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Monday, August 9, 2010

Railroad Retirement Board: Trust Fund Investment Practices

Scott Szymendera
Analyst in Disability Policy

Beginning in 2002, a significant portion of the assets of the Railroad Retirement Board (RRB) have been invested in private stocks, bonds, and other investments. Prior to the Railroad Retirement and Survivors' Improvement Act of 2001 (P.L. 107-90), surplus railroad retirement assets could only be invested in U.S. government securities—just as the Social Security trust funds must be invested. The 2001 act established the National Railroad Retirement Investment Trust (NRRIT; hereafter, the Trust) to manage and invest part of the RRB's assets in the same way that the assets of private-sector and most state and local government pension plans are invested. The remainder of RRB's assets continue to be invested solely in U.S. government securities. 

Congress structured the Trust to assure independence of investment decisions and limit political interference. It also aimed to increase railroad retirement system funding, add enhanced benefits, potentially reduce taxes, and protect system financing in case of market downturns. The Trust's assets are invested in a diversified portfolio, both to minimize investment risk and to avoid disproportionate influence over an industry or firm. Since the Trust is a nongovernmental agency, it is not subject to the same oversight as federal agencies. However, the act requires an annual management report to Congress. 

The Trust's investments have generally followed the markets' recent performance. From FY2003 to FY2009, the Trust's annual returns averaged 7.7%. This nearly matches the expectations of the bill's drafters, who assumed nominal annual returns of 8.0%. However, the recent economic downturn has not spared the Trust, which lost 19.1% in FY2008 and 0.7% in FY2009. As the Trust's investment portfolio has diversified over time, its administrative expenses have steadily increased, to 26 basis points in FY2009, but remain low compared with industry standards. 

The Trust is designed to maintain four to six years' worth of benefits in case of lower-than expected returns. In order to maintain this balance, the tier II tax is set to automatically adjust to maintain the fund balance at four to six years. This tax adjustment would not require congressional action. No tax increase is scheduled at the time of this writing. 

The goal of this report is to inform readers about the Trust, which is of particular interest to policymakers exploring the option of collective investment of the Social Security trust funds or establishing other private investment funds within the federal government. 

Date of Report: July 27, 2010
Number of Pages: 10
Order Number: RS22782
Price: $29.95

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