[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Program Descriptions]
[Section 5. Earned Entitlements for Railroad Employees]
[From the U.S. Government Printing Office, www.gpo.gov]




 
SECTION 5 - EARNED ENTITLEMENTS FOR RAILROAD EMPLOYEES

CONTENTS

Overview
The Retirement and Survivor Annuity Structure
  	Tier 1 and Tier 2 Benefits
  	Dual Benefit Payments
  	Disability Annuities
  	Spouse Annuities
  	Supplemental Annuities
  	Survivor Benefits
  	Lump-Sum Death Benefits
Program Data
Financing the System
 	Payroll Taxes
 	Financial Interchange
  	General Revenue Appropriations
  	Investment Income
Income Taxation of Railroad Retirement Benefits
Financial Status of the Railroad Retirement System
The Railroad Unemployment Insurance Program
  	Overview
  	Benefits and Eligibility Requirements
  	Financing
Legislative History
References

OVERVIEW

Retirement, unemployment compensation, sickness, disability, and death 
benefits for railroad employees are administered by the U.S. Railroad 
Retirement Board (RRB), a Federal agency headquartered in Chicago. That 
these entitlement benefits for a particular private industry are a 
function of Federal authority follows from actions taken during the 
1930s, when threats to the stability of the nation's railroads caused
Congress to pass legislation placing the industry's primary employee 
benefit programs under Federal law. Federal involvement in the rail 
industry was not unprecedented. Indeed, much of the foundation 
underlying the enormous success the industry enjoyed was in place 
because the Federal Government provided numerous incentives for early 
development of this first great industrial giant.
The RRB, which refers both to the agency that administers the Federal 
benefits of industry employees and to the 3-member governing board 
that oversees its operations, maintains records on 12 million present 
and former railroad employees. The RRB disbursed $8.6 billion in 
retirement and survivor benefits to 684,000 annuitants during fiscal 
year 2002.  During the 2001-2002 benefit year, the RRB disbursed 
$47 million in daily compensation to about 18,000 unemployed workers 
and $51 million in net sickness benefits to 23,000 employees.  The RRB 
paid $5 million in lump-sum payments to survivors of deceased workers 
in fiscal year 2002. Table 5-1 provides an overview of cash benefits 
received by various categories of beneficiaries in February 2003. 
Through its payroll and beneficiary record keeping system, the RRB 
verifies the collection of taxes on payroll and benefits with the 
Internal Revenue Service, which in fiscal year 2002 collected $4.6 
billion in taxes on railroad payrolls and  $343 million in taxes on 
railroad retirement beneficiary payments.


In the House of Representatives, jurisdiction over Railroad Retirement 
and Unemployment Benefit Programs is divided between two standing 
committees. The Transportation and Infrastructure Committee has 
jurisdiction over legislation pertaining to "railroads . . . and 
railroad retirement and unemployment (except revenue measures related 
hereto)." The Subcommittee on Railroads of the committee has primary 
responsibility for the Railroad Retirement Act (RRA) and amendments 
affecting railroad retirement. The Committee on Ways and Means has 
jurisdiction over all revenue measures, including the Railroad 
Retirement Tax Act (chapter 22 of the Internal Revenue Code; see 
Research Institute, 1997). Within the Committee on Ways and Means, 
jurisdiction over employment taxes and trust fund operations 
relating to the Railroad Retirement System lies within the 
Subcommittee on Social Security.

THE RETIREMENT AND SURVIVOR ANNUITY STRUCTURE

The Railroad Retirement System provides retirement, disability and 
survivor annuities to workers whose employment was connected with the 
railroad industry for at least 10 years, or in some cases at least 
5 years after 1995. The program is governed by the Railroad Retirement 
Act, Federal legislation enacted by Congress with input from all 
affected segments of the rail industry system. Railroad retirement 
came into existence in 1936, and was substantially modified by the 
Railroad Retirement Act of 1974 (Public Law 93-445) which provided 
for closer coordination with the Social Security System. Credits are 
primarily secured by employment in the railroad industry, although 
any Social Security credits earned during employees' work careers 
are included in the benefit computation. Benefits are financed through
a combination of employee, employer, and Federal Government 
contributions.




TABLE 5-1--MONTHLY RAILROAD RETIREMENT CASH BENEFITS IN CURRENT 
PAYMENT STATUS, FEBRUARY 2003


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]




The 1974 act established three benefit components. The ongoing benefit 
system was divided into two "tiers," one which approximates Social 
Security (tier 1) and one which provides a retirement benefit 
specifically for railroad workers (tier 2). The third component, a 
vested dual benefit, preserved certain benefits for employees who 
qualified for both railroad retirement and Social Security benefits 
prior to the 1974 act.
The Railroad Retirement System was substantially modified again in 
2001.  The Railroad Retirement and Survivors' Improvement Act of 2001 
(Public Law 107-90), signed into law by President Bush on December 
21, 2001, made several changes to railroad retirement benefits and 
financing. The 2001 law expanded benefits for some widows and widowers; 
lowered the minimum age at which employees with 30 years of experience 
may be eligible for full retirement benefits; reduced the number of 
years required to be fully vested for tier 2 benefits; repealed a 
maximum limitation on benefits; expanded the system's investment 
authority to include investment of trust funds in nongovernmental 
assets; and phased in changes to the tier 2 tax structure. About 
149,000 spouses and divorced spouses of retired or disabled workers 
receive railroad retirement benefits. About 192,000 survivors are 
on the RRB annuity rolls.

TIER 1 AND TIER 2 BENEFITS



Employees are eligible for a tier 1 retirement annuity if they have at 
least 10 years of total railroad service, or at least 5 years of 
railroad service after 1995 and "insured status" under Social Security 
rules (generally 40 quarters of coverage) based on combined railroad 
retirement and Social Security-covered earnings. Railroad retirement 
tier 1 benefits are based on the Social Security benefit formula, 
using the employee's combined railroad earnings and Social Security-
covered earnings up to the Social Security maximum wage base. The 
tier 1 benefit is roughly equal to what the Social Security benefit 
would have been had the worker's railroad employment been covered by 
the Social Security program. Because the tier 1 benefit is based on 
both railroad and Social Security employment, any Social Security 
benefit to which the railroad retirement beneficiary also is entitled 
is subtracted from the tier 1 benefit amount. Tier 1 benefits are 
automatically adjusted annually for the cost of living by the same 
percentage as Social Security benefits.Tier 2 benefits, which are 
payable in addition to tier 1 benefits, are based entirely on the 
employee's service in the railroad industry.  Employees are eligible 
for a tier 2  retirement benefit if they have at least 10 years of 
total railroad service, or at least 5 years of railroad service after 
1995.  (Employees must have at least 10 years of total railroad service 
to be eligible for a tier 2 disability benefit before age 62.) For 
current retirees, the tier 2 benefit is equal to seven-tenths of 
1 percent of the employee's average monthly earnings in the 60 months 
of highest earnings, times the total number of years of railroad 
service, less 25 percent of any employee vested dual benefit payable. 
Tier 2 benefits are automatically adjusted annually at a rate equal 
to 32.5 percent of the Social Security cost-of-living adjustment.

DUAL BENEFIT PAYMENTS

One of the primary purposes of the Railroad Retirement Act of 1974 was 
to coordinate railroad retirement and Social Security benefit payments 
to eliminate certain dual benefits considered to be a "windfall" for 
persons receiving benefits under both systems. This "windfall" was a 
result of the fact that the total benefit these retirees received from
both systems was higher than the benefit they would have received if 
their benefit were based on their total career earnings but paid only 
under railroad retirement. The total benefit was higher in these cases 
because the Social Security benefit formula favors workers who have 
low average earnings throughout their careers. Low career average 
earnings result from a career of low wages or from a relatively short
career in Social Security-covered employment. 
Workers who spent a period of time in employment covered by Social 
Security received the benefit of this "tilt" in the benefit formula, 
even though they may not have had low career earnings.
As a result of the 1974 act, "windfall" benefits were eliminated for 
any railroad employees not qualified for such benefits as of January 1, 
1975. The benefits generally were preserved for those individuals who 
were vested under both railroad retirement and Social Security before 
1975. These vested dual benefits are financed by the general revenue 
fund through an annual appropriation, rather than from the Social 
Security or Railroad Retirement Trust Funds. They are subject to 
reduction during any year in which the appropriation is less than the 
amount required for full benefit payments. The total appropriation for 
the Dual Benefits Payments Account includes an estimation of the amount 
collected from income taxes on the dual benefit, with the implication 
that dual benefits are partially financed by income taxes on dual 
benefits. The fiscal year 2002 appropriation was $146 million, including 
the income tax transfers. The fiscal year 2003 appropriation was $131 
million, including income tax transfers. Currently paid to about 
12 percent of railroad retirement beneficiaries, the average vested 
dual benefit is $147 per month.

DISABILITY ANNUITIES



Workers who are totally and permanently disabled for all employment are 
eligible for tier 1 and tier 2 benefits if they have at least 10 years 
of total railroad service. Workers who have at least 5 years of 
railroad service after 1995 (but less than 10 years of total service) 
are eligible only for tier 1 benefits before age 62 if their combined 
railroad retirement and Social Security earnings credits satisfy Social
Security eligibility requirements (tier 2 benefits would be payable at 
age 62). Otherwise, workers with periods of employment under Social 
Security would have their railroad retirement credits transferred to 
Social Security and eligibility for Social Security disability insurance 
payments would be determined under Social Security program rules.
In addition, workers who become totally disabled for their regular 
railroad occupation are eligible for an occupational disability benefit 
at age 60 with at least 10 years of railroad service, and at any age 
with at least 20 years of railroad service. To qualify, the worker must 
have a current connection with the industry, which generally means that 
he or she worked for a railroad in at least 12 of the 30 consecutive 
months before the month in which an annuity begins to accrue.

SPOUSE ANNUITIES

Spouses of retired or disabled railroad retirement beneficiaries also 
may qualify for benefits, the amount of which may depend on such factors 
as the spouse's age and work history, and the age, date of retirement, 
and years of railroad service of the railroad worker. Spouses also may 
qualify for benefits based on caring for a rail worker's unmarried or
disabled child. Tier 1 spouse benefits are based on 50 percent of the 
railroad worker's tier 1 benefit. Tier 2 spouse benefits are equal to 
45 percent of the retired or disabled worker's tier 2 benefit. Divorced 
spouses also may be eligible for benefits from tier 1 but not from 
tier 2 unless specified in a divorce decree.

SUPPLEMENTAL ANNUITIES

Under the 1974 act, employees may qualify for a supplemental annuity
at age 60 if they have at least 30 years of total railroad service, 
or at age 65 if they have 25-29 years of railroad service, and a 
current connection with the railroad industry. The supplemental 
annuity is $23 for 25 years of service plus $4 for each additional 
year of service, up to a maximum of $43 per month.  Under the 1981 
Omnibus Budget Reconciliation Act (OBRA), employees first hired after
October 1, 1981, are not eligible for supplemental annuities.

SURVIVOR BENEFITS 

Annuities may be payable under both tiers to surviving spouses, 
children, and certain other beneficiaries. With the exception of the 
lump-sum death benefit (discussed below), eligibility for survivor 
benefits depends on whether the employee was insured under the RRA at 
the time of death. An employee is insured if he or she has at least 
10 years of railroad service, or at least 5 years of service after 1995, 
and a current connection with the railroad industry.  If the worker had 
at least 5 years of railroad service after 1995 (but less than 10 years 
of total service), tier 1 and tier 2 survivor benefits are payable if 
the worker had insured status under Social Security rules based on 
combined railroad retirement and Social Security-covered earnings.  
Otherwise, only tier 2 survivor benefits are payable.  Generally, a tier 
1 survivor benefit, which is based on the worker's combined Social 
Security and railroad retirement earnings credits, is approximately 
equal to that provided by Social Security (benefit is based on the 
Social Security benefit formula). The tier 2 widow(er)'s amount is 
equal to 100 percent of the deceased worker's tier 2 amount. Public Law 
107-90 established an "initial minimum amount" for widow(er)'s benefits
which yields, in effect, a widow(er)'s tier 2 benefit equal to the 
tier 2 benefit the employee would have received at the time the 
widow(er)'s annuity is awarded (minus any applicable age reduction).  
It does so by adding a "guaranty amount," initially set at 50 percent 
of the employee's tier 2 amount, to the 100 percent tier 1 and 50 
percent tier 2 benefits provided under prior law.  This guaranty amount 
is offset each year by the dollar amount of the cost-of-living increases 
payable in both the tier 1 and tier 2 benefits provided under prior law.  
As a result, such a widow(er)'s net benefit payment will not increase 
until such time as the widow(er)'s annuity, as computed under prior law 
with all interim cost-of-living increases otherwise payable, exceeds 
the widow(er)'s annuity computed under the initial minimum amount 
formula.

LUMP-SUM DEATH BENEFITS

A lump-sum death benefit is paid when there is no person eligible for a 
monthly survivor benefit in the month in which the worker died. The 
lump-sum death benefit is payable if the worker had a current connection 
with the railroad industry and at least 10 years of total railroad 
service, or 5 years of service after 1995 and insured status under 
Social Security rules. For employees with at least 10 years of railroad 
service before 1975, the amount of the benefit is based on the 1937 
act (the average benefit payable is about $900). For all other railroad 
workers, the benefit is equal to the amount that would be paid under the
Social Security Act ($255, unless survivor benefits are paid). 
Generally, if monthly benefits are not payable at the time of the 
employee's death or in the future, a residual lump-sum payment may be 
made. A residual lump-sum payment is, in effect, a refund of the 
employee's pre-1975 railroad retirement taxes plus an amount in lieu of 
interest, less benefits already paid. An employee can designate a 
person as beneficiary for any residual payment that ever becomes due.  
Otherwise, it is payable to the widow(er), children, or other family 
members in a prescribed order of precedence.  Once a residual is paid, 
no further benefits are payable on the basis of the employee's railroad 
earnings.  (A widow(er) or parent under age 60 can waive rights to 
future monthly benefits in order for the residual payment to be made.  
The widow(er) or parent who elects a residual also gives up rights to 
Medicare based on the deceased employee's railroad service.)



TABLE 5-2--TOTAL BENEFIT PAYMENTS AND NUMBER OF BENEFICIARIES, SELECTED 
FISCAL YEARS 1950-2002



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]



PROGRAM DATA 

Table 5-2 summarizes railroad retirement benefit payments and the number 
of recipients in selected fiscal years 1950-2002. The table shows that 
the number of beneficiaries increased until about the mid-1970s and has 
declined thereafter. Similarly, as shown by the constant dollar column 
in table 5-2, after rapid increases between 1950 and about 1975, total 
benefit payments increased at a modest rate until the early 1980s and 
then declined by about $1.5 billion over the next 19 years.
Table 5-3 presents data on new awards for February 2003.

TABLE 5-3--NUMBER AND AVERAGE AMOUNT OF NEW AWARDS, FEBRUARY 2003


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]



FINANCING THE SYSTEM

The Railroad Retirement and Survivors' Improvement Act of 2001 (Public 
Law 107-90) made significant changes to the way the Railroad Retirement 
System is financed.  The 2001 law provided for investment of railroad 
retirement funds in nongovernmental assets (as well as government 
securities), adjustments in payroll tax rates paid by employers and 
employees, and repeal of the supplemental annuity work-hour tax paid 
by employers. Railroad retirement and survivor benefits are financed 
by: (1) payroll taxes paid by covered employees and employers on 
railroad earnings, up to a certain maximum wage base; (2) income from 
the Social Security financial interchange; (3) appropriations from 
general revenues (including transfers of income taxes collected on 
benefits); and (4) investment income.  

PAYROLL TAXES

The primary source of income to the Railroad Retirement Account is 
payroll taxes levied on covered employers and their employees. These 
taxes are imposed on wages below an annual maximum amount, known as 
the "wage base." Currently, both employers and employees pay a tier 1 
tax that is equivalent to the combined Social Security (Old-Age, 
Survivors and Disability Insurance) and Hospital Insurance (Part A of 
Medicare) tax rate. In addition, a tier 2 tax is paid by both rail 
employers and employees. The 2003 annual tier 1 and tier 2 wage bases 
are $87,000 and $64,500, respectively. Since 1994, there has been no 
wage limit for the hospital insurance portion of the tax (1.45 percent 
on employers and employees, each). Thus, this tax is imposed on all 
wages.
Under the Railroad Retirement and Survivors' Improvement Act of 2001 
(Public Law 107-90), the tier 2 tax rate paid by employers was lowered 
from 16.1 percent to 15.6 percent in 2002 and 14.2 percent in 2003.  
The tier 2 tax rate paid by employees remained unchanged at 4.9 percent 
in 2002 and 2003.  Beginning in 2004, tax rates paid by employers and 
employees will be adjusted annually based on the 10-year average ratio 
of certain asset balances to the sum of benefits and administrative 
expenses (the "average account benefits ratio").  Depending on the 
average account benefits ratio, tier 2 tax rates for employers will be 
between 8.2 percent and 22.1 percent.  Tier 2 tax rates for employees 
will be between 0 percent and 4.9 percent.  Scheduled tier 1 tax rates 
and projected tier 2 tax rates are shown in Table 5-4.
The tier 1 wage base is equal to the Social Security wage base and 
automatically increases with wage growth in the economy. The tier 2 
wage base is equal to what the Social Security wage base would have 
been without the ad hoc increases in the wage base established by the 
Social Security Amendments of 1977 (Public Law 95-215).

FINANCIAL INTERCHANGE

The Railroad Retirement System and the Social Security Program have been 
coordinated financially since 1951. The purpose of the financial 
interchange is to place the Social Security Trust Funds in the same 
position they would have been in if railroad employment had been 
covered under Social Security since its inception. Generally, under the 
interchange, for a given fiscal year the revenue that would 
have been collected by the Social Security Trust Funds if railroad 
employment had been covered directly by Social Security is netted 
against the amount of benefits Social Security would have paid to 
railroad beneficiaries based on railroad and nonrailroad earnings 
during that period. Where Social Security benefits that would have been 
paid exceed income to the trust funds that would have been due, the 
excess, plus an allowance for interest and administrative expenses, is 
transferred from the Social Security Trust Funds to the Railroad 
Retirement Board's (RRB) Social Security Equivalent Benefit Account. 
If income exceeds benefits, a transfer is made from the RRB's Social 
Security Equivalent Benefit Account to the Social Security Trust 
Funds. (Before 1985, transfers were made to or from the Railroad 
Retirement Account.)

TABLE 5-4--SCHEDULED TAX RATES FOR TIER 1 AND TIER 2, SELECTED 
YEARS 1975-2008


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]



The determination of the amount to be transferred through the financial 
interchange for a given fiscal year is made no later than June of the 
year following the close of the preceding fiscal year. Table 5-5 shows 
the actual operation of the financial interchange for selected years 
for the two Social Security Trust Funds (Old-Age and Survivors 
Insurance and Disability Insurance) and the Medicare Hospital Insurance 
Trust Fund.
In order to make funds available to the Social Security Equivalent 
Benefit Account from the forthcoming financial interchange on a more 
current basis, the Railroad Retirement Solvency Act of 1983 provided 
for transfers from general Treasury funds to the Social Security 
Equivalent Benefit Account each month. The amount transferred each 
month equals the Social Security benefits paid from the account during
the month less the Social Security taxes received by the account in 
that month. The amount so transferred for a particular month is repaid 
when the Social Security System makes reimbursement for that month 
under the financial interchange program.

GENERAL REVENUE APPROPRIATIONS

Vested dual benefits are funded solely through general revenue 
appropriations. The Congress authorized such funding through the year 
2003 in the 1974 act that substantially reformed the Railroad 
Retirement System. The total appropriated for the first 28 fiscal 
years (1976-2003) for which these benefits were payable was 
$8.12 billion.
The Omnibus Budget Reconciliation Act of 1981 (Public Law 97-35) 
established a Dual Benefits Payments Account. Each year an amount 
which is appropriated for the payment of vested dual benefits is 
placed in this account. If the amount appropriated is insufficient 
to pay full vested dual benefits to all eligible beneficiaries for 
the year, the Railroad Retirement Board is authorized to prorate 
payments from the dual benefits account so that the amounts paid 
do not exceed the amounts appropriated.
In addition to amounts transferred to the Dual Benefits Payments 
Account through the regular appropriations process, the Railroad 
Retirement Solvency Act of 1983 provided for the appropriation of 
approximately $1.7 billion to the Railroad Retirement Account in three 
installments paid on January 1, 1984, 1985, and 1986. These three 
appropriations were to reimburse the Railroad Retirement Account for 
prior shortfalls in annual appropriations. The actual amounts received, 
including interest, totaled $2.128 billion. This amount is not included 
in the figure given above for total appropriations between 1976 
and 2003.

TABLE 5-5--AMOUNTS TRANSFERRED TO OR FROM (-)  THE SOCIAL SECURITY 
EQUIVALENT BENEFIT ACCOUNT AND THE SOCIAL SECURITY AND MEDICARE 
HOSPITAL INSURANCE TRUST FUNDS, SELECTED FISCAL YEARS 1954-2002 



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


 INVESTMENT INCOME

    	Funds that are not needed immediately to pay benefits or 
administrative expenses are invested to provide additional income for 
the Railroad Retirement System. Before enactment of the Railroad 
Retirement and Survivors' Improvement Act of 2001 (Public Law 107-90) 
in December 2001, the Railroad Retirement Board was authorized to invest 
funds only in interest-bearing U.S. government or U.S. government-
guaranteed securities. Public Law 107-90 established the National 
Railroad Retirement Investment Trust (NRRIT), which has authority to 
invest  funds in nongovernmental assets (such as equities and debt 
securities), as well as government securities. The NRRIT is not a 
government agency. It is a nongovernmental entity legally domiciled 
in the District of Columbia and administered by a Board of Trustees.
	The Board of Trustees has 7 members:  3 chosen by rail labor, 
3 chosen by rail employers, and 1 chosen by a majority of the other 
6 members to represent the general public. With the assistance of 
independent advisors and investment managers, the Board of Trustees 
invests assets, pays administrative expenses, and will transfer funds 
to a disbursing agent (a qualified nongovernmental financial 
institution) responsible for benefit payments (in the interim, the 
Treasury Department will continue to issue railroad retirement benefit 
payments). The Board of Trustees is subject to reporting and fiduciary 
standards similar to those under the Employment Retirement Income 
Security Act of 1974 (ERISA), which covers most private sector employee 
benefit plans. If any provisions of the Railroad Retirement Act are 
violated, the Railroad Retirement Board may bring civil action against 
the NRRIT. An independent qualified public accountant will audit the 
financial statements of the trust fund annually.  A management report 
will be submitted each fiscal year to Congress, the President, the 
Railroad Retirement Board, and the Office of Management and Budget.
Public Law 107-90 directed the Railroad Retirement Board (RRB) to 
transfer funds in the Railroad Retirement Account that are not needed 
to pay current administrative expenses to the NRRIT. (Funds needed to 
pay benefits and related administrative expenses are transferred to a 
disbursing agent.)  In addition, the RRB was directed to transfer funds 
in the Social Security Equivalent Benefit Account that are not needed 
to pay current benefits and administrative expenses to the NRRIT (such 
funds may be used to pay benefits or invest in government securities 
only). In fiscal year 2002, the Railroad Retirement Board transferred 
$1.502 billion to the NRRIT. The RRB transferred an additional $10.25 
billion between  October 1, 2002 and January 24, 2003. All eligible 
assets are expected to be transferred to the NRRIT by the end of 
fiscal year 2003.
	The NRRIT, which began operations in February 2002, began 
investment activities in September 2002. The NRRIT's annual report for 
fiscal year 2002 indicates that, from September 13-30, 2002, the market 
value of NRRIT assets declined 5.3 percent due to falling stock prices. 
The report goes on to state that "overall during fiscal year 2002, the 
market value of the total railroad retirement assets, including NRRIT 
investments, increased $1.4 billion after benefit payments due in large 
part to significant increases in the market value of railroad retirement 
investments in Federal securities as interest rates declined during 
the year" (National Railroad Retirement Investment Trust, 2003).


INCOME TAXATION OF RAILROAD RETIREMENT BENEFITS



Before 1984, railroad retirement benefits, with the exception of 
supplemental annuities, were not subject to Federal income taxation. 
However, as a result of the Railroad Retirement Solvency Act (Public 
Law 98-76) and the Social Security Amendments of 1983 (Public Law 
98-21), tier 1, tier 2, and vested dual benefits received after 
December 31, 1983, are subject to taxation. The taxation provisions 
were subsequently amended by the Consolidated Omnibus Budget 
Reconciliation Act of 1985, the Tax Reform Act of 1986, and the Omnibus 
Budget Reconciliation Act of 1993. Under current law, the Social 
Security-equivalent portions of tier 1 benefits are taxed in a manner 
identical to Social Security benefits. The proceeds derived from the 
taxation under pre-OBRA 1993 rules of tier 1 benefits which are 
equivalent to Social Security benefits are deposited in the Social 
Security Equivalent Benefit Account and credited to the Social Security 
Trust Funds through adjustments in the financial interchange. The 
additional income taxes attributable to OBRA 1993 are deposited in the 
Hospital Insurance Trust Fund (Part A of Medicare). Tier 1 benefits in 
excess of Social Security-equivalent levels (including early retirement 
benefits payable at ages 60-61 and occupational disability annuities) 
and tier 2 benefits are taxed in a manner identical to private and 
public service pensions, with the proceeds deposited in the Railroad 
Retirement Account. Vested dual benefits are taxed like private and 
public service pensions, with the proceeds deposited in the Dual 
Benefits Payments Account.The Omnibus Budget Reconciliation Act of 
1987, which increased tier 2 payroll tax rates in January 1988 by a 
total of 2 percentage points, allowed revenues from Federal income 
taxes on tier 2 railroad retirement benefits to be returned to 
the Railroad Retirement System until October 1, 1989.  Subsequent 
legislation extended the date to October 1, 1990, and then to 
October 1, 1992.   Legislation in 1994 extended these transfers 
on a permanent basis.

          FINANCIAL STATUS OF THE RAILROAD RETIREMENT SYSTEM

	Along with the investment performance of the NRRIT, one of 
the most important factors affecting the financial status of the 
Railroad Retirement System is the level of employment in the industry. 
The recent history of industry employment is shown in table 5-6.  
Continuing decline in railroad employment raises concern about the 
financing of the Railroad Retirement System. Section 502 of the Railroad 
Retirement Solvency Act of 1983 requires a report each year by the Board 
on the system's actuarial status, and financing recommendations when 
appropriate. The Board's 2003 financial report to Congress, which 
addresses the 75-year period from 2002-2076 under optimistic, moderate, 
and pessimistic employment assumptions, indicates no cash flow problems 
under the optimistic and moderate employment assumptions.  Under the 
pessimistic assumptions, cash flow problems are projected to occur in 
2022 (U.S. Railroad, 2003a). Overall, the report concludes that  
"barring a sudden, unanticipated, large drop in railroad employment, 
the railroads retirement system will experience no cash flow problems 
during the next 19 years.  The long-term stability of the system, 
however, is not assured.  Under the current financing structure, actual 
levels of railroad employment and investment return over the coming 
years will determine whether additional corrective action is necessary."


TABLE 5-6--RAILROAD INDUSTRY EMPLOYMENT, SELECTED YEARS 1940-2002



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


THE RAILROAD UNEMPLOYMENT INSURANCE PROGRAM

OVERVIEW

The Railroad Unemployment Insurance System has been in existence since 
1938.  Railroad workers were initially covered by the unemployment 
provisions of the Social Security Act of 1935. However, the Railroad 
Unemployment Insurance Act (Public Law 75-722) was passed in 1938 to 
provide a uniform unemployment insurance system for all railroad 
workers, regardless of the State in which they worked or lived. The 
main reasons for this action were to avoid administrative problems in 
handling claims for railroad workers who earned wages in a number of 
States and to accommodate the railroad unions' desire that individuals 
throughout the industry be treated the same for purposes of 
unemployment compensation.

Table 5-7 summarizes Railroad Unemployment Program statistics for 
selected years between 1970 and 2002. The table shows projected 
statistics for 2003 and 2004.

BENEFITS AND ELIGIBLITY REQUIREMENTS

A new benefit year for unemployment and sickness benefits begins every  
July 1. To qualify in the benefit year beginning July 1, 2002, a worker
must have base year railroad earnings of at least $2,625 in the 
preceding calendar year, not counting earnings over $1,050 per month. 
Under the indexing provisions of the law reflecting growth in average 
national wages, a worker must have base year earnings of $2,750 in 
calendar year 2002, not counting earnings of more than $1,100 per 
month, to qualify in the benefit year beginning July 1, 2003.  If the 
base year was the first year of railroad service, the worker also must 
have worked in 5 months of that year (see Table 5-8). 
No benefits are payable for the first 7 days of the first claim (or 
claims) for unemployment and sickness in a benefit year. This generally 
results in a 1-week waiting period. A claimant is normally paid for 
days of unemployment or sickness over 4 in 14-day registration periods. 
The maximum daily benefit payable in the benefit year that began 
July 1, 2002 is $52, and maximum benefits for biweekly claims is $520.  
The maximum daily benefit rate increases to $55 on July 1, 2003 and 
$56 on July 1, 2004.
The program offers "normal" and "extended" benefits. Qualified workers 
can receive normal benefits for up to 130 days or 26 weeks, but the 
total may not exceed their creditable wages in the base year. Workers 
with at least 10 years of railroad service may receive up to 65 
additional days or 13 additional weeks of extended benefits.  The 
average duration of benefits fluctuates with the unemployment rate. 
In the 1940-2002 period, it ranged from 7.4 to 19.1 weeks and averaged 
12.1 weeks.


In 1946, a program of cash sickness benefits was established for 
railroad workers as part of the unemployment compensation system. 
Sickness benefits are financed out of the same employer-paid payroll 
taxes used to finance unemployment compensation benefits. A qualified 
railroad worker may receive sickness benefits if he or she files a 
"statement of sickness" signed by a doctor that is mailed within 7 days 
of the first day for which a day of sickness is claimed.A rail worker 
who is unemployed due to a strike that is not in violation of the 
Railway Labor Act of 1926 can receive unemployment compensation 
benefits after a 14-day waiting period. Unemployment benefits cannot 
be paid to individuals participating in a strike that is in violation 
of the Railway Labor Act, and is therefore "illegal." Individuals who 
are unemployed due to an "illegal" strike, but who are not actually 
participating in the strike, are eligible for unemployment compensation 
benefits but are subject to the 14-day waiting period. Total 
expenditures for unemployment and sickness benefits were $98 million 
in benefit year 2001-2002, which was 0.7 percent of total wages paid 
by the industry during the period. This compares to a peak of 5.1 
percent in 1959. It is also much lower than in benefit year 1983, a 
recession year, when the figure was 3.9 percent. Since the beginning
of sickness benefits, unemployment benefits have comprised over two-
thirds of total payments. However, in benefit years ending 1999 through
2002, they accounted for less than half of the total. Benefit payments 
vary directly with the insured unemployment rate, covered employment, 
average weekly benefit amount, and average duration of benefits. The 
insured unemployment rate is the percentage of workers qualified under 
the Railroad Unemployment Compensation System who drew benefits in a 
particular benefit year. The railroad insured unemployment rate has 
been high and volatile since the beginning of the program, averaging 
12 percent. Since 1946, it has ranged from 4 percent to 30 percent.  
	Changes in covered employment have short-run and long-run 
effects on the unemployment program. In the short run, when layoffs 
cause employment to decline, the insured unemployment rate and benefits 
paid increase. In the long run, when employers have fewer workers to 
lay off, benefits decline and the program shrinks. Railroad industry 
employment has declined from 1,195,000 in 1940 to 227,000 in 2002.
From 1940 to 1975, the average annual decline in railroad employment 
was 18,000.  Since then, the average annual decline was 12,000. 



TABLE 5-7--RAILROAD UNEMPLOYMENT AND SICKNESS INSURANCE PROGRAM 
STATISTICS, SELECTED YEARS 1970-2004


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]




TABLE 5-8--BENEFITS UNDER THE RAILROAD UNEMPLOYMENT INSURANCE SYSTEM, 
BENEFIT YEARS 2002-2003, 2003-2004, 2004-2005



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]



FINANCING

The Railroad Unemployment and Sickness Benefit Programs are financed 
by payroll taxes on railroad employers.  Employees do not pay railroad 
unemployment taxes. The taxable earnings base in calendar year 2002 is 
the first $1,100 of each employee's monthly earnings. The earnings base 
is adjusted each year to equal approximately two-thirds of the 
cumulative increase in the maximum base for railroad retirement tier 
1 taxes since 1984.Experience-based tax rates, under which employers 
with higher levels of unemployment pay somewhat higher rates, were 
phased in on a partial basis in 1991 and 1992, and became fully
effective in 1993 with a minimum rate of 0.65 percent and a maximum 
rate of 12 percent. The future maximum rate could be 12.5 percent if a 
maximum surcharge is in effect.Railroad unemployment taxes are collected 
by the Railroad Retirement Board. Of each year's tax receipts, an 
amount equal to 0.65 percent of taxable payroll is set aside for 
administration. Excess funds allocated but not needed for 
administration are transferred to the Railroad Unemployment Insurance 
Account at the end of each fiscal year.
The Railroad Unemployment Insurance and Railroad Unemployment 
Insurance Administration Accounts are part of the Federal Unemployment 
Trust Fund. This trust fund has 53 State Unemployment Compensation 
Program accounts, 4 Federal accounts, and the 2 railroad accounts.
Since 1959, the Railroad Unemployment Trust Fund has been able to 
borrow funds from the railroad pension fund when employer taxes have 
not been sufficient to cover the costs of unemployment and sickness 
benefits. The unemployment program became depleted for the first time 
in 1960 after a long decline from peak reserves of nearly 18 percent 
of total annual wages in 1948. By 1963, it owed the retirement account 
$314 million, or 5.9 percent of total annual wages paid in the industry 
that year. The program gradually recovered during the 1960s until it had 
positive reserves again in 1974. The reserves were depleted again in 
1976-78 and loans were again required beginning in 1981.
A rapid decline in 1981-82 in railroad employment during a recession 
resulted in substantial borrowing from the pension system. The borrowing 
reached a peak level of over $850 million at the end of 1986. This debt 
was repaid in full with a $180.2 million cash repayment from the 
Railroad Unemployment Insurance Account on June 29, 1993. Interest on 
the loan during the debt period was charged at the average rate earned 
by U.S. Treasury securities held by the retirement account so that the 
retirement account did not lose any investment earnings as a result of 
the loan.
Financial measures to assist the Railroad Unemployment Insurance 
Account were included in the Railroad Retirement Solvency Act of 
August 12, 1983. The Solvency Act raised the taxable limit on monthly 
earnings and the base-year qualifying amount. The waiting period for 
benefits during strikes was increased from 7 to 14 days. A temporary 
repayment tax on railroad employers began July 1, 1986, to initiate 
repayment of the loans made by the Railroad Retirement Account.
The 1983 legislation also mandated the establishment of a Railroad 
Unemployment Compensation Committee (1984) to review the unemployment 
and sickness benefit programs and submit a report to Congress. The 
Committee reviewed all aspects of the Railroad Unemployment Insurance 
System, especially repayment of the system's debt to the Railroad 
Retirement Account and the viability of transferring railroad 
unemployment benefit payments to State programs. The Consolidated 
Omnibus Budget Reconciliation Act of April 1986 (Public Law 99-272) 
amended the temporary unemployment insurance loan repayment tax 
beginning July 1, 1986, continued authority for borrowing by the 
Railroad Unemployment Insurance Account from the Railroad Retirement 
Account, and provided a contingency surtax on rail employers if further
borrowing took place. Changes enacted under the Technical and 
Miscellaneous Revenue Act of 1988 (Public Law 100-647) were based on 
the recommendations of the Railroad Unemployment Compensation Committee. 
The 1988 amendments improved financing by indexing the tax base to 
average national wages and experience rating employer contributions. 
Repayment of the unemployment system's debt to the retirement system 
was ensured by fixing the loan repayment tax at 4 percent of the 
contribution base and retaining this elevated tax rate until the debt 
was fully repaid with interest on June 29, 1993.
A contingency surtax (3.5 percent), effective in the event of further 
borrowing by the Railroad Unemployment Insurance Account, was eliminated
in 1991. Instead, a surcharge will be added to employers' unemployment 
insurance taxes for a calendar year if the balance in the unemployment 
insurance account on the previous June 30 goes below $100 million (as 
indexed). The surcharge rate would be 1.5, 2.5, or 3.5 percent depending 
on how low the balance had fallen. If a 3.5 percent surcharge goes into 
effect for a given year, the maximum rate for any employer would be 12.5 
percent rather than 12 percent. If the account balance on the preceding
June 30 is above $250 million (as indexed), the excess will be refunded 
to the employers in the form of a rate reduction for the year through a 
pooled credit.
In 1996, Congress enacted H.R. 2594, the Railroad Unemployment Insurance 
Amendments Act of 1996 (Public Law 104-251). Among other provisions, 
this law raised daily benefit rates for retirement and sickness 
benefits and revised the formula for indexing future rates. The Act 
shortened the waiting period for initial unemployment and sickness 
benefits, cut the weeks of extended benefits payable to rail workers 
with more than 15 years' service, and established an earnings test for 
workers with days of employment as well as unemployment or sickness 
during each 2-week registration period.
The Board is required to submit an annual financial report to Congress 
on the status of the Unemployment Insurance System. The report must 
include recommendations for financing changes that might be advisable, 
specifically with regard to rates of employer contributions.  The 2003 
report (U.S. Railroad, 2003b) states that, under three different sets 
of employment assumptions (optimistic, moderate, and pessimistic), 
experience-based contribution rates are projected to respond to 
fluctuating employment and unemployment levels thereby maintaining 
fund solvency. Employer contribution rates, which include a surcharge 
of 2.5 percent in calendar year 2003, are projected to include a 1.5 
percent surcharge in calendar years 2004 and 2005. The 2003 report 
shows that during the 11-year projection period (fiscal years 2003-
2013), the average employer contribution rate is projected to remain 
well below the maximum, even under the pessimistic assumptions. The 
Board recommends no financing changes at this time.

LEGISLATIVE HISTORY

In the final quarter of the 19th century, railroad companies were among 
the largest in America. It was in the rail industry that the first 
industrial pension was established in 1874. By the mid-1920s, more than 
80 percent of all rail workers were covered by pension plans. In the 
early 1930s these pension plans began to face enormous financial 
problems. The commercial success of the rail industry peaked in the 
period between 1900 and 1920, and rail employment decreased 
significantly in the 1920s.
	Rail pension plans were for the most part poorly constructed. 
There was no regulation of railroad pensions and plans were frequently 
terminated, pension funds were chronically underfinanced, and most 
funds could not survive the financial pressures of the depression. 
These problems, plus a tradition of Federal regulation of the railroads, 
led to the enactment of the Railroad Retirement Act of 1934. The 
original Railroad Retirement System was structured to provide annuities 
to retirees based on rail earnings and length of service. Benefits were 
disbursed for retirees at age 65, although workers with 30 years of 
service could retire at age 60 with a reduction in payments. The 
original disability provisions were very stringent. 
Little was provided for dependents, and nothing for spouses.
The Railroad Retirement System has been modified many times by Congress. 
In the late 1940s and 1950s, benefits were liberalized, and the Railroad 
Retirement System was brought into closer conformity with Social 
Security. For instance, in 1946, benefits were extended to survivors, 
based on combined railroad and Social Security-covered employment. 
This extension demonstrated congressional concern for the social goal 
of providing income security in old age, or social insurance, rather 
than simply rewarding career performance.
In the 1970s and 1980s, the Railroad Retirement System encountered 
recurrent financial crises as a result of employment declines in the 
industry, inflation, and more beneficiaries. Major legislation was 
enacted in 1974, 1981, 1983, and 1987 to prevent the system from 
becoming insolvent.


The Railroad Retirement Solvency Act of 1983 (Public Law 98-76) 
increased payroll taxes on employers and employees, deferred cost-
of-living increases, reduced early retirement benefits, made tier 2 
benefits and vested dual benefit payments subject to Federal income 
taxes on the same basis as private and public service pensions, and
provided other measures designed to improve railroad retirement 
financing. (The Social Security Amendments of 1983 (Public Law 98-
21) made up to 50 percent of tier 1 benefits subject to Federal income 
taxes on the same basis as Social Security benefits.) Without the 
enactment of this legislation, the Railroad Retirement Board would have 
been required to substantially reduce benefit payments in 1983.
The Omnibus Budget Reconciliation Act (OBRA) of 1987 (Public Law 
100-203) increased tier 2 tax rates in January 1988 by a total of 
2 percent: 1.35 percent on employers and 0.65 percent on employees. 
In addition, the law extended for 1 year, until October 1, 1989, the 
time during which revenues from Federal income taxes on tier 2 railroad 
retirement benefits could be transferred from the general fund of the 
U.S. Treasury to the Railroad Retirement Account for use in paying 
benefits.
Railroad retirement amendments were included with railroad unemployment 
insurance amendments in the Technical and Miscellaneous Revenue Act of 
1988 (Public Law 100-647). This legislation ensured repayment of the 
Railroad Unemployment Insurance Account's debt to the Railroad 
Retirement Account by extending a temporary unemployment insurance tax 
until the debt was fully repaid with interest in 1993. Public Law 
100-647 also eased work restrictions and the crediting of military 
service in certain cases and provided more equitable treatment 
of severance pay for railroad retirement purposes.
The Omnibus Budget Reconciliation Act of 1989 (Public Law 101-239) 
included a number of railroad retirement and Social Security provisions 
that affected payroll taxes and benefits beginning in 1990. The law 
increased the amount of earnings subject to Social Security and railroad
retirement payroll taxes by including contributions to 401(k) deferred 
compensation plans in the measure of average wages, which is used to 
index the wage base. It also extended for 1 additional year, until 
October 1, 1990, the time during which revenues from Federal income 
taxes on tier 2 railroad retirement benefits may be transferred to the 
Railroad Retirement Account for use in paying benefits.
The Omnibus Budget Reconciliation Act of 1990 (Public Law 101-508) 
further extended the date of this transfer until October 1, 1992, and 
also permanently exempted supplemental annuities from reductions under 
the Gramm-Rudman deficit reduction measures adopted by Congress.
 The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) 
removed the maximum taxable earnings base for purposes of paying the 
Medicare tax, thus making all railroad retirement tier 1 earnings 
subject to the Medicare payroll tax.  Public Law 103-66 also increased 
the amount of Social Security and railroad retirement tier 1 benefits 
subject to Federal income taxes for persons with higher incomes. A 
provision in the Social Security Administrative Reform Act of 1994 
(Public Law 103-296) extended on a permanent basis the transfer to the 
Railroad Retirement Account of Federal income taxes on tier 2 railroad 
retirement benefits and a retroactive payment was made, covering the 
period October 1, 1992 through September 30, 1994.


	The Senior Citizens' Freedom to Work Act (Public Law 106-182), 
enacted on April 7, 2000, eliminated the earnings limitation on 
beneficiaries beginning with the month the beneficiary reaches the full 
retirement age.  In the calendar years before the year in which the 
beneficiary reaches the full retirement age, $1 in benefits is withheld 
for every $2 earned above an exempt amount ($11,520 in 2003).  For 
months in the calendar year in which the beneficiary reaches the full 
retirement age (up to the month the beneficiary reaches the full 
retirement age), $1 in benefits is withheld for every $3 earned above 
an exempt amount ($30,720 in 2003).
The Railroad Retirement and Survivors' Improvement Act of 2001 (Public 
Law 107-90) made a number of changes to railroad retirement benefits 
and financing.  In terms of benefit changes, the 2001 law: (1) 
liberalized early retirement benefits for 30-year employees and their 
spouses (employees with 30 years of railroad service and their spouses 
may retire at age 60 with full tier 1 and tier 2 annuities); (2) 
repealed the cap on total monthly retirement and disability benefits 
payable to an employee and spouse; (3) lowered the minimum service 
requirement for retirement annuities from 10 years to 5 years of service 
performed after 1995; and (4) increased benefits for some widow(er)s.
In terms of financing changes, the 2001 law: (1) established the 
National Railroad Retirement Investment Trust (NRRIT) which is 
authorized to invest funds in nongovernmental assets as well as 
government securities (the Board of Trustees invests assets, pays 
administrative expenses and transfers funds to a disbursing agent 
responsible for the payment of benefits); (2) adjusted payroll tax 
rates paid by employers and employees (beginning in 2004, tier 2 tax 
rates will be based on a 10-year "average account benefits ratio" with 
employer rates ranging from 8.2 percent to 22.1 percent and employee 
rates ranging from 0 percent to 4.9 percent); (3) repealed the 
supplemental annuity work-hour tax; (4) eliminated the Supplemental 
Annuity Account and transferred the balance in the account to the NRRIT 
(the NRRIT will pay supplemental annuity benefits); (5) provided 
authority to transfer Railroad Retirement Account funds not needed to 
pay current administrative expenses to the NRRIT (the NRRIT will pay 
tier 2 benefits); (6) provided authority to transfer Social Security 
Equivalent Benefit Account (SSEBA) funds not needed to pay current 
benefits and administrative expenses to the NRRIT (the SSEBA will 
pay the Social Security level of tier 1 benefits and the NRRIT will pay 
the portion of tier 1 benefits in excess of the Social Security level); 
(7) provided authority to transfer Dual Benefit Account funds needed 
for dual benefit payments to a disbursing agent; and (8) provided 
tax-exempt status for the NRRIT. The 2001 law was based on joint 
recommendations to Congress negotiated by rail labor organizations 
and rail freight carriers.

REFERENCES

Commission on Railroad Retirement Reform. (1990, September). Final 
report. Washington, DC: Author.
Executive Office of the President.  (2003).   Budget of the
United States Government: (Historical Tables; ISBN 0-16-051239-5). 
Washington, DC: U.S. Government Printing Office.
National Railroad Retirement Investment Trust. (2003, January). 
Annual Management Report for Fiscal Year 2002.  Washington, DC: 
Author.
Railroad Unemployment Compensation Committee. (1984, June).  
Report of the 
Railroad Unemployment Compensation Committee. Washington, DC: 
Author.
Research Institute of America. (1997). Complete internal revenue 
code.  
New York: Author.
U.S. Railroad Retirement Board. (2002). Railroad Retirement 
Handbook. 
Washington, DC: Author.
U.S. Railroad Retirement Board, Bureau of the Actuary. (2003a).   
Twenty-second actuarial valuation of the assets and liabilities under  
the Railroad Retirement Acts as of December 31, 2001.  Washington, 
DC: Author.
U.S. Railroad Retirement Board, Bureau of the Actuary. (2003b, June). 
Railroad Unemployment Insurance System: Annual Report required by 
Section 7105 of the Technical and Miscellaneous Revenue Act of 1988. 
Washington, DC: Author.


