As previously noted, under the financial interchange, the railroad retirement system gives the social security system the taxes social security would have collected, and the social security system gives the railroad retirement system the additional benefits social security would have paid to railroad workers and their families over what it actually pays them.
The word additional in the preceding sentence is important because it is possible for a railroad employee to be covered under both railroad retirement and social security. The social security coverage may be based on earnings from moonlighting while in a railroad job or from coverage under the two systems at different times. Fulfilling the purpose of the financial interchange requires deducting from social security's fund only the difference between what social security would have paid had it covered railroad employment and what it actually pays the person based on his or her nonrailroad employment. Under the financial interchange, therefore, social security subtracts an employee's social security benefit from the amount it would otherwise give to the railroad retirement system.
This arrangement gave rise to problems that became acute in the early 1970s. The problems arose from the weighting in the social security formula in favor of low-earning, short-service workers. A railroad employee's nonrailroad earnings usually added little to the benefit social security would have paid on combined railroad and nonrailroad earnings (called gross tier I today). However, the employee might qualify for the minimum social security benefit, receiving much more from social security than the nonrailroad earnings added to his or her gross tier I benefit.
In order to improve the system's financial condition, the Railroad Retirement Act of 1974 provided that the tier I component of the railroad retirement annuity be reduced by any social security benefit. This essentially integrated the two systems and eliminated the advantage of qualifying for benefits under both systems.
It was generally considered unfair to eliminate this advantage entirely for those already retired or close to retirement when the 1974 Act became effective. The 1974 Act, therefore, provided for a restoration of social security benefits that were considered vested at the end of 1974. The restored amount is known as the vested dual benefit. This benefit was available to qualifying spouses and survivors as well as to qualifying employees.
For employees retiring in 1975 or later, the vested dual benefit was to be equal to:
- a social security benefit based on social security earnings, plus
- a social security benefit based on railroad earnings, minus
- a social security benefit based on combined railroad and social security earnings.
Social security or railroad earnings after 1974 were not to be included in this calculation, and the social security benefit referred to in the above calculation is the one which would have been calculated at the end of 1974. The resulting amount was to be increased by all the automatic social security cost-of-living adjustments between 1974 and the date the employee retired.
For spouses and survivors, the formulas were different and more complicated than those for employees.
The 1981 amendments made significant changes regarding vested dual benefits. Spouses and survivors were not to be awarded vested dual benefits after August 13, 1981, though they would continue to receive these benefits if they were awarded before that date. Also, vested dual benefits awarded to employees would take into account cost-of-living increases only through 1981, rather than through the date of retirement.
Since October 1981, vested dual benefits have been paid from a segregated Dual Benefits Payments Account, and appropriations have been made to that account. This means that, starting in fiscal year 1982, each annual appropriation is to be sufficient to pay the benefits for that year. If the appropriation for a fiscal year is less than required for full funding, the RRB must reduce benefits to a level that the amount appropriated will cover.
The appropriation for vested dual benefits in fiscal year 1982 was less than required for full funding, resulting in a cutback in benefits during that year. Full funding was restored for the last two months of fiscal year 1982. The appropriation was less than required in fiscal year 1986, resulting in a cutback during April-September of that year. The appropriation was again less than required in fiscal year 1988, which resulted in a cutback during April-September. Benefits were cut back in January 1996 due to a lapse in government funding and then restored later that same month. For years other than those mentioned, full benefits have been paid.