Analyst in Disability Policy
Beginning in 2002, a significant portion of the assets of the Railroad Retirement Board (RRB) has 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; hereinafter, 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 continues to be invested solely in U.S. government securities.
Congress structured the Trust to ensure 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 FY2012, the Trust’s annual returns averaged 8.1%, just slightly above the expectations of the bill’s drafters, who assumed nominal annual returns of 8.0%. The economic downturn did not spare the Trust, which lost 19.1% in FY2008, 0.7% in FY2009, and 0.1% in FY2011. However, the Trust exceeded its own strategic policy benchmarks in FY2012 with a rate of return of 16.4%. As the Trust’s investment portfolio diversified over time, its administrative expenses steadily increased, to 36 basis points in FY2011, but fell to 30 basis points in FY2012 and remain low when compared with other mutual funds.
The Trust is designed to maintain four to six years’ worth of benefits in case of lower-than expected returns. To maintain this balance, the tier II tax rates are set to automatically adjust as needed. This tax adjustment does not require congressional action. The tier II tax rates increased in 2013 for the first time since the inception of the Trust.
Date of Report: November 13, 2013
Number of Pages: 10
Order Number: RS22782
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