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
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.
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:
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.
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.
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.
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:
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
Adryenn Cantor, Esq., Certified Family Law Specialist