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H. CON. RES. 52, MODIFYING THE RAILROAD RETIREMENT TIER II BENEFITS FOR WIDOWS AND WIDOWERS
THURSDAY, SEPTEMBER 17, 1998
U.S. House of Representatives,
Subcommittee on Railroads,
Committee on Transportation and Infrastructure
Washington, DC.
The Subcommittee met, pursuant to call, at 10 a.m., in Room 2167, Rayburn House Office Building, Hon. Bob Franks (Chairman of the subcommittee) presiding.
Mr. FRANKS. Good morning, ladies and gentlemen. I'd like to welcome all of you to the hearing.
First, I would like to take care of some housekeeping matters. I ask unanimous consent that the hearing record be held open for 30 days to allow Members to submit written questions to the witnesses and to receive written answers for inclusion in the record. Without objection, so ordered.
I ask unanimous consent that the opening statement of Mr. Shuster, the Chairman of the Transportation and Infrastructure Committee, be included in the hearing record at the appropriate point. Without objection, so ordered.
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[The statement of Mr. Shuster follows:]
[Insert here.]
Mr. FRANKS. Today's hearing on possible changes to certain Railroad Retirement benefits is designed to afford all interested parties an opportunity to discuss the issues raised by the proposal of one of our Subcommittee's Members, the gentleman from New York, Mr. Quinn.
As many of you know, this is the first hearing on the Railroad Retirement system conducted by this Subcommittee since railroad matters were transferred from the Commerce Committee to the Transportation and Infrastructure Committee back in 1995. For that reason, I view today's hearing as a double opportunity. First, it will allow the Subcommittee Members to develop a better understanding of the Railroad Retirement system, the context within which any and all legislative proposals must be evaluated.
Members need to have at least a basic understanding of the Railroad Retirement Act payroll tax base system of benefits and taxes in order to reach informed judgments about any proposed changes to existing law. Having the Railroad Retirement Board, the independent agency that administers the Retirement Act, here to testify should help Members to better understand and explore how the system works.
Second, this hearing will allow the Subcommittee to hear the views of affected parties regarding proposed increases in certain types of Railroad Retirement benefits.
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These include, in addition to the Railroad Retirement Board, the representatives of the large rail carriers, the smaller railroads, commuter railroads, the active railroad workers who, along with their employers, bear the burden of Railroad Retirement taxes, and the representatives of retirees.
It's also important that we have a thorough understanding of the fiscal implications of any possible changes to Railroad Retirement laws. We presently have only about one active railroad worker for every three retirement beneficiaries, a far lower ratio than prevails under the current Social Security system.
The industry's workforce is roughly half of what it was in the early 1980s, and the Railroad Retirement system was kept afloat in the wake of the downsizing only through some major tax increases back in 1983.
We have a responsibility to evaluate any proposed benefit increases as to how it may affect the soundness of the present system for current workers and future retirees. We should also take into account that the railroad's competitors do not pay nearly as much in Federal payroll taxes and, therefore, our legislative actions here can seriously affect the competitive balance between rail and other modes of transportation. In turn, that can heavily influence how many rail jobs continue to exist in the future.
I look forward today to an informative hearing. We will hear today that the railroad industry is not monolithic on this issue. The carriers and their employees represent a wide range of organizations and interests—large freight railroads, inter-city passenger rail, smaller short line and regional railroads and commuter rail. Potential payroll tax increases can affect each of these interests and the workers they employ quite differently, and I hope to learn more about their particular situations at today's hearing.
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Again, I would like to thank all the witnesses for making an effort to come to testify before us today, welcome Members of the Subcommittee, and would like to move to opening statements where I will first recognize the gentleman from West Virginia, my friend, Mr. Wise.
Mr. WISE. Thank you very much, Mr. Chairman, it's good to be here. And I also want to thank in many ways Mr. Quinn, who has brought us here with this resolution that I support. I'm happy that we are turning our attention today to the Railroad Retirement system which provides retirement security to the nation's retired railroad workers and their families.
In my district alone, there are 25,000 recipients of Railroad Retirement pensions. Nationwide, there are 740,000 recipients of Railroad Retirement pensions. What is not generally known is that fewer than half of these recipients, about 330,000, are actually retired railroad employees, and the balance, 410,000 people, are spouses and survivors of retired employees. Most of these spouses and survivors, of course, are women.
In the Social Security system, the standard rule for determining the benefits for spouses and widows is that the spouse gets half of the employee's benefits while the employee is alive, and then gets a pension equal to the employee after he dies. The assumption is that a widow needs as much to live on as a retired employee living alone, and the rule for Social Security embodied that assumption.
Railroad Retirement, of course, has two parts, Tier I and Tier II. Tier I is the equivalent of Social Security and follows approximately the same rules. Tier II, on the other hand, is supposed to represent the benefits of a good private pension plan, and follows own rules. Tier II provides about the same benefits for spouses that Tier I provides, but its benefits for widows are only half of Tier I. Whereas the Tier I benefit for widows is equal to what a single retiree receives, the Tier II benefit for widows is only half of what a single retiree receives. This can have a devastating impact on women struggling to manage in the wake of their husband's death.
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When I hold mobile offices, the toughest, most complex, sometimes intractable, problems that are brought to me often come from surviving spouses of railroad employees.
I have a letter from a 93-year-old woman whose husband worked for the Santa Fe Railroad for 37 years and who is trying to live on an annual pension of $4500. Another woman was receiving $1,529.20 per month while her husband was alive, but her income was cut in half when he died to $774.59. And some women don't receive any pension at all. One woman's husband had been a conductor for 35 years and was gone for days at a time working for the railroad. They decided that she would stay at home to care for their four children. At the age of 64, just before he planned to retire, he died after a short illness. His wife, however, was only 55, so she was declared too young to receive a pension. So now she must go into the workforce to try to find her first job in 30 years.
Conversely, other spouses who have worked all their lives suddenly find that the contributions they have made to Social Security all those years are worth nothing because their spouse's benefits are subtracted from the benefits they earned as employees.
In my district in West Virginia, there are many widows living on their husbands' pensions. It is a testimony to their frugality and ability to make ends meet that they have been able to live on their reduced income. Fortunately, many have the help and support of their family, churches and communities, and are able to get by.
These cases are examples of the widespread problems that women face in securing adequate retirement incomes. The Quinn resolution, which I support, addresses one aspect of this problem, it begins the discussion. This hearing is a good start on that, and I look forward to hearing from the witnesses we have here today. Thank you, Mr. Chairman.
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Mr. FRANKS. Thank you, Mr. Wise. Seeing no Members of the Subcommittee yet, although I know a number are on their way, I'd like to move to the first panel.
For our first panel, we have the membership of the Railroad Retirement Board and, as I indicated in my opening statement, this is the first time responsibilities were transferred, at least in major part, to this committee that we have had the opportunity to visit with Members of the Railroad Retirement Board.
I'd like to first present Ms. Cherryl T. Thomas, the Chair of the Railroad Retirement Board, who is being accompanied by Mr. Jerome F. Kever, the Management Member of the Railroad Retirement Board, as well as Mr. David Lucci, who is Counsel to the Labor Member of the Railroad Retirement Board.
Ms. Thomas, welcome, thank you for joining us, and we look forward to your testimony.
TESTIMONY OF CHERRYL T. THOMAS, CHAIR, RAILROAD RETIREMENT BOARD, ACCOMPANIED BY JEROME F. KEVER, MANAGEMENT MEMBER, AND DAVID LUCCI, COUNSEL TO THE LABOR MEMBER
Ms. THOMAS. Good morning, Mr. Chairman and Members of the Subcommittee. I am Cherryl T. Thomas. I am the Chair of the Railroad Retirement Board. With me this morning are Mr. Jerome F. Kever, Management Member of the Board, and Mr. David Lucci, as you stated, who is representing Mr. Speakman, who could not be with us today. Also with us are Steven Bartholow, the Board's Deputy General Counsel; Frank Buzzi, our Chief Actuary; and Mr. Martin Dickman, the Board's Inspector General. We appreciate the opportunity to appear before you this morning.
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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 1930s by legislation establishing a retirement benefit program of the nation's railroad workers. Under the Railroad Retirement Act, retirement and disability annuities are paid to railroad workers with at least ten 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. It approximates what would be payable under the Social Security Act. This amount is consequently reduced by the amount of any Social Security benefits also payable to the beneficiary in order to prevent duplication.
Tier I payments may include benefits that are not available under Social Security, such as occupational disability annuities and early railroad benefits to employees with 30 years of service.
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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 ten years of rail 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, for example, 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.
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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's 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 cost increased from $11.3 million in 1999 to $91.2 million in 2008, for a 10-year total of $653.7 million. The estimated actuarial present value of the additional costs for the period January 1, 1999, through December 31, 2071, was $1.658 million, which is equivalent of 0.6 percent of Tier II payroll. A copy of the Chief Actuary's updated cost analysis is included with my written statement as Exhibit B.
The proposal which Congressman Quinn forwarded to the Board in August 1996 was never introduced in the Congress. Congressman Quinn, however, introduced House Continuing Resolution 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. And, of course, we think this is the proper thing to do.
I would at this point entertain any questions that you may have.
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Mr. FRANKS. Ms. Thomas, thank you for your testimony.
I would invite Mr. Kever and Mr. Lucci to offer their comments.
Mr. Kever.
Mr. KEVER. Thank you, Mr. Chairman, and thank you, other Members of the Committee, for allowing me to speak on this matter today.
As previously stated and as you know, the 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.
The taxes paid for Tier II benefits represent primarily the amounts in the trust fund that the Railroad Retirement Board is responsible for investing and safekeeping, and it is currently about $16 billion.
Tier II is funded through an additional 16.1 percent for the employer and 4.9 percent for the employee on the first $50,700 earned in 1998. This is in addition to the FICA tax of 7.65 percent on the first $68,400 earned, which both the employer and the employee pay. The Tier II 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 under 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 funded by the Tier II tax.
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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, to 197,000 beneficiaries.
The text of the Quinn bill, which we are discussing today, calls upon rail labor, management and retiree groups to discuss changes to widow/widowers 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.
I believe that the Chief Actuary's estimate of an additional $653 million over ten years, with a present value of $1.7 billion over the next 75 years, is conservative. These additional costs, of course, must be considered in light of the already existing $700-plus million of unrecompensed Tier I benefits currently paid on an annual basis.
The Board's most recent Section 502 report, forwarded to Congress in 1988, 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.
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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. In view of an unfunded liability of approximately $37 billion in the system, I firmly believe that any increase in Tier II benefits should necessarily be offset by reductions elsewhere.
As I pointed out, 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, of course, 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 sufficient funds exist 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.
In conclusion, I look forward to working with the Committee in the interests of rail management, labor and retirees in discussing a fair resolution to this issue. Thank you very much, and I will be prepared to answer any questions.
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Mr. FRANKS. Thank you.
Mr. Lucci.
Mr. LUCCI. Mr. Chairman, Members of the Committee, my name is David Lucci. I am counsel to V.M. Speakman, Jr., who is the Labor Member of the Railroad Retirement Board. Mr. Speakman was scheduled to be here, he was anxious to be here. Two days ago, however, his mother fell very ill, and she is now scheduled—this morning, in fact—to have serious bypass heart surgery. He is, of course, with his mother, with his family, and asked that I be here to make a few statements on his behalf.
Mr. Speakman filed no written statement with the Committee. We feel the Chair's statement is a perfect explanation of the history of the Railroad Retirement system and of this issue, and we did not want to be redundant, and we associate ourselves with that statement.
Mr. Speakman also asked that I express for the record that he commends Congressman Quinn for this resolution, and the reason for that is that this resolution, H. Con. Res. 52, appropriately places this issue into the hands of the principal taxpayers of the Railroad Retirement system. The principal taxpayers of this system have always solved the big issues. They are the only ones to determine how these benefits should be adjusted. They are the only ones who can determine how they should be funded, whether it be through tax increases or in other ways.
Mr. Speakman pointed out because there is going to be a certain amount of testimony today saying that adjustment and survivor benefits would cost $650 million over ten years or $1.75 billion over 75 years, that this resolution before the Committee has no price tag, it costs no money. It merely states that the parties are urged to sit down and find a way to improve benefits and to fund them.
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Were this amendment something that had a price tag, of course, Mr. Speakman would insist it is its responsibility that it have proper funding. But this resolution, in fact, has no cost to it.
Finally, Mr. Speakman asked that I point out that the parties, rail labor and management, have an admirable outstanding track record for taking on the very biggest issues and resolving those issues. This system, the Railroad Retirement system, faced bankruptcy in the early 1980s. They, after agonizing and difficult negotiations, put into place the '81 and the '83 Amendments which have preserved the Railroad Retirement system.
With respect to employees alone, after those Amendments went into place, our Actuary at that time projected that the tax increases and benefit reductions undertaken by employees alone projected out to be over $1.5 trillion over the 75-year projection period. That's trillion with a ''T'', not a billion with a ''B''. Mr. Speakman points those figures out not as a way of boasting employees have done this or that or the other thing, but as a way of showing these parties can take on the issues and handle the decisions of how the burden of cost should be allocated. They have done it again and again and, for that reason, Mr. Speakman supports this resolution, asks that the Committee give it favorable consideration, and that it be passed because it puts this issue into the hands—and he uses this term constantly—into the hands of the principal taxpayers. They are the ones who, through the '81 and '83 Amendments, set what is basically the current structure today, and benefit structure, and the tax rates, including the measure by which the Tier I, as we pay under Railroad Retirement, exceeds the Social Security benefits, the $700 million. The majority of that was put in place by labor-management decisions.
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Thank you.
Mr. FRANKS. Thank you all for your testimony. Let me, if I can, begin with a couple of questions. Ms. Thomas, just listening to the three of you, it sounds as if there are some severe constraints within which these negotiations take place. I wouldn't call it exactly a zero-sum game, but if I listen correctly, I'm hearing that we've got a very serious, legitimate equity issue here about whether or not we're treating surviving spouses within this system fairly, and whether more ought to be done to make certain that they can live a viable existence after the death of a retiree. That's on the one hand.
On the other hand, we're saying that since the employees and the employers contribute to the system in some very significant ways, if we are to fund a new benefit, we will either have to reduce benefits elsewhere or increase taxes on some or all of the parties currently paying in.
Is there any other more palatable option available, or is that it?
Ms. THOMAS. Mr. Chairman, I would say that you have disseminated all the information and that is exactly it. I think what's important is the parties need to come together and talk. There is no other way to do this. You have all the information and you have certainly absorbed it correctly. We need to have people at the table to discuss how we go about doing this.
Mr. FRANKS. When other major issues have been confronted within this retirement system—because I know this hasn't been the first over the many years that this system has existed—have these negotiations been preceded by a resolution of this type being passed by the Congress?
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Ms. THOMAS. To my knowledge, no. Rail labor and management have quite a good track record of coming together to discuss the problems that face the Railroad Retirement system. So, is there a resolution necessary? No, they can come together any time and talk.
Mr. FRANKS. Mr. Kever, you indicate that while the stability of the system is relatively positive in the years ahead, that stability depends upon certain employment trends within the industry. Can you elaborate on that for just a minute?
Mr. KEVER. Well, of course, the major amount of money that comes into the Trust Fund is through the payroll taxes. And if the employment levels which have been relatively stable of recent, which we are certainly happy about, that's going to be the determining factor of whether or not the Trust Fund will have the stability in the future. Of course, while our retirees and beneficiaries are being reduced, if the payees into the system are reduced, our unfunded liability of some $37 billion could increase.
Mr. FRANKS. Thank you. Mr. Wise.
Mr. WISE. Ms. Thomas, when was the last time that management and labor came together to negotiate or to discuss changes in benefits for survivors in Railroad Retirement?
Ms. THOMAS. Mr. Wise, I cannot answer that question, I am not aware. Maybe Mr. Kever or Mr. Lucci can answer that question.
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Mr. WISE. Is anybody able to answer that?
Mr. LUCCI. The Railroad Unemployment Insurance Act was amended in 1996, and I think that was the last time there were protracted labor-management negotiations dealing with the programs we administer.
Last year, labor and management met to work out a new method for determining occupational disability annuities, that was more an administrative scheme than a statutory one. It was not a statutory one. Other than those, I don't recall recent year discussions between labor and management.
Mr. WISE. Is there any reason—this is the basic question of this hearing, I guess—is there any reason why there should not be these discussions, whether or not they are requested by resolution of Congress or initiated by the parties themselves?
Ms. THOMAS. There is every reason to have these discussions, Congressman, and that's why we support the resolution in that they should come together and talk.
Mr. WISE. Mr. Kever, in your testimony, you've said that—and let me just say that I think you've got a tough job. My understanding is you are the guy with the green eyeshade, and you've got to make this thing work with a lot of competing interest both on the social equity side as well as the financial side. So I say that going in, and I make that observation.
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Mr. Kever, in your testimony, you say that various amendments made to the Railroad Retirement system since 1946 ensure that the system's benefits ''would exceed the amounts paid by Social Security''. And then you gave a series of examples of the adverse effects of trying to make Railroad Retirement benefits exceed those of Social Security.
I guess my question is, are you suggesting there's something wrong in having Railroad Retirement benefits exceed Social Security benefits—and I'm going to follow that up, I'll tip you off right now—to ask wasn't the whole purpose of Railroad Retirement to provide a pension equal to both Social Security and a good private pension plan?
Mr. KEVER. Well, first of all, I do not think that the benefits, obviously, that it would provide are excessive, they are in addition to Social Security. My comment about the relationship between Social Security and Railroad Retirement was only to put this in an historic perspective.
Many of the increases in the Railroad Retirement system after the 1946 legislation resulted, as of that legislation, increased benefits under Social Security. These increases then were applied to Railroad Retirement. So, the Railroad Retirement is always in addition to the Social Security, it's just similar to a private pension plan.
Mr. WISE. I think we can reach agreement, can't we, that Social Security was never intended to be a retirement plan, or to be a complete retirement plan, for anybody, railroad employee or any other employee.
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Mr. KEVER. I don't know whether I can make that statement or not, Mr. Wise.
Mr. WISE. I think I can. Now, admittedly, I was not here for the creation——
Mr. KEVER. Nor was I.
Mr. WISE. ——of Social Security, nor were you, but I don't think anyone believes that it was intended to be a complete retirement plan, although, interestingly enough, I believe about two-thirds of retired persons—not in the railroad industry necessarily, but across-the-board—depend upon Social Security for almost all of their income.
Ms. Thomas, we're going to hear testimony later today that—and I'm quoting from it—''in recent years attempts to fix the problem of the Railroad Retirement system's recurring financial instability merely resulted in staving off a crisis in the near-term without putting the system on a sound basis for the long-run''. Is that an accurate characterization of the current financial status of the Trust Fund?
Ms. THOMAS. All that I have seen since I have been there, I don't think that's quite an accurate statement. The present condition of the Trust Fund is quite good, actually, and the projections that the Chief Actuary has made show that there will not be a crisis in the near future. So, I would have to try to understand what goes behind that statement, or when it was made. We think that the Trust Fund is quite sound at this point in time.
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Mr. WISE. Would anybody else care to comment on that?
Mr. LUCCI. I think that throughout the history of the Railroad Retirement system, there were situations where you had increase in benefits that perhaps were not adequately financed at the time. There was an emulation of Social Security benefits increase-for-increase. However, again, this system was restructured in '74. We had a deteriorating economy in '81 and '83, so the '74 restructuring had to be modified in '81 with increased taxes and benefit reductions, and again in '83, same way.
As a result of those, the system is in a situation today where the Actuary says there is no cash flow—and the Actuary is here and can speak to this—but my understanding, no cash flow problems under any of the assumptions we use to make our projections for the next 25 years. And under the most optimistic assumption—which, by no means, to my way of thinking, is very optimistic, it seems to be the most realistic right now—no cash flow problems of any kind for 75 years. So the system may well be in-balance.
Mr. WISE. Mr. Kever?
Mr. KEVER. Yes, I'd like to make a comment. The Trust Fund is probably in the best position it has been certainly since I have been on the Board. However, you have to always keep in mind in pension plans the amount of tax that does come in—which, of course, is determined by the number of employees and payroll that is paid in—and then the assumptions that are made, which are the interest income that we may generate on the Trust Fund as well as the increase in payroll and any increase in benefits. So, these three or four issues always come to play. They can change at any point in time. If you just think about the stock market in the last couple of weeks, perhaps that brings some realism to the numbers, and our Actuary is continuing to look at that constantly. We still have an approximate $37 billion unfunded liability that I would prefer not to forget about.
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Mr. WISE. As one, Mr. Kever, who went on vacation about two weeks ago and woke up to find that his retirement was 15 percent lower when he finished vacation than when he started—I go and Wall Street just falls apart—but, at any rate, I appreciate what you're saying.
Mr. Chairman, thank you. Mr. Chairman, I would ask unanimous consent to include the Ranking Minority Member, Mr. Oberstar's, statement in the record.
Mr. FRANKS. Without objection, so ordered.
[The statement of Mr. Oberstar follows:]
[Insert here.]
Mr. FRANKS. I'm pleased to call on the sponsor of the resolution, Mr. Quinn.
Mr. QUINN. Thank you, Mr. Chairman, and I apologize for being a few minutes late to our witnesses this morning and to the chairman and staff. I also want to say, Bob—both Bobs—I appreciate you both getting together to have a hearing on this this morning. And while it's clear, I think, to everybody I've talked to, my intentions here is—just to take a minute because I missed the beginning opening statements—is only to get the parties talking together. H. Con. Res. 52, is its single purpose—no numbers are attached, as you know, and no suggestions are made—only to get the parties talking about some concerns that have been raised to me through constituents not only in my own district—and because of my family background in railroads—but across the country. So, thanks, Mr. Chairman, I appreciate that very much.
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I want to follow-up, if I can, a little bit, Ms. Thomas, on a statement you made as I was coming in, I think, in response to a question from the Chairman as testimony was finishing, and you said that the parties, of course, are able to sit down and talk at any time, about anything, that's the whole idea.
And then I think Mr. Wise asked you and Mr. Lucci responded about discussions—the question was, when was the last time you've sat down and talked about this issue—and I think Mr. Lucci said that in 1996 you had some discussion about negotiations.
Did you talk about spousal annuities then? Did you actually talk about—when was the last time the subject has been brought up? Can anybody speak to that? Mr. Kever?
Mr. KEVER. Yes, the negotiations that Mr. Lucci referred to are for the unemployment and for occupational disability. Those are the two things that labor and management have discussed over the last two years. To my knowledge, I do not know when the last time any discussions were held about survivors, but we will certainly look into it and get back to the Committee to give you the date that it was last discussed.
Mr. QUINN. And you know where I'm going on this. I generally think that if we don't know when the last time was we talked about it, I think it might be time we talked about it now. Obviously, there's no secret here, and I don't have any other intentions than what you see, so thank you, appreciate it.
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Mr. Chairman, I don't have any other questions.
Mr. FRANKS. Mr. Quinn, thank you very much. Ladies and gentlemen, thank you for your testimony, we appreciate it very much.
Mr. FRANKS. I'd like to call forward Panel II, comprised of Mr. Clarence Monin, President, Brotherhood of Locomotive Engineers, on behalf of the Transportation Trades Department of the AFL–CIO; Mr. August W. Westphal, President, National Association of Retired and Veteran Railway Employees. I also understand that accompanying Mr. Monin will be Julia Carter, who has a personal perspective she would like to share with us.
TESTIMONY OF CLARENCE V. MONIN, PRESIDENT, BROTHERHOOD OF LOCOMOTIVE ENGINEERS, ON BEHALF OF THE RAIL LABOR DIVISION, TRANSPORTATION TRADES DEPARTMENT OF THE AFL–CIO; JULIA CARTER, WIDOW; AND AUGUST W. WESTPHAL, NATIONAL PRESIDENT, NATIONAL ASSOCIATION OF RETIRED AND VETERAN RAILWAY EMPLOYEES (NARVRE)
Mr. MONIN. Thank you, Mr. Chairman. I appreciate the opportunity to testify today on House Concurrent Resolution 52, and I think this hearing is a timely one because the benefits paid to the widows and widowers under the Railroad Retirement Act are simply not adequate and they need adjustment.
Let me begin by saying what H. Con. Res. 52 does. It tells the parties that they should begin a dialogue which would lead to an understanding about how to fund increased benefits for widows and widowers. H. Con. Res. 52 costs nothing because it only directs the parties, railroad management, labor and retirees, to figure out how to pay for this much needed increase in benefits for widows and widowers.
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I can safely say that there have been no such discussions and we would welcome them. Just like under Social Security, widows should receive 100 percent of the deceased employee's benefit amount.
We believe that the railroads are doing extremely well financially, and that their earnings would support an increase in their Tier II tax to pay for this benefit. By the same token, we understand that the railroads may not be willing to agree to such a change without the chance for discussion with rail labor. We are eager to begin discussions with them about how they should pay for this increase in benefits.
I should point out that the outstanding earnings of the railroad industry are a direct result of the enormous increase in productivity by railroad employees in recent years. It is railroad employees who have made the railroads so profitable, because they work harder and smarter, and there are far fewer of them. At the same time, railroad employees have not shared in the prosperity of the railroad industry, and this disparity could be offset by an additional contribution by the railroads to the widows and widowers of retirees.
Let me state briefly why it is important that this benefit be increased. Widows covered by Social Security receive a benefit amount which is equal to the benefit of the deceased wage earner. The same is not the case for the widow of a railroad retiree. The calculations are extremely complex and, fortunately, the Railroad Retirement Board is here to answer any technical questions, but I can tell you that the financial hardship on a widow when a railroad retiree dies can be very severe. Widows of railroad retirees see a bigger drop in their income than widows under Social Security.
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I anticipate that the railroads will tell us they cannot afford to pay for the costs of helping these widows, and that they have a whole list of items involving Railroad Retirement that they would like to talk about. We, too, have a list of important items that should be improved under Railroad Retirement, including options to the current system for workers who qualify for leaving the service after completing a service period consistent with options currently offered workers in other industries. Our primary commitment is to the current Railroad Retirement system, with the financial security that it brings to railroad workers who have given a lifetime of service to the rail industry.
We are anxious to talk to the railroads as H. Con. Res. 52 instructs us to do, and I hope we can make progress on this important item without months and years of talk about all of the other issues that lay before us with Railroad Retirement. Now is the time for rail management to sit down with rail labor and discuss solutions to this issue.
I appreciate this opportunity to express our support for H. Con. Res. 52, and I would be happy to answer any questions you may have.
If it would be—well, I know that you've recognized Ms. Carter, so at your pleasure I would ask that you give her an opportunity to make a statement.
Mr. FRANKS. Ms. Carter, please.
Ms. CARTER. I'm a widow of a railroad engineer, locomotive engineer. He worked for the Frisco Railroad for 47 years. He retired when he was 65. His annuity was around $750 a month. He lived four years after he retired. I never drew Railroad Retirement until his death. I tell you, I'm scared to death.
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Mr. FRANKS. Ma'am, this is the easiest committee to testify in front of.
Ms. CARTER. When I took my Railroad Retirement, they deemed me 62, and I thought I would get a big pension. My husband got around, as I said, $750 a month. And when I got mine, it was $390. I was so disappointed, I didn't know how in the world I was going to make it on that small amount.
Fortunately, my husband had set aside a little bit of money, and I had to watch it very carefully because I knew when it was gone I wouldn't have anymore. And my house taxes is high. The car insurance you wouldn't believe. It's hard to live on the income that I have. And I thought as much as my husband put into Railroad Retirement, that I would at least have a good pension, which did not happen.
And the years that he worked on the railroad was very hard. He was either on the road or on the engineers Extra Board, which we never knew when he was going to work. Somebody had to stay by the phone. And we had one child, and I never worked outside the home. But I had to be there to look out for my child and my husband because it was hard. And I was very disappointed, I still have not got over it.
And I know that my life is easier than some people on the railroad pension, but my life is not easy. And I do think that that should be changed.
Mr. FRANKS. Ms. Carter, let me say that you've made yourself very, very clear. We're very grateful for your having traveled here to offer your personal experience with regard to this issue, and I'm very grateful, and so are the other Members of the Committee.
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Mr. FRANKS. Mr. Westphal.
Mr. WESTPHAL. Thank you, Mr. Chairman and Members of the Subcommittee. The National Association of Retired and Veteran Railroad Employees, Inc., NARVRE, is the only Federally Chartered Railroad Retiree Organization in the industry whose sole purpose is to protest, promote, and preserve our pension system. We are pleased to appear before your Subcommittee in support of H. Con. Res. 52, the spouse minimum benefit. We thank Congressman Quinn for the introduction of the resolution which presently has in excess of 130 co-sponsors.
The history of the Railroad Retirement Board is a matter of record. NARVRE has been present for every proposed change, good or bad, since the beginning of the association between management and labor involving the funding of the Act, and since the last major change, at the request of the parties, which was adopted in 1974. Our greatest concern at this point in time is for the survivor, the widow or widower, when the retiree drawing the larger pension passes away. This is a shocking period of time for the surviving widows or widower, as the case may be. For example, the averages obtained from the Railroad Retirement Board reveal the retiree draws $1,278 a month plus $43 supplemental pension.
The average spouse benefit is $536 per month, which represents a total of $1857 for the retiree family. Then the retiree passes away. The average widow benefit today, depending upon which category one looks at, is $762, less than one-half of the family income prior to his or her death.
This proposal is not intended to affect the current widow or widower, only those who become such after the agreement and the resulting legislation amending the Act.
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Social Security presently has in place the same payment of widow benefits that we are supporting in H. Con. Res. 52. The Railroad Retirement Board Actuary reports this amendment would only increase the current tax paid by management and labor in the amount of .6 of 1 percent divided between the parties. It is important to note there has been no increase in the tax rate paid by the parties for many years. For management, it would be an opportunity to right a cruel injustice inflicted upon the spouse. For labor, it would be one of the greatest opportunities for the well being of the retired and future retiree. For the retired employee, the knowledge his or her surviving spouse would receive an annuity no less than what the retiree was receiving during the post-employment years is a blessing, indeed.
Why shouldn't the survivor receive the same consideration the widow or widower presently receives under Social Security? We urge both management and labor to begin that important dialogue to the end an agreement may be reached between the parties.
We would appreciate the Committee's consideration and support of our appeal, and I will be happy to answer any questions. Thank you very much.
Mr. FRANKS. I want to thank all the witnesses. Let me lead off with a couple of questions, if I might.
Let me first make one observation, and I probably should have brought it up while the Railroad Retirement Board was before us, but—this is difficult for folks to see in the audience—but I'd like to ask that this chart be made a part of the record. This is the Railroad Retirement Board's schematic drawing of how the system works.
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Those of us who are in Government are used to seeing a lot of dotted lines and crossing lines going to a number of different agencies and decisionmakers and stakeholders, but, Ms. Carter, you said you thought one level of benefit would be due you, and that that's not what happened.
I've got to tell you, I couldn't conceivably figure out what my benefit was within a system this complicated, and I don't know how anybody would. So, I'd like to simply make this current configuration of the system chart a part of the record.
[The information follows:]
[Insert here.]
Mr. FRANKS. Mr. Westphal, give me some history here. You indicate that NARVRE has been engaged in this discussion and a stakeholder in the outcome of all these discussions, through all the good and the bad changes that the system has seen over the decade. Tell me what the best changes have been, tell me what the bad changes were that you alluded to.
Mr. WESTPHAL. Thank you, Mr. Chairman. I don't think that there have been any bad changes, but I do recall the good changes when I was working on the railroad. At that time, the Act proposed that the employee and the employer pays a tax to support the Railroad Retirement system. And back prior to 1974, the railroad man and the railroad employer was experiencing ever increasing tax. Every year it would increase. If memory serves me correctly, it was $109 a month back in 1946–47 and up into '74. And the parties reached an agreement, or they proposed an agreement to the Congress in 1974 to change the Railroad Retirement system to create a Tier I and a Tier II. Tier I would be equal to Social Security, Tier II would be the industry pension plan. And our organization went across the country having people, our membership, support this amendment to the Railroad Retirement Act. And it was finally adopted in 1974.
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The Congress at that time even created what they called a ''vested dual benefit'', that if a person was entitled to Tier I, Social Security, and had his quarters in for Railroad Retirement, he was entitled to both. And management approached the Congress at that time that they didn't want to get involved in that. The Congress, in their wisdom, chose to go ahead with it and created what they called the ''vested dual benefit''. That was an extra income for that person that was qualified under both systems, and that was paid up—never defaulted on that, only at one time, and then they corrected that in one year. That was the one change.
And then in 1983, the organizations and labor and the Congress, in their wisdom, organized and developed and passed the law which was the Railroad Retirement Solvency Act of 1983, and that was, as I understand, a give-and-take on both parties on the taxes and everything on retirees to create what they called the Railroad Retirement Solvency Act. And that was the result of the commission appointed by the Congress to study the Railroad Retirement Act, the solvency of the Railroad Retirement Act. And as the speaker from the Railroad Retirement Board pointed out, the results of that commission, which was comprised of members of Congress, the public, labor, management, and they studied for months and months to come up with a report, and that report recognized the fact that Railroad Retirement was in a good, sound financial condition for the next 25 years, and it was conceivable to assume the pension system would be good for another 75 years even with a decrease in employment.
I might point out that there have been no—the reports of the Labor Members of the Railroad Retirement Board indicate that there have been little or no increased taxes on the parties for the last number of years because of the solvency of the Railroad Retirement Act. I'm sorry my answer was so long.
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Mr. FRANKS. Let me distill some of your answer and ask one quick follow-up question. A number of folks on the Railroad Retirement Board said that there are two ways to achieve additional funding to expand benefits. One is to increase taxes, the other is to reduce other forms of benefits. Your approach would be exclusively to increase taxes, or would it be a combination, or not?
Mr. WESTPHAL. It would be to increase taxes on the two parties because the retirees, the people who would benefit from this, have paid in their taxes and they are due over the years, many, many years. But the increase in the cost-of-living and inflation doesn't keep up with the pension that they are getting under the Act today.
Mr. FRANKS. Thank you. A quick follow-up for Mr. Monin, if I might. Mr. Monin, from your experience, what can you tell me about non-railroad pension plans in terms of requiring that the surviving spouses' benefit will be treated as it is under Social Security?
Mr. MONIN. I apologize for not being able to answer that question. I don't have an answer for you.
Mr. FRANKS. If anybody can help supply that information for the record, I'd appreciate it. If not, we can get it elsewhere, I'm certain. Mr. Wise.
Mr. WISE. Mr. Monin, the Chairman asked a good question. I guess my observation would be that for better or worse, the railroad industry has always been a bit unique, and going, I think, back to the '30s, the pension and the way it's arrived at has always been somewhat different than the private sector. Is that a fair statement?
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Mr. MONIN. That's correct.
Mr. WISE. Mr. Monin, in testimony later on, the Association of American Railroads will cite the 1990 report on the Commission on Railroad Retirement Reform, and indicate that it would prefer to discuss improvements to survivor's benefits in the context of a more general review of Railroad Retirement, including a review of the 1990 Commission's recommendations.
What I would like to ask is your view of the recommendations of the Commission, and whether its recommendations form a good basis for negotiations about improving survivor's benefits under the Railroad Retirement.
Mr. MONIN. I would certainly believe that we could reach an accord by sitting down and focusing on that issue, even though there are several other issues associated with that same 8-year-old plan. For instance, it also suggested that the railroads continue to pay the benefit or the tax for those employees that they've laid off. It also would require us to negotiate conditions on how workers who are replaced by contract workers and are taken out of the retirement system and they likewise do not pay into the system for contractors that replace railroad workers.
Mr. WISE. There's also a lot of discussion at every level, whether it's Social Security, private pensions, whatever, about allowing part of whatever the pension's fund is to be invested in the stock market. That proposal is certainly not unique to the Railroad Retirement Trust Fund, the thought being that over time, over long-term, earn higher returns than currently earned on Government bonds.
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Is this approach to earning increased revenue something that you would consider?
Mr. MONIN. Well, I'm not a money manager, I'm a locomotive engineer. I wouldn't have an adequate answer on whether or not that would be a good approach. There are certainly people here who I think would be better qualified to answer that question, but I also understand that there are current hearings under this same approach in Social Security. And I would suggest that it might be beneficial for those of us in our industry, in the Railroad Retirement system, to at least participate in those discussions or have the benefit of the findings that they are looking into this issue with Social Security.
Mr. WISE. You are absolutely correct. I think that we are all treading into this area together, whether it's Social Security, whether it's private sector pension plans, or whatever. So, you are correct.
I might make a personal observation. I mentioned earlier about my retirement, which a lot of it is in a Thrift Plan which was in the stock market. And my wife six months earlier had been on me saying we ought to get some of that into bonds and out of stock. And I pointed out to her very knowledgeably, because I had read at least two articles on it, that we were in this for the ''long-term'', so we didn't really care what happened to the market today or tomorrow. And she pointed out to me that, ''Bob, we're over 50. The long-term isn't as long as it used to be''.
[Laughter.]
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But at any rate, it sounds—am I correct, I don't want to put words in your mouth—that in the context of discussing everything, that's something that you would be willing to look at as well, without making any commitments on it.
Mr. MONIN. In our industry, with the rail management, we're very experienced at sitting down and talking and working things out. We can work this out as well.
Mr. WISE. Thank you very much.
Mr. FRANKS. Thank you. Mr. Quinn.
Mr. QUINN. Thank you, Mr. Chairman, and thank you for your testimony. And, Ms. Carter, thanks for joining us this morning, we appreciate your being here.
As someone who said at my house, my father was a railroad man for 38 years, I took some of the calls for the Extra Board. Some of the days he was supposed to be home and some days he wasn't supposed to be home, and he was there when he wasn't supposed to be so we would wait for the second time around and the calls would make their way through. So we appreciate that, and we really appreciate you coming by today to share that with us.
Mr. Monin, at one point in your testimony—and I don't suppose this is a question as much as it is an observation, as both the Chairman and the Ranking Member observed—you mentioned that even with the prosperity of the railroads that the railroad employees have not shared all that prosperity. And in the interest of fairness, I just want to point out that if we were to take a look at any table of wages that working men and women make in this country, before the next panel has a chance to do it, I just want to submit to you that I know what my father made on the railroad a long time ago, I know what he made when he retired, I know what he'd be making today, and I would only point out to you that I believe the employees have shared in some of the prosperity. I won't argue with you over how much. I won't argue with you over whether it's enough. I certainly will agree with you that we need to do something for the surviving spouses, the widows and widowers. But I for the record want to tell you that I have a hard time believing that the employees of the railroad industry haven't shared in some of the prosperity, and yet I offer this resolution here today. I don't know if you have a reaction to that or not.
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Mr. MONIN. Only a very brief one because, as testimony was given yesterday on the fatigue issue, in the Senate under Senator Hutchinson's committee. We talked about fatigue and what contributes to fatigue, and one of the things pointed out that railroad locomotive engineers are subject to 450 hours per month. And if you take the salary that some of them are earning and divide it by the number of hours that they are putting in and the number of hours that they have to be available at the opposite terminal where they are not being paid—and I know I'm saying something to you that you're very familiar with—so when you add everything in to what each of our employees are expected to do, as Ms. Carter can testify—she spent a lot of time at home by herself raising a child because her husband had to be someplace earning that money.
Mr. QUINN. Believe me, you're talking to the wrong guy, I'm not going to argue with you.
Mr. MONIN. No, this is the choir.
Mr. QUINN. And I suppose if we took our salaries and divided it by the amount of hours we work and we're by the phone waiting for anybody to call us, I suppose, you might get some different numbers.
Mr. Westphal, I want to thank you and the group of your organizations for providing me with some great information, which is why I offered this resolution, also to thank Mike Herr who I know wanted to be with us today and couldn't, if you would, for me, extend those thanks for me.
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Both of you, just again for the record, do you think if we sat down and labor and management talked about this, we could get a workable situation, Mr. Monin?
Mr. MONIN. Yes, I do.
Mr. QUINN. Mr. Westphal?
Mr. WESTPHAL. I think they could.
Mr. QUINN. They?
Mr. WESTPHAL. I think we could. I'll be there as a cheerleader.
Mr. QUINN. Thank you, I appreciate it. Mr. Chairman, thank you.
Mr. FRANKS. Thank you. Mr. Bachus.
Mr. BACHUS. Thank you, Mr. Chairman. Mr. Chairman, as you know, I'm the Chairman of another Committee, and we had a hearing. I want to apologize to Ms. Carter. We're from the same town, and I have read her testimony. I understand she said she was a little nervous in testifying, but I wanted to welcome her to the hearing as her Congressman, and also to tell all three of you panelists that my grandmother was a widow of a locomotive engineer, which makes my granddad a locomotive engineer, and he worked for the Southern Railroad. My grandmother, one of her brothers worked for the Seaboard Railroad, and one of my cousins worked for the Frisco Railroad—he was a cousin but they were all lots older than I was, and I've been in a lot of discussions on which was the best railroad with them, fighting back and forth, but I do know that at that time, that if you worked for the railroad that was one of the best jobs in the community, and you did work very hard. There was an awful lot of risk. It was one of the most dangerous jobs in the community. You were subject to being called at all times, night and day. It was hard on family life.
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And it does concern me that the widows of these men who worked 40, 50, sometimes 55 years, I'm sure that their husbands thought that they were providing the very best retirement and benefits for them and they would never have to worry about anything. It does concern me that Ms. Carter and others now, that every month it is a struggle, and I certainly hope that the Congress can address this. And I certainly appreciate her coming because it reminds us once again that these aren't abstract statistics, they are actually our grandmothers and our neighbors, and they are us. And they are people that worked very hard because the railroads really did the business of the country. So, I want to tell her how much I appreciate her coming up here. She makes a very good appearance. I think she represents the widows of locomotive engineers very well, and I thank you for being here.
Mr. FRANKS. I'd like to thank the witnesses very much.
I'd like to now move to Panel III, where we will have Mr. Edward Hamberger, Chairman and CEO of the Association of American Railroads; Mr. Gerald Hanas, General Manager, Northern Indiana Commuter Transportation District, on behalf of APTA, and Mr. Mike Ogborn, Managing Director, OmniTRAX, Inc., on behalf of the American Short Line and Regional Railroad Association.
Gentlemen, welcome, thank you for attending this morning.
Mr. Hamberger, welcome, would you like to lead.
TESTIMONY OF EDWARD R. HAMBERGER, PRESIDENT AND CEO, ASSOCIATION OF AMERICAN RAILROADS; GERALD R. HANAS, GENERAL MANAGER, NORTHERN INDIANA COMMUTER TRANSPORTATION DISTRICT, ON BEHALF OF THE AMERICAN PUBLIC TRANSIT ASSOCIATION; AND MIKE OGBORN, MANAGING DIRECTOR, OMNITRAX, INC., ON BEHALF OF THE AMERICAN SHORT LINE AND REGIONAL RAILROAD ASSOCIATION
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Mr. HAMBERGER. Thank you, Mr. Chairman. I do appreciate the opportunity to be here. I have to say that it's a pleasure. This is the first hearing I've had the experience of participating in as the President of the Association of American Railroads and I'm pleased that it's about an issue as simple as Railroad Retirement. Seriously though, I do appreciate the opportunity to be here.
I am going to go into more detail in my statement—I'd ask your consent that my entire statement be made a part of the record—but I really just wanted to build on what was said by the previous panel, by President Monin, the President of the Brotherhood of Locomotive Engineers. That was exciting testimony for us because we have been trying to get together—I know Bob Allen of the National Rail Labor Conference has been in touch with his counterpart with labor, Dan Pickett, the head of Railway Signalmen. I believe they are in discussions now trying to schedule meetings. We're pleased that President Monin supports those and that he believes that one of the issues that should be on the table is, in fact, not just the benefit side, but also what happens with the money that is collected. The fact of the matter is that because of both the Tier I and Tier II benefits, railroad labor—the employee—and management pay 36 percent of the industry's payroll in a tax to pay for retirement benefits, far more than any other industry in this country. So, I think it's important that we look at the benefits, but we also need to take a look at what happens to that money when it goes into the good keeping of our friends at the Railroad Retirement Board.
It is currently, as you know, only allowed to be invested in Government-backed securities. I believe basically we're in T-bills, earning somewhere short of 6 percent per year. Any money manager could beat that, I would think. If we could get the return up to 8 or 9 percent—not outrageous returns—the amount of money that would be available to pay for benefits would increase and, Mr. Chairman, in answer to your question, that is one more way to pay for these benefits. It's not an increase in taxes, which we obviously would vigorously oppose, and it's not a cut in other benefits, which perhaps the retirees would not appreciate, but it is a third way, and that is an increase to the corpus. We are delighted again that President Monin thinks that this should be taken a look at by Congress in the context of what's going to happen to Social Security. We support that. We want to do it. We look forward to sitting down with him and his brothers to see what we can work out. Thank you.
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Mr. FRANKS. Mr. Ogborn.
Mr. OGBORN. Thank you, Mr. Chairman. As you know, I'm Mike Ogborn, and I'm the Managing Director of OmniTRAX, Inc., which is a Denver, Colorado-based holding company which owns and operates 13 shortline railroads in the United States and Canada. I am here today representing the American Shortline and Regional Railroad Association, which represents approximately 550 regional and shortline railroads around the United States. I am also Chairman of the Association's Railroad Retirement Issues Committee.
There are three points I would like to cover today in relation to my time. The first is that our Association strongly supports the view of the Association of American Railroads and also those of Mr. Kever, that the concurrent resolution benefits, if they are to be made equivalent to Social Security benefits, they should be made equivalent across-the-board.
If Congress is only going to address those benefits where there would be a change and an increase in the cost of the Trust Fund, then Congress needs to offset those costs somewhere else in this scheme.
While we join with the AAR in applauding the resolution's assertion that any increase in benefits requires no outside contributions from American taxpayers, we respectfully submit that ''saying so don't make it so''.
As Mr. Kever says in his testimony, ''benefit liberalizations always entail an additional cost to the Trust Fund''. History will bear this out.
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As you study this issue and the system, you will confront such terms as ''dual benefits'', ''early retirement benefits'', ''liberalized disability benefits'', and ''orphan and stepchildren benefits''. What you will find in each of these instances is that additional benefits were imposed on the system by Congress and are one of the reasons we are burdened with such a high Tier II tax rate.
Second issue or point that I would like to make and emphasize to the Committee is one of the great difficulties of the Class II and II railroads is that with the way decisions are made on Railroad Retirement, we have not been involved in the decisionmaking, and it is a problem for us still in this resolution.
In previous years when Congress called on rail labor and rail management to negotiate these matters, the small railroads did not have a seat at that table. This is not meant to be a criticism of the Class I railroads, it's simply a reflection of where we have been historically and where we sit in the system today.
We believe that the small railroads need to be part of the process both in defining the issues and in reaching accommodation on negotiated legislation, if that is the course we are going to follow.
Approximately 65 percent of the ASLRRA's members' properties are not unionized. These companies negotiate their own contracts with their own economics, which are far different than the Class I economics. All of our members run on light density lines that had been, or would have been, abandoned by Class I railroads, and that all those lines do require significant investments to eliminate deferred maintenance and bring them up to standard.
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We are competing head-to-head with truck traffic for carload traffic, a competitor of ours that does not pay the additional 16.1 percent cost of a private pension system—they don't have that—is an unfair balance, in our opinion.
My third point relates to our past inability to have an impact on the process. That really is interrelated with the first. However, I will add to that and say that rather than piecemeal this process and look at only one aspect, which is the resolution today, I believe, our Association believes, that you should look at the entirety of this Railroad Retirement Trust Fund, and we should encourage the Committee to undertake an effort to privatize Tier II of the Railroad Retirement.
I know that with today's stock market gyrations, Social Security privatization has taken on some heavy baggage, but let's be very clear on one point—Tier II is not Social Security. Tier II is the equivalent of a private pension plan for the railroad industry, and we are the only industry in this country treated in this manner.
As a federal mandate, and one that we don't control, it eliminates our companies—that is, our Association's abilities—to deal rationally with our cost structures. We believe it is unfair and discriminatory treatment that Congress has never seen fit to impose on any of our competitors. That needs to be looked at.
We realize that because of the long existence of this plan and this Tier II structure, that individual employees and retirees have become dependent upon that system and the promises that have been made over the years, and that cannot be ignored. And we believe that with that in mind, one of the solutions to this could be that there should be a division, and that the existing employees should be treated under Tier II just as they have been with the benefits, and that a new system be put into place in relation to new hires.
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I know that this resolution is not in front of you in terms of dealing with the entirety of the Railroad Retirement system, but I do think that you cannot look at just one piece and ignore all the rest. I do think it's important not only that we look at the entirety of the Railroad Retirement system as an industry, but that we look at it in context of Social Security changes also.
Our proposals, simply stated, are that we believe that there should be an elimination of all differences between Tier I and Social Security; there should be a continuation of Tier II and its benefit levels for all existing retirees and employees hired prior to the adoption of a new Tier II plan; we believe that there should be a creation of a new Tier II plan for all new-hires for contributions and benefits are a matter of negotiation between the employees and the employers on individual properties; and, finally, making the so-called ''orphans and stepchildren'' of the current system the financial responsibility of the Federal Government, whose policies created them in the first place.
Thank you for the opportunity to appear today. I submit my written statement, and be glad to answer any questions.
Mr. FRANKS. Thank you.
Mr. Hanas.
Mr. HANAS. Thank you, Mr. Chairman, and good morning to all the Members. We appreciate the opportunity to testify here this morning. I represent the American Public Transit Association and its member commuter railroads that operate service across the country and that are members of the Railroad Retirement system. I'm also General Manager of the Northern Indiana Commuter Rail Property that operates in Northern Indiana.
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We are happy to talk about the House Resolution 52, and we have submitted comments accordingly and know that those will be put in the record, so I will simply highlight some of our comments that we have brought to you this morning.
From a financial perspective, the first thing I would tell you that the commuter railroads have discussed for many years is that this system for us is an expensive system to be in. It's costly not only to the employer, but to the employee. Under 1998 rates, a hypothetical employee with an annual salary of $40,000 would cost my agency $9500 in Tier I and Tier II Railroad Retirement benefits, plus Medicare, of course. Were that employee covered under Social Security and the Indiana Public Employees Retirement Fund, that cost to us would be $5,260, nearly a 45 percent difference in cost, and that's very much of a burden to us in our annual operating deficit.
I might add that if the employee were covered under FICA and PERF—Indiana PERF, that is—that they would receive, as Mr. Wise said, would not be dependent entirely on Social Security as a retirement income, but would be part of a defined benefit pension program that over time would yield more benefits than the current Railroad Retirement system. So, despite the fact that it's more expensive, it would yield less benefits over time.
We would also note that specifically on House Resolution 52—just a very quick comment—that it's our experience, and certainly has been across the country, that under normal pension programs that are defined benefit plans, an employee who at the time of retirement can take an election to provide spouse survival benefit options, but that usually includes a small reduction in the initial benefit. So there are industrial and ERISA standards that account for these kinds of actions that currently Railroad Retirement does not consider.
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And also let me emphasize that House Resolution 52 includes a statement that no outside contributions from the American taxpayer are needed, and any changes will be paid for from within the railroad industry itself. It should be noted that commuter railroads are public tax supported entities and do pass on these expenses attributable to the Railroad Retirement system to our riding public and to our taxpayers at the state and local levels because we are, by our very nature, a subsidized operation.
I would tell you that the commuter railroads are very interested in equity considerations here in the Railroad Retirement system in general as well as the specific proposal in 52. The Railroad Retirement system, pure and simple, has a numbers problem, with one active worker supporting three retired workers. That's not a healthy ratio. It's worse than the Social Security system, and there has been much discussion about its future.
The Railroad Retirement Board has projections under a worse case scenario, that that number could go up to 1-to-5, meaning that the situation would grow worse and possibly forcing some additional tax increases.
Let me emphasize that we are happy, as management, labor and retirees, to participate in that discussion with respect to spouse survival recommendations, that we would urge Congress not to consider these highly particular issues but rather consider it as an overall Railroad Retirement Reform possibly in connection with Social Security, and that we're very interested in an item 5, that we think Railroad Retirement should very much consider an experience rating to base their tax payments on rather than looking at the system as they do today, that beneficiaries and number of employees should both be included.
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Commuter railroad employment has been very stable over the last ten to 15 years and, were it not for the public agencies, this system would be in worse shape because the employees would not be part of the commuter rail system. Freight systems, obviously, have had dramatic decreases in employment, and we don't dispute why that's been done, but there should be some actuarial liability assessed to those employers for active members and deferred vested members. Otherwise, commuter railroads are being assessed for a workforce that they are not really a part of. I would leave you with that.
Mr. FRANKS. Mr. Hanas—excuse me—all of your statement will be included for purposes of the record, so you haven't missed anything. You all heard the bells just go off. We have a vote on the Floor. We have decided to try to limit our questions, and if you would limit your answers to about 30 seconds to 45 seconds, and with everybody having the right to reserve the opportunity to give us more full explanations to any of these questions. I don't think it would be worth us going to the Floor and coming back to reconvene since you three are the last panel.
Mr. WISE. The Chairman has just offered an incredible deal, three minutes of questions and answers and out of here, or you can sit for 30 minutes more. [Laughter.]
Mr. FRANKS. Mr. Hamberger, the testimony of Mr. Monin indicates that railroads are doing so well financially today that they can afford increase in Tier II taxes. In 45 seconds, can you answer that?
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Mr. HAMBERGER. There are two sides to the answer, number one, a 36 percent tax is already being paid by both labor and employees, 16.1 percent by the employer on top of the current Social Security tax. Secondly, I'm not sure we're doing as well as everyone thinks. I would also point to Union Pacific which has had three red quarters in a row. Not everybody in the industry is doing as well as everybody would say. There's some discussion about what revenue adequacy really means, but suffice it to say that the STB has found only three of the Class I railroads' revenue adequate, the rest not.
Mr. FRANKS. Mr. Ogborn, quickly, we all recognize that railroads are in competition with other modes of transportation, most notably trucks. Do you have, or could you submit for the record, any independent information that you have gathered that shows the relative taxing burden on trucking industry that we should consider in terms of truck pension plans and the cost of those plans to that industry?
Mr. OGBORN. We can submit that.
Mr. HAMBERGER. We'd be delighted to help.
Mr. FRANKS. I appreciate it. Mr. Wise.
Mr. WISE. Mr. Hanas, since I quoted from your remarks earlier with the previous panel, am I correct that I believe you answered some of that about why you feel that the Railroad Retirement system is not on as sound a basis as perhaps might have been suggested.
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Mr. HANAS. Again, we think it's a definite numbers problem when you have one active worker trying to take care of the needs of three retirees, it's difficult, and those expectations can't be met.
Mr. WISE. Mr. Hamberger, based on what you've heard here, it seems to me that there are some grounds for discussion, and that both sides have indicated a willingness to look at issues that perhaps in the past weren't on the table. Is that a fair statement?
Mr. HAMBERGER. Absolutely. We would like, when we meet, to consider not only the survivor annuity benefits, but the entire spectrum of issues facing us.
Mr. WISE. Thank you very much.
Mr. FRANKS. Thank you. Mr. Quinn.
Mr. QUINN. Thank you, Mr. Chairman. Mr. Hanas, you make an excellent point about the fact that there is some public subsidy already in the transportation business, and that was not thought of by any of us, and I appreciate that very much.
I guess Mr. Wise sort of asked the question of all three of you gentlemen, I asked it of the other panels, do you think we can make some headway on this and other issues, Mr. Hamberger, as you point out, if we're willing to sit down and have some discussion?
Mr. HAMBERGER. Yes, and let me just thank you and the co-sponsors of the resolution, for recognizing that it is important for us to sit down and work this out.
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Mr. QUINN. Important, and I think timely, as we've noted, if nothing else came home this morning, this hasn't been visited in quite some time, and maybe now is the time to do that. And I appreciate your willingness to give us a hand with it, all of you. Thank you, Mr. Chairman.
Mr. FRANKS. On that note of cooperation and compromise, this hearing is adjourned. Thank you very much.
[Whereupon, at 11:30 a.m., the subcommittee was adjourned.]
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