Railroad Retirement Board
Railroad Retirement Annuities and Pensions From
Work Not Covered by Social Security or Railroad Retirement
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
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
· Persons
employed on
· 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
Public Affairs 312-751-4777
Posted: 09/05/12