5-1 

SECTION 5 - EARNED ENTITLEMENTS FOR RAILROAD 

EMPLOYEES 

CONTENTS 

Overview 

The Retirement and Survivor Annuity Structure 

 Tier 1 and Tier 2 Benefits 

 Dual Benefit Payments 

 Disability Annuities 

 Spouse Annuities 

 Supplemental Annuities 

 Survivor Benefits 

 Lump-Sum Death Benefits 

Program Data 

Financing the System 

 Payroll Taxes 

 Financial Interchange 

 General Revenue Appropriations 

 Investment Income 

Income Taxation of Railroad Retirement Benefits 

Financial Status of the Railroad Retirement System 

The Railroad Unemployment Insurance Program 

 Overview 

 Benefits and Eligibility Requirements 

 Financing 

Legislative History 

References 

OVERVIEW 

Retirement, unemployment compensation, sickness, disability, and death 

benefits for railroad employees are administered by the U.S. Railroad Retirement 

Board (RRB), a Federal agency headquartered in Chicago. That these entitlement 

benefits for a particular private industry are a function of Federal authority follows 

from actions taken during the 1930s, when threats to the stability of the nation's 

railroads caused Congress to pass legislation placing the industry's primary 
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employee benefit programs under Federal law. Federal involvement in the rail 

industry was not unprecedented. Indeed, much of the foundation underlying the 

enormous success the industry enjoyed was in place because the Federal 

Government provided numerous incentives for early development of this first great 

industrial giant. 

The RRB, which refers both to the agency that administers the Federal 

benefits of industry employees and to the 3-member governing board that oversees 

its operations, maintains records on 12 million present and former railroad 

employees. The RRB disbursed $8.6 billion in retirement and survivor benefits to 

684,000 annuitants during fiscal year 2002. During the 2001-2002 benefit year, the 

RRB disbursed $47 million in daily compensation to about 18,000 unemployed 

workers and $51 million in net sickness benefits to 23,000 employees. The RRB 

paid $5 million in lump-sum payments to survivors of deceased workers in fiscal 

year 2002. Table 5-1 provides an overview of cash benefits received by various 

categories of beneficiaries in February 2003. Through its payroll and beneficiary 

record keeping system, the RRB verifies the collection of taxes on payroll and 

benefits with the Internal Revenue Service, which in fiscal year 2002 collected $4.6 

billion in taxes on railroad payrolls and $343 million in taxes on railroad retirement 

beneficiary payments. 

In the House of Representatives, jurisdiction over Railroad Retirement and 

Unemployment Benefit Programs is divided between two standing committees. The 

Transportation and Infrastructure Committee has jurisdiction over legislation 

pertaining to “railroads . . . and railroad retirement and unemployment (except 

revenue measures related hereto).” The Subcommittee on Railroads of the 

committee has primary responsibility for the Railroad Retirement Act (RRA) and 

amendments affecting railroad retirement. The Committee on Ways and Means 

has jurisdiction over all revenue measures, including the Railroad Retirement Tax 

Act (chapter 22 of the Internal Revenue Code; see Research Institute, 1997). Within 

the Committee on Ways and Means, jurisdiction over employment taxes and trust 

fund operations relating to the Railroad Retirement System lies within the 

Subcommittee on Social Security. 

THE RETIREMENT AND SURVIVOR ANNUITY STRUCTURE 

The Railroad Retirement System provides retirement, disability and survivor 

annuities to workers whose employment was connected with the railroad industry 

for at least 10 years, or in some cases at least 5 years after 1995. The program is 

governed by the Railroad Retirement Act, Federal legislation enacted by Congress 
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with input from all affected segments of the rail industry system. Railroad 

retirement came into existence in 1936, and was substantially modified by the 

Railroad Retirement Act of 1974 (Public Law 93-445) which provided for closer 

coordination with the Social Security System. Credits are primarily secured by 

employment in the railroad industry, although any Social Security credits earned 

during employees' work careers are included in the benefit computation. Benefits 

are financed through a combination of employee, employer, and Federal 

Government contributions. 

TABLE 5-1--MONTHLY RAILROAD RETIREMENT CASH BENEFITS IN 

CURRENT PAYMENT STATUS, FEBRUARY 2003 

Category of Beneficiary Number Percent of Total Average Monthly Benefit 

Retired Workers 249,900 39.3 $1,509 

Disabled Workers 1 45,700 7.2 1,872 

Spouse 145,600 22.9 595 

Divorced Spouse 3,500 0.5 361 

Aged Widow(er)s 157,400 24.7 968 

Disabled Widow(er)s 5,200 0.8 813 

Widowed Mothers/Fathers 1,100 0.2 1,243 

Remarried Widow(er)s 5,500 0.9 640 

Divorced Widow(er)s 9,500 1.5 644 

Children 12,800 2.0 743 

Parents 100 (2) 646 

Total 636,100 100.0 $1,144 1

 Under full retirement age. 

2

 Less than 0.05 percent. 

Note: Includes tier 1, tier 2, and vested dual benefits. Excludes 130,900 supplemental employee 

annuities averaging $42. Total includes fewer than 5 survivor option annuities averaging $70, payable 

under laws in effect before August 1946. 

Source: U.S. Railroad Retirement Board. 

The 1974 act established three benefit components. The ongoing benefit 

system was divided into two “tiers,” one which approximates Social Security (tier 

1) and one which provides a retirement benefit specifically for railroad workers 

(tier 2). The third component, a vested dual benefit, preserved certain benefits for 

employees who qualified for both railroad retirement and Social Security benefits 

prior to the 1974 act. 

The Railroad Retirement System was substantially modified again in 2001. 

The Railroad Retirement and Survivors’ Improvement Act of 2001 (Public Law 

107-90), signed into law by President Bush on December 21, 2001, made several 

changes to railroad retirement benefits and financing. The 2001 law expanded 

benefits for some widows and widowers; lowered the minimum age at which 

employees with 30 years of experience may be eligible for full retirement benefits; 
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reduced the number of years required to be fully vested for tier 2 benefits; repealed 

a maximum limitation on benefits; expanded the system’s investment authority to 

include investment of trust funds in nongovernmental assets; and phased in changes 

to the tier 2 tax structure. About 149,000 spouses and divorced spouses of retired or 

disabled workers receive railroad retirement benefits. About 192,000 survivors are 

on the RRB annuity rolls. 

TIER 1 AND TIER 2 BENEFITS 

Employees are eligible for a tier 1 retirement annuity if they have at least 10 

years of total railroad service, or at least 5 years of railroad service after 1995 and 

“insured status” under Social Security rules (generally 40 quarters of coverage) 

based on combined railroad retirement and Social Security-covered earnings. 

Railroad retirement tier 1 benefits are based on the Social Security benefit formula, 

using the employee's combined railroad earnings and Social Security-covered 

earnings up to the Social Security maximum wage base. The tier 1 benefit is 

roughly equal to what the Social Security benefit would have been had the worker's 

railroad employment been covered by the Social Security program. Because the tier 

1 benefit is based on both railroad and Social Security employment, any Social 

Security benefit to which the railroad retirement beneficiary also is entitled is 

subtracted from the tier 1 benefit amount. Tier 1 benefits are automatically adjusted 

annually for the cost of living by the same percentage as Social Security benefits. 

Tier 2 benefits, which are payable in addition to tier 1 benefits, are based 

entirely on the employee's service in the railroad industry. Employees are eligible 

for a tier 2 retirement benefit if they have at least 10 years of total railroad service, 

or at least 5 years of railroad service after 1995. (Employees must have at least 10 

years of total railroad service to be eligible for a tier 2 disability benefit before age 

62.) For current retirees, the tier 2 benefit is equal to seven-tenths of 1 percent of 

the employee's average monthly earnings in the 60 months of highest earnings, 

times the total number of years of railroad service, less 25 percent of any employee 

vested dual benefit payable. Tier 2 benefits are automatically adjusted annually at a 

rate equal to 32.5 percent of the Social Security cost-of-living adjustment. 

DUAL BENEFIT PAYMENTS 

One of the primary purposes of the Railroad Retirement Act of 1974 was to 

coordinate railroad retirement and Social Security benefit payments to eliminate 

certain dual benefits considered to be a “windfall” for persons receiving benefits 
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under both systems. This “windfall” was a result of the fact that the total benefit 

these retirees received from both systems was higher than the benefit they would 

have received if their benefit were based on their total career earnings but paid only 

under railroad retirement. The total benefit was higher in these cases because the 

Social Security benefit formula favors workers who have low average earnings 

throughout their careers. Low career average earnings result from a career of low 

wages or from a relatively short career in Social Security-covered employment. 

Workers who spent a period of time in employment covered by Social Security 

received the benefit of this “tilt” in the benefit formula, even though they may not 

have had low career earnings. 

As a result of the 1974 act, “windfall” benefits were eliminated for any 

railroad employees not qualified for such benefits as of January 1, 1975. The 

benefits generally were preserved for those individuals who were vested under both 

railroad retirement and Social Security before 1975. These vested dual benefits are 

financed by the general revenue fund through an annual appropriation, rather than 

from the Social Security or Railroad Retirement Trust Funds. They are subject to 

reduction during any year in which the appropriation is less than the amount 

required for full benefit payments. The total appropriation for the Dual Benefits 

Payments Account includes an estimation of the amount collected from income 

taxes on the dual benefit, with the implication that dual benefits are partially 

financed by income taxes on dual benefits. The fiscal year 2002 appropriation was 

$146 million, including the income tax transfers. The fiscal year 2003 appropriation 

was $131 million, including income tax transfers. Currently paid to about 12 

percent of railroad retirement beneficiaries, the average vested dual benefit is $147 

per month. 

DISABILITY ANNUITIES 

Workers who are totally and permanently disabled for all employment are 

eligible for tier 1 and tier 2 benefits if they have at least 10 years of total railroad 

service. Workers who have at least 5 years of railroad service after 1995 (but less 

than 10 years of total service) are eligible only for tier 1 benefits before age 62 if 

their combined railroad retirement and Social Security earnings credits satisfy 

Social Security eligibility requirements (tier 2 benefits would be payable at age 62). 

Otherwise, workers with periods of employment under Social Security would have 

their railroad retirement credits transferred to Social Security and eligibility for 

Social Security disability insurance payments would be determined under Social 

Security program rules. 
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In addition, workers who become totally disabled for their regular railroad 

occupation are eligible for an occupational disability benefit at age 60 with at least 

10 years of railroad service, and at any age with at least 20 years of railroad service. 

To qualify, the worker must have a current connection with the industry, which 

generally means that he or she worked for a railroad in at least 12 of the 30 

consecutive months before the month in which an annuity begins to accrue. 

SPOUSE ANNUITIES 

Spouses of retired or disabled railroad retirement beneficiaries also may 

qualify for benefits, the amount of which may depend on such factors as the 

spouse's age and work history, and the age, date of retirement, and years of railroad 

service of the railroad worker. Spouses also may qualify for benefits based on 

caring for a rail worker's unmarried or disabled child. Tier 1 spouse benefits are 

based on 50 percent of the railroad worker's tier 1 benefit. Tier 2 spouse benefits 

are equal to 45 percent of the retired or disabled worker's tier 2 benefit. Divorced 

spouses also may be eligible for benefits from tier 1 but not from tier 2 unless 

specified in a divorce decree. 

SUPPLEMENTAL ANNUITIES 

Under the 1974 act, employees may qualify for a supplemental annuity at age 

60 if they have at least 30 years of total railroad service, or at age 65 if they have 

25-29 years of railroad service, and a current connection with the railroad industry. 

The supplemental annuity is $23 for 25 years of service plus $4 for each additional 

year of service, up to a maximum of $43 per month. Under the 1981 Omnibus 

Budget Reconciliation Act (OBRA), employees first hired after October 1, 1981, 

are not eligible for supplemental annuities. 

SURVIVOR BENEFITS 

Annuities may be payable under both tiers to surviving spouses, children, and 

certain other beneficiaries. With the exception of the lump-sum death benefit 

(discussed below), eligibility for survivor benefits depends on whether the 

employee was insured under the RRA at the time of death. An employee is insured 

if he or she has at least 10 years of railroad service, or at least 5 years of service 

after 1995, and a current connection with the railroad industry. If the worker had at 

least 5 years of railroad service after 1995 (but less than 10 years of total service), 
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tier 1 and tier 2 survivor benefits are payable if the worker had insured status under 

Social Security rules based on combined railroad retirement and Social Securitycovered earnings. Otherwise, only tier 2 survivor benefits are payable. Generally, 

a tier 1 survivor benefit, which is based on the worker's combined Social Security 

and railroad retirement earnings credits, is approximately equal to that provided by 

Social Security (benefit is based on the Social Security benefit formula). The tier 2 

widow(er)’s amount is equal to 100 percent of the deceased worker’s tier 2 amount. 

Public Law 107-90 established an “initial minimum amount” for widow(er)’s 

benefits which yields, in effect, a widow(er)’s tier 2 benefit equal to the tier 2 

benefit the employee would have received at the time the widow(er)’s annuity is 

awarded (minus any applicable age reduction). It does so by adding a “guaranty 

amount,” initially set at 50 percent of the employee’s tier 2 amount, to the 100 

percent tier 1 and 50 percent tier 2 benefits provided under prior law. This guaranty 

amount is offset each year by the dollar amount of the cost-of-living increases 

payable in both the tier 1 and tier 2 benefits provided under prior law. As a result, 

such a widow(er)’s net benefit payment will not increase until such time as the 

widow(er)’s annuity, as computed under prior law with all interim cost-of-living 

increases otherwise payable, exceeds the widow(er)’s annuity computed under the 

initial minimum amount formula. 

LUMP-SUM DEATH BENEFITS 

A lump-sum death benefit is paid when there is no person eligible for a 

monthly survivor benefit in the month in which the worker died. The lump-sum 

death benefit is payable if the worker had a current connection with the railroad 

industry and at least 10 years of total railroad service, or 5 years of service after 

1995 and insured status under Social Security rules. For employees with at least 10 

years of railroad service before 1975, the amount of the benefit is based on the 1937 

act (the average benefit payable is about $900). For all other railroad workers, the 

benefit is equal to the amount that would be paid under the Social Security Act 

($255, unless survivor benefits are paid). 

Generally, if monthly benefits are not payable at the time of the employee’s 

death or in the future, a residual lump-sum payment may be made. A residual 

lump-sum payment is, in effect, a refund of the employee's pre-1975 railroad 

retirement taxes plus an amount in lieu of interest, less benefits already paid. An 

employee can designate a person as beneficiary for any residual payment that ever 

becomes due. Otherwise, it is payable to the widow(er), children, or other family 

members in a prescribed order of precedence. Once a residual is paid, no further 
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benefits are payable on the basis of the employee’s railroad earnings. (A widow(er) 

or parent under age 60 can waive rights to future monthly benefits in order for the 

residual payment to be made. The widow(er) or parent who elects a residual also 

gives up rights to Medicare based on the deceased employee’s railroad service.) 

TABLE 5-2--TOTAL BENEFIT PAYMENTS AND NUMBER OF 

BENEFICIARIES, SELECTED FISCAL YEARS 1950-2002 

Benefit Payments (In Millions) 1 Beneficiaries (In Thousands) 2

Total Dollars Fiscal 

Year 

Current Constant3 Retirement Survivor Total Retirement Survivor 

1950 $301.6 $2,476.8 $248.2 $53.4 458 272 189 

1955 549.7 3,874.2 424.5 125.2 700 452 252 

1960 925.7 5,536.9 711.5 214.2 873 584 299 

1965 1,117.7 6,086.4 834.0 283.7 980 650 340 

1970 1,593.5 6,937.8 1,177.0 416.5 1,051 702 366 

1975 3,060.3 9,365.1 2,222.4 837.9 1,094 733 380 

1980 4,730.6 9,782.2 3,389.8 1,340.8 1,084 731 367 

1981 5,286.6 9,912.9 3,779.9 1,506.7 1,074 726 363 

1982 5,725.5 10,028.1 4,097.9 1,627.6 1,067 722 359 

1983 6,041.1 10,110.7 4,354.2 1,686.9 1,056 715 357 

1984 6,099.8 9,728.5 4,417.8 1,682.0 1,040 705 351 

1985 6,250.9 9,638.3 4,539.3 1,711.6 1,023 694 343 

1986 6,329.5 9,524.5 4,608.1 1,721.4 1,007 684 339 

1987 4

 6,520.3 9,549.5 4,773.6 1,746.7 994 675 333 

1988 6,675.9 9,477.1 4,915.0 1,760.9 981 666 328 

1989 6,938.5 9,497.9 5,140.9 1,797.6 967 659 322 

1990 7,194.6 9,526.6 5,357.0 1,837.6 951 650 315 

1991 7,490.8 9,499.4 5,593.2 1,897.6 932 638 307 

1992 7,693.9 9,437.0 5,754.0 1,939.9 913 626 301 

1993 7,872.3 9,418.3 5,896.0 1,976.2 898 615 298 

1994 7,978.9 9,351.8 5,978.9 1,999.9 874 599 288 

1995 8,059.2 9,226.4 6,042.9 2,016.3 847 582 282 

1996 8,113.6 9,075.1 6,089.1 2,024.4 818 565 272 

1997 8,205.7 8,991.9 6,166.3 2,039.4 800 549 263 

1998 8,246.6 8,924.0 6,199.0 2,047.5 772 530 254 

1999 8,248.5 8,785.8 6,207.2 2,041.3 748 514 246 

2000 8,294.5 8,612.5 6,254.1 2,040.3 724 499 237 

2001 8,411.4 8,542.0 6,352.6 2,058.8 700 483 228 

2002 8,643.5 8,643.5 6,535.9 2,107.5 684 475 219 1

 Retirement benefits include tier 1 and tier 2 employee and spouse benefits, employee and spouse 

vested dual benefits, and supplemental employee annuity payments. Survivor benefits include 

tier 1 and tier 2 benefits, vested dual benefits and lump-sum payments. Total benefits include hospital 

insurance benefits for services in Canada. 

2

 Number of beneficiaries represents all individuals paid benefits in each year. In the total number for 

each year, beneficiaries are counted only once, even though they may have received more than one 

type of benefit. In fiscal year 2002, some 10,000 individuals received both retirement and survivor 

benefits. Figures are partly estimated. 

3

 Constant 2002 dollars were calculated using the Office of Management and Budget's composite 

outlay deflator; see Executive Office of the President (2003), table 10.1. 

4 Benefits paid for fiscal years beginning in 1987 are not strictly comparable to those for prior years 

due to a change in accounting systems. 

Source: U.S. Railroad Retirement Board. 
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PROGRAM DATA 

Table 5-2 summarizes railroad retirement benefit payments and the number 

of recipients in selected fiscal years 1950-2002. The table shows that the number of 

beneficiaries increased until about the mid-1970s and has declined thereafter. 

Similarly, as shown by the constant dollar column in table 5-2, after rapid increases 

between 1950 and about 1975, total benefit payments increased at a modest rate 

until the early 1980s and then declined by about $1.5 billion over the next 19 years. 

Table 5-3 presents data on new awards for February 2003. 

TABLE 5-3--NUMBER AND AVERAGE AMOUNT OF NEW AWARDS, 

FEBRUARY 2003 

Beneficiary Type Number Average Amount 

Employee Annuities: 

 Retired Workers 794 $2,192 

 Disabled Workers (Under Full Retirement Age) 394 2,193 

Spouse 756 763 

Divorced Spouse 30 427 

Survivor Benefits: 

 Aged Widow(er)s 804 1,344 

 Disabled Widow(er)s 18 1,204 

 Widowed Mothers and Fathers 18 888 

 Divorced and Remarried Widow(er)s 86 697 

 Children 60 989 

 Parents 0 0 

 Insurance Lump Sums 457 877 

 Residual Benefits 5 4,130 

Total 3,422 ----- 

Source: U.S. Railroad Retirement Board. 

FINANCING THE SYSTEM 

The Railroad Retirement and Survivors’ Improvement Act of 2001 (Public 

Law 107-90) made significant changes to the way the Railroad Retirement System 

is financed. The 2001 law provided for investment of railroad retirement funds in 

nongovernmental assets (as well as government securities), adjustments in payroll 

tax rates paid by employers and employees, and repeal of the supplemental annuity 

work-hour tax paid by employers. Railroad retirement and survivor benefits are 

financed by: (1) payroll taxes paid by covered employees and employers on railroad 

earnings, up to a certain maximum wage base; (2) income from the Social Security 

financial interchange; (3) appropriations from general revenues (including transfers 

of income taxes collected on benefits); and (4) investment income. 
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PAYROLL TAXES 

The primary source of income to the Railroad Retirement Account is payroll 

taxes levied on covered employers and their employees. These taxes are imposed 

on wages below an annual maximum amount, known as the “wage base.” 

Currently, both employers and employees pay a tier 1 tax that is equivalent to the 

combined Social Security (Old-Age, Survivors and Disability Insurance) and 

Hospital Insurance (Part A of Medicare) tax rate. In addition, a tier 2 tax is paid by 

both rail employers and employees. The 2003 annual tier 1 and tier 2 wage bases 

are $87,000 and $64,500, respectively. Since 1994, there has been no wage limit for 

the hospital insurance portion of the tax (1.45 percent on employers and employees, 

each). Thus, this tax is imposed on all wages. 

Under the Railroad Retirement and Survivors’ Improvement Act of 2001 

(Public Law 107-90), the tier 2 tax rate paid by employers was lowered from 16.1 

percent to 15.6 percent in 2002 and 14.2 percent in 2003. The tier 2 tax rate paid 

by employees remained unchanged at 4.9 percent in 2002 and 2003. Beginning in 

2004, tax rates paid by employers and employees will be adjusted annually based 

on the 10-year average 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 2 tax rates for employers will be between 8.2 

percent and 22.1 percent. Tier 2 tax rates for employees will be between 0 percent 

and 4.9 percent. Scheduled tier 1 tax rates and projected tier 2 tax rates are shown 

in Table 5-4. 

The tier 1 wage base is equal to the Social Security wage base and 

automatically increases with wage growth in the economy. The tier 2 wage base is 

equal to what the Social Security wage base would have been without the ad hoc 

increases in the wage base established by the Social Security Amendments of 1977 

(Public Law 95-215). 

FINANCIAL INTERCHANGE 

The Railroad Retirement System and the Social Security Program have been 

coordinated financially since 1951. The purpose of the financial interchange is to 

place the Social Security Trust Funds in the same position they would have been in 

if railroad employment had been covered under Social Security since its inception. 

Generally, under the interchange, for a given fiscal year the revenue that would 

have been collected by the Social Security Trust Funds if railroad employment had 

been covered directly by Social Security is netted against the amount of benefits 
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Social Security would have paid to railroad beneficiaries based on railroad and 

nonrailroad earnings during that period. Where Social Security benefits that would 

have been paid exceed income to the trust funds that would have been due, the 

excess, plus an allowance for interest and administrative expenses, is transferred 

from the Social Security Trust Funds to the Railroad Retirement Board's (RRB) 

Social Security Equivalent Benefit Account. If income exceeds benefits, a transfer 

is made from the RRB's Social Security Equivalent Benefit Account to the Social 

Security Trust Funds. (Before 1985, transfers were made to or from the Railroad 

Retirement Account.) 

TABLE 5-4--SCHEDULED TAX RATES FOR TIER 1 AND TIER 2, 

SELECTED YEARS 1975-2008 

Tier 1 Tier 2 Combined 2

Year Employer Employee Wage 

Base1 Employer Employee Wage 

Base Employer Employee 

1975 5.85 5.85 $14,100 9.50 0.00 $14,100 15.35 5.85 

1980 6.13 6.13 25,900 9.50 0.00 20,400 15.63 6.13 

1985 7.05 7.05 39,600 13.75 3.50 29,700 20.80 10.55 

1986 7.15 7.15 42,000 14.75 4.25 31,500 21.90 11.40 

1987 7.15 7.15 43,800 14.75 4.25 32,700 21.90 11.40 

1988 7.51 7.51 45,000 16.10 4.90 33,600 23.61 12.41 

1989 7.51 7.51 48,000 16.10 4.90 35,700 23.61 12.41 

1990 7.65 7.65 51,300 16.10 4.90 38,100 23.75 12.55 

1991 7.65 7.65 53,400 16.10 4.90 39,600 23.75 12.55 

1992 7.65 7.65 55,500 16.10 4.90 41,400 23.75 12.55 

1993 7.65 7.65 57,600 16.10 4.90 42,900 23.75 12.55 

1994 7.65 7.65 60,600 16.10 4.90 45,000 23.75 12.55 

1995 7.65 7.65 61,200 16.10 4.90 45,300 23.75 12.55 

1996 7.65 7.65 62,700 16.10 4.90 46,500 23.75 12.55 

1997 7.65 7.65 65,400 16.10 4.90 48,600 23.75 12.55 

1998 7.65 7.65 68,400 16.10 4.90 50,700 23.75 12.55 

1999 7.65 7.65 72,600 16.10 4.90 53,700 23.75 12.55 

2000 7.65 7.65 76,200 16.10 4.90 56,700 23.75 12.55 

2001 7.65 7.65 80,400 16.10 4.90 59,700 23.75 12.55 

2002 7.65 7.65 84,900 15.60 4.90 63,000 23.25 12.55 

2003 7.65 7.65 87,000 14.20 4.90 64,500 21.85 12.55 

2004 7.65 7.65 88,200 13.10 4.90 65,400 20.75 12.55 

2005 7.65 7.65 92,100 13.10 4.90 68,400 20.75 12.55 

2006 7.65 7.65 96,000 13.10 4.90 71,400 20.75 12.55 

2007 7.65 7.65 99,900 13.10 4.90 74,100 20.75 12.55 

2008 7.65 7.65 103,500 13.10 4.90 76,800 20.75 12.55 

1

 The wage base for the 1.45-percent hospital insurance tax, included in the 7.65-percent tier 1 rate, is 

$125,000 in 1991, $130,200 in 1992, $135,000 in 1993, and no limit in 1994 and later. 2

 These rates apply only up to the tier 2 maximum wage base. 

Note: Wage bases and tier 2 tax rates for years 2004-2008 are projected. 

Source: U.S. Railroad Retirement Board. 
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The determination of the amount to be transferred through the financial 

interchange for a given fiscal year is made no later than June of the year following 

the close of the preceding fiscal year. Table 5-5 shows the actual operation of the 

financial interchange for selected years for the two Social Security Trust Funds 

(Old-Age and Survivors Insurance and Disability Insurance) and the Medicare 

Hospital Insurance Trust Fund. 

In order to make funds available to the Social Security Equivalent Benefit 

Account from the forthcoming financial interchange on a more current basis, the 

Railroad Retirement Solvency Act of 1983 provided for transfers from general 

Treasury funds to the Social Security Equivalent Benefit Account each month. The 

amount transferred each month equals the Social Security benefits paid from the 

account during the month less the Social Security taxes received by the account in 

that month. The amount so transferred for a particular month is repaid when the 

Social Security System makes reimbursement for that month under the financial 

interchange program. 

GENERAL REVENUE APPROPRIATIONS 

Vested dual benefits are funded solely through general revenue 

appropriations. The Congress authorized such funding through the year 2003 in the 

1974 act that substantially reformed the Railroad Retirement System. The total 

appropriated for the first 28 fiscal years (1976-2003) for which these benefits were 

payable was $8.12 billion. 

The Omnibus Budget Reconciliation Act of 1981 (Public Law 97-35) 

established a Dual Benefits Payments Account. Each year an amount which is 

appropriated for the payment of vested dual benefits is placed in this account. If the 

amount appropriated is insufficient to pay full vested dual benefits to all eligible 

beneficiaries for the year, the Railroad Retirement Board is authorized to prorate 

payments from the dual benefits account so that the amounts paid do not exceed the 

amounts appropriated. 

In addition to amounts transferred to the Dual Benefits Payments Account 

through the regular appropriations process, the Railroad Retirement Solvency Act 

of 1983 provided for the appropriation of approximately $1.7 billion to the Railroad 

Retirement Account in three installments paid on January 1, 1984, 1985, and 1986. 

These three appropriations were to reimburse the Railroad Retirement Account for 

prior shortfalls in annual appropriations. The actual amounts received, including 

interest, totaled $2.128 billion. This amount is not included in the figure given 

above for total appropriations between 1976 and 2003. 
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 INVESTMENT INCOME 

 Funds that are not needed immediately to pay benefits or administrative 

expenses are invested to provide additional income for the Railroad Retirement 

System. Before enactment of the Railroad Retirement and Survivors’ Improvement 

Act of 2001 (Public Law 107-90) in December 2001, the Railroad Retirement 

Board was authorized to invest funds only in interest-bearing U.S. government or 

U.S. government-guaranteed securities. Public Law 107-90 established the National 

Railroad Retirement Investment Trust (NRRIT), which has authority to invest 

funds in nongovernmental assets (such as equities and debt securities), as well as 

government securities. The NRRIT is not a government agency. It is a 

nongovernmental entity legally domiciled in the District of Columbia and 

administered by a Board of Trustees. 

TABLE 5-5--AMOUNTS TRANSFERRED TO OR FROM (-) 

 THE SOCIAL SECURITY EQUIVALENT BENEFIT ACCOUNT1

 

AND THE SOCIAL SECURITY AND MEDICARE HOSPITAL 

INSURANCE TRUST FUNDS, SELECTED FISCAL YEARS 1954-2002 

[In Millions of Dollars]

Fiscal Year Old Age and 

Survivors Insurance

Disability 

Insurance 

Hospital 

Insurance Total 

Through June 30, 1954 -$21.1 ----- ----- -$21.1 

1955 -7.4 ----- ----- -7.4 

1960 318.4 -$4.9 ----- 313.5 

1965 435.6 23.6 ----- 459.3 

1970 578.8 10.4 -$63.5 525.7 

1975 981.8 28.5 -132.5 877.8 

1980 1,442.0 -12.1 -244.3 1,185.6 

1985 2,310.2 42.7 -371.4 1,981.5 

1990 2,969.3 79.9 -367.4 2,681.8 

1991 3,374.6 82.1 -352.2 3,104.5 

1992 3,148.4 58.0 -374.5 2,831.9 

1993 3,352.5 82.8 -400.5 3,034.9 

1994 3,419.6 106.0 -412.9 3,112.6 

1995 4,052.3 67.8 -396.1 3,724.1 

1996 3,554.1 2.2 -401.3 3,154.9 

1997 3,688.1 59.1 -419.1 3,328.1 

1998 3,662.2 156.8 -419.4 3,399.7 

1999 3,681.4 134.6 -429.9 3,386.1 

2000 3,538.2 159.4 -465.3 3,232.3 

2001 3,273.1 9.7 -469.7 2,813.1 

2002 3,493.3 153.5 -424.7 3,222.1 

 Total 82,339.5 1,914.8 -10,050.3 74,204.1 1

 Before 1985, transfers were made to or from the Railroad Retirement Account. 

Source: U.S. Railroad Retirement Board. 
5-14 

 The Board of Trustees has 7 members: 3 chosen by rail labor, 3 chosen by 

rail employers, and 1 chosen by a majority of the other 6 members to represent the 

general public. With the assistance of independent advisors and investment 

managers, the Board of Trustees invests assets, pays administrative expenses, and 

will transfer funds to a disbursing agent (a qualified nongovernmental financial 

institution) responsible for benefit payments (in the interim, the Treasury 

Department will continue to issue railroad retirement benefit payments). The Board 

of Trustees is subject to reporting and fiduciary standards similar to those under the 

Employment Retirement Income Security Act of 1974 (ERISA), which covers most 

private sector employee benefit plans. If any provisions of the Railroad Retirement 

Act are violated, the Railroad Retirement Board may bring civil action against the 

NRRIT. An independent qualified public accountant will audit the financial 

statements of the trust fund annually. A management report will be submitted each 

fiscal year to Congress, the President, the Railroad Retirement Board, and the 

Office of Management and Budget. 

Public Law 107-90 directed the Railroad Retirement Board (RRB) to transfer 

funds in the Railroad Retirement Account that are not needed to pay current 

administrative expenses to the NRRIT. (Funds needed to pay benefits and related 

administrative expenses are transferred to a disbursing agent.) In addition, the RRB 

was directed to transfer funds in the Social Security Equivalent Benefit Account 

that are not needed to pay current benefits and administrative expenses to the 

NRRIT (such funds may be used to pay benefits or invest in government securities 

only). In fiscal year 2002, the Railroad Retirement Board transferred $1.502 billion 

to the NRRIT. The RRB transferred an additional $10.25 billion between 

October 1, 2002 and January 24, 2003. All eligible assets are expected to be 

transferred to the NRRIT by the end of fiscal year 2003. 

 The NRRIT, which began operations in February 2002, began investment 

activities in September 2002. The NRRIT’s annual report for fiscal year 2002 

indicates that, from September 13-30, 2002, the market value of NRRIT assets 

declined 5.3 percent due to falling stock prices. The report goes on to state that 

“overall during fiscal year 2002, the market value of the total railroad retirement 

assets, including NRRIT investments, increased $1.4 billion after benefit payments 

due in large part to significant increases in the market value of railroad retirement 

investments in Federal securities as interest rates declined during the year” 

(National Railroad Retirement Investment Trust, 2003). 
5-15 

INCOME TAXATION OF RAILROAD RETIREMENT BENEFITS 

Before 1984, railroad retirement benefits, with the exception of supplemental 

annuities, were not subject to Federal income taxation. However, as a result of the 

Railroad Retirement Solvency Act (Public Law 98-76) and the Social Security 

Amendments of 1983 (Public Law 98-21), tier 1, tier 2, and vested dual benefits 

received after December 31, 1983, are subject to taxation. The taxation provisions 

were subsequently amended by the Consolidated Omnibus Budget Reconciliation 

Act of 1985, the Tax Reform Act of 1986, and the Omnibus Budget Reconciliation 

Act of 1993. Under current law, the Social Security-equivalent portions of tier 1 

benefits are taxed in a manner identical to Social Security benefits. The proceeds 

derived from the taxation under pre-OBRA 1993 rules of tier 1 benefits which are 

equivalent to Social Security benefits are deposited in the Social Security 

Equivalent Benefit Account and credited to the Social Security Trust Funds through 

adjustments in the financial interchange. The additional income taxes attributable to 

OBRA 1993 are deposited in the Hospital Insurance Trust Fund (Part A of 

Medicare). Tier 1 benefits in excess of Social Security-equivalent levels (including 

early retirement benefits payable at ages 60-61 and occupational disability 

annuities) and tier 2 benefits are taxed in a manner identical to private and public 

service pensions, with the proceeds deposited in the Railroad Retirement Account. 

Vested dual benefits are taxed like private and public service pensions, with the 

proceeds deposited in the Dual Benefits Payments Account. 

The Omnibus Budget Reconciliation Act of 1987, which increased tier 2 

payroll tax rates in January 1988 by a total of 2 percentage points, allowed revenues 

from Federal income taxes on tier 2 railroad retirement benefits to be returned to 

the Railroad Retirement System until October 1, 1989. Subsequent legislation 

extended the date to October 1, 1990, and then to October 1, 1992. Legislation in 

1994 extended these transfers on a permanent basis. 

 FINANCIAL STATUS OF THE RAILROAD RETIREMENT SYSTEM 

 Along with the investment performance of the NRRIT, one of the most 

important factors affecting the financial status of the Railroad Retirement System is 

the level of employment in the industry. The recent history of industry employment 

is shown in table 5-6. Continuing decline in railroad employment raises concern 

about the financing of the Railroad Retirement System. Section 502 of the Railroad 

Retirement Solvency Act of 1983 requires a report each year by the Board on the 

system's actuarial status, and financing recommendations when appropriate. The 
5-16 

Board's 2003 financial report to Congress, which addresses the 75-year period from 

2002-2076 under optimistic, moderate, and pessimistic employment assumptions, 

indicates no cash flow problems under the optimistic and moderate employment 

assumptions. Under the pessimistic assumptions, cash flow problems are projected 

to occur in 2022 (U.S. Railroad, 2003a). Overall, the report concludes that “barring 

a sudden, unanticipated, large drop in railroad employment, the railroads retirement 

system will experience no cash flow problems during the next 19 years. The longterm stability of the system, however, is not assured. Under the current financing 

structure, actual levels of railroad employment and investment return over the 

coming years will determine whether additional corrective action is necessary.” 

TABLE 5-6--RAILROAD INDUSTRY EMPLOYMENT, 

SELECTED YEARS 1940-2002 

Year Number 

(Thousands) 

1940 1,195 

1945 1,085 

1950 1,421 

1955 1,239 

1960 909 

1965 753 

1970 640 

1975 548 

1980 532 

1985 372 

1990 296 

1995 265 

1996 257 

1997 253 

1998 256 

1999 256 

2000 246 

2001 238 

2002 227 

Source: U.S. Railroad Retirement Board. 

THE RAILROAD UNEMPLOYMENT INSURANCE PROGRAM 

OVERVIEW 

The Railroad Unemployment Insurance System has been in existence since 

1938. Railroad workers were initially covered by the unemployment provisions of 

the Social Security Act of 1935. However, the Railroad Unemployment Insurance 

Act (Public Law 75-722) was passed in 1938 to provide a uniform unemployment 

insurance system for all railroad workers, regardless of the State in which they 
5-17 

worked or lived. The main reasons for this action were to avoid administrative 

problems in handling claims for railroad workers who earned wages in a number of 

States and to accommodate the railroad unions' desire that individuals throughout 

the industry be treated the same for purposes of unemployment compensation. 

Table 5-7 summarizes Railroad Unemployment Program statistics for 

selected years between 1970 and 2002. The table shows projected statistics for 

2003 and 2004. 

BENEFITS AND ELIGIBLITY RE QUIREMENTS 

A new benefit year for unemployment and sickness benefits begins every 

July 1. To qualify in the benefit year beginning July 1, 2002, a worker must have 

base year railroad earnings of at least $2,625 in the preceding calendar year, not 

counting earnings over $1,050 per month. Under the indexing provisions of the law 

reflecting growth in average national wages, a worker must have base year earnings 

of $2,750 in calendar year 2002, not counting earnings of more than $1,100 per 

month, to qualify in the benefit year beginning July 1, 2003. If the base year was 

the first year of railroad service, the worker also must have worked in 5 months of 

that year (see Table 5-8). 

No benefits are payable for the first 7 days of the first claim (or claims) for 

unemployment and sickness in a benefit year. This generally results in a 1-week 

waiting period. A claimant is normally paid for days of unemployment or sickness 

over 4 in 14-day registration periods. The maximum daily benefit payable in the 

benefit year that began July 1, 2002 is $52, and maximum benefits for biweekly 

claims is $520. The maximum daily benefit rate increases to $55 on July 1, 2003 

and $56 on July 1, 2004. 

The program offers "normal” and "extended” benefits. Qualified workers can 

receive normal benefits for up to 130 days or 26 weeks, but the total may not 

exceed their creditable wages in the base year. Workers with at least 10 years of 

railroad service may receive up to 65 additional days or 13 additional weeks of 

extended benefits. The average duration of benefits fluctuates with the 

unemployment rate. In the 1940-2002 period, it ranged from 7.4 to 19.1 weeks and 

averaged 12.1 weeks. 

In 1946, a program of cash sickness benefits was established for railroad 

workers as part of the unemployment compensation system. Sickness benefits are 

financed out of the same employer-paid payroll taxes used to finance 

unemployment compensation benefits. A qualified railroad worker may receive 
5-18 

sickness benefits if he or she files a "statement of sickness” signed by a doctor that 

is mailed within 7 days of the first day for which a day of sickness is claimed. 

A rail worker who is unemployed due to a strike that is not in violation of the 

Railway Labor Act of 1926 can receive unemployment compensation benefits after 

a 14-day waiting period. Unemployment benefits cannot be paid to individuals 

participating in a strike that is in violation of the Railway Labor Act, and is 

therefore “illegal.” Individuals who are unemployed due to an “illegal” strike, but 

who are not actually participating in the strike, are eligible for unemployment 

compensation benefits but are subject to the 14-day waiting period. 

Total expenditures for unemployment and sickness benefits were $98 million 

in benefit year 2001-2002, which was 0.7 percent of total wages paid by the 

industry during the period. This compares to a peak of 5.1 percent in 1959. It is also 

much lower than in benefit year 1983, a recession year, when the figure was 3.9 

percent. Since the beginning of sickness benefits, unemployment benefits have 

comprised over two-thirds of total payments. However, in benefit years ending 

1999 through 2002, they accounted for less than half of the total. 

Benefit payments vary directly with the insured unemployment rate, covered 

employment, average weekly benefit amount, and average duration of benefits. The 

insured unemployment rate is the percentage of workers qualified under the 

Railroad Unemployment Compensation System who drew benefits in a particular 

benefit year. The railroad insured unemployment rate has been high and volatile 

since the beginning of the program, averaging 12 percent. Since 1946, it has ranged 

from 4 percent to 30 percent. 

 Changes in covered employment have short-run and long-run effects on the 

unemployment program. In the short run, when layoffs cause employment to 

decline, the insured unemployment rate and benefits paid increase. In the long run, 

when employers have fewer workers to lay off, benefits decline and the program 

shrinks. Railroad industry employment has declined from 1,195,000 in 1940 to 

227,000 in 2002. From 1940 to 1975, the average annual decline in railroad 

employment was 18,000. Since then, the average annual decline was 12,000. 
TABLE 5-7--RAILROAD UNEMPLOYMENT AND SICKNESS INSURANCE PROGRAM STATISTICS, 

SELECTED YEARS 1970-2004 

Benefit Year Ending In 

Program Statistic 1970 1975 1980 1985 1990 1995 1997 1998 1999 2000 2001 2002 2003 (est) 2

Insured Unemployment 

 (Percent) 1

11 12 17 18 9 6 5 4 5 5 6 7 6 

Coverage (Thousands of 

Qualified Employees) 

748 640 609 459 349 295 285 277 272 278 277 270 259 

Unemployment (Average 

Daily Benefit): 

 Current Dollars $12.61 $12.68 $24.94 $24.98 $30.162 $35.78 $40.57 $42.78 $43.81 $45.45 $47.81 $49.61 $51.60 $

 Constant Dollars3 $54.90 $38.80 $51.57 $38.52 $39.94 $40.96 $44.46 $46.29 $46.66 $47.19 $48.55 $49.61 $50.64 $

Sickness (Average Daily 

Benefit): 

 Current Dollars $12.66 $12.69 $24.97 $24.99 30.252 $35.75 $40.18 $42.90 $43.91 $45.65 $47.88 $49.85 $51.80 $

Constant Dollars3 $55.12 $38.83 $51.63 $38.53 $40.06 $40.93 $44.03 $46.42 $46.77 $47.40 $48.62 $49.85 $50.83 $

Number of Beneficiaries: 

Unemployment  (Thousands) 

79.2 77.9 101.6 81.7 29.9 18.7 15.3 11.3 12.6 13.7 16.7 17.8 16.3 

 Sickness (Thousands) 91.4 67.4 76.8 51.6 28.2 21.0 20.5 20.5 20.6 22.0 23.0 23.0 22.8 Benefit Exhaustions, 

Normal Benefits: 

 Unemployment  (Thousands) 4

6.3 4.8 11.2 16.1 5.6 2.9 2.7 2.1 2.0 2.1 2.2 2.7 2.7 

 Sickness (Thousands) 16.8 7.9 9.5 8.0 6.1 4.3 4.3 4.3 3.9 4.1 4.5 5.1 5.1 

Amount Paid:  Unemployment  (Millions) 5

35.0 37.5 112.7 125.8 57.2 37.4 38.2 27.0 31.6 35.6 43.0 47.4 52.5 

 Sickness (Millions) 57.9 29.6 60.0 43.8 32.6 24.2 32.5 33.1 34.6 40.5 49.5 50.9 50.8 
TABLE 5-7--RAILROAD UNEMPLOYMENT AND SICKNESS INSURANCE PROGRAM STATISTICS, 

SELECTED YEARS 1970-2004-continued

Benefit Year Ending In 

Program Statistic 1970 1975 1980 1985 1990 1995 1997 1998 1999 2000 2001 2002 2003 (est) 

Total Tax Collection:  Benefits Account  (Millions) 122.7 109.4 173.3 223.1 192.5 5.6 9.6 35.5 87.2 68.8 19.9 63.6 114.5  Administration  (Millions) 8.2 7.3 12.9 15.2 17.2 17.4 16.1 14.3 22.8 18.9 20.0 19.8 20.4 Outlays:  Benefits (Millions) 4 93.0 67.1 172.7 169.6 89.8 61.6 70.7 60.1 66.2 76.1 92.5 98.3 103.3 

 Administration 

(Millions) 6.6 7.3 11.2 14.8 14.6 15.9 16.2 13.3 13.7 14.1 13.8 13.2 15.6 

Account Balance (Millions)6 81.3 113.9 40.8 50.8 188.4 177.5 77.2 59.7 89.6 95.7 34.8 16.1 24.9 

1 Unemployment beneficiaries divided by qualified employees; does not include sickness insurance beneficiaries. 2 Benefit amounts for registration periods beginning on or after October 1, 1989, were originally reduced by 5.3 percent under the Gramm-Rudman-Ho

Act. On February 10, 1990, the final fiscal year 1990 Gramm-Rudman-Hollings sequestration rate of 1.7 percent was implemented for all d

unemployment and sickness after September 30, 1989. Refund payments were issued on February 13, 1990. Cumulative averages do not reflect these re

3 Constant 2002 Dollars were calculated using the Office of Management and Budget’s composite outlay deflator (fiscal year basis); see Executive Office 

President (2003), table 10.1. 

4 Excludes supplemental extended benefits financed from general revenues. 5 Includes benefits under title V of the Emergency Unemployment Compensation Act of 1991, as amended, which has provided extended unemplo

benefits, regardless of years of service. 

6 Account balances do not reflect amounts due the Railroad Retirement Account. Pre-1985 loans were repaid in full with a $180.2 million cash repaymen

the Railroad Unemployment Insurance Account on June 29, 1993. The small loan made in February 2002 is expected to be repaid in May 2003. 

Source: U.S. Railroad Retirement Board. 
5-21 

TABLE 5-8--BENEFITS UNDER THE RAILROAD UNEMPLOYMENT 

INSURANCE SYSTEM, BENEFIT YEARS 2002-2003, 

2003-2004, 2004-2005 

 Benefit Category Benefit Amount 

Qualifying Wages: 

Base Year 2001...................................................................... $2,625 

Base Year 2002...................................................................... $2,750 

Base Year 2003...................................................................... $2,800 

Daily Benefit Rate: Basic Rate ............................................60% of daily rate of pay 

Maximum: 5 Percent of Base Year Monthly Compensation Base 

Benefit Year 2002-2003 ........................................ $52.00 

Benefit Year 2003-2004 ........................................ $55.00 

Benefit Year 2004-2005 ........................................ $56.00 

Minimum Guarantee.............................................................. $12.70 

Maximum Normal Benefits:1

For 14-day Period: 

Benefit Year 2002-2003 ........................................ $520 

Benefit Year 2003-2004 ......................................... $550 

Benefit Year 2004-2005 ......................................... $560 

For Benefit Year: 

Duration: .........................................................130 Compensable Days 

Amount:1

Benefit Year 2002-2003 ......................................... $6,760 

Benefit Year 2003-2004 ......................................... $7,150 

Benefit Year 2004-2005 ......................................... $7,280 

Maximum Extended Benefits: 

10 or More Years of Service: 

Duration: ........................................................... 65 Compensable Days 

Amount: 

Benefit Year 2002-2003 ......................................... $3,380 

Benefit Year 2003-2004 ........................................ $3,575 

Benefit Year 2004-2005 ......................................... $3,640 1

Not to exceed the employee’s taxable earnings in the base year, counting earnings up to $1,356 a 

month for benefit year 2002-2003 (base year 2001), $1,421 a month for benefit year 2003-2004 

(base year 2002), and $1,447 a month for benefit year 2004-2005 (base year 2003). 

Note: Some net sickness benefit payments are somewhat less than the above amounts since they 

are subject to tier 1 railroad retirement taxes. 

Source: U.S. Railroad Retirement Board. 

FINANCING 

The Railroad Unemployment and Sickness Benefit Programs are financed 

by payroll taxes on railroad employers. Employees do not pay railroad 

unemployment taxes. The taxable earnings base in calendar year 2002 is the first 

$1,100 of each employee's monthly earnings. The earnings base is adjusted each 

year to equal approximately two-thirds of the cumulative increase in the maximum 

base for railroad retirement tier 1 taxes since 1984. 
5-22 

Experience-based tax rates, under which employers with higher levels of 

unemployment pay somewhat higher rates, were phased in on a partial basis in 

1991 and 1992, and became fully effective in 1993 with a minimum rate of 0.65 

percent and a maximum rate of 12 percent. The future maximum rate could be 12.5 

percent if a maximum surcharge is in effect. 

Railroad unemployment taxes are collected by the Railroad Retirement 

Board. Of each year's tax receipts, an amount equal to 0.65 percent of taxable 

payroll is set aside for administration. Excess funds allocated but not needed for 

administration are transferred to the Railroad Unemployment Insurance Account at 

the end of each fiscal year. 

The Railroad Unemployment Insurance and Railroad Unemployment 

Insurance Administration Accounts are part of the Federal Unemployment Trust 

Fund. This trust fund has 53 State Unemployment Compensation Program 

accounts, 4 Federal accounts, and the 2 railroad accounts. 

Since 1959, the Railroad Unemployment Trust Fund has been able to borrow 

funds from the railroad pension fund when employer taxes have not been sufficient 

to cover the costs of unemployment and sickness benefits. The unemployment 

program became depleted for the first time in 1960 after a long decline from peak 

reserves of nearly 18 percent of total annual wages in 1948. By 1963, it owed the 

retirement account $314 million, or 5.9 percent of total annual wages paid in the 

industry that year. The program gradually recovered during the 1960s until it had 

positive reserves again in 1974. The reserves were depleted again in 1976-78 and 

loans were again required beginning in 1981. 

A rapid decline in 1981-82 in railroad employment during a recession 

resulted in substantial borrowing from the pension system. The borrowing reached 

a peak level of over $850 million at the end of 1986. This debt was repaid in full 

with a $180.2 million cash repayment from the Railroad Unemployment Insurance 

Account on June 29, 1993. Interest on the loan during the debt period was charged 

at the average rate earned by U.S. Treasury securities held by the retirement 

account so that the retirement account did not lose any investment earnings as a 

result of the loan. 

Financial measures to assist the Railroad Unemployment Insurance Account 

were included in the Railroad Retirement Solvency Act of August 12, 1983. The 

Solvency Act raised the taxable limit on monthly earnings and the base-year 

qualifying amount. The waiting period for benefits during strikes was increased 

from 7 to 14 days. A temporary repayment tax on railroad employers began July 1, 

1986, to initiate repayment of the loans made by the Railroad Retirement Account. 
5-23 

The 1983 legislation also mandated the establishment of a Railroad 

Unemployment Compensation Committee (1984) to review the unemployment and 

sickness benefit programs and submit a report to Congress. The Committee 

reviewed all aspects of the Railroad Unemployment Insurance System, especially 

repayment of the system's debt to the Railroad Retirement Account and the viability 

of transferring railroad unemployment benefit payments to State programs. 

The Consolidated Omnibus Budget Reconciliation Act of April 1986 (Public 

Law 99-272) amended the temporary unemployment insurance loan repayment tax 

beginning July 1, 1986, continued authority for borrowing by the Railroad 

Unemployment Insurance Account from the Railroad Retirement Account, and 

provided a contingency surtax on rail employers if further borrowing took place. 

Changes enacted under the Technical and Miscellaneous Revenue Act of 

1988 (Public Law 100-647) were based on the recommendations of the Railroad 

Unemployment Compensation Committee. The 1988 amendments improved 

financing by indexing the tax base to average national wages and experience rating 

employer contributions. Repayment of the unemployment system's debt to the 

retirement system was ensured by fixing the loan repayment tax at 4 percent of the 

contribution base and retaining this elevated tax rate until the debt was fully repaid 

with interest on June 29, 1993. 

A contingency surtax (3.5 percent), effective in the event of further 

borrowing by the Railroad Unemployment Insurance Account, was eliminated in 

1991. Instead, a surcharge will be added to employers' unemployment insurance 

taxes for a calendar year if the balance in the unemployment insurance account on 

the previous June 30 goes below $100 million (as indexed). The surcharge rate 

would be 1.5, 2.5, or 3.5 percent depending on how low the balance had fallen. If a 

3.5 percent surcharge goes into effect for a given year, the maximum rate for any 

employer would be 12.5 percent rather than 12 percent. If the account balance on 

the preceding June 30 is above $250 million (as indexed), the excess will be 

refunded to the employers in the form of a rate reduction for the year through a 

pooled credit. 

In 1996, Congress enacted H.R. 2594, the Railroad Unemployment Insurance 

Amendments Act of 1996 (Public Law 104-251). Among other provisions, this law 

raised daily benefit rates for retirement and sickness benefits and revised the 

formula for indexing future rates. The Act shortened the waiting period for initial 

unemployment and sickness benefits, cut the weeks of extended benefits payable to 

rail workers with more than 15 years' service, and established an earnings test for 

workers with days of employment as well as unemployment or sickness during each 

2-week registration period. 
5-24 

The Board is required to submit an annual financial report to Congress on the 

status of the Unemployment Insurance System. The report must include 

recommendations for financing changes that might be advisable, specifically with 

regard to rates of employer contributions. The 2003 report (U.S. Railroad, 2003b) 

states that, under three different sets of employment assumptions (optimistic, 

moderate, and pessimistic), experience-based contribution rates are projected to 

respond to fluctuating employment and unemployment levels thereby maintaining 

fund solvency. Employer contribution rates, which include a surcharge of 2.5 

percent in calendar year 2003, are projected to include a 1.5 percent surcharge in 

calendar years 2004 and 2005. The 2003 report shows that during the 11-year 

projection period (fiscal years 2003-2013), the average employer contribution rate 

is projected to remain well below the maximum, even under the pessimistic 

assumptions. The Board recommends no financing changes at this time. 

LEGISLATIVE HISTORY 

In the final quarter of the 19th century, railroad companies were among the 

largest in America. It was in the rail industry that the first industrial pension was 

established in 1874. By the mid-1920s, more than 80 percent of all rail workers 

were covered by pension plans. In the early 1930s these pension plans began to face 

enormous financial problems. The commercial success of the rail industry peaked 

in the period between 1900 and 1920, and rail employment decreased significantly 

in the 1920s. 

 Rail pension plans were for the most part poorly constructed. There was no 

regulation of railroad pensions and plans were frequently terminated, pension funds 

were chronically underfinanced, and most funds could not survive the financial 

pressures of the depression. These problems, plus a tradition of Federal regulation 

of the railroads, led to the enactment of the Railroad Retirement Act of 1934. 

The original Railroad Retirement System was structured to provide annuities 

to retirees based on rail earnings and length of service. Benefits were disbursed for 

retirees at age 65, although workers with 30 years of service could retire at age 60 

with a reduction in payments. The original disability provisions were very stringent. 

Little was provided for dependents, and nothing for spouses. 

The Railroad Retirement System has been modified many times by Congress. 

In the late 1940s and 1950s, benefits were liberalized, and the Railroad Retirement 

System was brought into closer conformity with Social Security. For instance, in 

1946, benefits were extended to survivors, based on combined railroad and Social 

Security-covered employment. This extension demonstrated congressional concern 
5-25 

for the social goal of providing income security in old age, or social insurance, 

rather than simply rewarding career performance. 

In the 1970s and 1980s, the Railroad Retirement System encountered 

recurrent financial crises as a result of employment declines in the industry, 

inflation, and more beneficiaries. Major legislation was enacted in 1974, 1981, 

1983, and 1987 to prevent the system from becoming insolvent. 

The Railroad Retirement Solvency Act of 1983 (Public Law 98-76) increased 

payroll taxes on employers and employees, deferred cost-of-living increases, 

reduced early retirement benefits, made tier 2 benefits and vested dual benefit 

payments subject to Federal income taxes on the same basis as private and public 

service pensions, and provided other measures designed to improve railroad 

retirement financing. (The Social Security Amendments of 1983 (Public Law 98-

21) made up to 50 percent of tier 1 benefits subject to Federal income taxes on the 

same basis as Social Security benefits.) Without the enactment of this legislation, 

the Railroad Retirement Board would have been required to substantially reduce 

benefit payments in 1983. 

The Omnibus Budget Reconciliation Act (OBRA) of 1987 (Public Law 

100-203) increased tier 2 tax rates in January 1988 by a total of 2 percent: 1.35 

percent on employers and 0.65 percent on employees. In addition, the law extended 

for 1 year, until October 1, 1989, the time during which revenues from Federal 

income taxes on tier 2 railroad retirement benefits could be transferred from the 

general fund of the U.S. Treasury to the Railroad Retirement Account for use in 

paying benefits. 

Railroad retirement amendments were included with railroad unemployment 

insurance amendments in the Technical and Miscellaneous Revenue Act of 1988 

(Public Law 100-647). This legislation ensured repayment of the Railroad 

Unemployment Insurance Account's debt to the Railroad Retirement Account by 

extending a temporary unemployment insurance tax until the debt was fully repaid 

with interest in 1993. Public Law 100-647 also eased work restrictions and the 

crediting of military service in certain cases and provided more equitable treatment 

of severance pay for railroad retirement purposes. 

The Omnibus Budget Reconciliation Act of 1989 (Public Law 101-239) 

included a number of railroad retirement and Social Security provisions that 

affected payroll taxes and benefits beginning in 1990. The law increased the 

amount of earnings subject to Social Security and railroad retirement payroll taxes 

by including contributions to 401(k) deferred compensation plans in the measure of 

average wages, which is used to index the wage base. It also extended for 1 

additional year, until October 1, 1990, the time during which revenues from Federal 
5-26 

income taxes on tier 2 railroad retirement benefits may be transferred to the 

Railroad Retirement Account for use in paying benefits. 

The Omnibus Budget Reconciliation Act of 1990 (Public Law 101-508) 

further extended the date of this transfer until October 1, 1992, and also 

permanently exempted supplemental annuities from reductions under the 

Gramm-Rudman deficit reduction measures adopted by Congress. 

 The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) 

removed the maximum taxable earnings base for purposes of paying the Medicare 

tax, thus making all railroad retirement tier 1 earnings subject to the Medicare 

payroll tax. Public Law 103-66 also increased the amount of Social Security and 

railroad retirement tier 1 benefits subject to Federal income taxes for persons with 

higher incomes. A provision in the Social Security Administrative Reform Act of 

1994 (Public Law 103-296) extended on a permanent basis the transfer to the 

Railroad Retirement Account of Federal income taxes on tier 2 railroad retirement 

benefits and a retroactive payment was made, covering the period October 1, 1992 

through September 30, 1994. 

 The Senior Citizens’ Freedom to Work Act (Public Law 106-182), enacted on 

April 7, 2000, eliminated the earnings limitation on beneficiaries beginning with 

the month the beneficiary reaches the full retirement age. In the calendar years 

before the year in which the beneficiary reaches the full retirement age, $1 in 

benefits is withheld for every $2 earned above an exempt amount ($11,520 in 

2003). For months in the calendar year in which the beneficiary reaches the full 

retirement age (up to the month the beneficiary reaches the full retirement age), $1 

in benefits is withheld for every $3 earned above an exempt amount ($30,720 in 

2003). 

The Railroad Retirement and Survivors’ Improvement Act of 2001 (Public 

Law 107-90) made a number of changes to railroad retirement benefits and 

financing. In terms of benefit changes, the 2001 law: (1) liberalized early 

retirement benefits for 30-year employees and their spouses (employees with 30 

years of railroad service and their spouses may retire at age 60 with full tier 1 and 

tier 2 annuities); (2) repealed the cap on total monthly retirement and disability 

benefits payable to an employee and spouse; (3) lowered the minimum service 

requirement for retirement annuities from 10 years to 5 years of service performed 

after 1995; and (4) increased benefits for some widow(er)s. 

In terms of financing changes, the 2001 law: (1) established the National 

Railroad Retirement Investment Trust (NRRIT) which is authorized to invest funds 

in nongovernmental assets as well as government securities (the Board of Trustees 

invests assets, pays administrative expenses and transfers funds to a disbursing 
5-27 

agent responsible for the payment of benefits); (2) adjusted payroll tax rates paid by 

employers and employees (beginning in 2004, tier 2 tax rates will be based on a 10-

year "average account benefits ratio” with employer rates ranging from 8.2 percent 

to 22.1 percent and employee rates ranging from 0 percent to 4.9 percent); (3) 

repealed the supplemental annuity work-hour tax; (4) eliminated the Supplemental 

Annuity Account and transferred the balance in the account to the NRRIT (the 

NRRIT will pay supplemental annuity benefits); (5) provided authority to transfer 

Railroad Retirement Account funds not needed to pay current administrative 

expenses to the NRRIT (the NRRIT will pay tier 2 benefits); (6) provided authority 

to transfer Social Security Equivalent Benefit Account (SSEBA) funds not needed 

to pay current benefits and administrative expenses to the NRRIT (the SSEBA will 

pay the Social Security level of tier 1 benefits and the NRRIT will pay the portion 

of tier 1 benefits in excess of the Social Security level); (7) provided authority to 

transfer Dual Benefit Account funds needed for dual benefit payments to a 

disbursing agent; and (8) provided tax-exempt status for the NRRIT. The 2001 law 

was based on joint recommendations to Congress negotiated by rail labor 

organizations and rail freight carriers. 

REFERENCES 

Commission on Railroad Retirement Reform. (1990, September). Final report. 

Washington, DC: Author. 

Executive Office of the President. (2003). Budget of the United States 

Government: (Historical Tables; ISBN 0-16-051239-5). Washington, DC: 

U.S. Government Printing Office. 

National Railroad Retirement Investment Trust. (2003, January). Annual 

Management Report for Fiscal Year 2002. Washington, DC: Author. 

Railroad Unemployment Compensation Committee. (1984, June). Report of the 

Railroad Unemployment Compensation Committee. Washington, DC: 

Author. 

Research Institute of America. (1997). Complete internal revenue code. 

New York: Author. 

U.S. Railroad Retirement Board. (2002). Railroad Retirement Handbook. 

Washington, DC: Author. 

U.S. Railroad Retirement Board, Bureau of the Actuary. (2003a). Twenty-second 

actuarial valuation of the assets and liabilities under the Railroad Retirement 

Acts as of December 31, 2001. Washington, DC: Author.