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.

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 1
benefits. Tier 2 benefits, excess tier | 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.


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TIE


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.


Under employment assumption I (Table 2-I), the combined NRRIT and RRA balance
declines initially 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-II), the combined NRRIT and RRA balance
remains relatively level, declining through 2026 and then generally growing through the
end of the projection period. The combined employer and employee tier 2 tax rate
increases to 19% in 2032-2041.

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

declines through the end of the projection period. The combined employer and employee
tier 2 tax rate increases to 27% in 2038. 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 0.9.

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 2016 Report

The overall results do not differ substantially from last year. The projected tier 2 tax
rates are the same as in last year’s report in each calendar year under employment
assumptions I and III. Under employment assumption II, the projected tier 2 tax rate
differs only in being one percent higher in calendar years 2032-2034.

Actual investment return in calendar year 2016 met expectations, and actual employment
fell within the assumed range falling just below the intermediate assumption in last year’s
report.

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.


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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 2017


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Table 1. Employment, inflation and investment return assumptions

Percentage increase

Calendar Average employment (thousands) over prior year Investment
year I Il Ml Earnings Cost of living return
2016 225 225 225 2.0% 0.0% 7.0%
2017 224 221 218 3.7 0.3 7.0
2018 223 218 211 37 19 7.0
2019 222 214 205 3.7 2.3 7.0
2020 221 211 199 3.7 27 7.0
2021 220 208 193 3.7 2.7 7.0
2022 219 204 188 3.7 2.7, 7.0
2023 219 201 182 a7 2.7. 7.0
2024 218 198 177 37 2.7, 7.0
2025 217 195 171 37 2.7 7.0
2026 216 192 166 3.7 2.7 7.0
2027 215 189 162 37 2.7 7.0
2028 214 186 157 3.7 2.7 7.0
2029 214 184 152 a7 2.7 7.0
2030 213 181 148 3.7 2.7 7.0
2031 212 178 144 3.7 2.7 7.0
2032 211 176 140 3.7 27 7.0
2033 210 173 135 3.7 va 7.0
2034 209 171 132 3.7 2.7 7.0
2035 209 168 128 3.7 2.7 7.0
2036 208 166 124 3.7 2.7 7.0
2037 207 163 121 3.7 27 7.0
2038 206 161 117 3.7 2.7 7.0
2039 205 159 114 3.7 Quid 7.0
2040 205 156 111 37 2.7 7.0
2041 204 154 108 3.7 Deh 7.0



The projected average employment for 2016, based on the three employment assumptions
used in the 2016 report, ranged from 223,000 to 229,000. The actual average
employment for 2016 was 225,000 (subject to later adjustment), which was within the
range of projected amounts. Average passenger employment for calendar year 2016 was
estimated to be 47,000. Based on this result, it was decided to use 2016 average
employment of 225,000 as a starting point in this year's report and continue the use of the
rates of decline used in the 26th valuation. In this year’s report, for employment
assumptions I and II, passenger employment is assumed to remain level at 47,000. 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.

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-Sixth
Actuarial Valuation of the Assets and Liabilities Under the Railroad Retirement Acts as
of December 31, 2013 with Technical Supplement, which may be found at www.rb.gov.

Il. RESULTS

Projections were made for the various components of income and outgo under each
employment assumption for the 25 calendar years 2017-2041. 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.

' 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 such fiscal year. The
Average Account Benefits Ratio (AABR), with respect to any calendar year, is the average of the account
benefits ratios for 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.



1965 753,000 3.7
1970 640,000 3.2,
1975 548,000 2:1
1980 532,000 0.6
1985 372,000 6.9
1990 296,000 45
1995 265,000 2.2
2000 246,000 1.5
2005 232,000 1.2
2010 221,000 1.0

Between 1955 and 2010, the average annual rate of decline was 3.1 percent. Since 2010,
average employment has instead had an increasing period with rates of decline as
follows:

Average employment Annual rate of decline

- Year for year from previous year
2011 229,000 -3.6%
2012 234,000 -2.2%
2013 237,000 -1.3%
2014 242,000 -2.1%
2015 247,000 -2.1%
2016 225,000 8.9%

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 26" actuarial valuation, which served as
the 2015 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 46,000, 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 | 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 3.5 percent for 25 years, at a reducing rate over the
next 25 years, and remain level thereafter.

The 2016 annual report continued the use of the three employment assumptions, updating
them to reflect recent employment declines.


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

1, 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.

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 2010 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%