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Press Release

    Runaway Train

    08/27/2001

    Michael Tanner of the Cato Institute recently stated that, arguing over the precise date when Social Security will go belly up is like strolling on the deck of the Titanic, and debating whether you're going to the bottom in 30 minutes or an hour. Like Social Security, the federal Railroad Retirement System (RRS) has struck a demographic iceberg and is sinking; the only question is, how long will it take to sink?

    In many ways, the RRS is like a microcosm of Social Security. It is a pay-as-you-go system, where the payroll taxes of today’s workers and employers are used to pay the benefits of today’s retirees. The system faces a fast-dwindling workforce relative to retirees; the ratio was 8:1 in 1940, and is 3:1 today.

    Last month, the U.S. House of Representatives hastily passed legislation to “reform” the program. The problem is the Railroad Retirement and Survivors' Improvement Act (RRSIA), which shot through the House like a runaway train with virtually unanimous support, “reforms” the program by expanding benefits, cutting employer taxes, and giving a federally controlled board authority to invest railroad workers’ retirement funds in the stock market. That would be akin to promoting the captain of the Titanic to Admiral and letting him run the Merchant Marine.

    The RRSIA legislation is steaming toward the Senate, where it already has 71 co-sponsors. Senators Don Nickles (R., Okla.), Pete Domenici (R., N.M.), and Phil Gramm (R., Tex.) have vowed to “derail” this runaway train in the Senate. However, should they fail, the president may have to apply the brakes with a veto, to avert a train wreck.

    The railroad industry is mostly private, but the government runs its retirement system through a Railroad Retirement Board established in 1935, and today pays benefits to about 748,000 retirees and spouses. Railroad workers generally do not qualify for Social Security but instead receive two tiers of benefits: Tier I approximates Social Security, and Tier II is the equivalent of a government-run, multi-employer pension plan. Benefits are financed through payroll taxes levied on both the railroads and individual workers.

    Under Tier I, railroad employers and employees each pay 6.2% just like in Social Security. Tier II taxes are currently 16.1% on employers and 4.9% on employees, amounting to a combined payroll tax burden of 33.4% on railroad workers’ wages.

    Even at this obscene level of taxation, this government retirement fund is in dire straits. From the inception of the railroad retirement program, taxes on workers and the railroads have risen continuously, in a fruitless effort to graft a pay-as-you-go system on to a declining industry with a shrinking workforce. In order to receive full benefits the retirement age has increased from 65 to 67 years of age and for partial benefits from 60 to 62 years of age (Social Security all over again). Furthermore, the system has needed a steady infusion of cash from federal income taxes and general appropriations to remain functionally solvent (in 2000, the fund drew $265 million from the general treasury).

    It’s disappointing that the Republican-controlled House failed to seize the opportunity to make the railroad retirement program a real retirement plan, set on the firm foundation of personal retirement accounts. Here was a chance to pave the way for reinventing Social Security for the 21st century on the basis of personal retirement accounts, and the Republican House blew it — adopting instead a top-down, big-government solution creating ominous precedent for the upcoming Social Security debate.

    In fact, the Clinton-Gore team once proposed that the “solution” to Social Security was to allow government investment in the stock market. Having Tier II railroad retirement benefits ‘invested’ in private securities through a central bureaucratic board just gives credence to that bad idea, and risks giving true personal retirement accounts, owned and controlled by workers, a bad name.

    Before long, liberals will renew the call for “saving Social Security” by having the government invest in the stock market, citing a GOP-backed precedent in their favor. In fact, Sen. Jon Corzine (D., N.J.) proposed exactly that (government-directed investment of 15% of social security) in his election campaign last year.

    Fed Chairman Alan Greenspan has repeatedly thrown cold water on the idea of the government investing Social Security funds in private equities, on the ground that it would be virtually impossible to insulate investment decisions from political interference. He’s exactly right, and allowing the government to invest railroad retirement funds in the stock market today is equally dangerous, because of the precedent it would set.

    The difference between government control over payroll tax investment and having individual workers having the opportunity to save, invest, own, and bequeath their personal retirement accounts is as profound as the difference between socialism and capitalism. If the Senate and the president fail to forestall the RRSIA now, there may be an even greater price to pay in the future. Only next time, the problem will not be the derailment of a tiny railroad fund, but the sinking of the Titanic, otherwise known as Social Security.