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 the tier I portion of their annuity 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 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 noncovered service 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
2012, the gross tier I benefit is equal to: 90 percent of the first $767 of
average indexed monthly earnings, plus 32 percent of the amount of those
earnings over $767 up to $4,624, plus 15 percent of those earnings in excess of
$4,624.
Beginning with 1986, a reduction in the 90 percent factor was phased in until,
for employees subject to the noncovered service pension reduction 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 1950 is eligible for a noncovered
service pension and has less than 30 years of service. Her railroad retirement
annuity begins with the first full month she is age 62 and her average indexed
monthly earnings are $1,800. The gross tier I amount, after reduction for the
noncovered service pension, would be $637, rather than the $1,020 otherwise
payable. A reduction for early retirement would also be applied to her annuity.
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 railroad retirement employee annuitants
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;
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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 1982, earnings of $6,075 would be considered a
year of substantial earnings; in 1992, earnings of $10,350 would be needed; in
2002, earnings of $15,750; and in 2012, earnings of $20,475.
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 certain Federal, State or local government pensions 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. Most military service pensions and payments from the
Department of Veterans Affairs will not cause a reduction. Pensions paid by a
foreign government or interstate instrumentality will also 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 should contact an office of the Railroad
Retirement Board (RRB) by calling toll-free 1-877-772-5772. 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.
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