The Railroad Retirement and Survivors' Improvement Act of 2001, signed into law December 21, 2001, liberalized early retirement benefits for 30-year employees and their spouses, eliminated a cap on monthly retirement and disability benefits, lowered the minimum service requirement from 10 years (120 months) to 5 years (60 months) of service if performed after 1995, and provided increased benefits for some widow(er)s. Financing sections in the law provided for the investment of railroad retirement funds in nongovernmental assets, adjustments in the payroll tax rates paid by employers and employees, and the repeal of a supplemental annuity work-hour tax. The law was based on joint recommendations to Congress negotiated by a coalition of rail labor organizations and rail freight carriers.
The law amended 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 are also eligible for full annuities at age 60. Full 60/30 benefits had not been payable since 1983 legislation reduced such early retirement benefits.
The law eliminated, 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.
Basic Service Requirement
The legislation lowered the minimum eligibility requirement for regular railroad retirement annuities from 10 years (120 months) of creditable railroad service to 5 years (60 months) of creditable railroad service for those with 5 years of service rendered after 1995. This provision was effective January 1, 2002, and was not retroactive.
The legislation established an "initial minimum amount" 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, minus any applicable reductions. Widow(er)s' annuities computed on the basis of the initial minimum amount will not increase until the amount payable under previous law plus cost-of-living increases is higher than the initial minimum amount.
This provision was effective February 1, 2002, and was not retroactive. It applied to widow(er)s on the rolls before the effective date only if the annuity the widow(er) was receiving on the effective date was less than she or he would have received had the legislation been in effect on the date the widow(er)'s annuity began.
The legislation provided for the transfer of railroad retirement funds from the Railroad Retirement Accounts to the National Railroad Retirement Investment Trust, whose Board of seven trustees is empowered to invest Trust assets in nongovernmental assets, such as equities and debt, as well as in governmental securities. The sole purpose of the Trust is to manage and invest railroad retirement assets.
The Trust is a tax-exempt entity independent from the Federal Government. Its Board of Trustees is comprised of the following: three members selected by rail labor to represent the interests of labor; three members selected by rail management to represent management interests; and one independent member selected by a majority of the other six members. The Trustees are subject to fiduciary standards similar to those required by the Employee Retirement Income Security Act. The Trust must submit an annual report to Congress on its operations.
Effect on Payroll Tax Rates
The legislation reduced 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 repealed 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 was reduced from 16.10 percent to 15.60 percent in 2002 and to 14.20 percent in 2003. The tier II tax rate for rail employee representatives was 14.75 percent in calendar year 2002 and 14.20 percent in 2003.
While there was no change in the tier II tax rate of 4.90 percent on employees in the years 2002 and 2003, starting with calendar year 2004 tier II taxes on both employers and employees have been 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 range between 8.20 percent and 22.10 percent, while the tier II tax rate for employees ranges between 0 percent and 4.90 percent. In 2005, as a result of this provision, the tier II tax rate on employees decreased to 4.40 percent from 4.90 percent. The rate on employers and rail employee representatives decreased to 12.60 percent from 13.10 percent. The 2006 rates were the same as in 2005. In 2007, the tier II tax rate on employees decreased from 4.40 percent to 3.90 percent and on employers it decreased from 12.60 percent to 12.10 percent. Those rates remained the same through 2012. In 2013, the tier II tax rate on employees increased from 3.90 percent to 4.40 percent. The rate on employers increased from 12.10 percent to 12.60 percent. Those rates did not change in 2014. In 2015, the tier II tax rate on employees increased from 4.40 percent to 4.90 percent. The rate on employers increased from 12.60 percent to 13.10 percent. Those rates remain unchanged through 2017.
Supplemental Annuity Funding
In addition to repealing the supplemental annuity work-hour tax, the legislation eliminated the separate Supplemental Annuity Account. Supplemental annuities are funded through the National Railroad Retirement Investment Trust.