Honorable Harrison A. Williams, Jr. S. 2816 In order to be eligible for a widow's annuity under the present Act, a widow must be unmarried and either be 60 years of age, meet disability qualifications and be 50 years of age, or have in her care a minor child of the deceased employee entitled to a child's annuity. Once she has met these eligibility requirements, the widow must remain unmarried in order to continue to receive her widow's annuity. Because of the provision in the bill that the widow of a retired railroad employee should receive the amount payable to her husband if it is larger than the amount otherwise payable, notwithstanding any other provision of this Act," it could be interpreted that any widow who fails to meet the regular eligibility requirements for a widow's annuity would he entitled to receive a benefit in the amount of her deceased husband's annuity regardless of her age. Section 2(h)(3) of the Railroad Retirement Act of 1974 provides that any individual who is entitled to a retirement annuity or disability annuity and is also entitled, during the same month, to a widow's annuity, shall have her widow's annuity reduced by the amount of her retirement or dinability annuity if the widow or the individual on whose service her widow's annuity is based rendered no railroad service prior to 1975. Rogardless of when the applicable railroad service occurred, Section 4(1)(2) of the Act requires that the social security component of a widow's annuity paid under the Railroad Retirement Act must be reduced by the social security component of any railroad retirement or disability annuity the widow is entitled to receive on the basis of her own railroad service. Under Section 2(h) (4) of the Act, if a widow is entitled to more than one an~ nuity, based upon her statum as a widow or spouse of a railroad employee, during the same month, she is paid only the larger amount unless she elects to receive the smallar amount. The purpose of the above provisions is to prevent certain dual payments to widowa. On the basis that the guaranty applies "notwithstanding any other provision of the Act," it appeara that the widow of a retired railroad employee would be entitled to receive a benefit in the amount of her deccased husband's retirement annuity and any other retirement, disability, spouse or widow's annuity to which she might be entitled under the Railroad Retirement Act. In any event, the Act, which now provides, in effect, that survivor benefits can be paid only in cases where the employed had a current connection with the railroad industry at death, would have to be amended to insure that this requirement and the other eligibility conditions for widowa' annuities are applicable to survivor benefits which would become payable under Section 4(3) if the bill is enacted, Effects on the Financial Condition of the System The cost of the amendment would amount to about 0.88 percent of payroll or $76 million per year on a laval basis based on the assumption that the Honorab. Harrison A. Williams, Jr. S. 2816 widow's railroad retirement benefit under the guaranty would continue to be offset by any social aecurity benefit paid to the widow. However, the bill as written would seem to imply that this offset should not be made, and under this assumption the cost of the bill would be about 2 percent of payroll. Both the percent of payroll figures given above are based on the assumption that the widow would not be entitled to benefits which are specifically limited to employees (the dual bensfit vindfall and the supplemental annuity), that the ragular eligibility requiroments for widows' benefits are rotuined, and that the prohibition against certain dual paymenta to widowa mentioned Above are also retained, The cost could be substantially higher if other interpretations are made. Views of the Board 8. 2816 would appear to extend to the widows of retired railroad employeea certain benefit amounts which were intended to be provided only to career railroad employees. Moreover, the bill would provide these benefits and the other advantagea contained therein to widows of retired railroad eployees, while denying them to widovers and widows whose husbands had not retired prior to their death. The increased benefits would result in increased costs, and there is no provision in the bill for financing these additional costs; consequently, the bill would have the effect of adding to the deficit in the Railroad Retirement Account. Prior to the enactment of the Railroad Retirement Act of 1974 (Public Law 93-445, 93d Cong., approved October 16, 1974), the deficit in the Account was about 9 percent of taxable payroll. Because of concern at the size of this deficit, the Congress in Section 108 of Public Law 93-69 and Section 6 of Public Law 92-460 expressed its intent to enact legislation to reduce the actuarial deficit, and directed labor and managemont representatives to enter into negotiations for this purpose. The enactment of Public Law 93-445 resulted from thene negotiations between the repreventativen of railroad labor and management, and was approved by the Congress, and reduced the actuarial deficit to about one percent of taxable payrolls. Enactment of this bill would again increase the actuarial deficit to a serious level. Furthermore, the parties to the negotiations have agreed not to sponsor ar support any recommended changes in the Railroad Retirement Act before 1978. For the above reasons, the Board recommends that your Committee not act favorably on this bill. -4 Honorable Harrison A. Williams, Jr. S. 2816 Because this report was requested for inclusion in the transcript of the hearings which were held on S. 3662 on September 8, 1976, there has been no opportunity to submit it for clearance to the Office of Management and Budget. Copies of this report are being sent to that office concurrently with the submission of this report. Sincerely youre, R+Butler FOR THE BOARD R. F. Butlar, Secretary ACTUARIAL NOTES No. 1-76 September 1976 OFFICE OF CHIEF ACTUARY RAILROAD RETIREMENT BOARD Thirteenth Actuarial Valuation of the Railroad Retirement System The first actuarial valuation showed the condition of the system December 31, 1938. Since then the Board has produced a valuation every three years with the thirteenth being as of December 31, 1974. The thirteenth valuation will be presented in four parts, as follows: The first three parts have been completed and a limited number of copies have been distributed. These three parts will appear later in the 1976 Annual Report of the Railroad Retirement Board. When the technical supplement has been completed, it will be combined with the first three parts, published as a separate document and distributed to interested persons. The technical supplement is of interest particularly to consulting pension actuaries, many of whom make use of the Board's tables in their work. The purpose of this note is to summarize the results of this latest valuation. Supplemental Annuities Supplemental annuities are paid from a special fund called the Railroad Retirement Supplemental Account. Financing is by a cents-per-hour tax paid by the employer. The fund is on a pay-as-you-go basis with the tax rate set each quarter at enough to pay the benefits if they were all paid according to the 1937 Act. Under the old Act the monthly benefit ran from $45 to $70 depending on years -2 Since supplemental annuities are paid out of a special fund, their existence has no effect on the railroad retirement account except for the transfer, which is taken into account in both the actuarial deficiency calculations and the projections. The thirteenth valuation has a projection of the supplemental account through the year 2000. This projection shows that the cents-per-hour tax will increase from its present 12 cents to 15.75 cents in 1985, stay at that level for three years and then gradually decrease to 10 cents in the year 2000. Although there is a good chance that the future tax rates will approximate the pattern developed in the projection, it should not be assumed that the projection will prove to be a good prediction of the actual level. The reason is that the tax rate depends heavily on the level of employment and the retirement rates for the employees in the age-60-with-30-years group. Both of these things can change quickly with changes in economic conditions, technology and employee attitudes. Accurate predictions over a long period are not really possible. This is the reason that tax rate calculations are made quarterly. Regular Retirement Annuities The benefit formula divides the benefit into three parts called tier 1, tier 2 and the windfall. Tier 1 is equal to (a) the social security benefit based on the employee's covered earnings if railroad earnings had always been covered minus (b) any benefit actually paid to the beneficiary by social security. This definition of tier 1 eliminates dual benefits. However, dual benefits that are considered vested before 1975 are given back in the windfall. Tier 2 is the staff or pure railroad part of the benefit. The retirement tax is no longer split 50-50 between employer and employee. Now the employee's rate is the employee social security rate and the employer's rate is 9.5 percent more. In 1976, for example, the employee's rate is 5.85 percent and the employer's rate is 15.35 percent. Both rates include 0.9 percent earmarked for health insurance. Financial Interchange The financial interchange is designed to place the social security system in the same financial position it would be in if railroad workers had always been covered directly by social security. In order to accomplish this, the railroad retirement system pays to social security the additional taxes that social security would have collected if there were no railroad retirement system. Also, social security pays to railroad retirement the additional benefits that social security would have paid in the absence of a railroad retirement system. |