RAILROAD
RETIREMENT
BENEFIT AND FINANCING CHANGES
President Bush signed the Railroad Retirement and
Survivors' Improvement Act of 2001, Public Law 107-90, into law on
December 21, 2001.
The legislation liberalizes early retirement benefits for 30-year
employees, eliminates a cap on monthly retirement and disability benefits,
lowers the minimum service requirement from 10 years to 5 years of service
if performed after 1995, and provides increased benefits for some
widow(er)s. The financing sections of the new law provide for the
investment of railroad retirement funds in non-governmental assets,
adjustments in the payroll tax rates paid by employers and employees, and
the repeal of a supplemental annuity work-hour tax.
The following is a summary of the changes in railroad retirement benefits
and financing provided by the new law, which was based on joint
recommendations to Congress negotiated by a coalition of rail labor
organizations and rail freight carriers.
60/30
retirement
The new law amends 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
would also be eligible for full annuities at age 60. Full 60/30 benefits
have not been payable to 30-year employees retiring before age 62 since
1983 legislation reduced such early retirement benefits.
This provision is not retroactive and not applicable to 30-year employees
who retired on the basis of age and service prior to January 1, 2002, or
to their spouses, even if their spouses retire after 2001. However, if a
disability annuitant is age 60 and has 30 years of service, his or her
spouse can now receive an unreduced annuity as early as age 60 if the
spouse's annuity beginning date is January 1, 2002, or later.
Maximum provision
The new law eliminates, 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.
While not retroactive, the amendment prospectively increases benefits,
effective January 1, 2002, for almost 2,600 employee and 12,000 spouse
annuitants on the Board's rolls whose benefits were reduced by the maximum
provision prior to 2002.
In 2001, the average monthly employee benefit reduction under the maximum
provision was $164, and the average spouse reduction was $78. The removal
of any benefit reductions applied to affected annuitants should be
completed by June 2002. Such annuitants can expect to receive accrual
payments in late May 2002 retroactive to January, and increased regular
monthly payments reflecting their new rates beginning with the monthly
payment due on June 1, 2002. Notices are being sent by the Board to all
affected annuitants in January 2002 advising them
accordingly.
Notices are also being sent to employees whose spouses may have been
previously advised by the Board to defer filing for spouse benefits
because of the adverse effects of the maximum provision, as their spouses
would now want to consider filing for railroad retirement benefits.
Basic service requirement
The new law lowers the minimum eligibility requirement for regular
railroad retirement annuities from 10 years (120 months) of creditable
railroad service to five years (60 months) of creditable railroad service
for those with five 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.
Also, for those with less than 10 years of service, additional earnings
credits acquired under social security coverage would be required for a
tier I benefit. A tier II benefit would, however, be payable even if the
employee never worked under social security coverage. Additional
requirements apply in disability cases. In addition, a deceased employee
with five years of service after 1995 must still have had a "current
connection" with the rail industry in order for survivor annuities to be
payable by the Board under this provision, rather than the Social Security
Administration.
Anyone with five years of service performed after 1995, who was previously
denied benefits because of the 10-year service requirement, will want to
contact a Board office.
Widow(er)s' benefits
The new law establishes an "initial minimum amount" which is 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. The initial
minimum amount is computed with a widow(er)'s tier II amount equal to 100
percent of the employee's tier II amount. Under prior law, the widow(er)'s
tier II amount was equal to 50 percent of the employee's tier II amount;
only the tier I amount equaled 100 percent. Widow(er)s' annuities computed
on the basis of the new initial minimum amount will not be adjusted for
annual cost-of-living increases until the annuity amount is exceeded by
the annuity amount the widow(er) would have been paid under prior law,
with all interim cost-of-living increases otherwise payable.
This provision is effective February 1, 2002, and is not payable
retroactively. The Railroad Retirement Board estimates that about 20 to 25
percent of the widow(er)s on its rolls in 2001 will see some increase in
their annuity.
This provision applies to widow(er)s on the rolls before the effective
date only if the annuity the widow(er) is currently receiving is less than
she or he would have received had the new law been in effect on the date
the widow(er)'s annuity began. Most widow(er)s' annuities awarded before
October 1986 will not be increased. Many of the widow(er)s' annuities
currently being paid are already higher than the annuity that would be
payable under the new law because of previous cost-of-living adjustments.
Widow(er)s affected by this change can expect to receive any accrual
payments, retroactive to February, in late April 2002, and increased
regular monthly payments reflecting their new rates beginning with the
payment they receive on May 1, 2002. Letters are being sent to affected
widow(er)s on the Board's rolls, advising them as to whether they will
receive an increase. As a result, widow(er)s do not need to take any
action or contact the Board.
Investment changes
The new law provides 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 will not be treated as an agency or instrumentality of the
Federal Government. Its Board of Trustees will be comprised of seven
members: three members selected by rail labor to represent the interests
of labor; three members likewise selected by rail management to represent
management interests; and one independent member selected by a majority of
the other six members. The new law also provides that if the parties
involved cannot agree on the selection of Trustees within 60 days of the
law's enactment date, an impartial umpire shall, at the petition of a
party to the dispute, be appointed by the District Court of the United
States for the District of Columbia. The Trustees will be appointed only
from among persons who have experience and expertise in the management of
financial investments and pension plans. The Trustees will be subject to
reporting and fiduciary standards similar to those under the Employee
Retirement Income Security Act.
The new law also allows for railroad retirement benefit payments in the
future to be issued by a qualified non-governmental financial institution,
rather than the Treasury Department. The selection of the financial
institution would be made by the Railroad Retirement Board, after
consulting with the Board of Trustees and the Secretary of the Treasury.
Railroad retirement payments will continue to be processed through the
U.S. Treasury in the meantime.
Effect on payroll tax rates
The new law reduces the 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 repeals 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 is
reduced from 16.10 percent to 15.60 percent in 2002 and to 14.20 percent
in 2003, but the tier II earnings base is not changed; and for 2002, that
amount remains at $63,000. The tier II tax rate for rail employee
representatives is 14.75 percent in calendar year 2002 and 14.20 percent
in 2003. An employee representative is a labor official of a
non-covered labor organization who represents employees covered under the
Acts administered by the Railroad Retirement Board.
While there is 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 account 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.
The new law does not affect the 7.65 percent tier I social security
equivalent tax rate. The tier I tax on employees and employers remains the
same as for social security covered employees and employers, and is
divided into 6.20 percent for retirement and 1.45 percent for Medicare
hospital insurance. The maximum amount of an employee’s earnings subject
to the 6.20 percent rate is $84,900 in 2002; the Medicare hospital
insurance tax is applied to all earnings.
Other revenue provisions
While supplemental railroad retirement annuities provided by the Railroad
Retirement Act continue to be due and payable, the new law, in addition to
repealing the supplemental annuity work-hour tax, also eliminates the
separate Supplemental Annuity Account under the Railroad Retirement Act.
Supplemental annuities provided under the Railroad Retirement Act are now
funded through the new National Railroad Retirement Investment Trust.
No changes were effected in railroad unemployment insurance
taxes on employers.
The Board is making every effort to notify by
mail all parties affected by this legislation as soon as possible.
Therefore patience on the part of annuitants would be appreciated when
contacting Board offices, as a higher than usual volume of calls is
expected as a result of this legislation.
Railroad Retirement Board offices are open to the public Monday through
Friday, except on Federal holidays. Persons can find the address and
telephone number of the Board office serving their area by calling the
Board's automated toll-free Help Line at 1-800-808-0772, or from the
Board's Web site at www.rrb.gov. E-mail
inquiries about the new law can be sent to the Board by going to the
Board's Web site and clicking on "Send us a
secure message" under "Latest News." |