Railroad retirement bill threatened

WASHINGTON (AP) -- A campaign-season bill to raise benefits for thousands of retired rail workers and cut taxes for railroads appears headed for passage in Congress despite concerns it could drain $15 billion from the budget surplus and permit risky investment in private securities.

The bill arose from two years of negotiations between railroads and unions representing 250,000 workers and 650,000 retirees, widows and dependents -- from every state and most congressional districts -- to overhaul a federal retirement system older than Social Security.

Among other things, it would permit investment of some railroad retirement funds in private securities in hopes of increasing the rate of return to finance an increase in benefits for workers and a $400 million annual reduction in payroll taxes paid by the railroads.

"It is a win for railroads. It is a win for railroad labor. It is a win for retirees," said Rep. Jim Oberstar, D-Minn., before the House passed the bill earlier this month on a 391-25 vote.

The retirement age for rail workers would fall to 60 from 62 and surviving spouses of rail workers would see a sizable increase in their benefits.

But according to the Congressional Budget Office, the railroad pension bill could consume $15 billion of the surplus in fiscal 2001, which begins Sunday. This would occur because a large pension reserve fund now invested in government securities would be transferred to a new trust overseen by a seven-member board, who would invest it in private markets.

That would jeopardize the plan by Republican congressional leaders to set aside 90 percent of next year's surplus to pay down public debt and use the remaining 10 percent for tax relief or additional spending.

"It would be impossible to comply with the 90-10 debt plan," said Sen. Don Nickles, R-Okla., in papers filed with the Senate Finance Committee -- which planned to consider the bill Thursday.

Nickles has proposed simply delaying by one year the effective date of the legislation, which would sidestep the budget surplus dilemma for now. The bill's sponsors also say the hit on the surplus is a one-time cost associated with the redeeming of Treasury bonds, which would eventually result in less public debt and lower interest costs.

But other proposed changes would be left in place, including creation of a new, non-governmental board to invest a portion of the pension money in private financial markets.

The General Accounting Office, which acts as Congress' investigative arm, noted in a report on the bill that these investments offer "the prospect of higher returns but greater risk" and that there is no limit placed on federal taxpayer liability if things don't work out.

In addition, GAO estimated that increasing the benefits and reducing payroll taxes would worsen the current system's unfunded liability of $40 billion over 30 years.

The system, the GAO concluded, "could face a more pronounced shortfall if the new investment plan does not deliver the expected results." That could require a tax increase, which would be borne by the railroads, sponsors said.

Some lawmakers, and the White House, are concerned that this system sets a poor example for Social Security, where there are several proposals to permit investment of payroll taxes in private markets.

A White House statement said the legislation "could encourage excessive risk without sufficient safeguards or oversight, in a fashion that would set an unfortunate precedent."

Sen. Phil Gramm, R-Texas, has proposed a series of amendments requiring that any railroad fund tax cuts or benefit increases be contingent on successful returns on the private investments and giving beneficiaries individual rights over their portion of money they've paid in.

There has also been some grumbling among lawmakers about other odd features of the rail retirement system, including a quirk in the law in which income taxes paid by retirees on their benefits are immediately transferred back to the retirement fund -- a transfer amounting to $265 million in this fiscal year.

"This bill maintains a special subsidy available to no other industry," said Rep. Nick Smith, R-Mich.

Still, given the lopsided House vote in favor of the bill and the fact that 78 of the 100 senators are listed as co-sponsors, the measure appears likely to win final approval before Congress adjourns for the year.

Rep. E. Clay Shaw, R-Fla., said one driving force behind the legislation was "seeing the industry and the unions coming together to ask for these changes. This bill is a good thing for the United States taxpayers."

The bill is H.R. 4844.

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