The Railroad Retirement Board is an independent agency in the executive branch of the United States Government which administers the Railroad Retirement and the Railroad Unemployment Insurance Acts. Under the Railroad Retirement Act, the Board pays retirement, disability, and survivor benefits based on employment in the railroad industry.

We understand that the Subcommittee has requested our testimony to aid in its consideration of a resolution introduced by Congressman Jack Quinn. This resolution urges the railroad industry, including rail labor, rail management, and railroad retiree organizations, to begin open discussions for the purpose of adequately funding an amendment to the Railroad Retirement Act to increase benefits for widows and widowers.

The Railroad Retirement Board was created in the 1930's by legislation establishing a retirement benefit program for the nation's railroad workers. Under the Railroad Retirement Act, retirement and disability annuities are paid to railroad workers with at least 10 years of railroad service. Annuities paid under the Railroad Retirement Act consist of different components called tiers. The tier I benefit is based upon both the railroad and non-railroad earnings of the railroad employee, using social security formulas, and approximates what would be payable under the Social Security Act. This amount is consequently reduced by the amount of any social security benefit also payable to the beneficiary in order to prevent duplications. Tier I payments may include benefits that are not available under social security, such as occupational disability annuities and early retirement benefits to employees with 30 years of service.

Tier II benefits payable under the Railroad Retirement Act are based on an employee's railroad service only and are computed under benefit formulas in the Railroad Retirement Act.

The Railroad Retirement Act provides for annuities to survivors of railroad employees who had at least 10 years of railroad service and a current connection with the railroad industry. An annuity for widows and widowers is comprised of a tier I benefit generally equal to the amount the widow or widower would have received under the Social Security Act and a tier II benefit equal to 50 percent of the tier II component of the railroad employee. Unlike social security, a widow or widower retiring at age 60 or 61 is deemed to be age 62, and thus suffers less of an age reduction than under social security. There is no benefit under the Social Security Act comparable to the tier II benefit for widows and widowers. In addition, a railroad widow or widower who was entitled to an annuity as a spouse in the month before the month in which the employee dies is guaranteed that the widow's or widower's annuity amount will not be less than the annuity amount the spouse previously received. In September 1997, the average amount awarded was $900, compared to about $669 under social security.

Six sources provide funding for these benefits, with payroll taxes on railroad employers and employees under the Railroad Retirement Tax Act serving as the primary source. Other sources include fund transfers under the financial interchange with the social security system; investment earnings from the trust funds; general revenue appropriations for vested dual benefit payments; income taxes on benefits; and a work hour tax paid by railroad employers under the Railroad Retirement Tax Act.

In August 1996, Congressman Jack Quinn asked the agency to comment on a possible amendment to the Railroad Retirement Act to provide for an increased annuity to widows and widowers. Congressman Quinn's proposal provided that the amount payable to the widow or widower of a deceased railroad employee would be equal to the annuity amount payable to the employee at the time of the employee's death.

In response to Congressman Quinn's inquiry, the Chief Actuary of the Railroad Retirement Board prepared an estimate of the additional costs of the proposal to the railroad retirement system over a 10-year period beginning in 1999. The estimated costs increase from $11.3 million in 1999 to $91.2 million in 2008, with a total 10-year cost of $653.7 million. The Chief Actuary's estimated actuarial present value of the additional costs to the system for the period January 1, 1999 through December 31, 2071 was $1.658 billion, which is equivalent to 0.6 percent of tier II taxable payroll.

The proposal which Congressman Quinn forwarded to the Board in August 1996 was never introduced in the Congress. Congressman Quinn has, however, introduced H. Con. Res. 52. That resolution is a non-binding resolution which would urge all parties of the railroad community, including rail labor, rail management, and railroad retiree organizations to find a suitable way to fund an amendment that would improve the survivor benefits component payable under the Railroad Retirement Act of 1974.

Of course, any increase in benefits provided under the Railroad Retirement Act increases the costs of the retirement system. At the present time, the financial condition of the railroad retirement system is good. The Board's most recent report on the actuarial status of the railroad retirement system, which was submitted to the Congress on June 8, 1998, contains generally favorable information concerning railroad retirement financing for the 25-year period from 1998 through 2022. The report notes that between 1955 and 1995, rail employment has continually declined at an irregular rate. The average rate of decline during that 40-year period was 3.8 percent. Despite that decline, the report indicates that cash flow problems arise only under the most pessimistic employment assumptions and not until 2022.

As I have indicated, substantive amendments to the Railroad Retirement Act have generally had their origins in negotiations between rail labor and management. Congressman Quinn's resolution follows this pattern by asking rail labor, rail management, and rail retiree organizations to initiate discussions of ways to improve benefits and of ways to finance any improvements. The Congressman's resolution would place the responsibility to address these matters in the hands of the constituent groups whose interests would be affected by the discussions.