United States General Accounting Office

GAO Report to the Chairman, Committee on

Transportation and Infrastructure,

House of Representatives

August 1998 RAILROAD

RETIREMENT

Enhancing Portability

Would Raise Cost and

Policy Concerns

GAO/GGD-98-168

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-279596 

August 10, 1998

The Honorable Bud Shuster

Chairman, Committee on Transportation

 and Infrastructure

House of Representatives

Dear Mr. Chairman:

The Railroad Retirement program was established in 1937 and is among

the older retirement programs for private sector employees in the United

States. In 1997, the program had about 254,000 active participants and

provided pension benefits to about 742,000 retirees, spouses, and survivor

and disability annuitants. Over the past 30 years, the railroad industry has

experienced extensive downsizing. Also, about 60 percent of employees

who begin railroad service leave the industry with less service than they

need to qualify for a pension under the program. As a consequence, there

has been discussion of possible legislation to enhance the portability of

Railroad Retirement benefits.1

In accordance with your request that we study the portability of Railroad

Retirement benefits, our objectives were to determine

• which, if any, Railroad Retirement benefits are portable;

• what changes could be made to the Federal Employees’ Retirement

System (FERS) that might enhance the portability of Railroad Retirement

benefits into FERS for former railroad employees who secure federal

civilian employment and the cost and administrative implications of those

changes for FERS and whether such changes could be made cost-neutral to

FERS; and

• what changes could be made to Railroad Retirement that might enhance

the overall portability of its retirement benefits and what are the cost and

administrative implications of these changes for Railroad Retirement.

1

While analysts have used several definitions of portability, in this report, portability refers to an

employee’s capacity to retain retirement benefits when leaving one employer and going to the next in a

manner that generally maintains the value of those benefits until retirement. However defined,

portability can be achieved in a variety of ways depending on how a retirement plan is designed.

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Background Railroad Retirement is a multiemployer defined benefit (DB) plan for

railroad employees.2

 It is sponsored by interstate and other types of

railroads and their affiliates that are engaged in railroad-connected

operations as well as employer associations and national labor

organizations and their subordinate units. Although the program’s

retirement benefits generally are determined through collective bargaining

agreements, the program is governed by the Railroad Retirement Act of

1974, as amended, and administered by the Railroad Retirement Board

(RRB), an independent agency of the federal government. The program is

not subject to the Employee Retirement Income Security Act of 1974

(ERISA), as amended, and thus railroad employees are not covered by ERISA

requirements designed to protect the pension benefits of most private

sector employees.

Railroad Retirement benefits are provided in the form of a pension that is

based on two formulas—known as Tier I and Tier II.3

 The first-tier

formula, which takes into account both railroad service and nonrailroad

service covered by Social Security, provides benefits that are equivalent to

what would be provided by Social Security. The second-tier formula,

which takes into account railroad service only, provides additional

benefits and is comparable in design to other private sector DB plans,

according to RRB. However, Railroad Retirement provides certain benefits

not generally provided under pension systems, including Tier II benefits

for spouses and survivor Tier II benefits without an offset in the

employee’s benefit. Regarding post-retirement benefit increases, the Tier I

portion is increased automatically in the same way that Social Security

benefits are increased. The Tier II portion is normally increased annually

at 32.5 percent of the increase in living costs owing to inflation as

measured by the Consumer Price Index (CPI).4

2

A multiemployer plan is one to which more than one employer is required to contribute under one or

more collective bargaining agreements. A DB plan is one in which retirement benefits are computed on

the basis of a formula generally reflecting years of service, or a percentage of salary, or both. In

contrast, the retirement benefits for a defined contribution (DC) plan depend upon the amounts

contributed to an employee’s individual account and the investment experience of that account.

3

In addition to these basic benefits, a federally funded added benefit is paid to the one-fourth of

railroad retirees whose dual entitlement to Railroad Retirement and Social Security benefits was

established before 1975. Railroad employees may also receive a supplemental annuity if at retirement

they have (1) attained age 65 with 25-29 years of railroad service or age 60 with 30 years of service;

(2) worked in the industry before Oct. 1, 1981; and (3) maintained a current connection with the

industry, that is, worked in the industry for at least 12 of the 30 months preceding their retirement.

4

The CPI is compiled by the Bureau of Labor Statistics and is intended to measure the average change

in prices paid by urban consumers for a fixed market basket of goods and services.

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Railroad Retirement benefits are financed primarily through payroll taxes,

which are deposited in Railroad Retirement trust funds.5

 Tier I payroll

taxes are the same as those for Social Security; for 1998, employers and

employees are assessed 6.2 percent of pay on wages up to a maximum

annual wage ceiling of $68,400.6

 Tier II payroll taxes in 1998 are

16.1 percent for employers and 4.9 percent for employees, and they are

assessed on wages up to a maximum of $50,700. Both the Social Security

and Tier II wage bases are adjusted annually for economywide increases in

wages. Tier II tax rates are higher than employer and employee

contributions to private sector DB plans.7

 According to an official of the

Employee Benefit Research Institute, private sector employers that

sponsor DB plans contribute 3 percent of payroll, on average, and most

employees make no contribution to fund plan benefits.

Former railroad employees who secure federal civilian employment would

most likely also be covered by FERS—the federal retirement program

nearly all new civilian employees must join. FERS provides benefits from

three sources: a basic pension (a DB plan), Social Security, and the Thrift

Savings Plan (TSP)—a DC plan much like private sector 401(k) plans.

Starting at age 62, FERS pensions are to be increased automatically each

year according to the CPI, unless inflation is greater than 2 percent. When

inflation is between 2 and 3 percent, the adjustment is limited to 2 percent;

and if inflation is 3 percent or more, the adjustment is limited to the CPI

minus 1 percent.

FERS benefits are funded through various agency and employee

contributions, which are deposited in the Civil Service Retirement and

Disability Trust Fund (CSRDF) that is administered by the Office of

Personnel Management (OPM). In 1996, agencies and employees

contributed 11.4 and 0.8 percent of pay, respectively, to cover the cost of

FERS pension benefits in addition to the 6.2 percent each paid in Social

Security payroll taxes.8 FERS also requires that agencies make automatic

5

The Tier I trust fund is technically known as the Social Security Equivalent Benefit Account, and the

Tier II trust fund, as the Railroad Retirement Account. Funds that are not used to pay current benefits

are invested in nonmarketable Treasury securities in the same manner as other federal trust funds,

including Social Security. In contrast, other private sector DB plans invest these contributions in

assets such as marketable stocks and bonds and are managed by fiduciaries for the exclusive benefit

of plan participants as required by ERISA.

6

Employers and employees are also assessed 1.45 percent of pay on unlimited wages for Medicare

hospital insurance.

7

On this point, see Railroad Competitiveness: Federal Laws and Policies Affect Railroad

Competitiveness (GAO/RCED-92-6, Nov. 5, 1991).

8

Agencies and employees also contributed 1.45 percent of pay for Medicare hospital insurance.

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B-279596 

contributions of 1 percent and matching contributions of up to 4 percent

on voluntary employee contributions to employees’ TSP accounts.

National trends toward increased workforce mobility and the aging of the

baby boom generation have focused greater attention on retirement issues

in recent years, including the portability of retirement benefits. In this

regard, portability can be more easily achieved in DC than DB plans. For DC

plans, employees own or are immediately vested in any contributions they

make to their own retirement accounts, as well as any investment earnings

or losses associated with those contributions. Employees also generally

become vested in employer contributions to their accounts and any

associated earnings or losses within 5 to 7 years. Thus, an employee who

separates can either withdraw his or her vested account balance as a

lump-sum payment or preserve the benefits by rolling the account over

into an individual retirement account or a new employer’s plan, if allowed.

For DB plans, portability depends on the way in which vesting and service

credit provisions, if any, are designed and whether the vested benefits of

separated employees are deferred. For DB plans other than Railroad

Retirement, employees are immediately vested in their own plan

contributions, plus interest, and become vested in employer-provided

benefits within 5 to 7 years. When an employee separates, vested DB

benefits can be withdrawn as a lump-sum payment; however, more

commonly, plans require that these benefits be deferred until the point at

which the separated employee would have become eligible to retire under

the plan and begin receiving benefits.9

 If payment of vested benefits is

deferred for many years, the value of those benefits may be eroded by the

effects of inflation during the pre-retirement period. Indexation to protect

the value of such benefits by increasing the value of the employee’s final

wages (i.e., wage indexation) is rare because it is expensive.

DB plan benefits can also be made portable through the transfer of service

credits, where service under one employer is counted by a subsequent

employer in determining retirement benefits under the more recent

employer’s retirement program. Although some private sector

multiemployer plans and some state and local governments allow for the

transfer of service credit, most do not because of concerns about

9

According to a 1993 U.S. Department of Labor survey of medium and large private sector

establishments, less than 0.5 percent of full-time employees with a defined benefit plan had an option

to cash out vested pension benefits valued at more than $3,500. (Employee Benefits in Medium and

Large Firms 1991 and 1993, U.S. Department of Labor, Bureau of Labor Statistics (Washington, D.C.:

1994)).

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B-279596 

differences in plan design and benefit levels and who would pay the

potential increase in retirement costs.

Results in Brief Under the Railroad Retirement program, Tier I and Tier II benefits are fully

portable within the railroad industry; the benefits that employees earn

from one railroad employer can be carried to the next employer without

any reduction in value. Tier I benefits are also portable outside the

industry; railroad employees can convert their Tier I benefits into Social

Security benefits and vice versa. Tier II benefits, however, are less

portable outside the industry; railroad employees must have at least 10

years of railroad service to establish their right to Tier II benefits (i.e.,

become vested), and the receipt of any benefits must be deferred until the

time that the employee would have become eligible to retire under the

plan. Although the Railroad Retirement program provides for indexing

wages for inflation that occurred during the pre-retirement period, this

provision applies only to former railroad workers who secure employment

at selected federal agencies that are responsible for federal railroad

policies.

For former railroad workers who secure federal civilian employment, the

portability of Tier II benefits could be enhanced if they could be converted

into FERS pension benefits. Such a conversion could be accomplished by

counting railroad service credit earned under Railroad Retirement as FERS

service credit. However such an arrangement could increase federal

retirement costs, which raises the question of how such costs would be

paid. The arrangement would be cost-neutral to the CSRDF only if any

increased costs were paid in full by the railroad industry, the former

railroad employees, or a combination of the two. According to OPM

analysis, per-person lifetime costs could be high. However, its analysis

also suggests that the aggregate cost probably would not be high if the

number of employees involved was small. According to OPM, the agencies

that hire former railroad employees and OPM would both experience

modest increases in administrative costs because they would need to

record and verify employees’ railroad service and calculate the cost of

crediting railroad service into FERS on a case-by-case basis.

Although it believes the administrative burdens of adding a railroad

service credit provision to FERS would be manageable, OPM has consistently

objected to proposals that would extend service credit for work that was

not covered by the Civil Service Retirement System (CSRS) or FERS,

especially if such work was performed in the private sector. Consistent

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B-279596 

with that view, OPM strongly opposes adding a railroad service credit

provision to FERS, because even if it were designed to be cost-neutral, such

a provision would be inconsistent with the intent of FERS and set a

troublesome precedent for other private sector employees to seek similar

treatment.

The portability of Tier II benefits could also be enhanced by reducing the

required vesting period for railroad employees—for instance, from 10 to 5

years—which would make more railroad employees eligible to receive

deferred benefits, and/or by providing for a lump-sum payment of

nonvested employee contributions upon separation. Under either option,

according to an RRB actuary, the impact on Railroad Retirement trust fund

assets, outlays, and receipts would be less if the option applied only to

benefits earned by current or future employees. Because either of these

options could increase benefits for some employees, their adoption would

also increase Railroad Retirement costs. Currently, any increases in

benefit costs are borne by the railroad industry, and they can be passed on

in whole or in part to railroad employees through increased Tier II payroll

taxes and/or reductions in other employee benefits or compensation. RRB

officials told us that the Board would experience increases in

administrative costs but that they would be manageable.

Scope and

Methodology

As described in more detail in appendix I, to respond to your request, we

reviewed our prior work, analyzed retirement literature on portability, and

interviewed railroad and federal civilian retirement specialists and other

retirement experts. We worked with an OPM retirement benefits specialist,

RRB actuaries, and a Congressional Research Service (CRS) specialist in

social legislation to (1) identify changes to FERS and Railroad Retirement

that might enhance portability and (2) gain an understanding of the cost

and administrative implications of such changes. The examples of cost

increases presented in this report illustrate increases that might occur if

the portability changes that we examined were enacted. More precise

estimates would require detailed information on the design of any

particular policy change and the specific requirements for its

implementation.

We requested comments on a draft of this report from the Director of OPM

and the Chair of RRB. These comments are discussed at the end of this

letter. We did our review in Washington, D.C., from February 1998 to

June 1998 in accordance with generally accepted government auditing

standards.

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B-279596 

Railroad Retirement

Benefits Are More

Portable Within the

Industry Than Outside

It

The portability of Railroad Retirement benefits depends on whether an

employee changes employers within the industry or leaves the industry for

nonrailroad employment. If the employee continues doing railroad work,

then Tier I and Tier II benefits are fully portable, regardless of how many

times the employee changes employers. Outside the industry, the

employee’s Tier I benefits are portable into nonrailroad employment;

however, the portability of Tier II benefits depends on the employee’s

status concerning vesting and other factors specific to Railroad

Retirement.

Tier I and Tier II Benefits

Are Portable Within the

Industry

Multiemployer plans such as Railroad Retirement are more portable than

other types of DB plans because if an employee changes employers within

the plan, any accumulated retirement benefits are transferred from the

prior employer to the new employer—usually as credited service. The

Railroad Retirement program has a service credit arrangement within the

industry, and thus, a railroad employee who switches employers

experiences no loss in retirement benefits as long as the employee

eventually obtains the 10 years (120 months) or more of total railroad

service that is required for vesting. Moreover, the 120 months need not be

consecutive, and one full month is credited for each month in which any

amount of service is compensated by a participating railroad employer.

In practical terms, service crediting may have diminished in value owing to

a decline in railroad employment opportunities. According to RRB, about 60

percent of employees who begin railroad service leave the railroad

industry with less than 10 years of service. Moreover, railroad employment

has declined from more than 1.2 million in 1955 to less than 260,000 in

1997. Although railroad employment trends may have stabilized in recent

years, a smaller number of job opportunities remains an important

indicator that an employee who loses one railroad job may not be able to

find another or return to the railroads after a period outside the industry.

Outside the Industry, Tier I

Benefits Are Portable to

Any Employment Covered

by Social Security

Outside the industry, Tier I benefits are portable to any employment

covered by Social Security and vice versa. A combined total of at least 10

years (or 40 quarters or 120 months) of railroad employment or

nonrailroad employment covered by Social Security, or both, is required to

establish eligibility for either Tier I or Social Security benefits. Wage

information and service credits that are used to compute retirement

benefits are entirely transferable between the two programs, and the

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B-279596 

benefits that a retiring employee would receive are comparable under

either program as well, other factors being equal.

To illustrate, if a railroad worker retired from the railroads with at least 10

years of railroad service, any wage information and service credits earned

under Social Security from prior nonrailroad employment would be

transferred to RRB and used to compute the employee’s Tier I benefits.

Similarly, if a railroad employee separated without accumulating 10 years

of railroad service, RRB would transfer Tier I wage information and service

credits to the Social Security Administration to be used in computing any

future Social Security benefits.

Tier II Benefits Are Less

Portable Outside the

Industry

Outside the industry, Tier II benefits are less portable than Tier I benefits

because of Railroad Retirement’s stringent vesting and forfeiture rules and

the fact that Tier II service credits are not transferable to nonrailroad

employers. As described earlier, private sector plan participants become

fully vested in DB plan benefits within 5 to 7 years, while railroad

employees must have 10 years of railroad service to vest in their Tier II

benefits.10 Railroad employees who are not vested also forfeit their Tier II

employee contributions at separation.11 ERISA, as amended, requires other

private sector employers to return such employee contributions even for

those employees who separate before they are vested. Similarly, federal

employees who are covered by CSRS or FERS can withdraw their

contributions upon separation other than retirement, regardless of their

vesting status, as can many state and local government employees.

Tier II benefits are also less portable because any vested Tier II benefits

must be deferred upon separation. It is difficult to generalize about the

financial consequences of deferring benefits because the impacts vary

depending on the length of the pre-retirement period and the rate of

inflation over that same period. However, the impacts could be substantial

if inflation rates were high and/or many years passed before the separated

employee began to draw benefits. According to a Hay/Huggins analysis of

private sector plans, up to two-thirds of the average loss in the value of

10The Social Security program also has a 10-year (40 quarters) vesting requirement.

11As noted in the background section of this report, the contributions technically are mandatory

payroll taxes imposed by the Railroad Retirement Tax Act.

Page 8 GAO/GGD-98-168 Railroad Retirement
B-279596 

deferred retirement benefits could be eliminated if vested benefits were

indexed for inflation.12

Railroad Retirement does have a wage indexation feature for certain Tier

II deferred benefits. In particular, any former railroad employee who

secures employment at one of five federal agencies—Department of

Transportation (DOT), RRB, Surface Transportation Board (STB), National

Mediation Board, and National Transportation Safety Board

(NTSB)—would have his or her deferred Tier II pension benefits indexed

for inflation in the same way that Social Security benefits are indexed for

changes in wages.13 However, if that employee separated from the federal

agency before retirement, then Tier II benefits would not be indexed.

Crediting Railroad

Service Into FERS

Could Enhance Tier II

Portability, but Could

Increase FERS Costs

Crediting railroad service as federal service under FERS could enhance the

portability of Tier II benefits by allowing former railroad workers who

secure federal employment to effectively convert their Tier II pension

benefits into FERS pension benefits. However, adding a railroad

employment service credit provision to FERS could increase FERS costs as

well as raise policy and administrative issues.

Crediting Railroad Service

Into FERS Could Increase

FERS Costs

Although transferring service credits across DB plans can be complicated

to implement, conceptually it involves little more than totaling the

employee’s years of service under both a former and current plan when

calculating the employee’s pension under the current plan. Following this

logic, a provision could be added to FERS to allow railroad service to be

credited when computing a FERS pension for former railroad employees

who secure federal employment and become covered by FERS.

Extending service credit for railroad employment in this way could

increase FERS retirement costs. Any such increased costs would be borne

by the federal government unless the added costs were not paid from the

CSRDF. The amount of any increase would depend on how many former

railroad employees would actually become FERS participants, the number

of those who would elect the service credit, and the characteristics of

these employees (e.g., their railroad salary and work histories).

12Hay/Huggins Company, The Effect of Job Mobility on Pension Benefits, prepared for the U.S.

Department of Labor, Pension and Welfare Benefits Administration (Washington, D.C.: July 1988), p.

viii.

13For more information on Railroad Retirement wage indexation, see 20 CFR ch. II, sections 226.60 and

226.63.

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At our request, an OPM retirement specialist prepared cost estimates to

illustrate the potential per-person lifetime cost increase for three

hypothetical employees, using various assumptions about age, salary, and

service that the Federal Railroad Administration (FRA) believed

represented a realistic range of former railroad employee circumstances.

The calculations were present-value calculations and assumed that all of

the former railroad employees began their FERS-covered employment at a

GS-12, step 1 federal pay grade and had a normal salary progression

thereafter.14 The OPM specialist used this starting pay grade because FRA

told us that virtually every former railroad employee who has been hired

by FRA has started at that grade, including those who had earned

substantially more from the railroads. The results varied depending on the

employees’ salaries, length of service, and age at retirement.

For example, according to OPM’s calculations, the cost of a FERS pension

could increase by about $34,000 for a 35-year-old railroad employee who

had a railroad salary of $40,000 and 6 years of railroad service, a beginning

federal salary of $47,066, and retired at age 56 after reaching the FERS

minimum retirement age. The cost could increase by about $53,000 if the

same employee worked until he or she reached age 62 and became eligible

to retire with unreduced benefits. The cost could increase considerably

more for senior employees who received higher salaries during their

railroad employment than during their federal employment. For example,

the cost could increase by as much as $148,000 for a 50-year-old railroad

employee who had a railroad salary of $60,000 and 15 years of railroad

service, a beginning federal salary of $47,066, and retired at age 62.

Although OPM’s illustrations suggest that per-person lifetime costs could be

high, the aggregate cost probably would not be if the number of employees

involved was small. On this point, more than 1.6 million employees are

covered by FERS, but only about 2,600 employees in all work for the five

federal agencies that would most likely attract former railroad employees.

Moreover, these five agencies made very few new appointments in 1997,

ranging from 6 at STB to 100 at NTSB. The number of former railroad

employees involved might be even smaller than these statistics suggest.

The OPM specialist with whom we worked said that if given the choice,

former railroad employees who secure employment at any of the five

agencies might decide not to transfer their railroad service into FERS.

Because their Tier II pension benefits would be indexed at retirement,

these employees might be better off by drawing separate Tier II and FERS

14This cost calculation—the actuarial present value of the increase in FERS pension benefits—equals

the amount of money that, with interest, would fully fund the additional retirement benefits an

employee would receive above those earned while a federal employee.

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pensions. However, as the specialist also noted, if extending FERS service

credit for railroad employment was made available to former railroad

employees who secured employment in any federal agency, the number of

employees who elected the service credit might increase, and as a

consequence, so might the costs.

The only way that adding a railroad service credit provision would be

cost-neutral to FERS would be if the increase in FERS retirement costs

attributable to the change was not paid from the CSRDF. One arrangement

that could serve as a cost-neutral model was applied to employees of

non-appropriated fund instrumentalities (NAFI)—organizations that

generally provide morale and welfare support services to the military, such

as military exchanges. Under section 1043 of the National Defense

Authorization Act of 1996,15 FERS and NAFI employees of the Department of

Defense or Coast Guard who met certain conditions after December 31,

1965, and before August 10, 1996, were allowed to credit all of their federal

civilian service—both as NAFI employees or employees covered by

FERS—toward a single pension. In practice, the credit could be combined

under either FERS or NAFI. The opportunity to elect the transfer of service

credits into FERS expired August 11, 1997.

The railroad industry and each employee who elected the credit could

together be required to pay the full actuarial cost of that portion of his or

her FERS pension benefits attributable to railroad employment, similar to

the arrangement for NAFI employees. As the illustrative examples

described earlier suggest, however, the costs that would need to be paid

could be considered high, perhaps too high to be paid as a lump-sum by an

individual employee. As an alternative, cost-neutrality could also be

accomplished by requiring a transfer of the employee and employer

retirement contributions, plus interest, from Railroad Retirement trust

funds to the CSRDF. Similar to the NAFI approach, if the amount transferred

was insufficient to cover the full cost of the increase in the employee’s

FERS pension, the employee could be required to pay any remaining cost.

Rather than having the employee make a cash deposit to meet such a

shortfall, OPM could make up the difference by making an actuarial

reduction in the amount of the employee’s monthly FERS pension equaling

the present value of the difference.

Policy and Administrative

Issues Could Arise

Because they would need to collect and verify the railroad service of each

employee who elected the credit, OPM and the agencies that hire former

15Public Law 104-106, Feb. 10, 1996.

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railroad employees could experience some increase in administrative

costs if a railroad service credit provision were added to FERS. In addition,

OPM would need to determine the actuarial cost of crediting the employees’

railroad service into FERS. OPM officials told us that the increased

administrative costs would be manageable, largely because they expect

that the number of employees who would elect the credit would be small.

OPM has consistently objected to proposals to extend service credit for

work that was not covered by CSRS and FERS, especially if it was performed

in the private sector. As far back as 1969, the Civil Service Commission

opposed extending service credit to state employees who were involved in

federal grant activities. Although federal funds might have been involved,

the Commission asserted that the programs were state functions and that

the employees engaged in their administration were selected, employed,

and supervised by states or their instrumentalities. Accordingly, OPM

concluded that CSRS’ effectiveness as a retirement system would be

severely reduced if it was to become a pension plan for numerous types of

nonfederal service and that allowing individuals with such service to

credit that service into CSRS would inevitably generate pressures for

extending credit for almost any type of nonfederal work.

We prepared several letters on the same issue, the most recent one at the

request of the Chairman of the House Committee on the Post Office and

Civil Service.16 Our letters recognized that the proposed amendment

involved a matter of policy for the determination of Congress; however,

they also recognized certain problems. In particular, they noted that any

amendment to existing law that would permit the crediting of

nongovernment service for civilian retirement purposes appeared to be

inconsistent with the concept that an employee’s retirement annuity will

be based upon, and will vary in proportion to, the length of civilian

government service rendered. The letters also concluded that the

amendment would impose a financial burden upon the federal government

not contemplated under basic retirement law and suggested that if credit

was to be extended, action should be taken to prevent any increase in the

unfunded liability of the retirement trust fund.

In 1986, OPM criticized provisions of the proposed Railroad Service

Retirement Credit Act that would have granted retroactive railroad service

credit into the now-closed CSRS to former railroad employees who had

secured employment at DOT, Interstate Commerce Commission, National

16Letter from the Comptroller General of the United States to the Chairman, House Committee on Post

Office and Civil Service (B-84843, Apr. 10, 1969). This letter references three earlier GAO letters.

Page 12 GAO/GGD-98-168 Railroad Retirement
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Mediation Board, NTSB, or RRB. Under that proposal, an employee who

elected service credits would have been required to deposit into the CSRDF

an amount equal to the difference between his or her retirement

contributions under Railroad Retirement and the amount the employee

would have contributed under CSRS if he or she had been covered by that

program during the years of railroad service. OPM opposed the legislation,

in part because the deposit would be substantially less than other covered

employees would have contributed to the CSRDF. OPM also asserted that

there was no justification for granting civil service retirement credit for

private sector work and expressed strong concern that once the threshold

of extending coverage for nonfederal service was crossed, it would be

difficult to exclude employment in other sectors having needed expertise

or a special relationship with the government.

In interviews for this report, OPM officials told us that OPM would strongly

oppose adding a railroad employment service credit provision to FERS.

17

OPM’s rationale continues to be that providing credit for railroad service

would be inconsistent with the intent of FERS and would create a

troublesome precedent. As OPM has stated, FERS was designed to be a staff

retirement program, providing deferred compensation benefits to

employees based on the service that they perform while federal

employees. Under the basic FERS statute, only service that was performed

while an employee was covered under FERS would be credited in

computing a FERS pension.

However, past amendments to the CSRS statute provided for certain service

credits and have applied to employees covered by FERS under limited

circumstances. Specifically, there were 16 types of service for which

federal civilian retirement credit could be granted, including work

performed while a VISTA (Volunteers in Service to America) or Peace Corps

volunteer; Nurse Cadet; U.S. Capitol Guide; or NAFI employee.18 A review of

the terms under which credit for these services has been provided shows

that although the work is not federal employment because there was no

appointment to the civil service by a federal official, in most cases the

work served a federal purpose.

17In testimony on June 24, 1998, OPM reiterated its opposition. See Federal Employees Integrity,

Performance, and Compensation Improvement Act, Janice R. Lachance, Director, Office of Personnel

Management. Statement before the Subcommittee on Civil Service, Committee on Government Reform

and Oversight, U.S. House of Representatives.

18According to an OPM official and 5 U.S.C. section 8411, these services are creditable under FERS

only if (1) a deposit was made and (2) the service was performed before Jan. 1, 1989, except for

service as a full-time volunteer or volunteer leader with the Peace Corps or VISTA, which could be

performed at any time before separation.

Page 13 GAO/GGD-98-168 Railroad Retirement
B-279596 

These election opportunities were available for a limited time and applied

retrospectively only to past service performed by an individual who had

since become a federal employee covered by CSRS or FERS. Currently, the

only creditable service not performed while under FERS is military service

and service performed under the Foreign Service Pension System. In no

case has service credit been allowed for private sector service.

Changing Vesting and

Contribution

Forfeiture Rules

Might Enhance

Portability, but

Railroad Retirement

Costs Might Increase

The overall portability of Railroad Retirement Tier II benefits outside the

industry could be enhanced in several ways. First, Tier II vesting

requirements are stringent compared with requirements under ERISA. By

allowing a 5-year rather than 10-year vesting period, more separated

employees might receive deferred Tier II retirement benefits. Second, as

Railroad Retirement is currently designed, a separated employee who is

not vested forfeits not only any accrued plan benefits but also his or her

own contributions. If these contributions were returned, they could be

reinvested to provide additional assets in retirement.

Railroad Retirement costs could increase if the vesting and forfeiture

changes were adopted, but the amount of the increase could be small. At

our request, RRB actuaries prepared illustrative estimates of these costs.

The results of their analysis showed that if the vesting requirement was

reduced from 10 to 5 years, there would be little difference in trust fund

assets, outlays, and receipts. Annual outlays for program benefits and

administration would increase by about $14 million more (or 0.26 percent)

by 2022—if 5-year rather than 10-year vesting was used.19 As for trust fund

balances, at the end of 1998, the Tier II trust fund asset balance was

projected to be $14.2 billion. Under both 5-year and 10-year vesting, this

balance would grow to a high of $18.7 billion in 2009 and then decline to

about $9 billion in 2022.20

Reducing the vesting requirements would have no effect on Tier II payroll

taxes. Because Tier II benefits would increase, federal income taxes on

these benefits would increase, and such taxes are paid to the Railroad

Retirement Account. Finally, with or without the change in vesting rules,

tax revenues into the account are projected to decline from 88 to

19RRB actuaries told us that annual outlays for program benefits would be projected to increase by

about $232 million (or 2.23 percent) by 2071, and the Tier II balance would be $19.3 billion less, which

would be a 25 percent reduction. The actuaries calculated that the $19.3 billion reduction could be

offset through an additional 0.1 percent increase in Tier II payroll taxes.

20In 2022, the Tier II fund balance under 5-year vesting would be about $131 million less than under

10-year vesting—which represents a 1.5 percent reduction.

Page 14 GAO/GGD-98-168 Railroad Retirement
B-279596 

65 percent of Railroad Retirement benefits and administration costs

between 1998 and 2022.

Regarding the potential cost of forfeiture rule changes, the RRB analysis

showed that if lump-sum payments equal to contributions plus interest had

been paid to employees who separated in 1995 and who were not vested,

program costs in that year would have increased by

$31.7 million—$23.9 million for contributions and $7.8 million for interest.

Excluding interest from these payments would reduce costs by about

25 percent. The annual cost of providing refunds to separating employees

in future years would depend on how many employees would separate

from the railroad industry and the amount employers contributed toward

the Tier II benefit.21

According to RRB officials, if either or both of the potential changes were

adopted, the Board’s administrative burdens would also increase but they

would be manageable. The changes would require substantial software

modifications in application processing, calculation, recordkeeping, and

edits.

Conclusions Our work has shown that it would be possible to enhance the portability of

Railroad Retirement benefits; however, the changes that we considered

might not be desirable for cost, administrative, and policy reasons. If a

service credit provision was added to FERS, it would be cost-neutral from

the federal government’s perspective only if the costs were paid in full by

the former railroad employees or the railroad industry or a combination of

the two. If the required vesting period under Railroad Retirement were

reduced and/or the contributions of nonvested employees were provided

to them in a lump-sum payment upon their separation, the costs would be

borne by the railroad industry and/or other railroad employees.

Under the assumption that the number of former railroad employees that

federal agencies would hire is limited, the aggregate administrative costs

for agencies that might be involved—including OPM, RRB, and the hiring

21A somewhat different perspective on the potential per-person costs—and benefits from the

employee’s perspective—is provided by comparing the amounts that currently would be forfeited by

employees with different work histories. Of the 8,872 employees who separated in 1995 and were not

vested, 7,381 separated with between 1 and 59 months of service and forfeited contributions averaging

$1,952 per employee ($1,577 excluding interest). The 1,491 employees with between 60 and 119 months

of service forfeited an average of $11,582 per employee ($8,235 excluding interest). The average

amount of payroll tax contributions, plus interest, attributable to the 8,872 employees who separated

during 1995 with between 1 and 119 months of service was about $3,571 per employee ($2,696

excluding interest).

Page 15 GAO/GGD-98-168 Railroad Retirement
B-279596 

agencies—would be manageable if one or all of the changes were adopted,

according to the OPM and RRB officials with whom we talked.

Although a change to FERS could be made cost-neutral from the

perspective of the CSRDF and the administrative costs could be

manageable, according to OPM officials, any change to existing law to

permit the crediting of nongovernment service for civilian retirement

purposes would be strongly opposed by OPM. And as we have said in the

past, such a change would appear to be inconsistent with the fundamental

concept of CSRS and FERS that an employee’s retirement benefits, exclusive

of Social Security, will be based on the years of his or her CSRS or FERS

government service. Such a change could set a precedent for other private

sector employees to seek similar treatment.

Agency Comments

and Our Evaluation

We requested comments on a draft of this report from OPM and RRB. We

received oral comments from RRB’s Deputy General Counsel. RRB agreed

with the contents of the draft report and offered several technical and

clarifying comments, which we incorporated where appropriate.

We received written comments from the Director of OPM, which stated that

the report effectively evaluated the cost and policy implications if

provisions governing CSRS or FERS were amended to allow crediting

Railroad Retirement as a means of enhancing portability. The letter, which

is reproduced in appendix II, reiterated OPM’s opposition to such a change.

We are sending copies of this report to the Ranking Minority Member of

your Committee, the Director of OPM, and the Chair of RRB. Copies of this

report will also be sent to other parties interested in railroad retirement

matters and will be made available to others upon request.

Page 16 GAO/GGD-98-168 Railroad Retirement
B-279596 

Major contributors to this report are listed in appendix III. If you have any

questions, please call me at (202) 512-8676.

Sincerely yours,

Michael Brostek

Associate Director, Federal Management

 and Workforce Issues

Page 17 GAO/GGD-98-168 Railroad Retirement
Contents

Letter 1

Appendix I 

Objectives, Scope,

and Methodology

20

Objectives 20

Scope and Methodology 20

Appendix II 

Comments From the

Office of Personnel

Management

23

Appendix III 

Major Contributors to

This Report

24

Abbreviations

AAR Association of American Railroads

CPI Consumer Price Index

CRS Congressional Research Service

CSRDF Civil Service Retirement and Disability Trust Fund

CSRS Civil Service Retirement System

DB Defined benefit

DC Defined contribution

DOT Department of Transportation

ERISA Employee Retirement Income Security Act of 1974

FERS Federal Employees’ Retirement System

FRA Federal Railroad Administration

NAFI Non-appropriated fund instrumentalities

NTSB National Transportation Safety Board

OPM Office of Personnel Management

RRB Railroad Retirement Board

STB Surface Transportation Board

TSP Thrift Savings Plan

UTU United Transportation Union

VISTA Volunteers in Service to America

Page 18 GAO/GGD-98-168 Railroad Retirement
Page 19 GAO/GGD-98-168 Railroad Retirement
Appendix I 

Objectives, Scope, and Methodology

Objectives The Chairman, House Committee on Transportation and Infrastructure,

asked us to provide information on the portability of Railroad Retirement

Program benefits and the potential for enhancing that portability. This

review was undertaken in response to that request. The objectives of our

review were to determine

• which, if any, Railroad Retirement benefits are portable;

• what changes could be made to the Federal Employees’ Retirement

System (FERS) that might enhance the portability of Railroad Retirement

benefits into FERS for former railroad employees who obtain federal

civilian employment and the cost and management implications of those

changes for FERS and whether such changes could be made cost-neutral to

FERS; and

• what changes could be made to Railroad Retirement that might enhance

the portability of its retirement benefits and the cost and management

implications of such program changes for Railroad Retirement.

Portability refers to an employee’s ability to retain retirement benefits

when leaving one job for another while maintaining the value of those

benefits until retirement.

Scope and

Methodology

To determine which, if any, Railroad Retirement program benefits are

portable, we first reviewed our prior work and retirement literature and

interviewed experts at the Employee Benefit Research Institute,

Watson-Wyatt Worldwide, Office of Personnel Management (OPM),

Congressional Research Service (CRS), Railroad Retirement Board (RRB),

Association of American Railroads (AAR), and the United Transportation

Union (UTU) to determine what portability means and how retirement

program features can help to achieve it. We then reviewed RRB documents

and provisions of the Railroad Retirement Act, as amended. We compared

program features regarding eligibility for benefits to the ways in which

such features could be designed to enhance portability as determined

through our literature review and discussions with experts. We confirmed

our understanding of what and how Railroad Retirement features enhance

or limit portability with officials at RRB, CRS, and OPM.

To identify changes to FERS that could enhance the portability of the

Railroad Retirement program benefits into FERS and develop information

on any associated costs and the policy and management implications of

the changes, we worked with retirement policy specialists at OPM and CRS.

In collaboration with these specialists, we used feasibility and

Page 20 GAO/GGD-98-168 Railroad Retirement
Appendix I 

Objectives, Scope, and Methodology

cost-neutrality as our criteria for selecting changes to FERS. Using these

criteria, we selected a transfer of service credit approach, which was

similar to transfers of service credit commonly described in the literature

on multiemployer defined benefit (DB) plans and could be cost-neutral to

FERS.

To understand the potential increase in retirement costs from a service

credit arrangement, we developed illustrative examples for three

hypothetical employees, using information provided by the Federal

Railroad Administration that represented former railroad employees. To

calculate what the full actuarial cost would be if those employees

purchased service credits under FERS, OPM used different salary and service

histories for each. We did not determine how or what funds might be

transferred from the Railroad Retirement fund to the Civil Service

Retirement and Disability Trust Fund to help fund the purchase.

To identify changes to Railroad Retirement that might enhance the

portability of its retirement benefits and the cost and management

implications of the changes, we interviewed private sector, RRB, and CRS

retirement experts to determine the most feasible changes. We focused on

Tier II benefits because Tier I benefits are equivalent to what would be

provided by Social Security if an employee left the railroad industry and

thus are portable. First, we identified the Railroad Retirement provisions

that affected portability. On the basis of our review, we selected changes

in vesting and forfeiture rules, because these are the features that most

limit the portability of Tier II benefits. We worked with the RRB actuary and

a CRS specialist in social legislation to develop a methodology for

estimating the potential cost of a shorter vesting period and more liberal

forfeiture rules. The RRB actuary projected the cost of 5-year vesting on

Railroad Retirement over 25 years and compared it to the projected cost

under 10-year vesting required by current law. These projections allowed

us to compare alternative trust balances, payouts, and income.

We also worked with the RRB actuary to estimate the potential cost of

requiring that employees who are not vested receive lump-sum payments

of their own contributions, with and without interest, at the time of

separation. We estimated the costs for 1995 because it was the most recent

year for which data were available. The actuary estimated the cost of

refunds by determining the number of employees and the aggregated

amount of the employee contributions with and without interest in excess

of Social Security for employees who (1) separated in 1995; (2) had not

died or retired; (3) were not on the retirement rolls in 1996; and (4) had

Page 21 GAO/GGD-98-168 Railroad Retirement
Appendix I 

Objectives, Scope, and Methodology

between 1 and 59 service months (0 to 5 years), between 60 and 119

service months (more than 5 but less than 10 years), and between 1 and

119 service months (0 to almost 10 years). He then calculated the average

amount of forfeited contributions with and without interest for these

groups of employees. The forfeited contributions for the group with

between 0 and almost 10 years of service served as an estimate of the

costs of immediate vesting of employee contributions. The average

forfeiture of contributions in the other groups showed how the length of

service affected the average amount forfeited per employee.

As agreed with Committee staff, we developed information on portability

primarily as it relates to DB plans, because Railroad Retirement is a DB

plan. Also as agreed, we only examined portability changes prospectively.

In the case of FERS, the term prospective means that the change would

apply only for employees who obtained federal employment after the

portability service credit change was adopted. We did not consider any

changes to FERS that would be applied retroactively for former railroad

employees who were already federal employees and covered by FERS as of

the date the option would be adopted. In the case of changes to Railroad

Retirement, the term prospective means that the option would generally

apply for all railroad employees who were employed within the industry as

of the date the option would be adopted. If any of the changes—whether

to FERS or Railroad Retirement—would be applied retroactively, they

potentially would be much more costly. The information that we

developed on the potential costs of portability enhancements should be

viewed as illustrative, because more precise estimates of costs would

require detailed information on the design of the portability enhancement

and how it would be required to be implemented.

We did not independently verify any of the estimates made by OPM or RRB

actuaries.

Page 22 GAO/GGD-98-168 Railroad Retirement
Appendix II 

Comments From the Office of Personnel

Management

Page 23 GAO/GGD-98-168 Railroad Retirement
Appendix III 

Major Contributors to This Report

General Government

Division

Margaret T. Wrightson, Assistant Director

H. John Ripper, Evaluator-in-Charge

(410259) Page 24 GAO/GGD-98-168 Railroad Retirement
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