I would like to thank this Committee for allowing me to appear today and share my thoughts on this matter.

As you know, railroad retirement benefits consist of two components: Tier I and Tier II. Tier I is essentially the social security benefit that would be paid based on the employee's lifetime earnings from employment under both the Railroad Retirement Act and the Social Security Act. Tier II is referred to as a "staff" benefit, similar to a private pension.

Tier I is funded through the Financial Interchange and is based on an employee/employer tax that is equal to the FICA tax, and applied to the same earnings base. Under both the Railroad Retirement Act and the Social Security Act, this tax is 7.65 percent (including the 1.45 percent Medicare tax) on the first $68,400 earned in 1998. The Financial Interchange, of course, only funds that portion of Tier I that is equal to the benefit that the individual would receive under the Social Security Act.

Tier II is funded through an additional tax of 16.1 percent for the employer and 4.9 percent for the employee on the first $50,700 earned in 1998. The Tier II tax funds not only the Tier II amounts paid to employees, spouses and eligible survivors of deceased employees but also that portion of Tier I that exceeds the social security benefit that the individual would receive under the Social Security Act. This happens when the Railroad Retirement Act provides for a benefit earlier than does the Social Security Act -- such as reduced benefits as early as age 60 or an unreduced benefit at age 62 for employees with 30 or more years of railroad service, or a lesser early retirement reduction for surviving spouses under age 62; or provides for benefits not paid under the Social Security Act -- such as Occupational Disability benefits, benefits to incarcerated felons, disability benefits to the criminally insane or drug and/or alcohol addicts, and benefits to parents of children over age 16. The amount by which Railroad Retirement Tier I benefits exceed Social Security equivalent benefits is over $700 million annually. This amount is paid entirely from the Railroad Retirement Account.

Survivor benefits, as a separate benefit, were first legislated by Congress as part of the 1946 Amendments to the Railroad Retirement Act of 1937. Prior to 1946, an employee could elect a "joint-and-survivor" benefit option which reduced the employees' benefit to provide for survivors, or if no option was elected a lump sum benefit was paid. In fiscal year 1997 the Board paid approximately $2 billion in survivor benefits. The average annuity awarded to a widow(er) in fiscal year 1997 was $900.00 a month compared with an average of $685.00 a month at Social Security. In fiscal year 1997, the Board paid approximately 197,000 survivor annuities to aged widow(er)s.

Since 1946, various amendments passed by Congress ensured that railroad retirement benefits, including survivor benefits, would exceed the amounts paid by Social Security. The 1972 Commission on Railroad Retirement Reform reported that these legislative efforts caused stress on the financial stability of the railroad retirement system. This was aggravated by the failure to either provide adequate funding or to provide offsets for the benefit increases. To provide a long term solution to RRB's financing problems, the 1972 Commission recommended that the railroad retirement benefits be split into two separate tiers: Tier I reflecting a social security benefit based on combined railroad retirement and social security covered earnings; and, Tier II reflecting a benefit in the nature of a private pension. These recommendations were enacted in the 1974 Railroad Retirement Act. It was recognized, however, that the benefits paid under Tier II must be fully supported by the taxes paid by the employees/employers.

The text of the Quinn bill, which we are discussing today, calls upon rail management, labor and retiree groups to discuss changes to widow(er)s benefits. The bill recognizes that most changes to the benefits under railroad retirement have been negotiated first between rail management and labor before congressional action. Since the changes would affect Tier II benefits -- that portion described as resembling a private pension, agreement between the parties is essential for enactment.

Our Chief Actuary estimated the real dollar effect to the Trust Fund of implementing a legislative proposal similar to the initial Quinn legislation over the next ten years to be an additional $653 million and a present value of $1.7 billion over the next 75 years. I believe that these estimates are conservative. These additional costs also must be considered in light of the already existing $700 million dollars of unrecompensed Tier 1 benefits currently paid on an annual basis.

The Board's Section 502 Report, forwarded to Congress in 1998, reported that there are no projected cash flow problems over the next 20 years. Also reported, however, was that the long-term stability of the system is still questionable and that, under the current financing structure, actual levels of employment over the coming years will determine whether additional corrective actions will be necessary such as an increase in payroll taxes or a decrease in benefits. It is important to remember that the railroad retirement system has periodically suffered financial distress due to the inadequate financing of benefit increases. Congress has had to revisit the financing of the system numerous times over the years to remedy these shortfalls. I appreciate the approach Congress is taking in this bill in seeking the cooperation of the parties so that the long-term viability of the trust funds will be ensured.

I am charged in my position as a Board member with safeguarding the Trust Funds. I believe that any increase in Tier II benefits should necessarily be offset by reductions elsewhere. Benefit liberalizations always entail an additional cost to the Trust Fund. As I stated, there are many instances where the Railroad Retirement Act pays Tier I benefits not found in the Social Security Act, or pays such benefits earlier than does Social Security. These benefits are funded entirely by the Trust Fund. I believe that the parties should be prepared to consider reducing some or all of these additional benefits in order to offset the cost of this provision. We must make sure that the Trust Funds will continue to have sufficient funds to pay future benefits to the employees who have and are now paying into this Fund. Alternatively, consideration of an increase in the tax, which in my opinion is already extremely high at 21 percent, in lieu of benefit offsets, I believe, would not be in the best interest of the industry or the employees.

I look forward to working with this Committee and the interests of rail management, labor and the retirees in discussing a fair resolution to this issue.