What Is the Railroad Retirement System?

Learn how the Railroad Retirement plan works and calculates benefits

Railway workers using digital tablet

Monty Rakusen / Getty Images

The Railroad Retirement system is a national retirement program for U.S. railroad workers. Understanding the structure and benefits of this unique system can help you plan for and achieve financial security in retirement.

How the Railroad Retirement System Works

Railroad workers don't participate in the Social Security system. Instead, they pay higher taxes than most employees who pay into Social Security. Under the Railroad Retirement Act, those taxes are funneled to the Railroad Retirement system and used to fund basic retirement benefits for railroad workers and an investment trust that generates returns for the pension fund.

The Railroad Retirement system, while separate from and parallel to the Social Security Administration, is overseen by the administration and the Railroad Retirement Board. The Social Security Administration collects taxes to fund the program, while the Railroad Retirement Board is tasked with distributing benefits to eligible railroad industry employees and their family members to provide income assurance during retirement. These two governing bodies cooperate in determining an individual's benefits. A third body, the National Railroad Retirement Investment Trust, invests excess funds and uses the returns to pay for additional retirement pensions.

Benefits Under the Railroad Retirement System

The Railroad Retirement system offers two tiers of payment: Tier 1 represents basic retirement payments, while Tier 2 awards additional sums to retirees based on their length of service.

Tier-1 Benefits

This portion of the payment is based on combined credits under the Railroad Retirement and Social Security systems. It uses Social Security formulas to calculate payments to retirees but Railroad Retirement ages and service periods.

To calculate the payment, an employee's creditable earnings are adjusted to account for fluctuations in lifetime earnings, and the adjusted earnings are used to figure the worker's indexed monthly earnings. The total Tier-1 payment amounts to the sum of the first $926 of indexed monthly earnings, plus 32% of the earnings over $926, plus 15% of the earnings over $5,583.

This plan is available to retirees who have served at least 10 years of service for a covered employer under the Railroad Retirement Act, or at least five years after 1995.

Retirees with at least 30 years of service are eligible for full annuities at age 60. Retirees with less than 30 years of service are eligible for partial annuities at age 62 and full benefits at age 65 to 67, depending on their birth year.

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

Tier-2 Benefits

This payment tier is awarded based on the tenure of railroad service. The added benefits are similar to pensions offered in other industries.

The benefit amounts to 0.7 of 1% of the result of the years of service multiplied by the worker's average monthly income in his 60 highest-earning months.

This plan is available to retirees who meet the age and service requirements of Tier-1 retirees and who worked additional months beyond the normally 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 a claim.

Dual Social Security and Railroad Retirement Benefits

For railroad retirees who are eligible for Social Security payments, the Tier-1 payment is reduced by the Social Security benefit or any employee railroad retirement employee annuity entitled to a survivor of the worker.

However, the Railroad Retirement Plan compensates for that reduction with what's called a "vested dual benefit." This benefit is paid in addition to the regular railroad retirement. Only retirees who qualified for dual benefits prior to 1975 and who meet other vesting requirements are eligible for this benefit.

Advantages to this system include:

  • Railroad workers who also have been employed in other industries that pay into Social Security may transfer their Railroad Retirement credits, benefits, and taxes to the Social Security system.
  • Retirees may also be eligible for a refund for excess payments toward Social Security. These retirees must have paid taxes into both systems while working between 1951 and 1974. The Social Security tax refund is paid as a one-time lump sum.
  • 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.
  • Railroad retirement payments grow each year with cost of living adjustments.

Disadvantages of the system include:

  • 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.
  • 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.

Is the Railroad Retirement System Worth It?

The Railroad Retirement program provides benefits to eligible railroad workers and their families that can help provide income security during retirement. The eligibility criteria are strict, and the formulas for calculating benefits are exacting, especially if you have also worked for a non-railroad employer and accrued Social Security benefits. However, the benefits are relatively generous, making them worthwhile for those who are eligible.

Although these guidelines can help you assess your expected benefit from the program, for information specific to your situation, contact the local Railroad Retirement Board field offices using the RRB's field office locator.

Edited by Scott Spann