DESCRIPTION OF THE

RAILROAD RETIREMENT AND SURVIVORS’

IMPROVEMENT ACT OF 2000

(H.R. 4844)

Scheduled for Markup 

by the

HOUSE COMMITTEE ON WAYS AND MEANS

on July 25, 2000

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

July 24, 2000

JCX-74-00R
(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

the “Railroad Retirement and Survivors’ Improvement Act of 2000" (H.R. 4844) (JCX-74-00R),

July 24, 2000.

- 1 -

I. INTRODUCTION

This document,1

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

description of the “Railroad Retirement and Survivors’ Improvement Act of 2000” (H.R. 4844).

The House Committee on Ways and Means has scheduled a markup of the bill on July 25, 2000. 
2

 The railroad unemployment insurance system also provides uniform unemployment

insurance to covered employees.

3

 The board of trustees would be comprised of the following seven members: (1) three

would represent the interests of labor; (2) three would represent the interests of management; and

(3) one would represent 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.2 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 interestbearing Treasury obligations. 

Description of Proposal

Railroad Retirement Trust Fund

The bill would create a new railroad retirement investment trust (the “Trust”) to administer

a new railroad retirement trust fund (the “Fund”). The bill describes the Trust as a private entity

which is not a department, agency, or instrumentality of the Federal government. The Trust would

be governed by a seven-member board of trustees.3

 The board would independently manage and

invest the assets of the Fund. 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) set

investment guidelines for the management of Fund assets and select outside investment advisors and
4

 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.

5

 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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managers to implement the board’s decisions; (2) transfer funds to a centralized, nongovernmental

disbursement agent that would pay the various components of the railroad retirement benefits in a

single check to beneficiaries; and (3) pay administrative expenses of the Trust. The board would be

subject to fiduciary standards similar to those required for pension fund managers under the

Employment Retirement Income Security Act of 1974.

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

accountant. The Trust would be required to produce an annual management report to Congress about

the operations and financial condition of the Trust and the Fund.

Transfers to the Fund

Upon the creation of the Trust and the Fund, the Railroad Retirement Board shall direct the

Secretary of the Treasury to transfer to the Fund (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 account4 which is not needed to pay current benefits.

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.5

 A widow’s or widower’s tier 1 benefit generally equals the amount of the
6

 These amounts are indexed for inflation annually.

7

 These amounts are indexed for inflation annually.

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deceased employee’s tier 1 benefits on the date of death.6

 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.7

Retirement age

Generally, an employee aged 60 with 30 years of service (and at age 60 for his or her spouse)

may retire and collect full tier 2 benefits. However, tier 1 benefits for an employee aged 60 with 30

years of service (and at age 60 for his or her spouse) are actuarially reduced for retirement before age

62.

Vesting requirements

Under present law, 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 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

Benefits for widows and widowers

Generally, the bill 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 bill provides widows and widowers essentially the same

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

Vesting requirements

The bill 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
- 5 -

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

benefits.

Effective Date

The provision related to the expansion of benefits to widows and widowers would be

effective on January 1, 2001, and would apply to annuity amounts accruing after December 31, 2000.

The provision related to the actuarial reduction in tier 1 benefits 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 after December 31, 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.
8

 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.

9

 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 taxes8

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.9 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 Proposals

In general

The bill 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 bill described in A.1., above.

Payroll taxes
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The bill 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 bill 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 bill would not change the tier 2 tax on employees for 2001 and

2002.

Beginning in calendar year 2003, the bill 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 is 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
10 The funds in the supplemental annuity account would be transferred to the Fund 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 bill would repeal the supplemental annuity tax.10 Supplemental annuity benefits would

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

Tax exemption for the Trust

The bill 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.