January 25, 2001
TO: ALL GENERAL CHAIRMEN
LOCAL AND DISTRICT CHAIRPERSONS
ALL GRASSROOTS COMMITTEE MEMBERS
Dear Sisters and Brothers:
A number of members and local representatives have inquired to my office regarding the response they have received from Senator Phil Gramm (R-TX) to their letters soliciting his support of H.R. 4844, the Railroad Retirement and Survivors’ Improvement Act of 2000.
Evidently, not only did Senator Gramm answer his constituents in the State of Texas – he also answered letters he received from other TCU members from across the country. For those who have received Senator Gramm’s letter, the following shall constitute our response.
Response to Senator Phil Gramm’s Letter
In his response, the senator writes that he is concerned that the legislation "could jeopardize the solvency of the Railroad Retirement Trust Fund and threaten the security of retirees’ benefits." That is a serious charge. It is also wrong.
From the first day of negotiations with the carriers through the long process that resulted in H.R. 4844 being introduced in Congress, the paramount concern of rail labor was that nothing be done that could possibly jeopardize the solvency of the trust fund. At every step of the way, the Actuary of the Railroad Retirement Board rigorously analyzed the impact of the proposed changes. Nothing was agreed to until the Actuary signed off on it. The Actuary’s only interest was to protect fund solvency. His conclusion was that the improvements under H.R. 4844 did not threaten fund solvency. The Carrier and Labor Members of the Railroad Retirement Board shared that opinion.
In his letter, Senator Gramm suggests that he would support the bill if three changes were made. First, he wants the provision to receive a full annuity at age 60 with 30 years service dropped, thereby keeping the retirement age at 62 with 30 years service. In private meetings with rail labor and management, the senator was very clear on this: he is absolutely opposed to any reduction in retirement age for rail workers. As in his letter, he bases this on the fact that "Social Security began this year to raise its full retirement age from 65 to 67 to cope with its own insolvency problems." The senator also points to the ratio of retirees to active workers.
What Senator Gramm doesn’t say is that the trend in Social Security is exactly opposite to that of railroad retirement. Under Social Security, the ratio of retirees to workers will greatly increase in the coming decades as the baby boom generation retires. Under railroad retirement, that ratio will decrease, because the dramatic employment cuts were made in the 1980’s and 1990’s. Under railroad retirement, billion dollar surpluses are projected down the road both under current law and under H.R. 4844.
The comparison between retirement ages under Social Security and Railroad Retirement is totally irrelevant for another reason. To the degree Railroad Retirement currently has a retirement age earlier than Social Security – full annuity at age 62 with thirty years service – that early retirement benefit is completely paid for by taxes paid by the carriers and employees. Currently, carriers pay a 16.1% Tier II tax. Employees pay a 4.9% Tier II tax. Both those taxes are in addition to the 7.65% Tier I tax paid by both carriers and employees, which is equivalent to the Social Security and Medicare taxes paid by employers and workers outside the railroad industry.
In other words, the carriers and employees under Railroad Retirement self finance early retirement, as well as other benefits superior to Social Security, by paying a 21% payroll tax above and beyond Social Security and Medicare taxes. Payments for current early retirement, as well as the reduced age in our bill, are financed solely from these Tier II payments. Not a dime comes out of the Tier I account. In this regard, it is no different than the thousands of other private sector pension plans that provide early retirement to workers at age 60 or even earlier. Senator Gramm knows this.
Furthermore, H.R. 4844 calls for the carriers to dramatically increase contributions to the trust fund should investment returns lag behind projections and fund balances drop. Senator Gramm does not mention this in his letter. In our meetings with him, he was cognizant of this feature, but felt that if the industry experienced extremely hard times, they would be unable to fulfill their tax commitments. We pointed out to no avail that that would be true under current law as well. Obviously, if one paints a doomsday scenario where the railroad industry no longer exists as we know it, any railroad retirement system would be in crisis. Our bill does not increase the chance of that happening; by having the taxes on the carriers increase at any time that the fund balances drop below current historical highs, the system will in fact be more responsible than current law.
The second specific objection in the senator’s letter is his belief that it does not make sense to increase benefits and reduce taxes now before the equity investments are actually made and produce results. Again, the reasoning is fallacious. In our discussions with Senator Gramm, he confused railroad retirement with a defined contribution plan, like a 401k plan, where the balance available to be paid out in benefits varies year-to-year depending on fund performance. Railroad retirement is a defined benefit plan. The cost of benefits can be projected on a 75-year basis, as can revenue from taxes and average long-term return on investments. Based on those expert projections, the Railroad Retirement Board Actuary concluded that the improvements in H.R. 4844 were affordable today. Should projected returns fall short, carrier taxes would automatically increase, as described above, to make up for that shortfall.
Finally, Senator Gramm states that he objects to a "politically appointed government board" making "politically motivated investment decisions." That is not an accurate portrayal of what would happen under the bill. The investment board will be composed of a majority of private sector trustees, who in turn will hire a private sector investment advisor, as every other pension plan does. The trustees will statutorily be bound to maximize investment returns, as under ERISA. When we met with Senator Gramm, we assured him that we agreed with him that the Board should not engage in so-called social investing, but that its only goal should be to maximize returns. We even offered to accept language he proposed to clarify this during the Senate Finance Committee’s consideration of the legislation in late September. While he appreciated that offer, it was not enough to overcome his fundamental opposition to the bill.
The most distressing aspect of Senator Gramm’s opposition was his unwillingness to let the bill come up for a vote by the full Senate. Late in the legislative session before the election, the Senate was operating under an unusual procedure where bills could only be brought up if no senator objected to their being considered. (The Republican leadership did this to avoid the consideration of controversial items in the period leading up to very contested Senate elections.) Had our bill been debated on the Senate floor, the vast majority of senators from both parties would have rebutted Senator Gramm’s concerns about fund solvency. No one in Congress wants to jeopardize fund solvency, since that would force Congress to act to save the system from crisis. Yet 85 senators, after carefully studying the bill’s provisions, agreed that the bill would strengthen the program, not weaken it. This was also true in the House, where the bill was drafted and passed only after painstaking scrutiny by experts on the tax committee and the railroad committee.
We will continue to try to convince Senator Gramm that he is wrong about the bill’s impact on potential fund solvency. Unfortunately, his objection to lowering the retirement age appears set in stone. At the Senate Finance Committee hearing, he lobbied his fellow senators to vote against our bill on purely political grounds, arguing that it would be politically harmful for them to reduce the retirement age for railroaders after voting to increase the Social Security retirement age for millions of workers. It is therefore doubtful that we will ever be successful in getting Senator Gramm’s support for passage of our bill.
In closing, when the outcome of the Presidential Election is determined, we will be meeting with other rail unions, the carriers and representatives of the incoming administration to determine what course of action we will take in an effort to reintroduce H.R. 4844.