Prepared by Public Affairs 312-751-4777
Most railroad retirement annuities, like social security benefits, increased
in January 2003 as the result of a cost-of-living adjustment (COLA). However,
almost all of those widow(er)s' annuities being paid under legislation enacted
in December 2001 did not increase for the COLA. The following questions and
answers provide information on the recent COLA and how it affected railroad
retirement annuities.
1. When and how are COLAs calculated in
railroad retirement and social security benefits?
COLAs are calculated in both the tier I and tier II benefits included in a
railroad retirement annuity. These increases, effective December 1 and included
in the January payment, are triggered under both the railroad retirement and
social security programs when the Consumer Price Index (CPI) rises during the 12
months ending the previous September 30. Under certain circumstances, the
increase can be based on average national wage increases rather than price
increases. Generally, tier I benefits increase by the full amount of the rise in
the CPI, while tier II benefits increase by 32.5% of the CPI rise. The vested
dual benefit payments and supplemental annuities paid by the Railroad Retirement
Board are not adjusted for the CPI rise.
2. How did the COLA payable in January
2003 affect most railroad retirement annuities?
Tier I benefits, like social security benefits, increased by 1.4 percent,
which was the percentage of the CPI rise. Tier II benefits increased by 0.5
percent, which was 32.5 percent of the CPI rise.
Consequently, in January 2003, the average regular railroad retirement
employee annuity increased $17 a month to $1,548 and the average of combined
benefits for an employee and spouse increased $23 a month to $2,200. For aged
widow(er)s whose annuities are not computed under the December 2001 legislation,
the average annuity increased $10 a month to $820. For those beneficiaries
covered by Medicare, the basic Part B premium generally deducted from monthly
benefits increased from $54 to $58.70 in 2003.
3. Why did the railroad retirement
widow(er)s' annuities that were either increased or awarded in 2002 under the
recent legislation not increase for the COLA?
The Railroad Retirement and Survivors' Improvement Act of 2001 (P.L. 107-90),
enacted on December 21, 2001, among other provisions, provided increased
benefits for some widow(er)s through a new formula for computing their
annuities. However, widow(er)s' annuities computed under this new formula are
not increased for COLAs until the amount payable under prior law plus interim
COLAs, exceeds the amount payable under the new law.
Under prior law, the widow(er)'s tier I benefit, before any reductions for
early retirement or other benefits, was generally equal to the unreduced tier I
benefit the deceased employee had, or would have, received; and a widow(er)'s
tier II benefit was generally equal to 50 percent of the tier II benefit that
was payable to the employee at the time of his or her death.
The new law established an "initial minimum amount" which yields, in effect,
a widow(er)'s tier II benefit equal to the tier II benefit the employee would
have received at the time of the award of the widow(er)'s annuity, minus any
applicable age reduction. It does this by adding a "guaranty amount," initially
set at 50 percent of the employee's tier II, to the 100 percent tier I and 50
percent tier II benefits provided under prior law.
This guaranty amount will be reduced each year by the dollar amount of the
COLAs payable in both the tier I and tier II benefits provided under prior law.
Consequently, until such time as the guaranty amount is reduced to zero, the
amount of a widow(er)'s annuity paid under the new law will not increase for the
COLA.
4. What would be a very basic example of
how this formula works?
Assume that a 68 year-old widow became entitled in June 2002 to a railroad
retirement widow's annuity. The widow is not entitled to any social security
benefits. The employee had been receiving a railroad retirement annuity of
$2,000 a month, comprised of a tier I benefit of $1,200 and a tier II benefit of
$800. Consequently, the widow's tier I benefit on her annuity beginning date was
$1,200. Her tier II benefit under prior law (50 percent of the employee's tier
II) was $400; and, under the new law, her "guaranty amount" was $400. Her
railroad retirement widow's annuity as of June 2002 was $2,000.
As the COLA payable in January 2003 provided a 1.4 percent increase in tier I
benefits and a 0.5 percent increase in tier II benefits, the total dollar amount
increase was $18. This amount is deducted from the $400 guaranty amount,
reducing it to $382, so that the $2,000 amount payable to the widow (before any
deduction for the Part B Medicare premium) does not change. The amount payable
to the widow will increase only when the tier I and tier II amounts computed
under prior law with subsequent COLAs exceed $2,000. The average COLA paid over
the last 10 years, including the COLA payable in January 2003, was 2.4 percent.
If all future COLAs were at a steady 2.4 percent rate, this would occur with the
COLA payable in January 2014.
5. What if the widow(er) is also entitled
to social security benefits?
Widow(er)s' tier I benefits continue to be reduced for entitlement to social
security, certain public service pensions and dual railroad retirement
entitlement. However, while widow(er)s' railroad retirement annuities will be
reduced by subsequent social security and applicable public service pension
COLAs, the total amount of combined benefits will not decrease from the total
payable before the COLA.
6. What would be a very basic example of
how this would work?
Assume that a 67 year-old widow became entitled in June 2002 to a railroad
retirement widow's annuity. The employee had been receiving a railroad
retirement annuity of $1,500 a month, comprised of a tier I benefit of $900 and
a tier II benefit of $600. This widow's tier I benefit on her annuity beginning
date (and before any dual benefit reduction) was $900. Her tier II benefit under
prior law (50 percent of the employee's tier II) was $300; and, under the new
law, her "guaranty amount" was $300. Her widow's initial minimum amount on her
annuity beginning date (before any reduction for dual benefits) was $1,500. The
widow is also entitled to a social security benefit, based on her own earnings,
of $1,100 a month.
Thus, at the time her railroad retirement widow's annuity began, her net
annuity was $600 and her total combined social security and railroad retirement
benefits were $1,700.
After the 1.4 percent increase in tier I and social security benefits and the
0.5 percent increase in tier II benefits, the total dollar amount of this
widow's tier I and tier II benefit increase would be $13.50. This amount is
subtracted from the $300 guaranty amount, reducing it to $286.50. In this case,
tier I is not actually payable because it is reduced to zero for the social
security benefit. The guaranty amount is reduced by the tier I and tier II cost
of living increases, not the social security increase. Her net railroad
retirement widow's annuity (before any deduction for the Part B Medicare
premium) would be $588 (her increased tier II of $301.50 plus the reduced
guaranty amount of $286.50). However, the total amount of the combined benefits
payable rose to $1,703 because her social security benefit was increased by the
1.4 percent COLA to $1,115.
7. When was this provision effective and
to which widow(er)s did it apply?
This provision was effective February 1, 2002, and was not payable
retroactively.
The provision applied to widow(er)s on the rolls before the effective date
only if the annuity the widow(er) was receiving was less than she or he would
have received had the new law been in effect on the date the widow(er)'s annuity
began. Most of the widow(er)s' annuities being paid were already higher than the
annuity that would have been payable under the new law because of previous
COLAs.
8. Did the Railroad Retirement Board
notify affected widow(er)s that they would not see a COLA in their January
payments?
There are almost 50,000 widow(er)s on the Railroad Retirement Board's benefit
rolls whose annuities were either awarded or recomputed under the new law. The
Board released letters in November to these individuals advising them that their
monthly payments would not change. The only change in their monthly payments
would be due to changes in the amount of their Federal income tax withholding,
their Part B Medicare premium, or increases in their social security benefit or
public service pension.
In addition, in late December all annuitants received letters from the Board
providing a breakdown of the annuity rates payable to them in January 2003.
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