The Railroad Retirement Act of 1974, reflecting the basic principles of the Commission Report and incorporating the subsequent management-labor agreement, was enacted on October 16, 1974.
Two-Tier Formulas
The 1974 Act provided a first tier formula yielding amounts equivalent to social security benefits, taking into account both railroad retirement and nonrailroad social security credits. A second tier formula, based on railroad service exclusively, provides benefits comparable to those paid over and above social security benefits by other industrial pension systems. The total annuity yielded by the tier formulas continued traditional levels of railroad retirement benefits and reflected the three cost-of-living increases aggregating 51.8 percent, which had been provided between 1970 and 1972 on a temporary basis.
Dual Benefit Phase-Out
The 1974 Act eliminated duplication in dual railroad retirement-social security benefits for new hires and individuals not vested as of December 31, 1974, under both programs. Dual benefits for vested employees were protected through provision for payment of an amount in their annuities referred to as a "vested dual benefit." However, such vested dual benefit amounts were not allowed to increase because of any social security or railroad credits earned after December 31, 1974.
For career employees, vesting was defined as having 10 years of railroad service on December 31, 1974, and, in addition, having enough quarters of coverage under the social security program to be entitled to a benefit at age 62 if no further social security credits were acquired after December 31, 1974.
Vesting for employees who had fully qualified for benefits under both systems but had left the industry prior to 1974 presented a difficult problem. The 1974 Act favored employees who had remained in the railroad industry more than those who left railroad employment. Accordingly, active or long-term employees in the railroad industry, in a sense, were placed in the same situation as employees who had already retired, while former employees were made subject to more stringent requirements. The resulting vesting provisions were subsequently tested in the courts and upheld by the U.S. Supreme Court in 1980.
Cost-of-Living Increases
The 1972 amendments to the Social Security Act introduced provisions for cost-of-living adjustments in social security benefits on the basis of changes in the Consumer Price Index. Under the two-tier plan, the first tier railroad retirement benefit increases automatically the same way social security benefits increase. Four separate tier II cost-of-living adjustments were provided during the six-year period commencing January 1, 1975. (A fifth increase was provided in subsequent legislation.)
Benefit Improvements
The 1974 Act also provided improvements in existing benefits. The initial agreement of labor and management had enabled employees to retire on or after July 1, 1974, on unreduced annuities if they met the eligibility requirements of attaining age 60 and completing 30 years of service. But an employee could not receive a supplemental annuity until age 65 nor could a spouse receive a spouse annuity until the employee reached age 65. The Act revised the eligibility requirements for these benefits so that they were coordinated directly with the employee annuity requirements. Under the 1937 Act, the vast majority of widows and other survivors received benefits based upon 110 percent of the comparable social security benefit, and the resulting amount was generally felt to be inadequate in relation to the level of other railroad benefits. The 1974 Act survivor formula increased the calculation basis to 130 percent from the former 110 percent.
Financing
It was anticipated that the changes in the benefit formulas, the reduction in dual benefits, higher investment earnings, plus provisions for additional funds from the Federal Government to pay the phase-out costs of dual benefits, together would place the railroad retirement system on a reasonably sound basis. However, the cost estimates made at that time did not anticipate the resurgence of substantial inflation in the latter part of the decade, which led to a recurrence of financial difficulties for the railroad retirement system.
With regard to financing the phase-out costs of dual benefits, the joint management-labor committee initially proposed that the cost of vested dual benefit payments be paid out of the social security trust funds, as this element was basically a social security benefit. However, Congress concluded that the cost should be borne by the General Treasury. It was thought that it would be unfair to impose this cost upon current and future employees who would not (except where vested rights are involved) be permitted to receive dual benefits upon retirement, or upon the railroads since the excess benefit arose out of nonrailroad employment performed by these individuals. Payment out of the General Treasury was supported by a precedent regarding military service and by the fact that the dual benefit problem had been brought about by prior congressional action repealing past dual benefit restrictions over the objections of the railroads.