SUPPLEMENTAL STATEMENT OF HOWARD W. HABERMEYER, CHAIRMAN, U.S. RAILROAD RETIREMENT BOARD, CHICAGO, ILL.

Re hearings on S. 2838, May 1, 1968.

Hon. CLAIBORNE PELL,

MAY. 7, 1968.

Chairman, Subcommittee on Railroad Retirement of the Senate Committee on Labor and Public Welfare, New Senate Office Building, Washington, D.C. DEAR SENATOR PELL: The information contained in items 3, 4 and 5, and in item 6, of the enclosed statement was requested by Senator Morse of Mr. Elliott, and of the Board, respectively. The information in items 1 and 2 is, in our opinion, pertinent to the other information in the statement.

Sincerely yours,

HOWARD W. HABERMEYER,

Chairman.

SUPPLEMENTARY INFORMATION ON WIDOWS' BENEFITS UNDER

THE RAILROAD RETIREMENT ACT

The primary purpose of this statement is to provide the information which was requested of the Railroad Retirement Board in the course of the hearing on S. 2838. The statement includes some additional data which are believed to be pertinent to the matters discussed at the hearing.

1. Cost of widows' benefits.-It is estimated that the total cost of widows' annuities under the present provisions of the Railroad Retirement Act is nearly 6 percent of taxable payroll. Of this amount, 5.74 percent is for aged widows' annuities (Section 5(a)(1) of the Act) and some 0.22 percent is for widowed mothers' and disabled widows' annuities (Sections 5(a) (2) and 5(b) of the Act). How the cost of widows' annuities compared with the cost of other railroad retirement benefits is shown graphically in Chart I and also in Table 1.

2. Benefit income of widows now on the Board's rolls.-Preliminary and partly estimated data were obtained for aged widows on the Board's benefit rolls at the close of March 1968. These data are summarized in tables 2 and 3. An examination of these tables leads to the following conclusions:

(a) The dual beneficiaries (widows who receive some social security benefit in addition to their railroad retirement annuity) generally have a higher benefit income than the nondual beneficiaries. This can be seen from the average amounts of combined benefit which are shown in table 2. What this means is that a small widow's annuity under the Railroad Retirement Act does not necessarily indicate a grossly inadequate benefit income. It should also be noted that the annuities for the nondual beneficiaries are nearly always computed under the special guaranty (110-percent social security formula) and that these annuities would be raised automatically if social security benefits were to be increased.

(b) In terms of combined benefit income, there are 31 percent of widows whose income is below $100 a month. (Table 3) Here too, it is interesting to note that the low benefit income group consists mainly of nondual beneficiaries whose railroad retirement benefit is generally higher than it is for the dual beneficiaries.

(c) The data strongly suggest that any plan for improving benefits to widows of railroad employees would have to consider the combined benefits from railroad retirement and social security rather than the railroad retirement benefit alone.

3. Variation by age of beneficiary.-As could be expected, widows' benefits under the Railroad Retirement Act vary by age, that is, the older widows tend to receive smaller benefits. However, the same does not hold true for wives; for this group, the age does not seem to be a factor influencing the size of the basic benefit, that is, the benefit prior to reduction for claiming it before age 65. Data on average benefits of widows and wives by age of beneficiary are shown in table 4.

The reasons for the relationships described immediately above are as follows: (a) The very old widows most likely received benefits based on service which ended some years ago. While the widow's benefit might have been adjusted several times as a result of amendments (the benefit under the basic amount formula was increased nearly 75 percent since 1947), the adjustment could not include the effects of the increases in the earnings

bases. It should be noted, however, that employees who died some years ago have contributed relatively little to the railroad retirement system so that considerations of equity would justify smaller benefits to their widows.

(b) In the case of wives, their benefit is subject to a maximum (110 percent of the highest wife's benefit that can be paid under social security at the given point of time) and this maximum tends to have an equalizing effect. In any event, the distribution of wives' benefits by age of wife does not give a clear picture because of the admixture of reduced and unreduced benefits. No such admixture exists in the case of widows' annuities.

4. Variation by date of employee's death.-As indicated in the preceding seetion, the size of a widow's railroad retirement benefit is greatly influenced by the date on which her deceased husband's railroad employment was terminated. This is borne out by the data appearing in table 5.

The first part of the table shows the average amounts that were actually payable in each of the years 1956-66. In order to eliminate the bias resulting from subsequent amendments, the amounts were converted to what they would have been under the 1968 Railroad Retirement Act. It can be seen that the adjusted figures are also steadily increasing and this is largely due to the fact that each successive year included later terminations of railroad employment on the part of the deceased employees who gave rise to the widows' benefits.

The second part of the table shows directly the influence of the date of termination of employment. The data pertain to deaths before separation from railroad employment and before retirement and include aged widows' annuities payable on account of such death, at the close of 1965. Once more, to give a clearer picture, the benefit amounts were converted to what they would have been under the 1968 law. The interesting part about these data is that for all employee deaths which occurred after 1955, the average widow's benefit (at the 1968 rates) is in excess of $100 per month.

5. Relationship between widows' and wives' benefits.-There is no direct relationship between these two types of benefits under the Railroad Retirement Act. This is because wives' annuities stem from employee annuities which depend largely on the length of railroad service; in contrast, widows' annuities are computed under entirely different formulas which give little if any weight to the length of covered employment. The only formal link between these two types of benefits is the provision which guarantees that if a wife beneficiary becomes a widow, her widow's annuity cannot be smaller than the spouse's annuity the woman was actually receiving. What this means is that a woman cannot receive less as a widow than what she was receiving as a wife; however, if the widow in question was never entitled to a wife's annuity, her widow's annuity can be smaller than what she could have received as a spouse if she had been entitled to a spouse's annuity at the time of her husband's death.

As of now, the maximum wife's annuity is $104.50 and about 40 percent of the wives on the Boards' rolls have annuities based on that amount. Should any of these women become widowed in 1968, their widow's annuity (if otherwise eligible) would therefore be at least $104.50. In 1969, the floor for widows' annuities in spouse maximum cases will be $112.20 and in 1970 and later, $115.50. The actual amounts of widows' annuities will in many cases be much larger as can be seen from line B of section 1 of the table submitted by the Chairman of the Board in connection with his testimony on the bill, S. 2838.

6. Reinstitution of joint and survivor options.-The Chairman of the Board stated in his testimony that the reinstitution of joint and survivor options would greatly alleviate the situation of widows of retired employees. Under such an arrangement, the retired employee gives up a relatively small part of his own benefit and uses it to secure a substantial extra benefit for his wife in case she survives him. Options of this kind are very common in pension plans of all types and are an integral part of the Civil Service retirement system. The options were also available under the Railroad Retirement Act until it was amended in 1946 The benefit income for a retired long-service employee and his wife is now sufficiently large to permit him to divert a part of it for the protection of his wife. From the point of view of the railroad retirement system, such an arrangement would be most desirable because it would not involve any extra cost to the system. There would, of course, remain the group of widows whose husbands die before retirement but the cost of giving them alone some extra benefits would be much smaller than if the same were to be done for all widows. This is because the majority of new accessions to the rolls of aged widows come from deaths among retired employees and not from deaths before retirement.

TABLE 1.-ACTUARIAL BALANCE SHEET OF THE RAILROAD RETIREMENT SYSTEMS AS OF DEC. 31, 1967 (INCLUDES EFFECTS OF 1967 SOCIAL SECURITY AND 1968 RAILROAD RETIREMENT AMENDMENTS)

1 Percentages of a $5,010,000,000 annual payroll with a $650 monthly earnings base.

2 Includes prorated administrative expenses.

* Includes 0.02 loss due to health insurance program.

* Includes disability annuities payable after age 65.

TABLE 2-DISTRIBUTION OF AGED WIDOWS RECEIVING BENEFITS UNDER THE RAILROAD RETIREMENT ACT (RRA) AND AVERAGE COMBINED BENEFIT INCOME FOR NONDUAL AND DUAL BENEFICIARIES BY AMOUNT OF RAILROAD RETIREMENT BENEFIT, MARCH 1968

1 RRA widow's annuity plus any social security benefit received by the same widow.

2 The phrase "dual beneficiary" refers to those railroad retirement beneficiaries who are simultaneously entitled to some social security benefit. All other railroad retirement beneficiaries are designated as nondual beneficiaries. 8 The upper end of the interval includes fractions of a dollar from 1 to 99 cents. Less than 0.05.

Note: The numbers of beneficiaries exclude several thousand cases in which no benefit adjustment was made as of the end of March 1968. In about 3,000 cases, checks paid to aged widows include annuities payable to entitled children.

TABLE 3.-DISTRIBUTION OF AGED WIDOWS RECEIVING BENEFITS UNDER THE RAILROAD RETIREMENT ACT (RRA) BY AMOUNT OF COMBINED BENEFIT INCOME FOR DUAL AND NONDUAL BENEFICIARIES MARCH 1968

1 RRA widow's annuity plus any social security benefit received by the same widow.

2 The phrase "dual beneficiary" refers to those railroad retirement beneficiaries who are simultaneously entitled to some social security benefit. All other railroad retirement beneficiaries are designated as nondual beneficiaries. 3 The upper end of the interval includes fractions of a dollar from 1 to 99 cents.

Note: The numbers of beneficiaries exclude several thousand cases in which no benefit adjustment was made as of the end of March 1968. In about 3,000 cases, checks paid to aged widows include annuities payable to entitled children.