By law, railroad retirement tier I payroll taxes are coordinated with social security taxes and increase automatically when social security taxes rise. Employees and employers pay tier I taxes which are the same as social security taxes. In addition, both employees and employers pay tier II taxes to finance railroad retirement benefit payments over and above social security levels.
The tier I tax on employees and employers is 7.65 percent in 2017. The tier II tax on employees is 4.90 percent, while the tier II tax on rail employers, rail labor organizations, and rail employee representatives is 13.10 percent in 2017. An employee representative is a labor official of a noncovered labor organization who represents employees covered under the Acts administered by the RRB.
The ratio of certain asset balances to the sum of benefits and administrative expenses (the average account benefits ratio) determines tier II taxes on employers and employees. Depending on the average account benefits ratio, tier II taxes for employers range between 8.20 percent and 22.10 percent, while the tier II tax rate for employees is between 0 and 4.90 percent.
Railroad retirement taxes apply to earnings on an annual basis. The amounts of earnings subject to these taxes are determined annually on the basis of national wage levels.
(See Table 3 in IB-2 Facts for more information.)