Social Security, Retirement Benefits, and Divorce ?
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.
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