Prepared by Public Affairs 312-751-4777
Employee annuities paid under the
Railroad Retirement Act are subject to dual benefit reductions when social
security benefits are also payable, and they may be subject to reduction when
certain public, non-profit or foreign pension payments are also due a retired
employee.
The following questions and answers describe how railroad retirement annuities
are affected when retired rail employees are also entitled to pensions from
employers not covered by railroad retirement or social security.
1. When and how did the noncovered service pension reduction in employee
annuities come about?
The noncovered service pension reduction in railroad retirement benefits was
introduced by 1983 social security legislation which also applied to the tier I
benefits of railroad retirement employee annuities.
Social security and railroad retirement tier I benefits replace a percentage of
a worker’s pre-retirement earnings. The formula used to compute benefits
includes factors that ensure lower-paid workers get a higher return than
highly-paid workers. For example, lower-paid workers could get a social security
or tier I benefit that equals about 55 percent of their pre-retirement earnings.
The average replacement rate for highly-paid workers is about 25 percent. Before
1983, such benefits for people who worked in jobs not covered by railroad
retirement or social security were computed as if they were long-term, low-wage
workers. They received the advantage of the higher percentage benefits in
addition to their other pension. The modified formula eliminated this advantage.
2. In general terms, which employees are
affected by this reduction and what types of benefits would cause a reduction?
For employees first eligible for a railroad retirement annuity
and a Federal, State or local
government pension after 1985, there may be a reduction in their tier I benefits
for receipt of a public pension based, in part or in whole, on employment not
covered by social security or railroad retirement after 1956. This may also
apply to certain other payments not covered by railroad retirement or social
security, such as from a non-profit organization or from a foreign government or
a foreign employer. It includes both periodic payments, as well as lump-sum
payments made in lieu of periodic payments. It does not include military service
pensions, payments by the Department of Veterans Affairs, or certain benefits
payable by a foreign government as a result of a totalization agreement between
that government and the United States.
3. If a noncovered service pension reduction
is required in a railroad retirement employee annuity, how would it be applied?
Unlike the dual benefit offset for social security entitlement applied by
deducting the amount of the social security benefit from the annuitant’s tier I
railroad retirement benefit, an alternate factor is used in the tier I benefit
computation of annuitants with such pensions.
A tier I benefit is calculated in the same way as a social security benefit. In
computing a tier I benefit, an employee’s creditable earnings are adjusted to
take into account the changes in wage levels over a worker’s lifetime. This
procedure, called indexing, increases creditable earnings from past years to
reflect average national wage levels at the time of the employee’s retirement.
The adjusted earnings are used to calculate the employee’s “average indexed
monthly earnings” and a formula is applied to determine the gross tier I amount.
This benefit formula has up to three levels. Each level of earnings is
multiplied by a specified percentage. The first level of earnings is multiplied
by 90 percent, the second by 32 percent, and the final level by 15 percent. The
results are added to obtain the basic benefit rate. For those first eligible in
2007, the gross tier I benefit is equal to: 90 percent of the first $680 of
average indexed monthly earnings, plus 32 percent of the amount of those
earnings over $680 up to $4,100, plus 15 percent of those earnings in excess of
$4,100.
Beginning with 1986, a reduction in the 90 percent factor was phased in until,
for employees subject to the noncovered service pension reduction and who became
eligible in 1990 or later, the 90 percent factor is reduced to as low as 40
percent. For example, an employee born in 1945 is eligible for a noncovered
service pension and has 20 years of railroad service. Her railroad retirement
annuity begins with the first full month she is age 62 and her average indexed
monthly earnings are $1,800. She would receive, after the reductions for the
noncovered service pension and early retirement, a tier I benefit of $475.13,
rather than the $731.54 otherwise payable.
However, for employees with relatively low noncovered service pensions, there is
a guarantee that the amount of the reduction in tier I cannot be more than 50
percent of the pension.
4. Are there any provisions exempting
retired railroad employees who also receive noncovered service pensions from
this reduction?
Railroad retirement employee annuitants also receiving a noncovered service
pension who attained age 62 before 1986, or who became entitled to a railroad
retirement disability annuity before 1986 and remained entitled to it in any of
the 12 months before attaining age 62 (even if the employee attained age 62
after 1985) are not affected by the noncovered service pension reduction.
Railroad retirement employee annuitants who received, or were eligible to
receive, their noncovered service pensions before 1986 would not be affected.
They are considered eligible if they met the requirements of the pension plan
before January 1986, even if they continued to work.
The reduction also does not apply to:
-
Federal workers hired after December 31, 1983;
-
Persons employed on December 31, 1983, by a nonprofit organization that was
exempt from social security and became mandatorily covered under social security
on that date;
-
Railroad employees whose pensions are based entirely on noncovered employment
before 1957; and
-
Railroad employees eligible for a noncovered service pension who have 30 or more
years of "substantial railroad retirement and/or social security earnings." They
are generally exempt from the reduction. Also, employees with 21 to 29 years of
substantial earnings may be subject to a lesser reduction. In such cases, the 90
percent factor is reduced in increments of 5 percent, providing factors ranging
from 85 percent for employees with 29 years of substantial earnings to 45
percent for those with 21 years.
5. What is considered a year of
“substantial earnings” for purposes of exempting a person from the reduction for
a noncovered service pension?
A year of “substantial earnings” is not the same as a year of service. For
1951-78, the amount of earnings needed for a year of coverage is 25 percent of
the annual social security maximum creditable earnings bases in effect for those
years. For years after 1978, the amounts are 25 percent of what the maximum
earnings bases would have been if the 1977 social security amendments had not
been enacted. For example, in 1977, earnings of $4,125 would be considered a
year of substantial earnings; in 1987, earnings of $8,175 would be needed; in
1997, earnings of $12,150; and in 2007, earnings of $18,150.
6. Are any reductions made in railroad
retirement spouse or widow(er)s’ benefits if a public service pension is also
payable?
Yes. The tier I portion of a spouse or widow(er) annuity may also be reduced for
receipt of any Federal, State or local pension separately payable to the spouse
or widow(er) based on her or his own earnings. The reduction generally does not
apply if the employment on which the public pension is based was covered under
the Social Security Act throughout the last 60 months of public employment.
(This 60-month requirement is being phased in over a 5-year period ending March
1, 2009, and there are some exceptions.) Most military service pensions and
payments from the Department of Veterans Affairs will not cause a reduction. For
spouses and widow(er)s subject to the public pension reduction, the tier I
reduction is equal to 2/3 of the amount of the public pension.
7. Where can more specific information be
obtained on how noncovered pensions affect railroad retirement benefits?
For more information, individuals who may be affected should contact the
nearest office of the Railroad Retirement
Board (RRB). Most RRB offices are open to the public from 9:00 a.m. to 3:30
p.m., Monday through Friday, except on Federal holidays.
Persons can find the address and phone number of the RRB office serving their
area by calling the automated toll-free RRB
Help Line at
1-800-808-0772. They can also get this information from the agency’s Web site at
www.rrb.gov.
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