Many railroad workers and annuitants want to know how their railroad retirement benefits are calculated.

The following describes the various components of a railroad retirement annuity, defines terms, and explains the calculation of each component. It also provides various tables at the end to help individuals understand how their annuities are calculated.

The calculation of annuities is presented in general terms. For specific cases, please contact your local Railroad Retirement Board office. Addresses and telephone numbers of Board offices are listed in telephone directories with other U.S. Government agencies. They are also available by calling the Board's Help Line at 800-808-0772 or by visiting the Board's Web site at http://www.rrb.gov/.

Components of a regular annuity:

There are as many as 4 components of a regular annuity

• Tier 1
• Tier 2
• Vested Dual Benefit
• Supplemental Annuity

Specific information about each component is shown below.

Tier 1

Tier 1 is based on earnings an employee has acquired under both railroad retirement and social security covered employment.

The calculation uses the social security benefit formula, but with railroad retirement age and service requirements.

NOTE: Certain factors may differ for annuities based on disability.

Tier 2

Tier 2 is based only on railroad earnings.

It is computed under a separate formula that compares to retirement benefits paid over and above social security benefits to workers in other industries.

Vested Dual Benefit

The vested dual benefit is payable as part of the regular annuity if an employee qualified for both railroad retirement and social security benefits before 1975 and met certain vesting requirements.

Supplemental Annuity

A supplemental annuity may also be payable to an employee who is age 60 and has at least 30 years of creditable railroad service; or is age 65 and has 25-29 years of railroad service.

A "current connection" with the railroad industry is required for supplemental annuities. Eligibility is further limited to employees who had some rail service before October 1981.

A current connection is generally defined as having at least 12 months of railroad service in the 30 months preceding death or retirement. An employee whose last 12 months of railroad service occurred prior to the 30 months before retirement or death may maintain a current connection if the employee did not perform any regular employment between the end of the 30-month period containing the last 12 months of railroad service and the month of retirement or death. For purposes of the supplemental annuity or survivors' benefits, an employee who was terminated involuntarily and without fault on or after October 1, 1975, after 25 years of service and did not thereafter decline an offer of employment in the same class or craft in the railroad industry is deemed to have a current connection.

Terms used in Tier 1

The Railroad Retirement Board calculates the tier 1 component for annuities based on age and service using a number of factors.

The following is an explanation of the terms involved.

First year of eligibility

For most cases, the Railroad Retirement Board considers the year the employee attains age 62, becomes disabled, or dies as his or her first year of eligibility.

However, in cases where benefits (either full or reduced) are paid at ages 60-61 based on 30 years of railroad service, the Railroad Retirement Board deems the year the annuity begins as the eligibility year.

Indexing

Indexing is a process for bringing the actual reported earnings for prior years of employment up to the dollar value level of the recent earnings.

Indexing year

The indexing year is the second year prior to the first year of eligibility.

EXAMPLE:

For a person attaining age 62 in 2007, the indexing year is 2005.

However, an employee born on January 1 is deemed to have attained his or her first year of eligibility in the prior year. Consequently, the applicable "indexing year," "indexing factors," and "bend points" will be for that earlier year.

Indexing factors

To determine the indexing factor for a particular year, divide the average wage for the indexing year by the average wage in each prior year to obtain the indexing factor for each prior year.

Average wage for indexing year ÷
Average wage for (year) = Indexing factor for (year)

NOTE: Table 1 shows the indexing factors applicable to the earnings of workers who were first eligible in 2005-2008. The column entitled "National Wage Series" shows the average annual wage from 1951-2006.

EXAMPLE: For a person who attains age 62 in 2007, the

• indexing year is 2005.
• average annual wage for 2005 was $36,952.94.

To index earnings for a particular year, e.g., 1975, obtain from Table 1 the average annual wage for that year ($8,630.92). Then divide the average annual wage for 2005 ($36,952.94) by $8,630.92, which yields an indexing factor of 4.2814601.

Indexed earnings

For indexed earnings, multiply the employee's actual earnings covered under railroad retirement and/or social security in a particular year, up to the maximum earnings creditable, by the indexing factor to obtain the indexed earnings.

Employee's actual reported earnings for (year) x
Indexing factor = Indexed earnings for (year)
(but not exceeding the maximum annual taxable earnings)

NOTE: Refer to Table 3 for the maximum annual taxable earnings amounts.

EXAMPLE:

Actual covered earnings in 1975 of $10,000 multiplied by 4.2814601, result in indexed earnings of $42,814.60 for 1975.B

AIME

The AIME (Average Indexed Monthly Earnings) is the quotient obtained by dividing the total indexed earnings in the benefit computation years by the divisor months. The amounts less than $1 in the quotient are dropped so that the AIME is expressed in whole dollar amounts.

PIA

The PIA (primary insurance amount) is an amount determined by applying a formula to the AIME.

The formula consists of brackets in which 3 percentages are applied to the amounts of the AIME.

The dollar amounts defining the brackets are called "bend points," and the bend points are different for each calendar year the first year of eligibility is attained.

NOTE: Table 5 shows the bend points for the years 1979-2008.

Full PIA

The full PIA is payable to an employee retiring

• at age 60 with 30 (or more) years of service.
• at full retirement age with less than 30 years of service.
• at any age on the basis of disability.

Reduced PIA

The retirement age for unreduced benefits is gradually rising from 65 to 67, depending on the year of birth.

• maximum annuity reduction for retirement at age 62 is gradually increasing from 20 percent to 30 percent.

The retirement age for benefits increases as follows:

Reduced benefits continue to be available but at greater reductions.

For employees retiring in the year 2000 and later at age 62 with less than 30 years of service Table 2 shows the age reduction increases required.

NOTE: Age reductions were required in the tier 1 component of 30-year employees who retired at ages 60-61 before 2002 and attained age 60 or completed 30 years of service after June 1984. The age reductions are applied only to tier 1. If an employee affected by this provision was born before 1938 and attained 60/30 eligibility after December 1985, tier 1 is permanently reduced by 20% if the employee was born on the first or second day of the month. Otherwise the reduction is 19.444%. For those born after 1937 who retired before 2002, the reduction ranged from 20.833% to 23.333%, depending on the year of birth. (In reduced 60/30 cases, tier 1 was rounded down to the nearest dollar.) In both cases, tier 1 is frozen until the first month throughout which the employee is age 62. It is then recomputed to reflect interim increases in national wage levels and will become subject to future cost-of-living increases. No reduction will apply if the employee retired at age 62 or older with 30 years of service, or at age 60 with 30 years of service and retirement is after 2001.

Reduced PIA

The reduced PIA is payable to an employee retiring as early as age 62 with less than 30 years of service.

To compute the reduced PIA, reduce the monthly benefit by 5/9 of 1% (or 1/180) for each of the first 36 months the employee is under full retirement age when the annuity begins and 5/12 of 1% (or 1/240) for each additional month.

EXAMPLE:

An employee born in 1944 retires in 2007 at age 63 with less than 30 years of service. His annuity begins with the month he is age 63.

• The PIA is $750.
• This PIA is reduced by 20% (5/9 of 1% (0.0055555) multiplied by 36 months, with 36 being the number of months under his full retirement age of 66 years).
• Subtract the resulting reduction, $150.00, from $750 to obtain $600.00. Use this amount to the exact cent.

EXAMPLE:

An employee born in 1945 retires in 2007 at age 62 with less than 30 years of service. His annuity begins with the first full month he is age 62.

• The PIA is $750.
• This PIA is reduced by 24.583% (5/9 of 1% (0.0055555) multiplied by 36 months and 5/12 of 1% (0.0041666) multiplied by 11 months, with 47 being the number of months under his full retirement age of 66 years).
• Subtract the resulting reduction, $184.37, from $750 to obtain $565.63. Use this amount to the exact cent.

Determining the Tier 1 amount

There are 8 steps in computing a tier 1 benefit amount for those whose first year of eligibility is in 1991 or later. They are listed below.

Step 1

Determine the number of computation years to use.

The number of computation years is 35 for employees whose first year of eligibility was in 1991 or later (it will likely be fewer than 35 years if disabled).

Step 2

Index creditable earnings.  

Determine the employee's first year of eligibility.

Step 3

Compute the AIME as follows:

• Select the highest 35 years of indexed creditable earnings from Step 2, if the person's first year of eligibility is 1991 or later (it will likely be fewer than 35 years if disabled).
• Total them.
• Divide by 420 months (which is 35 years expressed in months).
• Round the result to the nearest lower dollar.

EXAMPLE:

For a person attaining age 62 in 2007, the highest 35 years of indexed earnings are used.

If the sum of these earnings equals $500,000, the AIME is $1,190 ($500,000 divided by 420 months = $1,190.48, rounded to $1,190).

Step 4

Compute the PIA.

• Determine the "bend points" for the first year of eligibility.
• Using the AIME, calculate:
  90% of the first AIME bend point, plus 32% of the amount in excess of the first bend point but less than or equal to the second bend point, plus 15% of the amount over the second bend point.

NOTE. Receipt of a pension from noncovered employment based, in part or in whole, on employment not covered by social security or railroad retirement after 1956 may cause a reduced percentage amount to be applied to the first AIME bend point.

An explanation of this calculation is contained in the Appendix.

• Round the result to the nearest lower ten cents.
• Apply a cost-of-living increase (if needed) for each year between the first year of eligibility and the year of retirement.
• Round the result to the nearest lower ten cents.

Examples of PIA computations:

For retired employees who attained age 62 in 2007, the bend points are $680 and $4,100.

Thus the formula is 90% of the first $680 of AIME; plus 32% of the next $3,420 of AIME; plus 15% of the AIME above $4,100.

The following are examples of PIA computations for such employees who attained age 62 in 2007 with different AIME amounts:

For retired employees who attained age 62 in prior years, the bend points will be different and the PIA is increased to reflect cost-of-living adjustments between the year of attainment of age 62 and the year of retirement.

After the PIA is calculated for the year of attainment of age 62, apply the cost-of-living increases due for each year through 2007. The result is the 2007 PIA.

EXAMPLE:

An employee who attained age 62 in 2005 would receive cost-of-living adjustments for the years 2005-2007. The adjustments are cumulative, with each step rounded to the next lower ten cents.

If the age 62 PIA was $600, the cost-of-living adjustments would be:

$660.00 would be the PIA effective December 2007.

Step 5

Consider if delayed retirement credits are due.

Did the worker delay retirement past full retirement age

or

were benefits withheld because of work deductions after full retirement age?

If yes, the delayed retirement credit is 5/8 of 1% per month up until age 70 for those who attain full retirement age January 1, 2007, or later with a birth date January 2, 1941, through January 1, 1943.

For those who attain full retirement age in later years, the delayed retirement credit gradually increases every other year until it becomes 8% per year beginning in 2008 (earned in 2008 but payable effective January 1, 2009).

Delayed retirement credits earned in a particular year are payable effective with January of the following year. (If earned in the year the worker turns age 70, the delayed retirement credits are payable effective with the month age 70 is attained).

If no, go to Step 6 below.

Step 6

Consider receipt of workers' compensation or public disability benefits.

For employees who are under age 65 and receiving a disability annuity, the tier 1 amount is, under certain circumstances, reduced for receipt of workers' compensation or public disability benefits.

Step 7

Consider age reductions.

Is the employee retiring at age 60 or older with 30 years of railroad service

or

full retirement age or older with less than 30 years of railroad service?

If yes, go to Step 8. No age reductions apply.

If no, the tier I benefit is actuarially reduced.

The monthly benefit is reduced by 5/9 of 1% (or 1/180) for each of the first 36 months the employee is under full retirement age when the annuity begins and 5/12 of 1% (or 1/240) for each additional month.

Refer to Table 2 to determine maximum reductions in the year 2000 and later.

Step 8

Consider reducing for receipt of any social security benefits.

Is the employee receiving any social security benefits (whether paid on the employee's own earnings record or on another person's earnings record)?

If yes, reduce the tier 1 amount by the amount of the social security benefit.

If no, this is the net tier 1 payable to the employee.

Determining the Tier 2 amount

Gross tier 2

The formula for the gross tier 2 amount is 7/10 of 1% of the employee's average monthly railroad earnings (up to the tier 2 taxable maximum earnings base) in the 60 months of highest earnings, times the years of service in the rail industry.

.007 x Average monthly earnings x Years of service =
Tier 2 for highest 60 months of earnings

Table 4 shows the tier 2 taxable maximum earnings base from 1973-2008.

Example 1

An employee retired in December 2006 with 40 years of service. His earnings for the 5 years ending in 2006 (which were also his highest 60 months of earnings) were:

His total earnings ($240,000) divided by 60 equals average monthly earnings of $4,000. Multiplied by .007 (7/10 of 1 percent) yields $28, which when multiplied by his years of service (40) provides a tier 2 of $1,120.

Example 2

An employee retired in December 2006 with 35 years of service. Her annual earnings for the 5 years ending in 2006 (which were also her highest 60 months of earnings) were:

As her earnings were over the tier 2 taxable maximums, and since only annual earnings up to the tier 2 tax base can be considered in computing tier 2, the following amounts would be used:

Her total creditable earnings for tier 2 purposes were $329,400, which yield average monthly earnings of $5,490. Multiplied by .007, this yields $38.43, which when multiplied by 35 provides a tier 2 of $1,345.05.

Effect of a vested dual benefit

Reduce the gross tier 2 component by 25% of any gross employee vested dual benefit payable.

Age reductions

Apply age reductions to tier 2 for those employees retiring between ages 62 and full retirement age with less than 30 years of service.

The reduction is 1/180 for each of the first 36 months the employee is under full retirement age when his or her annuity begins and 1/240 for each additional month.

Full retirement age is gradually rising as mentioned earlier. However, if an employee had any creditable railroad service before August 12, 1983, the retirement age for tier 2 purposes will remain 65.

No age reduction applies to employees who retire with 30 years of service.

NOTE.--Employees with 5-9 years of creditable service after 1995 are eligible for tier 2 benefits the first full month they are age 62. Their tier II benefits are subject to the same reductions that apply to employees with 10 to 29 years of service. If they are eligible on the basis of total disability, a tier 2 benefit is not payable until age 62 and that amount is reduced for early retirement.

Determining the Vested Dual Benefit Amount

Amount payable

For employees meeting the vesting requirements, the additional amount is determined by computing PIA's based solely on the individual's

• railroad service before 1975,
• social security covered earnings before 1975, and
• combined railroad and nonrailroad earnings before 1975.

The vested dual benefit is the amount by which the total of the first two PIA computations exceeds the third PIA computation.

Cost-of-living increase

Increase the vested dual benefit by the cumulative cost-of-living percentage applicable to tier 1 benefits that occurred between

January 1,1975, and the date of retirement

or

January 1, 1982, whichever was earlier.

The computed amount is then frozen; that is, no further cost-of-living increases are applied thereafter.

Age reductions

Apply the same formula for age reductions as used for the tier 1 component of those employees retiring at ages 62 through full retirement age with less than 30 years of service.

No age reduction applies to employees who retire with 30 years of service.

Determining the Supplemental Annuity Amount

Amount payable

For employees meeting eligibility requirements, the amount payable is equal to

• $23 for the first 25 years of service
• plus $4 for each full year of service over 25 (up to a maximum of $43 (30 years of service)

NOTE. For any fractional years between 25 and 30, a fraction of $4 is added to the minimum rate of $23.

Effect of receiving an employer private pension