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Salary Reduction Results in Lower Retirement Benefits
(Posted May 2, 2001)
Question 96: I was "down-sized" after 31 years of rail work. I still work for a railroad but only make half of what I used to. I plan to work 15 more years. How much will my lower earnings penalize me in terms of my retirement benefits?
Answer: Railroad Retirement is based directly on the amount of your earnings over your entire career. Tier 1 and Tier 2 calculate "average monthly earnings" using different formulas.
Happily, the percentage drop in your retirement benefits will be less that the percentage drop of your salary reduction for the following reasons.
Tier 1 uses the same method that is used to compute Social Security. That method gives more credit to the lowest portion of your monthly average. 90% of the first $531 is credited, 32% of between $532 and $3,202, and only 15% of the amount over $3,202 is credited. Although your Tier 1 benefit will be less now, the reduction is far less than the percentage of your salary reduction.
Tier 2 uses the 60 months of highest earnings to compute the average. The last 60 months (5 years) are only used if they are the highest months. In your case, earlier months will be used if they are higher than the last 5 years.
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