Railroad Retirement Board
Railroad Retirement Annuities and Pensions From
Work Not Covered by Social Security or Railroad Retirement
September 2007
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 non-covered
service pension reduction in employee annuities come about?
The non-covered 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 their tier I 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
3. If a non-covered 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 such 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 2007, the gross tier I benefit is equal
to: 90 percent of the first $680 of
average indexed monthly earnings, plus 32 percent of the amount of those
earnings over $680 up to $4,100, plus 15 percent of those earnings in excess of
$4,100.
Beginning with 1986, a reduction in the 90 percent factor
was phased in until, for employees subject to the non-covered service pension
reduction and 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 1945 is eligible for a non-covered service pension
and has 20 years of railroad service.
Her railroad retirement annuity begins with the first full month she is
age 62 and her average indexed monthly earnings are $1,800. She would receive, after the reductions for
the non-covered service pension and early retirement, a tier I benefit of
$475.13, rather than the $731.54 otherwise payable.
However, for employees with relatively low non-covered
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 retired railroad employees who also receive non-covered service
pensions from this reduction?
Railroad retirement employee annuitants also receiving a non-covered
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 non-covered service pension
reduction.
Railroad retirement employee annuitants who received, or
were eligible to receive, their non-covered 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 non-covered employment before
1957; and
· Railroad
employees eligible for a non-covered 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 non-covered 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 1977, earnings of $4,125 would be considered a year of
substantial earnings; in 1987, earnings of $8,175 would be needed; in 1997,
earnings of $12,150; and in 2007, earnings of $18,150.
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 any
Federal, State or local pension 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. (This
60-month requirement is being phased in over a 5-year period ending
7. Where can more specific
information are obtained on how non-covered pensions affect railroad retirement
benefits?
For more information, individuals who may be affected should
contact the nearest office of the Railroad Retirement Board (RRB). Most RRB offices are open to the public from
Persons can find the address and phone number of the RRB
office serving their area by calling the automated toll-free RRB Help Line at
1-800-808-0772. They can also get this
information from the agency’s Web site at www.rrb.gov.
Public Affairs 312-751-4777
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