Social Security, Retirement Benefits, and Divorce
Social Security in the United States refers directly to the lesser known federal Old Age, Victim, and Disability Insurance program or OASDI. The program was originally launched in the 1930s in an attempt to limit what were seen as dangers to the American way of life such as increased life expectancy, poverty, and orphans. So the Social Security Act, signed in 1935, created a social insurance program to provide benefits to retirees, the unemployed, as well as lump sum benefits to families at death. Many amendments have been made since the original Social Security Act of 1935. Most importantly; Medicare was added in 1965. The Social Security Act of 1965 also recognized for the first time that divorce was a common cause of marriage ending and added divorce to the list of beneficiaries.
The largest benefit component is retirement income. Throughout a person’s working life, the Social Security Administration tracks income and taxpayers fund the program through payroll taxes also known as FICA taxes (Federal Insurance Contributions Act). The amount of the monthly benefit that the worker is entitled to depends on the record of income and on the age at which the retiree chooses to start receiving benefits. The FICA tax is 7.65% for employees and 15.3% for self-employed individuals. The amount of taxes paid is not directly used to calculate individual benefits. This rate is divided into two parts: Social Security and Medicare. The portion is 6.2% and is paid out with a maximum income of $106,800 for 2009. The maximum income is also known as the wage base. Medicare’s share is 1.45% of all income.
Self-employed people pay double the amount of tax because the employer is responsible for the other half of the employee’s obligations. An self-employed individual is both employer and employee. There are wages that are not subject to FICA tax including some state and local government employees who participate in alternative programs such as CalSTRS and CalPERS. Each state and local government unit with a pension plan decides whether to opt for Social Security and Medicare coverage. Civilian federal employees are covered by Medicare but usually not Social Security.
The earliest age at which reduced benefits are paid is 62. The age at which full retirement benefits are available depends on the age of the taxpayer. An increase in the regular retirement age is enforced to reduce the amount of benefits paid out. For those who are currently over 70 years old, the normal age is 65 years. Anyone born after that will fall somewhere on an increasing scale that goes up gradually to age 67 depending on the date of birth. Anyone born after 1960 must reach the age of 67 to receive normal retirement benefits. Delaying receiving benefits will increase taxpayer benefits until the age of 70.
Benefits are paid from taxes collected from other taxpayers. This makes it a pay-as-you-go system and will ultimately be directly responsible for the downfall of the program. At least as we know it today. In 2009, nearly 51 million Americans will receive $650 billion in Social Security Benefits. Economists project that payroll taxes will no longer be sufficient to fund benefits somewhere in the next 10 to 15 years. Once we are unable to cover the expenditure from the cash flow, the program will start withdrawing the trust funds that have accumulated during the tax surplus period. We can only speculate what happens when the trust fund runs out. This is a concern that is often discussed in the news and other media. The fix for this problem is the subject of many political stances including those witnessed in President Bush’s speech.
The first reported Social Security payment was to Ernest Ackerman, who retired just one day after Social Security started. Five cents was deducted from his salary during that period, and he received a lump-sum payment of seventeen cents from Social Security. This may give you an indication of how Social Security handles business.
Spouses are currently eligible to receive survivor benefits equivalent to 100% of deceased workers’ benefits if they have reached the normal retirement age.
Divorced spouses are entitled to benefits equivalent to half of workers’ benefits if they have been married for 10 years and have not remarried and are at least 62 years old. These are called inherited benefits. Spouse applicants must wait until the worker reaches retirement age, 62, to apply for benefits. Workers are not required to apply for benefits in order for an ex-spouse to apply for spousal benefits. They are not entitled to an increase in benefits taken after the normal retirement age. If a worker has died and his former spouse has reached full retirement age, they can receive 100% of the worker’s benefits as survivor benefits.
If the applicant is between 62 years of age and their normal retirement age; Applications for benefits will be based on the applicant’s record of income. If half of the ex-spouse’s profit is greater than the applicant’s profit in their own records; the applicant can choose to take whichever is greater. If you wait until your normal retirement age and apply for spousal benefits, you can continue to receive benefits and upgrades to defer your own retirement until you are 70 years old.
The ex-spouse’s receipt of derivative benefits in the worker’s record does not reduce the worker’s benefits. There may even be more than one ex-spouse to collect employee derivative benefits. This could account for as much as 500% of the original benefits claimed by five former partners.
Windfall Elimination Provisions and Government Pension Offset Provisions
For workers covered by a pension based on their own income that is not covered by Social Security, a different method of calculating benefits applies. The alternative method is called the Windfall Elimination Provision (WEP) and was created to close a loophole that would allow workers who benefit in covered and underemployed employment label low-income workers and receive disproportionately large Social Security benefits.
The formula weighs in favor of low income because such people are more dependent on Social Security. If WEP applies, it reduces workers’ Social Security benefits by 50% of workers’ pension benefits up to a maximum of $380.50 in 2010.
If you earn a pension based on an occupation for which you do not pay Social Security taxes, your spouse’s or Social Security derivative benefits may be deducted. Provisions for Government Pension Compensation (GPO) are applied to treat retired civil servants who have not received Jamsostek contributions the same as retirees who have. The GPO reduces derivative benefits by two-thirds of other government pensions received. This can reduce the benefits of Jamsostek to zero.
The truly important ramifications of the WEP and the GPO on Social Security retirement benefits come into play during the divorce process. Federal law makes Social Security benefit property separate from the party that acquires it.
They are not transferable or assignable in family law courts and are not considered a community asset in California.
Government and other pensions, on the other hand, are considered community property in the state of California to the extent that the benefits accrue during the marriage. The derivative benefits under the Social Security program for ex-spouse seem, at first glance, to address the problem. The non-employee’s spouse gets half of the worker’s pension benefit through derivative benefit payments. Getting to the true consequences of WEPs and GPOs during the divorce process requires good financial planning.
Consider the following pair.
– Jim is a private employee covered by the Social Security system. He retired at the age of 66 with a monthly Social Security benefit of $2,014.
– Barbara has worked as a teacher for the 30 years covered by the California State Teacher Retirement System. He retired this year at the age of 65 with 30 years of service under CalSTRS and a monthly allowance of $5,520 without paying a dime to Social Security.
– Barbara’s CalSTRS benefits are considered community property in California fully acquired during the marriage.
– Jim and Barbara will divorce and his CalSTRS pension will be divided equally with each party receiving $2,760.
– Jim will continue to receive Social Security $2,014 per month.
– Barbara will be entitled to a derivative Social Security benefit equal to half of Jim’s benefits, $1,007, or the benefits he accrues from his own records. Barbara has not yet benefited from her own records so she will choose to receive derivative benefits from Jim’s records.
– The Government Pension Offset will reduce Barbara’s Social Security benefits by two-thirds of her $2,760 pension benefit, or $1,839.82. The GPO leaves Barbara with $0 of Social Security derived benefits.
– Barbara will receive a total of $2,760 from CalSTRS Pension and $0 from Jim’s Social Security derivative benefits.
– Jim’s Social Security benefits will not be affected by GPO or WEP.
– Jim will receive $2,760 from Barbara’s CalSTRS benefits and $2,014 from her Social Security retirement benefits for a total of $4,776.
What the public saw as a properly regulated method of settling the division of equal assets led to a very unfair settlement that gave Jim $ 4,776 per month and Barbara $ 2,760 per month.
The California Federation of Teachers sponsored a rally on November 7 to urge Congress to pass SR 484 in the Senate and HR 235 in the House of Representatives to repeal the Provisions for the Elimination of the Government Pension Offset and the Elimination of Windfalls. This has been tried many times before without success. Social Security is a monster of finance, public policy, and rights. Making changes is not easy or quick.
Consulting with a qualified financial planner who is experienced in the nuances of divorce finance and maintaining their services as an expert or neutral advisor will help divorced individuals work with and around the inequalities caused by the system.
Pacific Divorce Management’s mission is to help couples deal with the legal, emotional, and financial aspects of divorce in a civilized, fair and efficient manner by providing expert divorce financial planning advice.
While breaking up a marriage is never fun, it doesn’t have to be an ongoing exercise in mutual misery. Pacific Divorce Management provides divorce financial planning services with a focus on the long-term welfare of all parties. The process known as Collaborative Mediation and Divorce is a form of Alternative Dispute Resolution that Pacific Divorce Management specializes in.
Also read Socialization Process