Railroad Retirement

Enhancing Portability Would Raise Cost and Policy Concerns Gao ID: GGD-98-168 August 10, 1998

The railroad retirement program, established in 1937, is among the older retirement programs for private sector employees in the country. In 1997, the program had 254,000 active participants and provided pension benefits to 742,000 retirees, spouses, and survivor and disability annuitants. During the past 30 years, the railroad industry has experienced extensive downsizing. Also, about 60 percent of railroad workers leave the industry with less service than they need to qualify for a pension under the program. Consequently, there has been discussion of possible legislation to enhance the portability of railroad retirement benefits. This report discusses (1) which, if any, railroad retirement benefits are portable; (2) what changes could be made to the Federal Employees' Retirement System (FERS) that might enhance the portability of railroad retirement benefits into FERS for former railroad employees who secure federal jobs and the cost and administrative implications of those changes for FERS and whether such chances could be made cost-neutral to FERS; and (3) what changes could be made to railroad retirement that might enhance the overall portability of its retirement benefits and what are the cost and administrative implications of these changes for railroad retirement.

GAO noted that: (1) under the Railroad Retirement program, Tier I and Tier II benefits are fully portable within the railroad industry; the benefits that employees earn from one railroad employer can be carried to the next employer without any reduction in value; (2) Tier I benefits are also portable outside the industry; railroad employees can convert their Tier I benefits into social security benefits and vice versa; (3) Tier II benefits, however, are less portable outside the industry; railroad employees must have at least 10 years of railroad service to establish their right to Tier II benefits and the receipt of any benefits must be deferred until the time that the employee would have become eligible to retire under the plan; (4) although the Railroad Retirement program provides for indexing wages for inflation that occurred during the pre-retirement period, this provision applies only to former railroad workers who secure employment at selected federal agencies that are responsible for federal railroad policies; (5) for former railroad workers who secure federal civilian employment, the portability of Tier II benefits could be enhanced if they could be converted into FERS pension benefits; (6) the arrangement would be cost-neutral to the Civil Service Retirement and Disability Trust Fund only if any increased costs were paid in full by the railroad industry, the former railroad employees, or a combination of the two; (7) according to the Office of Personnel Management's (OPM) analysis, per-person lifetime costs could be high; (8) however, its analysis also suggests that the aggregate cost probably would not be high if the number of employees involved was small; (9) according to OPM, the agencies that hire former railroad employees and OPM would both experience modest increases in administrative costs; (10) although it believes the administrative burdens of adding a railroad service credit provision to FERS would be manageable, OPM has consistently objected to proposals that would extend service credit for work that was not covered by the Civil Service Retirement System or FERS; (11) the portability of Tier II benefits could also be enhanced by reducing the required vesting period for railroad employees; and (12) according to a Railroad Retirement Board, the impact on Railroad Retirement trust fund assets, outlays, and receipts would be less if the option applied only to benefits earned by current or future employees.

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