Posts

Social Security Statement in Divorce Financial Planning?

Social Security

An individual’s Social Security Statement can be a valuable resource in your divorce financial planning. Make sure to gather copies of the most recent statements available and we can help you uncover a wealth of financial knowledge.

1. Earnings and employment history.

The Social Security Statement is a great place to look for historical employment earnings. It is valuable to understand the earnings history and trajectory of both parties in a divorce. If tax returns and other documentation are being with-held by your spouse the Social Security statement can provide a valuable baseline.

2. Estimated retirement and disability benefits for long term, post divorce financial planning purposes.

Understanding the long term cash flow is very important when negotiating a financial settlement. Having details of the Social Security administration’s estimated benefits can help me understand your future cash flow and plan more effectively for the future.

3. If there is a public pension.

A worker who participates in California State Teacher’s Retirement System (STRS), California Public Employees Retirement System (PERS) and many other governmental retirement systems may not have paid into the Social Security system. Some may pay into Medicare but not Social Security. You can see this if the worker’s statement has wages in the Medicare taxed earnings column but not the Social Security column. Using the Social Security statement we can uncover the existence of a previously undisclosed pension.

4. Derivative benefits available to a former spouse.

In a marriage over ten years you can receive derivative benefits on the record of your former spouse. The derivative benefit is equal to one half of the former spouse’s benefit which can be found on their annual statement. This is useful for long term planning and can be important in long term spousal support negotiations.

5. Social Security and Medicare tax details.

We often need to estimate incomes for negotiation purposes. A common mistake occurs when the 6.2% Social Security tax is applied to the worker’s entire income. Instead the tax should be applied up to the maximum wage base for Social Security taxes. If you apply the tax to $300,000 of income the net, after tax income will be understated by over $10,000 per year.

6. Possible application of Government Pension Offset Provision (GPO) or Windfall Elimination Provision (WEP).

Those workers mentioned in #3 above may find themselves subject to the GPO or WEP and end up receiving less benefits than they expected if not careful. It is always important to understand how these government provisions affect an individual in divorce. The Social Security Statement even talks about them in the bottom right hand corner of page 2 in it’s current lay-out.

7. Existence of tax deferral vehicles such as deferred compensation plans and retirement accounts.

If the numbers reported under Medicare wages don’t match those reported in the Social Security earnings column there may be tax deferral vehicles like deferred compensation plans that are being used. The worker may also have simply hit the wage base maximum after which Social Security taxes are no longer incurred but Medicare taxes are.

8. Misreported income.

In California an individual involved in divorce proceedings must file a declaration of disclosure detailing their income and expenses and sign it for accuracy under penalty of perjury. This doesn’t keep people from reporting incorrect figures. If the Social Security Statement doesn’t match what is reported on the declaration there better be an explanation.

The Social Security Administration is provides an online version of taxpayers’ statements. The online version is now available at www.socialsecurity.gov/mystatement.

Your Wellspring Divorce advisor can uncover a lot from simple and easily available documentation. Imagine what we can find with a complete and accurate set of financial documents.

Social Security and Divorce

This Saturday we will be presenting a Social Security benefit course for clients and other professionals we work with during dissolution proceedings such as attorneys, mental health professionals and accountants. Social Security benefits are an often misunderstood piece of the divorce financial planning picture because they are governed by federal laws, not the local laws of the state you reside in but a little planning can go a long way. Check out our past blog posts on Social Security benefits and Divorce here.

Defense of Marriage Act Ruled Unconstitutional – Same-Sex Marriage Legal in California

The Supreme Court has found the Federal Defense of Marriage Act (DOMA) to be unconstitutional in all states where the state allows same-sex marriage. Same-sex couples now have equal rights to those of opposite-sex marriages including

  1. File joint tax returns as their marriage is not recognized for this purpose. This may result in larger tax bills for same sex couples compared to a marriage of a man and woman which enjoys the right to file Married Jointly. Under DOMA same-sex couples did not have the option.
  2. Take advantage of unlimited asset transfers between spouses. Section 1041 of the internal revenue code allows married couples to transfer an unlimited amount of assets back and forth during marriage and as part of a marital dissolution proceeding. A same sex couple did not have the same rights under DOMA and instead was often required to make other plans for tax efficiently passing assets via complicated and costly estate planning and trusts. Property settlements upon the dissolution of an opposite-sex marriage would not trigger income taxes. However, under DOMA a property settlement in the divorce of same-sex couples resulted in appreciated assets being deemed to have been sold for the value of the obligation being extinguished (the property settlement). This could trigger a gain or loss for tax purposes and have possible tax implications.
  3. Collect Social Security benefits on their spouses record. Under DOMA Same sex couples did not have the right to spousal or survivor benefits under the Social Security system. This kept a same sex couple from adopting a family model with a stay at home parent and had major negative consequences if a major bread-winner passes away.
  4. Have a spouse covered under an employer provided benefit program such as medical insurance. Under DOMA a same-sex couple was not afforded the same rights to cover their spouse on employer provided medical and other benefits.  The resulting accommodation had become some corporations adopting eligibility requirements allowing a same sex couple to have coverage but DOMA made the benefit a taxable income to the employee when a man and woman couple would avoid such taxation.
  5. Deduct alimony payments to their spouse on a tax return. Under DOMA alimony payable from a member of a same sex couple to their spouse is not tax deductible as it would be when payments are made between a man and woman couple. This arrangement generally had the effect of transferring income between ex-spouses tax efficiently by reducing income of the taxpayer in the higher marginal tax bracket and transferring it to the ex-spouse in the lower marginal tax bracket. Under DOMA alimony payments from same-sex divorces are not deductible for federal income tax purposes and may in fact be considered a gift, further reducing the lifetime limit or even triggering taxable gifts.

The Supreme Court has found the Proposition 8 supporters in California lack standing for appealing the voter decision making same-sex marriage legal in California and remanded the case to a lower court. Ultimately this means same-sex marriage in California will resume.

The combination of Defense of Marriage Act strike down and Proposition 8 decision means same-sex couples in California will have the same rights under the law as their opposite-sex counterparts.

 

How Does Spousal Support Affect My Social Security Retirement Benefits?

From time to time we are involved in a divorce with an individual or couple who is already receiving Social Security benefits. It is important to consider the affect of spousal support payments on these benefits during your divorce financial planning.

  • Social Security Retirement benefits are entitlement based meaning you have to have paid into the system in order to be eligible for benefits. You are ENTITLED to a certain amount of funds in return based up on your contributions while working. These benefits are entitlement based  and not subject to reduction based on income from spousal support. Benefits may be reduced by income from earnings if the recipient is under the normal retirement age when they receive benefits. Benefits may also be reduced for taxes and or Medicare premiums. This can be determined by reviewing the participants pay-stub.
  • Supplemental Security Income (SSI), also a Social Security benefit, is a needs based program which means you must prove you NEED the funds because of limited resources. It is, to my knowledge, reserved for those who did not contribute enough into the system to be eligible for the entitlement based programs. Supplemental Security Income has income limits for eligibility because it is NEED based. A participants’s eligibility can be affected if they earn over a certain level of income or receive support payments so it is very important to recognize the difference in your divorce financial planning.

Here is the link to the Social Security Administration web site http://www.socialsecurity.gov/pubs/10069.html#a0=-1 . A Certified Divorce Financial Analyst can help you navigate the many complications of the Social Security programs.

Social Security and Divorce Financial Planning

Social Security in the United States refers directly to a lesser known federal Old Age, Survivors and Disability Insurance program or OASDI. The program was originally rolled out in the 1930’s in an attempt to limit what were seen as dangers to the American way of life such as increased life expectancy, poverty, and fatherless children. So the Social Security Act, signed in 1935, created social insurance programs to provide benefits to retirees, the unemployed, and as well as a lump sum benefit to the family 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 becoming a common cause for the end of marriages and added divorcees to the beneficiary list.

The largest component of benefits is retirement income. Throughout a person’s working life the Social Security Administration keeps track of income and taxpayers fund the program via payroll taxes also known as FICA (Federal Insurance Contributions Act) taxes. The amount of the monthly benefit to which the worker is entitled depends upon the earnings record and upon the age at which the retiree chooses to begin receiving benefits. FICA taxes are 7.65% for employees and 15.3% for self employed individuals. The amount of taxes paid is not directly used to calculate an individual’s benefit. The rate is broken down into two parts: Social Security and Medicare. The portion is 6.2% and is paid on a maximum of $106,800 of income for 2009. The income maximum is also known as a wage base. The Medicare portion is 1.45% on all earnings. These rates are set by law and haven’t changed since 1990. The wage base for Social Security is indexed each year for inflation and Medicare has maintained an unlimited base since 1993.

Self employed person’s pay double the amount of tax because the employer is responsible for the other half of an employee’s liability. A self employed individual is both employer and employee. There are wages not subject to FICA taxes 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 elect 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 payable is 62. The age at which full retirement benefits are available is dependent upon the taxpayers age. An increase of regular retirement age was enacted to reduce the amount of benefits payable. For those currently over age 70 the normal age was 65. Anyone born after will fall somewhere on increasing scale which climbs incrementally to age 67 depending upon birth date. Anyone born after 1960 must reach age 67 for normal retirement benefits. Delaying receipt of benefits will increase a taxpayer’s benefit until age 70.

Benefits are paid from taxes collected from other tax-payers. This makes it a pay as you go system and will eventually 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 can’t cover the expense from cash flow, the program will begin drawing down the trust fund it has accumulated during times of surplus taxes. We can only speculate what happens when the trust fund runs out. This is the cause for concern often discussed in the news and other media. The fix for this problem is the subject of much political posturing including that witnessed in President Bush’s 2005 State of the Union address.

The first reported Social Security payment was to Ernest Ackerman, who retired only one day after Social Security began. Five cents were withheld from his pay during that period, and he received a lump-sum payout of seventeen cents from Social Security. This might give you an indication of how Social Security handles business.

A current spouse is eligible to receive survivor benefits equal to 100% of the deceased worker’s benefit if they have reached normal retirement age.

Divorced spouses are eligible for benefits equal to one half of the worker’s benefit if they were married for 10 years have not remarried and are at least 62 years old. This is called a derivative benefit. A spousal applicant must wait until the worker has reached retirement age, 62, in order to apply for benefits. The worker is not required to have applied for benefits in order for the ex-spouse to apply for spousal benefits. They are not entitled to increases for benefits taken after normal retirement age. If a worker has died and the ex-spouse has reached full retirement age they can receive 100% of the worker’s benefit as survivor benefits.

If an applicant is between age 62 and their normal retirement age; the application for benefits will be based on the applicant’s earnings record. If one half of an ex-spouse’s benefit is greater than the applicant’s benefit on their own record; the applicant can choose to take whichever is greater. If you wait until your normal retirement age and file for spousal benefits you can continue to accrue benefits and enhancements for delaying your own retirement up until your age 70.

An ex-spouse’s receipt of derivative benefits on the worker’s record does not reduce the worker’s benefits. It is even possible for more than one ex-spouse to collect on the worker’s derivative benefits. This could lead to as much as 500% of the original benefit being claimed by the five ex-spouses.

Windfall Elimination Provision and Government Pension Offset Provision

For those worker’s who are covered by a pension based on their own earnings not covered by Social Security a different method of computing benefits applies. The alternative method is called the Windfall Elimination Provision (WEP) and was created to close a loophole that enabled worker’s who earned benefits in covered and non-covered employment from being labeled a low-earning worker and receiving a disproportionately large Social Security benefit.

The formula is weighted in favor of low earners because such a person is more dependent on Social Security. If the WEP is applicable it reduces a worker’s Social Security benefit by 50% of the worker’s pension benefit up to a maximum of $380.50 in 2010.

If you earned a pension based on work where you did not pay Social Security taxes, your Social Security spousal or derivative benefits may be reduced. The Government Pension Offset Provision (GPO) was enacted to treat retired government employees who had not contributed to Social Security similarly to retirees who had. The GPO reduces derivative benefits by two-thirds of other government pensions received. This can reduce Social Security benefits to zero.

The truly important ramification of the WEP and GPO on Social Security retirement benefits comes into play during divorce proceedings. Federal Law makes Social Security benefits the separate property of the party that earned them.

They are not assignable or divisible in a family law court and not considered an asset of the community in California.

Government and other pensions, on the other hand, are considered community property in the state of California to the extent benefits were earned during marriage. Derivative benefits under the Social Security program for ex-spouses would seem, at first glance to remedy the problem. The non-worker spouse get’s half of the worker’s retirement benefit via derivative benefit payments. Getting to the true ramifications of the WEP and GPO during divorce proceedings requires sound financial planning.

Consider the following couple.

– Jim was a private employee covered by the Social Security system. He retired at age 66 with a monthly Social Security benefit of $2,014.
– Barbara has been employed as a teacher for 30 years covered by the California State Teacher’s Retirement System. She retired this year at age 65 with 30 years of service under CalSTRS and a monthly benefit of $5,520 without having paid a single penny into Social Security.
– Barbara’s CalSTRS benefits are considered community property in California having been earned entirely during marriage.
– Jim and Barbara are divorcing and her CalSTRS pension will be divided equally with each party receiving $2,760.
– Jim will continue to receive his $2,014 per month of Social Security.
– Barbara will be entitled to a derivative Social Security benefit equal to one half of Jim’s benefit, $1,007, or the benefit she has earned on her own record. Barbara has not earned a benefit on her own record so she will choose to receive the derivative benefit on Jim’s record.
– 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 from the Social Security derivative benefit.
– Barbara will receive a total of $2,760 from her CalSTRS Pension and $0 from Jim’s Social Security derivative benefit.
– Jim’s Social Security benefits will not be affected by the GPO or WEP.
– Jim will receive $2,760 from Barbara’s CalSTRS benefit and $2,014 from his Social Security retirement benefits for a total of $4,776.

What looks to the lay person to be an appropriately arranged method for completing an equal division of assets leads to a grossly in-equitable settlement that provides Jim with $4,776 per month and Barbara with $2,760 per month.

The California Federation of Teachers sponsored a rally on November 7th 2009 to urge Congress to pass SR 484 in the Senate and HR 235 in the House of Representatives to repeal the Government Pension Offset and Windfall Elimination Provision. This has been attempted numerous times before without success. Social Security is a monster of finances, public policy and entitlement. Making changes is not easy or quick.

Consulting with a qualified financial planner experienced in the nuances of divorce finances and retaining their services as a neutral expert or advisor will help divorcing individuals work with and around in-equities caused by the system.