ANNUAL ACTUARIAL REPORT REQUIRED BY

RAILROAD RETIREMENT ACT OF 1974 AND

RAILROAD RETIREMENT SOLVENCY ACT OF 1983

I. INTRODUCTION

Section 22 of the Railroad Retirement Act of 1974 and Section 502 of the Railroad Retirement Solvency

Act of 1983 require the Railroad Retirement Board to prepare an annual report on the actuarial status of

the railroad retirement system. The report must be submitted to the President and 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 debt to the

Railroad Retirement Account.

This report is intended to meet the requirements of Section 22 and Section 502 for 1996.

II. 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 1995 is shown in the

following table.

 Average annual rate of decline

Average employment for the 5-year period

Year for year beginning with the year 

1955 1,239,000 6.0%

1960 909,000 3.7

1965 753,000 3.2

1970 640,000 3.1

1975 548,000 0.6

1980 532,000 6.9

1985 372,000 4.5

1990 296,000 2.3

1995 264,000

Between 1955 and 1995, the average annual rate of decline was 3.8 percent. Since 1990, average

employment and rates of decline have been as follows:
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Average employment Annual rate of decline

Year for year from previous year 

1991 285,000 3.7%

1992 276,000 3.2

1993 271,000 1.8

1994 266,000 1.8

1995 264,000 0.8

Two things become clear from the figures shown -- (1) railroad employment has continued to decline

over a long period of years, and (2) the rate of decline has been irregular.

Three employment assumptions were used in the 19th actuarial valuation, which served as the 1994

annual report required by Section 502. Employment assumptions I and II were based on the model

developed by the Association of American Railroads, and assumed that (1) passenger employment will

remain at the level of 46,000, and (2) the employment base, excluding passenger employment, will decline

at a constant annual rate (2.0 percent for assumption I and 3.5 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 will decline to 30,000

evenly over a 32-year period and then remain level, and (2) the employment base, excluding passenger

employment, will decline at a constant annual rate of 5.0 percent for 25 years, at a reducing rate over the

next 25 years, and remain level thereafter.

The 1995 annual report continued the use of the three employment assumptions, updating them as to

current employment levels and providing for anticipated reductions in Amtrak employment.

The projected average employment for 1995, based on the three employment assumptions used in the

1995 annual report, ranged from 252,000 to 259,000. The actual average employment for 1994 was

264,000 (subject to later adjustment), which exceeds the projected amounts. Based on this result and the

relative stability in recent annual employment declines, it was decided to use 1995 average employment as

a starting point in this year's report and continue the use of the rates of decline used in the 19th valuation,

with the exception of an initial decline in passenger employment to account for an announced reduction in

Amtrak employment. For employment assumptions I and II, passenger employment of 45,000 in 1995 is

assumed to decline to 43,000 in 1996, 41,000 in 1997 and remain level thereafter. For employment

assumption III, passenger employment is assumed to follow the same pattern as employment assumptions

I and II through 1997; after 1997, passenger employment is assumed to decline to 30,000 evenly over a

22-year period and then remain level. These assumptions are shown in Table 1.
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III. RESULTS

Projections were made for the various components of income and outgo under each employment

assumption for the 25 calendar years 1996-2020. The projections of these components were combined

and the investment income calculated to produce the projected balances in the Railroad Retirement (RR)

Account and the Social Security Equivalent Benefit (SSEB) Account at the end of each projection year. 

The results are summarized in Table 2.

Table 2 consists of three tables, one for each of employment assumptions I, II and III. The tables show,

for each account, (1) the various elements of income and outgo, (2) the account balance on December 31,

and (3) the interplay between the two accounts when the SSEB Account must transfer money to the RR

Account. The tables also show combined balances for the two accounts.

Table 2 indicates that cash-flow problems do not arise under any of the three employment assumptions. 

The results shown in Table 2 will be discussed separately for each account.

A. Social Security Equivalent Benefit Account

The SSEB Account 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. If there were no other source

of income or outgo during the course of a year, a surplus or deficiency would build up, depending on

whether taxes exceed or are less than benefits. The SSEB Account, however, 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 extinguish

any surplus or deficit for the year. The SSEB Account 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 SSEB Account collects an

amount through the financial interchange but does not pay a corresponding benefit. This imbalance

between outgo and income is small in any particular year, but over many years a substantial fund builds

up. The SSEB Account must transfer money to the RR Account if (1) the balance in the RR Account is

insufficient to enable it to pay benefits, and (2) the transfer will not jeopardize the payment of SSEB

Account benefits. There is no requirement that these transfers be repaid.

Under each projection, if the RR Account runs into cash-flow problems, the SSEB Account is assumed to

transfer enough of its accumulated funds to allow the RR Account to meet its benefit obligations. This

continues until the SSEB Account's accumulated balance is exhausted. Thereafter, the SSEB Account is

assumed to transfer to the RR Account any excess of income over outgo, maintaining a zero balance. 

 
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B. Railroad Retirement Account

Under employment assumption I, the RR Account balance grows throughout the projection period. 

Under employment assumption II, the RR Account balance grows through 2008 and then begins to

decline. The account has a positive balance at the end of the projection period under both employment

assumption I (Table 2-I) and employment assumption II (Table 2-II).

Under employment assumption III (Table 2-III), the RR Account balance grows through 2002 and then

begins to decline. The balance would become negative in 2017 if no money were allowed to be

transferred from the SSEB Account. By the end of 2016, the SSEB Account has built up a balance of

$8,611 million. The SSEB Account transfers enough money to the RR Account in 2017 and after to

enable the RR Account to meet its obligations. At the end of 2020, the balance in the combined accounts

represents less than one month of combined benefit payments.

C. Analysis of Results

The following table shows, for each employment assumption, the tier 2 tax rate increase needed January

1, 1997, to provide for a December 31, 2020 balance in the combined RR and SSEB Accounts equal to

50 percent of the preceding 12 months' benefit payments. Part or all of the additional funding could, of

course, be achieved by reductions in benefits.

Employment Tier 2 tax rate increase

assumption on January 1, 1997 

I none

II none

III 1.04%

The overall conclusion is that, barring a sudden, unanticipated, large decrease in railroad employment, the

railroad retirement system will experience no cash-flow problems for at least 25 years. The long-term

stability of the system, however, is still questionable. Under the current financing structure, actual levels

of railroad employment over the coming years will largely determine whether corrective action is

necessary.

D. Comparison of Results with 1995 Report

The projections contained in this report for employment assumption I are similar to last year's report. 

Favorable employment experience has resulted in higher combined account balances for all calendar years

under employment assumptions II and III.
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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 RR Account.

A. Tax Rates

This report recommends no change in the rate of tax imposed on employers and employees. The absence

of projected cash flow problems for 25 years under each employment assumption indicates that an

immediate increase in tax rates is not required. However, the continued dependence on future entrants to

fund the past service costs of current and former employees, along with the low final account balance

projected under employment assumption III, indicate that a decrease in tax rates may be premature.

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 1. Employment Assumptions Used in 1996 Actuarial Report

 

 Average employment

Calendar (Thousands) 

 year I II III

 1995 264 264 264

 1996 258 254 251

 1997 251 245 239

 1998 247 238 228

 1999 243 231 218

 2000 239 224 209

 2001 235 218 200

 2002 231 212 191

 2003 227 206 183

 2004 224 200 176

 2005 220 194 168

 2006 216 189 161

 2007 213 184 154

 2008 209 179 148

 2009 206 174 142

 2010 203 169 136

 2011 200 165 130

 2012 196 161 125

 2013 193 156 120

 2014 190 152 115

 2015 187 148 111

 2016 184 145 106

 2017 181 141 102

 2018 179 138 98

 2019 176 134 94

 2020 173 131 91

 
Table 2-I. Progress of the Railroad Retirement (RR) and Social Security Equivalent Benefit (SSEB) Accounts under: Employment Assumption I

 (Dollar amounts in millions)

________________________________________________________________________________________________________________________________________

 Railroad Retirement Account Social Security Equivalent Benefit Account Combined 

 Calendar Benefits Tax Other Balance, Benefits Tax Other income Balance, RR and SSEB

 year and admin- income income end of and admin- income and expense end of balance,

 istration 1/ 2/ year istration 3/ 4/ year end of year

________________________________________________________________________________________________________________________________________

 1996 $2,941 $2,540 $718 $12,140 $4,976 $1,926 $3,044 $1,847 $13,987

 1997 2,973 2,562 795 12,523 5,043 1,945 3,273 2,022 14,545

 1998 3,021 2,599 818 12,919 5,113 1,975 3,324 2,209 15,128

 1999 3,072 2,646 842 13,335 5,198 2,013 3,383 2,407 15,742

 2000 3,117 2,694 867 13,778 5,279 2,052 3,439 2,619 16,397

 2001 3,161 2,743 893 14,254 5,349 2,091 3,483 2,844 17,098

 2002 3,211 2,794 922 14,759 5,410 2,130 3,520 3,084 17,843

 2003 3,268 2,845 952 15,288 5,472 2,169 3,557 3,338 18,626

 2004 3,328 2,896 979 15,836 5,542 2,208 3,604 3,609 19,445

 2005 3,392 2,949 1,000 16,392 5,622 2,248 3,662 3,897 20,289

 2006 3,467 3,004 1,031 16,960 5,710 2,287 3,730 4,204 21,164

 2007 3,558 3,060 1,064 17,527 5,805 2,327 3,804 4,530 22,057

 2008 3,660 3,117 1,098 18,082 5,915 2,366 3,896 4,877 22,959

 2009 3,766 3,175 1,129 18,620 6,057 2,405 4,022 5,246 23,866

 2010 3,875 3,235 1,144 19,124 6,227 2,446 4,175 5,640 24,764

 2011 3,992 3,298 1,168 19,599 6,411 2,489 4,342 6,060 25,659

 2012 4,114 3,364 1,191 20,041 6,613 2,535 4,526 6,508 26,549

 2013 4,235 3,433 1,215 20,453 6,836 2,583 4,731 6,985 27,438

 2014 4,355 3,504 1,238 20,839 7,076 2,633 4,952 7,494 28,333

 2015 4,470 3,579 1,254 21,201 7,323 2,688 5,178 8,037 29,238

 2016 4,577 3,656 1,256 21,537 7,579 2,746 5,412 8,616 30,153

 2017 4,672 3,737 1,276 21,878 7,834 2,808 5,643 9,232 31,110

 2018 4,753 3,822 1,296 22,244 8,084 2,875 5,866 9,889 32,133

 2019 4,814 3,910 1,319 22,660 8,322 2,946 6,075 10,588 33,248

 2020 4,855 4,003 1,346 23,153 8,538 3,023 6,259 11,332 34,485

________________________________________________________________________________________________________________________________________

 1/ Includes payroll taxes, income taxes on benefits and tax transfers from Railroad Retirement Supplemental Account.

 2/ Includes interest income and repayment of loans made to Dual Benefits Payments Account and Railroad Retirement Supplemental Account.

 3/ Includes payroll taxes and income taxes on benefits.

 4/ Other income includes financial interchange income, advances from general revenues, and interest income. Other expense

 includes repayment of advances from general revenues.
Table 2-II. Progress of the Railroad Retirement (RR) and Social Security Equivalent Benefit (SSEB) Accounts under: Employment Assumption II

 (Dollar amounts in millions)

________________________________________________________________________________________________________________________________________

 Railroad Retirement Account Social Security Equivalent Benefit Account Combined 

 Calendar Benefits Tax Other Balance, Benefits Tax Other income Balance, RR and SSEB

 year and admin- income income end of and admin- income and expense end of balance,

 istration 1/ 2/ year istration 3/ 4/ year end of year

________________________________________________________________________________________________________________________________________

 1996 $2,941 $2,523 $718 $12,122 $4,976 $1,913 $3,056 $1,847 $13,969

 1997 2,973 2,518 792 12,459 5,043 1,912 3,306 2,022 14,481

 1998 3,021 2,530 812 12,780 5,113 1,923 3,376 2,209 14,989

 1999 3,072 2,551 830 13,089 5,198 1,941 3,455 2,407 15,496

 2000 3,117 2,571 848 13,392 5,279 1,959 3,531 2,619 16,011

 2001 3,161 2,592 866 13,689 5,349 1,976 3,598 2,844 16,533

 2002 3,211 2,613 882 13,973 5,410 1,993 3,657 3,084 17,057

 2003 3,268 2,633 898 14,238 5,472 2,008 3,718 3,338 17,576

 2004 3,328 2,654 909 14,473 5,542 2,023 3,790 3,609 18,082

 2005 3,392 2,674 910 14,664 5,622 2,037 3,873 3,897 18,561

 2006 3,467 2,696 918 14,811 5,710 2,050 3,966 4,204 19,015

 2007 3,557 2,718 925 14,896 5,804 2,063 4,067 4,530 19,426

 2008 3,660 2,740 929 14,905 5,913 2,075 4,185 4,877 19,782

 2009 3,765 2,762 926 14,827 6,054 2,086 4,337 5,246 20,073

 2010 3,874 2,784 903 14,641 6,220 2,097 4,517 5,640 20,281

 2011 3,990 2,809 884 14,345 6,402 2,111 4,711 6,060 20,405

 2012 4,111 2,836 860 13,931 6,599 2,125 4,921 6,507 20,438

 2013 4,231 2,864 831 13,395 6,816 2,141 5,152 6,984 20,379

 2014 4,349 2,894 796 12,736 7,048 2,159 5,398 7,493 20,229

 2015 4,461 2,926 749 11,949 7,288 2,179 5,650 8,035 19,984

 2016 4,565 2,960 681 11,025 7,533 2,203 5,908 8,613 19,638

 2017 4,657 2,996 623 9,988 7,777 2,230 6,163 9,229 19,217

 2018 4,733 3,035 560 8,850 8,014 2,260 6,410 9,884 18,734

 2019 4,787 3,077 491 7,632 8,238 2,294 6,642 10,582 18,214

 2020 4,822 3,121 419 6,350 8,439 2,333 6,848 11,324 17,674

________________________________________________________________________________________________________________________________________

 1/ Includes payroll taxes, income taxes on benefits and tax transfers from Railroad Retirement Supplemental Account.

 2/ Includes interest income and repayment of loans made to Dual Benefits Payments Account and Railroad Retirement Supplemental Account.

 3/ Includes payroll taxes and income taxes on benefits.

 4/ Other income includes financial interchange income, advances from general revenues, and interest income. Other expense

 includes repayment of advances from general revenues.
 Table 2-III. Progress of the Railroad Retirement (RR) and Social Security Equivalent Benefit (SSEB) Accounts under: Employment Assumption III

 (Dollar amounts in millions)

______________________________________________________________________________________________________________________________________________________________

 Railroad Retirement Account Social Security Equivalent Benefit Account Transfers Balance after Combined 

 Calendar Benefits Tax Other Balance, Benefits Tax Other income Balance, from SSEB transfers from RR and SSEB

 year and admin- income income end of and admin- income and expense end of to RR SSEB to RR balance,

 istration 1/ 2/ year 3/ istration 4/ 5/ year 6/ RR SSEB end of year

______________________________________________________________________________________________________________________________________________________________

 1996 $2,941 $2,506 $717 $12,105 $4,976 $1,901 $3,069 $1,847 $12,105 $1,847 $13,952

 1997 2,973 2,474 790 12,396 5,043 1,880 3,339 2,022 12,396 2,022 14,418

 1998 3,021 2,459 806 12,640 5,113 1,870 3,429 2,209 12,640 2,209 14,849

 1999 3,072 2,452 819 12,840 5,198 1,867 3,530 2,407 12,840 2,407 15,247

 2000 3,117 2,444 830 12,996 5,279 1,862 3,628 2,619 12,996 2,619 15,615

 2001 3,161 2,435 837 13,107 5,349 1,857 3,718 2,844 13,107 2,844 15,951

 2002 3,211 2,425 842 13,163 5,410 1,850 3,800 3,084 13,163 3,084 16,247

 2003 3,268 2,415 843 13,153 5,472 1,841 3,885 3,338 13,153 3,338 16,491

 2004 3,328 2,404 837 13,066 5,542 1,831 3,981 3,609 13,066 3,609 16,675

 2005 3,392 2,392 817 12,882 5,622 1,820 4,089 3,897 12,882 3,897 16,779

 2006 3,467 2,381 801 12,597 5,710 1,809 4,208 4,204 12,597 4,204 16,801

 2007 3,557 2,369 782 12,191 5,803 1,795 4,334 4,530 12,191 4,530 16,721

 2008 3,660 2,358 755 11,645 5,911 1,780 4,477 4,877 11,645 4,877 16,522

 2009 3,764 2,345 718 10,943 6,050 1,764 4,655 5,246 10,943 5,246 16,189

 2010 3,873 2,333 656 10,060 6,214 1,748 4,860 5,640 10,060 5,640 15,700

 2011 3,988 2,322 595 8,989 6,392 1,733 5,078 6,060 8,989 6,060 15,049

 2012 4,107 2,312 523 7,718 6,584 1,718 5,313 6,507 7,718 6,507 14,225

 2013 4,226 2,303 442 6,236 6,795 1,705 5,568 6,984 6,236 6,984 13,220

 2014 4,342 2,294 349 4,536 7,020 1,692 5,837 7,492 4,536 7,492 12,028

 2015 4,452 2,286 238 2,608 7,251 1,681 6,111 8,034 2,608 8,034 10,642

 2016 4,553 2,280 100 436 7,486 1,673 6,391 8,611 436 8,611 9,047

 2017 4,641 2,276 (33) (1,963) 7,718 1,667 6,666 9,225 $1,906 0 7,262 7,262

 2018 4,711 2,273 (179) (4,581) 7,942 1,664 6,933 9,880 2,427 0 5,299 5,299

 2019 4,760 2,273 (338) (7,406) 8,152 1,665 7,183 10,576 2,476 0 3,170 3,170

 2020 4,787 2,280 (508) (10,421) 8,336 1,673 7,404 11,317 2,496 0 896 896

____________________________________________________________________________________________________________________________________________________________

 1/ Includes payroll taxes, income taxes on benefits and tax transfers from Railroad Retirement Supplemental Account.

 2/ Includes interest income and repayment of loans made to Dual Benefits Payments Account and Railroad Retirement Supplemental Account.

 3/ For 2017 and later, balance is before transfers from SSEB Account.

 4/ Includes payroll taxes and income taxes on benefits.

 5/ Other income includes financial interchange income, advances from general revenues, and interest income. Other expense includes repayment of

 advances from general revenues.

 6/ For 2017 and later, balance is before transfers to RR Account.