Railroad Retirement Board
The
Railroad Retirement System: Its First
Seventy-Five Years
April 2010
The 75th anniversary of the enactment of the Railroad
Retirement Act of 1935 is being observed during 2010. Part of President Franklin Delano Roosevelt’s
New Deal legislation, the Act was signed into law on
It was in the rail
industry that the first formal industrial pension plan in
Legislation was
enacted in 1934, 1935 and 1937 to establish a railroad retirement system
separate from the social security program enacted in 1935. The social security program would not credit
past service and was not scheduled to begin monthly benefit payments until the
1940s. Legislation taking into account
the particular circumstances of the rail industry was not without
precedent. Numerous laws pertaining to
rail operations and safety had already been enacted since the Interstate
Commerce Act of 1887. Since passage of
the Railroad Retirement Acts of the 1930s, numerous other railroad laws have
been enacted.
The 1934 Act was
declared unconstitutional by the Supreme Court and the 1935 Act was also
challenged in the Courts. Nonetheless,
the Railroad Retirement Board (RRB) made its first annuity payments 11 months
after passage of the 1935 legislation.
While an appeal was pending, railroad management and labor, at the
urging of President
This legislation
set up a staff retirement plan providing annuities based on an employee’s
creditable railroad earnings and service.
Annuities could be paid at age 65 or later, regardless of length of
service, or at ages 60-64 (on a reduced basis) after 30 years of service. Disability benefits were payable after 30
years of service or at age 60.
Numerous amendments
after 1937 increased benefits and added benefits for dependents. Amendments enacted in 1946 and 1951 added
survivor and spouse benefits, liberalized disability benefit requirements and
established jurisdictional coordination with the Social Security
Administration.
In addition, a
financial interchange was established between the two systems to equitably
apportion the costs of benefits and taxes based on rail service. This financial interchange, which ensures
that the Social Security Trust Funds neither gain nor lose from the existence
of the railroad retirement system, became an integral source of railroad
retirement funding in subsequent decades.
In 1965, the financial interchange served as an operating vehicle
through which the Medicare program was extended to railroad retirement
beneficiaries.
The recurring
inflation and recession in the national economy during the 1970s and 1980s
created formidable actuarial problems for pension systems, particularly those
providing substantial cost-of-living protection for beneficiaries. Railroad retirement annuities, like social
security benefits, were increased by an aggregate of 52 percent between 1970
and 1972 alone. The cost of these
increases jeopardized the solvency of the system and Congress directed that a
Commission on Railroad Retirement study the system and its
financing for the purpose of recommending changes that would ensure adequate
benefit levels on an actuarially sound basis.
Following the
Commission’s study, railway labor and management proposed a restructuring of
the railroad retirement system that was enacted into law as the Railroad
Retirement Act of 1974. The 1974 Act
provided a two-tier system with a first tier formula yielding amounts
equivalent to social security benefits, taking into account both railroad
retirement and nonrailroad social security
credits. A second tier formula, based on
railroad service exclusively, provided benefits comparable to those paid over
and above social security benefits by other industrial pension systems. The Act eliminated duplications in dual
railroad retirement-social security benefits for new hires and individuals not
vested as of
However, neither
industry nor government at that time anticipated the resurgence of double digit
inflation in the latter part of the 1970s and the recession of 1981. Financial amendments were subsequently
enacted in 1981 as part of the Omnibus Budget Reconciliation Act and in 1983
under the Railroad Retirement Solvency Act.
These amendments raised retirement taxes, deferred cost-of-living
increases, reduced early retirement benefits, limited future vested dual
benefits, and subjected annuities to Federal income tax. These amendments also simplified benefit
formulas, provided protection for divorced spouses and remarried widow(er)s, liberalized the current
connection requirement for career employee benefits, and increased benefits for
disabled widow(er)s and employees with military
service.
Legislation in 1988
liberalized work restrictions and the crediting of military service in certain
cases. It also provided more equitable
treatment of separation or severance pay for railroad retirement purposes.
In 2001, the
Railroad Retirement and Survivors’ Improvement Act, the most significant
railroad retirement legislation in almost 20 years, and the first in almost
three decades not to involve tax increases or benefit reductions, was signed
into law. The benefit and financing
provisions of the legislation, like those of most previous railroad retirement
legislation, were based on joint recommendations negotiated by a coalition of
rail freight carriers and rail labor organizations.
The Act liberalized
early retirement benefits for 30-year employees and their spouses, eliminated a
cap on monthly retirement and disability benefits, lowered the minimum service
requirement from 10 years to 5-9 years, if at least 5 years were after 1995,
and provided increased benefits for some widow(er)s. Financing sections in the law provided for
adjustments in the payroll tax rates paid by employers and employees, and the
repeal of a supplemental annuity work-hour tax.
The legislation
also created the National Railroad Retirement Investment Trust, which manages
and invests railroad retirement funds in non-governmental assets, as well as in
governmental securities.
The railroad
unemployment insurance system was also established in the 1930s. While the State unemployment programs first
provided in 1935 generally covered railroad workers, railroad operations which
crossed State lines caused special problems.
Unemployed railroad workers were denied compensation by one State
because they became unemployed while working in another State or because their
employer had paid unemployment taxes in another State. Although there were cases where employees
appeared to be covered in more than one State, they often did not qualify in
any.
A National Security
Commission reporting on the nationwide State unemployment plans recommended
that railroad workers be covered by a separate plan because of the
complications their coverage had caused the State plans. Congress subsequently enacted the Railroad
Unemployment Insurance Act in 1938, which established a system of benefits for
unemployed railroad workers, plus a free placement service, financed by a
payroll tax payable by employers.
Benefits became payable on
Amendments enacted
in 1946 increased the maximum daily benefit rate and the maximum duration to 26
weeks. They also provided sickness
benefits; at that time, only two States,
Amendments enacted
in the 1950s raised the maximum daily benefit rate in stages, provided extended
unemployment benefits for 13 weeks to employees with at least 10 years of
service and 26 weeks of extended benefits to 15-year employees. In 1968, legislation increased the daily
benefit rate and provided extended benefits for sickness on essentially the
same basis as for unemployment.
Amendments in 1975
increased the maximum daily benefit rate and liberalized the basic eligibility
requirements for new employees by lowering the 7-month base-year service
requirement to 5 months. In addition,
the 1975 amendments mandated a 7-day waiting period for benefit payments
resulting from strikes. The tax rate
schedule was increased, starting in 1976, depending on the balance in the
account, in order to finance the increased benefits. This legislation also lowered the waiting
period for sickness benefits.
The national
economic recession of the early 1980s caused large-scale railroad layoffs. The layoffs increased unemployment benefit
payments to record levels which far exceeded unemployment tax income and
necessitated high levels of loans from the Railroad Retirement Account. The Railroad Unemployment Insurance Account
owed the Railroad Retirement Account a peak amount of over $850 million at the
end of fiscal year 1986. Financial
measures to assist the Railroad Unemployment Insurance Account were included in
the Railroad Retirement Solvency Act enacted in 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
Legislation in 1986
amended the repayment tax and provided for an automatic surtax on rail
employers if further borrowing took place.
In 1988, the most
significant railroad unemployment insurance legislation in decades was
enacted. Based on the recommendations of
the Railroad Unemployment Compensation Committee, the Railroad Unemployment
Insurance and Retirement Improvement Act of 1988 increased the railroad
unemployment and sickness daily benefit rate, and indexed future benefit rates
and qualifying earnings requirements to national wage levels. This legislation improved the railroad
unemployment insurance system’s financing by indexing the tax base to increased
wage levels, experience rating employer contributions and assuring repayment of
the system’s debt to the Railroad Retirement Account. In June 1993, the $180 million loan balance
was repaid in its entirety from cash reserves in the Railroad Unemployment
Insurance Account and the loan repayment tax was terminated.
The 1988 amendments
also required the RRB to make annual financial reports to Congress on the
status of the unemployment insurance system.
The reports have been favorable.
Legislation enacted
in 1996 increased the railroad unemployment and sickness insurance daily
benefit rate and revised the formula for indexing future benefit rates. It also reduced the waiting period for
initial benefit payments and eliminated duplicate waiting periods in continuing
periods of unemployment and sickness. In
addition, the legislation applied an earnings test to claims for unemployment
and reduced the duration of extended benefit periods for long-service
employees.
By the beginning of
the 2010 anniversary year, railroad retirement benefits of $281 billion had
been paid by the RRB to 2,000,000 retired employees, 1,100,000 spouses and
2,400,000 survivors; unemployment and sickness benefits had totaled some $8
billion. The first retirement annuities
awarded under the 1935 Railroad Retirement Act averaged $60 a month and no
monthly benefits were payable to spouses or survivors. Currently, employee annuity awards average
about $2,700 a month, annuities for spouses average over $900 a month, and
annuities to aged and disabled widow(er)s just over $1,700 a month.
In 2010, nearly
600,000 beneficiaries will receive retirement and survivor benefits of about $11
billion, and about 42,000 persons will receive
unemployment and sickness benefits of about $300 million.
Originally
headquartered in
Established in a
time of national crisis, and periodically challenged during the past 75 years,
the railroad retirement system has nonetheless continued to serve railroad
employees and their families through programs affording protection against the
economic hazards of old age, disability, unemployment and sickness.
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