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Railroad Retirement Plans

For retirees who have spent their careers working on the railroad, the Railroad Retirement Plan offers benefits beyond Social Security.

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(LifeWire) - The Railroad Retirement Plan oversees national retirement benefits to US railroad workers.

Railroad workers pay higher taxes than most employees who pay Social Security taxes. These taxes are used to fund basic retirement fees as well as an investment trust, which generates returns for additional pensions.

The Railroad Retirement Board (RRB) and the Social Security Administration oversee the programs for the Railroad Retirement Plan. Although the two governing bodies are separate, they often overlap and exchange credits. The National Railroad Retirement Investment Trust invests excess funds and uses the returns to pay for additional retirement pensions.

The Railroad Retirement Plan offers two tiers of payment. Tier 1 makes basic retirement payments, while Tier 2 awards additional sums to retirees on the basis of their length of service.

In 2007, the average monthly retirement benefit for railroad retirement workers was $1,940, and for spouses, $710.

Tier 1 of the Railroad Retirement Plan

Tier 1 gives workers basic credits, which can be used in both the Railroad Retirement and Social Security systems. It uses Social Security formulas to calculate payments but uses Railroad Retirement ages and service periods.

This plan is available to retirees who have served at least 10 years and to retirees who have served at least five years as of 1995.

Retirees with at least 30 years of service are eligible for full annuities at age 60. Retirees with less than 30 years service are eligible for partial annuities at age 62 and full benefits at age 65, 66 or 77, depending on birth year.

Retirees who were eligible in 2008 qualified for earnings on the following basis:

  • 90% of the first $711 of monthly earnings
  • 32% of the next $712 to $4,288 of monthly earnings
  • 15% of the next $4,289 or more of monthly earnings

The total of these three numbers equals the total monthly retirement payment. The monthly earnings are averages, adjusted for inflation.

Tier 2 of the Railroad Retirement Plan

The Tier 2 plan rewards workers for longer service. The added benefits are similar to pensions offered in other industries.

This plan is available to retirees who meet the age and service requirements of Tier 1 retirees and who worked additional months beyond the normal contracted months of a salaried railroad job. Tier 2 is also available to retirees who maintain a current connection with the railroad industry. Current connection requirements include working for at least 12 months in the last 30 months prior to making claims.

Retirees may earn credits for a maximum of 12 service months in a calendar year.

Payments made under Tier 2 are calculated on the following basis:

  • The number of years served times the average monthly salary (for 60 months of highest salaries) equals the average salary, and 70% of the average salary equals the monthly retirement payment.
  • If the retiree has "vested dual interests," to offset Social Security reductions, then take 25% of the vested dual benefit amount. This is called the reduction amount. The monthly retirement payment minus the reduction amount equals the vested amount. The sum of the monthly retirement payment and vested amount equals the total monthly retirement payment. The monthly earnings are averages, adjusted for inflation.

 Dealing With Dual Benefits

Railroad retirees who are eligible for Social Security payments are required to cancel those payments against income from the Railroad Retirement Plan. This is because of legislation that eliminates dual benefits to workers receiving both Social Security and pension income.

However, the Railroad Retirement Plan compensates for that reduction with a vested dual benefit, which is about 75% of the retirement check. This is paid in addition to the regular railroad retirement. Only retirees who qualified for dual benefits prior to 1975 and who meet other requirements are eligible for this benefit.

Advantages

  • Social Security credits: Railroad workers who take up employment in other industries that pay into the Social Security system may transfer their Railroad Retirement credits, benefits and taxes to the Social Security system.
  • Social Security refunds: Retirees may also be eligible for a refund from Social Security. These retirees must have paid taxes into both systems while working sometime between 1951 and 1974. The Social Security tax refund is paid as a one-time lump sum.
  • Spousal benefits: Retirement benefits may be passed to spouses, divorced spouses, widows, widowers, children and parents of deceased workers. In order for family members to qualify, the individual must have worked in the railroad industry at the time of retirement or death.
  • Cost of living adjustments: Railroad retirement payments grow each year with cost of living adjustments.

Disadvantages

  • Social Security reductions: Government regulations prevent railroad workers from receiving full benefits from both the Railroad Retirement and Social Security systems. A Railroad Retirement check cancels out any funds up to the amount that the retiree might qualify for through Social Security.
  • Other pension reductions: Retirees who received pensions from other U.S. government jobs, nonprofit organizations and some foreign governments after 1985 will have their Tier 1 payment reduced. The amount is usually not more than half the other pension.
LifeWire, a part of The New York Times Company, provides original and syndicated online lifestyle content. Helen Kaiao Chang is a writer specializing in business, motivational and lifestyle topics. She may be reached at www.oceancloudmedia.com.
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