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How to Determine the Different Parts of a Tier 1 Benefit
(Posted January 24, 2002)
Question 155: I retired at 62 on a reduced 60/30 benefit. My wife started to receive a spouse benefit at 60. She is now over 62. What percentage of her spouse Tier 1 benefit is considered to be above the Social Security benefit?
Answer: Your question hits on a fine point of the Railroad Retirement System. Because Railroad Retirement benefits generally are available at earlier ages than Social Security and usually at higher rates, the RRB must calculate two different Tier 1 rates for taxation purposes.
It first determines the amount actually payable by the RRB using the special benefit formula prescribed by the Railroad Retirement law. Although essentally the same as the Social Security formula, there are some differences because of 60/30 retirement and different age reductions. The result is generally higher than what Social Security would pay based on the same earnings.
The RRB than determines what Social Security would have paid based on the same earnings. This amount is called the "Social Security Equivalent Benefit" and is reported and taxed as a Social Security benefit.
The RRB subtracts the "Social Security Equivalent Benefit" from the full Tier 1 benefit. The result is the "Non-Social Security Equivalent Benefit," which is reported and taxed as a private pension, the same as a Tier 2 benefit.
Between 60 and 62, the entire Tier 1 benefit would be a "Non-Social Security Equivalent Benefit" because Social Security would not pay anything until age 62. At age 62, the Tier 1 benefit is divided as explained above. The division is different in each case; there is no set percentage applied.
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