Private
pension plans originated in the railroad industry in 1874
when the first formal industrial pension plan in America
was established. By 1927, over 80 percent of all railroad
employees in the United States worked for employers who
had formal plans in operation, but only a small proportion
of the employees ever received benefits under these plans.
The pension plans had a number of serious defects. They
generally paid inadequate benefits and had limited provisions
for disability retirement. Credits could not be transferred
freely from employer to employer, and the employers could
terminate the plans at will. With few exceptions, the plans
were inadequately financed and could not withstand even
temporary difficulties.
The Great Depression of the early 1930’s led to movements
for retirement plans on a national basis because few of
the nation’s elderly were covered under any type of retirement
plan. Railroad employees were particularly concerned because
the private railroad pension plans could not keep up with
the demands made upon them by the general deterioration
of employment conditions and by the great accumulation of
older workers in the industry. While the social security
system was in the planning stage, railroad workers sought
a separate railroad retirement system which would continue
and broaden the existing railroad programs under a uniform
national plan. The proposed social security system was not
scheduled to begin monthly benefit payments for several
years and would not give credit for service performed prior
to 1937, while conditions in the railroad industry called
for immediate benefit payments based on prior service.
Legislation was enacted in 1934, 1935 and 1937 to establish
a railroad retirement system separate from the social security
program legislated in 1935. Such legislation, taking into
account the particular circumstances of the rail industry,
was not without precedent. Numerous laws pertaining to rail
operations and safety had already been enacted since the
Interstate Commerce Act of 1887. Since passage of the Railroad
Retirement Acts of the 1930’s, numerous other railroad laws
have subsequently been enacted.
Railroad
Retirement Acts of the 1930'S
The Railroad Retirement Act of 1934 set up
the first retirement system for nongovernmental workers
in this country to be administered by the Federal Government.
However, the Act was declared unconstitutional by a Federal
district court, and this decision was sustained by the Supreme
Court. The Railroad Retirement and Carriers’ Taxing Acts
of 1935 were enacted to avoid the constitutional difficulties
encountered by the 1934 Act. However, these Acts were also
challenged in the courts, and a Federal district court held
that neither the employees nor their employers could be
compelled to pay railroad retirement taxes. The court, however,
did not prohibit the payment of benefits, and the Railroad
Retirement Board began awarding annuities in July 1936 under
the provisions of the 1935 Act.
While an appeal was pending, railroad management and labor,
at the request of President Roosevelt, formed a joint committee
to negotiate their differences. The result was a memorandum
of agreement which led to the Railroad Retirement and Carriers’
Taxing Acts of 1937 establishing the railroad retirement
system. The pensions of retired employees on the railroads’
private pension rolls were transferred to the Board’s rolls
with pension reductions restored. The benefit payments of
almost 50,000 pensioners were taken over by the Board in
July 1937. There followed an immediate reduction in both
the number of employed and unemployed older railroad workers.
By the end of 1938, the number of workers age 65 and over
in active railroad service was less than one-half of the
number two years earlier. Almost 100,000 employees had retired
under the system by that date, 80 percent of them under
the nondisability annuity provisions.
Features
of the 1937 Act
The 1937 Act set up a staff retirement plan which provided
annuities to aged retired employees based on their creditable
railroad earnings and service. The amounts of retirement
annuities awarded were directly related to the employee’s
earnings and length of service, with a maximum of $120 a
month. Creditable earnings were limited to a maximum of
$300 a month, while no more than 30 years of service could
be credited when service before 1937 was counted. Annuities
could be paid at age 65 or later, regardless of length of
service, or at ages 60-64 (on a reduced basis) after 30
years of service.
The conditions for paying annuities based on disability
were severely restricted. The disability had to be total
and permanent and 30 years of service were required for
full annuities. Employees could receive disability annuities
at ages 60-64 after less than 30 years of service, but on
a reduced basis.
The Act made little provision for dependents of deceased
employees and no provision for spouse annuities. A survivor
could receive a lump sum equal to 4 percent of the employee’s
creditable earnings after 1936, less any annuity payments
already made. In addition, a retiring employee could elect
to receive a reduced annuity in order to provide an annuity
to his surviving spouse.
The system was financed by a schedule of taxes beginning
with 2.75 percent each on employers and employees applicable
to the first $300 of monthly compensation.
Amendments
to the 1937 Act
Numerous amendments after 1937 increased benefits
and added, to what began as a staff retirement system, social
insurance features similar to those provided by the social
security system.
The first significant sets of amendments were enacted in
1946 and 1951. By initiating coordination in certain areas
with the social security system, they laid the foundation
for the evolution of the system’s present structure. Amendments
enacted in 1946 added survivor benefits to the railroad
retirement system which were similar to those provided under
social security coverage, but approximately 25 percent higher.
These amendments also introduced the first step of coordination
with the social security system by dividing jurisdiction
over individual survivor benefits between the Board and
the Social Security Administration. Benefits to survivors
were thereafter based on combined railroad retirement and
social security earnings credits.
Provisions for annuities based on occupational disability—a
staff retirement feature—were also established by the 1946
amendments. The provision for occupational disability annuities
recognized that employees who were not totally disabled
could be prevented from earning a living because they could
not perform their regular jobs. The 1946 amendments also
reduced the service requirements for total disability annuities,
making it possible for comparatively young disabled employees
to receive benefits.
In addition, the amounts of disability retirement annuities
were increased through the elimination of the reduction
for employees with less than 30 years of service and the
extension of new minimum provisions of the law to annuities
based on disability. In 1954, annuities were provided for
disabled children of deceased employees. And in 1968, disabled
widows ages 50-59 were added to those who could receive
benefits.
Amendments enacted in 1951
added annuities for the spouses of retired railroad employees.
This legislation completed the addition of social insurance
features to the railroad retirement system and expanded
the coordination of the railroad retirement and social security
systems.
Provision was made for social security to assume jurisdiction
of benefits for employees not having at least 10 years of
railroad service, and a minimum guaranty was provided to
ensure that railroad retirement benefits would be no less
than the benefit, or additional benefit, the social security
system would have paid on the basis of the railroad service
involved. In addition, a financial interchange was established
between the two systems to apportion the costs of benefits
and taxes, related to railroad service, between the two
systems on an equitable basis.
In 1965, provision
was made to coordinate the railroad retirement tax base
and tax rate with those of the social security system. This
provision and the existing provisions for the financial
interchange served as an operating vehicle through which
the Medicare program was easily extended in 1965 to railroad
employees and members of their families, on the same basis
as it was provided for social security beneficiaries. The
addition of a strictly staff benefit for career employees
was provided in 1966
in the form of supplemental railroad retirement annuities.
By 1970, amendments to the Act provided for regular annuities
of more than double the amount provided under the original
formula. The amounts of earnings creditable and taxable
were $650 a month in 1970 compared with $300 originally.
Tax rates had substantially increased in order to finance
the new types of benefits, the increases in benefit amounts
and other liberalizations in the program. The rate of regular
railroad retirement taxes, still divided equally between
employees and employers in 1971, was 9.95 percent on each
as compared with 3.5 percent in 1946.
The annuities being paid in 1970 included a general benefit
increase of 15 percent provided in that year following a
social security benefit increase of 15 percent. In the following
two years of an inflationary spiral in the national economy,
social security and railroad retirement benefits were again
substantially increased, by 10 percent in 1971 and 20 percent
in 1972. However, these three increases were provided for
railroad retirement annuities on a temporary basis only.
The costs of making these three increases aggregating 51.8
percent permanent without adequate financing would have
jeopardized the solvency of the system. Congress directed
that a Commission on Railroad Retirement be formed to study
the railroad retirement system and its financing for the
purpose of recommending to Congress changes in the system
that would ensure adequate benefit levels on an actuarially
sound basis.
Report
of the Commission
The Commission’s 1972 report proposed a restructuring of
the railroad retirement system with two separate tiers of
benefits,
tier I being a social security-type benefit and tier II
a supplemental staff benefit. It also recommended a phaseout
of dual railroad retirement-social security benefits with
some protection for the vested rights to such benefits already
acquired by employees. Under the 1937 Act, an individual
engaging in covered employment under both the Railroad Retirement
Act and the Social Security Act was entitled to separate
benefits under both Acts, assuming he or she met at least
the minimum requirements for benefit eligibility. By the
early 1970’s, approximately 40 percent of all beneficiaries
on the Board’s rolls were also receiving social security
benefits. Because of certain duplications in their dual
benefits, considered a windfall element, the total of their
benefits from both systems averaged more than the annuities
of railroad employees who worked in the rail industry exclusively,
and who had paid proportionally higher retirement taxes
for the purpose of receiving higher benefits. At the same
time, dual benefits were a cost to the railroad retirement
system because they reduced the system’s income from its
financial interchange with the social security system. (By
the mid-1970’s, the costs to the railroad retirement system
of dual benefits exceeded $450 million per year and would
have been a major factor in bankrupting the railroad retirement
system if allowed to continue. The cumulative total loss
to the system by 1974 had been about $4 billion.)
Upon the release of the Commission’s report, Congress ordered
that representatives of employees and representatives of
carriers negotiate mutual recommendations for a restructuring
of the railroad retirement system which would put it on
a sound financial basis, taking into account the report
and recommendations of the Commission on Railroad Retirement.
Preliminary
Agreement
The preliminary recommendations of management and labor
for revision of the railroad retirement system, recorded
in a Memorandum of Understanding, were enacted by the Congress
in 1973. The major provisions, which reflected components
of an industry-wide wage settlement, effected a redistribution
of railroad retirement taxes and earlier retirement as follows.
Generally effective October 1, 1973, employee and employer
tax rates under the Railroad Retirement Tax Act were revised
so as to reduce the employee rate to the percentage rate
paid by employees in social security covered employment,
with the employer absorbing the difference so that total
tax income to the program was maintained at the level in
effect before the change. Employee rates consequently were
lowered from 10.60 percent of creditable earnings to 5.85
percent; employer rates correspondingly increased from 10.60
percent to 15.35 percent. Effective July 1, 1974, all employees
at least 60 years of age and having 30 years or more of
creditable railroad service could retire without their annuities
being subject to reduction for retirement before age 65.
Under previous law, only female employees were granted this
advantage.
Railroad
Retirement Act of 1974
The Railroad Retirement Act of 1974, reflecting
the basic principles of the Commission Report and incorporating
the subsequent management-labor agreement, was enacted on
October 16, 1974.
Two-tier
Formulas
The 1974 Act provided a tier I formula yielding amounts
equivalent to social security benefits, taking into account
both railroad retirement and nonrailroad social security
credits. A tier II formula, based on railroad service exclusively,
provides benefits comparable to those paid over and above
social security benefits by other industrial pension systems.
The total annuity yielded by the tier formulas continued
traditional levels of railroad retirement benefits and reflected
the three cost-of-living increases aggregating 51.8 percent,
which had been provided between 1970 and 1972 on a temporary
basis.
Dual
Benefit Phase-out
The 1974 Act eliminated duplications in dual railroad retirement-social
security benefits for new hires and individuals not vested
as of December 31, 1974, under both programs. Dual benefits
for vested employees were protected through provision for
payment of an amount in their annuities referred to as a
“vested dual benefit.” However, such vested dual benefit
amounts were not allowed to increase because of any social
security credits earned after December 31, 1974.
For career employees, vesting was defined as having 10 years
of railroad service on December 31, 1974, and, in addition,
having enough quarters of coverage under the social security
program to be entitled to a benefit at age 62 if no further
social security credits were acquired after December 31,
1974.
Vesting for employees who had fully qualified for benefits
under both systems but had left the industry prior to 1974
presented a difficult problem. The 1974 Act favored employees
who had remained in the railroad industry more than those
who left railroad employment. Accordingly, active or long-term
employees in the railroad industry in a sense were placed
in the same situation as employees who had already retired,
while former employees were made subject to more stringent
requirements. The resulting vesting provisions were subsequently
tested in the courts and upheld by the U.S. Supreme Court
in 1980.
Cost-of-living
Increases
The 1972 amendments to the Social Security Act introduced
provisions for cost-of-living adjustments in social security
benefits on the basis of changes in the Consumer Price Index.
Under the two-tier plan, the first tier railroad retirement
benefit increases automatically the same way social security
benefits increase. Four separate tier II cost-of-living
adjustments were provided during the six-year period commencing
January 1, 1975. (A fifth increase was provided in subsequent
legislation.)
Benefit
Improvements
The 1974 Act also provided improvements in existing benefits.
The initial agreement of labor and management had enabled
employees to retire on or after July 1, 1974, on unreduced
annuities if they met the eligibility requirements of attaining
age 60 and completing 30 years of service. But an employee
could not receive a supplemental annuity until age 65 nor
could a spouse receive a spouse annuity until the employee
reached age 65. The Act revised the eligibility requirements
for these benefits so that they were coordinated directly
with the employee annuity requirements.
And under the 1937 Act, the vast majority of widows and
other survivors received benefits based upon 110 percent
of the comparable social security benefit, and the resulting
amount was generally felt to be inadequate in relation to
the level of other railroad benefits. The 1974 Act survivor
formula increased the calculation basis to 130 percent from
the former 110 percent.
Financing
It was anticipated that the changes in the benefit formulas,
the reduction in dual benefits, higher investment earnings,
plus provisions for additional funds from the Federal Government
to pay the phase-out costs of dual benefits, together would
place the railroad retirement system on a reasonably sound
basis. However, the cost estimates made at that time did
not anticipate the resurgence of substantial inflation in
the latter part of the decade, which led to a recurrence
of financial difficulties for the railroad retirement system.
With regard to financing the phase-out costs of dual benefits,
the joint management-labor committee initially proposed
that the cost of vested dual benefit payments be paid out
of the social security trust funds, as this element was
basically a social security benefit. However, Congress concluded
that the cost should be borne by the General Treasury. It
was thought that it would be unfair to impose this cost
upon current and future employees who would not (except
where vested rights are involved) be permitted to receive
dual benefits upon retirement, or upon the railroads since
the excess benefit arose out of nonrailroad employment performed
by these individuals. Payment out of the General Treasury
was supported by a precedent regarding military service
and by the fact that the dual benefit problem had been brought
about by prior congressional action repealing past dual
benefit restrictions over the objections of the railroads.
1981
Railroad Retirement Amendments
By 1980, recurring inflation and recession
combined with other factors placed financial stresses on
the railroad retirement system which made it clear that
further financial action was needed to maintain the system.
Railroad retirement amendments were subsequently enacted
on August 13, 1981, as part of an Omnibus Budget Reconciliation
Act. The amendments were generally effective October 1,
1981.
These amendments increased railroad retirement taxes on
both rail employers and employees. While tier I taxes on
employers and employees remained at the same rate as social
security taxes, 6.65 percent in 1981, the 9.5 percent tier
II tax paid by employers was increased by 2.25 percent to
11.75 percent and employees assumed a tier II tax of 2 percent.
The amendments also gave the Railroad Retirement Board the
authority to borrow from U.S. Treasury general funds on
the basis of forthcoming financial interchange income if
Railroad Retirement Account funds were insufficient to pay
benefits during a month.
Although the two-tier benefit structure provided by the
1974 Act was left intact, changes were made in the tier
II formula and there were other changes in benefit provisions.
The amendments revised the employee, spouse, and survivor
formulas for annuity portions paid over and above social
security levels. For retirees whose annuities are awarded
on or after October 1, 1981, the simplified formula yields
awards that automatically keep pace with average wage increases
in the last 60 months of service. The 1981 law continued
tier II employee and spouse cost-of-living increases, while
revising survivor cost-of-living increases to correspond
with those provided employees and spouses. It also broadened
the current connection requirement applicable to certain
career employee benefits. While the amended law eliminated
future supplemental annuity closing dates, it restricted
future supplemental annuity eligibility to employees with
some service prior to October 1981. In addition, the amendments
provided benefits for divorced spouses, surviving divorced
spouses and remarried widow(er)s which are like those provided
under the Social Security Act.
This legislation also required prorated adjustments in individual
vested dual benefit payments, depending upon the amounts
appropriated to the fund created for these payments, and
the level of vested dual benefit payments was made contingent
on the annual Federal budget and appropriations process.
The amendments restricted the further award of vested dual
benefit payments to vested employees with dual coverage
on their own earnings, and precluded further awards of vested
dual benefit payments to spouses or widows.
The 1981 amendments mandated, in the event of certain adverse
financial indicators, that railway management and labor,
and the White House, make further financing recommendations
to Congress. And the new law required the Railroad Retirement
Board to reduce annuity levels during any fiscal year in
which it appears there would be insufficient funds with
which to make full benefit payments on a timely basis for
every month of the year.
In the first half of 1981, when the amendments were developed,
it was anticipated that the financing arrangements would
provide the railroad retirement system with adequate funding
throughout the 1980’s. However, the continuing recession
in the national economy depressed rail traffic levels to
the extent that large-scale layoffs were underway by the
first quarter of 1982. Average monthly employment in fiscal
year 1982 dropped to 457,000 from the 512,000 average of
the previous year, and it subsequently declined to 388,000
in the first quarter of 1983. The decline in employment
limited payroll tax income accordingly. In addition, increased
unemployment benefit payments resulting from the layoffs
made such unprecedented demands on the Railroad Unemployment
Insurance Account that it owed $500 million to the Railroad
Retirement Account by the end of March 1983.
The condition of the Railroad Retirement Account consequently
deteriorated to the point that the Board was required to
prepare to reduce annuity levels on October 1, 1983, by
an estimated 40 percent of tier II portions, in the absence
of remedial financial legislation.
Railroad
Retirement Solvency Act of 1983
The scheduled annuity reductions were averted
by enactment of the Railroad Retirement Solvency Act on
August 12, 1983. The 1983 Act was based on negotiated recommendations
of management and labor, and also incorporated recommendations
of Congress and the Administration. The amendments were,
in part, patterned after major social security amendments
enacted earlier in the year, which had already effected
changes in railroad retirement taxes and benefits through
coordinating provisions in the Railroad Retirement Act.
Taxes
Under the Railroad Retirement Solvency Act, tier II taxes
on employers increased from 11.75 percent to 12.75 percent
in January 1984, to 13.75 percent in January 1985, and to
14.75 percent in January 1986. Tier II taxes on employees
increased from 2 percent to 2.75 percent in 1984, to 3.50
percent in 1985, and to 4.25 percent in 1986. And since
1985, railroad retirement taxes are applied to earnings
on an annual, rather than a monthly, basis. As a result
of the 1983 social security amendments, tier I taxes on
employers and employees increased from 6.70 percent to 7
percent in January 1984, to 7.05 percent in 1985, to 7.15
percent in 1986, to 7.51 percent in 1988 and to 7.65 percent
in 1990.
The 1983 social security amendments subjected railroad retirement
tier I annuity portions to Federal income taxes on the same
basis as social security benefits and the Solvency Act made
tier II benefits and vested dual benefit payments subject
to Federal income tax on the same basis as private and public
service pensions, beginning with tax year 1984. The revenues
raised from income taxes on tier I and vested dual benefits
are used for benefit payments. Revenues raised by the tax
on tier II benefits were to be used for benefit payments
through fiscal year 1988, after which the revenues would
remain in general Treasury funds. Subsequent legislation
extended these transfers permanently.
Other
Financing Provisions
The Railroad Retirement Account was reimbursed
in three installments from the general fund of the Treasury
for shortfalls in vested dual benefit appropriations between
1975 and 1981. The railroad retirement system’s authority
to borrow general U.S. Treasury funds until the Board receives
financial interchange funds from the social security system
was broadened to place financial interchange monies in the
Railroad Retirement Account effectively on a current basis.
Benefit
Provisions
The 1983 social security amendments deferred July 1983 cost-of-living
increases to January 1984 and required that future increases
be made in January of subsequent years. This deferral applied
to railroad retirement tier I annuity amounts as well as
social security benefits. The Railroad Retirement Solvency
Act correspondingly changed the future payment dates of
tier II cost-of-living increases from July 1 to January
1, with the first increase payable on January 1, 1985. It
also required an offset of the dollar amount of the next
five percent of tier I cost-of-living increases from
tier II benefits.
The Act modified early retirement provisions for 30-year
employees attaining age 60 after June 1984 by applying certain
reductions to the tier I portions of their annuities if
they retired before age 62. The reductions did not affect
tier II benefits, and employees who acquired 30 years of
service and attained age 60 before July 1, 1984, could still
retire at any time with full benefits, as under prior law.
(The Railroad
Retirement and Survivors’ Improvement Act
of 2001 eliminated these reductions for 60/30 employees
retiring after 2001.) The 1983 law established a five-month
waiting period for railroad retirement disability annuities,
just as for social security disability benefits, and altered
the tier I computation of annuities subject to reduction
for certain non-covered service pensions. It required the
Board to honor court orders that treat non-tier I railroad
retirement benefits as property subject to division in proceedings
related to divorce, annulment or legal separation. And the
Act limited the retroactivity of applications for benefits
to a maximum of six months to conform to the Social Security
Act, except for disability benefit applications, which can
retroact 12 months.
The Solvency Act eliminated annuity reductions made under
prior law when military service was counted as railroad
service and was also the basis for benefits under another
Federal law. It conformed railroad retirement student benefit
provisions to social security student benefit provisions
and eliminated age reductions applied to disabled widow(er)s’
annuities for months they were under age 60 when their annuities
began.
Legislation
Enacted 1985-2000
The Balanced
Budget and Emergency Deficit Control Act of 1985,
known as the Gramm/Rudman/Hollings Act, enacted in December
1985, required decreases in vested dual benefit payments
during the 1986 fiscal year and suspension of the January
1986 cost-of-living increase in the tier II portions of
railroad retirement annuities. Gramm/Rudman and/or related
budget legislation reduced vested dual benefits and supplemental
annuities periodically in subsequent years.
Budget reconciliation legislation
enacted in April 1986 included changes in Internal
Revenue Code provisions increasing income taxes on some
railroad retirement annuities. Effective with tax year 1986,
the tier I portion of a railroad retirement annuity, which
is treated as a social security benefit for Federal income
tax purposes, was limited for tax purposes to amounts actually
equivalent to social security benefits. This primarily affected
tier I early retirement benefits payable between ages 60
and 62 and some occupational disability benefits that are
now treated like private and public service pensions. The
Tax Reform Act of October
1986 eliminated, for annuities beginning after July
1, 1986, the three-year recovery rule for contributory pensions,
making railroad retirement benefits exceeding social security
equivalent levels taxable immediately upon retirement. For
tax reporting purposes, benefit payments are prorated on
the basis of estimated life expectancies to exempt an employee’s
previously-taxed pension contributions.
In 1987, the continuing decline in railroad employment led
to concern over the system’s financing in the next century.
A Federal budget deficit reduction bill consequently increased
tier II tax rates in January 1988 to 16.10 percent on employers
and 4.90 percent on employees, and extended for one year,
until October 1, 1989, the time during which revenues from
Federal income taxes on tier II railroad retirement benefits
could be transferred to the Railroad Retirement Account
for use in paying benefits.
Amendments enacted in 1988
eliminated the provision suspending annuities of retired
employees and spouses who work for their last pre-retirement
nonrailroad employers, but provided for tier II earnings
deductions in such cases. These amendments also increased
the amount disabled railroad retirement annuitants can earn
without reducing their benefits from $200 per month to $400
per month, exclusive of work-related expenses.
In addition, these amendments provided a lump sum, equal
to railroad retirement tier II payroll taxes deducted from
separation or severance payments made after 1984, to be
paid upon retirement to employees meeting minimum service
requirements if the separation or severance payments did
not yield additional railroad retirement service or earnings
credits.
The 1989 budget laws effective
in 1990 increased the amount of earnings subject
to social security and railroad retirement payroll taxes,
and specified that 401(k) contributions and some employer-paid
life insurance premiums are subject to railroad retirement
payroll taxes, conforming railroad retirement with social
security.
Omnibus budget legislation
in 1990 permanently exempted supplemental annuities
from reductions under the Gramm/Rudman Act. It also increased
the maximum compensation subject to Medicare hospital insurance
payroll tax and mandated an expedited payroll tax deposit
schedule for large employers covered by social security
or railroad retirement. Budget
legislation enacted in 1993 made all earnings subject
to the Medicare payroll tax and, for those in high tax brackets,
made a larger amount of social security and railroad retirement
tier I benefits subject to Federal income tax.
The time during which revenues from Federal income taxes
on tier II railroad retirement benefits could be transferred
to the Railroad Retirement Account for use in paying benefits
was extended one year in 1989, and 1990 budget legislation
further extended the date until October 1, 1992. In
1994, legislation extended the transfers, retroactive
to October 1992, on a permanent basis which improved the
financing of the railroad retirement system.
Legislation enacted in
April 2000 eased the earnings restrictions affecting
social security beneficiaries working after full retirement
age. The legislation also applied to railroad retirement
annuitants but it did not change the railroad retirement
work restrictions applying to last pre-retirement employment
which are not included in the Social Security Act.
The
Railroad Retirement and Survivors' Improvement Act of 2001 The Railroad Retirement and Survivors’ Improvement
Act of 2001, signed into law December 21, 2001, liberalized
early retirement benefits for 30-year employees and their
spouses, eliminated a cap on monthly retirement and disability
benefits, lowered the minimum service requirement from 10
years to 5 years of service if performed after 1995, and
provided increased benefits for some widow(er)s. Financing
sections in the law provided for the investment of railroad
retirement funds in nongovernmental assets, adjustments
in the payroll tax rates paid by employers and employees,
and the repeal of a supplemental annuity work-hour tax.
The law was based on joint recommendations to Congress negotiated
by a coalition of rail labor organizations and rail freight
carriers.
60/30
Retirement
The law amended the Railroad Retirement Act by eliminating
the early retirement reduction applied to the annuities
of 30-year employees retiring between the ages of 60 and
62 if their annuities begin January 1, 2002, or later. The
spouses of such employees are also eligible for full annuities
at age 60. Full 60/30 benefits had not been payable since
1983 legislation reduced such early retirement benefits.
Maximum
Provision
The law eliminated, effective January 1, 2002, a maximum
on the amount of combined monthly employee and spouse benefit
payments which had been intended to prevent benefits from
exceeding an amount based on an employee’s earnings immediately
prior to retirement. This maximum provision had the unintended
effect of reducing benefits for former employees with no
earnings, or low earnings, in the 10-year period prior to
retirement, and for long-service employees with moderate
earnings.
Basic
Service Requirement
The legislation lowered the minimum eligibility requirement
for regular railroad retirement annuities from 10 years
(120 months) of creditable railroad service to 5 years (60
months) of creditable railroad service for those with 5
years of service rendered after 1995. Benefits payable on
the basis of this provision are not retroactive and are
not payable earlier than January 1, 2002.
Widow(er)s’
Benefits
The legislation established an “initial minimum amount”
based on the two-tier annuity amount that would have been
payable to the railroad employee at the time the widow(er)’s
annuity is awarded, minus any applicable reductions. Widow(er)s’
annuities computed on the basis of the new initial minimum
amount will not increase until the amount payable under
previous law plus cost-of-living increases is higher than
the initial minimum amount.
This provision was effective February 1, 2002, and was not
retroactive. It applies to widow(er)s on the rolls before
the effective date only if the annuity the widow(er) was
receiving on the effective date was less than she or he
would have received had the legislation been in effect on
the date the widow(er)’s annuity began.
Investment Changes
The legislation provided for the transfer of railroad retirement
funds from the Railroad Retirement Accounts to a new National
Railroad Retirement Investment Trust, whose Board of seven
trustees is empowered to invest Trust assets in non-governmental
assets, such as equities and debt, as well as in governmental
securities.
The Trust is not treated as an agency or instrumentality
of the Federal Government and its trustees are subject to
reporting and fiduciary standards similar to those under
the Employee Retirement Income Security Act.
Effect on Payroll Tax Rates
The legislation reduced tier II tax rates on rail employers,
including rail labor unions, in calendar years 2002 and
2003, and beginning with 2004 provides automatic adjustments
in the tier II tax rates for both employers and employees.
It also repealed the supplemental annuity work-hour tax
rate paid by employers, beginning with calendar year 2002.
The tier II tax rate on rail employers and rail labor organizations
was reduced from 16.10 percent to 15.60 percent in 2002
and to 14.20 percent in 2003. The tier II tax rate for rail
employee representatives is 14.75 percent in calendar year
2002 and 14.20 percent in 2003.
While there was no change in the tier II tax rate of 4.90
percent on employees in the years 2002 and 2003, beginning
with the taxes payable for calendar year 2004 tier II taxes
on both employers and employees will be based on the ratio
of certain asset balances to the sum of benefits and administrative
expenses (the average accounts benefits ratio). Depending
on the average account benefits ratio, tier II taxes for
employers will range between 8.20 percent and 22.10 percent,
while the tier II tax rate for employees will be between
0 percent and 4.90 percent.
Supplemental Annuity Funding
In addition to repealing the supplemental
annuity work-hour tax, the legislation eliminated the separate
Supplemental Annuity Account. Supplemental annuities are
now funded through the new National Railroad Retirement
Investment Trust.
|