Washington, DC - Ask Rusty - Railroad Retirement Benefits vs Social Security

Dear Rusty:  My neighbor was a long time employee of the railroad and has told me that he doesn't receive Social Security like I do, but rather gets Railroad Retirement Benefits which are, according to him, better than Social Security.  This irks me a little bit because I've worked my whole life paying those FICA taxes, so why should my neighbor have a better retirement benefit than me?  And just what exactly is this Railroad thing he's covered by? ~ Annoyed

Dear Annoyed:  Let there be peace among neighbors!  While your neighbor's railroad retirement benefit may be better than your Social Security benefit, he also paid more into it over his lifetime than you contributed to Social Security.   

First, a little history.

Back in the 1920's workers in the railroad industry were covered by various private pensions that were beset with problems, leaving those workers vulnerable to inadequate financial support during their old age.   Following the Great Depression those pension problems reached crisis proportions and in 1934 Congress enacted the Railroad Retirement Act (RRA), which was meant to help aging and needy railroad workers who would not be covered under the planned Social Security system.  Various legal issues held the program up until 1937 when about 50,000 private railroad pensions were transferred into the Federal Railroad Retirement program.  Initially meant as an old age retirement and disability program for rail workers, it evolved over the years to become more of a social insurance program providing survivor, spousal, dependent, sickness and unemployment benefits, similar in many ways to how Social Security evolved during the same time period.  A financial interchange between Social Security and Railroad benefits was set up in 1951, eventually evolving to the Railroad Retirement Act of 1974.  The program has continued to undergo refinements as needed, and is administered by an independent Federal agency called the Railroad Retirement Board (RRB).  While independent, the RRB is closely aligned with Social Security, but the benefits of each program differ.

Railroad employees pay taxes into the system for two separate benefit categories known as Tier I and Tier II.  Tier I contributions are similar to Social Security (6.20%), but Tier II contributions - essentially for a supplemental pension - are an additional 3.9%.  In both cases, there is a maximum taxable wage cap.  And similar to Social Security, another 1.45% is levied for Medicare.  As with Social Security, rail industry employers pay an equal amount of payroll tax for Tier I, but they also pay a substantially higher tax percentage than employees for Tier II benefits.

Without getting into the myriad of details, suffice to say that just like Social Security, RRA has eligibility criteria for beneficiaries. Although Tier I railroad benefits are intended to somewhat mimic Social Security, there are a lot of nuances in the railroad retirement program, which can make benefits higher.  The differences are far too numerous to describe here but as an example, early retirement benefits aren't reduced if the worker has at least 30 years of railroad service.  Tier II benefits are designed to resemble a private defined benefit pension plan.  

So how different are the benefits?  Well, for 2016 the average Social Security retirement benefit was about $1,350 per month, while the average retirement benefit for railroad employees was about $2,675 per month.  While the difference is substantial, remember that a defined benefit pension is part of rail employees' retirement benefits.  Further, career rail employees - those who have contributed through payroll taxes for a long period of time - receive considerably more than the average.  

So if your neighbor was a long time railroad employee, don't begrudge him his somewhat higher benefit.  He earned it, just as you have earned Social Security plus any additional pension benefit you might enjoy from working in the private sector.  Now, invite your neighbor over for coffee and discuss something non-controversial, like politics.