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How Sound is Your Railroad Retirement?

Tier 1 Tier 2 Video Annuity Retirement


Let's find out how long railroad retirement will last.

Welcome, everyone, to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors, and today we're going to do, I guess, a semi-deep dive into the railroad retirement report that they make to Congress every three years. Triennial, I think is the word. I actually had to look that word up, triennial, every three years. Here's what they found, just high level stuff. It's from 30th of September of last year. All right, so it's their 28th Actuarial Valuation report. They do that every three years, like I said.

Currently at the end of that September, they had almost $26 billion in the Railroad Retirement Trust Fund. That goes into the National Railroad Retirement Investment Trust, which is the Tier II portion, and then the railroad retirement has accounts at Treasury, and that's where they do the interchange with Social Security, payments back and forth, the Tier I part. There's $26 billion there. It seems like a lot of money, so let's see what that means, if that's going to last.

They run different scenarios when they do the test. They have an optimistic, a moderate scenario, a pessimistic. Optimistic is, railroad is going to go great. They're going to keep hiring people, lots of things going on, tremendous growth in the railroads. Okay, that's optimistic. Moderate is just kind of the same thing, grow a little percent every year, maybe flat, that type. Then pessimistic is, "Well, we're going to really reduce the workforce even more than it already is reduced and just keep grinding it down. There will be no growth in the railroad industry for the next ad infinitum." That's pessimistic. They're kind of planning for everything.

What happens under those scenarios? It lasts 75 years, because that's their charge, go out 75 years. Under optimistic and moderate, 2094, it looks great. If we all make it to 2094... geez, I'll be really old... but you're in great shape. Now the pessimistic one, remember that reducing the workforce, 2055. That's with no changes. It's like, if you see the iceberg coming, I'm sure they'll turn the ship and make some changes, so that is 2055. Still, that's still pretty good. When you look at Social Security, which is 2035, you got an extra 20 years on that. That's a whole different conversation. What happens with Social Security and railroad retirement is some changes have to happen in Social Security. That'll be interesting to see. We'll keep an eye on that.

Then they also talked about the payroll tax. Just a little refresher, remember, you're paying 4.9% for Tier II. The railroad does 13.4%. They recommended no change in that number. Then on the Tier I, 6.2%, both you and the railroad pay for the Tier I, no change on that. All in all, railroad retirement's good. I don't know, really, where a lot of this conventional wisdom is, "I don't know if railroad retirement going to be around." It's fine. It's going to be good. I wouldn't stress about it. That's the least thing I would worry about. If I had to worry on my sleep scale of things I stress about, the stability of railroad retirement, I'm not stressing about that one.

However, if I look at some of the risks that I would see, probably inflation would be a big risk in that this year, they're paying out a lot. I mean, we could be looking at a 6% Tier I payout to retirees, and 32% of that is around 2%. That's a lot of money coming out. If there's not a lot of growth, you need growth to offset all that money going out, at least 6% growth. If you have a stagflation scenario, that could be bad, and then, obviously, continuing downsizing. You need people paying into the system. If there's continuing downsizing in the railroad, that could be a big issue, too. Those are the two things I would keep an eye on to check out. The inflation one gets me a little... We'll just hope this is just a blip. But if that continues, that can really drain the resources pretty quick.

I hope you found this helpful to give you a little solace, I guess, when it comes to your railroad retirement. You're fine. Share this with other railroaders, kind of maybe ease their nerves a little bit. Subscribe to the channel. Click on the notification bell down at the bottom so that way, anytime I put up a new video, you'll see it. In the meantime, everyone, please stay safe, stay on track and take care. So long, everybody. Bye.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.