Under the Railroad Unemployment Insurance Act, an employee’s eligibility for
benefits is based on taxable earnings in a calendar year and normally applies
only to benefits in the benefit year starting the following July 1. Given this
limited period of potential benefits, the financing of railroad unemployment and
sickness benefits is essentially a short-term proposition in comparison to the
financing of retirement benefits. An employee’s eligibility for unemployment or
sickness benefits ceases within two years after he or she leaves railroad work,
while eligibility for railroad retirement annuities continues for decades after
an employee leaves the industry. Consequently, in a given series of benefit
years, gradually declining rail employment is less of a factor than major
recessions or work stoppages causing industry-wide unemployment on a temporary
basis.
Contributions
The railroad unemployment and sickness benefit programs are financed
exclusively by contributions of railroad employers, based on the taxable
earnings of their employees. The employees themselves do not contribute.
Experience-based tax rates were phased in during 1991. Each employer pays
contributions at a rate which takes into consideration the employer’s actual
incidence of benefit usage. Under experience rating, employers whose employees
have low incidences of unemployment and sickness pay contributions at a lower
rate than employers with higher levels of benefit usage. Each employer’s rate
also has a component for administrative expenses and a component to cover costs
shared by all employers.
In 2006, the basic tax rates on railroad employers, including covered commuter
railroads, range from a minimum of 0.65 percent to a maximum of 12 percent.
Also, a surcharge of 1.5 percent is added to the basic tax rates, as the
Railroad Unemployment Insurance Account accrual balance of $113.1 million was
less than an indexed threshold of $114.9 million but greater than a threshold of
$57.4 million on June 30, 2005. About 76 percent of employers are being assessed
2.15 percent in 2006 (the 0.65 percent minimum rate plus the 1.5 percent
surcharge). New employers initially pay a tax of 4.03 percent in 2006, which
represents the average rate paid by all employers in the period 2002-2004.
A surcharge is added to each employer’s tax rate during any calendar year in
which the balance in the Railroad Unemployment Insurance Account on the
preceding June 30 is less than an indexed threshold amount. If the account
balance is less than $100 million (as indexed), but at least $50 million (as
indexed), the surcharge will be 1.5 percent. If the account balance is less than
$50 million (as indexed), but greater than zero, the surcharge will be 2.5
percent. A maximum surcharge of 3.5 percent applies if the account balance is
less than zero. If the account balance on the preceding June 30 is above $250
million (as indexed), the excess will be refunded to the employers in the form
of a rate reduction for the year through a pooled credit. Each employer’s tax
rate (prior to application of individual maximum and minimum limitations) will
be reduced by the ratio of the excess amount to the taxable payroll of all
employers.
The experience-based tax rates have a 12 percent maximum, or a 12.5 percent
maximum if a 3.5 percent surcharge is in effect. Included in the rate is the
basic rate, an administration tax rate of 0.65 percent, and, if either is
applicable, the surcharge rate or the rate of the pooled credit. Since the basic
employer tax rate plus any pooled credit cannot be less than zero, 0.65 percent
is the minimum rate which any employer can pay.
Railroad Unemployment Insurance Account
Railroad unemployment insurance funds not needed immediately for the payment
of benefits are deposited in the Railroad Unemployment Insurance Account
maintained by the Treasury. This account, together with similar accounts for
each State, forms a national unemployment trust fund. Deposits in the
unemployment trust fund are invested by the Treasury in securities of the U.S.
Government. Every quarter, the Railroad Unemployment Insurance Account and the
Railroad Unemployment Insurance Administration Fund each receive a proportionate
share of the interest earnings of the trust fund, based on average daily
balances.
The Railroad Unemployment Insurance Administration Fund, separate from the
Railroad Unemployment Insurance Account, pays the costs of administering the
railroad unemployment insurance system. An amount equal to 0.65 percent of
taxable payroll is set aside from railroad contributions for the Railroad
Unemployment Insurance Administration Fund. Any amount in the Railroad
Unemployment Insurance Administration Fund in excess of $6 million (on an
accrual basis) on September 30 of any year is transferred to the Railroad
Unemployment Insurance Account.
Borrowing Authority
To ensure adequate funds in periods of high unemployment, Congress gave the
Board authority in 1959 to borrow money from the Railroad Retirement Account for
the payment of benefits from the Railroad Unemployment Insurance Account.
Financial Report
The Railroad Retirement Board is required to report annually to the Congress
on the financial status of the railroad unemployment insurance system. The
reports must include any recommendations for financing changes which might be
advisable, including any adjustment the Board recommends regarding the rates of
employer contributions.
The Board’s 2005 railroad unemployment insurance financial report was generally
favorable. Even as projected maximum benefit rates increase 39 percent from $56
to $78 from 2004 to 2015, experience-based contribution rates are expected to
maintain solvency, except for small, short-term cash-flow problems in 2007 and
2008. Projections show quick repayment of the loans even under the most
pessimistic assumption. The report also predicted average employer contribution
rates well below the maximum throughout the projection period, except for a
periodic
resumption of the surcharge required to maintain a minimum account balance. No
financing changes were recommended by the Board. |