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 2004
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 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. 

This report is intended to meet the requirements of Section 22 and Section 502 for 2004. 

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 2000 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 
2

1970 640,000 3.2 

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 

Between 1955 and 2000, the average annual rate of decline was 3.5 percent. Since 2000, 

average employment and rates of decline have been as follows: 

Average employment Annual rate of decline 

Year for year from previous year 

2001 238,000 3.3% 

2002 229,000 3.8 

2003 223,000 2.6 

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 22nd actuarial valuation, which served 

as the 2003 annual report required by Section 502. Employment assumptions I and II 

were based on a model developed by the Association of American Railroads, and 

assumed that (1) passenger employment would remain at the level of 44,000, and (2) the 

employment base, excluding passenger employment, would decline at a constant annual 

rate (1.5 percent for assumption I and 3.0 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 35,000 was 

reached and then remain level, and (2) the employment base, excluding passenger 

employment, would decline at a constant annual rate of 4.5 percent for 25 years, at a 

reducing rate over the next 25 years, and remain level thereafter. 

The projected average employment for 2003, based on the three employment assumptions 

used in the 2003 report, ranged from 224,000 to 218,000. The actual average 

employment for 2003 was 223,000 (subject to later adjustment), which is within the 

range of projected amounts. Passenger employment at the end of calendar year 2003 was 

estimated to be 42,000. Based on this result, it was decided to use 2003 average 

employment as a starting point in this year's report and continue the use of the rates of 

decline used in the 22nd valuation. In this year’s report, for employment assumptions I 

and II, passenger employment is assumed to remain level at 42,000. For employment 

assumption III, passenger employment is assumed to decline by 500 per year until a level 

of 35,000 is reached and then remain level. These assumptions are shown in Table 1. 
3 

III. RESULTS 

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

employment assumption for the 25 calendar years 2004-2028. 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), (1) the various elements of income and outgo, (2) the 

account balance on December 31, and (3) the account benefits ratio1

 (ABR) and average 

account benefits ratio (AABR). 

Table 2 indicates that cash flow problems arise only under employment assumption III, 

and not until 2026. 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 

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. 

1

 At the end of each fiscal year (September 30), an Account Benefits Ratio (ABR) is calculated by dividing 

the fair market value of the assets in the RRA and of the NRRIT (and for years before 2002, the SSEBA) as 

of the close of such fiscal year by the total benefits and administrative expenses paid from the RRA and the 

NRRIT during such fiscal year. The Average Account Benefits Ratio (AABR), with respect to any 

calendar year, is then calculated as 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. 
4

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. However, if the NRRIT runs into cash flow problems, the SSEBA 

is assumed to transfer enough of its accumulated funds to the NRRIT to provide for 

benefit payments until the SSEBA is exhausted. Thereafter, the SSEBA is assumed to 

transfer to the NRRIT any excess of income over outgo, maintaining a zero balance. 

The projected balance in the SSEBA falls below 1.5 months of benefits in 2006 and 

periodically thereafter due to expected quinquennial transfers to social security for pre1957 military service benefit costs required by P.L. 88-133. 

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 1 

benefits. The RRA is required to pay administrative expenses and transfer amounts in 

excess of the amount needed for administrative expenses to the NRRIT. The NRRIT is 

required to receive transfers from the RRA and SSEBA, and pay tier 2, excess tier 1 and 

supplemental annuity benefits, and administrative expenses. 

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 ABR’s, 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 I (Table 2-I), the combined NRRIT and RRA balance 

grows through 2010 and then begins to decline. After reaching a minimum in 2022, the 

balance increases through the end of the projection period. The combined employer and 

employee tier 2 tax rate decreases to 16% in 2007-2013, and then increases to 18% in 

2016-2028. 

Under employment assumption II (Table 2-II), the combined NRRIT and RRA balance 

grows through 2009 and then declines. The ABR and AABR fall below 4.0 in 2018 and 

2024, respectively. The tier 2 tax rate decreases to 16% in 2007-2013 and then increases 

until reaching a level of 23% in 2028. 

Under employment assumption III (Table 2-III), the combined NRRIT and RRA balance 

grows through 2008 and then declines. The ABR declines throughout the projection 

period, falling below 4.0 and 2.5 in calendar years 2016 and 2020, respectively. Due to 

the effect of 10-year averaging, the AABR first increases to 6.7 in 2009-2010, and then 

declines throughout the remainder of the projection period, falling below 4.0 and 2.5 in 

2022 and 2026, respectively. As a result, the tier 2 tax rate first decreases to 16% in 
5 

2007-2012, then increases reaching the maximum rate of 27% in 2026. The increase in 

tax rate is not sufficient to offset the decline in account balance, and cash flow problems 

occur in 2026. 

C. Analysis of Results 

Under employment assumptions I and II, no cash flow problems occur throughout the 25-

year projection period, and the ABR remains above 0.5 in each year. Under employment 

assumption III, cash flow problems occur in 2026. In order to maintain an ABR of at 

least 0.5 throughout the projection period under employment assumption III, the increase 

in tier 2 tax rate to 27% would need to be accelerated to calendar year 2020. 

Alternatively, increasing the tier 2 tax rate to 18.8% beginning in calendar year 2005 

would also maintain an ABR of at least 0.5 throughout the projection period. 

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 for at least 22 years. The long-term stability of the 

system, however, is still questionable. 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 2003 Report 

The projected account balances are higher due primarily to the actual investment return 

of approximately 22.6% significantly exceeding the expected investment return of 6% in 

calendar year 2003. Projected benefit amounts are slightly lower due in part to the lower 

assumed cost of living increases in 2004 and 2005 in this year’s report. Projected tax 

income differs primarily due to projected changes in tax rates resulting from higher 

account balances. 

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 tax adjustment mechanism will automatically increase or decrease tax 

rates in response to changes in fund balance. Even under a pessimistic employment 
6 

assumption, this mechanism is expected to prevent cash flow problems for at least 22 

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 1. Employment, inflation and interest assumptions 

Percentage increase 

Calendar Average employment (thousands) over prior year Interest 

year I II III Earnings Cost of living rate 

2003 223 223 223 3.0% 1.4% 22.6% 

2004 221 218 215 4.0 2.1 8.0 

2005 218 213 206 4.0 2.5 8.0 

2006 215 208 198 4.0 3.0 8.0 

2007 213 203 191 4.0 3.0 8.0 

2008 210 198 184 4.0 3.0 8.0 

2009 208 193 177 4.0 3.0 8.0 

2010 205 189 170 4.0 3.0 8.0 

2011 203 184 163 4.0 3.0 8.0 

2012 200 180 157 4.0 3.0 8.0 

2013 198 176 151 4.0 3.0 8.0 

2014 196 172 146 4.0 3.0 8.0 

2015 193 168 140 4.0 3.0 8.0 

2016 191 164 135 4.0 3.0 8.0 

2017 189 160 130 4.0 3.0 8.0 

2018 187 157 126 4.0 3.0 8.0 

2019 184 153 122 4.0 3.0 8.0 

2020 182 150 118 4.0 3.0 8.0 

2021 180 147 114 4.0 3.0 8.0 

2022 178 144 111 4.0 3.0 8.0 

2023 176 141 107 4.0 3.0 8.0 

2024 174 138 104 4.0 3.0 8.0 

2025 172 135 101 4.0 3.0 8.0 

2026 170 132 98 4.0 3.0 8.0 

2027 168 129 95 4.0 3.0 8.0 

2028 166 127 92 4.0 3.0 8.0 
Table 2-I. Progress of the Combined National Railroad Retirement Investment Trust (NRRIT) and Railroad Retirement (RR) Accoun

Social Security Equivalent Benefit (SSEB) Account under Employment Assumption I

(Dollar amounts in millions)

Average Combined NRRIT and RR Account SSEB Account 

Account account Tier 2 Benefits Benefits Other 

Calendar benefits benefits tax and admin- Tax Other Balance, and admin- Tax income an

year ratioa ratiob rate istration incomec incomed end year istration incomec expense

2004 7.12 5.90 18.0% $3,729 $2,515 $2,164 $26,358 $5,362 $2,169 $3,12005 7.03 6.20 17.0% 3,884 2,452 2,135 27,061 5,465 2,227 3,2

2006 6.93 6.30 17.0% 4,024 2,514 2,101 27,652 5,599 2,286 3,2

2007 6.75 6.50 16.0% 4,200 2,446 2,137 28,035 5,731 2,345 3,4

2008 6.55 6.70 16.0% 4,393 2,510 2,240 28,392 5,876 2,404 3,5

2009 6.34 6.70 16.0% 4,580 2,574 2,274 28,661 6,052 2,466 3,6

2010 6.13 6.70 16.0% 4,765 2,641 2,292 28,829 6,250 2,531 3,7

2011 5.90 6.70 16.0% 4,957 2,710 2,211 28,793 6,458 2,599 3,7

2012 5.65 6.60 16.0% 5,152 2,782 2,202 28,625 6,676 2,671 4,1

2013 5.41 6.50 16.0% 5,338 2,856 2,261 28,404 6,909 2,747 4,2

2014 5.20 6.40 17.0% 5,518 3,089 2,269 28,245 7,151 2,827 4,3

2015 5.00 6.20 17.0% 5,689 3,173 2,257 27,985 7,398 2,902 4,5

2016 4.82 6.00 18.0% 5,836 3,423 2,136 27,708 7,651 2,983 4,5

2017 4.67 5.80 18.0% 5,956 3,515 2,117 27,384 7,903 3,068 4,9

2018 4.55 5.60 18.0% 6,055 3,611 2,205 27,145 8,146 3,158 5,0

2019 4.45 5.40 18.0% 6,132 3,709 2,193 26,915 8,375 3,252 5,1

2020 4.37 5.20 18.0% 6,188 3,810 2,184 26,720 8,583 3,350 5,2

2021 4.30 5.10 18.0% 6,226 3,913 2,039 26,446 8,771 3,451 5,2

2022 4.26 4.90 18.0% 6,246 4,019 2,099 26,318 8,938 3,556 5,4

2023 4.25 4.80 18.0% 6,260 4,128 2,164 26,349 9,086 3,663 5,4

2024 4.26 4.60 18.0% 6,278 4,238 2,175 26,484 9,221 3,770 5,4

2025 4.28 4.50 18.0% 6,298 4,349 2,193 26,728 9,349 3,879 5,4

2026 4.29 4.50 18.0% 6,317 4,463 2,059 26,934 9,477 3,989 5,4

2027 4.35 4.40 18.0% 6,338 4,580 2,225 27,401 9,606 4,102 5,5

2028 4.42 4.40 18.0% 6,373 4,700 2,284 28,012 9,740 4,217 5,5

a The fair market value of the assets in the RR Account and NRRIT as of the close of the fiscal year (September 30) divided by the total benefits and administrative 

expenses paid from the RR Account and NRRIT during the fiscal year. 

b The average of the account benefits ratios for the 10 most recent fiscal years ending before the calendar year. c Includes payroll taxes and income taxes on benefits. d Includes investment income and transfers from SSEB Account. e 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. 
Table 2-II. Progress of the Combined National Railroad Retirement Investment Trust (NRRIT) and Railroad Retirement (RR) Acc

Social Security Equivalent Benefit (SSEB) Account under Employment Assumption II

(Dollar amounts in millions)

Average Combined NRRIT and RR Account SSEB Accou

Account account Tier 2 Benefits Benefits Ot

Calendar benefits benefits tax and admin- Tax Other Balance, and admin- Tax incom

year ratioa ratiob rate istration incomec incomed end year istration incomec expe

2004 7.11 5.90 18.0% $3,729 $2,501 $2,163 $26,343 $5,362 $2,156 2005 7.02 6.20 17.0% 3,884 2,414 2,132 27,005 5,465 2,192 2006 6.90 6.30 17.0% 4,024 2,453 2,094 27,528 5,599 2,230 2007 6.71 6.50 16.0% 4,200 2,365 2,124 27,818 5,731 2,265 2008 6.48 6.60 16.0% 4,393 2,403 2,218 28,046 5,876 2,299 2009 6.24 6.70 16.0% 4,579 2,441 2,241 28,150 6,052 2,335 2010 5.99 6.70 16.0% 4,764 2,480 2,244 28,111 6,249 2,372 2011 5.71 6.70 16.0% 4,956 2,521 2,145 27,821 6,457 2,411 2012 5.41 6.50 16.0% 5,150 2,563 2,115 27,349 6,675 2,452 2013 5.12 6.50 16.0% 5,335 2,606 2,149 26,769 6,906 2,497 2014 4.84 6.30 17.0% 5,514 2,789 2,126 26,169 7,147 2,544 2015 4.57 6.10 17.0% 5,684 2,837 2,077 25,399 7,391 2,586 2016 4.30 5.80 18.0% 5,830 3,029 1,913 24,511 7,642 2,631 2017 4.04 5.60 18.0% 5,948 3,081 1,843 23,487 7,890 2,679 2018 3.80 5.30 18.0% 6,044 3,135 1,874 22,452 8,128 2,731 2019 3.57 5.10 18.0% 6,118 3,189 1,796 21,319 8,351 2,785 2020 3.35 4.80 18.0% 6,170 3,246 1,713 20,108 8,551 2,842 2021 3.10 4.50 18.0% 6,203 3,303 1,485 18,692 8,729 2,901 2022 2.87 4.30 18.0% 6,218 3,361 1,452 17,288 8,885 2,962 2023 2.64 4.00 18.0% 6,226 3,420 1,413 15,895 9,020 3,023 2024 2.43 3.80 19.0% 6,236 3,645 1,315 14,619 9,140 3,083 2025 2.22 3.50 19.0% 6,247 3,708 1,218 13,298 9,249 3,143 2026 2.00 3.30 20.0% 6,255 3,943 965 11,953 9,355 3,203 2027 1.80 3.10 20.0% 6,263 4,010 1,005 10,706 9,460 3,264 2028 1.66 2.80 23.0% 6,282 4,618 949 9,991 9,566 3,325 

a The fair market value of the assets in the RR Account and NRRIT as of the close of the fiscal year (September 30) divided by the total benefits and administrative 

expenses paid from the RR Account and NRRIT during the fiscal year. 

b The average of the account benefits ratios for the 10 most recent fiscal years ending before the calendar year. c Includes payroll taxes and income taxes on benefits. d Includes investment income and transfers from SSEB Account. e 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. 
Table 2-III. Progress of the Combined National Railroad Retirement Investment Trust (NRRIT) and Railroad Retirement (RR) Accou

Social Security Equivalent Benefit (SSEB) Account under Employment Assumption III

(Dollar amounts in millions)

Average Combined NRRIT and RR Account SSEB Account 

Account account Tier 2 Benefits Benefits Other 

Calendar benefits benefits tax and admin- Tax Other Balance, and admin- Tax income a

year ratioa ratiob rate istration incomec incomed end year istration incomec expense

2004 7.11 5.90 18.0% $3,729 $2,484 $2,163 $26,325 $5,362 $2,142 $3,12005 7.00 6.20 17.0% 3,884 2,371 2,129 26,941 5,465 2,152 3,3

2006 6.87 6.30 17.0% 4,024 2,382 2,085 27,385 5,599 2,164 3,3

2007 6.65 6.50 16.0% 4,199 2,272 2,109 27,566 5,731 2,173 3,6

2008 6.39 6.60 16.0% 4,392 2,282 2,192 27,648 5,876 2,180 3,7

2009 6.12 6.70 16.0% 4,578 2,291 2,203 27,564 6,052 2,186 3,8

2010 5.83 6.70 16.0% 4,763 2,300 2,189 27,290 6,249 2,193 4,0

2011 5.50 6.60 16.0% 4,954 2,310 2,071 26,717 6,456 2,201 4,1

2012 5.14 6.50 16.0% 5,147 2,320 2,017 25,906 6,673 2,211 4,5

2013 4.81 6.40 17.0% 5,332 2,451 2,026 25,052 6,903 2,222 4,7

2014 4.46 6.20 17.0% 5,510 2,462 1,974 23,978 7,142 2,236 4,9

2015 4.12 5.90 18.0% 5,679 2,594 1,891 22,784 7,384 2,242 5,1

2016 3.76 5.60 18.0% 5,823 2,605 1,685 21,252 7,631 2,252 5,3

2017 3.40 5.30 18.0% 5,939 2,619 1,563 19,495 7,876 2,265 5,7

2018 3.04 5.00 18.0% 6,032 2,637 1,534 17,633 8,107 2,283 5,8

2019 2.67 4.70 18.0% 6,103 2,655 1,389 15,574 8,323 2,304 6,0

2020 2.29 4.30 18.0% 6,150 2,676 1,230 13,330 8,515 2,329 6,2

2021 1.87 4.00 18.0% 6,179 2,698 918 10,766 8,682 2,354 6,2

2022 1.46 3.60 19.0% 6,188 2,844 798 8,221 8,826 2,381 6,5

2023 1.05 3.20 20.0% 6,189 2,994 671 5,696 8,947 2,408 6,5

2024 0.68 2.90 23.0% 6,192 3,399 491 3,394 9,049 2,434 6,6

2025 0.29 2.50 23.0% 6,194 3,427 311 939 9,138 2,459 6,6

2026 0.09 2.10 27.0% 6,190 3,972 1,111 (168) 9,221 2,484 5,6

2027 -0.26 1.70 27.0% 6,188 4,006 (27) (2,377) 9,300 2,509 6,7

2028 -0.63 1.40 27.0% 6,196 4,041 (202) (4,734) 9,376 2,534 6,8

a The fair market value of the assets in the RR Account and NRRIT as of the close of the fiscal year (September 30) divided by the total benefits and administrative 

expenses paid from the RR Account and NRRIT during the fiscal year. 

b The average of the account benefits ratios for the 10 most recent fiscal years ending before the calendar year. c Includes payroll taxes and income taxes on benefits. d Includes investment income and transfers from SSEB Account. e 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. 
Figure 1. Combined NRRIT, RRA and SSEBA Balance 

(In millions) 

$35,000 $30,000 $25,000 $20,000 $15,000 $10,000 

$5,000 

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