Former railroad employees who secure federal civilian employment would most likely also be covered by FERS—the federal retirement program nearly all new civilian employees must join. FERS benefits are funded through various agency and employee contributions, which are deposited in the Civil Service Retirement and Disability Trust Fund (CSRDF) that is administered by the Office of Personnel Management (OPM). When an employee separates, vested DB benefits can be withdrawn as a lump-sum payment; however, more commonly, plans require that these benefits be deferred until the point at which the separated employee would have become eligible to retire under the plan and begin receiving benefits. Railroad Retirement Benefits Are More Portable Within the Industry Than Outside It

The portability of Railroad Retirement benefits depends on whether an employee changes employers within the industry or leaves the industry for nonrailroad employment. To illustrate, if a railroad worker retired from the railroads with at least 10 years of railroad service, any wage information and service credits earned under Social Security from prior nonrailroad employment would be transferred to RRB and used to compute the employee’s Tier I benefits. Tier II Benefits Are Less Portable Outside the Industry

Outside the industry, Tier II benefits are less portable than Tier I benefits because of Railroad Retirement’s stringent vesting and forfeiture rules and the fact that Tier II service credits are not transferable to nonrailroad employers. Crediting Railroad Service Into FERS Could Enhance Tier II Portability, but Could Increase FERS Costs

Crediting railroad service as federal service under FERS could enhance the portability of Tier II benefits by allowing former railroad workers who secure federal employment to effectively convert their Tier II pension benefits into FERS pension benefits. Although OPM’s illustrations suggest that per-person lifetime costs could be high, the aggregate cost probably would not be if the number of employees involved was small. Policy and Administrative Issues Could Arise

Because they would need to collect and verify the railroad service of each employee who elected the credit, OPM and the agencies that hire former railroad employees could experience some increase in administrative costs if a railroad service credit provision were added to FERS. OPM has consistently objected to proposals to extend service credit for work that was not covered by CSRS and FERS, especially if it was performed in the private sector. The results of their analysis showed that if the vesting requirement was reduced from 10 to 5 years, there would be little difference in trust fund assets, outlays, and receipts. If a service credit provision was added to FERS, it would be cost-neutral from the federal government’s perspective only if the costs were paid in full by the former railroad employees or the railroad industry or a combination of the two. The objectives of our review were to determine which, if any, Railroad Retirement benefits are portable; what changes could be made to the Federal Employees’ Retirement System (FERS) that might enhance the portability of Railroad Retirement benefits into FERS for former railroad employees who obtain federal civilian employment and the cost and management implications of those changes for FERS and whether such changes could be made cost-neutral to FERS; and what changes could be made to Railroad Retirement that might enhance the portability of its retirement benefits and the cost and management implications of such program changes for Railroad Retirement.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the portability of Railroad Retirement Benefits, focusing on: (1) which, if any, Railroad Retirement benefits are portable; (2) what changes could be made to the Federal Employees' Retirement System (FERS) that might enhance the portability of Railroad Retirement benefits into FERS for former railroad employees who secure federal civilian employment and the cost and administrative implications of those changes for FERS and whether such changes could be made cost-neutral to FERS; and (3) what changes could be made to Railroad Retirement that might enhance the overall portability of its retirement benefits and what are the cost and administrative implications of these changes for Railroad Retirement.

What GAO Found

GAO noted that: (1) under the Railroad Retirement program, Tier I and Tier II benefits are fully portable within the railroad industry; the benefits that employees earn from one railroad employer can be carried to the next employer without any reduction in value; (2) Tier I benefits are also portable outside the industry; railroad employees can convert their Tier I benefits into social security benefits and vice versa; (3) Tier II benefits, however, are less portable outside the industry; railroad employees must have at least 10 years of railroad service to establish their right to Tier II benefits and the receipt of any benefits must be deferred until the time that the employee would have become eligible to retire under the plan; (4) although the Railroad Retirement program provides for indexing wages for inflation that occurred during the pre-retirement period, this provision applies only to former railroad workers who secure employment at selected federal agencies that are responsible for federal railroad policies; (5) for former railroad workers who secure federal civilian employment, the portability of Tier II benefits could be enhanced if they could be converted into FERS pension benefits; (6) the arrangement would be cost-neutral to the Civil Service Retirement and Disability Trust Fund only if any increased costs were paid in full by the railroad industry, the former railroad employees, or a combination of the two; (7) according to the Office of Personnel Management's (OPM) analysis, per-person lifetime costs could be high; (8) however, its analysis also suggests that the aggregate cost probably would not be high if the number of employees involved was small; (9) according to OPM, the agencies that hire former railroad employees and OPM would both experience modest increases in administrative costs; (10) although it believes the administrative burdens of adding a railroad service credit provision to FERS would be manageable, OPM has consistently objected to proposals that would extend service credit for work that was not covered by the Civil Service Retirement System or FERS; (11) the portability of Tier II benefits could also be enhanced by reducing the required vesting period for railroad employees; and (12) according to a Railroad Retirement Board, the impact on Railroad Retirement trust fund assets, outlays, and receipts would be less if the option applied only to benefits earned by current or future employees.