Under the Railroad Unemployment Insurance Act, an employee’s eligibility for benefits is based on taxable earnings in a calendar year and normally applies only to benefits in the benefit year starting the following July 1. Given this limited period of potential benefits, the financing of railroad unemployment and sickness benefits is essentially a short-term proposition in comparison to the financing of retirement benefits. An employee’s eligibility for unemployment or sickness benefits ceases within two years after he or she leaves railroad work, while eligibility for railroad retirement annuities continues for decades after an employee leaves the industry. Consequently, in a given series of benefit years, gradually declining rail employment is less of a factor than major recessions or work stoppages causing industry-wide unemployment on a temporary basis.

Contributions

The railroad unemployment and sickness benefit programs are financed exclusively by contributions of railroad employers, based on the taxable earnings of their employees. The employees themselves do not contribute. 

Experience-based tax rates were phased in during 1991. Each employer pays contributions at a rate which takes into consideration the employer’s actual incidence of benefit usage. Under experience rating, employers whose employees have low incidences of unemployment and sickness pay contributions at a lower rate than employers with higher levels of benefit usage. Each employer’s rate also has a component for administrative expenses and a component to cover costs shared by all employers.

In 2002, the basic tax rates on railroad employers, including covered commuter railroads, range from a minimum of 0.65 percent to a maximum of 12 percent. Also, a surcharge of 2.5 percent is added to the basic tax rates, as the Railroad Unemployment Insurance Account balance was less than $56 million but greater than zero on June 30, 2001. About three-fourths of employers are being assessed 3.15 percent in 2002 (the 0.65 percent minimum rate plus the 2.5 percent surcharge). New employers initially pay a tax of 2.71 percent in 2002, which represents the average rate paid by all employers in the period 1998-2000.

Surcharges of 1.5 percent or 2.5 percent are added to all employers’ unemployment insurance tax rates, subject to the applicable maximum rate, during any year in which the balance in the Railroad Unemployment Insurance Account as of the close of business on the preceding June 30 is less than $100 million (as indexed) but greater than zero. If the account balance is less than zero, the surcharge will be 3.5 percent. If the account balance on the preceding June 30 is above $250 million (as indexed), the excess will be refunded to the employers in the form of a rate reduction for the year through a pooled credit. Each employer’s tax rate (prior to application of individual maximum and minimum limitations) will be reduced by the ratio of the excess amount to the taxable payroll of all employers. 

The experience-based tax rates have a 12 percent maximum, or a 12.5 percent maximum if a 3.5 percent surcharge is in effect. Included in the rate is the basic rate, an administration tax rate of 0.65 percent, and, if either is applicable, the surcharge rate or the rate of the pooled credit. Since the basic employer tax rate plus any pooled credit cannot be less than zero, 0.65 percent is the minimum rate which any employer can pay.

Railroad Unemployment Insurance Account

Railroad unemployment insurance funds not needed immediately for the payment of benefits are deposited in the Railroad Unemployment Insurance Account maintained by the Treasury. This account, together with similar accounts for each State, forms a national unemployment trust fund. Deposits in the unemployment trust fund are invested by the Treasury in securities of the U.S. Government. Every quarter, the Railroad Unemployment Insurance Account and the Railroad Unemployment Insurance Administration Fund each receive a proportionate share of the interest earnings of the trust fund, based on average daily balances.

The Railroad Unemployment Insurance Administration Fund, separate from the Railroad Unemployment Insurance Account, pays the costs of administering the railroad unemployment insurance system. An amount equal to 0.65 percent of taxable payroll is set aside from railroad contributions for the Railroad Unemployment Insurance Administration Fund. Any amount in the Railroad Unemployment Insurance Administration Fund in excess of $6 million (on an accrual basis) on September 30 of any year is transferred to the Railroad Unemployment Insurance Account. 

Borrowing Authority

To ensure adequate funds in periods of high unemployment, Congress gave the Board authority in 1959 to borrow money from the Railroad Retirement Account for the payment of benefits from the Railroad Unemployment Insurance Account. 

Financial Report

The Railroad Retirement Board is required to report annually to the Congress on the financial status of the railroad unemployment insurance system. The reports must include any recommendations for financing changes which might be advisable, including any adjustment the Board recommends regarding the rates of employer contributions.

The Board’s 2002 railroad unemployment insurance financial report was generally favorable. Even as projected maximum benefit rates increase 50 percent from $50 to $75 from 2001 to 2012, experience-based contribution rates maintain solvency, except for small, short-term cash-flow deficits in 2002 and 2003. The report also predicted average employer contribution rates well below the maximum throughout the projection period, except for a periodic resumption of the surcharge required to maintain a minimum account balance. No financing changes were recommended by the Board.

 

Table 7. -- Unemployment and Sickness Insurance Program Consolidated Financing Sources, Costs and Net Position (Millions)*

	For the fiscal year ended September 30,
	2001	2000
Financing Sources:
Contributions	$50.6	$67.2
Interest income	4.0	7.6
Other	(13.9)	(14.1)
Total financing sources	40.7	60.7
Costs:
Benefit payments:
Unemployment	42.8	35.2
Sickness	51.6	41.3
Total costs	94.4	76.5
Financing sources over costs	(53.7)	(15.8)
Net position - beginning of period	93.8	109.6
Net position - end of period	$40.1	$93.8
*Prepared on an accrual basis of accounting.