The Balanced Budget and Emergency Deficit Control Act of 1985, known as the Gramm/Rudman/Hollings Act, enacted in December 1985, required decreases in vested dual benefit payments during the 1986 fiscal year and suspension of the January 1986 cost-of-living increase in the tier II portions of railroad retirement annuities. Gramm/ Rudman and/or related budget legislation reduced vested dual benefits and supplemental annuities periodically in subsequent years.
Budget reconciliation legislation enacted in April 1986 included changes in Internal Revenue Code provisions increasing income taxes on some railroad retirement annuities. Effective with tax year 1986, the tier I portion of a railroad retirement annuity, which is treated as a social security benefit for Federal income tax purposes, was limited for tax purposes to amounts actually equivalent to social security benefits. This primarily affected tier I early retirement benefits payable between ages 60 and 62 and some occupational disability benefits that are now treated like private pensions.
The Tax Reform Act of October 1986 eliminated, for annuities beginning after July 1, 1986, the three-year recovery rule for contributory pensions, which had been applicable to railroad retirement benefits exceeding social security equivalent levels. Under the tax reform law, railroad retirement benefits exceeding social security equivalent levels are taxable immediately upon retirement. For tax reporting purposes, benefit payments are prorated on the basis of estimated life expectancies to exempt an employee's previously-taxed pension contributions.
While the railroad retirement trust funds held a reserve of $6.9 billion at the end of fiscal year 1987, the continuing decline in railroad employment had caused concern over the system's financing in the next century.
A Federal budget deficit reduction bill enacted in December 1987increased tier II tax rates in January 1988 to 16.10 percent on employers and 4.90 percent on employees, and extended for one year, until October 1, 1989, the time during which revenues from Federal income taxes on tier II railroad retirement benefits could be transferred to the Railroad Retirement Account for use in paying benefits.
The Railroad Unemployment Insurance and Retirement Improvement Act was included in the Technical and Miscellaneous Revenue Act of 1988, enacted November 10, 1988. The railroad retirement amendments in the Act eliminated the provision suspending annuities of retired employees and spouses who work for their last pre-retirement nonrailroad employers, but provided for tier II earnings deductions in such cases. The Act also increased the amount disabled railroad retirement annuitants could earn without reducing their benefits from $200 per month to $400 per month, exclusive of work-related expenses.
In addition, it provided railroad retirement military service credits under certain conditions for railroad workers who served in the Armed Forces between June 15, 1948, and December 15, 1950, but had not been allowed service credit because there was not a national state of emergency in force during this period before the Korean War.
The Act also provided a lump sum, equal to railroad retirement tier II payroll taxes deducted from separation or severance payments made after 1984, to be paid upon retirement to employees meeting minimum service requirements if the separation or severance payments did not yield additional railroad retirement service or earnings credits.
Social security amendments included in this legislation modified the non-covered service pension reductions applied to the social security and tier I railroad retirement benefits of employees awarded certain Federal, State or local government pensions in recent years.
Omnibus budget reconciliation legislation enacted in 1989 included a number of railroad retirement and social security provisions affecting payroll taxes and benefits in 1990 and subsequent years. The budget law increased the amount of earnings subject to social security and railroad retirement payroll taxes, and specified that 401(k) contributions and some employer-paid life insurance premiums are subject to railroad retirement payroll taxes, conforming railroad retirement with social security.
The 1989 budget law also revised sequestration of railroad retirement supplemental annuities under the Gramm/Rudman Act in fiscal year 1990.
Subsequent omnibus budget legislation in 1990 permanently exempted supplemental annuities from reductions under the Gramm/Rudman Act. It also increased the maximum compensation subject to Medicare hospital insurance payroll tax and mandated an expedited payroll tax deposit schedule for large employers covered by social security or railroad retirement. Budget legislation enacted in 1993 made all earnings subject to the Medicare payroll tax and, for those in high tax brackets, made a larger amount of social security and railroad retirement tier I benefits subject to Federal income tax.
The time during which revenues from Federal income taxes on tier II railroad retirement benefits could be transferred to the Railroad Retirement Account for use in paying benefits was extended one year in 1989, and 1990 budget legislation further extended the date until October 1, 1992. In 1994, legislation extended the transfers, retroactive to October 1992, on a permanent basis which improved the financing of the railroad retirement system.
Legislation enacted in April 2000 eased the earnings restrictions affecting social security beneficiaries working after full retirement age. The legislation also applied to railroad retirement annuitants but it did not change the railroad retirement work restrictions applying to last pre-retirement employment which are not included in the Social Security Act.