A. Who We Are

The Railroad Retirement Board (RRB) is a Federal agency that administers comprehensive income security programs for the nation’s railroad employees, retirees and their families. Legislation creating the RRB was enacted in the 1930’s, with an initial focus on establishing a retirement benefit program for the nation’s rail workers. At that time, the railroad industry had more highly developed pension plans than other businesses or industries, but these plans had defects that the Great Depression magnified. A short time later, the RRB was charged with administering an unemployment benefits program to address problems unique to interstate rail employment.

Three Board Members appointed by the President of the United States, with the advice and consent of the Senate, head the RRB. One member is appointed upon the recommendation of railroad employers, one is appointed upon the recommendation of railroad labor organizations and the third, the Chairman, is appointed to represent the public interest. The Board Members all serve 5-year, staggered terms. The RRB currently employs about 950 full-time equivalent employees who work in its Chicago headquarters and in over 50 field offices around the country.

As an independent agency in the executive branch of the Federal Government, the RRB reports to the President and Congress. RRB officials work closely with the President’s Office of Management and Budget with respect to the agency’s budget and executive management initiatives. They also testify at congressional hearings on proposed changes to the RRB’s enabling statutes and the annual appropriation for benefit payments and agency administrative expenses. (The agency’s administrative expenses have traditionally averaged about one percent of benefit payments.)

The RRB also works closely with other Federal agencies and some State agencies. The principal ones, inasmuch as they relate to benefit administration, are the Social Security Administration, the Centers for Medicare & Medicaid Services, State employment security departments and, to a lesser extent, the Department of Labor. Other agencies with which the RRB interacts on a routine basis include the Department of the Treasury, the Office of Personnel Management, the General Services Administration and the Government Accountability Office.

Figure 4 provides a graphic representation of our internal and external stakeholders.

Figure 4

B. Whom We Serve

In fiscal year 2005, retirement and survivor benefits of nearly $9.2 billion were paid to about 634,000 beneficiaries. During fiscal year 2005, the RRB also paid $73 million in net unemployment and sickness benefits to some 29,000 rail workers.

Our primary customers are the employees and employers of the rail industry. They include, for example, train and engine service employees, maintenance of way employees, dispatchers, signalmen, computer specialists, sales personnel, lawyers and accountants. They also include the railroad employees who have retired on the basis of age and their spouses and dependents, as well as younger beneficiaries who have retired on the basis of disability, and employees who are not working because of layoffs, injuries or illness. Employers include the nation’s Class I freight railroads as well as about 600 other employers, including short line and regional railroads, Amtrak, certain commuter roads and rail labor unions.

The RRB pays retirement benefits to railroad workers and their spouses, and survivor benefits to their families. A component of the retirement program also includes disability annuities – both permanent and occupational – for railroad employees. The RRB also enrolls railroad retirement beneficiaries for Medicare, collects premiums for Part B, and oversees a nationwide contract for the processing of Part B claims. The agency also works closely with rail employers to ensure that payroll taxes are credited properly for all active employees.

As the only Federal agency dedicated to providing income security and related programs to a specific industry, the RRB is a customer-centered organization. The agency has traditionally enjoyed a relationship with its customers based on cooperation, respect and service. This was confirmed by recent surveys of RRB customers performed as part of the American Customer Satisfaction Index (ACSI).

Produced through a partnership of the University of Michigan Business School, the American Society for Quality and Claes Fornell International (CFI), the ACSI represents an independent annual measure of national customer satisfaction with corporate and government services. The 2005 ACSI survey focused on those who received payments as initial survivors or as spouse-to-widow conversions, a group of the RRB’s core constituencies. The RRB scored the highest of any agency, with an overall satisfaction rating of 90, 18 points higher than the overall score for the Federal government. This year’s score is also the highest among the other RRB ACSI studies - the 2001 survey score for retirement beneficiaries was 82, and in 2002, the survey of unemployment and sickness insurance beneficiaries received a score of 75.

In the 2005 survey, the RRB scored highest (94) in the area of customer service, with respondents specifically praising the courtesy and professionalism of agency employees. The agency earned a high confidence index score (92), indicating that customers are very satisfied with service provided by the agency and remain confident that they will continue to receive outstanding service in the future. The agency also received high marks in the areas of the award letters and the application process.

In addition, the survey revealed that the respondents’ preferred methods of service for conducting future business with the RRB are via phone contact and U.S. Mail. The least preferred method for conducting future business is via the Internet.

C. What We Do

Our primary responsibility is to administer retirement, survivor, disability, unemployment and sickness insurance programs for railroad workers and their families as mandated by the Railroad Retirement Act and Railroad Unemployment Insurance Act. We also make certain payments under provisions of the Social Security Act and assist in providing Medicare coverage for our beneficiaries. In addition, we have administrative responsibilities under the Internal Revenue Code to withhold and report taxes in accordance with a variety of Internal Revenue Service requirements.

While the railroad retirement system has remained separate from the social security system, the two systems are closely coordinated with regard to earnings credits, benefit payments, and taxes. The financing of the two systems is linked through a financial interchange under which, in effect, the portion of railroad retirement annuities that is equivalent to social security benefits is coordinated with the social security system.

The purpose of this financial coordination is to place the social security trust funds in the same position they would be in if railroad service were covered by the social security program instead of the railroad retirement program. Legislation enacted in 1974 restructured railroad retirement benefits into two tiers, so as to coordinate them more fully with social security benefits. The first tier is based on combined railroad retirement and social security credits, using social security benefit formulas. The second tier is based on railroad service only and is comparable to private pensions in other industries.

In terms of unemployment benefits, the State-administered programs enacted in the 1930’s generally covered railroad employees. However, as railroad operations crossed State lines, unemployed rail workers were sometimes denied compensation by one State because their employer had paid unemployment taxes to a different State. While there were cases in which rail employees appeared to be eligible for benefits in more than one State, they often did not qualify in any. A Federal study commission subsequently recommended a national plan for railroad workers, which passed in 1938. Sickness benefits were added in 1946.

As an agency in the executive branch of the Federal Government, we must comply with Federal requirements. They include those mandated by the budget and appropriations process and other laws and regulations governing fiscal activities, the collection of government debts, procurement, control of government property, civil service employment, equal employment opportunity, privacy, and security. As a member of the Federal community, we also participate in various efforts such as the Combined Federal Campaign, blood drives and other local community service volunteer programs, and various cultural diversity events.

D. Strengths and Weaknesses

One of the RRB’s major strengths is the generally favorable financial condition of its benefit programs, including the railroad retirement, unemployment and sickness insurance systems. A number of legislative changes enacted in recent years, with the support of railroad labor and management, made this possible and helped guarantee solvency. Nevertheless, the long-term financial stability of these systems still depends to a large extent on future levels of railroad employment. A sudden, unanticipated and significant drop in the level of employment could change this picture and require a greater financial commitment by railroad employers and employees.

We have two other major strengths that are closely related – a tradition of outstanding customer service and a dedicated, talented workforce. Over the years, both internal and external surveys have consistently shown high customer satisfaction with the accuracy and timeliness of benefit payments and information, informational materials and service delivery options. A key aspect of this has been our employees’ strong sense of mission and core values. Over the years, they have been extremely flexible in terms of reacting to legislative changes and budgetary pressures. Automation has been an important part of the RRB’s ability to do more with less, as we have been able to provide improved service in the face of significant staff reductions. Figure 5 shows the increase in the ratio of the railroad population (workers and retirees) to RRB employees since 1993. If this trend continues, we will be challenged in our ability to maintain high levels of performance in the future.

Figure 5

The RRB is a relatively small agency, with about 950 employees as of fiscal year 2006. Because we are a small agency, our employees have the advantage of being able to readily communicate with one another in every office and division. It can also allow us to be more flexible and responsive in terms of addressing problems or implementing new programs. Conversely, our size poses a continuing challenge to retain staff expertise in specialized areas, such as technology, financial management and actuarial services.

The agency has an aggressive, proactive stance to financial and management controls. The RRB’s financial statements received an unqualified “clean” audit opinion in fiscal year 2005 for the sixth consecutive year. However, the RRB’s Inspector General identified three material weaknesses in his Opinion on the Financial Statements, dated October 27, 2005: information security, performance measures, and controls over the actuarial projection process. The Board Members have acknowledged all three weaknesses and have determined that the information security weakness represents a material weakness under the Federal Managers Financial Integrity Act (FMFIA). The Board Members have not categorized the other two areas as material weaknesses under the FMFIA. Nevertheless, the agency has developed action plans and is taking steps to make improvements in all three areas.

In March 2006, the RRB received a favorable fiscal year 2005 Performance Measures Scorecard from the Department of the Treasury’s Financial Management Service (FMS). The Performance Measures Scorecard includes performance indicators for timeliness, reconciliation of unexplained differences, consistency/integrity, and completeness for the reporting of fiscal year 2005 financial information to FMS. Each performance indicator has performance goals and the RRB has met all the goals listed for the four performance indicators.

E. Recent Legislative Activity

The Railroad Retirement and Survivors’ Improvement Act of 2001 (RRSIA), signed into law December 21, 2001, was the most significant railroad retirement legislation in almost 20 years, and the first in almost three decades not to involve tax increases or benefit reductions. The benefit and financing provisions of the legislation, like those of most previous railroad retirement legislation, were based on joint recommendations negotiated by a coalition of rail freight carriers and rail labor organizations.

The Act liberalized early retirement benefits for 30-year employees and their spouses, eliminated a cap on monthly retirement and disability benefits, lowered the minimum service requirement from 10 years to at least 5 years, provided the service was performed after 1995, and provided increased benefits for some widow(er)s. Financing sections in the law provided for the investment of railroad retirement funds in nongovernmental assets, adjustments in the payroll tax rates paid by employers and employees, and the repeal of a supplemental annuity work-hour tax.

In 2003, the Medicare Modernization Act (MMA) was signed into law allowing for the biggest changes to senior health care in nearly 40 years, including the establishment of a prescription drug benefit. While the Centers for Medicare & Medicaid Services (CMS) is the agency primarily responsible for administering the new legislation, the RRB is greatly impacted.

The MMA amended Section 1854(d) of the Social Security Act allowing beneficiaries the option to have premiums for Part C (the managed care component of Medicare) and Part D (the prescription drug program) withheld from monthly benefit payments; previously the RRB only withheld Part B premiums. Section 811 of the MMA amended Section 1839 of the Social Security Act to increase Part B premiums for higher income beneficiaries. Guidance from CMS and sufficient RRB staff support are essential to implement the required system modifications to facilitate proper withholding of the Part B, C and D premiums.

In addition to procedure and automated system changes, our field offices frequently receive calls from RRB beneficiaries seeking assistance on provisions of the legislation.

F. Who Gets Benefits and How Much They Receive

At the end of fiscal year 2005, the average monthly annuity paid to career railroad workers was $2,165 and $1,659 for all retired rail employees. The average monthly annuity for spouses was $640, and $1,065 for aged and disabled widow(er)s.

Retirement-survivor benefits – Under the Railroad Retirement Act, retirement and disability annuities are paid to railroad workers with at least 10 years of service. Beginning in 2002, such annuities are also payable to workers with 5 years of service if performed after 1995.

Full age annuities are payable at age 60 to workers with 30 years of service. For those with less than 30 years of service, reduced annuities are payable at age 62 and unreduced annuities are payable at full retirement age, which is gradually rising from 65 to 67, depending on the year of birth. Disability annuities can be paid on the basis of total or occupational disability. Annuities are also payable to spouses and divorced spouses of retired workers and to widow(er)s, surviving divorced spouses, remarried widow(er)s, children, and parents of deceased railroad workers.

The RRB and the Social Security Administration share jurisdiction over the payment of retirement and survivor benefits. The RRB makes the payment if the employee had at least 10 years of railroad service, or 5 years if performed after 1995; for survivor benefits, there is an additional requirement that the employee’s last regular employment before retirement or death was in the railroad industry. If a railroad employee or his or her survivors do not qualify for railroad retirement benefits, the RRB transfers the case to the Social Security Administration, which treats the railroad retirement credits as regular social security credits.

Unemployment-sickness benefits – Unemployment insurance benefits are paid to railroad workers who are unemployed but ready, willing, and able to work and sickness benefits to railroad workers who are unable to work because of illness or injury. The RRB also operates a placement service to assist unemployed railroaders in securing employment. A new unemployment-sickness benefit year begins every July 1, with eligibility generally based on railroad service and earnings in the preceding calendar year. Up to 26 weeks of normal unemployment or sickness benefits are payable to an individual in a benefit year. Additional extended benefits are payable to persons with 10 or more years of service.

The current maximum benefit rate is $56 a day. It will rise to $57 in July 2006 and $59 in July 2007. Benefits are normally paid for the number of days of unemployment or sickness in excess of 4 in a 14-day registration period, making $560 ($570 in July 2006 and $590 in July 2007) the maximum benefit amount for biweekly claims.

G. Sources of Financing

Payroll taxes paid by railroad employers and their employees are the primary source of funding for the RRB’s benefit programs. Railroad retirement taxes, which have historically been higher than social security taxes, are calculated, like benefit payments, on a two-tier basis. Railroad retirement tier I payroll taxes are coordinated with social security taxes so that employees and employers pay tier I taxes at the same rate as social security taxes. In addition, both employees and employers pay tier II taxes that are used to finance railroad retirement benefit payments over and above social security levels. Beginning with calendar year 2004, these tier II taxes are based on the ratio of certain asset balances to the sum of benefit payments and administrative expenses.

Additional trust fund income is derived from the financial interchange with the social security trust funds, revenues from Federal income taxes on railroad retirement benefits, and appropriations from general treasury revenues provided after 1974 as part of a phase-out of certain vested dual benefits.

Revenues in excess of benefit payments are invested to provide additional trust fund income, and the RRSIA legislation enacted in 2001 authorized investment of railroad retirement funds in non-governmental assets, as well as in governmental securities. This law also established the National Railroad Retirement Investment Trust.

The railroad unemployment-sickness benefit program is financed by taxes on railroad employers under an experience-rating system. Each employer’s payroll tax rate is determined annually by the RRB on the basis of benefit payments to the railroad’s employees.

H. Financial Status of RRB Programs

Railroad Retirement Accounts – The RRB continues to coordinate its activities with the National Railroad Retirement Investment Trust (NRRIT), which was established by the Railroad Retirement and Survivors’ Improvement Act of 2001 to manage and invest railroad retirement assets. Through fiscal year 2005, the RRB transferred a total of $21.276 billion to the NRRIT for this purpose. During the same period, the NRRIT transferred $2.673 billion to the Railroad Retirement Account for payment of retirement and survivor benefits. As of September 30, 2005, the market value of NRRIT-managed railroad retirement assets was approximately $27.7 billion.

The Board’s 2005 railroad retirement financial report to Congress, which addressed the period 2005-2029, was generally favorable, concluding that, barring a sudden, unanticipated, large decrease in railroad employment, or substantial investment losses, the railroad retirement system will experience no cash-flow problems during the next 25 years. This is an improvement over the 2004 report and reflects continued favorable employment experience in the railroad industry. However, the 2005 report also indicated that the long-term stability of the system is still questionable. Under its current financing structure, actual levels of railroad employment and investment return over the coming years will largely determine whether corrective action is necessary. No financing changes were recommended by the Board based on this report.

Railroad Unemployment Insurance Account – The equity balance of the Railroad Unemployment Insurance Account at the end of fiscal year 2005 was $94.2 million, an increase of $14.3 million from the previous year. The RRB’s June 2005 report on the financial status of the railroad unemployment insurance system was generally favorable, indicating that even as maximum daily benefit rates rise 39 percent (from $56 to $78) from 2004 to 2015, experience-based contribution rates maintain solvency, with the exception of small, short-term cash-flow problems in 2007 and 2008. Projections show quick repayment of the loans, even under our most pessimistic assumption. The average employer contribution rate remains well below the maximum throughout the projection period, but a 1.5 percent surcharge is now in effect and is expected for calendar year 2007. No financing changes were recommended by the Board based on this report.