Railroad Retirement Employee Annuities and Pensions from Work Not Covered by Social Security or Railroad Retirement

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 1 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.

The reduction in the employee tier 1 benefit for receipt of a noncovered service pension is not based on deducting the pension from tier 1. Instead, the reduction is built into the tier 1 benefit computation.

As explained earlier, a tier 1 benefit is calculated in the same way as a social security benefit. In computing a tier 1 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” (AIME) and a formula is applied to determine the gross tier 1 amount.

This benefit formula has 3 levels. Each level of earnings is multiplied by a specified percentage. The first level of earnings is multiplied by 90%, the second by 32%, and the final level by 15%. The results are added to obtain the basic benefit rate.

For those first eligible in 2007, the gross tier 1 benefit is equal to 90% of the first $680 of the AIME, plus 32% of the AIME over $680 up to $4,100, plus 15% of those earnings in excess of $4,100.

Beginning with 1986, a reduction in the 90% factor was phased in until, for employees subject to the noncovered service pension reduction and who became eligible in 1990 or later, the 90% factor is reduced to 40%. For example, an employee born in 1945 is eligible for a noncovered service pension and has less than 30 years’ service. Her annuity begins with the first full month she is age 62. Her AIME is $1,800. She would receive, after the reduction for early retirement, a tier 1 benefit of $475.13, rather than the $731.54 otherwise payable.

The following illustrates how these amounts are computed:

Without the reduction for a noncovered service pension, the PIA is rounded down to $970. It is then 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 her full retirement age of 66 years). The resulting reduction, $238.46, is subtracted from $970 to obtain $731.54. Use this amount to the exact cent.

With the reduction for a noncovered service pension, the reduced PIA is rounded down to $630. It is then also reduced by 24.583%. The resulting reduction, $154.87, is subtracted from $630 to obtain $475.13, which is used to the exact cent.

However, for employees with relatively low noncovered service pensions there is a guarantee that the PIA cannot be reduced by more than 50% of the pension.

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 pension is based entirely on noncovered employment before 1957; and
• Also, railroad employees eligible for a noncovered service pension who have 30 or more years of substantial railroad retirement and/or social security earnings are generally exempt from the reduction (a year of substantial earnings is not the same as a year of service). Employees with 21 to 29 years of substantial earnings may be subject to a lesser reduction.

The table below lists the amount of earnings considered substantial for each year:

¹ Total credited earnings from 1937-50 are divided by $900 to get the number of years of coverage (maximum of 14 years).

The next table shows the percentage used depending on the number of years of substantial earnings: