Private pension plans originated in the railroad industry in 1874
when the first formal industrial pension plan in North America was
established. By 1927, over 80 percent of all railroad employees in the
United States worked for employers who had formal plans in operation,
but only a small proportion of the employees ever received benefits
under these plans. The pension plans had a number of serious defects.
They generally paid inadequate benefits and had limited provisions for
disability retirement. Credits could not be transferred freely from
employer to employer, and the employers could terminate the plans at
will. With few exceptions, the plans were inadequately financed and
could not withstand even temporary difficulties.
The Great Depression of the early 1930’s led to movements for retirement
plans on a national basis because few of the nation’s elderly were
covered under any type of retirement plan. Railroad employees were
particularly concerned because the private railroad pension plans could
not keep up with the demands made upon them by the general deterioration
of employment conditions and by the great accumulation of older workers
in the industry. While the social security system was in the planning
stage, railroad workers sought a separate railroad retirement system
which would continue and broaden the existing railroad programs under a
uniform national plan. The proposed social security system was not
scheduled to begin monthly benefit payments for several years and would
not give credit for service performed prior to 1937, while conditions in
the railroad industry called for immediate benefit payments based on
prior service.
Legislation was enacted in 1934, 1935 and 1937 to establish a railroad
retirement system separate from the social security program legislated
in 1935. Such legislation, taking into account the particular
circumstances of the rail industry, was not without precedent. Numerous
laws pertaining to rail operations and safety had already been enacted
since the Interstate Commerce Act of 1887. Since passage of the Railroad
Retirement Acts of the 1930’s, numerous other railroad laws have
subsequently been enacted.
Railroad Retirement Acts
of the 1930s
The Railroad Retirement Act of 1934 set up the first retirement
system for nongovernmental workers in this country to be administered by
the Federal Government. However, the Act was declared unconstitutional
by a Federal district court, and this decision was sustained by the
Supreme Court. The Railroad Retirement and Carriers’ Taxing Acts of 1935
were enacted to avoid the constitutional difficulties encountered by the
1934 Act. However, these Acts were also challenged in the courts, and a
Federal district court held that neither the employees nor their
employers could be compelled to pay railroad retirement taxes. The
court, however, did not prohibit the payment of benefits, and the
Railroad Retirement Board began awarding annuities in July 1936 under
the provisions of the 1935 Act.
While an appeal was pending, railroad management and labor, at the
request of President Roosevelt, formed a joint committee to negotiate
their differences. The result was a memorandum of agreement which led to
the Railroad Retirement and Carriers’ Taxing Acts of 1937 establishing
the railroad retirement system. The pensions of retired employees on the
railroads’ private pension rolls were transferred to the Board’s rolls
with pension reductions restored. The benefit payments of almost 50,000
pensioners were taken over by the Board in July 1937. There followed an
immediate reduction in both the number of employed and unemployed older
railroad workers. By the end of 1938, the number of workers age 65 and
over in active railroad service was less than one-half of the number two
years earlier. Almost 100,000 employees had retired under the system by
that date, 80 percent of them under the nondisability annuity
provisions.
Features of the 1937 Act
The 1937 Act set up a staff retirement plan which provided annuities to
aged retired employees based on their creditable railroad earnings and
service. The amounts of retirement annuities awarded were directly
related to the employee’s earnings and length of service, with a maximum
of $120 a month. Creditable earnings were limited to a maximum of $300 a
month, while no more than 30 years of service could be credited when
service before 1937 was counted. Annuities could be paid at age 65 or
later, regardless of length of service, or at ages 60-64 (on a reduced
basis) after 30 years of service.
The conditions for paying annuities based on disability were severely
restricted. The disability had to be total and permanent and 30 years of
service were required for full annuities. Employees could receive
disability annuities at ages 60-64 after less than 30 years of service,
but on a reduced basis.
The Act made little provision for dependents of deceased employees and
no provision for spouse annuities. A survivor could receive a lump sum
equal to 4 percent of the employee’s creditable earnings after 1936,
less any annuity payments already made. In addition, a retiring employee
could elect to receive a reduced annuity in order to provide an annuity
to his surviving spouse.
The system was financed by a schedule of taxes beginning with 2.75
percent each on employers and employees applicable to the first $300 of
monthly compensation.
Amendments to the 19378 Act
Numerous amendments after 1937 increased benefits and added, to what
began as a staff retirement system, social insurance features similar to
those provided by the social security system.
The first significant sets of amendments were enacted in 1946 and 1951.
By initiating coordination in certain areas with the social security
system, they laid the foundation for the evolution of the system’s
present structure. Amendments
enacted in 1946 added survivor benefits to the railroad
retirement system which were similar to those provided under social
security coverage, but approximately 25 percent higher.
These amendments also introduced the first step of coordination with the
social security system by dividing jurisdiction over individual survivor
benefits between the Board and the Social Security Administration.
Benefits to survivors were thereafter based on combined railroad
retirement and social security earnings credits.
Provisions for annuities based on occupational disability—a staff
retirement feature—were also established by the 1946 amendments. The
provision for occupational disability annuities recognized that
employees who were not totally disabled could be prevented from earning
a living because they could not perform their regular jobs. The 1946
amendments also reduced the service requirements for total disability
annuities, making it possible for comparatively young disabled employees
to receive benefits.
In addition, the amounts of disability retirement annuities were
increased through the elimination of the reduction for employees with
less than 30 years of service and the extension of new minimum
provisions of the law to annuities based on disability. In 1954,
annuities were provided for disabled children of deceased employees. And
in 1968, disabled widows ages 50-59 were added to those who could
receive benefits.
Amendments enacted in 1951
added annuities for the spouses of retired railroad employees. This
legislation completed the addition of social insurance features to the
railroad retirement system and expanded the coordination of the railroad
retirement and social security systems.
Provision was made for social security to assume jurisdiction of
benefits for employees not having at least 10 years of railroad service,
and a minimum guaranty was provided to ensure that railroad retirement
benefits would be no less than the benefit, or additional benefit, the
social security system would have paid on the basis of the railroad
service involved. In addition, a financial interchange was established
between the two systems to apportion the costs of benefits and taxes,
related to railroad service, between the two systems on an equitable
basis.
In 1965, provision was made
to coordinate the railroad retirement tax base and tax rate with those
of the social security system. This provision and the existing
provisions for the financial interchange served as an operating vehicle
through which the Medicare program was easily extended in 1965 to
railroad employees and members of their families, on the same basis as
it was provided for social security beneficiaries. The addition of a
strictly staff benefit for career employees was provided
in 1966 in the form of supplemental railroad retirement
annuities.
By 1970, amendments to the
Act provided for regular annuities of more than double the amount
provided under the original formula. The amounts of earnings creditable
and taxable were $650 a month in 1970 compared with $300 originally. Tax
rates had substantially increased in order to finance the new types of
benefits, the increases in benefit amounts and other liberalizations in
the program. The rate of regular railroad retirement taxes, still
divided equally between employees and employers in 1971, was 9.95
percent on each as compared with 3.5 percent in 1946.
The annuities being paid in 1970 included a general benefit increase of
15 percent provided in that year following a social security benefit
increase of 15 percent. In the following two years of an inflationary
spiral in the national economy, social security and railroad retirement
benefits were again substantially increased, by 10 percent in 1971 and
20 percent in 1972. However, these three increases were provided for
railroad retirement annuities on a temporary basis only. The costs of
making these three increases, aggregating 51.8 percent, permanent
without adequate financing would have jeopardized the solvency of the
system. Congress directed that a Commission on Railroad Retirement be
formed to study the railroad retirement system and its financing for the
purpose of recommending to Congress changes in the system that would
ensure adequate benefit levels on an actuarially sound basis.
Report of the Commission
The Commission’s 1972 report proposed a restructuring of the railroad
retirement system with two separate tiers of benefits, tier I being a
social security-type benefit and tier II a supplemental staff benefit.
It also recommended a phaseout of dual railroad retirement-social
security benefits with some protection for the vested rights to such
benefits already acquired by employees. Under the 1937 Act, an
individual engaging in covered employment under both the Railroad
Retirement Act and the Social Security Act was entitled to separate
benefits under both Acts, assuming he or she met at least the minimum
requirements for benefit eligibility. By the early 1970’s, approximately
40 percent of all beneficiaries on the Board’s rolls were also receiving
social security benefits. Because of certain duplications in their dual
benefits, considered a windfall element, the total of their benefits
from both systems averaged more than the annuities of railroad employees
who worked in the rail industry exclusively, and who had paid
proportionally higher retirement taxes for the purpose of receiving
higher benefits. At the same time, dual benefits were a cost to the
railroad retirement system because they reduced the system’s income from
its financial interchange with the social security system. (By the
mid-1970’s, the costs to the railroad retirement system of dual benefits
exceeded $450 million per year and would have been a major factor in
bankrupting the railroad retirement system if allowed to continue. The
cumulative total loss to the system by 1974 had been about $4 billion.)
Upon the release of the Commission’s report, Congress ordered that
representatives of employees and representatives of carriers negotiate
mutual recommendations for a restructuring of the railroad retirement
system which would put it on a sound financial basis, taking into
account the report and recommendations of the Commission on Railroad
Retirement.
Preliminary Agreement
The preliminary recommendations of management and labor for revision of
the railroad retirement system, recorded in a Memorandum of
Understanding, were enacted by the Congress in 1973. The major
provisions, which reflected components of an industry-wide wage
settlement, effected a redistribution of railroad retirement taxes and
earlier retirement as follows. Generally effective October 1, 1973,
employee and employer tax rates under the Railroad Retirement Tax Act
were revised so as to reduce the employee rate to the percentage rate
paid by employees in social security covered employment, with the
employer absorbing the difference so that total tax income to the
program was maintained at the level in effect before the change.
Employee rates consequently were lowered from 10.60 percent of
creditable earnings to 5.85 percent; employer rates correspondingly
increased from 10.60 percent to 15.35 percent. Effective July 1, 1974,
all employees at least 60 years of age and having 30 years or more of
creditable railroad service could retire without their annuities being
subject to reduction for retirement before age 65. Under previous law,
only female employees were granted this advantage.
Railroad Retirement Act of
1974
The Railroad Retirement Act of 1974, reflecting the basic principles
of the Commission Report and incorporating the subsequent
management-labor agreement, was enacted on October 16, 1974.
Two-tier Formulas
The 1974 Act provided a tier I formula yielding amounts equivalent to
social security benefits, taking into account both railroad retirement
and nonrailroad social security credits. A tier II formula, based on
railroad service exclusively, provides benefits comparable to those paid
over and above social security benefits by other industrial pension
systems. The total annuity yielded by the tier formulas continued
traditional levels of railroad retirement benefits and reflected the
three cost-of-living increases aggregating 51.8 percent, which had been
provided between 1970 and 1972 on a temporary basis.
Dual Benefit Phase-out
The 1974 Act eliminated duplications in dual railroad retirement-social
security benefits for new hires and individuals not vested as of
December 31, 1974, under both programs. Dual benefits for vested
employees were protected through provision for payment of an amount in
their annuities referred to as a “vested dual benefit.” However, such
vested dual benefit amounts were not allowed to increase because of any
social security credits earned after December 31, 1974.
For career employees, vesting was defined as having 10 years of railroad
service on December 31, 1974, and, in addition, having enough quarters
of coverage under the social security program to be entitled to a
benefit at age 62 if no further social security credits were acquired
after December 31, 1974.
Vesting for employees who had fully qualified for benefits under both
systems but had left the industry prior to 1974 presented a difficult
problem. The 1974 Act favored employees who had remained in the railroad
industry more than those who left railroad employment. Accordingly,
active or long-term employees in the railroad industry, in a sense, were
placed in the same situation as employees who had already retired, while
former employees were made subject to more stringent requirements. The
resulting vesting provisions were subsequently tested in the courts and
upheld by the U.S. Supreme Court in 1980.
Cost-of-living Increases
The 1972 amendments to the Social Security Act introduced provisions for
cost-of-living adjustments in social security benefits on the basis of
changes in the Consumer Price Index. Under the two-tier plan, the first
tier railroad retirement benefit increases automatically the same way
social security benefits increase. Four separate tier II cost-of-living
adjustments were provided during the six-year period commencing January
1, 1975. (A fifth increase was provided in subsequent legislation.)
Benefit Improvements
The 1974 Act also provided improvements in existing benefits. The
initial agreement of labor and management had enabled employees to
retire on or after July 1, 1974, on unreduced annuities if they met the
eligibility requirements of attaining age 60 and completing 30 years of
service. But an employee could not receive a supplemental annuity until
age 65 nor could a spouse receive a spouse annuity until the employee
reached age 65. The 1974 Act revised the eligibility requirements for
these benefits so that they were coordinated directly with the employee
annuity requirements.
And under the 1937 Act, the vast majority of widows and other survivors
received benefits based upon 110 percent of the comparable social
security benefit, and the resulting amount was generally felt to be
inadequate in relation to the level of other railroad benefits. The 1974
Act survivor formula increased the calculation basis to 130 percent from
the former 110 percent.
Financing
It was anticipated that the changes in the benefit formulas, the
reduction in dual benefits, higher investment earnings, plus provisions
for additional funds from the Federal Government to pay the phase-out
costs of dual benefits, together would place the railroad retirement
system on a reasonably sound basis. However, the cost estimates made at
that time did not anticipate the resurgence of substantial inflation in
the latter part of the decade, which led to a recurrence of financial
difficulties for the railroad retirement system.
With regard to financing the phase-out costs of dual benefits, the joint
management-labor committee initially proposed that the cost of vested
dual benefit payments be paid out of the social security trust funds, as
this element was basically a social security benefit. However, Congress
concluded that the cost should be borne by the General Treasury. It was
thought that it would be unfair to impose this cost upon current and
future employees who would not (except where vested rights are involved)
be permitted to receive dual benefits upon retirement, or upon the
railroads since the excess benefit arose out of nonrailroad employment
performed by these individuals. Payment out of the General Treasury was
supported by a precedent regarding military service and by the fact that
the dual benefit problem had been brought about by prior congressional
action repealing past dual benefit restrictions over the objections of
the railroads.
1981 Railroad
Retirement Amendments
By 1980, recurring inflation and recession combined with other
factors placed financial stresses on the railroad retirement system
which made it clear that further financial action was needed to maintain
the system. Railroad retirement amendments were subsequently enacted on
August 13, 1981, as part of an Omnibus Budget Reconciliation Act. The
amendments were generally effective October 1, 1981.
These amendments increased railroad retirement taxes on both rail
employers and employees. While tier I taxes on employers and employees
remained at the same rate as social security taxes, 6.65 percent in
1981, the 9.5 percent tier II tax paid by employers was increased by
2.25 percent to 11.75 percent and employees assumed a tier II tax of 2
percent. The amendments also gave the Railroad Retirement Board the
authority to borrow from U.S. Treasury general funds on the basis of
forthcoming financial interchange income if Railroad Retirement Account
funds were insufficient to pay benefits during a month.
Although the two-tier benefit structure provided by the 1974 Act was
left intact, changes were made in the tier II formula and there were
other changes in benefit provisions. For retirees whose annuities are
awarded on or after October 1, 1981, a simplified formula yields awards
that automatically keep pace with average wage increases in the last 60
months of service. The 1981 law continued tier II employee and spouse
cost-of-living increases, while revising survivor cost-of-living
increases to correspond with those provided employees and spouses. It
also broadened the current connection requirement applicable to certain
career employee benefits. While the amended law eliminated future
supplemental annuity closing dates, it restricted future supplemental
annuity eligibility to employees with some service prior to October
1981. In addition, the amendments provided benefits for divorced
spouses, surviving divorced spouses and remarried widow(er)s which are
like those provided under the Social Security Act.
This legislation also required prorated adjustments in individual vested
dual benefit payments, depending upon the amounts appropriated to the
fund created for these payments, and the level of vested dual benefit
payments was made contingent on the annual Federal budget and
appropriations process. The amendments restricted the further award of
vested dual benefit payments to vested employees with dual coverage on
their own earnings, and precluded further awards of vested dual benefit
payments to spouses or widows.
The 1981 amendments mandated, in the event of certain adverse financial
indicators, that railway management and labor, and the White House, make
further financing recommendations to Congress. And the new law required
the Railroad Retirement Board to reduce annuity levels during any fiscal
year in which it appears there would be insufficient funds with which to
make full benefit payments on a timely basis for every month of the
year.
In the first half of 1981, when the amendments were developed, it was
anticipated that the financing arrangements would provide the railroad
retirement system with adequate funding throughout the 1980’s. However,
the continuing recession in the national economy depressed rail traffic
levels to the extent that large-scale layoffs were underway by the first
quarter of 1982. Average monthly employment in fiscal year 1982 dropped
to 457,000 from the 512,000 average of the previous year, and it
subsequently declined to 388,000 in the first quarter of 1983. The
decline in employment limited payroll tax income accordingly. In
addition, increased unemployment benefit payments resulting from the
layoffs made such unprecedented demands on the Railroad Unemployment
Insurance Account that it owed $500 million to the Railroad Retirement
Account by the end of March 1983.
The condition of the Railroad Retirement Account consequently
deteriorated to the point that the Board was required to prepare to
reduce annuity levels on October 1, 1983, by an estimated 40 percent of
tier II portions, in the absence of remedial financial legislation.
Railroad
Retirement Solvency Act of 1983
The scheduled annuity reductions were averted by enactment of the
Railroad Retirement Solvency Act on August 12, 1983. The 1983 Act was
based on negotiated recommendations of management and labor, and also
incorporated recommendations of Congress and the Administration. The
amendments were, in part, patterned after major social security
amendments enacted earlier in the year, which had already effected
changes in railroad retirement taxes and benefits through coordinating
provisions in the Railroad Retirement Act.
Taxes
Under the Railroad Retirement Solvency Act, tier II taxes on employers
increased from 11.75 percent to 12.75 percent in January 1984, to 13.75
percent in January 1985, and to 14.75 percent in January 1986. Tier II
taxes on employees increased from 2 percent to 2.75 percent in 1984, to
3.50 percent in 1985, and to 4.25 percent in 1986. And since 1985,
railroad retirement taxes are applied to earnings on an annual, rather
than a monthly, basis. As a result of the 1983 social security
amendments, tier I taxes on employers and employees increased from 6.70
percent to 7 percent in January 1984, to 7.05 percent in 1985, to 7.15
percent in 1986, to 7.51 percent in 1988 and to 7.65 percent in 1990.
The 1983 social security amendments subjected railroad retirement tier I
annuity portions to Federal income taxes on the same basis as social
security benefits and the Solvency Act made tier II benefits and vested
dual benefit payments subject to Federal income tax on the same basis as
private pensions, beginning with tax year 1984. The revenues raised from
income taxes on tier I and vested dual benefits are used for benefit
payments. Revenues raised by the tax on tier II benefits were to be used
for benefit payments through fiscal year 1988, after which the revenues
would remain in general Treasury funds. Subsequent legislation extended
these transfers permanently.
Other Financing Provisions
The Railroad Retirement Account was reimbursed in three installments
from the general fund of the Treasury for shortfalls in vested dual
benefit appropriations between 1975 and 1981. The railroad retirement
system’s authority to borrow general U.S. Treasury funds until the Board
receives financial interchange funds from the social security system was
broadened to place financial interchange monies in the Railroad
Retirement Account effectively on a current basis.
Benefit Provisions
The 1983 social security amendments deferred July 1983 cost-of-living
increases to January 1984 and required that future increases be made in
January of subsequent years. This deferral applied to railroad
retirement tier I annuity amounts as well as social security benefits.
The Railroad Retirement Solvency Act correspondingly changed the future
payment dates of tier II cost-of-living increases from July 1 to January
1, with the first increase payable on January 1, 1985. It also required
an offset of the dollar amount of the next five percent of tier I
cost-of-living increases from tier II benefits.
The Act modified early retirement provisions for 30-year employees
attaining age 60 after June 1984 by applying certain reductions to the
tier I portions of their annuities if they retired before age 62. The
reductions did not affect tier II benefits, and employees who acquired
30 years of service and attained age 60 before July 1, 1984, could still
retire at any time with full benefits, as under prior law. (The
Railroad Retirement and Survivors’ Improvement Act of 2001
eliminated these reductions for 60/30 employees retiring after 2001.)
The 1983 law established a five-month waiting period for railroad
retirement disability annuities, just as for social security disability
benefits, and altered the tier I computation of annuities subject to
reduction for certain non-covered service pensions. It required the
Board to honor court orders that treat non-tier I railroad retirement
benefits as property subject to division in proceedings related to
divorce, annulment or legal separation. And the Act limited the
retroactivity of applications for benefits to a maximum of six months to
conform to the Social Security Act, except for disability benefit
applications, which can retroact 12 months.
The Solvency Act eliminated annuity reductions made under prior law when
military service was counted as railroad service and was also the basis
for benefits under another Federal law. It conformed railroad retirement
student benefit provisions to social security student benefit provisions
and eliminated age reductions applied to disabled widow(er)s’ annuities
for months they were under age 60 when their annuities began.
Legislation enacted
1985-2000
The Balanced Budget and Emergency
Deficit Control Act of 1985, known as the Gramm/Rudman/Hollings
Act, enacted in December 1985, required decreases in vested dual benefit
payments during the 1986 fiscal year and suspension of the January 1986
cost-of-living increase in the tier II portions of railroad retirement
annuities. Gramm/Rudman and/or related budget legislation reduced vested
dual benefits and supplemental annuities periodically in subsequent
years.
Budget reconciliation legislation
enacted in April 1986 included changes in Internal Revenue Code
provisions increasing income taxes on some railroad retirement
annuities. Effective with tax year 1986, the tier I portion of a
railroad retirement annuity, which is treated as a social security
benefit for Federal income tax purposes, was limited for tax purposes to
amounts actually equivalent to social security benefits. This primarily
affected tier I early retirement benefits payable between ages 60 and 62
and some occupational disability benefits that are now treated like
private pensions. The Tax Reform Act
of October 1986 eliminated, for annuities beginning after July 1,
1986, the three-year recovery rule for contributory pensions, making
railroad retirement benefits exceeding social security equivalent levels
taxable immediately upon retirement. For tax reporting purposes, benefit
payments are prorated on the basis of estimated life expectancies to
exempt an employee’s previously-taxed pension contributions.
In 1987, the continuing decline in railroad employment led to concern
over the system’s financing in the next century. A Federal budget
deficit reduction bill consequently increased tier II tax rates in
January 1988 to 16.10 percent on employers and 4.90 percent on
employees, and extended for one year, until October 1, 1989, the time
during which revenues from Federal income taxes on tier II railroad
retirement benefits could be transferred to the Railroad Retirement
Account for use in paying benefits.
Amendments enacted in 1988
eliminated the provision suspending annuities of retired employees and
spouses who work for their last pre-retirement nonrailroad employers,
but provided for tier II earnings deductions in such cases. These
amendments also increased the amount disabled railroad retirement
annuitants can earn without reducing their benefits from $200 per month
to $400 per month, exclusive of work-related expenses.
In addition, these amendments provided a lump sum, equal to railroad
retirement tier II payroll taxes deducted from separation or severance
payments made after 1984, to be paid upon retirement to employees
meeting minimum service requirements if the separation or severance
payments did not yield additional railroad retirement service or
earnings credits.
The 1989 budget laws effective in
1990 increased the amount of earnings subject to social security
and railroad retirement payroll taxes, and specified that 401(k)
contributions and some employer-paid life insurance premiums are subject
to railroad retirement payroll taxes, conforming railroad retirement
with social security.
Omnibus budget legislation in 1990
permanently exempted supplemental annuities from reductions under the
Gramm/Rudman Act. It also increased the maximum compensation subject to
Medicare hospital insurance payroll tax and mandated an expedited
payroll tax deposit schedule for large employers covered by social
security or railroad retirement.
Budget legislation enacted in 1993 made all earnings subject to
the Medicare payroll tax and, for those in high tax brackets, made a
larger amount of social security and railroad retirement tier I benefits
subject to Federal income tax.
The time during which revenues from Federal income taxes on tier II
railroad retirement benefits could be transferred to the Railroad
Retirement Account for use in paying benefits was extended one year in
1989, and 1990 budget legislation further extended the date until
October 1, 1992. In 1994,
legislation extended the transfers, retroactive to October 1992,
on a permanent basis which improved the financing of the railroad
retirement system.
Legislation enacted in April 2000
eased the earnings restrictions affecting social security beneficiaries
working after full retirement age. The legislation also applied to
railroad retirement annuitants but it did not change the railroad
retirement work restrictions applying to last pre-retirement employment
which are not included in the Social Security Act.
The Railroad
Retirement and Survivors' Improvement Act of 2001
The Railroad Retirement and Survivors’ Improvement Act of 2001,
signed into law December 21, 2001, liberalized early retirement benefits
for 30-year employees and their spouses, eliminated a cap on monthly
retirement and disability benefits, lowered the minimum service
requirement from 10 years to 5 years of service if performed after 1995,
and provided increased benefits for some widow(er)s. Financing sections
in the law provided for the investment of railroad retirement funds in
nongovernmental assets, adjustments in the payroll tax rates paid by
employers and employees, and the repeal of a supplemental annuity
work-hour tax. The law was based on joint recommendations to Congress
negotiated by a coalition of rail labor organizations and rail freight
carriers.
60/30 Retirement
The law amended the Railroad Retirement Act by eliminating the early
retirement reduction applied to the annuities of 30-year employees
retiring between the ages of 60 and 62 if their annuities begin January
1, 2002, or later. The spouses of such employees are also eligible for
full annuities at age 60. Full 60/30 benefits had not been payable since
1983 legislation reduced such early retirement benefits.
Maximum Provision
The law eliminated, effective January 1, 2002, a maximum on the amount
of combined monthly employee and spouse benefit payments which had been
intended to prevent benefits from exceeding an amount based on an
employee’s earnings immediately prior to retirement. This maximum
provision had the unintended effect of reducing benefits for former
employees with no earnings, or low earnings, in the 10-year period prior
to retirement, and for long-service employees with moderate earnings.
Basic Service Requirement
The legislation lowered the minimum eligibility requirement for regular
railroad retirement annuities from 10 years (120 months) of creditable
railroad service to 5 years (60 months) of creditable railroad service
for those with 5 years of service rendered after 1995. This provision
was effective January 1, 2002, and was not retroactive.
Widow(er)s’ Benefits
The legislation established an “initial minimum amount” based on the
two-tier annuity amount that would have been payable to the railroad
employee at the time the widow(er)’s annuity is awarded, minus any
applicable reductions. Widow(er)s’ annuities computed on the basis of
the initial minimum amount will not increase until the amount payable
under previous law plus cost-of-living increases is higher than the
initial minimum amount.
This provision was effective February 1, 2002, and was not retroactive.
It applied to widow(er)s on the rolls before the effective date only if
the annuity the widow(er) was receiving on the effective date was less
than she or he would have received had the legislation been in effect on
the date the widow(er)’s annuity began.
Investment Changes
The legislation provided for the transfer of railroad retirement funds
from the Railroad Retirement Accounts to the National Railroad
Retirement Investment Trust, whose Board of seven trustees is empowered
to invest Trust assets in non-governmental assets, such as equities and
debt, as well as in governmental securities.
The Trust is a tax-exempt entity independent from the Federal Government
and its trustees are subject to fiduciary standards similar to those
required by the Employee Retirement Income Security Act. The Trust must
submit an annual report to Congress on its operations.
Effect on payroll tax rates
The legislation reduced tier II tax rates on rail employers, including
rail labor unions, in calendar years 2002 and 2003, and beginning with
2004 provides automatic adjustments in the tier II tax rates for both
employers and employees. It also repealed the supplemental annuity
work-hour tax rate paid by employers, beginning with calendar year 2002.
While there was no change in the tier II tax rate of 4.90 percent on
employees in the years 2002 and 2003, beginning with calendar year 2004
tier II taxes on both employers and employees are based on the ratio of
certain asset balances to the sum of benefits and administrative
expenses (the average accounts benefits ratio). Depending on the average
account benefits ratio, tier II taxes for employers range between 8.20
percent and 22.10 percent, while the tier II tax rate for employees
ranges between 0 percent and 4.90 percent. In 2005, as a result of this
provision, the tier II tax rate on employees decreased from 4.9 percent
to 4.4 percent, while the rate of employers decreased from 13.1 percent
to 12.6 percent. These rates remained in effect in 2006
.
Supplemental Annuity Funding
In addition to repealing the supplemental annuity work-hour tax, the
legislation eliminated the separate Supplemental Annuity Account.
Supplemental annuities are now funded through the National Railroad
Retirement Investment Trust.
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