Employee Retirement Annuity

The amount of a regular annuity is the total of portions which are computed separately under different formulas and called tiers, plus any vested dual benefit payment also due.

Tier I

The first tier is calculated in generally the same way as a social security benefit. Any nonrailroad social security credits of an employee are combined with his or her railroad retirement credits for tier I computation purposes.

In computing tier I, 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 just prior to the employee's first year of eligibility. The adjusted earnings are used to calculate “average indexed monthly earnings,” and a formula is applied to determine the gross tier I amount.

For those first eligible in 2004, the gross tier I is equal to:

• 90% of the first $612 of average indexed monthly earnings, plus
• 32% of the amount of these earnings over $612 up to $3,689, plus
• 15% of these earnings in excess of $3,689.

For employees with less than 10 years of railroad service, tier I benefits are calculated only if the employee has at least 5 years of service after 1995 and an “insured status” under Social Security Act rules (usually 40 quarters of coverage), counting both railroad retirement and social security covered earnings.

Delayed retirement credits.--Tier I benefits are increased for each month an employee delays retirement past full retirement age up until age 70. For those who attain full retirement age on January 1, 2004, or later with a date of birth January 2, 1939, through January 1, 1941, the delayed retirement credit is 7/12 of 1% per month. For those who attain full retirement age in later years, the delayed retirement credit gradually increases every other year until it becomes 8% per year beginning in 2008 (earned in 2008 but payable effective 2009).

Age reductions.--For employees retiring between age 62 and full retirement age with less than 30 years of service, age reductions are applied separately to the components of an annuity. The tier I reduction is 1/180 for each of the first 36 months the employee is under full retirement age when his or her annuity begins and 1/240 for each additional month. As mentioned earlier, the full retirement age is gradually rising from 65 to 67, depending on the year of birth (see Table 4). The maximum annuity reduction for retirement at age 62 is gradually increasing from 20% to 30%.

The full retirement age for employee and spouse benefits increases from 65 to 66 and from 66 to 67 at the rate of two months per year over two separate six-year periods. These changes also affect how reduced benefits are computed for early retirement. The increase in full retirement age from age 65 to age 66 affects those people who were born in the years 1938 through 1942. The full retirement age will remain at age 66 for people born in the years 1943 through 1954. The increase in full retirement age from age 66 to age 67 affects those who were born in the years 1955 through 1959. For people who were born in 1960 or later the full retirement age will be age 67.

Reduced benefits continue to be available but at greater reductions. The early retirement reduction factor for an employee is 1/180 for each of the first 36 months of the reduction period regardless of the age of initial entitlement and decreases to 1/240 for each month (if any) over 36, as mentioned earlier. This will result in a gradual increase in the reduction at age 62 to 30% for an employee once the age 67 retirement age is in effect.

Age reductions are required in the tier I annuity amounts of 30-year employees who retired at ages 60-61 before 2002 and attained age 60 or completed 30 years of service after June 1984. The age reductions are applied only to the tier I annuity portion. If an employee affected by this provision was born before 1938 and attained 60/30 eligibility after December 1985, tier I is permanently reduced by approximately 20%. For those born after 1937 who retired before 2002, the reduction gradually increased as described earlier. In both cases, the tier I amount is frozen until the first month throughout which the employee is age 62. It is then recomputed to reflect interim increases in national wage levels and will become subject to future cost-of-living increases. There is no reduction if the employee retired at age 62 or older with 30 years of service, or at age 60 with 30 years of service and retirement is after 2001.

(See Table 4 in IB-2 Facts for more information.)

Workers’ compensation or public disability benefit reductions.--For employees who are under age 65 and receiving a disability annuity, the tier I amount is, under certain circumstances, reduced for receipt of workers’ compensation or public disability benefits.

Social security reductions.--After any required age reduction, the tier I amount is reduced by the amount of any social security benefits also payable but not to an amount below zero.

Reductions for public, non-profit or foreign pensions.--For employees who attain eligibility for both tier I benefits and certain government pension or other payments after 1985, a reduction may be required for receipt of a public pension based, in part or in whole, on employment not covered by railroad retirement or social security after 1956. This also applies to payments from a non-profit organization or from certain foreign governments or employers. Usually, an employee’s tier I benefit will not be reduced by more than 1/2 of his or her pension from noncovered employment. However, if the employee is under age 65 and is receiving a disability annuity, the tier I benefit may be reduced by an additional amount if the pension from noncovered employment is a public disability benefit.

Tier II

The second tier of a regular annuity is computed under a separate formula, and is based on railroad service alone. Tier II benefits are equal to seven-tenths of 1 percent of the product which is obtained by multiplying an individual’s years of service by such individual’s average monthly compensation using the tier II tax base in the 60 months of highest earnings. The tier II component is reduced by 25% of any gross employee vested dual benefit amount due.

Age reductions required for those employees retiring between age 62 and full retirement age with less than 30 years of service are also applied to the tier II component of an annuity. The reduction is 1/180 for each of the first 36 months the employee is under full retirement age when his or her annuity begins and 1/240 for each additional month.

Full retirement age is gradually rising as mentioned earlier. However, if an employee had any creditable railroad service before August 12, 1983, the retirement age for tier II purposes will remain 65.

Employees with 5-9 years of creditable service, if at least 5 years were after 1995, are eligible for tier II benefits the first full month they are age 62. Their tier II benefits are subject to the same age reductions that apply to employees with 10 to 29 years of service. If they are eligible on the basis of total disability, a tier II benefit is not payable until age 62 and that amount is reduced for early retirement.

Amount of Vested Dual Benefit Payment

To determine this additional annuity amount for a retired employee meeting the vesting requirements, the Railroad Retirement Board computes a social security benefit based solely on the individual’s railroad service before 1975, and a social security benefit based solely on social security covered earnings before 1975. The vested dual benefit is the amount by which the total of these two computations exceeds a social security benefit based on combined railroad and social security covered earnings before 1975.

The vested dual benefit is increased by the cumulative cost-of-living percentage increases applicable to tier I benefits that occurred between January 1, 1975, and the date of retirement or January 1, 1982, whichever was earlier. The computed amount is then frozen; that is, no further cost-of-living increases are applied thereafter. The amount of any vested dual benefit due is added to the tier portions and paid as part of the regular annuity.

The same age reduction applied to the tier I component is applied to the vested dual benefit component of an annuity for those employees retiring before full retirement age with less than 30 years of service.

Supplemental Annuity Formula

The amount of a supplemental annuity awarded after 1974 is equal to $23 plus $4 for each year of service over 25, up to a maximum of $43. A fraction of $4 is added for each fractional year of service.

If a retired employee also receives a private pension paid for entirely or in part by a railroad, the supplemental annuity is subject to reduction. The reduction is equal to the amount of the pension paid for by the employer. If the employer reduces the private pension because of the supplemental annuity, the amount of the reduction is restored to the supplemental annuity but does not raise it over the $43 maximum. There is no reduction in the supplemental annuity for any part of a private pension paid for by the employee alone nor is there a reduction for a pension paid by a railroad labor organization.

Spouse Annuity

The spouse annuity formula is based on certain percentages of the employee’s tier I and tier II amounts.

Tier I

The tier I portion of a spouse annuity is 1/2 of the employee's tier I amount after any reduction for the employee's noncovered service pension but before any reduction in the employee's annuity for early retirement or entitlement to a social security benefit. 

Spouse age reductions.--Age reductions required for those spouses between age 62 and full retirement age of employees retiring with less than 30 years of service are applied separately to each annuity component. Full retirement age for a spouse is gradually rising, just as for an employee. Actuarially reduced benefits continue to be available but at greater reductions. The tier I reduction is 1/144 for each of the first 36 months the spouse is under full retirement age when her or his annuity begins and will decrease to 1/240 for each month (if any) over 36. This will result in a gradual increase in the reduction at age 62 from 25% to 35% for a spouse once the age 67 retirement age is in effect.

December 2001 legislation eliminated the tier I age reduction for employees ages 60 or 61 with 30 or more years of service whose railroad retirement annuities begin January 1, 2002, or later. The spouses of these employees are also eligible for full annuities at age 60.

Age reductions required for spouses of employees with 30 years of service who attained 60/30 eligibility after June 1984 but whose annuities began before January 2002 are applied only to the tier I portion of the spouse annuity. If the employee attained 60/30 eligibility before July 1984, retired at age 62 with 30 years of service or begins receiving an annuity at ages 60 or 61 after 2001 with 30 years of service, the spouse tier I portion is not subject to these reductions.

If the employee’s annuity is subject to 60/30 age reductions, the spouse of such an employee may receive a reduced tier I benefit, even if the spouse does not retire until age 62.

In reduced 60/30 spouse cases, the tier I benefit is equal to 1/2 of the employee's reduced tier I on the employee’s annuity beginning date and is also frozen until the first full month throughout which both the employee and spouse are age 62. Then it is recomputed based on 1/2 of the employee's gross tier I amount and reduced for each month the spouse is under full retirement age at that time. If at the time of recomputation the spouse is already at full retirement age, or the spouse has a minor or disabled child in care, no age reduction would apply.

The spouse of a disability annuitant who is otherwise eligible for a 60/30 age annuity receives an age reduction if the spouse's annuity beginning date was before 2002. If the spouse's annuity beginning date is January 1, 2002, or later, the spouse can receive an unreduced annuity as early as age 60. If the spouse is entitled based on having a minor or disabled child in care, there is no age reduction.

Reductions for other benefits.--After any applicable age reduction required for the spouse’s early retirement, the spouse tier I amount is reduced by the amount of any social security benefit to which the spouse is entitled.

The tier I amount may also be reduced for certain Federal, State or local government pension payments based on the spouse's own earnings. For spouses subject to the public pension reduction, the tier I reduction is equal to 2/3 of the public pension.

The spouse tier I amount may also be reduced if the employee under age 65 is receiving a disability annuity and a workers’ compensation or public disability benefit.

Divorced spouse.--The annuity of a divorced spouse is limited to the tier I amount and thus equal to what social security would pay.

Tier II

The second tier amount is 45% of the employee's tier II amount before any age reductions. If the employee is awarded a vested dual benefit, the employee tier II amount used in computing the spouse benefit is the amount after the 25% reduction for the employee's vested dual benefit entitlement.

Age reductions.--As mentioned earlier, age reductions are gradually increasing. The tier II age reduction for spouses of employees retiring with less than 30 years of service is 1/144 for each of the first 36 months the spouse is under full retirement age when her or his annuity begins and decreases to 1/240 for each month (if any) over 36. However, if a railroad employee had any creditable railroad service before August 12, 1983, the employee and spouse retirement age for tier II purposes remains 65. Age reductions are not applied to spouse annuities based on the spouse’s caring for a child.

Dual Annuities

If both the employee and spouse are railroad employees and either one had some railroad service before 1975, the spouse tier I amount is reduced by the amount of the railroad employee tier I to which the spouse is entitled and that reduction is restored in the spouse tier II amount. The spouse tier I amount cannot be reduced below zero.

If a spouse is also a railroad employee annuitant and both the employee and spouse started railroad employment after 1974, the amount of any spouse or divorced spouse annuity is reduced by the amount of the employee annuity to which the spouse is also entitled.

A spouse who is also entitled to a survivor annuity on a different earnings record will receive only the higher benefit unless the smaller benefit is chosen.

Survivor Annuity

Tier I

The survivor tier I amount is based on the deceased employee’s combined railroad retirement and social security credits, and is computed using social security formulas. In general, the survivor tier I amount is equal to the amount of survivor benefits that would have been payable under social security.

The gross survivor tier I amount (before reductions for early retirement, or other benefits) is generally equivalent to the unreduced tier I retirement benefit the deceased employee had, or would have, received.

For surviving aged or disabled widow(er)s, remarried widow(er)s and surviving divorced spouses whose annuities begin a year or more after the employee’s death, the “average indexed monthly earnings,” upon which the tier I benefit is based, may be reindexed using a later year if it would result in a higher benefit, provided the employee died before age 62. The reindexing takes into account changes in national earnings levels which occur after the employee’s death but before the survivor becomes eligible for benefits. This provides a benefit consistent with earnings levels at the time of the survivor’s eligibility, rather than the time of the employee’s death.

A widow(er), surviving divorced spouse or remarried widow(er) whose annuity begins at full retirement age or later receives the full tier I amount unless the deceased employee received an annuity that was reduced for early retirement. The eligibility age for a full widow(er)’s annuity is gradually rising from 65 to 67. The maximum age reductions will range from 17.1 percent to 20.36 percent, depending on the widow(er)’s date of birth. For a surviving divorced spouse or remarried widow(er), the maximum age reduction is 28.5 percent. For a disabled widow(er), disabled surviving divorced spouse or disabled remarried widow(er), the maximum reduction is 28.5 percent, even if the annuity begins at age 50.

A widow(er) or surviving divorced spouse whose eligibility is based on caring for a child of the employee receives 75% of the full tier I amount. Benefits to a surviving divorced spouse end when the child is 16. An eligible child also receives 75% of the full tier I amount. The total amount the family can receive is subject to a maximum (usually applicable if there are three or more family members, not counting aged or disabled surviving divorced spouses, entitled to survivor annuities).

A dependent parent can receive 82.5% of the full tier I amount, but if both parents are eligible, the total amount cannot be more than 150% of the full tier I amount.

Dual benefit reduction.--The tier I amount described above is reduced by the amount of any social security benefit or by the tier I amount of any railroad retirement employee annuity the survivor also receives. If either the deceased employee or the widow(er) had some railroad service before 1975 but less than 120 months, the survivor tier I portion is payable only to the extent that it exceeds the tier I portion of the widow(er)’s own employee annuity. In the case of a widow or dependent widower who is also a railroad employee annuitant, and either the widow(er) or the deceased employee had 120 months of railroad service before 1975, the tier I reduction may be partially restored in the survivor tier II amount. If the widow(er) qualifies for a railroad retirement employee annuity and neither the widow(er) nor the deceased employee had any railroad service before 1975, the survivor annuity payable to the widow(er) is reduced by the amount of the widow(er)’s own employee annuity.

The tier I amount may also be reduced by certain Federal, State or local government pensions which are based on a widow(er)'s own earnings. For widow(er)s subject to the government pension reduction, the tier I reduction is equal to 2/3 of the public pension.

Tier II

Widow(er)s.--December 2001 legislation established an "initial minimum amount" which yields, in effect, a widow(er)'s tier II benefit equal to the tier II benefit the employee would have received at the time of the award of the widow(er)'s annuity, minus any applicable age reduction. It does this by adding a "guaranty amount," initially set at 50% of the employee's tier II, to the 100% tier I and 50% tier II benefits provided under prior law.

This "guaranty amount" is offset each year by the dollar amount of the cost-of-living increases payable in both the tier I and tier II benefits provided under prior law. Consequently, such a widow(er)'s net benefit payment will not increase until such time as the widow(er)'s annuity, as computed under prior law with all interim cost-of-living increases otherwise payable, exceeds the widow(er)'s annuity computed under the initial minimum amount formula.

The widow(er)s’ guaranty provision applies to all widow(er)s whose annuities begin February 1, 2002, or later, and to some, but not all, widow(er)s on the rolls before that date. If, because of previous cost-of- living adjustments, annuities awarded before February 2002 were already higher than the annuity that would be payable under the December 2001 legislation, the guaranty did not apply.

The same age reductions that apply to tier I amounts also apply to tier II amounts.

If a widow(er) is also a railroad employee annuitant and both the widow(er) and the deceased employee started railroad employment after 1974, the amount of any survivor annuity is reduced by the amount of the employee annuity to which the survivor is also entitled.

Other survivors.--Each child receives 15% of the deceased employee’s tier II amount, and each surviving parent receives 35%. The minimum total tier II amount payable to a family is 35% of the employee’s tier II amount, and the maximum, 130%.

A tier II benefit is not provided for a surviving divorced spouse or a remarried widow(er). A tier II benefit is not payable to surviving parents if other family members may receive benefits or if the parent has remarried.

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