Senate Report 106-475 - RAILROAD RETIREMENT AND SURVIVORS' IMPROVEMENT ACT OF 2000

[Senate Report 106-475]
[From the U.S. Government Publishing Office]

Calendar No. 924
106th Congress Report
SENATE
2d Session 106-475

======================================================================

RAILROAD RETIREMENT AND SURVIVORS' IMPROVEMENT ACT OF 2000

_______

October 3 (legislative day, September 22), 2000.--Ordered to be printed

_______

Mr. Roth, from the Committee on Finance, submitted the following

R E P O R T

[To accompany H.R. 4844]

The Committee on Finance, to which was referred the bill
(H.R. 4844) to amend the Internal Revenue Code of 1986 to
modernize the financing of the railroad retirement system and
to provide enhanced benefits to employees and beneficiaries
having considered the same, reports favorably thereon with an
amendment to provide clarification that members of the Railroad
Retirement Board will be considered fiduciaries for purposes of
appointing the trustees of the Railroad Retirement Investment
Trust Board and make other changes recommends that the bill as
amended do pass.

CONTENTS

Page
I. Summary and Background............................................2
A. Summary............................................. 2
B. Background and Need for Legislation................. 2
C. Legislative History................................. 3
II. Explanation of the Bill...........................................3
A. Railroad Retirement Reform.......................... 3
1. Amendments to the Railroad Retirement Act of
1974........................................... 3
a. Structure and administration of railroad
employee benefit system.................... 3
b. Increased railroad retirement benefits...... 5
2. Amendments to the Internal Revenue Code of 1986. 7
III.Budget Effects of the Bill........................................9

IV. Votes of the Committee...........................................17
A. Motion to Report the Bill........................... 18
B. Votes on Amendments................................. 18
V. Regulatory Impact and Other Matters..............................19
A. Regulatory Impact................................... 19
B. Information Relating to Unfunded Mandates........... 19
C. Tax Complexity Analysis............................. 19
VI. Changes in Existing Law Made by the Bill as Reported.............19

I. SUMMARY AND BACKGROUND

A. Summary

The bill, H.R. 4844, as amended (the ``Railroad Retirement
and Survivors' Improvement Act of 2000''), will improve
benefits and modernize financing of the railroad retirement
system. Key provisions of the bill include:
Railroad Retirement Trust Fund.--The bill creates a new
railroad retirement investment trust (the ``Trust'') for the
investment of surplus Railroad Retirement funds in the private
capital markets. The Trust will be governed by a seven-member
board of trustees which will independently manage and invest
the assets of the Trust.
Railroad retirement benefits.--The bill increases tier 2
benefits for widows and widowers to 100 percent of the deceased
employee's benefits on the date of death. Also, the bill
reduces the number of years of covered service to be vested in
the railroad retirement system (both tier 1 and tier 2) from 10
years to 5 years. In addition, the bill reduces the age at
which full tier 1 benefits are payable from 62 to 60 for
employees with at least 30 years of rail service (with such
benefits paid from tier 2 funds). Finally, the bill repeals the
present-law maximum limit on monthly railroad retirement
benefits (both tier 1 and tier 2).
Amendments to the Internal Revenue Code of 1986 (the
``Code'').--The bill makes the following changes to the Code:
(1) lowers the tier 2 payroll tax rates for employers and
employee representatives in 2001 and 2002 and provides a
modified method of calculating the rate of all tier 2 taxes
after 2002; (2) repeals the supplemental annuity tax; and (3)
provides tax-exempt status for the Trust.

B. Background and Need for Legislation

The railroad retirement system is unique, in effect a
multi-employer pension plan operated by the Federal government
for the employees of a single industry, the railroad industry.
The railroad retirement system was created through a series of
laws enacted in the 1930's, culminating in the Railroad
Retirement and Carriers' Taxing Act of 1937. Substantive
changes to the Railroad Retirement and Carriers' Taxing Acts of
1937, including its replacement by the current Railroad
Retirement Act of 1974 and substantive amendments to that
latter Act, have generally been enacted on the basis of joint
recommendations negotiated by representatives of railroad labor
and management. The last major reform to railroad retirement
occurred in 1983 with enactment of the Railroad Retirement
Solvency Act.
The railroad retirement system is administered by the
Railroad Retirement Board, which is an independent agency in
the executive branch of the United States Government. The Board
has three members, each of whom is appointed by the President
and confirmed by the Senate. The Railroad Retirement Act
requires that one Board Member be appointed upon the
recommendation of railroad labor and another Member appointed
upon the recommendation of railroad management. The Chair is
appointed to represent the public at large.
The railroad retirement system provides annuities to
retired and disabled railroad workers and certain family
members; and to the survivors' of deceased railroad workers.
Annuities paid under the Railroad Retirement Act consist of
different components called ``tiers.'' The Tier I benefit is
based upon both the railroad and non-railroad earnings of the
railroad employee, using social security formulas, and
approximates what would be payable under the Social Security
Act. Tier II benefits are based on an employee's railroad
service only and are computed under benefit formulas in the
Railroad Retirement Act. Tier II is the functional equivalent
of a private industry-wide pension plan.
Payroll taxes on railroad employers and employees serve as
the primary source of funding for railroad retirement benefits.
The total payroll tax is 36.3 percent. Other sources of funding
include transfers under the financial interchange with the
Social Security system; investment earnings from the trust
funds; general revenue appropriations for vested dual benefits;
income taxes on benefits; and a work hour tax paid by railroad
employers called the ``supplemental annuity tax.''
In fiscal year 1999, the Railroad Retirement Board paid
$8.2 billion in retirement and survivor benefits to 748,000
beneficiaries. At the end of fiscal year 1999, there were
316,358 railroad retirees, 167,478 spouses or divorced spouses
of retirees, and 219,341 survivors receiving railroad
retirement benefits.
H.R. 4844 would improve benefits under the railroad
retirement system, modernize the financing of the system, and
increase railroad industry (company and labor) responsibility
for operations of this pension system. The benefit changes made
in H.R. 4844 would be funded from the tier II component of
railroad retirement. The principal innovation in railroad
retirement system financing would be the creation of an
investment trust that would invest surplus railroad retirement
funds in the private capital markets, in a manner similar to
private pension funds.

C. Legislative History

The Committee on Finance marked up the provisions of the
bill on September 28, 2000, and approved the provisions, as
amended, on September 28, 2000, by a voice vote with a quorum
present.

II. EXPLANATION OF THE BILL

A. Railroad Retirement Reform

1. Amendments to the Railroad Retirement Act of 1974

a. Structure and administration of railroad employee benefit system
(secs. 105-108 of the bill and secs. 3, 4, 7, 15, and 22 of the
Railroad Retirement Act of 1974)

Present Law

The Railroad Retirement Board is the Federal agency
responsible for the administration of the Federal employment
benefits system earned through railroad industry employment. It
is headed by a three-member governing board that oversees its
operations. The railroad retirement system provides retirement,
disability and survivor benefits to qualifying
individuals.¹ Generally, a qualifying individual is
any eligible individual with at least ten years of railroad
service and the individual's spouse and dependents. The system,
funded primarily by payroll taxes on covered employers and
employees, includes a benefit roughly equivalent to Social
Security (the ``tier 1'' benefit), an additional benefit
similar those allowed in some private defined benefit pension
plans (the ``tier 2'' benefit), and certain other benefits.
Amounts received into the railroad retirement system are held
in Federal accounts (primarily in the railroad retirement
account) within the Federal Treasury until needed to pay
benefits. The money in these accounts is invested in special
interest-bearing Treasury obligations.
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\1\ The railroad unemployment insurance system also provides
uniform unemployment insurance to covered employees.
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Reasons for Change

Between 1985 and 1998, the average annual return on
Railroad Retirement Account (RRA) assets was 9.12 percent. This
return lagged far behind the 15.17 percent return earned by
large multi-employer pension plans over the same period. The
bill allows the railroad retirement industry pension (tier 2)
to take advantage of the higher returns available in the
private sector in an account established outside of Treasury.
The increased income projected from private investment permits
an increase in employee benefits and a reduction in employer
tax rates while maintaining an average benefit reserve of 4
years or more.

Explanation of Provision

Railroad Retirement Investment Trust

The bill creates a new railroad retirement investment trust
(the ``Trust''). The bill provides that the Trust is a private
entity and not a department, agency, or instrumentality of the
Federal government. The Trust is organized in the District of
Columbia and is governed by a seven-member board of
trustees.² The board will independently manage and
invest the assets of the Trust. Five members of the board will
constitute a quorum and, with the exception of the adoption of
investment guidelines, which must be by a unanimous vote of the
trustees, all decisions must be made by a majority vote. The
board of trustees will: (1) retain independent advisers to
assist it in the formulation and adoption of its investment
guidelines; (2) retain independent investment managers to
invest the assets in a manner consistent with board guidelines;
(3) invest the assets of the Trust pursuant to the adopted
investment guidelines; (4) pay administrative expenses of the
Trust from the money in the Trust; and (5) transfer money to
the disbursing agent to pay benefits and administrative
expenses related to those benefits. The board will be subject
to fiduciary standards similar to those applicable to pension
fund fiduciaries under the Employment Retirement Income
Security Act of 1974, as amended. The Railroad Retirement Board
will enforce these standards. Also, members of the Railroad
Retirement Board will be considered fiduciaries for purposes of
appointing the trustees of the Railroad Retirement Investment
Trust Board.
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\2\ The board of trustees is comprised of the following seven
members: (1) three representing the interests of labor; (2) three
members representing the interests of management; and (3) one member
representing the interests of the general public. The three members of
the Railroad Retirement Board are not eligible to serve on the board of
trustees. The term of each member of the board of trustees is three
years, but the initial members have staggered terms.
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The Trust's financial statements will be audited by an
independent qualified public accountant. The Trust will be
required to provide an annual management report to Congress
about the operations and financial condition of the Trust.

Transfers to the Trust

Upon the creation of the Trust, the Railroad Retirement
Board shall direct the Secretary of the Treasury to transfer to
the Trust: (1) the portion of the railroad retirement account
which is not needed to pay current administrative expenses; and
(2) the portion of the Social Security equivalent benefit
account ³ which is not needed to pay current
benefits. The Board of Trustees for the Trust will consult with
the Secretary of the Treasury to develop an appropriate method
of transferring or converting existing obligations held by the
accounts.
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\3\ The Social Security equivalent benefit account annually
receives amounts from or pays amounts to the Social Security trust
funds based upon a hypothetical calculation which assumes railroad
employment had been directly covered by Social Security.
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Effective Date

The provisions generally are effective on the date of
enactment.

b. Increased railroad retirement benefits (secs. 101-104 of the bill
and secs. 2, 3, 4, 5, 18, and 19 of the Railroad Retirement Act of
1974)

Present Law

Annuity benefits for widows and widowers

The railroad retirement system, funded primarily by payroll
taxes on covered employers and employees, provides a benefit
roughly equivalent to Social Security (the ``tier 1'' benefit),
an additional benefit similar to those allowed in some private
defined benefit pension plans (the ``tier 2'' benefit) and
certain other benefits. The spouse of a deceased railroad
employee may be eligible for any of these benefits.⁴
A widow's or widower's tier 1 benefit generally equals the
amount of the deceased employee's tier 1 benefits on the date
of death.⁵ Tier 2 benefits for the widow or widower,
however, are limited to one-half of the deceased employee's
tier 2 benefits on the date of death.⁶
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\4\ Generally, the benefits for the surviving spouse are calculated
with reference to the railroad retirement benefit for the deceased
employee at the date of death before any benefit reductions required
under the Railroad Retirement Act, the Social Security Act, and any
public service pension.
\5\ These amounts are indexed for inflation annually.
\6\ These amounts are indexed for inflation annually.
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Retirement age

Generally, an employee aged 60 with 30 years of service may
retire and collect full tier 2 benefits. However, tier 1
benefits for an employee with 30 years of service are
actuarially reduced for retirement before age 62. This
actuarial reduction did not apply prior to 1984.

Vesting requirements

Under present law (both tier 1 and tier 2), an employee
must have 10 years of covered service to be vested in the
railroad retirement system.

Railroad retirement maximum benefit

Present law limits the total amount of monthly railroad
retirement benefits (tier 1 and tier 2) payable to an employee
and an employee's spouse at the time the employee's annuity
payout begins. The maximum benefit is based on the highest two
years of creditable railroad retirement or social security
covered earnings in the 10-year period ending with the year the
employee's annuity payout begins.

Reasons for Change

The bill makes several changes to the benefit structure of
the Railroad Retirement system. First, widow(er) benefits are
increased. Concurrent resolutions (H.Con.Res. 52 and S.Con.Res.
80) introduced in both the House of Representatives and the
Senate urged rail labor, management, and retirees to negotiate
an improvement to widow(er) benefits. This proposal
incorporates the negotiated improvements. Second, vesting
requirements are reduced from 10 years to 5 years. Under
current law, workers with less than 10 years of rail service
are ineligible for benefits under the railroad retirement
system, and should their Railroad employment terminate before
10 years, they forfeit all of their payroll tax contributions
to the system. A 5-year vesting requirement is consistent with
many multi-employer pension plans covered by ERISA. Third, the
retirement age at which full benefits are payable for career
workers is reduced from 62 to 60 for Tier I. (Historically, the
full retirement age was 60. However, the age was increased to
62 in 1983 when the Railroad Retirement system faced
insolvency.) Finally, the railroad benefit maximum is repealed.
This provision in current law is intended to limit benefits for
certain workers. However, it unintentionally affects spouses
and many low-wage workers who may have worked in low-paying
jobs in the 10 years prior to benefit entitlement.

Explanation of Provision

Benefits for widows and widowers

The bill increases tier 2 benefits for widows and widowers
to 100 percent of the deceased employee's benefits on the date
of death. When coupled with the present-law tier 1 benefit for
widows and widowers, the bill provides widows and widowers
essentially the same benefit as that payable to the railroad
employee prior to death.

Retirement age

The bill reduces the age at which full tier 1 benefits are
payable from 62 to 60 for employees with at least 30 years of
rail service (with such benefits paid from tier 2 funds).

Vesting requirements

The bill reduces the years of covered service to be vested
in the railroad retirement system from the present 10 years to
5 years. For this purpose, employees with less than 10 years of
railroad employment before 1996 will have to meet either the
10-year vesting requirement or have 5 years of post-1995
railroad service to be vested.

Railroad retirement maximum benefit

The bill repeals the present-law maximum limit on monthly
railroad retirement benefits.

Effective Date

The provision related to the expansion of benefits to
widows and widowers is effective on January 1, 2001, and
applies to annuity amounts accruing after December 31, 2000.
The provision related to retirement is effective for annuities
that begin to accrue on or after January 1, 2001. The provision
relating to the faster vesting requirement is effective after
December 31, 2001. The provision relating to the repeal of the
railroad retirement maximum benefit is effective on January 1,
2001, and applies to annuity amounts accruing for months after
December 31, 2000.

2. Amendments to the Internal Revenue Code of 1986 (the ``Code'')
(secs. 001-204 of the bill and secs. 501, 3201, 3211, 3221, and
3241 of the Code)

Present Law

In general

Present law also imposes a tier 1 tax on railroad
employers, employees, and employee representatives. This tax is
essentially equivalent to Social Security taxes, and is used
primarily to fund tier 1 benefits, which are essentially
equivalent to Social Security benefits. Tier 2 railroad
retirement benefits are funded primarily through a tier 2
payroll tax. Present law also imposes a supplemental annuity
tax, which is used to finance supplemental annuity benefits, as
well as some tier 2 benefits.

Tier 2 payroll taxes

Present law imposes a tier 2 payroll tax on railroad
employers, employees, and employee representatives. The tax on
employers is equal to 16.1 percent of covered compensation. The
employee-level tax is equal to 4.9 percent of covered
compensation.⁷ The tier 2 tax on railroad employee
representatives is equal to 14.75 percent of covered
compensation.
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\7\ Like tier 1 and Social Security taxes, the employee-level tier
2 tax is deducted from the employee's compensation and remitted by the
employer.
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The maximum amount of compensation taken into account for
tier 2 payroll tax purposes is $56,700 (for 2000).

Supplemental annuity tax

A cents-per-hour tax is imposed on railroad employers and
employee representatives to fund supplemental annuity benefits.
The rate of tax is determined quarterly by the Railroad
Retirement Board based on the level necessary to fund current
benefits, plus administrative costs. The current rate of tax is
26.5 cents per hour. Special rules apply in the case of an
employer with respect to employees covered by a supplemental
pension plan established pursuant to collective bargaining.

Reasons for Change

The bill reduces the tier 2 payroll tax rate paid by
employers and employee representatives and provides a tax
adjustment mechanism for years after 2002. According to the
Railroad Retirement Board, the assets of the RRA at the end of
2000 will be sufficient to pay more than 5 years of benefits.
As a result, the tier 2 tax rate can be lowered over the next
two years without impacting the ability to pay benefits. Beyond
the next two years, the tax rate will be set each calendar year
pursuant to a statutory formula based on the average benefit
ratio. If the program becomes underfunded, the tax rate will
automatically increase to bolster the system's income, placing
the burden and investment risk on the industry rather than the
general taxpayer. Alternatively, if the trust fund balance
increases to a certain level relative to benefit payments, tax
rates will decrease. The automatic tax adjustment mechanism
allows the tax rate to be more responsive to the system's
financing needs.

Explanation of Provision

In general

The bill makes the following changes to the Code: (1)
lowers the tier 2 payroll tax rates for employers and employee
representatives in 2001 and 2002 and provides a modified method
of calculating the rate of all tier 2 taxes after 2002; (2)
repeals the supplemental annuity tax; and (3) provides tax-
exempt status for the Trust created by the bill (described in
A.1., above).

Payroll taxes

The bill lowers the tier 2 tax rate on employers to 15.6
percent of covered compensation in 2001 and 14.2 percent in
calendar year 2002. The bill lowers the tier 2 tax rate for
employee representatives to 14.75 percent of covered
compensation in 2001 and 14.2 percent in calendar year 2002.
The bill does not change the tier 2 tax on employees for 2001
and 2002.
Beginning in calendar year 2003, the bill provides for
automatic modifications in the tier 2 tax rates for employers,
employee representatives, and employees based on the ratio of
certain asset balances to the sum of benefits and
administrative expenses (the ``average account benefits
ratio''). The average account benefits ratio is the sum of the
account benefits ratio for the previous 10 fiscal years divided
by 10. The account benefits ratio is determined by dividing the
sum of the fair market value of the assets in the railroad
retirement account and the Trust at the close of the fiscal
year by the sum of total benefit payments and administrative
expenses of the Trust for such fiscal year. Because the average
account benefits ratio is expected to be between 4.0 and 6.1 in
2003, the table is designed to produce a 13.10 tax rate for
employers and employee representatives and a 4.9 tax rate for
employees in calendar year 2003. The Secretary of the Treasury
is to use the following table to make adjustments to the tier 2
tax rates.

------------------------------------------------------------------------
Average account benefits ratio Applicable
----------------------------------- percentage for
employer and Applicable
employee percentage for
At least But less than representative employee tier 2
tier 2 taxes taxes (percent)
(percent)
------------------------------------------------------------------------
2.5 22.1 4.9
2.5 3.0 18.1 4.9
3.0 3.5 15.1 4.9
3.5 4.0 14.1 4.9
4.0 6.1 13.1 4.9
6.1 6.5 12.6 4.4
6.5 7.0 12.1 3.9
7.0 7.5 11.6 3.4
7.5 8.0 11.1 2.9
8.0 8.5 10.1 1.9
8.5 9.0 9.1 0.9
9.0 8.2 0
------------------------------------------------------------------------

Supplemental annuity tax

The bill repeals the supplemental annuity tax.⁸
Supplemental annuity benefits are not affected by the
elimination of the supplemental annuity tax.
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\8\ The funds in the supplemental annuity account will be
transferred to the Fund and the account will be eliminated by the
Railroad Retirement Board as soon as possible after December 31, 2000.
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Tax exemption for the Trust

The bill provides tax-exempt status for the newly created
Trust under Code section 501(c).

effective date

The provisions generally are effective for calendar years
beginning after December 31, 2000. The provision relating to
the tax-exempt status of the Trust is effective on the date of
enactment.

III. BUDGET EFFECTS OF THE BILL

In compliance with sections 308 and 403 of the
Congressional Budget Act of 1974, and paragraph 11(a) of rule
XXVI of the Standing Rules of the Senate, the following letter
has been received from the Congressional Budget Office on the
budgetary impact of the legislation:

U.S. Congress,
Congressional Budget Office,
Washington, DC, October 2, 2000.
Hon. William V. Roth,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4844, the Railroad
Retirement and Survivors' Improvement Act of 2000.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Geoffrey
Gerhardt.
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.

H.R. 4844--Railroad Retirement and Survivors' Improvement Act of 2000

Summary: H.R. 4844 would make several changes to the
Railroad Retirement program. The act would expand benefits for
certain participants in the program and reduce the number of
years of covered railroad service needed before a worker (and
qualified spouse) can be vested in the system. The legislation
would also eliminate the Supplemental Annuity tax and lower the
payroll tax rate on railroad employers. Finally, the act would
create a new Railroad Retirement Investment Trust and establish
a board to manage this fund. That board would be authorized to
invest the reserves of the Railroad Retirement System in
private securities.
Assuming that investments in private securities are treated
as budget outlays, as specified in OMB Circular A-11, CBO
estimates that H.R. 4844 would increase direct spending by
$13.2 billion during the 2001-2005 period and by $9.7 billion
over the 2001-2010 period. It would reduce revenues by $1.7
billion from 2001 through 2005 and by $3.9 billion in the 10-
year period. Because the act would affect direct spending and
receipts, pay-as-you-go procedures would apply. The net effect
of the act would be to decrease the budget surplus by $14.8
billion from 2001 through 2005 and by $13.6 billion over the
2001-2010 period. Because there is little precedent for the
purchase of private securities by the federal government,
alternative budgetary treatments are possible that could
substantially alter the budgetary impact.
The legislation contains no intergovernmental or private-
sector mandates as defined in the Unfunded Mandates Reform Act
(UMRA) and would impose on costs on state, local, or tribal
governments.
Estimated cost to the Federal Govenment: The estimated
budgetary impact of H.R. 4844 is summarized in Table 1. The
costs of this legislation fall within budget function 600
(income security).

TABLE 1.--ESTIMATED BUDGETARY EFFECTS OF H.R. 4844
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By fiscal year, in millions of dollars--
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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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CHANGES IN DIRECT SPENDING

Benefit Changes:
Expansion of Widow/er Benefits................. 68 91 91 93 94 96 98 100 101 103
Reduction in Retirement Age.................... 31 105 172 209 234 260 304 355 391 412
Reduction in Vesting Requirements.............. (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) 1 1 1 2
Repeal of Ceiling on Railroad Retirement 10 14 14 15 16 17 18 19 21 23
Benefits......................................
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Subtotal..................................... 109 210 277 316 343 374 421 475 515 540
Investment in non-Treasury Securities \2\.......... 14,760 -460 -650 -830 -920 -990 -1,060 -1,130 -1,240 -1.340
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Total........................................ 14,869 -250 -373 -514 -577 -616 -639 -655 -725 -800

CHANGES IN REVENUES

Repeal of Supplemental Annuity Tax \3\............. -60 -79 -81 -81 -79 -77 -76 -75 -74 -74
Adjustment in Tier II Tax Rate \3\................. -74 -197 -321 -354 -357 -360 -367 -370 -377 -381
----------------------------------------------------------------------------------------------------
Total........................................ -134 -276 -402 -435 -436 -437 -443 -445 -451 -455

TOTAL CHANGES IN THE BUDGET SURPLUS

Increase or Decrease (-) in the Surplus............ -15,003 -26 -29 79 141 179 196 210 274 345
--------------------------------------------------------------------------------------------------------------------------------------------------------
/1/ =Less than $500,000.
\3\ The budgetary treatment of this provision follows the instructions in OMB Circular A-11. CBO assumes that the investment board will maintain 20
percent of the portfolio in U.S. Treasury securities, 20 percent in corporate securities, and 60 percent in private equities.
\3\ Assumes that 20 percent of employer-paid payroll tax reductions are offset by additional income and employee-paid tax collections.

Note.--Components may not sum to totals because of rounding.

Basis of estimate: The Railroad Retirement system has two
main components. Tier I of the system is financed by taxes on
employers and employees equal to the Social Security payroll
tax and provides qualified railroad retirees (and their
spouses, dependents, and widow(er)s) with benefits that are
roughly equal to Social Security. Covered railroad workers and
their employers pay the Tier I tax instead of the Social
Security payroll tax, and most railroad retirees collect Tier I
benefits instead of Social Security. Tier II of the system
operates much like traditional multi-employer pension systems,
with employers and employees contributing a certain percentage
of pay toward the system to finance defined benefits to
eligible railroad retirees (and qualified spouses, dependents,
and widow(er)s) upon retirement. But while most multi-employer
plans are run by a group of cooperating employers in the same
industry, the federal government collects Tier II payroll
contributions and pays out benefits.
H.R. 4844 would make fundamental changes to the Railroad
Retirement System by expanding certain retirement benefits,
reducing payroll taxes, and authorizing a new government
organization to invest funds credited to the Railroad
Retirement Account in the private securities market. In
addition, the act would eliminate the separate account for
supplemental benefits and pay those benefits directly from the
Railroad Retirement Investment Trust.

Direct spending

H.R. 4844 would make several changes in Railroad Retirement
benefits, including:
Expanding benefits for qualified widows and
widowers;
Reducing the normal retirement age for Tier
I benefits to 60;
Reducing the system's vesting requirements;
and
Repealing the cap on Railroad Retirement
benefits.
The act also would establish a new entity called the
Railroad Retirement Investment trust that would be responsible
for investing the reserves of the Railroad Retirement System in
private securities, as well as in U.S. Treasuries.
Benefit changes
The four changes in Railroad Retirement benefits (described
below) would increase spending by $0.1 billion in 2001 and by
$3.6 billion over the 2001-2010 period.
Expansion of Widows' and Widowers' Benefits. Section 101 of
the legislation would increase Railroad Retirement annuities
payable to certain widows and widowers of railroad employees.
Under current law, the Tier II component of a widow(er)'s
Railroad Retirement annuity is generally equal to 50 percent of
the Tier II benefit that was payable to the retired employee at
the time of his or her death. Section 101 would provide a
guaranteed minimum benefit for widow(er)s based on 100 percent
of the employee's Tier II annuity. This proposal would
generally provide widow(er)s with the same Tier II benefits
that were previously being paid to the now deceased railroad
retiree.
Section 101 would apply to benefits paid for months after
December 2000. For widow(er)s whose benefits begin before
January 2001, the guaranteed minimum would be based on the
amount of the original annuity without adjustments for
inflation.
According to the Railroad Retirement Board, this provision
would initially affect approximately 50,000 widow(er)s
currently collecting benefits. CBO estimates this provision
would increase direct spending by $68 million in 2001 and by
$935 million during the 2001-2010 period.
Reduction in Retirement Age. Section 102 of the legislation
would provide for full retirement benefits at age 60 for
railroad workers (and qualified spouses) who have at least 30
years of covered service. Under current law, retirees with 30
years of service may begin collecting full Tier II benefits at
age 60, but Tier I benefits are reduced if they file before the
age of 62. This legislation would eliminate that reduction in
Tier I benefits, which was enacted in the Railroad Solvency Act
of 1983. Based on data provided by the Railroad Retirement
Board, CBO estimates this provision would increase direct
spending by $31 million in 2001 and by $2.5 billion over the
2001-2010 period.
Reduction in Vesting Requirements. Section 103 would reduce
the number of years of covered service needed before workers
(and qualified spouses) become vested in the Railroad
Retirement System from 10 years to five years. The reduced
vesting requirement would only apply to qualified service
performed after 1995. Employees who had fewer than 10 years of
qualified railroad employment before 1996 would either have to
meet the current 10-year vesting requirement or have five years
of covered service after 1995 in order to be vested. Section
103 would also provide conforming reductions in vesting
requirements for disability and survivor benefits.
Based on information provided by the Railroad Retirement
Board, CBO estimates this proposal would have a negligible
effect on direct spending through 2006, but would increase
direct spending by $5 million during the 2007-2010 period.
Repeal of the Ceiling on Railroad Retirement Benefits.
Current law caps the total monthly benefits payable to a
retiree and spouse under the Railroad Retirement system. This
cap is calculated based on the employee's average monthly
salary during the two years prior to retirement, or the
worker's monthly Social Security earnings in the 10-year period
prior to retirement. Section 104 would repeal this limit,
effective January 1, 2001. The Railroad Retirement Board
indicates that about 2,000 beneficiaries now collect reduced
benefits because of the cap. CBO estimates that eliminating the
Railroad Retirement maximum would increase direct spending by
$10 million in 2001 and by $167 million from 2001 through 2010.
Investment in non-Treasury securities
Section 105 of H.R. 4844 would establish a new entity, the
Railroad Retirement Investment Trust, which would be allowed to
invest in non-Treasury securities, such as publicly traded
stocks in private companies. By law, the fund's assets, which
CBO estimates will total about $18.5 billion in December 2000,
now consist solely of U.S. government securities. Because those
securities are the safest possible investment, they generally
earn a lower rate of return than riskier instruments like
corporate stocks and bonds. Similar restrictions apply to the
investment policies of every major federal trust fund--Social
Security, Medicare, Civil Service Retirement, Military
Retirement, the Highway Trust Fund, and others. H.R. 4844 would
make Railroad Retirement an exception to that rule.
Estimate Under Current Budgetary Treatment. The current
budgetary treatment of federal investments in non-Treasury
financial instruments is specified in the Office of Management
and Budget (OMB) Circular A-11, which states that the purchases
of such securities should be displayed as outlays and the sales
of such securities and returns such as dividends and interest
payments should be treated as offsetting receipts. Under this
budgetary treatment, this act's authorization for such
investment practices would increase outlays by $14.8 billion in
2001, decrease outlays beginning in 2002, and result in net
spending of $6.1 billion over the 10-year period.
As required by the act, funds currently held in the
Railroad Retirement Account and the Social Security Equivalent
Benefit Account that are not currently needed to pay benefits
would be transferred to the newly created Railroad Retirement
Trust Fund. CBO assumes that about $18.5 billion in those
accounts would be transferred on December 31, 2000, and would
promptly be invested in various financial instruments. Based on
the practices of other multi-employer pension plans, CBO
further assumes the managers of the fund would keep 20 percent
of the investment in U.S. Treasury securities, 20 percent in
high-grade corporate bonds, and the remaining 60 percent in
equities. Because purchases of Treasury securities are not
considered outlays, only 80 percent of the initial investments
of the fund would be shown as federal outlays. The estimates
assume that Treasury securities yield a 6 percent return, high-
grade corporate bonds a 7 percent return, and equities a 9
percent return.
Current Budgetary Treatment vs. Possible Alternatives. For
most federal programs, accounting for outlays is
straightforward. The federal government buys goods and
services--such as defense and medical care--and makes transfer
payments like Social Security and payments for Food Stamps by
issuing a check or its equivalent. Those payments are counted
as outlays when they are issued. The A-11 treats the purchases
of assets--financial or physical--in the same way. The purchase
price simply appears as a federal outlay. Specifically, the A-
11 states:

[w]e treat an investment in non-U.S. securities (equity
or debt securities) as a purchase of an asset. You must
record an obligation and an outlay for the purchase in
an amount equal to the purchase price * * * You record
interest received on such investments as a collection
when you receive it and in the amount that you receive
* * * You record the proceeds from the sale or
redemption of a non-U.S. security as a collection when
received and in the amount received.

In contrast, the A-11 directs that U.S. securities be
treated as equivalent to cash, and tells agencies to count
transactions involving such securities as a change in the mix
of asset holdings rather than as a purchase or sale of assets.
Thus, purchases of non-Treasury securities are deemed to be
outlays under the A-11 guidelines, but purchases of Treasury
securities are not. In practice, this difference has been of
little consequence because the government has only rarely
acquired non-Treasury securities.
Some budget experts think that this long-standing practice
is ill-suited to purchases of financial assets that the
government acquires as a way of preserving (or enhancing) the
value of cash balances. (For example, the current treatment
would dictate that if current or future budget surpluses were
entirely invested in non-Treasury securities, the budget would
record government expenditures equal to receipts, which might
not be a useful indicator of the government's financial
condition.) It can also be argued that purchases of financial
assets in order to preserve or enhance the value of cash
balances are very different in nature, and should be treated
differently in the budget, than purchases of goods and
services, entitlement benefits, grants, employees' salaries,
and other programmatic or operational activities of the
government. Consequently, some analysts have argued that these
purchases should not be treated as outlays, but rather as a
means of financing the activities of the federal government. In
this estimate, CBO has followed the instructions of the A-11,
but we may consider a different budgetary treatment in the
future.

Revenues

H.R. 4844 would make several changes to the payroll tax
specified in the Railroad Retirement Act, and would result in
estimated net revenue losses of $0.1 billion in 2001 and $3.9
billion over the 10-year period. Because reductions in
employer-paid employment taxes are assumed to be passed through
to workers as higher wages, increased income and employee-paid
payroll tax collections are assumed to offset 20 percent of the
lost payroll tax revenues.
Supplemental annuity tax
Section 203 of the act would repeal the Supplemental
Annuity tax, which is currently levied on employers to pay for
a third layer of benefits on top of Tier I and Tier II. Instead
of being paid from a separate account, supplemental benefits
would be paid directly from the Railroad Retirement Account.
Based on information provided by the Railroad Retirement Board,
CBO estimates that this provision would reduce revenue by $380
million over the 2001-2005 period and by $756 million over the
2001-2010 period.
Tier II payroll tax rates
The act would also lower the Tier II tax rate on employers
from its current level of 16.1 percent to 14.75 percent in
calendar year 2001 and 14.2 percent in calendar year 2002.
Thereafter, H.R. 4844 would link future Tier II tax rates to
the financial condition of the Railroad Retirement Investment
Trust (see Table 2). Specifically, the act would require the
Railroad Retirement Board to calculate the ratio of assets held
in the trust fund (using the average balance in the fund over
the previous 10 years) to the total Railroad Retirement
benefits paid out in a given year (the account benefit or trust
fund ratio). In 2003, CBO expects the account benefit ratio
would be about 5.6, which would cause payroll tax rates to be
set at 13.1 for employers and 4.9 for employees (which is the
current rate for employees). CBO estimates that the Tier II tax
rates will remain at the level through at least 2010 and that
the changes in the tax rate would reduce revenue by $1.3
billion over the 2001-2005 period and $3.2 billion from 2001
through 2010.
If, however, the account benefit ratio rises or falls below
expectations, a change in payroll tax rates could be triggered
by the act. For instance, if the board determined that this
ratio had gone above 6.0, then the Tier II payroll tax rate for
both employers and employees would be reduced. Conversely, if
the board determined that the ratio had fallen below 4.0, then
the payroll tax for railroad employers would increase.
Under reasonable assumptions about railroad employment and
investment income to the trust fund, CBO estimates that neither
outcome would occur during the next 10 years. For example, if
the new trust fund only held Treasury securities, the account
benefit ratio would fall from 5.9 today to 4.1 by 2010. If the
trust fund were invested in a wider variety of securities, and
the rates of return matched CBO's assumptions, the ratio would
be roughly 5.8 in 2010.
Although that conclusion represents CBO's best judgment,
the unexpected could happen. For example, rapid growth in the
railroad industry's payroll or spectacular returns in the stock
market could trigger tax cuts by 2010. On the other hand,
employment that is lower than expected or a drop in stock
returns could lead to automatic tax increases.

TABLE 2.--DETERMINATION OF TIER II TAX RATE
------------------------------------------------------------------------
If the acount benefit ratio is The Tier II tax rates would be:
------------------------------------------------------------------------
At least But less than For employers For employees
------------------------------------------------------------------------
0 2.5 22.1 4.9
2.5 3.0 18.1 4.9
3.0 3.5 15.1 4.9
3.5 4.0 14.1 4.9
4.0 6.1 13.1 4.9
6.1 6.5 12.6 4.4
6.5 7.0 12.1 3.9
7.0 8.5 11.6 3.4
7.5 8.0 11.1 2.9
8.0 8.5 10.1 1.9
8.5 9.0 9.1 0.9
9.0 NA 8.2 0
------------------------------------------------------------------------
NA = Not applicable.

Note.--The account benefit ratio is calculated by dividing average trust
fund assets over the previous 10 years by the total Railroad
Retirement benefits benefits paid in a given year.

Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go producers
for legislation affecting direct spending and receipts. The net
changes in outlays and governmental receipts that are subject
to pay-as-you-go procedures are shown in Table 3. For the
purposes of enforcing pay-as-you-go procedures, only the
effects in the budget year and the succeeding four years are
counted.

TABLE 3.--ESTIMATED EFFECTS OF H.R. 4844 ON DIRECT SPENDING AND RECEIPTS
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-----------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays............................................ 14,869 -250 -373 -514 -577 -616 -639 -655 -725 -800
Changes in receipts........................................... -134 -276 -402 -435 -436 -437 -443 -445 -451 -455
--------------------------------------------------------------------------------------------------------------------------------------------------------

Intergovernmental and private-sector impact: H.R. 4844
contains no intergovernmental or private-sector mandates as
defined by UMRA and would impose no costs on state, local, or
tribal governments.
Comparison with other estimates: The Railroad Retirement
Board has prepared an estimate of the individual benefit
increases and projected trust fund holdings under H.R. 4844.
The board's estimate contains trust fund projections using
three different assumptions about employment levels in the
railroad industry.
Using the middle employment assumption, which CBO believes
is the most realistic, the Railroad Retirement Board estimates
that the cost of benefits under H.R. 4844 would increase by
$1.4 billion from 2001 through 2005 and by $3.8 billion during
the 2001-2010 period, slightly more than CBO estimates. In
addition, the board estimates that revenues from Tier II
payroll taxes would decrease by $1.6 billion from 2001 through
2005 and $3.6 billion over the 2001-2010 period. The board's
estimates do not include any impact the lower employer-paid
payroll taxes might have on income and employee-paid payroll
tax receipts. On a comparable basis, excluding impacts on
income and employee-paid payroll tax receipts. On a comparable
basis, excluding impacts on income and employee-paid payroll
tax receipts, CBO estimates Tier II revenue losses of $1.6
billion over five years and $3.9 billion over 10 years. Both
the board and CBO estimate that balances in the new trust fund
would rise steadily over time, but would not be high enough to
trigger a reduction in the payroll tax during the next 10
years.
Previous CBO estimates: On September 11, 2000, CBO provided
the Committee on Ways and Means and the Committee on
Transportation and Infrastructure with a cost estimate for H.R.
4844 as passed by the House of Representatives on September 7,
2000. Although the version ordered reported by the Finance
Committee contains minor modifications to the version of H.R.
4844 that was approved by the House, CBO estimates that those
changes would not affect the cost of the legislation.
Therefore, the budgetary effects shown in this cost estimate
are identical to those contained in the estimate of the House-
passed act.
Estimate prepared by: Federal Costs: Geoffrey Gerhardt and
Ed Harris. Impact on State, Local, and Tribal Governments: Leo
Lex. Impact on the Private Sector: Ralph Smith.
Estimate approved by: Robert A. Sunshine, Assistant
Director for Budget Analysis.

IV. VOTES OF THE COMMITTEE

In compliance with paragraph 7(b) of rule XXVI of the
Standing Rules of the Senate, the following statements are made
concerning the votes of the Committee on Finance in
consideration of the bill, H.R. 4844.

A. Motion To Report the Bill

The bill, H.R. 4844, as amended, was ordered favorably
reported by a voice vote (with a quorum being present).
Present.--Roth, Grassley, Murkowski, Nickles, Gramm, Mack,
Craig, Moynihan, Baucus, Rockefeller, Breaux, Bryan, Robb.

B. Votes on Amendments

(1) An amendment by Senator Gramm to strike the retirement
age provision failed by a vote of 7 to 11.
Yeas.--Murkowski (proxy), Nickles, Gramm, Lott (proxy),
Mack, Breaux, Graham.
Nays.--Roth, Grassley, Hatch (proxy), Jeffords, Craig,
Moynihan, Baucus, Rockefeller, Conrad, Bryan, Robb.
(2) An amendment by Senator Grassley to add provisions
providing for health insurance of certain children with
disabilities was ruled not germane by the Chairman. A motion to
waive the ruling of the Chair failed by a vote of 7 to 10, two-
thirds of those present not having voted in the affirmative.
Yeas.--Grassley, Jeffords, Breaux, Conrad, Graham, Bryan,
Robb.
Nays.--Roth, Murkowski, Nickles, Gramm, Mack, Thompson,
Craig, Moynihan, Baucus, Rockefeller.
(3) An amendment by Senator Gramm to add a requirement that
any benefit changes or tax reductions be annually contingent on
returns to the investment trust, failed by a vote of 4 yeas to
15 nays.
Yeas.--Murkowski, Nickles, Gramm, Mack.
Nays.--Roth, Grassley, Hatch, Lott (proxy), Jeffords
(proxy), Thompson (proxy), Craig, Moynihan, Baucus,
Rockefeller, Breaux, Conrad, Graham, Bryan, Robb.
(4) An amendment by Senator Nickles to repeal the tier 1
component of the Railroad Retirement system and add a
requirement that participants in the Railroad Retirement system
join the Social Security system, failed by voice vote.
Present.--Roth, Grassley, Nickles, Gramm, Craig, Moynihan,
Baucus, Rockefeller, Breaux, Bryan, Robb.
(5) An amendment by Senator Nickles that would add a
provision that Railroad Retirement beneficiaries are no longer
entitled to benefits but shall get benefits only to the extent
sufficient funds exist in the Railroad Retirement investment
fund, failed by a vote of 5 to 14.
Yeas.--Murkowski (proxy), Nickles, Gramm, Mack (proxy),
Thompson (proxy).
Nays.--Roth, Grassley, Hatch (proxy), Lott (proxy),
Jeffords (proxy), Craig, Moynihan, Baucus, Rockefeller, Breaux,
Conrad (proxy), Graham (proxy), Bryan, Robb.
(6) An amendment by Senator Bryan to bar the Foreign Sales
Corporation tax benefit to pharmaceutical companies when
American patients are charged more than 100 percent for a drug
charged to foreign patients, failed by a vote of 3 to 17.
Yeas.--Graham (proxy), Bryan, Robb (proxy).
Nays.--Roth, Grassley, Hatch (proxy), Murkowski (proxy),
Nickles (proxy), Gramm (proxy), Lott (proxy), Jeffords (proxy),
Mack (proxy), Thompson (proxy), Craig (proxy), Moynihan, Baucus
(proxy), Rockefeller, Breaux, Conrad (proxy), Kerrey (proxy).

V. REGULATORY IMPACT AND OTHER MATTERS

A. Regulatory Impact

Pursuant to paragraph 11(b) of rule XXVI of the Standing
Rules of the Senate, the Committee states that the legislation
will not significantly increase regulation of any individuals
or businesses; will not adversely impact the personal privacy
of individuals; and will result in no significant additional
paperwork.
For further discussion of the impact of the bill on tax
complexity, see section V.C., below.

B. Information Relating to Unfunded Mandates

This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.

C. Tax Complexity Analysis

Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the House Committee on Ways and
Means, the Senate Committee on Finance, or any committee of
conference if the legislation includes a provision that
directly or indirectly amends the Internal Revenue Code and has
widespread applicability to individuals or small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Internal Revenue Code and that have
widespread applicability to individuals or small businesses.

VI. CHANGES TO EXISTING LAW MADE BY THE BILL AS REPORTED

In the opinion of the Committee, it is necessary, in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of rule XXVI of the Standing Rules
of the Senate, relating to changes in existing law made by the
bill reported by the Committee.