We previously reported that the 1951 amendments to the Railroad  Retirement Act of 1937 substantially increased railroad retirement  benefits to bring them in line with benefit increases granted to individuals  under Social Security, and that a financial interchange was created  between the agencies in 1951 to help pay for these increases. RRB  annually computes the amounts that SSA would have collected in taxes  from rail workers and their employers, and what SSA would have paid in  benefits if rail workers had been covered under Social Security, with the  net difference transferred between the agencies. In fiscal  year 2016, RRB paid about $12.4 billion in these benefits and collected  $5.9 billion in payroll taxes from rail employees and employers. RRB Calculates Financial Interchange Amounts by Approximating Key Flows In and Out of SSA and HHS Trust Funds

The financial interchange is intended to place Social Security’s OASI and  DI Trust Funds and HHS’s Hospital Insurance Trust Fund on the same  financial footing as if rail workers and beneficiaries were covered under  Social Security instead of by RRB. Regarding Social Security, RRB is  credited for what it paid beneficiaries, administrative costs involved with  paying benefits, and interest for the time between the determination of the  interchange amount and its actual transfer. SSA is credited for the  amount of payroll and income taxes it would have collected from rail  workers and for income taxes that would have been paid by RRB  beneficiaries on Social Security equivalent benefits. In keeping with the purpose of keeping the OASI and DI trust funds in the  same place as if rail workers were covered under Social Security, RRB  determines the retirement and disability benefits that rail workers and  dependents would have received if they were covered under Social  Security. Medicare Transfers

The process for determining the financial interchange transfer with HHS— which helps finance Medicare benefits for rail workers—has fewer  components than for retirement and disability benefits. Generally, RRB  determines the Medicare payroll taxes and income taxes paid by rail  workers and transfers this amount, less administrative expenses, to HHS  (see fig. Overall, the procedures we observed, and which RRB explained and  demonstrated, for calculating the financial interchange are consistent with  the methodology agreed to by RRB, SSA, and HHS. High Ratio of Beneficiaries to Rail Workers Has Resulted in Transfers From SSA to RRB Each Year Since 1958

SSA has made a net transfer to RRB through the financial interchange  each year since 1958. Additionally, the number of beneficiaries has  exceeded the number of active workers since 1961. According to SSA actuarial estimates, the flow of funds to RRB from SSA  is projected to continue. RRB has collected payroll taxes for HHS since 1966. RRB Takes Measures to Oversee the Financial Interchange Calculation, but Shortcomings Increase the Risk of Errors

		RRB Takes Oversight Steps, but Manual Data Entry and Systems Limitations May Prevent RRB from Detecting Mistakes

RRB takes a number of steps to ensure that the financial interchange  amount is accurately calculated each year. Federal internal control standards state that agencies should use  quality information to achieve their objectives. By taking additional steps  to obtain data from SSA electronically, RRB can better position itself to  ensure that data entered into its systems are correct and that its  calculations are free of errors. In response, RRB officials told us that they  produced some documentation such as charts showing the workflows for  different portions of the process, such as for calculating benefits, payroll  taxes, and financial projection—and instructions for staff in RRB’s Bureau  of the Actuary for high-level review of the formulas and entries for the final  calculation results. Limited Documentation of RRB’s Computer System

RRB does not have current or complete documentation related to the  computer system it uses to compute the financial interchange. SSA and HHS Do Not Review the Results of Case-Level Calculations

SSA and HHS provide some oversight of the financial interchange  process, but do not review case-level calculations. We continue to believe that HHS would be better  positioned to ensure that transfers it makes and receives are calculated  correctly if it reviews case-level calculations. (Recommendation 4)
The Board should produce formal policies on how the work of staff  performing the financial interchange is reviewed. RRB and SSA also provided technical comments which we  incorporated as appropriate. At that time, we will send copies of this report to the  appropriate congressional committees, the Railroad Retirement Board,  the Commissioner of the Social Security Administration, and the  Secretary of the Department of Health and Human Services.
Why GAO Did This Study

RRB collects payroll taxes and administers retirement, disability, and Medicare benefits for rail workers and their families. A financial interchange exists between RRB, SSA, and HHS in order to put the trust funds for these benefits in the same financial position as if Social Security covered rail workers. RRB generally transfers to the Social Security and Hospital Insurance trust funds the taxes that would be collected from rail workers and employers, while SSA provides RRB the benefits that would otherwise be paid directly to rail workers. GAO was asked to review the financial interchange calculation process.
This report examines (1) the steps taken to calculate financial interchange amounts, (2) factors that could account for trends in transfers over time, and (3) the extent to which RRB, SSA, and HHS provide oversight to ensure calculations are accurate. GAO reviewed agency policies, procedures, and regulations; observed RRB staff calculating four cases selected for beneficiary type; reviewed data on payment and beneficiary trends; and interviewed agency officials.

What GAO Found

Established in 1937, the Railroad Retirement Board (RRB) administers retirement and disability benefits for rail workers and their families. A financial interchange between RRB and the Social Security Administration (SSA) was created in 1951, which as GAO previously reported, helped finance RRB benefits as they increased over time to keep pace with growing Social Security benefits to individuals. Through its financial interchange calculation, RRB takes steps each year to estimate the amount of funds that would have flowed in and out of Social Security's trust funds if rail beneficiaries were covered by Social Security instead of RRB. Five key steps go into the annual calculation:
RRB is credited for (1) the estimated amount of benefits it would have paid to beneficiaries under SSA rules, (2) administrative costs, and (3) interest accrued on the financial interchange amount.
SSA is credited for the revenues it would have received from rail workers if they paid into Social Security; specifically, (4) payroll taxes and (5) income taxes paid on benefits received.
The determined net amounts are transferred between the agencies, which since 1958 have been from SSA to RRB each year. RRB received $4.1 billion in fiscal year 2016, almost one-third of the $12.4 billion in retirement and disability benefits it paid that year. The financial interchange was expanded to Medicare in 1965 to facilitate funding of Medicare benefits to rail workers; RRB transfers Medicare payroll taxes collected, income taxes paid on benefits received, and interest, minus administrative costs to the Department of Health and Human Services (HHS).
A high ratio of beneficiaries to active railroad workers primarily explains the net transfers from Social Security's trust funds to RRB each year since 1958. Rail employment has fallen steadily since World War II, and the number of beneficiaries has exceeded the number of workers since 1961. RRB had 2.7 beneficiaries for every worker in 2015. As a result, RRB has paid out more in benefits than it has collected in payroll taxes and projects this to continue for the foreseeable future.
RRB takes a number of steps each year to ensure the accuracy of its calculations, such as checking that the sample of cases used to estimate benefit payments is complete, reviewing the work of new employees, and using electronic alerts to help prevent staff from entering incorrect information into its computer system. SSA and HHS also conduct high-level reviews of the calculation results to identify any significant changes from one year to the next. However, RRB's process includes manual data entry and its electronic edit checks cannot flag entries that are incorrect but plausible, which could lead to calculation errors. RRB also has limited documentation of its calculation process, and does not have formal policies on how staff should address some potential calculation errors and on how supervisors should review staff work. This is contrary to internal control standards for having quality data and documenting procedures. In terms of SSA and HHS, they do not currently review case-level calculations made by RRB, and cannot reasonably ensure that work used to determine the transfers they made and received is correct.

What GAO Recommends

GAO makes eight recommendations, including that RRB create formal policies and improve documentation of its processes, work with SSA to obtain data electronically, and that SSA and HHS increase their oversight. RRB and SSA agreed, while HHS did not, asserting that statute limits its authority; however, HHS continues to review this issue. HHS should seek this authority if it determines it necessary.