By 1980, recurring inflation and recession combined with other factors placed financial stresses on the railroad retirement system which made it clear that further financial action was needed to maintain the system. Railroad retirement amendments were subsequently enacted on August 13, 1981, as part of an Omnibus Budget Reconciliation Act. The amendments were generally effective October 1, 1981.
These amendments increased railroad retirement taxes on both rail employers and employees. While tier I taxes on employers and employees remained at the same rate as social security taxes, 6.65 percent in 1981, the 9.5 percent tier II tax paid by employers was increased to 11.75 percent and employees assumed a tier II tax of 2 percent. The amendments also gave the RRB the authority to borrow from U.S. Treasury general funds on the basis of forthcoming financial interchange income if Railroad Retirement Account funds were insufficient to pay benefits during a month.
Although the two-tier benefit structure provided by the 1974 Act was left intact, changes were made in the tier II formula and there were other changes in benefit provisions. The amendments revised the employee, spouse, and survivor formulas for annuity portions paid over and above social security levels. Generally, for career retirees whose annuities are awarded on or after October 1, 1981, the simplified formula yields awards that automatically keep pace with average wage increases in the last 60 months of service. The 1981 law continued tier II employee and spouse cost-of-living increases, while revising survivor cost-of-living increases to correspond with those provided employees and spouses. It also broadened the current connection requirement applicable to certain career employee benefits. While the amended law eliminated future supplemental annuity closing dates, it restricted future supplemental annuity eligibility to employees with some service prior to October 1981. In addition, the amendments provided benefits for divorced spouses, surviving divorced spouses and remarried widow(er)s which are like those provided under the Social Security Act.
This legislation also required prorated adjustments in individual vested dual benefit payments, depending upon the amounts appropriated to the fund created for these payments, and the level of vested dual benefit payments was made contingent on the annual Federal budget and appropriations process. The amendments restricted the further award of vested dual benefit payments to vested employees with dual coverage on their own earnings, and precluded further awards of vested dual benefit payments to spouses or widows. Furthermore, after 1981, no further cost-of-living adjustments are made to vested dual benefit payments.
The 1981 amendments mandated, in the event of certain adverse financial indicators, that railway management and labor, and the White House, make further financing recommendations to Congress. And the new law required the RRB to reduce annuity levels during any fiscal year in which it appears there would be insufficient funds with which to make full benefit payments on a timely basis for every month of the year.
In the first half of 1981, when the amendments were developed, it was anticipated that the financing arrangements would provide the railroad retirement system with adequate funding throughout the 1980s. However, the continuing recession in the national economy depressed rail traffic levels to the extent that large-scale layoffs were underway by the first quarter of 1982. Average monthly employment in fiscal year 1982 dropped to 457,000 from the 512,000 average of the previous year, and it subsequently declined to 388,000 in the first quarter of 1983. The decline in employment limited payroll tax income accordingly. In addition, increased unemployment benefit payments resulting from the layoffs made such unprecedented demands on the Railroad Unemployment Insurance Account that it owed $500 million to the Railroad Retirement Account by the end of March 1983.
The condition of the Railroad Retirement Account consequently deteriorated to the point that the RRB was required to prepare to reduce annuity levels on October 1, 1983, by an estimated 40 percent of tier II portions, in the absence of remedial financial legislation.