipients receive automatic cost-of-living increases, such
increases would be applied to the social security portion of
the railroad retirement benefit. Finally, H.R. 15301 would
add a new provision to the Railroad Retirement Act which
would make future liberalizations of eligibility require-
ments under the Social Security Act for benefits, including
medical benefits, automatically applicable to railroad
employees.
Administration.
H.R. 15301 would authorize RRB to determine the eligibility
for and the amount of social security benefits for all
persons who were actual or potential railroad retirement
beneficiaries. RRB rather than the Social Security Adminis-
tration (SSA) also would be required to notify beneficiaries
of the amount payable to them under social security, the
reasons for any changes in the amount, and the beneficiary's
rights of appeal.
Legislative Background
The need for an extensive restructuring of the railroad
retirement system was recognized in 1970 when the Congress
5
enacted legislation establishing a Commission on Railroad
Retirement to study the system and to make recommendations
as to the steps necessary to place it on an actuarially
sound basis.
After a year and a half of study, the Commission reported
its findings and recommendations on September 7, 1972.
Among its principal recommendations was that benefits
be financed " on an assured, fully self-supporting basis
by contributions from the railroad community through the
crisis period of the next 20 to 30 years and then beyond."
Following receipt of the report, Congress directed
representatives of railroad employees and management to
submit their mutual recommendations for restoring financial
soundness to the railroad retirement system, taking into
account the report and the specific recommendations of the
Commission.
Eight months later, on February 27, 1973, a joint industry
committee on railroad retirement notified Congress that
it had not yet come into agreement and that it needed
more time to shape its recommendations. Congress then
enacted P.L. 93-69, approved July 10, 1973, which extended
the industry's reporting date to April 1, 1974, and which
also made further liberalizations in the railroad retirement
system. P.L. 93-69, as enacted, directed the industry, as
before, to develop a proposal which "will assure the long-
term actuarial soundness of such system, which recommenda-
tions shall take into account the specific recommendations
of the Commission on Railroad Retirement."
H.R. 15301 would implement the recommendations of the Joint
Labor-Management Railroad Retirement Negotiating Committee
in accordance with the directive contained in P.L. 93-69.
The bill as passed by Congress differs from the Negotiating
Committee's proposal in only two principal respects.
-- As the result of strong opposition to the
Negotiating Committee's proposal for a subsidy from the
Social Security trust fund over the next 25 years, that
proposal was dropped in favor of a subsidy from the general
fund of the Treasury.
-- The Congress also added the provision shifting to
RRB from Treasury the responsibility for investing the
assets of the railroad retirement trust fund.
6
Throughout the legislative history of this measure--from
the inception of the Commission on Railroad Retirement
in 1970 to recent Congressional action on the enrolled
bill--the Administration has insisted that the respon-
sibility for restoring the railroad retirement fund to a
position of financial solvency properly rests with the
railroad community and not with the Federal taxpayer. In
testimony on the bill just four weeks ago, the Administra-
tion's spokesman told the Senate Subcommittee on Railroad
Retirement:
"The bill now pending before this Committee does
not provide financing on a fully-self-supporting
basis by contributions from the railroad community
as was recommended by the Commission. Instead, it
proposes that the Federal taxpayer pick up the tab
through a multi-billion dollar subsidy. Such an
approach should be rejected by the Congress
The problems of this system must be overcome within
the industry it serves and those individuals who
have benefitted from it in the past and will continue
to receive its benefits in the future."
The Administration proposed several ways to provide
financing on a self-supporting basis, including a gradual
phase-in of benefit liberalizations to correspond with a
phased increase in railroad retirement contributions.
Nevertheless, H.R. 15301 was passed with strong Congressional
support in both the House (343-10) and Senate (86-1). On
the only test vote to be taken, the House rejected 26-329
a motion to recommit the bill to committee with instructions
to provide for a one-year extension of present benefits,
Cost impact in fiscal year 1976.
Outlays. The provisions of H.R. 15301 that protect
the vested benefits of current and future retirees would
inhibit the realization of savings from the new benefit
formula until several years into the future. In fiscal
year 1976, the liberalizations and other changes in benefits
will raise annual outlays by an estimated $167 million.
Revenues. Under current law, income from trust fund
operations are estimated to fall short of outlays by $162
million.
This bill would not increase trust fund tax revenue at all.
It would, instead, add a subsidy, including general fund
appropriations, to the trust fund in the amount of an
7
estimated $285 million a year through the year 2,000.
Because of the higher outlays for benefits, the general
fund subsidy would still result in an annual deficit for
the fund in fiscal year 1976, but the fund should balance
itself in later years.
Fiscal year 1976 railroad retirement outlays and receipts
(Dollars in millions)
Current
law
H.R. 15301
Revenue
(a) From trust fund
operations
2,936
2,936
(b) From subsidy
operations
285
Total revenues
2,936
3,221
Outlays
3,098
3,265
Deficit
-162
-44
Arguments in favor of approval
1. While it does not provide for self-financing,
H.R. 15301 does adopt several principal recommendations
of the Commission on Railroad Retirement. In particular,
it would eliminate future accrual of dual benefits, which
has been a major factor in the financial problem of the
railroad retirement system, and it would revise the benefit
formula to produce future benefit levels which bear a
reasonable relationship to wages.
2. The bill represents a compromise after lengthy
negotiations between railway labor and railroad management,
each of whom has made major concessions. Labor has agreed
to the elimination of future dual benefits and alteration
of the formula, while management has agreed to continue to
accept responsibility (first enacted in P.L. 93-69) for
funding a much greater share of the cost of the system
than had previously been the case. It is unlikely that such
agreement could be reached again without the impetus of
a Congressional mandate (as in P.L. 93-69). This would
8
have to be accomplished under severe time pressure since
substantial benefit increases enacted on a temporary basis
since 1970 will expire on December 31, 1974 unless an
acceptable permanent solution is found or those increases
are again temporarily extended.
3. The Labor Department notes in its views letter,
that a veto of the bill, which is in fact a negotiated
agreement between the carriers and the unions, would have
direct labor-management implications. Labor points out
that very difficult negotiations are currently underway
on the existing contract, which covers over 500,000
employees and terminates on January 1, 1975.
4. Congressional proponents of H.R. 15301 concur
in the argument made by the railroad industry that the
substantial increase in the number of dual beneficiaries
over the years--from 15 to 40 percent of retirees--is
largely attributable to acts of Congress and not acts of
the industry. The proponents argue that it would be unfair
for Congress to thrust on the industry the large costs of
phasing out the dual benefits provisions which were created
and maintained by Congressional acts when the railroad
industry did not seek such legislation.
5. Proponents argue further that there is precedent
for a Federal payment to the railroad retirement system
in view of the fact that appropriations are made from
general revenues each year to cover the cost of allowing
social security and railroad retirement credits for
military service. While military service admittedly differs
from private sector employment, proponents argue that
providing these payments represents a policy decision by
the Congress that it would be inequitable not to pay them.
A similar policy decision has been made by the Congress
in passing H.R. 15301.
6. While it is possible that the currently estimated
$285 million annual cost of the Federal subsidy may turn
out to be even higher in the future, proponents of the
bill argue that any such increase would be offset by gains
in interest revenues anticipated from the changes the bill
makes in the investment policy of the railroad retirement
fund.
Arguments in favor of disapproval
1. H.R. 15301 would provide for inequitable and
unjustified $7.1 billion subsidy by Federal taxpayers
9
to a pension system for a particular industry in the private
sector. The railroad retirement system was created as an
independent, self-supporting retirement system to serve
only the members of the railroad industry. It would be
inappropriate and highly inequitable to levy the costs of
the system on taxpayers who cannot hope to benefit from it.
The problems of the system should be met within the industry
and by those it serves.
2. New benefit liberalizations should not be added
to the railroad retirement system until they can be financed
within the system. The liberalized benefits contained in
H.R. 15301 amount to almost as much as the full amount of
the Federal subsidy. Thus, under the enrolled bill the
Federal taxpayer--not the industry- is being called upon
to finance the new benefits for railroad retirees.
3. Financing the railroad retirement fund deficiency
from the general fund would be inflationary as compared
to the alternatives of reducing benefits, deferring benefit
increases, or raising the payroll tax or contribution by the
industry. Under the bill, the Federal subsidy is required
to be paid for each of the next 25 years even if there is
a surplus in other revenues of the railroad retirement fund.
It is likely to be even higher than the currently estimated
$285 million a year as benefit levels increase with the
cost of living.
4. The benefit formulas and administrative provisions
in the bill are extremely complex. This complexity will
seriously impede efficient administration of both the
railroad retirement and social security systems. In
addition, it will be impossible for the individual bene-
ficiary to understand the workings of the system, thus
undermining its credibility and public support.
5. It is inappropriate and inadvisable for RRB to
be given the responsibility for the administration of
certain provisions of the Social Security Act with no review
by SSA. Having two separate agencies simultaneously
administering the same statutory provisions will inevitably
lead to confusion and loss of efficiency. As HEW notes
in its letter, these provisions could create serious
administrative problems for SSA, with no counter balancing
advantages for RRB. Communication between SSA and its
beneficiaries would be impaired and the incidence of social
security benefit overpayments would increase. In addition,
it will be difficult to explain this arrangement to
10
beneficiaries who are entitled to social security benefits
in their own right and whose connection to the railroad
industry is only marginal.
6. The preferential investment provisions of the
bill are not available to any other Federal trust fund and
are highly undesirable. Treasury states that the powers
given to RRB could make its operations the single largest
factor in the Government securities market, with con-
sequent upsetting effects on other markets, and that such
powers should not be given to a body with no responsibilities
for the performance of those markets. Moreover, RRB could
not only lock in investments for long terms when interest
rates are at their peak, but could refund continuously
into higher rates whenever rates are rising. This represents
a concept that the railroad retirement system should, by
law, get continuing long-term benefits from periods of high
interest rates, but only current effects from periods of
low interest rates. This concept which was considered and
rejected by the Congress in the 1970 railroad retirement
legislation, was characterized as reflecting a "heads-I-
win-tails-you-lose" philosophy.
Recommendations
RRB recommends approval of H.R. 15301. The two members of
the Board representing labor and management, jointly,
state that they support H.R. 15301 in its entirety and
believe that it provides "the only solution to the complex
problems facing the railroad retirement system that is
both practical and equitable while at the same time being
by and large noninflationary." The RRB Chairman believes
that the bill is "as good as any which would be acceptable
to both the labor and management representatives." The
Chairman acknowledges that there are weaknesses in the
bill but does not believe they are important enough to
warrant a veto.
Treasury recommends disapproval, criticizing both the
investment and general fund financing provisions. The
Department states that "a subsidy should not be provided by
a sleight of hand investment policy designed to hide the
fact that the subsidy is being paid for by the taxpayers."
Treasury also opposes the new investment authority in view
of the "clear expression of Congressional intent that the
railroad retirement system not benefit from the new
investment provisions until after the close of this century
and the distinctly undesirable implications of those
provisions
"
11
HEW, while deferring to other agencies on the merits of
the bill, has serious reservations over the provisions
assigning RRB certain administrative responsibilities
for social security payments and is concerned that other,
perhaps more serious, problems may emerge on further
analysis.
Labor also defers to others on the substance of the bill,
but concludes:
"
we believe that negative action on
this enrolled bill will severely exacerbate the already
difficult negotiations that are currently being conducted.
*********
Despite the fact that H.R. 15301 represents an agreement
between labor and management reached after extended negotia-
tions, we believe the principles involved in this bill
and its cost implications are fundamentally inconsistent
with sound financial and administrative policies. Furthermore,
we do not believe the Federal subsidies provided in H.R. 15301
properly meet the mandate of P.L. 93-69 requiring the industry
to develop a long-term, actuarially sound financing plan. We
therefore recommend that H.R. 15301 be disapproved and that
the Congress be urged to enact sound and equitable legisla-
tion along the lines proposed by the Administration before
the temporary benefits in present law expire on December 31,
1974. A draft veto message is attached for your consideration.
Director
Enclosures
FORD LIBRARY
THE WHITE HOUSE
WASHINGTON
October 11, 1974
MEMORANDUM TO THE PRESIDENT
FROM:
JOHN O. MARSH,
JR
In
Congressman John Rhodes called to urge you, if at all
possible, to sign the Railroad Retirement Bill. He
realizes it is a budget buster, largely arising out of
previous congressional action, but says it will be a
one-time thing.
He is of the view that any veto will be overridden and
points out that a veto will have an adverse impact just
before election.
I told him I would convey his view to you.
cc: Donald Rumsfeld
William Timmons
FORD LIBRARY
HAND CARRY
One Original worth stemed
no date.
TO THE HOUSE OF REPRESENTATIVES:
I am returning today without my approval, H.R. 15301,
a bill which would finance a long-standing deficit in the
Railroad Retirement System at the expense of the general
taxpayer.
The Railroad Retirement System, under current law,
is headed toward bankruptcy by the mid-1980s. This
condition arises largely because benefits have been
increased 68 percent since 1970 without requiring the
beneficiaries of the system, railroad employees and
employers, to pay the added costs.
This bill proposes to solve the financial problems of
the Railroad Retirement System by placing a seven billion
dollar burden on the general taxpayer, requiring him to
contribute $285 million to the Railroad Retirement Trust
Fund each year for the next twenty-five years. In return
for his seven billion dollar contribution, the general
taxpayer would earn no entitlement to benefits and would
receive no return on his investment.
At a time when the taxpayer is already carrying the
double burden of taxes and inflation, legislation such
FORD LIBRARY 079839
as this is most inappropriate.
Recognizing the financial straits of the Railroad
Retirement System, the Executive Branch in 1970 proposed
and the Congress authorized an independent study of the
System. After eighteen months of careful work, the study
group recommended that the benefits be financed "
on an
assured, fully self-supporting basis by contributions from
the railroad community through the crisis period of the
next 20 to 30 years and then beyond. "
2
Following receipt of the report, the Congress directed
representatives of railroad employees and management to
submit their combined recommendations for restoring financial
soundness to the System, taking into account the report and
the specific recommendations of the Commission.
The bill which is now before me is true neither to
the recommendation of the Commission nor to the charge
placed on the industry by the Congress.
Forcing the general taxpayer to carry an unfair burden
is not the only defect in this bill. It would also establish
a special investment procedure for the Railroad Retirement
Trust Fund.
Under the bill, the interest paid by the Treasury on
Railroad Retirement investments and Federal securities
would rise when interest rates increase but would not fall
when they decrease. This "heads I win; tails you lose"
arrangement, with the taxpayer being the loser, has been
suggested before, but never adopted. It should not be a
part of the solution to the Railroad Retirement System's
financial problem.
Furthermore, the provisions of the benefit formula are
SO complex that they would be extremely difficult to
administer and virtually impossible to explain to the
persons who are supposed to benefit from it. Now is the
time to simplify the benefit structure of the Railroad
Retirement System, not make it more complex. Splitting
administrative responsibility between the Railroad
Retirement System and the Social Security System over
benefits that depend on entitlement under the Social
Security Act is bad law. Full responsibility for admin-
istering Social Security benefits should be vested in
the Social Security Administration, not divided among
agencies with resultant uncertainty as to who should
be held accountable.
3
I believe it is our obligation to the general taxpayer
to see that the problems of this system are overcome by the
industry and people it serves -- those who have benefitted
from it in the past and will continue to receive its benefits
in the future. Other industries -- other parts of the
transportation industry -- pay for their own pension systems.
There is no justification for singling out the railroads
for special treatment.
There are only two ways this obligation can be met --
by increasing revenues or by limiting benefits or by a
combination of both. Administration spokesmen have
proposed constructive ways to achieve this goal, but our
proposals have not received serious consideration by the
Congress.
We are in need of a better railroad retirement system
and a financially sound one. This bill does not meet that
need. I urge the Congress to reconsider that need and to
develop a new bill which is fair to the taxpayers as well
as to the beneficiaries of the Railroad Retirement System.
This Administration stands ready to help in any way it can.
Herald R. Ford
THE WHITE HOUSE,
October 12, 1974
Ow
RESEARCH
ROOM 121 E O. B,
TO THE HOUSE OF REPRESENTATIVES
oh
I am returning today without my approval, H.R. 15301,
a bill which would finance a long-standing deficit in the
Railroad Retirement System at the expense of the general
taxpayer.
The Railroad Retirement System, under current law,
Mid
ok
is headed toward bankruptcy by the early 1980s. This
condition arises largely because benefits have been
increased 68 percent since 1970 without requiring the
beneficiaries of the system, railroad employees and
employers, to pay the added costs.
This bill proposes to solve the financial problems of
placing
oh
the Railroad Retirement System by loading a seven billion
requiring him to
dollar burden on the general taxpayer, If this bill were
to become Law, the general taxpayer would contribute
our
ola
$285 million to the Railroad Retirement Trust Fund each
on
year for the next twenty-five years. In return for his
stat
seven billion dollar contribution, the general taxpayer
would earn no entitlement to benefits and would receive no
return on his investment.
At a time when the taxpayer is already carrying the
double burden of taxes and inflation, there is no
justification for legislation such as this A is most inappropriate.
Recognizing the financial straits of the Railroad
on
Retirement System, the Executive Branch in 1970 proposed
GERALO FORD LIBRARY
and the Congress authorized an independent study of the
System. After eighteen months of careful work, the study
group recommended that the benefits be financed on an
assured, fully self-supporting basis by contributions
from the railroad community through the crisis period
of the next 20 to 30 years and then beyond."
Following receipt of the report, the Congress
directed representatives of railroad employees and
management to submit their combined recommendations for
restoring financial soundness to the System, taking into
account the report and the specific recommendations of
the Commission.
The bill which is now before me is neither true to
the recommendation of the Commission nor to the charge
placed on the industry by the Congress.
Forcing the general taxpayer to carry an unfair
burden is not the only defect in this bill. It would
ok
also establish a special investment procedure for the
Railroad Retirement Trust Fund.
Under the bill, the interest paid by the Treasury
on Railroad Retirement investments and Federal securities
would rise when interest rates increase but would not fall
on
when they decrease. This "heads I win; tails you lose"
arrangement, with the taxpayer being the loser, has been
suggested before, but never adopted. It should not be a
part of the solution to the Railroad Retirement System's
GERALOR FORD (TONAR)
financial problem.
Furthermore, the provisions of the benefit formula
world extremely difficult
are so complex that they will be a nightmare to administer
or
and virtually impossible to explain to the persons who are
supposed to benefit from it. Now is the time to simplify
the benefit structure of the Railroad Retirement System,
not make it more complex. Splitting administrative
responsibility between the Railroad Retirement System
and the Social Security System over benefits that depend
on entitlement under the Social Security Act is bad law.
Full responsibility for administering Social Security
benefits should be vested in the Social Security Adminis-
tration, not divided among agencies with resultant
uncertainty as to who should be held accountable.
I believe it is our obligation to the general
taxpayer to see that the problems of this system are
overcome by the industry and people it serves--those who
have benefitted from it in the past and will continue to
receive its benefits in the future. Other industries--
other parts of the transportation industry--pay for their
own pension systems. There is no justification for
singling out the railroads for special treatment.
There are only two ways this obligation can be met
by increasing revenues or by limiting benefits or by a
combination of both. Administration spokesmen have
proposed constructive ways to achieve this goal, but our
proposals have not received serious consideration by the
Congress.
We are in need of a better railroad retirement system
and a financially sound one. This bill does not meet that
need. I urge the Congress to reconsider that need and to
FORD i LIBRARY CERALD
develop a new bill which is fair to the taxpayers as well
as to the beneficiaries of the Railroad Retirement System.
This Administration stands ready to help that endeaver in
any way it can.
THE WHITE HOUSE
WASHINGTON
October 10, 1974
MEMORANDUM FOR:
KATHY TINDLE
of
FROM:
KEN LAZARUS
DUDLEY CHAPMAN
SUBJECT:
Enrolled Bill H.R. 15301
Railroad Retirement Act of 1974
We favor signing the referenced bill. The papers show that both labor
and management strongly endorse it; and that it is a negotiated settlement
worked out with great difficulty. The fact that Congress has blessed
the arrangement should also be given substantial weight.
Moreover, the OMB arguments against the bill appear overdrawn. It is
not realistic, for example, to say that the public does not benefit at all
from help to the railroad industry. Alternative forms of transportation
(a) cost the taxpayer for direct subsidies, (b) consume fuel less efficiently,
and (c) benefit from reduced congestion to the extent that traffic is
diverted to rails. Congress has made clear enough through repeated
insistence on maintaining service to remote and unprofitable points
that it considers railroad service an important benefit to the public.
BERALD FORD VERAPTY
THE WHITE HOUSE
RUSH
ACTION MEMORANDUM
WASHINGTON
LOG NO.: 636
Date: October 9, 1974
Time:
9:00 a.m.
FOR ACTION:
Michael Duval
CC (for information): Warren K. Hendriks
Phil Buchen
Jerry Jones
Bill Timmons
Paul Theis
FROM THE STAFF SECRETARY
DUE: Date: Thursday, October 10, 1974
Time: 2:00 p.m.
SUBJECT:
Enrolled Bill H.R. 15301 - Railroad Retirement
Act of 1974
ACTION REQUESTED:
For Necessary Action
XX For Your Recommendations
Prepare Agenda and Brief
Draft Reply
For Your Comments
Draft Remarks
REMARKS:
Please return to Kathy Tindle. - West Wing
GERALO FORD LIBRAUX
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
delay in submitting the required material, please
Warren K. Hendriks
telephone the Staff Secretary immediately.
For the President
To Worm
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
MEMORANDUM FOR THE PRESIDENT
Subject: Enrolled Bill H.R. 15301 - Railroad Retirement
Act of 1974
Sponsor - Rep. Staggers (D) W. Va.
Last Day for Action
October 12, 1974 - Saturday
Purpose
Revises the structure of the Railroad Retirement System
to implement a collective bargaining agreement between
railway labor and management; authorizes a 25-year Federal
subsidy for the retirement system and shifts responsibility
for trust fund investment policy from Treasury to the
Railroad Retirement Board.
Agency Recommendations
Office of Management and Budget
Disapproval (Veto
message attached)
Department of the Treasury
Disapproval
Railroad Retirement Board
Approval
Department of Labor
No objection to approval
Council of Economic Advisers
No objection
Department of Health, Education,
and Welfare
Defers to other agencies
Department of Transportation
No position
Discussion
H.R. 15301 would provide for a complete revision of the
benefit and financing structure of the railroad retirement
system. The bill is the result of a four-year effort by
the Congress and the Executive Branch to resolve the
nearly bankrupt condition of the railroad retirement trust
fund. It is based on joint recommendations of railroad
labor and management after extensive negotiations, and
does not reflect the recommendations of the Executive
Branch and a study commission established in 1970 that
the system be self-financed.
FORD & LIBRARY 071839
THE WHITE HOUSE
RUSH
ACTION MEMORANDUM
WASHINGTON
LOG NO.: 636
Date: October 9, 1974
Time:
9:00 a.m.
FOR ACTION: 1974 Michael Duval
cc (for information): Warren K. Hendriks
Phil
21
Jerry Jones
Bill Timmons
Paul Theis
6k/PA
FROM THE STAFF SECRETARY
DUE: Date: Thursday, October 10, 1974
Time: 2:00 p.m.
SUBJECT:
Enrolled Bill H.R. 15301 - Railroad Retirement
Act of 1974
ACTION REQUESTED:
For Necessary Action
XX For Your Recommendations
Prepare Agenda and Brief
Draft Reply
For Your Comments
Draft Remarks
REMARKS:
Please return to Kathy Tindle. - West Wing
GLERALO FORD LIBRARY
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
delay in submitting the required material, please
Warren K. Hendriks
telephone the Staff Secretary immediately.
For the President
THE WHITE HOUSE
ACTION MEMORANDUM
WASHINGTON
LOG NO.: 636
Date: October 9, 1974
Time:
9:00 a.m.
Roser Semerad
FOR ACTION:
1
cc (for information): Warren K. Hendriks
Phil Buchen
Jerry Jones
Bill Timmons-
Paul Theis
FROM THE STAFF SECRETARY
DUE: Date: Tenteday, October 10, 1974
Time: 2:00 p.m.
SUBJECT:
Enrolled Bill H.R. 15301 - Railroad Retirement
Act of 1974
ACTION REQUESTED:
For Necessary Action
XX For Your Recommendations
Prepare Agenda and Brief
Draft Reply
For Your Comments
Draft Remarks
REMARKS:
Please return to Kathy Tindle - - West Wing
FORD i GIVEN LIBRARY
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
delay in submitting the required material, please
K. R. COLE, JR.
telephone the Staff Secretary immediately.
For the President
THE WHITE HOUSE
WASHINGTON
10/8/74
TO:
WARREN HENDRIKS
STATE
MDC
Robert D. Linder
UNITED STATES OF AMERICA
RAILROAD RETIREMENT BOARD
844 RUSH STREET
CHICAGO, ILLINOIS 60611
JAMES L. COWEN
CHAIRMAN
October 3, 1974
NEIL P. SPEIRS
WYTHE D. QUARLES. JR.
Mr. Wilfred H. Rommel
Assistant Director for Legislative Reference
Office of Management and Budget
Executive Office of the President
Washington, D.C.
20503
Dear Mr. Rommel:
This is the report of the Railroad Retirement Board on the enrolled
bill H.R. 15301.
The bill consists of six titles, the first of which would amend the
Railroad Retirement Act of 1937, in its entirety, and replace it with
a new Railroad Retirement Act, the Railroad Retirement Act of 1974,
which would become effective on January 1, 1975. With relatively
minor exceptions, the definitions in Section 1 of the proposed Act are
the same as those contained in the 1937 Act. The provisions of Sec-
tions 5, 7-18, and 20 of the proposed Act, which for the most part
relate to the administration of the railroad retirement system by the
Railroad Retirement Board, are also essentially the same as provisions
set forth in the 1937 Act.
The eligibility provisions for monthly annuities set forth in Section 2
of the proposed Act and the provisions in Section 6 for the payment of
lump-sum benefits are, with certain exceptions, the same as the corres-
ponding provisions of the present Act. In two instances, concerning
the age requirements for entitlement to employee supplemental annuities
and spouse annuities, the eligibility requirements have been liberalized
to make more effectual a 1973 amendment intended to encourage early
retirement. Also the residual lump-sum benefit, which is provided by
Section 5(f) (2) of the 1937 Act, would be retained in Section 6(c)
of the proposed Act but would be based only on compensation and service
prior to January 1, 1975. Finally, the lump-sum death benefit provided
under the proposed Act would, in most cases, be smaller than that
provided in the 1937 Act, and a new lump-sum benefit would be provided
for certain employees who have engaged, prior to 1975, in both railroad
retirement and social security employment in a particular year but
Keep Freedom in Your Future With U.S. Savings Bonds
Mr. Wilfred H. Rommel
-2-
H.R. 15301
who are not entitled to vested dual railroad retirement and social
security benefits. In essence, this latter benefit would provide a
refund of excess employment taxes paid in the past due to the lack
of coordination between the railroad retirement and social security
systems.
Section 19 of the proposed Act, which also concerns benefit eligibility
requirements, is entirely new. It would, with certain exceptions, make
future liberalizations of benefit eligibility requirements under the
Social Security Act (including those for health care benefits) and future
additions of benefits for new classes of beneficiaries under that Act
automatically applicable to railroad retirement annuitants under the
proposed Act. The exceptions referred to are generally intended to
prevent duplication of benefits and to retain eligibility requirements
which are basic to the railroad retirement system (such as the minimum
ten years of service requirement). This section would not operate to
provide annuity entitlement under the proposed Act to classes of
beneficiaries (such as divorced wives and children of living employees)
who were entitled to benefits under the Social Security Act prior to
1975 but were not then entitled to railroad retirement benefits.
Section 3 of the proposed Act contains the provisions for computing
employee annuities, and Section 4 sets forth the annuity computation
provisions for spouse and survivor annuities. An employee's regular
annuity would consist of two basic components - a social security level
component computed under the social security benefit formulas on the
basis of the employee's combined railroad and nonrailroad earnings
(this component would be reduced by the amount of any monthly social
security benefit actually paid to the employee) and a staff component
based on railroad service only. The staff component would be composed
of subcomponents based on past service (service prior to January 1,
1975, the effective date of the new Act) and future service. The past
service subcomponent would consist of two pieces: (1) an amount computed
under the present Railroad Retirement Act on the basis of railroad
service through December 31, 1974, less an imputed social security
benefit amount based only on railroad service through December 31,
1974; and (2) $1.50 for each of the employee's first ten years of
railroad service prior to 1975 plus $1.00 for each year of the employee's
railroad service prior to 1975 in excess of ten years of service -
this amount would be provided only for employees who engage in railroad
service after 1974. The future service portion of the employee's staff
benefit would be equal to the sum of one-half percent of the employee's
average monthly compensation after 1974 plus $4.00 multiplied by the
employee's years of service after 1974. Both the first piece of the
employee's past service subcomponent and the future service subcomponent
would be subject to cost-of-living adjustments due to increases in the
unadjusted Consumer Price Index during the period from September 30,
1976, through the earlier of September 30 of the year preceding the
year in which the employee's annuity begins or September 30, 1980.
Mr. Wilred H. Rommel
-3-
H.R. 15301
In addition to his regular annuity, an eligible employee would receive
a supplemental annuity (which would be considered a part of his total
staff annuity component) ranging in amount from $23.00 to $43.00.
Finally, an employee with "vested rights" to benefits under both the
Railroad Retirement Act and the Social Security Act as of a specified
date (December 31, 1974, in the case of some employees and December 31
of the year in which the employee last performed railroad service in
the case of other employees) would receive an additional benefit
amount based on his employment prior to 1975. This amount is intended
to preserve an eligible employee's "right" to such dual benefits as
had accrued prior to the effective date of the new Railroad Retirement
Act.
Spouse annuities, like employee annuities, would consist of a social
security level component plus a staff component. Generally speaking,
the amount of each component would be equal to one-half of the employee's
corresponding component (exclusive of the employee's supplemental
annuity), subject to the same spouse maximum as is contained in present
law. The social security level component would be reduced if the spouse
is entitled to a social security benefit based on either the employee's
earnings or her own earnings. The spouse would, however, receive an
additional benefit amount if she had "vested rights" to benefits under
the Railroad Retirement Act and the Social Security Act as of the
effective date of the proposed Act. The additional amount would com-
pensate, with respect to benefit rights accrued prior to 1975, for the
reduction in the social security level component of the spouse's annuity
because of her entitlement to a benefit under the Social Security Act.
The employee and spouse annuities described above would be subject to
a maximum which, in a case where the employee had maximum earnings,
would, generally speaking, limit the combined employee and spouse
annuities to the greater of (1) $1200 a month or (2) 90 percent of the
employee's taxable earnings. In addition to this maximum provision,
the proposed Act would contain two minimum provisions applicable to
employee and spouse annuities. The first of these minimums guarantees
that, in cases where the employee's annuity begins to accrue before
1983, the total of the annuities and supplemental annuity payable to
the employee and his spouse for any month under the new Act cannot be
less than the total amount that would have been payable to them for
that month under the present Act as in effect on December 31, 1974,
on the basis of the maximum monthly compensation creditable at that
time. The second minimum provision is similar to the so-called social
security minimum guaranty provision contained in the present Act.
Generally speaking, it assures that the total monthly benefits to a
retired employee and his spouse will not be less than the amount
that would have been payable to the employee's family under the Social
Security Act on the basis of his combined railroad and nonrailroad
earnings.
Mr. Wilfred H. Rommel
-4-
H.R. 15301
A survivor, like an employee and a spouse, would be entitled to a social
security level benefit under the proposed Act computed on the basis of
the deceased employee's combined railroad and nonrailroad earnings.
This benefit, like a social security survivor benefit, would be subject
to reduction if the survivor becomes entitled to a social security
benefit based on his or her own earnings. It would also be subject to
reduction by the amount of the social security level component of any
employee annuity to which the survivor may be entitled. The staff
component of the survivor annuity would be equal to 30 percent of the
social security level annuity component prior to any reduction due to
receipt of a benefit based on the survivor's own earnings. An additional
benefit amount may be payable to a widow or widower who had "vested
rights" to benefits under both the Railroad Retirement Act and the
Social Security Act on December 31, 1974. The new survivor annuity
formulas would be applicable to survivors on the benefit rolls when the
proposed Act becomes effective. These formulas would provide an increase
in benefits for most survivors since survivors who are not entitled to
benefits based on their own earnings now receive survivor annuities
equal to 110 percent of the amount that would have been payable to them
under the Social Security Act whereas under the new Act those same
survivors would receive 130 percent of that amount.
Title II of the bill provides for the benefits to be payable to railroad
retirement beneficiaries already on the rolls - railroad employees,
and their spouses and survivors, who retired prior to January 1, 1975.
Generally speaking, the benefits payable to such persons would merely
be divided into social security level components, staff components,
and additional amounts to preserve vested rights to dual benefits
without any change in the total benefit amounts previously paid,
except in the case of survivor annuities as discussed in the preceding
paragraph.
Titles III, IV, and V would amend the Social Security Act, the Railroad
Unemployment Insurance Act, and the Internal Revenue Code of 1954,
respectively, to take account of the changes made by Title I. Title VI
contains effective dates - generally, January 1, 1975.
The major change which would be made by the proposed new Railroad Retire-
ment Act concerns entitlement to dual benefits, that is, entitlement to
benefits under both the Railroad Retirement Act and the Social Security
Act on the basis of the earnings record of a single individual. Under
present law, if an individual engages in employment covered under the
Railroad Retirement Act and also engages in employment covered under
the Social Security Act, he, and his spouse, can become entitled to
benefits under both Acts, assuming, of course, that the individual has
sufficient service under each Act to meet the basic requirements to
benefit eligibility (ten years of service in the case of the Railroad
Retirement Act and a specified number of quarters of coverage, which
varies for different individuals, in the case of the Social Security
Act). The bill would eliminate this possibility of separate, largely
uncoordinated, benefit entitlement with respect to future service.
Mr. Wilfred H. Rommel
-5-
H.R. 15301
In order to accomplish the above-mentioned purpose, the railroad
retirement benefit formulas would be restructured, as discussed previously,
to provide a social security level benefit, which would be equal to the
benefit payable under the Social Security Act formulas on the basis
of an employee's combined social security and railroad retirement
earnings and service, plus a staff benefit, which would be based on
railroad service only. Since the social security level benefit payable
under the proposed Railroad Retirement Act would be reduced by the amount
of any benefit actually paid to the annuitant under the Social Security
Act, the railroad retirement annuity would supplement, rather than be
in addition to, the social security benefit. Retired persons who were
receiving separate benefits under both the Railroad Retirement Act
and the Social Security Act on the basis of a railroad employee's
earnings record prior to January 1, 1975, and nonretired persons with
"vested rights" to benefits under both Acts, would receive a "windfall"
amount which is intended to preserve rights to separate dual benefits
accrued prior to the effective date of the new Act. This "windfall"
amount would be based entirely on service prior to 1975 so that, in
effect, no dual benefits would accrue after the effective date of the
new Act. Annuitants and active railroad employees would have a "vested
right" to dual benefits for purposes of entitlement to a "windfall"
amount if they had been credited with ten or more years of service
under the Railroad Retirement Act on December 31, 1974, and had sufficient
social security credits to be fully insured under the Social Security
Act on that date. Inactive railroad employees who had ten years of
service on December 31, 1974, must have had sufficient quarters of coverage
to be fully insured under the Social Security Act as of December 31 of
the year in which they last engaged in railroad employment in order
to have had such a "vested right" to dual benefits as would entitle
them to a "windfall" amount.
Section 15(d) of the proposed Act authorizes annual appropriations
to the Railroad Retirement Account for the fiscal years 1976-2000 to
reimburse the Account for the total costs incurred (both during and
after those years) because of the payment of the above-discussed
"windfall" amounts. The amount of each such appropriation would be
determined as follows: The Railroad Retirement Board would make a
determination as to the amount which, if paid into the Account in
25 equal payments, would meet the total costs incurred due to the
payment of "windfall" amounts - current estimates are that appro-
priations at the level of $285 million a year for the 25 year period
would be sufficient for this purpose; however, the Board would re-
evaluate the yearly amount required at the time of each actuarial
valuation, that is, every three years. The amount so determined would,
each year, be reduced by an amount equal to 1/25 of the estimated
total increase in the interest income which the Railroad Retirement
Account is expected to realize during the 25 fiscal years 1976 through
2000 as a result of the new investment policy provisions contained in
Section 15(e) of the proposed Act. Thus, this increase in interest
income would be utilized to reduce the Treasury liability for the
Mr. Wilfred H. Rommel
-6-
H.R. 15301
financing of "windfall" amounts. As with the cost of "windfall"
amounts, the Board would determine the amount of the increased interest
income which the Account is expected to earn because of the new invest-
ment policy provisions and would re-evaluate this determination every
three years.
Under the new investment policy provisions referred to in the preceding
paragraph: (1) the Railroad Retirement Board, rather than the Secretary
of the Treasury, would determine what proportion of the funds in the
Railroad Retirement Account would be invested in special obligations
issued exclusively to the Account and what proportion would be invested
in interest=bearing obligations of the United States or obligations
guaranteed as to both principal and interest by the United States;
(2) specific statutory authority, not provided by present law, would
permit funds in the Account to be invested in obligations which are
lawful investments for trust funds of the United States such as FNMA
and Federal Home Loan Bank securities; and (3) the Board, rather than
the Secretary of the Treasury, would have the authority to determine what
securities should be redeemed at any time. All requests of the Board
as to purchases and redemptions would be mandatory upon the Secretary
of the Treasury. As stated, these provisions are expected to increase
the interest income earned by the funds in the Account.
A detailed, section-by-section analysis of the various sections of the
bill is set forth in pages 28-65, of the Report of the Senate Committee
on Labor and Public Welfare on H.R. 15301, Report No. 93-1163.
Views of the Board
Serious questions were first raised as to the actuarial soundness
of the railroad retirement system in 1970 at the time that con-
sideration was being given to an increase in railroad retirement
benefits. Congress established a Commission on Railroad
Retirement to study the system and its financing for the purpose
of making recommendations as to the measures necessary to
provide adequate levels of benefits on an actuarially sound basis
(Public Law 91-377). The Commission was to submit a report on
its findings and recommendations by June 30, 1971, but subsequently
received a one year extension to June 30, 1972.
Shortly after the Commission issued its report, which was received
by Congress on September 7, 1972, Congress enacted Public Law
92-460, which contained a provision instructing representatives of
railroad labor and management to enter into negotations that would
take into consideration the specific recommendations of the
Commission on Railroad Retirement and to submit a report con-
taining their mutual recommendations as to what measures should
be taken to assure the receipt of sufficient revenues to finance the
benefits provided by the Railroad Retirement Act. Pursuant to
that directive, the representatives of labor and management sub-
mitted a report, dated February 27, 1973, calling attention to the
complex issues involved and stating that substantial progress had
been made in shaping mutually agreeable recommendations. The
parties then jointly sponsored legislation which was enacted as
Public Law 93-69, approved July 10, 1973. As a result of that
legislation, the representatives of labor and management were
directed to present to Congress their joint recommendations, in
the form of a draft bill, for restructuring the railroad retirement
system in a manner which will insure its long-range actuarial
soundness. The enrolled bill H. R. 15301 implements the recom-
mendations submitted by the Joint Labor-Management Railroad
Retirement Negotiating Committee in accordance with the direc-
tive contained in Public Law 93-69.
Board Members Speirs and Quarles fully support H.R. 15301 in
its entirety. We believe that the provisions of the enrolled bill
not only meet the obligation imposed by Public Law 93-69 but,
in fact, provide the only solution to the complex problems facing
the railroad retirement system that is both practical and equitable
while at the same time being by and large noninflationary. We
recognize, however, that it will be difficult to implement the pro-
visions of H.R. 15301 expeditiously within the limits of our
present employment ceiling as established by the Office of
Management and Budget. However, these difficulties are not
insurmountable.
The Chairman of the Board believes that the bill goes a long way
towards meeting the requirements of Public Law 93-69. The bill
is probably as good as any which would be acceptable to both the
labor and management representatives. As he stated in his pre-
pared testimony at the hearings before the House and Senate
Committees, the Chairman feels that there are weaknesses in the
bill but these are not sufficiently important as to recommend a
veto. Therefore, he recommends that the bill be signed into law.
The Chairman would like to point out that the provisions of this bill
will significantly increase the administrative problems of the Board.
The bill, amongst other things, requires added coordination between
the social security and railroad retirement programs. Further, he
doubts that the Board would be able to accomplish its functions with
the present employment ceiling which it received from the Office of
Management and Budget. It is also doubtful whether the Board could
adjust its procedures to be able to implement the provisions of this
bill by January 1, 1975, although it will be able to put a few of them
into effect by that date.
The Board's budget request which was submitted to the Office of
Management and Budget on September 13, 1974, does not contain
allowances for the added benefit and administrative costs of this
bill. Thus a supplemental appropriation request will have to be
submitted.
Sincerely RtBathe yours,
FOR THE BOARD
R. F. Butler, Secretary
Effects on the Financial Condition of the System
The bill provides for a major restructuring of the railroad retirement system.
In addition to the revised benefit computation procedures, the restructuring
alters the relationship between the railroad retirement and social security
systems. Because the enactment of the bill would create an essentially new
system, cost figures are presented for the plan as a whole, and for its com-
ponents, rather than in relation to the present system.
a. The cost figures are based on data and assumptions used in connection with
the twelfth actuarial valuation of the railroad retirement system. Employee
salary scales were adjusted upward, however, because the valuation assumed
a monthly taxable ceiling of $1,000 instead of the current ceiling of $1,100.
Static conditions are assumed in that future increases in wages and prices
are not considered.
b. The bill provides for certain maximums and minimums to be applied to bene-
fits. There is a "100% overall minimum" in that retirement benefits
paid under the bill cannot be less than 100% of the social security benefits
that would be payable to the employee and his family on the basis of social
security law if all of his railroad and social security earnings were covered
under social security.
Section 3 (f) (1) provides for a maximum to be applied to the sum of
employee and spouse benefits. Under static conditions, however, the provi-
sion is virtually inoperative. Section 3 (f) (2) provides for an 8-year "guaranty"
period. Employees who retire during that period and their spouses cannot
receive less than they would have received under the Railroad Retirement
-2-
Act of 1937 as in effect on Dec. 31, 1974, on the basis of the maximum
monthly compensation creditable at that time. It is estimated that the cost
of this guaranty provision will be negligible.
C. Cost figures for components of benefits to nonretired employees and future
entrants are shown in table 1. The costs shown are costs to the railroad
retirement system in excess of the amounts that will be reimbursed to the
railroad retirement system through the financial interchange with social
security. In other words, the figures reflect the costs for providing
the full benefit that the annuitant will receive less the social security
benefit computed on the basis of combined railroad retirement and social
security earnings.
d. Costs and cost reductions arise from other differences between social
security law and the provisions of the bill. From a cost standpoint, the
principal areas are the following:
(1) Employees with 30 or more years of service who retire after June 30,
1974 at the age of 60 or above ("60 with 30" employees) will be con-
sidered eligible for an unreduced social security benefit based on
combined railroad retirement and social security earnings. Spouses
of such employees will be entitled to an unreduced social security
spouse annuity if they are age 60 or above.
(2) Occupational disability retirees are deemed to be totally and permanently
disabled for the purpose of calculating their social security benefits on
combined earnings.
(3) There is no 5-month waiting period for disability retirement benefits.
(4) The imputed social security spouse benefit based on the employee's
combined earnings is subject to the railroad retirement age reduction
-3-
factor of 1/180 for each month the spouse is below age 65 rather than
to the social security age reduction factor of 1/144.
(5) Social security benefits based on the employee's combined earnings will
not be paid to categories of beneficiaries not eligible for railroad
retirement benefits under the bill.
(6) Persons who have completed 10 years of railroad retirement service but who
are not eligible for a windfall benefit may obtain a refund of excess
social security taxes (assuming past railroad retirement taxes to be
applicable to social security) paid during the years 1951 through 1974
inclusive under the provisions of section 6(d).
e. In general, beneficiaries on the rolls on Dec. 31, 1974 will recéive the
same amount under the bill that they were receiving under the Railroad
Retirement Act of 1937. Survivors, however, will be guaranteed a total
benefit of at least 130% of the amount payable under social security law
based on the employee's combined earnings. At present, the guarantee is
110% of that amount.
f. Beneficiaries on the rolls on Dec. 31, 1974 who are receiving a supple-
mental annuity under the 1937 Act will continue on the $45 to $70 benefit
schedule. However, beneficiaries on the rolls on Dec. 31, 1974 who are
under 65 on that date and will begin- to receive a supplemental annuity after
Jan. 1, 1975 will be paid at the $23 to $43 rate. Contributions for supple-
mental annuities will be made on a pay-as-you-go basis in amounts sufficient
to pay benefits at the 1937 Act levels to all present and future recipients.
However, those taxes which are not required to pay supplemental annuity
benefits to employees retiring after Dec. 31, 1974 because of the lower
benefit schedule of the present bill will be credited to the regular railroad
-4-
retirement account rather than to the railroad retirement supplemental
account.
g. Table 2 presents an actuarial balance sheet for the railroad retirement
system under the provisions of the bill. In addition to financing from
the funds on hand and income from investments, the financial interchange,
and presently legislated taxes, the bill calls for an assumption of the
cost of windfall benefits by the general funds of the Treasury. The cost
of the windfall ás defined in the bill is estimated at 3.64% of taxable
railroad payroll or a total present value of $3.8 billion. The bill pro-
vides for the amortization of this amount by a payment in each fiscal year
from 1976 to 2000. The amount of each payment is $285 million reduced by
a level amount which will approximate the excess interest resulting when
the investment policy of the bill is compared to the investment policy
under the 1937 Act for the period from fiscal year 1976 to fiscal year
2000. On the basis of the above income, the actuarial deficiency of the
railroad retirement system under static conditions is .96% of payroll or
$57 million per year. These figures may be compared to the actuarial
deficiency of the present railroad retirement system which is estimated
at 9.06% of payroll or $529 million per year.
h. The twelfth valuation of the railroad retirement system and the report of
the Commission on Railroad Retirement both stated that the current railroad
retirement fund faced exhaustion in the not too distant future. In addition,
the present and potential beneficiary/employee ratio indicates the likelihood
of a cash flow problem over the next 20 years. For these reasons, table 3
shows a projection of components of the restructured railroad retirement
-5-
system from the year 1975 to the year 2000. To some extent, the projection
utilized the one prepared in the course of the valuation, but extensive
modifications were necessary to reflect the revisions contained in the
bill. Certain additional assumptions over those used in the valuation
were necessary and they introduce a degree of roughness in the final
figures.
Table 3 reflects that under the benefit and financing provisions of
the bill the combined regular and supplemental railroad retirement accounts
will decline to a balance of $625 million in the year 2000.
i. The previous discussion has been confined to static economic conditions
for a number of practical considerations. Essentially, the future course
of the railroad retirement system under "dynamic" conditions (i.e., where
there are increases in wages and prices that would activate the automatic
adjustment provisions of social security law) depends upon the nature of
those future conditions. There is some reason to believe, however, that
under the most likely patterns of future wage and price increases, the
financial position of the railroad retirement fund will be improved.
There are two major reasons for this view. First, the dynamic increases
in the railroad staff portion of the benefit are limited. Only four such
increases are provided for in the bill. Even if the number of increases
is raised, the increases will cover only certain portions of the railroad
staff benefit and are only a fraction of the rise in prices reflected by
the Consumer Price Index. Second, under dynamic conditions, taxable wages
and hence tax income, will be increasing. Projections made by the Social
Security Administration (in the 1974 Annual Report of the Trustees of OASDI)
-6-
indicate that the rise in income will be appreciably greater than the
rise in benefits produced by the cost-of-living adjustment formulas given
in the bill.
j. The cost figures presented make no allowance for the provisions of section
19 of the bill which extend to railroad retirement annuitants certain classes
of benefit liberalizations if those liberalizations are made part of social
security law. At the present time, there is no way to anticipate the nature
of any such liberalizations.
Table 1. Costs in excess of financial interchange reimbursements
for nonretired employees and future entrants under the restructured
railroad retirement system - static conditions
Equivalent level cost
Level annual
Percent of
amount
Item
payroll
(millions)
1.
Employees
7.52%
$439
(a) Basic past service benefit
3.31
193
(b) Additional amount on past service ($1.50
per year for the first 10 years, $1.00
per year for subsequent years of past
service)
.77
45
(c) Future service benefit
2.56
150
(d) Supplemental annuity ($23-$43)
.88
51
2. Spouses
.63
37
3.
Survivors
1.60
94
(a) Aged widows (30% of the social
security benefit on the employee's
combined earnings)
1.01
59
(b) Other survivors
.42
25
(c) Insurance lump sums
.02
1
(d) Residual payments
.15
9
4. Windfall benefits, gross amount before the
offset against the basic past service
benefit
1.35
79
(a) Active employees
.48
28
(b) Inactive employees
.22
13
(c) Spouses
.57
33
(d) Survivors
.08
5
5.
Costs in regard to a 100% overall minimum
provision for active and inactive em-
ployees and their families
.12
7
6. Costs in regard to certain relationships
1.26
74
between the railroad retirement and
social security systems
(a) Financial interchange for railroad
retirement ineligible beneficiaries
-.45
-26
(b) Providing social security benefits to
railroad retirement ineligible bene-
ficiaries based on social security
earnings
.20
12
Table 1 (continued)
Equivalent level cost
Level annual
Percent of
amount
Item
payroll
(millions)
(c)
Imputing a full social security
benefit to 60 with 30 retirees
.67
39
(d)
Imputing a full social security
spouse benefit at age 60 to
spouses of 60 with 30 retirees
.33
19
(e) Imputing a full social security
benefit in occupational disa-
bility cases
.32
19
(f) Imputing full social security
benefits in total and permanent
disability cases during the 5
month waiting period
.12
7
(g) Allowing the railroad retirement
rather than the social security
age reduction in social security
level benefits to spouses
.04
2
(h) Refund of excess taxes
.03
2
7.
Total, items 1 through 6
12.48
730
1/This cost is net after the reduction for the offset in the basic past
service benefit for the amount of the social security benefit on social
security earnings before the changeover date.
2/Includes the cost of allowing a reduced annuity to a spouse at 62 when
the employee is 62.
Note: A minus sign indicates a cost reduction. The level taxable payroll
is $5,840 million per year based on an $1,100 monthly ceiling. The
term "full" benefit as used here corresponds to a disability "freeze"
benefit, i.e., a social security benefit calculated using a
retirement date computation point.
Table 2. Actuarial balance sheet for the restructured
railroad retirement system (under static conditions)
Equivalent level cost
Level annual
Percent of
amount
Item
payroll
(millions)
a. Funds on hand, accrual basis
5.26%
$307
(1) Regular account
5.22
305
(2) Supplemental account
.04
2
b. Benefits to retired and deceased
employees
8.38
489
(1) Net costs with 110% overall minimum
a to survivors
6.59
385
(2) Additional costs of raising overall
minimum guarantee for survivors
to 130% for beneficiaries on the
rolls
1.22
71
(3) Cost of continuing supplemental
annuity to employees on the rolls
.57
33
c. Initial deficit (b - a)
3.12
182
d. Benefits with respect to active and
inactive employees and new entrants
(from table 1, item 7)
12.48
730
e. Administrative expenses
.10
6
f. Elimination of interchange with RUIA
-.07
-4
g. Total cost of plan in excess of financial
interchange reimbursements (c + d + e + 1 f)
15.63
914
h. Funding
14.67
857
(1) Net railroad retirement tax rate
9.25
540
(2) Level supplemental tax rate
1.78
104
(i) Applied to the railroad
retirement account
.33
19
(ii) Applied to the supplemental
annuity account
1.45
85
(3) Reimbursement for windfall phase-out
costs
3.64
213
(i) With respect to nonretired em-
ployees (from table 1, item 4)
1.35
79
(ii) For employees on the rolls and their
spouses
2.01
118
(iii) For survivors of retired and de-
ceased employees
.28
16
Table 2 (continued)
Equivalent level cost
Level annual
Percent of
amount
<Item
payroll
(millions)
i. Deficit under static conditions
(g - h)
.96
57
1/The railroad tax rate of 9.5% of taxable payroll reduced by .25%. The
reduction reflects that railroad retirement transfers to social security
more than it collects in social security taxes because of the difference
between the monthly and annual bases.
Note: A minus sign indicates a cost reduction. The level taxable payroll
is $5,840 million per year based on an $1,100 monthly ceiling.
Table 3. Projection of components of the railroad retirement system,
1975-200; static conditions
(Dollar amounts in millions)
Supplemental
Gain from
Benefit
RR tax
annuity
financial
Windfall re-
Fund5/
Year
outgo¹/
income
taxes
interchange3
imbursement
1975
$3,135
$1,230
$110
$1,145
$250
$3,810
1976
3,135
1,190
115
1,180
250
3,700
1977
3,120
1,155
120
1,185
250
3,565
1978
3,105
1,120
125
1,190
250
3,400
1979
3,095
1,100
125
1,190
250
3,205
1980
3,075
1,075
130
1,190
250
2,985
1981
3,055
1,055
130
1,175
250
2,725
1982
3,040
1,055
135
1,160
250
2,450
1983
3,025
1,055
135
1,140
250
2,150
1984
3,005
1,055
135
1,115
250
1,820
1985
2,970
1,055
140
1,095
250
1,490
1990
2,580
1,055
130
1,030
250
360
1995
2,145
1,055
115
755
250
100
2000
1,790
1,055
80
540
250
625
1/
All benefits derived from both railroad retirement and social security earnings
including supplemental annuity and windfall amounts less any concurrent benefits
based on social security wages only.
The tax rate of 19.40% applied to each year's taxable payroll.
The gain from financial interchange is equivalent to social security benefits on
combined earnings less social security taxes on railroad earnings less concurrent
benefits based on social security wages only.
This is the amount needed to finance the entire windfall liability by level pay-
ments from fiscal year 1976 to fiscal year 2000. Each payment is reduced by a
level amount derived from the excess interest gained by comparing the actual
interest earned under the bill with the interest under the investment policy of
the 1937 Act.
The combined regular and supplemental accounts. The fund begins with $3,900
million at the end of 1974 and the interest rate used begins at approximately
the level anticipated under the investment policy of the bill and decreases to
the twelfth valuation rate of 5 3/4%.
OF
THE TREASURY THE DEPARTMENT
THE GENERAL COUNSEL OF THE TREASURY
WASHINGTON, D.C. 20220
1789
OCT 4 1974
Director, Office of Management and Budget
Executive Office of the President
Washington, D. C. 20503
Attention: Assistant Director for Legislative
Reference
Sir:
Reference is made to your request for the views of this
Department on the enrolled enactment of H.R. 15301, "To amend
the Railroad Retirement Act of 1937 to revise the retirement
system for employees of employers covered thereunder, and for
other purposes."
Under existing law, the Secretary of the Treasury has the
responsibility for investing the Railroad Retirement Accounts,
which he may do either by issuing special Treasury obligations
directly to the Accounts or by buying Government obligations in
the market. The Secretary has this responsibility for Government
trust funds totalling over $140 billion as well as for the $4.4
billion Railroad Retirement Accounts. It has been the policy
of all Secretaries to carry out this authority in the main by
issuing special obligations directly to funds, because under any
other policy the purchase and sale in the market of some $7 billion
of obligations each month would have catastrophic effects on the
market. The special obligations issued directly to the funds bear
interest rates that are the equivalent of the average of market
yields on longer-term marketable Treasury obligations.
Section 15 of the enrolled enactment would change this
statutory arrangement by shifting to the Railroad Retirement Board
the function of deciding whether to invest in special obligations
or marketable issues, the function of fixing the maturities of
special obligations when they are used, and the function of
deciding which special obligations to redeem when disbursements
are made. This shift is apparently proposed in order to enable
the Railroad Retirement Board to do several things the Secretary
of the Treasury has resisted as unwise. For one thing, it would
give the Railroad Retirement Board powers which could make its
operations the single largest factor in the Government securities
market, with average monthly market purchases of $200 million but
-2-
reaching as much as $1.2 billion in May, and average monthly market
sales in about the same amount. Even though it is not likely that
the Board would exercise these powers to their full extent, because
the authority the bill would give the Board to use special issues
would ordinarily be so advantageous to it, the use of the powers
could have such severely adverse effects on the Government securities
market, with consequent upsetting effects on other markets, that
the powers should not be lodged in a body which has no responsibili-
ties for the performance of those markets.
The second authority the bill would lodge in the Board would
make it possible for it not only to lock in investments in special
issues for long terms when rates are at their peaks but also to
refund continuously into higher rates whenever rates are rising.
The bill thus resurrects a concept that was discredited during
consideration of H.R. 15733, 91st Congress, and dropped from that
legislation before its enactment in 1970. In essence the concept
is that the Congress should create by legislative fiat an "invest-
ment" program for the Railroad Retirement Accounts under which
these Accounts would get continuing long-term benefits from periods
of high interest rates but only current effects from periods of low
interest rates. Investment programs of this kind - the dream of
every portfolio manager - are not available to those who are
subject to the realities of the market place (including the Secretary
of the Treasury in his management of $140 billion of Government
trust funds in addition to the $4.4 billion Railroad Retirement
Account). In commenting on this concept in 1970, when H.R. 15733
was being considered by the Congress, the Treasury aptly characterized
it as reflecting a "heads-I-win-tails-you-lose" philosophy.
While the Congress can if it wishes subsidize the railroad
retirement program, any proposed subsidy should be disclosed for
what it is so that the need for it can be debated on the merits. A
subsidy should not be provided by a sleight-of-hand "investment"
policy designed to hide the fact that the subsidy is being paid
for by the taxpayers.
The bill was amended on the House floor (the so-called "Moss
amendment" which was itself clarified by the Senate) to provide in
effect that any increased interest earnings under the proposed new
investment provisions through fiscal year 2000 shall be returned to
the general fund of the Treasury. In view of this clear expression
of Congressional intent that the railroad retirement system not
FORD
-3-
benefit from the new investment provisions until after the close
of this century and the distinctly undesirable implications of those
provisions discussed above, the new investment authority should not
be adopted.
In addition, the enrolled enactment would provide that the
excess costs of paying benefits to persons entitled to both
Railroad Retirement and Social Security benefits be met through
appropriations estimated at $285 million per year on a level-cost
basis through the year 2000. As compared to the alternatives of
reducing benefits or increasing the payroll tax or contribution
by the industry, financing the retirement fund deficit from the general
fund would be inflationary.
In view of the foregoing, the Department recommends that the
enrolled enactment be vetoed by the President.
Sincerely yours,
General Counsel
R.FORD
U.S. DEPARTMENT OF LABOR
OFFICE OF THE SECRETARY
WASHINGTON
4
NM4
Honorable Roy L. Ash
Director
Office of Management and Budget
Washington, D.C. 20503
Dear Mr. Ash:
This is in response to your request for our views on
H.R. 15301, an enrolled enactment "To amend the Railroad
Retirement Act of 1937 to revise the retirement system
for employees of employers covered thereunder, and for
other purposes."
This bill, among other things, provides for refinancing
of the Railroad Retirement Fund by payments from general
revenue. This will amount to approximately $285 million
a year until the year 2000.
With respect to the substance of the bill, this Depart
ment is not directly involved in the administration of
these laws affected; therefore, we defer to other appro-
priate agencies for detailed comment on the substance
of the bill.
However, because this bill is in fact a negotiated
agreement between the carriers and the unions, its veto
would have direct labor-management implications. In
this regard, temporary increases in benefits provided
under the Railroad Retirement Act expire on the December 31,
1974 deadline, unless this bill becomes law or the existing
law is extended.
In light of the current contract negotiations between the
railway carriers and the unions, this is of special
significance. The existing contract terminates on Jan-
uary 1, 1975. This contract covers over 500,000 em-
ployees, including the operating unions, shopcraft,
- 2 -
clerks, and maintenance of way employees. Notices of
intention to change the existing agreement have already
been exchanged under section 6 of the Railway Labor Act
and the very difficult negotiations are underway.
In light of this, we believe that negative action on this
enrolled bill will severely exacerbate the already diffi-
cult negotiations that are currently being conducted.
Sincerely,
CRALD GERALD ? FORM
THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
October 4, 1974
Dear Mr. Rommel:
The Council of Economic Advisers has no objections to
the President's signing H.R. 15301, an Act "To amend the
Railroad Retirement Act of 1937 to revise the retirement
system for employees of employers covered thereunder, and
for other purposes. 11
Sincerely,
Alan Greenspan
PORTO is LIBRAR
Mr. W. H. Rommel
Assistant Director for Legislative Reference
Office of Management and Budget
Washington, D. C. 20503
PANERICAN REVOLUTION 1776-1976 BICENTENNAL
HEALTH.
DESIGN
DEPARTMENT OF HEALTH, EDUCATION. AND WELFARE
U.S.A
Honorable Roy L. Ash
Director
OCT 4 1974
Office of Management and Budget
Washington, D. C. 20503
Dear Mr. Ash:
This is in response to Mr. Rommel's request of October 2,
1974, for a report on H.R. 15301, an enrolled bill "To
amend the Railroad Retirement Act of 1937 to revise the
retirement system for employees of employers covered
thereunder, and for other purposes."
Under section 302 of the bill, the Social Security
Administration (SSA) would be required to certify to the
Railroad Retirement Board (RRB) for payment the amount
of any social security benefits payable to railroad
workers who have at least 120 months of railroad employment
(as well as to their spouses, their survivors actually or
potentially entitled to a railroad retirement annuity,
and any person entitled to benefits on their social
security earnings record) who first become entitled to
social security benefits after 1974. After objections
to this requirement were made by the Department in a
letter to Chairman Hathaway of the Railroad Subcommittee
of the Senate Committee on Labor and Public Welfare, the
report of the Committee on Labor and Public Welfare on
H.R. 15301 was modified to specify that RRB would notify
beneficiaries of the amount payable to them under the
Social Security Act, the reasons for any changes made in
the amount, and the beneficiary's rights of appeal.
However, it appears that serious administrative problems
for SSA would still arise under the proposed provisions.
These problems are outlined below.
Honorable Roy L. Ash - Page 2
In order for SSA to effectively administer the provisions
of social security law it is vital that social security
beneficiaries be reminded of the events which might result
in a reduction, suspension, or termination of their social
security benefits. SSA of course is in the best position
to keep beneficiaries informed and to explain any adjustments
made in the social security benefit checks. Under the bill,
railroad retirement annuitants receiving social security
benefits as part of their railroad retirement annuity checks
would no doubt be confused as to which Federal agency should
get' their reports of events affecting their benefits. This
would impair communication between SSA and beneficiaries and
increase social security benefit overpayments. Also, if
social security beneficiaries were not entitled to all or
part of the social security benefit included in their railroad
retirement checks but were entitled to the railroad retirement
annuity part, they would naturally be unwilling to return
the whole check to RRB. This could also increase the
incidence of overpayments for SSA.
While certification of social security benefit amounts to
RRB would create many administrative problems for SSA there
would appear to be no counterbalancing advantages for RRB.
In most instances, RRB district offices could not explain
any adjustments to the social security benefit included in
a railroad retirement check and would have to refer the
beneficiary to a social security district office. This
would undoubtedly result in significant public relations
problems for RRB as well as SSA.
The Report of the Committee on Labor and Public Welfare
indicates that the RRB has informed the Committee that a
substantial increase (about 10 percent) in the number of
Board employees may be necessary to effect the changes the
bill would make. In our view the certification of social
security benefits to RRB for payment would contribute to
this problem by requiring the RRB to administer a provision
Honorable Roy L. Ash - Page 3
that seems neither necessary nor desirable. SSA could
much more easily supply RRB with monthly listings of these
social security benefits, rather than certifications of
the benefit amounts for payment, so that RRB would have
timely notice of the amounts by which to reduce the tier-one
railroad retirement annuities. The only advantage to the
railroad retirement system of the certification provision
is that it would disguise the fact that railroad retirement
benefits would actually be reduced by any social security
benefits payable to the railroad retirement annuitant.
In addition, it should be noted that we are by no means
certain that further analysis will not identify other,
and perhaps more serious, problems.
Because of these administrative problems the Department
has serious reservations as to the desirability of section 302
of H.R. 15301. However, we defer to other agencies
within the Executive Branch more directly concerned with
the other provisions of the bill as to the desirability
of its enactment.
Sincerely,