Railroad Retirement: Enhancing Portability Would Raise Cost and Policy
Concerns (Letter Report, 08/10/98, GAO/GGD-98-168).

Pursuant to a congressional request, GAO reviewed the portability of
Railroad Retirement Benefits, focusing on: (1) which, if any, Railroad
Retirement benefits are portable; (2) what changes could be made to the
Federal Employees' Retirement System (FERS) that might enhance the
portability of Railroad Retirement benefits into FERS for former
railroad employees who secure federal civilian employment and the cost
and administrative implications of those changes for FERS and whether
such changes could be made cost-neutral to FERS; and (3) what changes
could be made to Railroad Retirement that might enhance the overall
portability of its retirement benefits and what are the cost and
administrative implications of these changes for Railroad Retirement.

GAO noted that: (1) under the Railroad Retirement program, Tier I and
Tier II benefits are fully portable within the railroad industry; the
benefits that employees earn from one railroad employer can be carried
to the next employer without any reduction in value; (2) Tier I benefits
are also portable outside the industry; railroad employees can convert
their Tier I benefits into social security benefits and vice versa; (3)
Tier II benefits, however, are less portable outside the industry;
railroad employees must have at least 10 years of railroad service to
establish their right to Tier II benefits and the receipt of any
benefits must be deferred until the time that the employee would have
become eligible to retire under the plan; (4) although the Railroad
Retirement program provides for indexing wages for inflation that
occurred during the pre-retirement period, this provision applies only
to former railroad workers who secure employment at selected federal
agencies that are responsible for federal railroad policies; (5) for
former railroad workers who secure federal civilian employment, the
portability of Tier II benefits could be enhanced if they could be
converted into FERS pension benefits; (6) the arrangement would be
cost-neutral to the Civil Service Retirement and Disability Trust Fund
only if any increased costs were paid in full by the railroad industry,
the former railroad employees, or a combination of the two; (7)
according to the Office of Personnel Management's (OPM) analysis,
per-person lifetime costs could be high; (8) however, its analysis also
suggests that the aggregate cost probably would not be high if the
number of employees involved was small; (9) according to OPM, the
agencies that hire former railroad employees and OPM would both
experience modest increases in administrative costs; (10) although it
believes the administrative burdens of adding a railroad service credit
provision to FERS would be manageable, OPM has consistently objected to
proposals that would extend service credit for work that was not covered
by the Civil Service Retirement System or FERS; (11) the portability of
Tier II benefits could also be enhanced by reducing the required vesting
period for railroad employees; and (12) according to a Railroad
Retirement Board, the impact on Railroad Retirement trust fund assets,
outlays, and receipts would be less if the option applied only to
benefits earned by current or future employees.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-98-168
     TITLE:  Railroad Retirement: Enhancing Portability Would Raise Cost 
             and Policy Concerns
      DATE:  08/10/98
   SUBJECT:  Government retirement benefits
             Retirement pensions
             Employee benefit plans
             Employee retirement plans
             Railroad employees
             Administrative costs
             Federal employee retirement programs
IDENTIFIER:  Railroad Retirement Program
             Civil Service Retirement System
             Federal Employees Retirement System
             Civil Service Retirement and Disability Trust Fund
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Transportation and
Infrastructure, House of Representatives

August 1998

RAILROAD RETIREMENT - ENHANCING
PORTABILITY WOULD RAISE COST AND
POLICY CONCERNS

GAO/GGD-98-168

Railroad Retirement

(410259)


Abbreviations
=============================================================== ABBREV

  AAR - Association of American Railroads
  CPI - Consumer Price Index
  CRS - Congressional Research Service
  CSRDF - Civil Service Retirement and Disability Trust Fund
  CSRS - Civil Service Retirement System
  DB - Defined benefit
  DC - Defined contribution
  DOT - Department of Transportation
  ERISA - Employee Retirement Income Security Act of 1974
  FERS - Federal Employees' Retirement System
  FRA - Federal Railroad Administration
  NAFI - Non-appropriated fund instrumentalities
  NTSB - National Transportation Safety Board
  OPM - Office of Personnel Management
  RRB - Railroad Retirement Board
  STB - Surface Transportation Board
  TSP - Thrift Savings Plan
  UTU - United Transportation Union
  VISTA - Volunteers in Service to America

Letter
=============================================================== LETTER


B-279596

August 10, 1998

The Honorable Bud Shuster
Chairman, Committee on Transportation
 and Infrastructure
House of Representatives

Dear Mr.  Chairman: 

The Railroad Retirement program was established in 1937 and is among
the older retirement programs for private sector employees in the
United States.  In 1997, the program had about 254,000 active
participants and provided pension benefits to about 742,000 retirees,
spouses, and survivor and disability annuitants.  Over the past 30
years, the railroad industry has experienced extensive downsizing. 
Also, about 60 percent of employees who begin railroad service leave
the industry with less service than they need to qualify for a
pension under the program.  As a consequence, there has been
discussion of possible legislation to enhance the portability of
Railroad Retirement benefits.\1

In accordance with your request that we study the portability of
Railroad Retirement benefits, our objectives were to determine

  -- which, if any, Railroad Retirement benefits are portable;

  -- what changes could be made to the Federal Employees' Retirement
     System (FERS) that might enhance the portability of Railroad
     Retirement benefits into FERS for former railroad employees who
     secure federal civilian employment and the cost and
     administrative implications of those changes for FERS and
     whether such changes could be made cost-neutral to FERS; and

  -- what changes could be made to Railroad Retirement that might
     enhance the overall portability of its retirement benefits and
     what are the cost and administrative implications of these
     changes for Railroad Retirement. 


--------------------
\1 While analysts have used several definitions of portability, in
this report, portability refers to an employee's capacity to retain
retirement benefits when leaving one employer and going to the next
in a manner that generally maintains the value of those benefits
until retirement.  However defined, portability can be achieved in a
variety of ways depending on how a retirement plan is designed. 


   BACKGROUND
------------------------------------------------------------ Letter :1

Railroad Retirement is a multiemployer defined benefit (DB) plan for
railroad employees.\2 It is sponsored by interstate and other types
of railroads and their affiliates that are engaged in
railroad-connected operations as well as employer associations and
national labor organizations and their subordinate units.  Although
the program's retirement benefits generally are determined through
collective bargaining agreements, the program is governed by the
Railroad Retirement Act of 1974, as amended, and administered by the
Railroad Retirement Board (RRB), an independent agency of the federal
government.  The program is not subject to the Employee Retirement
Income Security Act of 1974 (ERISA), as amended, and thus railroad
employees are not covered by ERISA requirements designed to protect
the pension benefits of most private sector employees. 

Railroad Retirement benefits are provided in the form of a pension
that is based on two formulas--known as Tier I and Tier II.\3 The
first-tier formula, which takes into account both railroad service
and nonrailroad service covered by Social Security, provides benefits
that are equivalent to what would be provided by Social Security. 
The second-tier formula, which takes into account railroad service
only, provides additional benefits and is comparable in design to
other private sector DB plans, according to RRB.  However, Railroad
Retirement provides certain benefits not generally provided under
pension systems, including Tier II benefits for spouses and survivor
Tier II benefits without an offset in the employee's benefit. 
Regarding post-retirement benefit increases, the Tier I portion is
increased automatically in the same way that Social Security benefits
are increased.  The Tier II portion is normally increased annually at
32.5 percent of the increase in living costs owing to inflation as
measured by the Consumer Price Index (CPI).\4

Railroad Retirement benefits are financed primarily through payroll
taxes, which are deposited in Railroad Retirement trust funds.\5 Tier
I payroll taxes are the same as those for Social Security; for 1998,
employers and employees are assessed 6.2 percent of pay on wages up
to a maximum annual wage ceiling of $68,400.\6 Tier II payroll taxes
in 1998 are 16.1 percent for employers and 4.9 percent for employees,
and they are assessed on wages up to a maximum of $50,700.  Both the
Social Security and Tier II wage bases are adjusted annually for
economywide increases in wages.  Tier II tax rates are higher than
employer and employee contributions to private sector DB plans.\7
According to an official of the Employee Benefit Research Institute,
private sector employers that sponsor DB plans contribute 3 percent
of payroll, on average, and most employees make no contribution to
fund plan benefits. 

Former railroad employees who secure federal civilian employment
would most likely also be covered by FERS--the federal retirement
program nearly all new civilian employees must join.  FERS provides
benefits from three sources:  a basic pension (a DB plan), Social
Security, and the Thrift Savings Plan (TSP)--a DC plan much like
private sector 401(k) plans.  Starting at age 62, FERS pensions are
to be increased automatically each year according to the CPI, unless
inflation is greater than 2 percent.  When inflation is between 2 and
3 percent, the adjustment is limited to 2 percent; and if inflation
is 3 percent or more, the adjustment is limited to the CPI minus 1
percent. 

FERS benefits are funded through various agency and employee
contributions, which are deposited in the Civil Service Retirement
and Disability Trust Fund (CSRDF) that is administered by the Office
of Personnel Management (OPM).  In 1996, agencies and employees
contributed 11.4 and 0.8 percent of pay, respectively, to cover the
cost of FERS pension benefits in addition to the 6.2 percent each
paid in Social Security payroll taxes.\8 FERS also requires that
agencies make automatic contributions of 1 percent and matching
contributions of up to 4 percent on voluntary employee contributions
to employees' TSP accounts. 

National trends toward increased workforce mobility and the aging of
the baby boom generation have focused greater attention on retirement
issues in recent years, including the portability of retirement
benefits.  In this regard, portability can be more easily achieved in
DC than DB plans.  For DC plans, employees own or are immediately
vested in any contributions they make to their own retirement
accounts, as well as any investment earnings or losses associated
with those contributions.  Employees also generally become vested in
employer contributions to their accounts and any associated earnings
or losses within 5 to 7 years.  Thus, an employee who separates can
either withdraw his or her vested account balance as a lump-sum
payment or preserve the benefits by rolling the account over into an
individual retirement account or a new employer's plan, if allowed. 

For DB plans, portability depends on the way in which vesting and
service credit provisions, if any, are designed and whether the
vested benefits of separated employees are deferred.  For DB plans
other than Railroad Retirement, employees are immediately vested in
their own plan contributions, plus interest, and become vested in
employer-provided benefits within 5 to 7 years.  When an employee
separates, vested DB benefits can be withdrawn as a lump-sum payment;
however, more commonly, plans require that these benefits be deferred
until the point at which the separated employee would have become
eligible to retire under the plan and begin receiving benefits.\9 If
payment of vested benefits is deferred for many years, the value of
those benefits may be eroded by the effects of inflation during the
pre-retirement period.  Indexation to protect the value of such
benefits by increasing the value of the employee's final wages (i.e.,
wage indexation) is rare because it is expensive. 

DB plan benefits can also be made portable through the transfer of
service credits, where service under one employer is counted by a
subsequent employer in determining retirement benefits under the more
recent employer's retirement program.  Although some private sector
multiemployer plans and some state and local governments allow for
the transfer of service credit, most do not because of concerns about
differences in plan design and benefit levels and who would pay the
potential increase in retirement costs. 


--------------------
\2 A multiemployer plan is one to which more than one employer is
required to contribute under one or more collective bargaining
agreements.  A DB plan is one in which retirement benefits are
computed on the basis of a formula generally reflecting years of
service, or a percentage of salary, or both.  In contrast, the
retirement benefits for a defined contribution (DC) plan depend upon
the amounts contributed to an employee's individual account and the
investment experience of that account. 

\3 In addition to these basic benefits, a federally funded added
benefit is paid to the one-fourth of railroad retirees whose dual
entitlement to Railroad Retirement and Social Security benefits was
established before 1975.  Railroad employees may also receive a
supplemental annuity if at retirement they have (1) attained age 65
with 25-29 years of railroad service or age 60 with 30 years of
service; (2) worked in the industry before Oct.  1, 1981; and (3)
maintained a current connection with the industry, that is, worked in
the industry for at least 12 of the 30 months preceding their
retirement. 

\4 The CPI is compiled by the Bureau of Labor Statistics and is
intended to measure the average change in prices paid by urban
consumers for a fixed market basket of goods and services. 

\5 The Tier I trust fund is technically known as the Social Security
Equivalent Benefit Account, and the Tier II trust fund, as the
Railroad Retirement Account.  Funds that are not used to pay current
benefits are invested in nonmarketable Treasury securities in the
same manner as other federal trust funds, including Social Security. 
In contrast, other private sector DB plans invest these contributions
in assets such as marketable stocks and bonds and are managed by
fiduciaries for the exclusive benefit of plan participants as
required by ERISA. 

\6 Employers and employees are also assessed 1.45 percent of pay on
unlimited wages for Medicare hospital insurance. 

\7 On this point, see Railroad Competitiveness:  Federal Laws and
Policies Affect Railroad Competitiveness (GAO/RCED-92-6, Nov.  5,
1991). 

\8 Agencies and employees also contributed 1.45 percent of pay for
Medicare hospital insurance. 

\9 According to a 1993 U.S.  Department of Labor survey of medium and
large private sector establishments, less than 0.5 percent of
full-time employees with a defined benefit plan had an option to cash
out vested pension benefits valued at more than $3,500.  (Employee
Benefits in Medium and Large Firms 1991 and 1993, U.S.  Department of
Labor, Bureau of Labor Statistics (Washington, D.C.:  1994)). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Under the Railroad Retirement program, Tier I and Tier II benefits
are fully portable within the railroad industry; the benefits that
employees earn from one railroad employer can be carried to the next
employer without any reduction in value.  Tier I benefits are also
portable outside the industry; railroad employees can convert their
Tier I benefits into Social Security benefits and vice versa.  Tier
II benefits, however, are less portable outside the industry;
railroad employees must have at least 10 years of railroad service to
establish their right to Tier II benefits (i.e., become vested), and
the receipt of any benefits must be deferred until the time that the
employee would have become eligible to retire under the plan. 
Although the Railroad Retirement program provides for indexing wages
for inflation that occurred during the pre-retirement period, this
provision applies only to former railroad workers who secure
employment at selected federal agencies that are responsible for
federal railroad policies. 

For former railroad workers who secure federal civilian employment,
the portability of Tier II benefits could be enhanced if they could
be converted into FERS pension benefits.  Such a conversion could be
accomplished by counting railroad service credit earned under
Railroad Retirement as FERS service credit.  However such an
arrangement could increase federal retirement costs, which raises the
question of how such costs would be paid.  The arrangement would be
cost-neutral to the CSRDF only if any increased costs were paid in
full by the railroad industry, the former railroad employees, or a
combination of the two.  According to OPM analysis, per-person
lifetime costs could be high.  However, its analysis also suggests
that the aggregate cost probably would not be high if the number of
employees involved was small.  According to OPM, the agencies that
hire former railroad employees and OPM would both experience modest
increases in administrative costs because they would need to record
and verify employees' railroad service and calculate the cost of
crediting railroad service into FERS on a case-by-case basis. 

Although it believes the administrative burdens of adding a railroad
service credit provision to FERS would be manageable, OPM has
consistently objected to proposals that would extend service credit
for work that was not covered by the Civil Service Retirement System
(CSRS) or FERS, especially if such work was performed in the private
sector.  Consistent with that view, OPM strongly opposes adding a
railroad service credit provision to FERS, because even if it were
designed to be cost-neutral, such a provision would be inconsistent
with the intent of FERS and set a troublesome precedent for other
private sector employees to seek similar treatment. 

The portability of Tier II benefits could also be enhanced by
reducing the required vesting period for railroad employees--for
instance, from 10 to 5 years--which would make more railroad
employees eligible to receive deferred benefits, and/or by providing
for a lump-sum payment of nonvested employee contributions upon
separation.  Under either option, according to an RRB actuary, the
impact on Railroad Retirement trust fund assets, outlays, and
receipts would be less if the option applied only to benefits earned
by current or future employees.  Because either of these options
could increase benefits for some employees, their adoption would also
increase Railroad Retirement costs.  Currently, any increases in
benefit costs are borne by the railroad industry, and they can be
passed on in whole or in part to railroad employees through increased
Tier II payroll taxes and/or reductions in other employee benefits or
compensation.  RRB officials told us that the Board would experience
increases in administrative costs but that they would be manageable. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

As described in more detail in appendix I, to respond to your
request, we reviewed our prior work, analyzed retirement literature
on portability, and interviewed railroad and federal civilian
retirement specialists and other retirement experts.  We worked with
an OPM retirement benefits specialist, RRB actuaries, and a
Congressional Research Service (CRS) specialist in social legislation
to (1) identify changes to FERS and Railroad Retirement that might
enhance portability and (2) gain an understanding of the cost and
administrative implications of such changes.  The examples of cost
increases presented in this report illustrate increases that might
occur if the portability changes that we examined were enacted.  More
precise estimates would require detailed information on the design of
any particular policy change and the specific requirements for its
implementation. 

We requested comments on a draft of this report from the Director of
OPM and the Chair of RRB.  These comments are discussed at the end of
this letter.  We did our review in Washington, D.C., from February
1998 to June 1998 in accordance with generally accepted government
auditing standards. 


   RAILROAD RETIREMENT BENEFITS
   ARE MORE PORTABLE WITHIN THE
   INDUSTRY THAN OUTSIDE IT
------------------------------------------------------------ Letter :4

The portability of Railroad Retirement benefits depends on whether an
employee changes employers within the industry or leaves the industry
for nonrailroad employment.  If the employee continues doing railroad
work, then Tier I and Tier II benefits are fully portable, regardless
of how many times the employee changes employers.  Outside the
industry, the employee's Tier I benefits are portable into
nonrailroad employment; however, the portability of Tier II benefits
depends on the employee's status concerning vesting and other factors
specific to Railroad Retirement. 


      TIER I AND TIER II BENEFITS
      ARE PORTABLE WITHIN THE
      INDUSTRY
---------------------------------------------------------- Letter :4.1

Multiemployer plans such as Railroad Retirement are more portable
than other types of DB plans because if an employee changes employers
within the plan, any accumulated retirement benefits are transferred
from the prior employer to the new employer--usually as credited
service.  The Railroad Retirement program has a service credit
arrangement within the industry, and thus, a railroad employee who
switches employers experiences no loss in retirement benefits as long
as the employee eventually obtains the 10 years (120 months) or more
of total railroad service that is required for vesting.  Moreover,
the 120 months need not be consecutive, and one full month is
credited for each month in which any amount of service is compensated
by a participating railroad employer. 

In practical terms, service crediting may have diminished in value
owing to a decline in railroad employment opportunities.  According
to RRB, about 60 percent of employees who begin railroad service
leave the railroad industry with less than 10 years of service. 
Moreover, railroad employment has declined from more than 1.2 million
in 1955 to less than 260,000 in 1997.  Although railroad employment
trends may have stabilized in recent years, a smaller number of job
opportunities remains an important indicator that an employee who
loses one railroad job may not be able to find another or return to
the railroads after a period outside the industry. 


      OUTSIDE THE INDUSTRY, TIER I
      BENEFITS ARE PORTABLE TO ANY
      EMPLOYMENT COVERED BY SOCIAL
      SECURITY
---------------------------------------------------------- Letter :4.2

Outside the industry, Tier I benefits are portable to any employment
covered by Social Security and vice versa.  A combined total of at
least 10 years (or 40 quarters or 120 months) of railroad employment
or nonrailroad employment covered by Social Security, or both, is
required to establish eligibility for either Tier I or Social
Security benefits.  Wage information and service credits that are
used to compute retirement benefits are entirely transferable between
the two programs, and the benefits that a retiring employee would
receive are comparable under either program as well, other factors
being equal. 

To illustrate, if a railroad worker retired from the railroads with
at least 10 years of railroad service, any wage information and
service credits earned under Social Security from prior nonrailroad
employment would be transferred to RRB and used to compute the
employee's Tier I benefits.  Similarly, if a railroad employee
separated without accumulating 10 years of railroad service, RRB
would transfer Tier I wage information and service credits to the
Social Security Administration to be used in computing any future
Social Security benefits. 


      TIER II BENEFITS ARE LESS
      PORTABLE OUTSIDE THE
      INDUSTRY
---------------------------------------------------------- Letter :4.3

Outside the industry, Tier II benefits are less portable than Tier I
benefits because of Railroad Retirement's stringent vesting and
forfeiture rules and the fact that Tier II service credits are not
transferable to nonrailroad employers.  As described earlier, private
sector plan participants become fully vested in DB plan benefits
within 5 to 7 years, while railroad employees must have 10 years of
railroad service to vest in their Tier II benefits.\10 Railroad
employees who are not vested also forfeit their Tier II employee
contributions at separation.\11

ERISA, as amended, requires other private sector employers to return
such employee contributions even for those employees who separate
before they are vested.  Similarly, federal employees who are covered
by CSRS or FERS can withdraw their contributions upon separation
other than retirement, regardless of their vesting status, as can
many state and local government employees. 

Tier II benefits are also less portable because any vested Tier II
benefits must be deferred upon separation.  It is difficult to
generalize about the financial consequences of deferring benefits
because the impacts vary depending on the length of the
pre-retirement period and the rate of inflation over that same
period.  However, the impacts could be substantial if inflation rates
were high and/or many years passed before the separated employee
began to draw benefits.  According to a Hay/Huggins analysis of
private sector plans, up to two-thirds of the average loss in the
value of deferred retirement benefits could be eliminated if vested
benefits were indexed for inflation.\12

Railroad Retirement does have a wage indexation feature for certain
Tier II deferred benefits.  In particular, any former railroad
employee who secures employment at one of five federal
agencies--Department of Transportation (DOT), RRB, Surface
Transportation Board (STB), National Mediation Board, and National
Transportation Safety Board (NTSB)--would have his or her deferred
Tier II pension benefits indexed for inflation in the same way that
Social Security benefits are indexed for changes in wages.\13
However, if that employee separated from the federal agency before
retirement, then Tier II benefits would not be indexed. 


--------------------
\10 The Social Security program also has a 10-year (40 quarters)
vesting requirement. 

\11 As noted in the background section of this report, the
contributions technically are mandatory payroll taxes imposed by the
Railroad Retirement Tax Act. 

\12 Hay/Huggins Company, The Effect of Job Mobility on Pension
Benefits, prepared for the U.S.  Department of Labor, Pension and
Welfare Benefits Administration (Washington, D.C.:  July 1988), p. 
viii. 

\13 For more information on Railroad Retirement wage indexation, see
20 CFR ch.  II, sections 226.60 and 226.63. 


   CREDITING RAILROAD SERVICE INTO
   FERS COULD ENHANCE TIER II
   PORTABILITY, BUT COULD INCREASE
   FERS COSTS
------------------------------------------------------------ Letter :5

Crediting railroad service as federal service under FERS could
enhance the portability of Tier II benefits by allowing former
railroad workers who secure federal employment to effectively convert
their Tier II pension benefits into FERS pension benefits.  However,
adding a railroad employment service credit provision to FERS could
increase FERS costs as well as raise policy and administrative
issues. 


      CREDITING RAILROAD SERVICE
      INTO FERS COULD INCREASE
      FERS COSTS
---------------------------------------------------------- Letter :5.1

Although transferring service credits across DB plans can be
complicated to implement, conceptually it involves little more than
totaling the employee's years of service under both a former and
current plan when calculating the employee's pension under the
current plan.  Following this logic, a provision could be added to
FERS to allow railroad service to be credited when computing a FERS
pension for former railroad employees who secure federal employment
and become covered by FERS. 

Extending service credit for railroad employment in this way could
increase FERS retirement costs.  Any such increased costs would be
borne by the federal government unless the added costs were not paid
from the CSRDF.  The amount of any increase would depend on how many
former railroad employees would actually become FERS participants,
the number of those who would elect the service credit, and the
characteristics of these employees (e.g., their railroad salary and
work histories). 

At our request, an OPM retirement specialist prepared cost estimates
to illustrate the potential per-person lifetime cost increase for
three hypothetical employees, using various assumptions about age,
salary, and service that the Federal Railroad Administration (FRA)
believed represented a realistic range of former railroad employee
circumstances.  The calculations were present-value calculations and
assumed that all of the former railroad employees began their
FERS-covered employment at a GS-12, step 1 federal pay grade and had
a normal salary progression thereafter.\14 The OPM specialist used
this starting pay grade because FRA told us that virtually every
former railroad employee who has been hired by FRA has started at
that grade, including those who had earned substantially more from
the railroads.  The results varied depending on the employees'
salaries, length of service, and age at retirement. 

For example, according to OPM's calculations, the cost of a FERS
pension could increase by about $34,000 for a 35-year-old railroad
employee who had a railroad salary of $40,000 and 6 years of railroad
service, a beginning federal salary of $47,066, and retired at age 56
after reaching the FERS minimum retirement age.  The cost could
increase by about $53,000 if the same employee worked until he or she
reached age 62 and became eligible to retire with unreduced benefits. 
The cost could increase considerably more for senior employees who
received higher salaries during their railroad employment than during
their federal employment.  For example, the cost could increase by as
much as $148,000 for a 50-year-old railroad employee who had a
railroad salary of $60,000 and 15 years of railroad service, a
beginning federal salary of $47,066, and retired at age 62. 

Although OPM's illustrations suggest that per-person lifetime costs
could be high, the aggregate cost probably would not be if the number
of employees involved was small.  On this point, more than 1.6
million employees are covered by FERS, but only about 2,600 employees
in all work for the five federal agencies that would most likely
attract former railroad employees.  Moreover, these five agencies
made very few new appointments in 1997, ranging from 6 at STB to 100
at NTSB.  The number of former railroad employees involved might be
even smaller than these statistics suggest.  The OPM specialist with
whom we worked said that if given the choice, former railroad
employees who secure employment at any of the five agencies might
decide not to transfer their railroad service into FERS.  Because
their Tier II pension benefits would be indexed at retirement, these
employees might be better off by drawing separate Tier II and FERS
pensions.  However, as the specialist also noted, if extending FERS
service credit for railroad employment was made available to former
railroad employees who secured employment in any federal agency, the
number of employees who elected the service credit might increase,
and as a consequence, so might the costs. 

The only way that adding a railroad service credit provision would be
cost-neutral to FERS would be if the increase in FERS retirement
costs attributable to the change was not paid from the CSRDF.  One
arrangement that could serve as a cost-neutral model was applied to
employees of non-appropriated fund instrumentalities
(NAFI)--organizations that generally provide morale and welfare
support services to the military, such as military exchanges.  Under
section 1043 of the National Defense Authorization Act of 1996,\15
FERS and NAFI employees of the Department of Defense or Coast Guard
who met certain conditions after December 31, 1965, and before August
10, 1996, were allowed to credit all of their federal civilian
service--both as NAFI employees or employees covered by FERS--toward
a single pension.  In practice, the credit could be combined under
either FERS or NAFI.  The opportunity to elect the transfer of
service credits into FERS expired August 11, 1997. 

The railroad industry and each employee who elected the credit could
together be required to pay the full actuarial cost of that portion
of his or her FERS pension benefits attributable to railroad
employment, similar to the arrangement for NAFI employees.  As the
illustrative examples described earlier suggest, however, the costs
that would need to be paid could be considered high, perhaps too high
to be paid as a lump-sum by an individual employee.  As an
alternative, cost-neutrality could also be accomplished by requiring
a transfer of the employee and employer retirement contributions,
plus interest, from Railroad Retirement trust funds to the CSRDF. 
Similar to the NAFI approach, if the amount transferred was
insufficient to cover the full cost of the increase in the employee's
FERS pension, the employee could be required to pay any remaining
cost.  Rather than having the employee make a cash deposit to meet
such a shortfall, OPM could make up the difference by making an
actuarial reduction in the amount of the employee's monthly FERS
pension equaling the present value of the difference. 


--------------------
\14 This cost calculation--the actuarial present value of the
increase in FERS pension benefits--equals the amount of money that,
with interest, would fully fund the additional retirement benefits an
employee would receive above those earned while a federal employee. 

\15 Public Law 104-106, Feb.  10, 1996. 


      POLICY AND ADMINISTRATIVE
      ISSUES COULD ARISE
---------------------------------------------------------- Letter :5.2

Because they would need to collect and verify the railroad service of
each employee who elected the credit, OPM and the agencies that hire
former railroad employees could experience some increase in
administrative costs if a railroad service credit provision were
added to FERS.  In addition, OPM would need to determine the
actuarial cost of crediting the employees' railroad service into
FERS.  OPM officials told us that the increased administrative costs
would be manageable, largely because they expect that the number of
employees who would elect the credit would be small. 

OPM has consistently objected to proposals to extend service credit
for work that was not covered by CSRS and FERS, especially if it was
performed in the private sector.  As far back as 1969, the Civil
Service Commission opposed extending service credit to state
employees who were involved in federal grant activities.  Although
federal funds might have been involved, the Commission asserted that
the programs were state functions and that the employees engaged in
their administration were selected, employed, and supervised by
states or their instrumentalities.  Accordingly, OPM concluded that
CSRS' effectiveness as a retirement system would be severely reduced
if it was to become a pension plan for numerous types of nonfederal
service and that allowing individuals with such service to credit
that service into CSRS would inevitably generate pressures for
extending credit for almost any type of nonfederal work. 

We prepared several letters on the same issue, the most recent one at
the request of the Chairman of the House Committee on the Post Office
and Civil Service.\16 Our letters recognized that the proposed
amendment involved a matter of policy for the determination of
Congress; however, they also recognized certain problems.  In
particular, they noted that any amendment to existing law that would
permit the crediting of nongovernment service for civilian retirement
purposes appeared to be inconsistent with the concept that an
employee's retirement annuity will be based upon, and will vary in
proportion to, the length of civilian government service rendered. 
The letters also concluded that the amendment would impose a
financial burden upon the federal government not contemplated under
basic retirement law and suggested that if credit was to be extended,
action should be taken to prevent any increase in the unfunded
liability of the retirement trust fund. 

In 1986, OPM criticized provisions of the proposed Railroad Service
Retirement Credit Act that would have granted retroactive railroad
service credit into the now-closed CSRS to former railroad employees
who had secured employment at DOT, Interstate Commerce Commission,
National Mediation Board, NTSB, or RRB.  Under that proposal, an
employee who elected service credits would have been required to
deposit into the CSRDF an amount equal to the difference between his
or her retirement contributions under Railroad Retirement and the
amount the employee would have contributed under CSRS if he or she
had been covered by that program during the years of railroad
service.  OPM opposed the legislation, in part because the deposit
would be substantially less than other covered employees would have
contributed to the CSRDF.  OPM also asserted that there was no
justification for granting civil service retirement credit for
private sector work and expressed strong concern that once the
threshold of extending coverage for nonfederal service was crossed,
it would be difficult to exclude employment in other sectors having
needed expertise or a special relationship with the government. 

In interviews for this report, OPM officials told us that OPM would
strongly oppose adding a railroad employment service credit provision
to FERS.\17 OPM's rationale continues to be that providing credit for
railroad service would be inconsistent with the intent of FERS and
would create a troublesome precedent.  As OPM has stated, FERS was
designed to be a staff retirement program, providing deferred
compensation benefits to employees based on the service that they
perform while federal employees.  Under the basic FERS statute, only
service that was performed while an employee was covered under FERS
would be credited in computing a FERS pension. 

However, past amendments to the CSRS statute provided for certain
service credits and have applied to employees covered by FERS under
limited circumstances.  Specifically, there were 16 types of service
for which federal civilian retirement credit could be granted,
including work performed while a VISTA (Volunteers in Service to
America) or Peace Corps volunteer; Nurse Cadet; U.S.  Capitol Guide;
or NAFI employee.\18 A review of the terms under which credit for
these services has been provided shows that although the work is not
federal employment because there was no appointment to the civil
service by a federal official, in most cases the work served a
federal purpose. 

These election opportunities were available for a limited time and
applied retrospectively only to past service performed by an
individual who had since become a federal employee covered by CSRS or
FERS.  Currently, the only creditable service not performed while
under FERS is military service and service performed under the
Foreign Service Pension System.  In no case has service credit been
allowed for private sector service. 


--------------------
\16 Letter from the Comptroller General of the United States to the
Chairman, House Committee on Post Office and Civil Service (B-84843,
Apr.  10, 1969).  This letter references three earlier GAO letters. 

\17 In testimony on June 24, 1998, OPM reiterated its opposition. 
See Federal Employees Integrity, Performance, and Compensation
Improvement Act, Janice R.  Lachance, Director, Office of Personnel
Management.  Statement before the Subcommittee on Civil Service,
Committee on Government Reform and Oversight, U.S.  House of
Representatives. 

\18 According to an OPM official and 5 U.S.C.  section 8411, these
services are creditable under FERS only if (1) a deposit was made and
(2) the service was performed before Jan.  1, 1989, except for
service as a full-time volunteer or volunteer leader with the Peace
Corps or VISTA, which could be performed at any time before
separation. 


   CHANGING VESTING AND
   CONTRIBUTION FORFEITURE RULES
   MIGHT ENHANCE PORTABILITY, BUT
   RAILROAD RETIREMENT COSTS MIGHT
   INCREASE
------------------------------------------------------------ Letter :6

The overall portability of Railroad Retirement Tier II benefits
outside the industry could be enhanced in several ways.  First, Tier
II vesting requirements are stringent compared with requirements
under ERISA.  By allowing a 5-year rather than 10-year vesting
period, more separated employees might receive deferred Tier II
retirement benefits.  Second, as Railroad Retirement is currently
designed, a separated employee who is not vested forfeits not only
any accrued plan benefits but also his or her own contributions.  If
these contributions were returned, they could be reinvested to
provide additional assets in retirement. 

Railroad Retirement costs could increase if the vesting and
forfeiture changes were adopted, but the amount of the increase could
be small.  At our request, RRB actuaries prepared illustrative
estimates of these costs.  The results of their analysis showed that
if the vesting requirement was reduced from 10 to 5 years, there
would be little difference in trust fund assets, outlays, and
receipts.  Annual outlays for program benefits and administration
would increase by about $14 million more (or 0.26 percent) by
2022--if 5-year rather than 10-year vesting was used.\19 As for trust
fund balances, at the end of 1998, the Tier II trust fund asset
balance was projected to be $14.2 billion.  Under both 5-year and
10-year vesting, this balance would grow to a high of $18.7 billion
in 2009 and then decline to about $9 billion in 2022.\20

Reducing the vesting requirements would have no effect on Tier II
payroll taxes.  Because Tier II benefits would increase, federal
income taxes on these benefits would increase, and such taxes are
paid to the Railroad Retirement Account.  Finally, with or without
the change in vesting rules, tax revenues into the account are
projected to decline from 88 to 65 percent of Railroad Retirement
benefits and administration costs between 1998 and 2022. 

Regarding the potential cost of forfeiture rule changes, the RRB
analysis showed that if lump-sum payments equal to contributions plus
interest had been paid to employees who separated in 1995 and who
were not vested, program costs in that year would have increased by
$31.7 million--$23.9 million for contributions and $7.8 million for
interest.  Excluding interest from these payments would reduce costs
by about 25 percent.  The annual cost of providing refunds to
separating employees in future years would depend on how many
employees would separate from the railroad industry and the amount
employers contributed toward the Tier II benefit.\21

According to RRB officials, if either or both of the potential
changes were adopted, the Board's administrative burdens would also
increase but they would be manageable.  The changes would require
substantial software modifications in application processing,
calculation, recordkeeping, and edits. 


--------------------
\19 RRB actuaries told us that annual outlays for program benefits
would be projected to increase by about $232 million (or 2.23
percent) by 2071, and the Tier II balance would be $19.3 billion
less, which would be a 25 percent reduction.  The actuaries
calculated that the $19.3 billion reduction could be offset through
an additional 0.1 percent increase in Tier II payroll taxes. 

\20 In 2022, the Tier II fund balance under 5-year vesting would be
about $131 million less than under 10-year vesting--which represents
a 1.5 percent reduction. 

\21 A somewhat different perspective on the potential per-person
costs--and benefits from the employee's perspective--is provided by
comparing the amounts that currently would be forfeited by employees
with different work histories.  Of the 8,872 employees who separated
in 1995 and were not vested, 7,381 separated with between 1 and 59
months of service and forfeited contributions averaging $1,952 per
employee ($1,577 excluding interest).  The 1,491 employees with
between 60 and 119 months of service forfeited an average of $11,582
per employee ($8,235 excluding interest).  The average amount of
payroll tax contributions, plus interest, attributable to the 8,872
employees who separated during 1995 with between 1 and 119 months of
service was about $3,571 per employee ($2,696 excluding interest). 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

Our work has shown that it would be possible to enhance the
portability of Railroad Retirement benefits; however, the changes
that we considered might not be desirable for cost, administrative,
and policy reasons.  If a service credit provision was added to FERS,
it would be cost-neutral from the federal government's perspective
only if the costs were paid in full by the former railroad employees
or the railroad industry or a combination of the two.  If the
required vesting period under Railroad Retirement were reduced and/or
the contributions of nonvested employees were provided to them in a
lump-sum payment upon their separation, the costs would be borne by
the railroad industry and/or other railroad employees. 

Under the assumption that the number of former railroad employees
that federal agencies would hire is limited, the aggregate
administrative costs for agencies that might be involved--including
OPM, RRB, and the hiring agencies--would be manageable if one or all
of the changes were adopted, according to the OPM and RRB officials
with whom we talked. 

Although a change to FERS could be made cost-neutral from the
perspective of the CSRDF and the administrative costs could be
manageable, according to OPM officials, any change to existing law to
permit the crediting of nongovernment service for civilian retirement
purposes would be strongly opposed by OPM.  And as we have said in
the past, such a change would appear to be inconsistent with the
fundamental concept of CSRS and FERS that an employee's retirement
benefits, exclusive of Social Security, will be based on the years of
his or her CSRS or FERS government service.  Such a change could set
a precedent for other private sector employees to seek similar
treatment. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

We requested comments on a draft of this report from OPM and RRB.  We
received oral comments from RRB's Deputy General Counsel.  RRB agreed
with the contents of the draft report and offered several technical
and clarifying comments, which we incorporated where appropriate. 

We received written comments from the Director of OPM, which stated
that the report effectively evaluated the cost and policy
implications if provisions governing CSRS or FERS were amended to
allow crediting Railroad Retirement as a means of enhancing
portability.  The letter, which is reproduced in appendix II,
reiterated OPM's opposition to such a change. 

We are sending copies of this report to the Ranking Minority Member
of your Committee, the Director of OPM, and the Chair of RRB.  Copies
of this report will also be sent to other parties interested in
railroad retirement matters and will be made available to others upon
request. 


Major contributors to this report are listed in appendix III.  If you
have any questions, please call me at (202) 512-8676. 

Sincerely yours,

Michael Brostek
Associate Director, Federal Management
 and Workforce Issues


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I


   OBJECTIVES
--------------------------------------------------------- Appendix I:1

The Chairman, House Committee on Transportation and Infrastructure,
asked us to provide information on the portability of Railroad
Retirement Program benefits and the potential for enhancing that
portability.  This review was undertaken in response to that request. 
The objectives of our review were to determine

  -- which, if any, Railroad Retirement benefits are portable;

  -- what changes could be made to the Federal Employees' Retirement
     System (FERS) that might enhance the portability of Railroad
     Retirement benefits into FERS for former railroad employees who
     obtain federal civilian employment and the cost and management
     implications of those changes for FERS and whether such changes
     could be made cost-neutral to FERS; and

  -- what changes could be made to Railroad Retirement that might
     enhance the portability of its retirement benefits and the cost
     and management implications of such program changes for Railroad
     Retirement. 

Portability refers to an employee's ability to retain retirement
benefits when leaving one job for another while maintaining the value
of those benefits until retirement. 


   SCOPE AND METHODOLOGY
--------------------------------------------------------- Appendix I:2

To determine which, if any, Railroad Retirement program benefits are
portable, we first reviewed our prior work and retirement literature
and interviewed experts at the Employee Benefit Research Institute,
Watson-Wyatt Worldwide, Office of Personnel Management (OPM),
Congressional Research Service (CRS), Railroad Retirement Board
(RRB), Association of American Railroads (AAR), and the United
Transportation Union (UTU) to determine what portability means and
how retirement program features can help to achieve it.  We then
reviewed RRB documents and provisions of the Railroad Retirement Act,
as amended.  We compared program features regarding eligibility for
benefits to the ways in which such features could be designed to
enhance portability as determined through our literature review and
discussions with experts.  We confirmed our understanding of what and
how Railroad Retirement features enhance or limit portability with
officials at RRB, CRS, and OPM. 

To identify changes to FERS that could enhance the portability of the
Railroad Retirement program benefits into FERS and develop
information on any associated costs and the policy and management
implications of the changes, we worked with retirement policy
specialists at OPM and CRS.  In collaboration with these specialists,
we used feasibility and cost-neutrality as our criteria for selecting
changes to FERS.  Using these criteria, we selected a transfer of
service credit approach, which was similar to transfers of service
credit commonly described in the literature on multiemployer defined
benefit (DB) plans and could be cost-neutral to FERS. 

To understand the potential increase in retirement costs from a
service credit arrangement, we developed illustrative examples for
three hypothetical employees, using information provided by the
Federal Railroad Administration that represented former railroad
employees.  To calculate what the full actuarial cost would be if
those employees purchased service credits under FERS, OPM used
different salary and service histories for each.  We did not
determine how or what funds might be transferred from the Railroad
Retirement fund to the Civil Service Retirement and Disability Trust
Fund to help fund the purchase. 

To identify changes to Railroad Retirement that might enhance the
portability of its retirement benefits and the cost and management
implications of the changes, we interviewed private sector, RRB, and
CRS retirement experts to determine the most feasible changes.  We
focused on Tier II benefits because Tier I benefits are equivalent to
what would be provided by Social Security if an employee left the
railroad industry and thus are portable.  First, we identified the
Railroad Retirement provisions that affected portability.  On the
basis of our review, we selected changes in vesting and forfeiture
rules, because these are the features that most limit the portability
of Tier II benefits.  We worked with the RRB actuary and a CRS
specialist in social legislation to develop a methodology for
estimating the potential cost of a shorter vesting period and more
liberal forfeiture rules.  The RRB actuary projected the cost of
5-year vesting on Railroad Retirement over 25 years and compared it
to the projected cost under 10-year vesting required by current law. 
These projections allowed us to compare alternative trust balances,
payouts, and income. 

We also worked with the RRB actuary to estimate the potential cost of
requiring that employees who are not vested receive lump-sum payments
of their own contributions, with and without interest, at the time of
separation.  We estimated the costs for 1995 because it was the most
recent year for which data were available.  The actuary estimated the
cost of refunds by determining the number of employees and the
aggregated amount of the employee contributions with and without
interest in excess of Social Security for employees who (1) separated
in 1995; (2) had not died or retired; (3) were not on the retirement
rolls in 1996; and (4) had between 1 and 59 service months (0 to 5
years), between 60 and 119 service months (more than 5 but less than
10 years), and between 1 and 119 service months (0 to almost 10
years).  He then calculated the average amount of forfeited
contributions with and without interest for these groups of
employees.  The forfeited contributions for the group with between 0
and almost 10 years of service served as an estimate of the costs of
immediate vesting of employee contributions.  The average forfeiture
of contributions in the other groups showed how the length of service
affected the average amount forfeited per employee. 

As agreed with Committee staff, we developed information on
portability primarily as it relates to DB plans, because Railroad
Retirement is a DB plan.  Also as agreed, we only examined
portability changes prospectively. 

In the case of FERS, the term prospective means that the change would
apply only for employees who obtained federal employment after the
portability service credit change was adopted.  We did not consider
any changes to FERS that would be applied retroactively for former
railroad employees who were already federal employees and covered by
FERS as of the date the option would be adopted.  In the case of
changes to Railroad Retirement, the term prospective means that the
option would generally apply for all railroad employees who were
employed within the industry as of the date the option would be
adopted.  If any of the changes--whether to FERS or Railroad
Retirement--would be applied retroactively, they potentially would be
much more costly.  The information that we developed on the potential
costs of portability enhancements should be viewed as illustrative,
because more precise estimates of costs would require detailed
information on the design of the portability enhancement and how it
would be required to be implemented. 

We did not independently verify any of the estimates made by OPM or
RRB actuaries. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE OFFICE OF
PERSONNEL MANAGEMENT
=========================================================== Appendix I


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

GENERAL GOVERNMENT DIVISION

Margaret T.  Wrightson, Assistant Director
H.  John Ripper, Evaluator-in-Charge

*** End of document. ***