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Inequities and Waste in Current Treatment of Social Security Benefits in Divorce Settlements

Thea Glazer, CFP®, CDFA™, MS Accounting Adryenn Cantor, CFLS

Thea Glazer is the principal of Glazer Financial Advisors. For over 25 years, she has provided analytical services and advice on the financial aspects of divorce for clients and their attorneys/mediators. She has specialized expertise in valuing and dividing stock options, deferred compensation, retirement plans other complex assets and income for divorce settlements.

Adryenn Cantor specializes in litigation, collaborative law and mediation services for all Family Law matters. She is a Certified Family Law Specialist with over thirty years experience. She is a former Chair of FLEXCOM. 

The current Social Security system as it applies to divorce is both wasteful and unfair. It is wasteful because multiple former spouses can collect benefits on the same worker’s history. It is unfair because Social Security benefits are considered separate property, while all other retirement plans are considered part of the marital estate. This particularly harms government employees who do not contribute to Social Security. This article discusses current law, economic waste, inequities and a proposed solution.

Social Security Benefits for Former Spouses

Background

The Social Security Act of 1935 originally covered only certain job categories and reinforced traditional views of family life. Women generally qualified for insurance only through their husband or their children. In the 1939 amendments to the Act, women were included and were able to collect on their own record or 50% of their husband’s.  In 1950, Social Security benefits were extended to former spouses with children. In 1965, they were extended to former spouses without children who were married at least 20 years. In 1977, the required length of marriage was reduced to 10 years, where it remains today. Those former spouses are entitled to receive 50% of the Social Security beneficiary’s benefits (derivative or dependent benefits) without reducing the worker’s 100% benefit. If the worker dies, the former spouse receives 100% of the benefits as a surviving former spouse. 

Economic Waste

More than one individual may collect benefits earned by only one employee. Example: Henry marries Wilma when he is 20. They divorce after 10 years of marriage.  Henry then marries Sally. They divorce after 10 years of marriage. Henry then marries Trish. They divorce after 10 years of marriage. At this point, Henry is only 50 and could continue to marry and divorce. Wilma, Sally and Trish are each eligible to receive 50% of Henry’s benefit while he receives 100%, if they have not remarried or remarry after age 60. That means there are 250% of benefits paid on Henry’s record. And, if Henry dies, each of the ex-wives can receive 100% benefit so 300% former spouse survivor benefits could be paid plus another 100% to his current widow if he was married at the time of his death. This is obviously extremely costly.

Severe inequities for members of certain government pension plans

In California, there are two state pension plans, Public Employees’ Retirement System (PERS) and California State Teachers’ Retirement System (CalSTRS) as well as numerous city and county pension plans. California teachers, state public safety officers (firefighters and police) and other workers who do not pay into the retirement portion of the Federal Insurance Contributions Act (FICA), do not receive Social Security benefits once they retire.  According to the law, they may be eligible to receive some benefits if they obtained eligibility based on their spouse’s record or their own earnings from private sector jobs.

However, two provisions exist that reduce the Social Security benefits the government employee is eligible to receive:

Windfall Elimination Provision (WEP). This provision applies to the employee’s own earning’s record for jobs in which they did contribute to Social Security. For 2009, it reduces the Social Security benefits by 50% of the government monthly pension benefit to a maximum monthly reduction of $372. Most long term public employees have accrued only minor benefits from private employment, so the $372 reduction leaves very little.

Government Pension Offset (GPO).  This provision reduces the derivative benefits a widow or ex-spouse can receive. The government pension offset reduces the 50% derivative benefit by 66.7¢ for each $1 of government pension received so the remaining Social Security benefits can be wiped out fairly easily.

Here is an example of how the above offsets would impact Jane, a soon to be retiring teacher in California. Jane is divorced from John, who worked in the private sector.

Facts

Jane is age 55
John is age 66.
Jane’s CALSTRS pension = $5,000 per month and is 100% community property
Jane’s Social Security benefit from jobs that withheld FICA = $200/mo.
John’s Social Security benefits = $2,323/mo
Jane’s Derivative benefit based on John’s record = $2,323 X 50% = $1,162.

Jane has the choice of collecting Social Security benefits on her own record or as a derivative benefit on John’s record.

Impact of WEP and GPO on Jane’s Social Security.

The WEP reduces her $200 benefits by 50% to $100.
The GPO reduces the $1,162 derivative benefit $.67 for each $1 of her $5,000 pension or $3,335 ($5,000 X 66.7%).   $1,162 - $3,335 = $0.

Bottom line: Jane will receive Social Security benefits of $100/mo.

Proposed Federal legislation seeks to repeal the WEP and GPO offsets. Two “Social Security Fairness Act of 2009” bills are pending; S484 in the Senate, and HR 235 in the House of Representatives. These bills seek to repeal the above offsets. Similar bills have been introduced for the last several years, but have failed to make it out of committee.

While the above offsets are unfair, the inherent unfairness in property division in a divorce is far worse. This is because Social Security benefits are separate property and separate income. They are non-assignable and nontransferable. Government pensions are marital property. That means the CalSTRS or San Diego City Employees’ Retirement System (SDCRS) pension plan is divided as community property and the Social Security benefits are off the table. 

In order to calculate the financial impact of this on Jane and John, we determined the present value of both CalSTRS and Social Security using RP2000 life expectancy tables, 2% COLA for Social Security, 2% non-compounding COLA for CalSTRS (per CalSTRS plan) and a 3.9% discount rate.

Jane’s CalSTRS = $686,070, Jane’s Social Security = $14,381
John’s Social Security = $397,749

For the division of assets:

Jane gets: 50% of her CalSTRS + her $100/mo. Social Security = $355,020
John’s gets: 50% of Jane’s CalSTRS or equivalent asset + his Social Security = $740,784

A number of states have dealt with the above inequity and there is quite a bit of case law regarding it.  The two cases mentioned below took different approaches in trying to level the playing field.

In Pennsylvania, the leading case is Cornbleth v. Cornbleth (1990) 397 Pa. Super. 431, 580 A.2d 369 The court held that a portion of a spouse’s civil service pension was excluded from the marital estate. That portion was the part of the pension that was in lieu of a Social Security benefit. The Social Security Offset approach, calculates the Social Security benefits that would have been earned if the employee was not a participant in the civil service pension. Once determined, the present value of the hypothetical Social Security benefits becomes separate property and is deducted from the pension plan’s present value. Of course if the earnings history of the spouses was unequal, the present values of the actual and hypothetical Social Security benefits would not be equal. The same thing applies if there was a great disparity in the ages of the spouses. It’s a good attempt for parity, but doesn’t quite make it from a financial prespective.

In Eickelberger v. Eickelberger, (1994) 93 Ohio App. 3d 221, the appeals court ruled that the private employee’s potential future Social Security benefits vested during the marriage should be present valued and offset against the public employee’s potential pension benefits before dividing the remainder of marital assets. Of course the present value of the Social Security benefits could be larger than that of the public pension. Since the actual Social Security benefits cannot be transferred or assigned, this necessitates that other assets be available for the additional offset.

The above workarounds and the resulting increased settlement fairness they brought are steps in the right direction. But what has been ignored is the need for the federal government to change its characterization of Social Security benefits.

There are a number of reasons given for Social Security benefits being excluded from the marital estate. These reasons are not compelling.

  • The Anti-assignment rules in the Social Security Act – but that could be changed
  • Social Security already has provision for former spouses – but at only 50% benefits while spouse retains 100%; and excluding those married less than 10 years and those penalized by the Government Pension Offset provision
  • There is no defined contract for payments so the government could change it – but some private and public pensions have changed their plans or have intentions to do so

When the character of Social Security benefits changes to a marital asset, the state family law courts no longer have a problem. This happened with military pensions. A 1981 California case led to the enactment of the Uniformed Services Former Spouses Protection Act in 1982 which made military pensions marital property and marital income.

A Solution

Just as the Federal Employees Retirement System (FERS) and military pensions are characterized as marital property, Social Security benefits need to be characterized as marital property as well, with no length of marriage requirement. Marital property should be marital property. This makes economic sense and rights a wrong, for the following reasons:

  • Once Social Security benefits are considered part of the marital estate, the benefits, or their equivalent present value, will be divided based on a time rule formula. That   means
  • only 100% of a worker’s benefits will be paid out per each earnings record, not the 150% or more that can be paid under current law. That saves the U.S. government money.
  • Successive ex-spouses would only be entitled to the portion of the Social Security benefits that were earned during their marriage to the worker. This is very easy to calculate with the excellent calculators on the Social Security website.
  • Ex-spouses married less than 10 years, currently excluded from any former spouse benefits, would share in the benefits as the Social Security earned during their marriage would be part of the marital estate.
  • Social Security benefits, as well as government pension plans such as CalSTRS, would be included in the marital estate, so a truly equitable division of property is possible.
  • If both spouses were eligible for Social Security benefits, the present value of each of their benefits would be considered even though they may have different values. This is currently done with 401(k), FERS plans and corporate pension plans.

Social Security was enacted at a time when divorce was rare and most women were full time homemakers. Times have changed and so should the Social Security laws.

The writers may be reached at:

Thea Glazer, Certified Financial Planner, Certified Divorce Financial Analyst, MS Accounting
(858) 485-0814, thea@glazerfa.com

Adryenn Cantor, Esq., Certified Family Law Specialist
(619) 546-7652, adryenn@adryenncantor.com