does not pay a corresponding benefit. This imbalance between outgo and income is small
in any particular year.

The SSEBA must from time to time transfer to the NRRIT or RRA amounts not needed
to pay current benefits and administrative expenses in such a manner as to maximize
investment return to the Railroad Retirement system.

The SSEBA is assumed to maintain a target balance of approximately 1.5 months of
benefit payments in order to meet benefit obligations and contingencies, and transfer any
excess to the NRRIT/RRA. However, if the NRRIT/RRA runs into cash flow problems,
the SSEBA is assumed to transfer enough of its accumulated funds to the NRRIT/RRA to
provide for benefit payments until the SSEBA is exhausted. Thereafter, the SSEBA is
assumed to transfer to the NRRIT/RRA any excess of income over outgo, maintaining a
zero balance.

B. Railroad Retirement Account and National Railroad Retirement Investment Trust

The RRA receives tier 2 payroll taxes and income taxes on tier 2 and excess tier |
benefits. Tier 2 benefits, excess tier 1 benefits, supplemental annuity benefits and
administrative expenses are paid from the RRA. The NRRIT receives funds from the
RRA and SSEBA for investment, pays investment expenses, and transfers funds to the
RRA to meet benefit obligations.

The tier 2 payroll tax rate is determined from a tax rate table based on the AABR. The
combined employer and employee tier 2 tax rate is 18% for values of the AABR between
4.0 and 6.0, inclusive. A maximum rate of 27% is reached when the AABR falls below
2.5, and a minimum rate of 8.2% is reached when the AABR reaches 9.0. Since the
AABR is a 10-year average of the ABRs, whether the AABR in a given year increases or
decreases from the prior year depends solely on whether the ABR in the prior year is
greater or less than the ABR 10 years earlier.

Under employment assumption | (Table 2-1), the combined NRRIT and RRA balance
declines through 2022 but then increases through the remainder of projection period. The
combined employer and employee tier 2 tax rate remains level at 18%.

Under employment assumption II (Table 2-11), the combined NRRIT and RRA balance
remains relatively level, declining through 2025 and then growing through 2041 before
small declines in 2042 and 2043. The combined employer and employee tier 2 tax rate
increases to 19% in 2033-2043.

Under employment assumption III (Table 2-II]), the combined NRRIT and RRA balance
declines through the end of the projection period. The combined employer and employee
tier 2 tax rate increases in steps until reaching 27% in 2040. Despite the 27% tax rate,
expenditures continue to exceed income at the end of the projection period and the ABR
falls to a level of 1.07.


Table 2-II1. Progress of the Combined National Railroad Retirement Investment Trust (NRRIT) and Railroad Retirement Account (RRA), and
Social Security Equivalent Benefit Account (SSEBA) under Employment Assumption IIT
(Dollar amounts in millions)

Average Combined NRRIT and RRA SSEBA
Account account Tier 2 Benefits Benefits Other Combined
Calendar benefits benefits tax and admin- Tax Other Balance, and admin- Tax income and Balance, balance,

year ratio” ratio” rate istration income income® end year istration income expense" end year end year
2019 4.30 5.10 18.0% $5,710 $3,582 $1,799 $24.207 $7,535 $2,995 $4,373 $938 $25,145
2020 422 5.00 18.0% 5741 3,709,717, 23,892 7656 3.343 4,327 953 24,845
2021 4.13 4.90 18.0% 5.769 3,744 1,598 23,465 7,802 4395 945 24,410
2022 404 4.80 18.0% 5,800 3,781 1,634 23,080 7.986 4,576 994 24,074
2023 3.95 4.70 18.0% 5.833 3.817 1,639 22,703 8,165 4,669 1,016 23,719
2024 3.86 4.60 18.0% 5875 3.852 1.616 22,296 8,334 4,781 1,037 23,333
2025 3.74 4.40 18.0% 5.920 3.882 1,510 21,769 8.501 4897 1,058 22,827
2026 364 4.30 18.0% 5.966 3.973 1559 21,335 8,669 4.959 1,079 22,414
2027 3.53 420 18.0% 6.018 4,001 1,530 20,847 8,838 5.079 1,100 21,987
2028 3.40 4.10 18.0% 6.088 4.026 =—1.497_——20,282 9,010 5,206 1,121 21.403
2029 328 3.90 19.0% 6.176 4.246 1,465 19,817 9,182 5,336 1,143 20,960
2030 3.14 3.80 19.0% 6,273 4271 1.432 19.247 9,359 5,486 1,164 20,411
2031 298 3.70 19.0% 6377 42951359 18,524 9,542 5.644 1,187 19,711
2032 282 3.60 19.0% 647543191340, «17,707 9,736 5,814 1211 18.918
2033 2.64 3.50 19.0% 6,560 4343 1.282 16,772 9,942 5.993 1.237 18,009
2034 247 340 20.0% 6664 4.572 1,225 15,906 10,146 6.166 1,262 17,168
2035 228 3.20 20.0% 6.799 4.607 1,165 14,879 10,343 6,331 1,286 16.165
2036 2.06 3.10 20.0% 6,942 4,646 1,086 13,669 10,547 6,501 1,312 14,981
2037 190 2.90 23.0% 7,092 5,302 1.028 12,906 10,759 6,677 1,338 14,244
2038 173 2.70 23.0% 7.261 5,350 974 11,970 10,970 6.850 1,364 13,334
2039 155 2.60 23.0% 7427 5,403 907 10,853 11,182 7,021 1,390 12.243
2040 144 240 27.0% 7591 6301 860 10,424 11,395 7.188 1417 11.841
2041 134 2.20 270% 7.779 6,370 828 9,842 11,610 7357 1,443 11,285
2042 121 210 27.0% 7.994 6,440 785 9.073 11,835 7,537 1471 10,544
2043 107 1.90 27.0% 8.225 6514 728 8,090 12,068 7.724 1,500 9,590

The fair market value of the assets in the RRA and NRRIT as of the close of the fiscal year (September 30) divided by the total benefits and administrative expenses
paid from the RRA and NRRIT during the fiscal year.

‘The average of the account benefits ratios for the 10 most recent fiscal years ending before the calendar year
Includes payroll taxes and income taxes on benefits
Includes investment income and transfers from the SSEBA.

Other income includes financial interchange income, advances from general revenues, and interest income, Other expense includes repayment of advances
from general revenues and transfers to the NRRIT or RRA.


Table 1. Employment, inflation and investment return assumptions

Percentage increase

Investment

Calendar Average employment (thousands) over prior year
year I I I Earnings Cost of living return
2018 223 223 223 3.6% 2.0% -3.9%
2019 222 220 217 3.6 2.8 7.0
2020 221 216 210 3.6 1.4 7.0
2021 221 213 204 3.6 2.0 7.0
2022 220 210 198 3.6 2.6 7.0
2023 219 206 192 3.6 2.6 7.0
2024 218 203 187 3.6 2.6 7.0
2025 217 200 181 3.6 2.6 7.0
2026 216 197 176 3.6 2.6 7.0
2027 216 194 171 3.6 2.6 7.0
2028 215 191 166 3.6 2.6 7.0
2029 214 188 161 3.6 2.6 7.0
2030 213 186 156 3.6 2.6 7.0
2031 212 183 152 3.6 2.6 7.0
2032 211 180 147 3.6 2.6 7.0
2033 211 177 143 3.6 2.6 7.0
2034 210 175 139 3.6 2.6 7.0
2035 209 172 136 3.6 2.6 7.0
2036 208 170 132 3.6 2.6 7.0
2037 207 167 129 3.6 2.6 7.0
2038 207 165 126 3.6 2.6 7.0
2039 206 163 123 3.6 2.6 7.0
2040 205 160 120 3.6 2.6 7.0
2041 204 158 117 3.6 2.6 7.0
2042 203 156 115 3.6 2.6 7.0
2043 203 154 112 3.6 2.6 7.0



C. Analysis of Results

Under each employment assumption, no cash flow problems occur throughout the 25-
year projection period, and the ABR remains above 0.5 in each year.

The overall conclusion is that, barring a sudden, unanticipated, large decrease in railroad
employment or substantial investment losses, the railroad retirement system will
experience no cash flow problems during the next 25 years. The long-term stability of
the system, however, is still uncertain. Under the current financing structure, actual
levels of railroad employment and investment return over the coming years will largely
determine whether corrective action is necessary.

D. Comparison of Results with 2018 Report

The largest change from last year’s report was due to actual investment return of -3.9% in
calendar year 2018 falling below the 7.0% expected return resulting in lower account
balances and higher projected tax rates in some years.

Overall payroll taxes increased due to favorable employment and wage increase
experience. A change in the definition of railroad compensation resulted in expected
refunds in calendar year 2019 for prior year payroll taxes and a small reduction in future
payroll taxes. Lower cost of living increases assumed for 2020 and 2021 resulted in
lower projected benefits.

IV, RECOMMENDATIONS

As stated in the introduction, this report must contain recommendations with regard to
(1) tax rates and (2) whether any part of the taxes on employers should be diverted to the
Railroad Unemployment Insurance Account to aid in the repayment of any debt to the
Railroad Retirement Account.

A. Tax Rates

This report recommends no change in the rate of tax imposed on employers and
employees. The tax adjustment mechanism will automatically increase or decrease tax
rates in response to changes in fund balance. Even under a pessimistic employment
assumption, this mechanism is expected to prevent cash flow problems for at least 25
years.

B. Diversion of Taxes to Railroad Unemployment Insurance Account

No diversion of taxes from the Railroad Retirement Account to the Railroad
Unemployment Insurance Account is recommended at this time. There are currently no
loans outstanding from the Railroad Retirement Account to the Railroad Unemployment
Insurance Account.


Table 2-11. Progress of the Combined National Railroad Retirement Investment Trust (NRRIT) and Railroad Retirement Account (RRA), and
Social Security Equivalent Benefit Account (SSEBA) under Employment Assumption II
(Dollar amounts in millions)

Average Combined NRRIT and RRA SSEBA
Account account Tier 2 Benefits Benefits Other Combined
Calendar benefits benefits tax and admin- Tax Other Balance, and admin- Tax income and Balance, balance,

year ratio” ratio” rate istration income" income“ end year istration income® expense end year end year
2019 431 5.10 18.0% $5,710 $3,605 $1,799 $24,231 $7,535 $3,016 $4,353 $938 $25,169
2020 423 5.00 18.0% 3.776 LL (23,987 7656 3,402, 4,269 953 24,940
2021 416 4.90 180% 3.855 1,609 23,682 7802 3,497, 4.296 945 24,627
2022 410 4.80 18.0% 3.938 1,654 23,474 7986 3,598 4,438 994 24,468
2023 405 4.70 18.0% 4022 1674 23,335 8165 3.699 4,487 1,016 24,351
2024 4.01 4.60 18.0% 4107 1,669 23,234 8334 3,800 4,555 1,037 24,271
2025 3.95 4.50 18.0% 4,189 1,586 23,086 8,502 3,899 4,623 1,058 24,144
2026 3.92 4.40 18.0% 4.335 1663 23,114 8670 4.055 4,636 1,079 24,193
2027 3.90 430 18.0% 4418 1,669 23,176 8840 4,156 4,705 1.100 24.276
2028 387 4.20 18.0% 4,502 1,676 23,258 9014 4255 4,780 1,122 24,380
2029 383 4.10 18.0% 4.586 1,684 23,342 9,189 4354 4,857 1,143 24,485
2030 3.78 4.10 18.0% 4672 1,691 23,420 9.369 4.438 4.953 1,166 24,586
2031 373 4.00 18.0% 4.159 1,666 23,453 9557 4.524 5,057 1.189 24,642
2032 3.68 4.00 18.0% 4848 1,701 23,509 9,157 4612, ——5.170 1214 24,723
2033 3.66 3.90 19.0% 5.184 1,716 (23,825 9971 4,704 5.293 1.240 25,065
2034 3.66 3.90 19.0% 5.282 1741 24,156 10185 4.798 5.414 1,267 25,423
2035 3.63 3.80 19.0% 5,384 1766 24,472 10394 4,891 5,529 1,293 25,765
2036 3.60 3.80 19.0% 5,488 1,783 24,758 10612 4,986 5.652 1,320 26,078
2037 3.56 3.80 19.0% 5,995 1.809 25,019 10,840 5,085 5,783 1348 26,367
2038 351 3.70 19.0% 1828 25,232 110695185 5,913 1376 26,608
2039 345 3.70 19.0% 1,843 25,399 11304 5,290 6,043 1.406 26,805
2040 339 3.70 19.0% 1.856 25,523 11544 5,400 6,173 1,435 26,958
2041 331 3.60 19.0% 1,863 25,575 11,790 5.513 6,308 1,466 27,041
2042 3.22 3.60 19.0% 1,867 25,527 12,050 5,626 6,456 1,498 27,025
2043 311 3.50 19.0% 1861 25,354 12324 5.742 6,616 1,532 26,886

The fair market value of the assets in the RRA and NRRIT as of the close of the fiscal year (September 30) divided by the total benefits and administrative expenses
paid from the RRA and NRRIT during the fiscal year

The average of the account benefits ratios for the 10 most recent fiscal years ending before the calendar year

Includes payroll taxes and income taxes on benefits

Includes investment income and transfers from the SSEBA.

Other income includes financial interchange income, advances from general revenues, and interest income. Other expense includes repayment of advances
from general revenues and transfers to the NRRIT or RRA.


Railroad Retirement
System

Annual Report Required by Railroad
Retirement Act of 1974 and Railroad
Retirement Solvency Act of 1983

U.S. Railroad Retirement Board
Bureau of the Actuary
June 2019


Figure 1. Combined NRRIT, RRA and SSEBA Balance
(In millions)

$60,000

$55,000
Employment assumption |

$50,000

$45,000

$40,000

$35,000

$30,000 Employment assumption II

$25,000

$20,000

$15,000 Employment assumption III

$10,000

$5,000



Table 2-1. Progress of the Combined National Railroad Retirement Investment Trust (NRRIT) and Railroad Retirement Account (RRA), and
Social Security Equivalent Benefit Account (SSEBA) under Employment Assumption |
(Dollar amounts in millions)

Average Combined NRRIT and RRA SSEBA
Account account Tier 2 Benefits Benefits Other Combined
Calendar benefits benefits tax andadmin- Tax Other Balance, andadmin- Tax income and Balance, balance,
year ratio” ratio” rate istration income" income" end year istration income" expense” end year end year
2019 431 5:10 18.0% $5,710 $3625 $1,800 $24,251 $7,535 $3,033 $4,336 $938 $25,189
2020 425 5.00 18.0% 5741 3,833,724 24,068 7656 (3.452 4.218 953 25.021
2021 419 490 18.0% 5770 3.951 1.618 ——23.868 7802 35824212 944 24.812
2022 415 4.80 18.0% 4075 1672 -23,813, 7.98 3,718 4,318 994 24,807
2023 414 470 18.0% 4.202 1.703 23,883 8165 3.859 4,328 1,016 24,899
2024 413 460 18.0% 4332 171S. 24.051 8334 4001 4,354 1,037 25,088
2025 413 450 18.0% 4463 1.652, 24,241 8502 4,144 43791058 25,299
2026 417 440 18.0% 4660 1,755 (24,683 8671 43474345 1,079 25,762
2027 422 440 18.0% 4798 1,791 25,243 8842 4497-4366 1,100 26,343
2028 428 4.30 18.0% 49391835 (25,915 9,017 4650-4389 1.122 27.037
2029 434 420 18.0% 5.083 1,886 26,690 9194 480444131 a 27,834
2030 441 4.20 18.0% 5232 1,944 27.569 9378 4.947 4.454 1.167 28.736
2031 448 430 18.0% 5385 1,976 28,524 9570 5,093 4,501 1,191 29.715
2032 457 430 18.0% 5542 2.078 29,633 9.776 5285 «4.556 1.216 30,849
2033 469 430 18.0% 5.705 2.160 30,892 9,997 5,404. 4,620 1,244 32,136
2034 482 440 18.0% 5874 2.253 32,299 10,219 4679271 33,570
2035 495 450 18.0% 6.049 2,356 33,836 10,439 4,732 1,298 35,134
2036 507 4.50 18.0% 6229-2461 35,500 10,670 4,792 1,327 36,827
2037 520 460 18.0% 6416 2,585 37,309 10,913 4858 1,357 38,666
2038 534 4.70 18.0% 6609-2715. -39.255 11,160 4921 1,388 40,643
2039 548 4.80 18.0% 6811 2.854 41,353 1141s 4986-1419 277
2040 5.64 5.00 18.0% 7,020 3,004 43,620 11,680 5,050 1,452 45,072
2041 579 5.10 18.0% 7238 3,164 46,045 11,956 S119 1,486 47,531
2042 593 5.20 18.0% 7462 3,336 48,616 12,249 5.202 1,523 50,139
2043 6.06 5.30 18.0% 7,694 3,516 51,325 12,562 5,298 1,562 52,887

* ‘The fair market value of the assets in the RRA and NRRIT as of the close of the fiscal year (September 30) divided by the total benefits and administrative expenses
paid from the RRA and NRRIT during the fiscal year

> The average of the account benefits ratios for the 10 most recent fiscal years ending before the calendar year
“Includes payroll taxes and income taxes on benefits.
* Includes investment income and transfers from the SSEBA

© Other income includes financial interchange income, advances from general revenues, and interest income. Other expense includes repayment of advances
from general revenues and transfers to the NRRIT or RRA.


With the exception of the economic and employment assumptions shown in Table 1, the
assumptions used in this report correspond to those published in the Twenty-Seventh
Actuarial Valuation of the Assets and Liabilities Under the Railroad Retirement Acts as
of December 31, 2016 with Technical Supplement, which may be found at www.rrb.gov.

Ill. RESULTS

Projections were made for the various components of income and outgo under each
employment assumption for the 25 calendar years 2019-2043. The projections of these
components were combined and the investment income calculated to produce the
projected balances in the accounts at the end of each projection year. The results are
summarized in Table 2 and Figure 1.

Table 2 consists of three tables, one for each of employment assumptions I, II and III.
The tables show, for the Social Security Equivalent Benefit Account (SSEBA) and the
combined National Railroad Retirement Investment Trust (NRRIT) and Railroad
Retirement Account (RRA), for each projection year, (1) the various elements of income
and outgo, (2) the account balance on December 31, and (3) the account benefits ratio
(ABR) and average account benefits ratio (AABR). !

Table 2 indicates that cash flow problems do not arise during the projection period under

any of the three employment assumptions. The results shown in Table 2 will be
discussed separately for the SSEBA and the combined NRRIT and RRA.

A. Social Security Equivalent Benefit Account

The SSEBA pays the social security level of benefits and administrative expenses
allocable to those benefits, and it receives as income the social security level of taxes.
The SSEBA also receives or pays the financial interchange transfers between the railroad
retirement and social security systems. The financial interchange transfer, subject to the
qualification in the next paragraph, should be enough to offset any surplus or deficit for
the year. The SSEBA can thus be regarded as automatically funded, the financial
interchange being the mechanism for correcting any surplus or deficiency.

The qualification mentioned in the preceding paragraph arises because, in a relatively
small number of cases, the railroad retirement system does not pay benefits when the
social security system would. In these cases, mainly dependent children of retired
railroad employees, the SSEBA collects an amount through the financial interchange but

' At the end of each fiscal year (September 30), the Account Benefits Ratio (ABR) is calculated by dividing
the fair market value of the assets in the RRA and the NRRIT as of the close of such fiscal year by the total
benefits and administrative expenses paid from the RRA and the NRRIT during stich fiscal year. The
Average Account Benefits Ratio (AABR), with respect to any calendar year, is the average of the account
benefits ratios for the 10 most recent fiscal years ending before such calendar year. If the AABR is not a
multiple of 0.1, it is increased to the next highest multiple of 0.1. The tier 2 tax rate is determined from a
tax rate table based on the AABR


1975 548,000 3.1
1980 532,000 0.6
1985 372,000 6.9
1990 296,000 4.5
1995 265,000 2.2
2000 246,000 1.5
2005 232,000 1.2
2010 221,000 1.0
2015 247,000 2.2

Between 1955 and 2015, the average annual rate of decline was 2.7 percent. Since 2015,
average employment has continued to decline with rates of decline as follows:

Average employment Annual rate of decline
Year for year from previous year
2016 231,000 6.5%
2017 225,000 2.6
2018 223,000 0.9

Two things become clear from the figures shown -- (1) railroad employment has
generally declined over a long period of years, and (2) the rate of decline has been
irregular.

Three employment assumptions were used in the 27" actuarial valuation, which served as
the 2018 annual report required by Section 502. Employment assumptions J and I] were
based on a model developed by the Association of American Railroads, and assumed that
(1) passenger employment would remain at the level of 48,000, and (2) the employment
base, excluding passenger employment, would decline at a constant annual rate (0.5
percent for assumption I and 2.0 percent for assumption II) for 25 years, at a reducing
rate over the next 25 years, and remain level thereafter. Employment assumption III
differed from employment assumptions I and II by assuming that (1) passenger
employment would decline by 500 per year until a level of 40,000 was reached and then
remain level, and (2) the employment base, excluding passenger employment, would
decline at a constant annual rate of 3.5 percent for 25 years, at a reducing rate over the
next 25 years, and remain level thereafter,

The projected average employment for 2018, based on the three employment assumptions
used in the 27" actuarial valuation, ranged from 216,000 to 222,000. The actual average
employment for 2018 was 223,000 (subject to later adjustment), which was higher than
the range of projected amounts. Average passenger employment for calendar year 2018
was estimated to be 48,000. Based on this result, it was decided to use 2018 average
employment of 223,000 as a starting point in this year's report and continue the use of the
rates of decline used in the 27" valuation. In this year’s report, for employment
assumptions I and II, passenger employment is assumed to remain level at 48,000. For
employment assumption III, passenger employment is assumed to decline by 500 per
year until a level of 40,000 is reached and then remain level. These assumptions are
shown in Table 1.


ANNUAL ACTUARIAL REPORT REQUIRED BY
RAILROAD RETIREMENT ACT OF 1974 AND
RAILROAD RETIREMENT SOLVENCY ACT OF 1983

L_INTRODUCTION

This report is intended to meet the requirements of Section 22 of the Railroad Retirement
Act of 1974 and Section 502 of the Railroad Retirement Solvency Act of 1983.

Section 22 of the Railroad Retirement Act of 1974 requires the Railroad Retirement
Board to prepare an annual report containing a five-year projection of revenues to and
payments from the Railroad Retirement Account and to submit the report to the President
and the Congress by July 1. The report must also contain a five-year projection of the
account benefits ratio and average account benefits ratio. If the five-year projection
indicates that funds in the Railroad Retirement Account will be insufficient to pay full
benefits, (1) representatives of railroad employees, railroad carriers and the President
must submit proposals to the Congress to preserve the financial solvency of the Railroad
Retirement Account, and (2) the Railroad Retirement Board must issue regulations to
reduce annuity levels during any fiscal year in which there would be insufficient funds to
make full payments.

Section 502 of the Railroad Retirement Solvency Act of 1983 requires the Railroad
Retirement Board to prepare an annual report on the actuarial status of the railroad
retirement system and to submit the report to the Congress by July 1. The report must
contain recommendations for any financing changes which might be advisable, including
(1) changes in the tax rates, and (2) whether any part of the taxes on employers should be
diverted to the Railroad Unemployment Insurance Account to aid in the repayment of its
debt to the Railroad Retirement Account.

Il. RAILROAD EMPLOYMENT

Over the years, the main source of income to the railroad retirement system has been a
payroll tax on railroad employment. The amount of income that the tax produces is
directly dependent on the number of railroad employees covered under the system.

An abbreviated history of average railroad employment from 1955 through 2015 is
shown in the following table.

Average annual rate of decline

Average employment for the 5-year period
Year for year ending with the year
1955 1,239,000 ,
1960 909,000 6.0%
1965 753,000 3.7

1970 640,000 3.2