Prepared by Public Affairs 312-751-4777
The 75th anniversary of the enactment of the Railroad Retirement
Act of 1935 is being observed during 2010. Part of President Franklin Delano
Roosevelt's New Deal legislation, the Act was signed into law on August 29,
1935.
It was in the rail industry that the first formal industrial
pension plan in North America was established in 1874. By 1925, more than
three-fourths of all railroad workers in the United States were covered by
pension plans. However, relatively few employees actually received benefits
under these plans, and during the Great Depression of the 1930s the plans had
difficulty meeting their obligations. Older workers consequently exercised
seniority rights to continue working, and accounted for a disproportionate
number of the industry's employees. Railway labor sought legislation to continue
railroad pensions as part of a reliable and equitable national program.
Legislation was enacted in 1934, 1935 and 1937 to establish a railroad
retirement system separate from the social security program enacted in 1935. The
social security program would not credit past service and was not scheduled to
begin monthly benefit payments until the 1940s. Legislation taking into account
the particular circumstances of the rail industry was not without precedent.
Numerous laws pertaining to rail operations and safety had already been enacted
since the Interstate Commerce Act of 1887. Since passage of the Railroad
Retirement Acts of the 1930s, numerous other railroad laws have been enacted.
The 1934 Act was declared unconstitutional by the Supreme Court and the 1935 Act
was also challenged in the Courts. Nonetheless, the Railroad Retirement Board (RRB)
made its first annuity payments 11 months after passage of the 1935 legislation.
While an appeal was pending, railroad management and labor, at the urging of
President Roosevelt, resolved their differences in a memorandum of agreement
which led to the Railroad Retirement and Carriers' Taxing Acts of 1937. In July
1937, the benefit payments of almost 50,000 pensioners were taken over by the
RRB and by the end of 1938, almost 100,000 employees had retired under the
system.
This legislation set up a staff retirement plan providing annuities based on an
employee's creditable railroad earnings and service. Annuities could be paid at
age 65 or later, regardless of length of service, or at ages 60-64 (on a reduced
basis) after 30 years of service. Disability benefits were payable after 30
years of service or at age 60.
Numerous amendments after 1937 increased benefits and added benefits for
dependents. Amendments enacted in 1946 and 1951 added survivor and spouse
benefits, liberalized disability benefit requirements and established
jurisdictional coordination with the Social Security Administration.
In addition, a financial interchange was established between the two systems to
equitably apportion the costs of benefits and taxes based on rail service. This
financial interchange, which ensures that the Social Security Trust Funds
neither gain nor lose from the existence of the railroad retirement system,
became an integral source of railroad retirement funding in subsequent decades.
In 1965, the financial interchange served as an operating vehicle through which
the Medicare program was extended to railroad retirement beneficiaries.
The recurring inflation and recession in the national economy during the 1970s
and 1980s created formidable actuarial problems for pension systems,
particularly those providing substantial cost-of-living protection for
beneficiaries. Railroad retirement annuities, like social security benefits,
were increased by an aggregate of 52 percent between 1970 and 1972 alone. The
cost of these increases jeopardized the solvency of the system and Congress
directed that a Commission on Railroad Retirement study the system and its
financing for the purpose of recommending changes that would ensure adequate
benefit levels on an actuarially sound basis.
Following the Commission's study, railway labor and management proposed a
restructuring of the railroad retirement system that was enacted into law as the
Railroad Retirement Act of 1974. The 1974 Act provided a two-tier system with a
first tier formula yielding amounts equivalent to social security benefits,
taking into account both railroad retirement and nonrailroad social security
credits. A second tier formula, based on railroad service exclusively, provided
benefits comparable to those paid over and above social security benefits by
other industrial pension systems. The Act eliminated duplications in dual
railroad retirement-social security benefits for new hires and individuals not
vested as of December 31, 1974, under both programs, but protected the equities
of employees vested for dual benefits before 1975. It was anticipated that the
changes in the benefit formulas, the reduction in dual benefits, higher
investment earnings, plus provisions for additional funds from the Federal
Government to pay the phase-out costs of dual benefits would place the railroad
retirement system on a reasonably sound basis.
However, neither industry nor government at that time anticipated the resurgence
of double digit inflation in the latter part of the 1970s and the recession of
1981. Financial amendments were subsequently enacted in 1981 as part of the
Omnibus Budget Reconciliation Act and in 1983 under the Railroad Retirement
Solvency Act. These amendments raised retirement taxes, deferred cost-of-living
increases, reduced early retirement benefits, limited future vested dual
benefits, and subjected annuities to Federal income tax. These amendments also
simplified benefit formulas, provided protection for divorced spouses and
remarried widow(er)s, liberalized the current connection requirement for career
employee benefits, and increased benefits for disabled widow(er)s and employees
with military service.
Legislation in 1988 liberalized work restrictions and the crediting of military
service in certain cases. It also provided more equitable treatment of
separation or severance pay for railroad retirement purposes.
In 2001, the Railroad Retirement and Survivors' Improvement Act, the most
significant railroad retirement legislation in almost 20 years, and the first in
almost three decades not to involve tax increases or benefit reductions, was
signed into law. The benefit and financing provisions of the legislation, like
those of most previous railroad retirement legislation, were based on joint
recommendations negotiated by a coalition of rail freight carriers and rail
labor organizations.
The Act liberalized early retirement benefits for 30-year employees and their
spouses, eliminated a cap on monthly retirement and disability benefits, lowered
the minimum service requirement from 10 years to 5-9 years, if at least 5 years
were after 1995, and provided increased benefits for some widow(er)s. Financing
sections in the law provided for adjustments in the payroll tax rates paid by
employers and employees, and the repeal of a supplemental annuity work-hour tax.
The legislation also created the National Railroad Retirement Investment Trust,
which manages and invests railroad retirement funds in non-governmental assets,
as well as in governmental securities.
The railroad unemployment insurance system
was also established in the 1930s.
While the State unemployment programs first provided in 1935 generally covered
railroad workers, railroad operations which crossed State lines caused special
problems. Unemployed railroad workers were denied compensation by one State
because they became unemployed while working in another State or because their
employer had paid unemployment taxes in another State. Although there were cases
where employees appeared to be covered in more than one State, they often did
not qualify in any.
A National Security Commission reporting on the nationwide State unemployment
plans recommended that railroad workers be covered by a separate plan because of
the complications their coverage had caused the State plans. Congress
subsequently enacted the Railroad Unemployment Insurance Act in 1938, which
established a system of benefits for unemployed railroad workers, plus a free
placement service, financed by a payroll tax payable by employers. Benefits
became payable on July 1, 1939.
Amendments enacted in 1946 increased the maximum daily benefit rate and the
maximum duration to 26 weeks. They also provided sickness benefits; at that
time, only two States, Rhode Island and California, had sickness plans.
Amendments enacted in the 1950s raised the maximum daily benefit rate in stages,
provided extended unemployment benefits for 13 weeks to employees with at least
10 years of service and 26 weeks of extended benefits to 15-year employees. In
1968, legislation increased the daily benefit rate and provided extended
benefits for sickness on essentially the same basis as for unemployment.
Amendments in 1975 increased the maximum daily benefit rate and liberalized the
basic eligibility requirements for new employees by lowering the 7-month
base-year service requirement to 5 months. In addition, the 1975 amendments
mandated a 7-day waiting period for benefit payments resulting from strikes. The
tax rate schedule was increased, starting in 1976, depending on the balance in
the account, in order to finance the increased benefits. This legislation also
lowered the waiting period for sickness benefits.
The national economic recession of the early 1980s caused large-scale railroad
layoffs. The layoffs increased unemployment benefit payments to record levels
which far exceeded unemployment tax income and necessitated high levels of loans
from the Railroad Retirement Account. The Railroad Unemployment Insurance
Account owed the Railroad Retirement Account a peak amount of over $850 million
at the end of fiscal year 1986. Financial measures to assist the Railroad
Unemployment Insurance Account were included in the Railroad Retirement Solvency
Act enacted in 1983.
The Solvency Act raised the taxable limit on monthly earnings and the base-year
qualifying amount. The waiting period for benefits during strikes was increased
from 7 to 14 days. A temporary repayment tax on railroad employers was scheduled
to begin July 1, 1986, to initiate repayment of loans made by the Railroad
Retirement Account. Sickness benefits, other than those resulting from
on-the-job injuries, were made subject to Federal income tax. The legislation
also mandated the establishment of a Railroad Unemployment Compensation
Committee to review the unemployment and sickness benefits programs and submit a
report to Congress.
Legislation in 1986 amended the repayment tax and provided for an automatic
surtax on rail employers if further borrowing took place.
In 1988, the most significant railroad unemployment insurance legislation in
decades was enacted. Based on the recommendations of the Railroad Unemployment
Compensation Committee, the Railroad Unemployment Insurance and Retirement
Improvement Act of 1988 increased the railroad unemployment and sickness daily
benefit rate, and indexed future benefit rates and qualifying earnings
requirements to national wage levels. This legislation improved the railroad
unemployment insurance system's financing by indexing the tax base to increased
wage levels, experience rating employer contributions and assuring repayment of
the system's debt to the Railroad Retirement Account. In June 1993, the $180
million loan balance was repaid in its entirety from cash reserves in the
Railroad Unemployment Insurance Account and the loan repayment tax was
terminated.
The 1988 amendments also required the RRB to make annual financial reports to
Congress on the status of the unemployment insurance system. The reports have
been favorable.
Legislation enacted in 1996 increased the railroad unemployment and sickness
insurance daily benefit rate and revised the formula for indexing future benefit
rates. It also reduced the waiting period for initial benefit payments and
eliminated duplicate waiting periods in continuing periods of unemployment and
sickness. In addition, the legislation applied an earnings test to claims for
unemployment and reduced the duration of extended benefit periods for
long-service employees.
By the beginning of the 2010 anniversary year, railroad retirement benefits of
$281 billion had been paid by the RRB to 2,000,000 retired employees, 1,100,000
spouses and 2,400,000 survivors; unemployment and sickness benefits had totaled
some $8 billion. The first retirement annuities awarded under the 1935 Railroad
Retirement Act averaged $60 a month and no monthly benefits were payable to
spouses or survivors. Currently, employee annuity awards average about $2,700 a
month, annuities for spouses average over $900 a month, and annuities to aged
and disabled widow(er)s just over $1,700 a month.
In 2010, nearly 600,000 beneficiaries will receive retirement and survivor
benefits of about
$11 billion, and about 42,000 persons will receive unemployment and sickness
benefits of about $300 million.
Originally headquartered in Washington, D.C., the RRB was moved during World War
II to the railroad crossroad of the nation, Chicago, Illinois. Since 1942, the
agency's headquarters have been at 844 N. Rush Street, just north of the Chicago
Loop. The RRB also maintains field offices across the country in railroad
localities.
Established in a time of national crisis, and periodically challenged during the
past 75 years, the railroad retirement system has nonetheless continued to serve
railroad employees and their families through programs affording protection
against the economic hazards of old age, disability, unemployment and sickness.
###
|