S. Rept. 106-475 - 106th Congress (1999-2000)
October 03, 2000, As Reported by the Finance Committee

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




[Senate Report 106-475]
[From the U.S. Government Printing 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.
---------------------------------------------------------------------------
    \1\ The railroad unemployment insurance system also provides 
uniform unemployment insurance to covered employees.
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                             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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   By fiscal year, in millions of dollars--
                                                    ----------------------------------------------------------------------------------------------------
                                                        2001      2002      2003      2004      2005      2006      2007      2008      2009      2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               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......................................
                                                    ----------------------------------------------------------------------------------------------------
      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
                                                    ----------------------------------------------------------------------------------------------------
      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.