Railroad workers don't participate in the same government retirement insurance plan as other citizens. Instead, they and their employers pay taxes on earned wages in exchange for future benefits in a separate program similar to Social Security. That platform consists of two parts: one that functions like Social Security and another that works like a private pension. Tier 1 benefits, as they are called, represent the equivalent of Social Security assistance and are calculated using a similar formula.
Different But Similar
Set at the same level as Federal Insurance Contribution Act (FICA) and Medicare taxes, Tier 1 contributions cover three separate areas: Old Age & Survivors Insurance (OASI), Disability Insurance (DI), and Health Insurance (HI) benefits. Those taxes are calculated from employee earnings up to a maximum wage base in a similar fashion as the Social Security wage base for that year. Employers and employees split the tax equally. So if you see Tier 1 deductions on your pay stub, think FICA and Medicare.
In addition to their Tier 1 contributions, which fund benefits similar to Social Security, railroad workers pay Tier 2 contributions that provide a benefit similar to a private pension. The base is smaller than that for Tier 1 payments and the employer is responsible for a larger portion. For example, in 2013 the Tier 1 base is the first $113,700 of earnings while the Tier 2 base is only the first $84,300.
Even though they're lumped together as part of Tier 1 contributions, the HI contribution -- also called Medicare -- is set at a separate rate and doesn't have a maximum taxable earnings. So, unlike other railroad worker payroll taxes, which are only calculated on earnings up to the wage base, the Medicare portion applies to the employee’s entire earnings. That means a worker who earned $140,000 in 2013 would owe Tier 1 contributions on $113,700, Tier 2 contributions on $84,300 and Medicare contribution on $140,000.
Where the Money Goes
While the Internal Revenue Service collects all payments for railroad retirement benefits, administering the program is the responsibility of the Railroad Retirement Board. All the taxes contribute to funding an annuity that provides both Social Security-like retirement benefits, as well as private pension income for railroad employees. In order to qualify for railroad retirement benefits, you must have worked either 10 years in total or at least five years since 1995. Your benefit is reduced if you quit before reaching retirement age.
- Railroad Retirement Board: Part 1 - Prerequisite Knowledge for Employer Reporting, Chapter 5: Compensation, Tax and Benefit Relationships
- Railroad Retirement Board: Retirement, Survivor & Disability
- Railroad Retirement Board: General Conditions Under Which a Person Is Entitled to a Railroad Retirement Employee Annuity
- Social Security Administration: An Overview of the Railroad Retirement Program
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.