Railroad Retirement is a multiemployer defined benefit (DB) plan for railroad employees. 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. 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). Railroad Retirement benefits are financed primarily through payroll taxes, which are deposited in Railroad Retirement trust funds. 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. 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. 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. FERS also requires that agencies make automatic 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. 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 differences in plan design and benefit levels and who would pay the potential increase in retirement costs. 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. 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. 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 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 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.