DESCRIPTION OF A CHAIRMAN’S MARK OF THE

“RAILROAD RETIREMENT AND SURVIVORS’

IMPROVEMENT ACT OF 2000”

(H.R. 4844)

Scheduled for Markup 

by the

SENATE COMMITTEE ON FINANCE

on September 27, 2000

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

September 25, 2000

JCX-101-00
(i)

CONTENTS

Page

I. INTRODUCTION ................................................... 1

II. EXPLANATION OF THE BILL ........................................ 2

A. Amendments to the Railroad Retirement Act of 1974 ..................... 2

1. Structure and administration of railroad employee benefit system ........ 2

2. Increased railroad retirement benefits ............................. 3

B. Amendments to the Internal Revenue Code of 1986 ...................... 6
1

 This document may be cited as follows: Joint Committee on Taxation, Description of a

Chairman’s Mark of the“Railroad Retirement and Survivors’ Improvement Act of 2000" (H.R.

4844) (JCX-101-00), September 25, 2000.

2

 H.R. 4844 was passed by the House on September 7, 2000. For legislative history, see

H.R. Rept. No. 106-777. Parts I and II.

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I. INTRODUCTION

This document,1 prepared by the staff of the Joint Committee on Taxation, provides a

description of a Chairman’s Mark of the “Railroad Retirement and Survivors’ Improvement Act of

2000” (H.R. 4844)2. The Senate Finance Committee has scheduled a markup of the proposal on

September 27, 2000.
3

 The railroad unemployment insurance system also provides uniform unemployment

insurance to covered employees.

4

 The board of trustees would be 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 would not be eligible to serve on the board of trustees. The term of

each member of the board of trustees would be three years, but the initial members would have

staggered terms.

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II. EXPLANATION OF THE BILL

A. Amendments to the Railroad Retirement Act of 1974

1. Structure and administration of railroad employee benefit system

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.3 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. 

Description of Proposal

Railroad Retirement Investment Trust

The proposal would create a new railroad retirement investment trust (the “Trust”). The

proposal would provide that the Trust is a private entity and not a department, agency, or

instrumentality of the Federal government. The Trust would be organized in the District of

Columbia and would be governed by a seven-member board of trustees.4 The board would

independently manage and invest the assets of the Trust. Five members of the board would

comprise a quorum and, with the exception of the adoption of investment guidelines, which must be

by a unanimous vote of the trustees, all decisions would be made by a majority vote. The board of

trustees would: (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
5

 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.

6

 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.

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consistent with board 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 would 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 would enforce these standards.

The Trust’s financial statements would be audited by an independent qualified public

accountant. The Trust would 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 account5 which is not needed to pay current benefits. The Board of Trustees for

the Trust would consult with the Secretary of the Treasury to develop an appropriate method of

transferring or converting existing obligations held by the accounts.

Effective Date

The provisions generally would be effective on the date of enactment.

2. Increased railroad retirement benefits

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.6 A widow’s or widower’s tier 1 benefit generally equals the
7

 These amounts are indexed for inflation annually.

8

 These amounts are indexed for inflation annually.

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amount of the deceased employee’s tier 1 benefits on the date of death.7 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.8

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.

Description of Proposal

Annuity benefits for widows and widowers

Generally, the proposal would increase 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 proposal would provide widows and widowers

essentially the same benefit as that payable to the railroad employee prior to death.

Retirement age

The proposal would reduce the age at which full tier 1 retirement benefits are payable to

an individual with 30 years service to 60.
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Vesting requirements

The proposal would reduce 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 would 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 proposal would repeal the present-law maximum limit on monthly railroad retirement

benefits.

Effective Date

The provision related to the expansion of tier 2 benefits to widows and widowers

generally would be effective on January 1, 2001, and would apply to annuity amounts accruing

after December 31, 2000. The provision related to the elimination of the actuarial reduction in tier

1 benefits generally would be effective for annuities that begin to accrue on or after January 1,

2001. The provision relating to the faster vesting requirement would be effective on January 1,

2001. The provision relating to the repeal of the railroad retirement maximum benefit would be

effective on January 1, 2001, and would apply to annuity amounts accruing for months after

December 31, 2000.
9

 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.

10 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.

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B. Amendments to the Internal Revenue Code of 1986

Present Law

Under present law, 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 taxes9

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.10 The tier 2 tax on railroad

employee representatives is equal to 14.75 percent of covered compensation.

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.

Description of Proposal

In general

The proposal would: (1) lower the tier 2 payroll tax rates for employers and employee

representatives in 2001 and 2002 and provide a modified method of calculating the rate of all tier

2 taxes after 2002; (2) repeal the supplemental annuity tax; and (3) provide tax-exempt status for

the Trust created by the proposal described in A.1., above.
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Payroll taxes

The proposal would lower the tier 2 tax rate on employers to 15.60 percent of covered

compensation in 2001 and 14.20 percent in calendar year 2002. The proposal would lower the

tier 2 tax rate for employee representatives to 14.75 percent of covered compensation in 2001 and

14.20 percent in calendar year 2002. The proposal would not change the tier 2 tax on employees

for 2001 and 2002.

Beginning in calendar year 2003, the proposal would provide 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 would be the sum of the account benefits ratio

for the previous 10 fiscal years divided by 10. The account benefits ratio would be 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 would be designed to produce a 13.10 tax rate for

employers and employee representatives and a 4.90 tax rate for employees in calendar year 2003. 

The Secretary of the Treasury would use the following table to make adjustments to the tier 2 tax

rates.

Average account benefits ratio

Applicable percentage for employer

and employee

representative

tier 2 taxes

(percent)

Applicable

percentage for

employee tier 2

taxes

(percent)

At least But less than

2.5

3.0

3.5

4.0

6.1

6.5

7.0

7.5

8.0

8.5

9.0

2.5

3.0

3.5

4.0

6.1

6.5

7.0

7.5

8.0

8.5

9.0

22.1

18.1

15.1

14.1

13.1

12.6

12.1

11.6

11.1

10.1

9.1

8.2

4.9

4.9

4.9

4.9

4.9

4.4

3.9

3.4

2.9

1.9

0.9

0
11 The funds in the supplemental annuity account would be transferred to the Trust and the

account would be eliminated by the board of the Trust as soon as possible after December 31,

2000.

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Supplemental annuity tax

The proposal would repeal the supplemental annuity tax.11 Supplemental annuity benefits

would not be affected by the elimination of the supplemental annuity tax.

Tax exemption for the Trust

The proposal would provide tax-exempt status for the newly created Trust under Code

section 501(c).

Effective Date

The provisions generally would be effective for calendar years beginning after 

December 31, 2000. The provision relating to the tax-exempt status of the Trust would be

effective on the date of enactment.