Most workers contribute a portion of their wages to the Social Security Administration through payroll taxes, but railroad employees are among a small handful of workers -- which also includes federal employees -- that don't contribute to Social Security. Instead, the United States Railroad Retirement Board administers a parallel retirement plan to all railroad employees. As a governmental agency, the RRB provides two types of retirement benefits, Tier I and Tier II, to qualifying beneficiaries.
Tier I Benefits Basis
The first portion of a retiree's pension, Tier I benefits, approximate a typical Social Security pension, and the RRB uses all of a beneficiary's lifetime earnings -- Social Security and railroad combined -- when calculating the monthly benefit amount. To calculate a benefit amount, the RRB first adjusts a beneficiary's past earnings relative to modern-day wages due to inflation and other cost-of-living increases. Using those adjusted earnings, the RRB calculates the worker' average adjusted monthly wages as the figure it uses to compute benefit amounts.
Calculating Tier I Benefits
After the RRB establishes a pensioner's adjusted average monthly earnings, it uses that figure to calculate his Tier I benefit amount using a graduated calculation system. The RRB pays beneficiaries 90 percent of their average monthly earnings up to $749 as of April 2011, 30 percent of his earnings between $750 and $4,517 and 15 percent for all earnings above $4,518. For example, a worker whose adjusted average salary is $5,000 receives a monthly benefit of $1,836, $641 for the first $749, $1,130 for the earnings between $750 and $4,517 and $32 for the high-end earnings.
Tier II Benefits
The RRB bases Tier II benefit amounts solely upon a worker's earnings while working for a railroad. The formula pays 0.7 percent per year of service in the industry of a basis derived from the worker's earnings in the 60-month period in which he earned the most. While all qualifying railroad workers will receive approximately the same amount of Tier I benefits, the RRB structured Tier II benefits to favor long-term railroad employees. A retiree receives his Tier I and Tier II benefit amounts each month as his pension.
Qualifying for Railroad Retirement
Not all workers with railroad experience qualify to receive a RRB pension instead of one from the Social Security Administration. Workers must have a total of 60 months of work with agencies covered by the Railroad Retirement Act since 1995. A month's service is defined as any calendar month in which a worker worked one day for a qualifying employer. The 60 months necessary to qualify don't need to be consecutive, and military service may be applied toward the total in some circumstances.