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you view it in the total package. If I had a choice as to whether I would take that $14 million that we were paying these spouses, who are going to get this additional money, I would rather give it to other types of beneficiaries, such as the aged widows, as I believe I said before your committee.

But apparently I don't have a choice. The Congress has spoken, both Houses acting unanimously, with respect to telling me I was wrong, that the spouses should have this additional benefit, so I am going to go along. I am very much in favor of the other feature in the bill.

Mr. MACDONALD. There is quite a difference between going along and thinking that this is a good amendment. You said you thought it was a good amendment earlier.

Mr. HABERMEYER. Yes, sir.

Mr. MACDONALD. Do you think it is a good amendment or are you just going along with it?

Mr. HABERMEYER. No, I think it is a good amendment in total. Mr. MACDONALD. So you are not just going along?

Mr. HABERMEYER. In total it is a good amendment.

Mr. MACDONALD. Thank you, Mr. Chairman.

The CHAIRMAN. I think we should point out that you said in your statement that you were still against that provision; that is, with reference to spouses. But then you explain the other provision of the bill with reference to the adjustment of the wage base and the tax rate, and the overall results, and you would support the bill.

Mr. HABERMEYER. Yes, sir.

The CHAIRMAN. That is notwithstanding your opposition to the first phase of it respecting the spouses.

Mr. HABERMEYER. That is right.

The CHAIRMAN. Mr. Younger.

Mr. YOUNGER. Just for the record, what is the amount of the fund. at the present time?

Mr. HABERMEYER. About $4 billion, sir.

Mr. YOUNGER. About $4 billion?

Mr. HABERMEYER. Yes, sir.

Mr. YOUNGER. Thank you.

The CHAIRMAN. Thank you very much, Mr. Habermeyer, for your presence today, and your contribution.

Mr. HABERMEYER. Mr. Chairman, the management member of my Board, Mr. Healy, had a statement he would like to introduce in the record. Could I file it at this time?

The CHAIRMAN. Let it be included in the record.

Mr. HABERMEYER. He touches on things that are not in the bill, so I don't feel competent to testify.

The CHAIRMAN. Let me ask you about one thing. I am glad you mentioned that before you left.

There is some provision someone talked to me about that they wanted to include in this which was considered in the Senate by Senator Hartke, particularly.

Mr. HABERMEYER. That was in the Senate bill.
The CHAIRMAN. Yes.

That was the tips.

Mr. HABERMEYER. We met on that as a Board and supported that amendment. The amendment would treat tips in the railroad industry

the same as tips are now being treated under the social security system. By and large we have a rather small group who receive tips in the railroad industry-redcaps, Pullman porters, dining car waiters. Under this provision they would report each month to their employer the amount of their tips and pay the tax, pay the employee tax, on those tips.

The CHAIRMAN. Do you think that would be a good thing?
Mr. HABERMEYER. I think so; yes, sir.

The CHAIRMAN. Would it affect the fund?

Mr. HABERMEYER. No, sir.

The CHAIRMAN. It would make a little for the fund, in fact? Mr. HABERMEYER. It wouldn't make a little. It would cost a little, but it would be so insignificant.

The CHAIRMAN. Thank you very much.

(Mr. Healy's statement follows:)

STATEMENT BY MR. THOMAS M. HEALY, MEMBER OF THE RAILROAD RETIREMENT

BOARD

As compared with H.R. 3157 as passed by the Senate on September 1, 1965, the bill H.R. 10874 grants the industry a temporary tax relief during the period beginning 1968. Thereafter, the additional tax burden would be the same under both bills.

I am firmly convinced that the tax relief granted by the bill H.R. 10874 is not sufficient and that means should be found for granting the industry some additional tax relief indefinitely. I believe that the loss of tax income to the system could be offset by a reasonable and equitable change in the provision relating to spouse's benefits. If such a change is adopted, the actuarial situation would be practically the same as under the present version of H.R. 10874. The amendment I have in mind is as follows:

1. The provision pegging the maximum spouse's annuity to the highest amount that could be paid to any wife under the Social Security Act would be eliminated. Instead of this, there would be a maximum equal to the amount that would be payable under the Social Security Act on the basis of the employee's earnings record.

2. Differentiation would be made between cases where the spouse is not entitled to a wife's annuity under the Social Security Act and cases where she is so entitled. In the first instance, the maximum spouse's annuity would equal one-half of the primary insurance amount (PIA) computed on the basis of the employee's railroad and social security earnings combined; in the second instance, that is when there is a dual spouse's benefit, the railroad retirement maximum would be one-half of the employee's primary insurance amount computed on the basis of his railroad earnings alone.

3. No reduction in the spouse's annuity would be made for social security or railroad retirement benefits to which she is entitled on the basis of her own earnings. This, in effect, would retain the basic part of H.R. 3157.

4. The new method of computation would apply only to awards after the effective date of the amendment and would not work to reduce any benefit that is already payable. However, the automatic increases in maximum spouse's annuities that would come about under present law in 1967 and 1968 would not be granted.

Our chief actuary has advised me that the amendment I am here proposing would reduce costs by about $21 million a year on a level basis. This cost reduction could be translated into a tax relief to the industry by keeping the basic part of the employee-employer tax rate at 7 percent from 1968 indefinitely. In other words, the basic part of the tax rate would be 64 percent for the period October-December 1965, 61⁄2 percent for 1966, 64 percent for 1967, and 7 percent for 1968 and thereafter. Of course, to these rates there will be added the dif ferential between the current social security tax rates and 24 percentage points. As I have stated before, the actuarial condition of the system would be, under my proposal, practically the same as under the present version of H.R. 10874

The actuarial deficiency would be about $30 million a year or 0.62 percent of the taxable payroll for the proposed $550 monthly limit.

I am still opposed to the provision in the bill which would eliminate the reduction in the railroad retirement spouse's annuity by the amount of her own railroad retirement annuity or by the amount of her own social security benefit. However, if my proposal for the change in the spouse annuity formula is adopted, I would reluctantly favor the enactment of the bill.

The CHAIRMAN. Mr. Curtin?

Mr. CURTIN. I am sorry I was late. I was detained on something else.

One question, Mr. Habermeyer. How many are on the Railroad Retirement Board?

Mr. HABERMEYER. Three members, sir.

Mr. CURTIN. Is your thinking as represented by the statement you gave today representative of the thinking of the other two members, as well as yourself, or are you speaking as an individual?

Mr. HABERMEYER. I think I am speaking today just for the public member and the labor member.

The CHAIRMAN. Thank you very much.

The next witness on this subject will be Mr. Gregory S. Prince. You may proceed, Mr. Prince.

STATEMENT OF GREGORY S. PRINCE, VICE PRESIDENT AND GENERAL COUNSEL, ASSOCIATION OF AMERICAN RAILROADS

Mr. PRINCE. Mr. Chairman and gentlemen of the committee, my name is Gregory S. Prince, and I am executive vice president and general counsel of the Association of American Railroads.

Mr. Chairman, if I might have permission to have this statement filed for the record, I might spare the committee some time by not reading this but by giving you the highlights of it and discussing certain of the features perhaps in more detail than I might in here.

The CHAIRMAN. Very well. You may proceed as you like, Mr. Prince. Your statement will be included in the record. I assume you want to include the tables and the other information.

Mr. PRINCE. If you please.

The CHAIRMAN. Very well. It will be included. (The statement referred to follows:)

STATEMENT OF GREGORY S. PRINCE, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL OF THE ASSOCIATION OF AMERICAN RAILROADS

My name is Gregory S. Prince, and I am executive vice president and general counsel of the Association of American Railroads. I appear here to present the views of the railroads with respect to H.R. 10874, the bill introduced by Mr. Harris on September 3, 1965, to amend the Railroad Retirement Act. The bill would do three principal things: (1) It would eliminate the provisions which reduce spouses' annuities by the amount of the monthly benefits to which the wife was entitled in her own right by reason of her own service as an employee under the social security system or the railroad retirement system; (2) it would increase the earnings base on which railroad benefits and taxes are computed from $450 a month to $550 a month; and (3) it would make reductions of varying percentages in the tax rate for the last quarter of 1965 and for each of the years 1966, 1967, and 1968. The broad general effect of the bill would be to spread the impact of the increase in taxes on both the employees and employers over a period of more than 3 years. This favorable effect as compared with the original Pell amendment would be offset in the long run by adding an additional

$5 million a year to the annual deficit in the retirement account as compared with the level of the deficit resulting from the Pell amendment or by adding a small increase in the tax rate beginning after the conclusion of the stretchout period to offset the increase in the deficit.

This bill cannot be considered in a vacuum or separate and apart from the background that has set the stage for today's hearing. H.R. 10874 is, of course, an outgrowth of H.R. 3157, introduced by Mr. Harris and passed by the House of Representatives earlier this year. This bill was opposed by the Railroad Retirement Board, by railroad management, and, originally in the preceding Congress, by representatives of the employee organizations. The reasons set forth by the Railroad Retirement Board in its letter of April 26, 1965, to the Honorable Oren Harris, signed by Howard W. Habermeyer, Chairman, seem to us sound and convincing, and we still subscribe to those views. When this bill was sent over the Senate it was referred to the Senate Committee on Labor and Public Welfare and set for hearings before a subcommittee of which Senator Pell was the chairman. At the hearing on June 29, Senator Pell made a statement in which he pointed to a level that would be reached by the actuarial deficit for the railroad retirement account assuming that the spouses' benefit bill then before the subcommittee-were to pass, and the amendments to the Social Security Act-then before the Senate were passed. Assuming the pas sage of these two bills, he stated that the deficit in the railroad retirement account would be raised from $191⁄2 million to approximately $61 million a year. In order to cure the deficit, even then not in being, Senator Pell said that he proposed to present an amendment to H.R. 3157 to raise the base for railroad retirement purposes from $450 per month to $550 per month. This, he indicated. would reduce the deficit to a level of approximately $22.3 million a year (which figure is presently estimated at $24.5 million a year). The added tax burden resulting from the Pell amendment was estimated on a level basis as 84.2 million per year, of which $42.1 million would be borne by railroad employers and an equal amount by railroad employees. No mention was made of the fact that in selecting this method of reducing the deficit in the railroad retirement account approximately $45.8 million of the tax revenue of $84 million would go to provide additional benefits, nor was any mention made of the fact that the tie-in provisions between railroad retirement and social security would provide additional railroad benefits of $472 million as and when the amendments to the Social Security Act become law.

The witnesses who were scheduled to appear on H.R. 3157 were notified just 3 or 4 days before they were scheduled to appear that their views on the proposed amendment of Senator Pell would be requested. The witness appearing for railroad management opposed the Pell amendment as well as the provisions relating to spouses' benefits. The representatives of the railroad employees supported both features, and the Railroad Retirement Board continued to oppose the original provisions of H.R. 3157, but a majority of that Board supported the Pell amendment. The bill was considered by the Senate Committee on Labor and Public Welfare and ordered favorably reported. At that time Senator Pell is reported to have stated that if, prior to the time the bill came up on the floor of the Senate, railroad management and railroad labor could agree on any modification of his amendment, he would offer such agreement by way of modification of his own amendment. At the instance of the staff member for the Senate Labor Committee handling H.R. 3157, two meetings were held between representatives of railroad labor and railroad management. These meetings did not result in agreement. When the bill came up on the floor of the Senate, a point of order was raised that the Pell amendment had turned H.R. 3157 into a revenue measure and as such it should have originated in the House of Representatives in accordance with article 1, section 7, of the U.S. Constitution. This motion was defeated by a vote of 41 to 44, and the measure was then passed. The point of order seems to have been well taken, and even though it did not prevail in the Senate, I would assume that the House of Representatives would be more zealous in guarding its prerogatives than would perhaps the other body in deferring to the House in what might fairly be called a questionable case. Attached to this statement is a very brief-and, admittedly, hurriedly prepared-memorandum in support of the position that H.R. 3157, in its present posture, could not lawfully be enacted.

There is one more bit of information by way of background that is relevant to the recommendations hereafter to be made, so I will diverge for a moment to supply that information. Several months ago the Railway Labor Executives'

Association submitted to representatives of the railroad industry a proposal for amendment of the Railroad Retirement Act providing for a supplemental annuity of $100 per month for an employee who retired at or after age 65 with 30 or more years of service on a noncontributory basis. Two meetings were held between representatives of management and labor to discuss this proposal, and at the second meeting representatives of railroad management said that further consideration of this proposal would necessarily have to be deferred until after an actuarial study could be made of this proposal in order to determine the cost consequences of this proposal or any proposal providing for a supplemental annuity in any lesser amount. The preliminary report of the firm of actuaries regarding this proposal was submitted just last month. At the same time demands had been served on many individual railroads for supplemental annuities in varying amounts-these demands being made pursuant to section 6 of the Railway Labor Act.

What is done with respect to the increase in the base under the Railroad Retirement Act with its accompanying increases in benefits would necessarily have a distinct bearing upon both the need for such supplemental benefits and the ability of the industry to pay for them. Neither the passage of H.R. 3157 or of H.R. 10874 would do anything to answer the question of the wisdom of continuing certain provisions of the Railroad Retirement Act whereby the increases under the Social Security Act bring about automatic increases in certain railroad benefits. Where the differences in the types of benefits are as great as they are between these two systems, it would not necessarily follow that because a particular benefit needed to be increased under the social security system a corresponding increase would be needed under the retirement system. For instance, the maximum retirement benefit for an employee retiring at age 65 at the end of 40 years continuous service in the year 1965 would be $133 under social security and $217 under railroad retirement. This is a difference of $84 and in the years to come the spread between the two will become even greater (see attached table). If, because of the relatively low primary benefit under social security, it should be decided that the wife's benefit should be increased under that system, it would not necessarily follow that this would be the feature of the railroad retirement system most in need of improvement and yet the increase would be automatic. Not only is the maximum spouses' benefit under railroad retirement equal to that under social security, but it must be at least 110 percent of that maximum.

I am satisfied that all but the keenest students of the Railroad Retirement Act and its interpretation by the Railroad Retirement Board have the impression that this provision would give the spouse of a railroad employee 110 percent as the maximum of what she would have been entitled to had her husband's compensation been earned under the Social Security Act. However, this is not at all so, and the maximum is 110 percent of an amount equal to the maximum amount which could be paid to anyone as a wife's insurance benefit under the Social Security Act. Without attempting to elaborate on the details, the net effect of this proposal and its interpretation will mean that by reason of the amendments to the Social Security Act the maximum spouses' benefit under the Railroad Retirement Act will go up 32 percent by the first of January 1968. There are numerous other tie-ins between benefits under railroad retirement and benefits under social security that should be reexamined. As a general principle we feel it would be sound that changes in benefits under the Railroad Retirement Act be made independently of those made under the Social Security Act. Railroad benefit changes should be made in relation to other benefits under the railroad system and at the same time a decision should be made as to the manner in which the benefits are to be paid for in order to keep the retirement account actuarily sound.

This brings me to the recommendations I would like to make to this committee. By all odds, the most desirable solution would be to defer action on all of the proposals found in either H.R. 3157 or H.R. 10874 thus giving an opportunity to representatives of railroad management to meet with representatives of railroad labor in an effort to agree on what should be recommended to the Congress by way of modification of the Railroad Retirement Act including such matters as the tie-in of benefit provisions with social security, the rate of tax, the monthly earnings base and the legislative proposal of the brotherhoods with respect to a supplemental pension. The piecemeal decisions being made by going forward with either piece of legislation referred to will impede the possibility

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