2012   Financial Report of the United States Government
2012   Financial Report of the United States Government

United States Government Required Supplementary Information (Unaudited) For the Years Ended September 30, 2012, and 2011

Railroad Retirement, Black Lung, and Unemployment Insurance

Railroad Retirement

The Railroad Retirement Board (RRB) was created in the 1930s to establish a retirement benefit program for the Nation's railroad workers. As the Social Security Program legislated in 1935 would not give railroad workers credit for service performed prior to 1937, legislation was enacted in 1934, 1935, and 1937 (collectively the Railroad Retirement Acts of the 1930s) to establish a railroad retirement program separate from the Social Security Program.

Railroad retirement pays full retirement annuities at age 60 to railroad workers with 30 years of service. The program pays disability annuities based on total or occupational disability. It also pays annuities to spouses, divorced spouses, widow(er)s, remarried widow(er)s, surviving divorced spouses, children, and parents of deceased railroad workers. Medicare covers qualified railroad retirement beneficiaries in the same way as it does Social Security beneficiaries.

Payroll taxes paid by railroad employers and their employees provide a primary source of income for the Railroad Retirement and Survivors' Benefit Program. By law, railroad retirement taxes are coordinated with Social Security taxes. Employees and employers pay tier I taxes at the same rate as Social Security taxes. Tier II taxes finance railroad retirement benefit payments that are higher than Social Security levels.

Other sources of program income include: the RRB-SSA-CMS Financial Interchanges with the Social Security and Medicare trust funds, earnings on investments, Federal income taxes on railroad retirement benefits, and appropriations (provided after 1974 as part of a phase out of certain vested dual benefits). See Note 26—Social Insurance, for additional information on railroad retirement program financing.

The RRSIA liberalized benefits for 30-year service employees and their spouses, eliminated a cap on monthly benefits for retirement and disability benefits, lowered minimum service requirements from 10 to 5 years, and provided for increased benefits for widow(er)s. Per the RRSIA, amounts in the Railroad Retirement Account and the SSEB Account that are not needed to pay current benefits and administrative expenses may be transferred to the NRRIT or used to offset transfers from the NRRIT to the Railroad Retirement Account. The NRRIT's sole purpose is to manage and invest railroad retirement assets. NRRIT's Board of Trustees is empowered to invest trust assets in nongovernmental assets, such as equities and debt, as well as in Government securities. Prior to RRSIA, all investments were limited to Government securities.

Since its inception, NRRIT has received $21.3 billion from RRB (including $19.2 billion in fiscal year 2003, pursuant to RRSIA) and returned $13.6 billion. During fiscal year 2012, the NRRIT made net transfers of $2.0 billion to the RRB to pay retirement benefits. Administrative expenses of the trust are paid out of trust assets. The balance as of September 30, 2012, and 2011, of non-Federal securities and investments of the NRRIT are disclosed in Note 9—Debt and Equity Securities.

Cashflow Projections

Economic and Demographic Assumptions. The economic and demographic assumptions used for the most recent set of projections are shown in the “Railroad Retirement” section of Note 26—Social Insurance.

Income and Expenditures. Chart 11 shows, in dollars, estimated railroad retirement income (excluding interest and financial interchange income) and expenditures for the period 2012-2086 based on the intermediate set of assumptions used in the RRB's actuarial evaluation of the program. The estimates are for the open-group population, which includes all persons projected to participate in the Railroad Retirement Program as railroad workers or beneficiaries during the period. Thus, the estimates include payments from, and on behalf of, those who are projected to be employed by the railroads during the period as well as those already employed at the beginning of the period. They also include expenditures made to, and on behalf of, such workers during that period.

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Source: Railroad Retirement Board

As Chart 11 shows, expenditures are expected to exceed tax income for the entire projection period. The imbalances continue to widen until about 2021, decrease slightly for the next 15 years, and then begin to grow steadily after 2036.

Income and Expenditures as a Percent of Taxable Payroll. Chart 12 shows estimated expenditures and income as a percent of tier II taxable payroll. The imbalances grow until 2021 but then begin to decrease somewhat steadily as expenditures fall. Tax rates begin to decline after 2036, stabilizing in 2066 through 2076, and declining thereafter. Compared to last year, projected tax rates are lower, on average. The tier II tax rate is determined from a tax rate table based on the average account benefit ratio.

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Source: Railroad Retirement Board

Sensitivity Analysis. Actual future income from railroad payroll taxes and other sources and actual future expenditures for scheduled benefits and administrative expenses will depend upon a large number of factors as mentioned above. Two crucial assumptions are employment growth and the interest rate. Table 7 shows the sensitivity of the shortfall in the Railroad Retirement Program to variations in these two assumptions. The low-cost employment scenario has a 6.1 percent smaller shortfall of income to expenditures, and the high-cost scenario has a 7.3 percent higher shortfall. A higher discount rate reduces future values relative to a lower rate. As seen in the table, the shortfall is 26.5 percent lower if the interest rate is 10 percent rather than 7.0 percent and 64.5 percent higher when the interest rate is 4.0 percent rather than 7.0 percent.

Table 7 Present Values of Railroad Retirement Expenditures in Excess of Income Under Various Employment and Interest Rate Assumptions, 2012-2086
(Dollar values in billions; values of assumptions shown in parentheses)
Assumption Low Middle High
Employment1 100.4
Interest rate 78.6

1The low and middle employment scenarios have passenger service employment remaining at 45,000 workers per year and the remaining employment base declining at 0.5 percent and 2.0 percent, respectively, for the next 25 years. The high-cost scenario has passenger service employment declining by 500 per workers per year until a level of 35,000 is reached with the remaining employment base declining by 3.5 percent per year for 25 years, at a reducing rate over the next 25 years, and remaining level thereafter.

Source: Railroad Retirement Board.

Sustainability of Railroad Retirement

Table 8 shows the magnitudes of the primary expenditures and sources of financing for the Railroad Retirement Program computed on an open-group basis for the next 75 years and expressed in present values as of January 1, 2012. The data are consistent with the Statements of Social Insurance.

From a Governmentwide perspective, revenues are expected to fall short of expenditures by approximately $107.0 billion, which represents the present value of resources needed to sustain the Railroad Retirement Program. From a trust fund perspective, when the trust fund balance and the financial interchange and transfers are included, the combined balance of the NRRIT, the Railroad Retirement Account, and the SSEB Account show a slight surplus.

Table 8 Present Values of 75-Year Projections of Revenues and Expenditures for the Railroad Retirement Program 1, 2
(In billions of present-value dollars as of January 1, 2012)
Estimated future income (excluding interest) 3 received from or on behalf of:
Current participants who have attained retirement age 6.6
Current participants not yet having attained retirement age 55.6
Those expected to become participants 77.9
All participants 140.0
Estimated future expenditures:4
Current participants who have attained retirement age 118.8
Current participants not yet having attained retirement age 94.7
Those expected to become participants 33.5
All participants 247.0
Net obligations from budget perspective (expenditures less income) 107.0
Railroad Retirement Program assets (mostly investments stated at market)5 24.2
Financial interchange from Social Security Trust 84.2
Net obligations from trust fund perspective (1.4)

1 Represents combined values for the Railroad Retirement Account, SSEB Account, and NRRIT, based on middle employment assumption.
2The data used reflect the provisions of RRSIA of 2001.
3Future income (excluding interest) includes tier I taxes, tier II taxes, and income taxes on benefits.
4Future expenditures include benefits and administrative expenditures.
5The value of the fund reflects the 7.0 percent interest rate assumption. The RRB uses the relatively high rate due to investments in private securities.

Note: Detail may not add to totals due to rounding. Employee and beneficiary status are determined as of 1/1/2011 whereas present values are as of 1/1/2012.

Black Lung

The Federal Coal Mine Health and Safety Act of 1969 created the Black Lung Disability Benefit Program to provide compensation, medical, and survivor benefits for eligible coal miners who are totally disabled due to pneumoconiosis (black lung disease) arising out of their coal mine employment. The survivor benefits are available only for eligible survivors of coal miners who died due to pneumoconiosis. DOL operates the Black Lung Disability Benefit Program. The BLDTF provides benefit payments to eligible coal miners totally disabled by pneumoconiosis and to eligible survivors when no responsible mine operator can be assigned the liability. The beneficiary population is a nearly closed universe in which attrition by death exceeds new entrants by a ratio of more than ten to one.

Excise taxes on coal mine operators, based on the sale of coal, are the primary source of financing black lung disability payments and related administrative costs. The Black Lung Benefits Revenue Act provided for repayable advances to the BLDTF from the General Fund of the Treasury, in the event that BLDTF resources were not adequate to meet program obligations. Prior to legislation enacted in 2008 that allowed for the restructuring of BLDTF debt, the trust fund had accumulated large liabilities from significant and growing shortfalls of excise taxes relative to benefit payments and interest expenses

The Energy Improvement and Extension Act of 2008 (Public Law 110-343 ), enacted on October 3, 2008, contained several provisions that significantly improved the BLDTF's financial position, including:

This Act also allowed that any debt issued by the BLDTF subsequent to the refinancing may be used to make benefit payments, other authorized expenditures, or to repay debt and interest from the initial refinancing. All debt issued by the BLDTF was effected as borrowing from the Treasury's Bureau of the Public Debt.

On September 30, 2012, total liabilities of the BLDTF exceeded assets by $6.0 billion. Prior to the enactment of Public Law 110-343, this shortfall was funded by repayable advances to the BLDTF, which are repayable with interest. Pursuant to Public Law 110-343 , any shortfall will be financed with debt instruments similar in form to zero-coupon bonds.

From the budget or consolidated financial perspective, Chart 13 shows projected black lung expenditures (excluding interest) and excise tax collections for the period 2013-2040. The significant assumptions used in the most recent set of projections are shown in the "Black Lung" section of Note 26 —Social Insurance. The projected decrease in cash inflows in the year 2019 and, thereafter, is the result of a scheduled reduction in the tax rate on the sale of coal. This rate reduction is projected to result in a 38.8 percent decrease in the amount of excise taxes collected between the years 2018 and 2019.

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Source: Department of Labor

Table 9 Present Values of 30-Year Projections of Expenditures and Revenues for the Black Lung Disability Benefit Program
(In billions of present value dollars, as of September 30, 2012)
Projected future expenditures 2.7
Projected future tax income 6.7
Net obligations from budget perspective (expenditures less income) (4.0)
Accumulated balance due General Fund 5.7
Net obligations from trust fund perspective 1.7
Note: Detail may not add to totals due to rounding.

Source: Department of Labor projections and Treasury Department calculations.

Table 9 shows present values of 28-year projections of expenditures and revenues for the Black Lung Disability Benefit Program computed as of September 30, 2012. Cashflows were discounted using the rates on the debt in the BLDTF. From a Governmentwide (budget) perspective, the present value of expenditures is expected to be less than the present value of income by $4.0 billion (a surplus). From a trust fund perspective, a large balance ($5.7 billion) is owed to the General Fund. From that perspective, when that accumulated balance is combined with the cashflow surplus, the program has a shortfall of $1.7 billion in present value dollars. This compares to a shortfall of $1.9 billion reported in last year's Financial Report.

Unemployment Insurance

The Unemployment Insurance Program was created in 1935 to provide temporary partial wage replacement to workers who lost their jobs. The program is administered through a unique system of Federal and State partnerships established in Federal law but administered through conforming state laws by state agencies. The program includes the 50 U.S. states and Puerto Rico, U.S. Virgin Islands, and the District of Columbia. DOL interprets and enforces Federal law requirements and provides broad policy guidance and program direction, while program details such as benefit eligibility, duration, and amount of benefits are established through individual state unemployment insurance statutes and administered through State unemployment insurance agencies.

The program is financed through the collection of Federal and state unemployment taxes that are credited to the UTF and reported as Federal tax revenue. The fund was established to account for the receipt, investment, and disbursement of unemployment taxes. Federal unemployment taxes are used to pay for Federal and state administration of the Unemployment Insurance Program, veterans' employment services, state employment services, and the Federal share of extended unemployment insurance benefits. Federal unemployment taxes also are used to maintain a loan account within the UTF, from which insolvent state accounts may borrow funds to pay unemployment insurance benefits.

Chart 14 shows the projected cash contributions and expenditures over the next 10 years under expected economic conditions (described below). The significant assumptions used in the projections include total unemployment rates, civilian labor force levels, percent of unemployed receiving benefits, total wages, distribution of benefit payments by State, State tax rate structures, State taxable wage bases, and interest rates on UTF investments. These projections, excluding interest earnings, indicate a negative net cashflow until 2013 followed by positive net cashflow for the remainder of the projection period.

The Worker, Homeownership, and Business Assistance Act of 2009, was enacted on November 6, 2009. This Act extended unemployment benefits to eligible recipients up to 14 additional weeks in all States. It also extended a total of up to 20 additional weeks in States with unemployment of 8.5 percent or greater. It also amended section 3301 of the Internal Revenue Code of 1986 to extend the 0.2 percent Federal Unemployment Tax Act surtax on covered employers through June 30, 2011. No benefits are payable for weeks of unemployment commencing before the date of enactment of the Act.

Public Law 111-205 Unemployment Compensation Extension Act of 2010, enacted on July 22, 2010, amends the Supplemental Appropriation Act, 2008 with respect to the state-established individual emergency unemployment compensation account and to apply to claims for Emergency Unemployment Compensation (EUC) payments the terms and conditions of state unemployment compensation law relating to availability of work, active search for work, and refusal to accept work. The Act extends the final dates for entering a federal-state agreement under the EUC program through November 30, 2010. The Act also postpones the termination of the program until April 30, 2011, and amends the Assistance for Unemployed Workers and Struggling Families Act to extend until December 1, 2010, and requires Federal payments to states cover 100 percent of EUC.

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Table 10 shows present values of 10-year projections of revenues and expenditures for the Unemployment Insurance Program using a discount rate of 3.24 percent, the average of the interest rates underlying the 10-year projections. Three sets of numbers are presented in order to show the effects of varying economic conditions as reflected in different assumptions about the unemployment rate. For expected economic conditions, the estimates are based on an unemployment rate of 7.8 percent during fiscal year 2013, decreasing to below 6 percent in fiscal year 2017 and thereafter. Under Recovery Scenario One (lower than expected unemployment rates), the unemployment rate decreases from 7.31 percent in fiscal year 2013 while net cash inflows peak in fiscal year 2013 and continue to be positive through 2022. Under Recovery Scenario Two, net cash outflows including interest earnings and expenses are projected in fiscal years 2013 through 2015. Net cash inflows are reestablished in fiscal year 2016 and peak in fiscal year 2018 with a drop in the unemployment rate to 7.65 percent and then lower rates for fiscal years 2019 through 2022.

Each scenario uses an open-group that includes current and future participants of the Unemployment Insurance Program. Table 10 shows the impact on the UTF projections of varying projected unemployment rates. For example, in Recovery Scenario Two, while tax income is projected to increase as higher layoffs result in higher employer taxes, benefit outlays increase even more. From the Governmentwide (budget) perspective, under expected conditions, the present value of income exceeds the present value of expenditures by $37.5 billion. From the same perspective, under Recovery Scenario Two, the present value of income exceeds the present value of expenditures by $3.6 billion. From a trust fund perspective, which takes into account the ($12.9) billion trust fund balance, the program has a surplus of $24.6 billion under expected conditions. As explained below, the negative trust fund balance reflects loans extended by the General Fund to the states.

Table 10 Present Values of 10-Year Projections of Expenditures and Revenues for Unemployment Insurance Under Three Alternative Scenarios for Economic Conditions
(In billions of present value dollars, as of September 30, 2012)
Economic Conditions
  Expected Recovery Scenario One Recovery Scenario Two
1Net obligations from the trust fund perspective equals net obligations from the budget perspective minus trust fund assets. The negative values in this line are indicative of surpluses.

Note: Detail may not add to totals due to rounding.

Source: Department of Labor
Projected future expenditures 403.0 384.3 507.6
Projected future cash income 440.5 426.2 511.2
Net obligations from budget perspective (expenditures less income) (37.5) (41.9) (3.6)
Trust fund assets (12.9) (12.9) (12.9)
Net obligations from trust fund perspective1 (24.6) (29.0) 9.3

Unemployment Trust Fund Solvency

Each state's accumulated UTF net assets or reserve balance should provide a defined level of benefit payments over a defined period. To be minimally solvent, a State's reserve balance should provide for one year's projected benefit payment needs based on the highest levels of benefit payments experienced by the State over the last 20 years. A ratio of 1.0 or greater indicates a state is minimally solvent. States below this level are vulnerable to exhausting their funds in a recession. States exhausting their reserve balance borrow funds from the Federal Unemployment Account to make benefit payments.

Chart 15 presents the State by State results of this analysis as of September 30, 2012. As the chart illustrates, 38 state funds plus the funds of Puerto Rico and the Virgin Islands were below the minimal solvency ratio of 1.0 at September 30, 2012.

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Last Updated:  February 27, 2013