In addition to amending
benefit provisions of the Railroad Retirement Act, the Railroad
Retirement and Survivors' Improvement Act of 2001 (P.L. 107-90)
significantly revised the financing of the railroad retirement
system through provisions 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 questions and
answers provide information on the changes effected by the new law.
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| 1. How is the railroad retirement
system funded? |
Payroll taxes paid by
railroad employers and their employees are the primary source of
funding for the railroad retirement system. Coordinated with social
security taxes, tier I railroad retirement payroll taxes are at the
same rate as social security taxes, while tier II taxes are set at
rates considered necessary to finance railroad retirement benefit
payments over and above social security levels.
Other sources of income include a financial interchange with the
social security trust funds, revenues from Federal income taxes on
railroad retirement benefits, appropriations from general treasury
revenues provided after 1974 as part of a phase-out of certain
vested dual benefits, and earnings on investments. |
| 2. How is the financing of the
railroad retirement system changed by the new law? |
The
new law allows greater latitude in the investment of railroad
retirement assets. Under prior law, the investment of funds not
needed immediately for benefit payments or administrative expenses
had been limited to interest-bearing securities restricted to
obligations of the U.S. Government, obligations guaranteed as to
principal and interest by the U.S. Government, or other obligations
that are lawful investments for trust funds.
The new law provides for the transfer of railroad retirement funds
from the Railroad Retirement Account and the Social Security
Equivalent Benefit Account to a new National Railroad Retirement
Investment Trust, whose Board of Trustees is empowered to invest
Trust assets, other than assets transferred from the Social Security
Equivalent Benefit Account, in non-governmental assets, such as
equities and debt, as well as in governmental securities. |
| 3. Will the new National Railroad
Retirement Investment Trust be a Federal body and who will serve as
its Trustees? |
The National Railroad
Retirement Investment 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 selected by
rail management to represent the interests of management; and one
independent member selected by a majority of the other six members.
The Trustees will be appointed only from among persons who have
experience and expertise in the management of financial investments
and pension plans. The members shall be appointed for three-year
terms. However, the initial labor and management members will be
divided into three groups, with one group appointed for a one-year
term, one group for a two-year term, and one group for a three-year
term.
The Trustees are authorized to retain independent advisors to assist
in the formulation and adoption of investment guidelines; retain
independent investment managers to invest the assets of the Trust in
a manner consistent with such investment guidelines; and invest
assets of the Trust, pursuant to such guidelines. |
| 4. Will the new National Railroad
Retirement Investment Trust be subject to the Employee Retirement
Income Security Act (ERISA)? |
| The
Trustees are subject to reporting and fiduciary standards similar to
ERISA requirements with respect to fiduciaries of private employee
pension benefit plans. However, no rules similar to the funding
requirements of ERISA and related provisions apply to the Trustees,
the Trust, or Trust assets. |
| 5. How did the financing
provisions of the new law affect the tier II payroll tax rates paid
by employers, employee representatives and employees? |
The
new law reduced the tier II tax rates on rail employers, including
rail labor organizations, 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 and
employee representatives, beginning with calendar year 2002.
The tier II tax rate on rail employers was reduced from 16.10
percent to 15.60 percent in 2002 and to 14.20 percent in 2003, but
the tier II earnings base was 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 an average account benefits ratio.
Depending on the average account benefits ratio, the tier II tax
rate 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. |
| 6. What is the average account
benefits ratio and, in basic terms, how will this mechanism work? |
As defined in the new law, the
"account benefits ratio" is, with respect to any fiscal
year, the amount determined by the Railroad Retirement Board by
dividing the fair market value of the assets in the Railroad
Retirement Account and of the National Railroad Retirement
Investment Trust (and for years before 2002, the Social Security
Equivalent Benefits Account) as of the close of such fiscal year by
the total benefits and administrative expenses paid from the
Railroad Retirement Account and the National Railroad Retirement
Investment Trust during such fiscal year. If the ratio is not an
exact multiple of 0.1, it is raised to the next highest multiple of
0.1.
Likewise, the term "average account benefits ratio" means,
with respect to any calendar year, the average determined by the
Secretary of the Treasury of the account benefits ratios for the 10
most recent fiscal years ending before such calendar year.
On or before November 1, 2003, the Railroad Retirement Board is to
compute the account benefits ratio for each of the most recent 10
preceding fiscal years and certify those ratios to the Secretary of
the Treasury. On or before November 1 of each year after 2003, the
Railroad Retirement Board will compute the account benefits ratio
for the fiscal year ending in such year and certify that ratio to
the Secretary of the Treasury.
The following shows the employer/employee representative and
employee tier II tax rates payable depending on the average account
benefits ratio.
--If the average account benefits ratio is less than 2.5, the
employer and employee representative tier II tax rate would be 22.1
percent and the employee tier II tax rate would be 4.9 percent.
--If the ratio is at least 2.5 but less than 3.0, the
employer/employee representative and the employee rates,
respectively, would be 18.1 percent and 4.9 percent.
--If the ratio is at least 3.0 but less than 3.5, the respective
rates would be 15.1 percent and 4.9 percent.
--If the ratio is at least 3.5 but less than 4.0, the respective
rates will be 14.1 percent and 4.9 percent.
--If at least 4.0 but less than 6.1, the rates will be 13.1
percent and 4.9 percent.
--If at least 6.1 but less than 6.5, the rates will be 12.6
percent and 4.4 percent.
--If at least 6.5 but less than 7.0, the rates will be 12.1
percent and 3.9 percent.
--If at least 7.0 but less than 7.5, the rates will be 11.6
percent and 3.4 percent.
--If at least 7.5 but less than 8.0, the rates will be 11.1
percent and 2.9 percent.
--If at least 8.0 but less than 8.5, the rates will be 10.1
percent and 1.9 percent.
--If at least 8.5, but less than 9.0, the rates will be 9.1
percent and 0.9 percent.
--If at least 9.0, the rates will be 8.2 percent and 0 percent.
|
| 7. Did the new law affect tier I
tax rates? |
| 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. |
| 8. How did the new law affect the
railroad retirement supplemental annuity tax? |
| The new law repealed the railroad
retirement supplemental annuity tax, which is no longer payable for
years after 2001. This work-hours tax had been paid solely by rail
employers, including rail labor organizations, and employee
representatives and at a rate determined quarterly by the Board. It
also eliminated the separate Supplemental Annuity Account under the
Railroad Retirement Act. Supplemental annuities will now be funded
by the new Railroad Retirement Investment Trust. |
| 9. Will employees continue to
receive supplemental annuities at age 65 if they have at least 25
years of railroad service and at age 60 if they have at least 30
years of railroad service? |
| The supplemental annuity provisions
of the Railroad Retirement Act are not affected. Employees will
still be eligible if they meet the requirements for a supplemental
annuity, including a current connection with the railroad industry
and at least one month of railroad service before October 1, 1981. |
| 10. Did the new law change any
other financing provision of the railroad retirement system? |
|
The new law did not change the provisions for the
financial interchange with social security or the vested dual
benefit appropriations, or the transfer of revenues from income
taxes on railroad retirement benefits to the railroad retirement
trust funds.
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