The 1937 Act set up a staff retirement plan which provided annuities to aged retired employees based on their creditable railroad earnings and service. The amounts of retirement annuities awarded were directly related to the employee's earnings and length of service, with a maximum of $120 a month. Creditable earnings were limited to a maximum of $300 a month, while no more than 30 years of service could be credited when service before 1937 was counted. Annuities could be paid at age 65 or later, regardless of length of service, or at ages 60-64 (on a reduced basis) after 30 years of service.
The conditions for paying annuities based on disability were severely restricted. The disability had to be total and permanent and 30 years of service were required for full annuities. Employees could receive disability annuities at ages 60-64 after less than 30 years of service, but on a reduced basis.
The Act made little provision for dependents of deceased employees and no provision for spouse annuities. A survivor could receive a lump sum equal to 4 percent of the employee's creditable earnings after 1936, less any annuity payments already made. In addition, a retiring employee could elect to receive a reduced annuity in order to provide an annuity to his surviving spouse.
The system was financed by a schedule of taxes beginning with 2.75 percent each on employers and employees applicable to the first $300 of monthly compensation.
Amendments to the 1937 Act
Numerous amendments after 1937 increased benefits and added, to what began as a staff retirement system, social insurance features similar to those provided by the social security system.
The first significant sets of amendments were enacted in 1946 and 1951. By initiating coordination in certain areas with the social security system, they laid the foundation for the evolution of the system's present structure. Amendments enacted in 1946 added survivor benefits to the railroad retirement system which were similar to those provided under social security coverage, but approximately 25 percent higher.
These amendments also introduced the first step of coordination with the social security system by dividing jurisdiction over individual survivor benefits between the RRB and the Social Security Administration. Benefits to survivors were thereafter based on combined railroad retirement and social security earnings credits.
Provisions for annuities based on occupational disability--a staff retirement feature--were also established by the 1946 amendments. The provision for occupational disability annuities recognized that employees who were not totally disabled could be prevented from earning a living because they could not perform their regular railroad jobs. The 1946 amendments also reduced the service requirements for total disability annuities, making it possible for comparatively young disabled employees to receive benefits.
In addition, the amounts of disability retirement annuities were increased through the elimination of the reduction for employees with less than 30 years of service and the extension of new minimum provisions of the law to annuities based on disability. In 1954, annuities were provided for disabled children of deceased employees. And in 1968, disabled widows ages 50-59 were added to those who could receive benefits.
In 1951 amendments added annuities for the spouses of retired railroad employees. This legislation completed the addition of social insurance features to the railroad retirement system and expanded the coordination of the railroad retirement and social security systems.
Provision was made for social security to assume jurisdiction of benefits for employees not having at least 10 years of railroad service, and a minimum guaranty was provided to ensure that railroad retirement benefits would be no less than the benefit, or additional benefit, the social security system would have paid on the basis of the railroad service involved. In addition, a financial interchange was established between the two systems to apportion the costs of benefits and taxes, related to railroad service, on an equitable basis.
In 1965 provision was made to coordinate the railroad retirement tax base and tax rate with those of the social security system. This provision and the existing provisions for the financial interchange served as an operating vehicle through which the Medicare program was easily extended in 1965 to railroad employees and members of their families, on the same basis as it was provided for social security beneficiaries. The addition of a strictly staff benefit for career employees was provided in 1966 in the form of supplemental railroad retirement annuities.
By 1970 amendments to the Act provided for regular annuities of more than double the amount provided under the original formula. The amounts of earnings creditable and taxable were $650 a month in 1970 compared with $300 originally. Tax rates had substantially increased in order to finance the new types of benefits, the increases in benefit amounts and other liberalizations in the program. The rate of regular railroad retirement taxes, still divided equally between employees and employers in 1971, was 9.95 percent on each as compared with 3.5 percent in 1946.
The annuities being paid in 1970 included a general benefit increase of 15 percent provided in that year following a social security benefit increase of 15 percent. In the following two years of an inflationary spiral in the national economy, social security and railroad retirement benefits were again substantially increased, by 10 percent in 1971 and 20 percent in 1972. However, these three increases were provided for railroad retirement annuities on a temporary basis only. The costs of making these three increases, aggregating 51.8 percent, permanent without adequate financing would have jeopardized the solvency of the system. Congress directed that a Commission on Railroad Retirement be formed to study the railroad retirement system and its financing for the purpose of recommending to Congress changes in the system that would ensure adequate benefit levels on an actuarially sound basis.
The preliminary recommendations of management and labor for revision of the railroad retirement system, recorded in a Memorandum of Understanding, were enacted by the Congress in 1973. The major provisions, which reflected components of an industry-wide wage settlement, effected a redistribution of railroad retirement taxes and earlier retirement as follows. Generally effective October 1, 1973, employee and employer tax rates under the Railroad Retirement Tax Act were revised so as to reduce the employee rate to the percentage rate paid by employees in social security-covered employment, with the employer absorbing the difference so that total tax income to the program was maintained at the level in effect before the change. Employee rates consequently were lowered from 10.60 percent of creditable earnings to 5.85 percent; employer rates correspondingly increased from 10.60 percent to 15.35 percent. Effective July 1, 1974, all employees at least 60 years of age and having 30 years or more of creditable railroad service could retire without their annuities being subject to reduction for retirement before age 65. Under previous law, only female employees were granted this advantage.
Commission on Railroad Retirement Report
Major changes in the law were recommended in the Commission's 1972 report as its basic solution to the serious problems of the system. Essentially, these involved a proposed restructuring of the railroad retirement system with two separate tiers of benefits, tier I being a social security-type benefit and tier II a supplemental staff benefit. In addition, the Commission recommended a phase-out of dual railroad retirement-social security benefits with some protection for the vested rights to such benefits already acquired by employees.
Under the 1937 Act, an individual engaging in covered employment under both the Railroad Retirement Act and the Social Security Act was entitled to benefits under both Acts, assuming he or she met at least the minimum requirements for benefit eligibility. By the early 1970s, approximately 40 percent of all beneficiaries on the RRB's rolls were also receiving social security benefits. Because of certain duplications in their dual benefits, considered a windfall element, the total of their benefits from both systems averaged more than the annuities of railroad employees who worked in the rail industry exclusively, and who had paid proportionally higher retirement taxes for the purpose of receiving higher benefits. At the same time, dual benefits were a cost to the railroad retirement system because they reduced the system's income from its financial interchange with the social security system. (By the mid-1970s, the costs to the railroad retirement system of dual benefits exceeded $450 million per year and would have been a major factor in bankrupting the railroad retirement system if allowed to continue. The cumulative total loss to the system by 1974 had been about $4 billion.)
Upon the release of the Commission's report, Congress ordered that representatives of employees and representatives of carriers negotiate mutual recommendations for a restructuring of the railroad retirement system which would put it on a sound financial basis, taking into account the report and recommendations of the Commission on Railroad Retirement.