Is Railroad Retirement Going Away?
Tier 1 Tier 2 RetirementTranscript:
How safe is railroad retirement?
Welcome everyone, to the Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors. Today, we're going to talk about ... The reason why a lot of you are in the railroad industry, is for the railroad retirement benefits. That's a lot of sacrifices you make, but on the end, you have a good retirement system. That's why some of you are still in the railroad.
Every year, mandated by Congress, the Railroad Retirement Board has to come and present to the Congress the stability of the railroad retirement system. We're just going to touch on some of the highlights and then some of the deep dive, some of the behind-the-scenes numbers and a little bit of commentary on top of that.
This year's report from the Railroad Retirement Board, they have 27.3, a little bit over $27 billion in the railroad retirement annuity and the National Railroad Investment Trust. That's the tier two part. They have those amount of assets, and then they report no cashflow problems for 25 years. How do they know that? They run three different types of scenarios, the optimistic, cleverly named, optimistic, moderate, and pessimistic. The good, bad and the ugly, I guess. Those are the types of scenarios, run models on it. They feel that in all the scenarios, it's good.
I thought I'd do a deep dive into that and really kind of look at the pessimistic scenario. I'm an optimistic guy, but let's look at, at least, the pessimistic one and see what happens here. For 2019, the average employment in the railroad industry, these are people paying into the railroad retirement system, 214,000 employees. Okay? On the report, 25 years, they say, if it goes down to 103,000. Well, that's a 50% drop in employment. That's a big number, but it is what the number is.
The investment return for 2019 was fantastic, 16.8%. That's a very good return, and they project 7% a year going forward. That's where I have a little bit of a challenge on, is 7%. Yeah. I think they probably could do that, but when you have a low inflation environment and you have very low interest rates in those bonds and fixed income investments, 7%, you never know. That could be a stretch number there.
That could be, if we had to identify one thing of risk, it's that. Then obviously, the big decrease in employment. I mean, you need people paying into it. Those are a couple of things that I flagged, and then the account benefit ratio. Basically, that is okay. We have $27 billion versus all the benefits and administrative expenses that we have to pay out. We have 4.41 times the amount of what we have to pay out, so we're in good shape there. However, if it gets down to this number, it comes down to 0.36. That's running on fumes there towards the end, in that scenario.
In the tier two tax, currently, it's at 18%. Which is, you guys pay 4.9% and the railroad picks up 13.1, and they feel they would have to raise that up to 27% to get that. And so, the thing that I flag about that is, that's going to create a spiraling event where this number is going to go down very rapidly. Because obviously, they're going to put a lot of that onto the railroad. They are all about cutting costs, so that's a lot to pay for employee, 27%.
But overall, no cashflow prompts, were good for the next 25 years, even in the worst case scenario. But I always like looking into the deep dive and some of the assumptions that they make. I challenge a couple of them, but so far so good for at least the next 25 years.
Send in your comments about this. If you have any questions, reach out to me. Any comments on my assumptions, I appreciate that. Please subscribe to my YouTube channel. Give me a thumbs-up on this video if you like it, I like to keep the mojo going. In the meantime, everyone, please stay safe, stay on track and take care. So long, everybody. Bye.