The Railroad Retirement Act of 1934 set up the first retirement system for nongovernmental workers in this country to be administered by the Federal Government. However, the Act was declared unconstitutional by a Federal district court, and this decision was sustained by the Supreme Court. The Railroad Retirement and Carriers' Taxing Acts of 1935 were enacted to avoid the constitutional difficulties encountered by the 1934 Act. However, these Acts were also challenged in the courts, and a Federal district court held that neither the employees nor their employers could be compelled to pay railroad retirement taxes. The court, however, did not prohibit the payment of benefits, and the Railroad Retirement Board (RRB) began awarding annuities in July 1936 under the provisions of the 1935 Act.
While an appeal was pending, railroad management and labor, at the request of President Roosevelt, formed a joint committee to negotiate their differences. The result was a memorandum of agreement which led to the Railroad Retirement and Carriers' Taxing Acts of 1937 establishing the railroad retirement system. The pensions of retired employees on the railroads' private pension rolls were transferred to the RRB's rolls with pension reductions restored. The benefit payments of almost 50,000 pensioners were taken over by the RRB in July 1937. There followed an immediate reduction in both the number of employed and unemployed older railroad workers. By the end of 1938, the number of workers age 65 and over in active railroad service was less than one-half of the number two years earlier. Almost 100,000 employees had retired under the system by that date, 80 percent of them under the nondisability provisions.