National Conference on Public Employee Retirement Systems Public Pensions & Social Security Hank Kim, Esq. Executive Director & Counsel National Conference on Public Employee Retirement Systems 1

National Conference on Public Employee Retirement Systems Presentation Overview Social Security Facts Social Security Offsets Wrap up and Q & As

National Conference on Public Employee Retirement Systems Will Social Security Be There for Me? Yes! A better question is: How might Social Security change? Social Security reforms are needed to address the long-range deficit facing the program. However, NCPERS opposes mandatory Social Security coverage for newly hired State and local government workers. 3

National Conference on Public Employee Retirement Systems How Do I Qualify? Must have 40 credits-- roughly 10 years of Social Security taxed work (not consecutive) In 2016, earn 1 credit for each $1,260 earned, but no more than 4 credits/year ($5,040) Or qualify for dependent’s benefits on Spouse’s record 4

National Conference on Public Employee Retirement Systems Relationship Between Earnings & Benefits Benefits are earnings related— the higher the earnings, the higher the benefit The benefit formula is weighted in favor of low wage earners— the lower the earnings, the higher the replacement rate (initial benefits as a percent of pre-retirement earnings)

National Conference on Public Employee Retirement Systems 6 Average Lifetime Earnings = $20,000 $50,000 $100,000 Monthly Benefits = $ 1,013 $ 1,813 $ 2,576 Annual Benefits = $12,156 $21,756 $ 30,912

National Conference on Public Employee Retirement Systems How Social Security Retirement Benefits Are Figured Social Security benefits are based on earnings:  Adjust (index) wages for inflation  Sum the highest 35 years of indexed earnings  Divide this sum by the # of months in 35 years (420). Result is “average indexed monthly earnings” or AIME  Apply formula to the AIME to get benefit amount

National Conference on Public Employee Retirement Systems 66 Year Old (‘48) Covered Employee Unadjusted Wages : $10, : $20, : $35, : $40, : $50, : $60, : $65, : $70, : $75,000 Inflation Adjusted Wages : $40, : $60, : $75, : $75, : $75, : $75, : $75, : $75, : $75,000 8

National Conference on Public Employee Retirement Systems AIME Calculation 1.Add the highest 35 years of indexed earnings. 2.Divide total by the # of months in 35 years (420). 3.Result is “average indexed monthly earnings” or AIME. 1.$75,000 x 35 years = $2,625,000 2.$2,625,000 / 420 = 3.$6,250 AIME 9

National Conference on Public Employee Retirement Systems 90% of first $856 of average indexed monthly earnings 32% between $856 and $5,157 15% of the remainder up to FICA tax limit Benefit Formula at Normal Retirement Age

National Conference on Public Employee Retirement Systems Monthly Social Security Benefit MONTHLY BENEFIT FORMULA: AIME = $6,250  90% x $ 856 =$  32% x $4,301 = $1, ($5,157 – $856)  15% x $1,093 = +$ ($6,250 – $5,157)  Primary Insurance Amount $ 2,310.67

National Conference on Public Employee Retirement Systems Social Security Early Retirement 12

National Conference on Public Employee Retirement Systems Non-covered Employees About 6.8 million state and local government employees are not covered by Social Security. These workers account for about 28% of all State and local government employees. 13

National Conference on Public Employee Retirement Systems Governmental Employees If you pay into Social Security, no offset. If you DO NOT pay into Social Security and receive a pension from that work, there are offsets that could affect you: – Windfall Elimination Provision – Government Pension Offset

National Conference on Public Employee Retirement Systems Offsets -- WEP & GPO The windfall elimination provision (WEP) and the government pension offset (GPO) affect people with pensions from non- covered employment. The WEP affects benefits on the record of retired or disabled worker. The GPO affects benefits received as a spouse or widow(er)— dependent’s benefits.

National Conference on Public Employee Retirement Systems Windfall Elimination Provision WEP Affects: Retired & disabled workers with non-covered pensions who have enough covered earnings to receive a Social Security benefit based on their own work.

National Conference on Public Employee Retirement Systems WEP--Purpose Intended purpose of the WEP is to remove the heavy weighting (the 90% factor) in the regular Social Security benefit formula that is intended to boost benefits for life-long, low-paid earners.

National Conference on Public Employee Retirement Systems WEP-- Different Formula Under the WEP, a different Social Security benefit formula applies to workers who: Receive for a pension based on non-covered employment; and have fewer than 30 years of substantial earnings under Social Security

National Conference on Public Employee Retirement Systems WEP Benefit Formula 90% of first $856 of AIME + 32% between $856 and $5,157 of AIME + 15% of remainder 40% of first $856 of AIME + 32% between $856 and $5,157 of AIME + 15% of remainder

National Conference on Public Employee Retirement Systems 66 Year Old (‘48) Non Covered Employee Unadjusted Wages : $1, : $1, : $ : $ : $ : $10, : $20, : $70, : $75,000 Inflation Adjusted Wages : $4, : $4, : $ : $ : $ : $12, : $23, : $75, : $75,000 20

National Conference on Public Employee Retirement Systems AIME Calculation 1.Add the highest 35 years of indexed earnings. 2.Divide total by the # of months in 35 years (420). 3.Result is “average indexed monthly earnings” or AIME. 1.$75,000 x 10 years + $23,200 x 5 yrs +$12,500 x 5 yrs + $ 4,500 x 5 yrs +$ 4,000 x 5 yrs + $ 0 x 5 yrs =$971,000 2.$971,000 / 420 = 3.$2,312 AIME 21

National Conference on Public Employee Retirement Systems Example AIME = $2,312 – 90% X$ 856 = $ – 32% X$1,456 = $ ($2,312 – $856) – 15% X$ 0 = + $ 0.00 – Primary Insurance Amount $1, % $808.32

National Conference on Public Employee Retirement Systems Non-covered Employees Look Like Low Earners The addition of all those “zero” years gives them an artificially low average wage (AIME) So the computation makes it look like you’re low earners and gives you the 90% rate of return

National Conference on Public Employee Retirement Systems Exception to the WEP Recognizes the more years of substantial earnings a person has paid Social Security taxes, the closer that person should be to the standard benefit formula. 30 or more yrs=WEP doesn’t apply years=modified WEP 20 or fewer years=full WEP

National Conference on Public Employee Retirement Systems $ $ 1, $ 3, $ 7, $11, $16, $17, $18, $19, $20, $21, $22,050 Example of amounts: Substantial Earnings Amounts

National Conference on Public Employee Retirement Systems WEP Arguments For WEP Reasonable means to prevents payment of overgenerous benefits Offset is limited; benefit never fully eliminated Good counter argument for mandatory Social Security Against WEP Unfair as it reduces a benefit worker had included in retirement plans 40% factor is arbitrary & inaccurate way to deal with individual benefits

National Conference on Public Employee Retirement Systems Dual Entitlement All Social Security benefits are subject to the dual entitlement rules. An individual who is eligible for both a benefit as a worker & a benefit as a dependent (spouse or widow(er)) cannot get both benefits in full. Rather, the amount of a person’s dependent’s benefit will be offset, dollar for dollar, by the amount of any worker’s benefit the person may have earned. For example, if a women gets a Social Security retirement benefit of $300 based on her own work, then $300 is subtracted from any Social Security benefit she would otherwise get as a wife or widow.

National Conference on Public Employee Retirement Systems Government Pension Offset The GOP affects government retirees who receive two benefits: 1.A government pension not covered by Social Security, and 2.A Social Security dependent spousal benefit 28

National Conference on Public Employee Retirement Systems GPO requires that the Social Security dependent spousal benefits be offset by 2/3 of the non-covered Government pension. Government Pension Offset

National Conference on Public Employee Retirement Systems Potential Benefit for Spouse = $500; Widow(er) = $1000 House B-Bea He – S.S. $1,000 She – S.S. $900 With $ for $ reduction Payable as a: Spouse: $0 ($500-$900=$0) Widow: $100 ($1,000-$900=$100) House C - Cleo He – S.S. $1,000 She – State DB $900 GPO 2/3 X $900 = $600 Payable as a: Spouse: $0 ($500-$600=$0) Widow: $400 ($1,000-$600=$400) House A - Ann He – S.S. $1,000 She – S.S. $0 Payable as a: Spouse: $500 (½ $1000=$500) Widow: $1,000 (Full spousal amount) Dual Entitlement vs GPO: Example

National Conference on Public Employee Retirement Systems Potential Benefit for Spouse = $500; Widow(er) = $1000 House B-Bea He – S.S. $1,000 She – S.S. $900 With $ for $ reduction Payable as a: Spouse: $0 ($500-$900=$0) Widow: $100 ($1,000-$900=$100) House C - Cleo He – S.S. $1,000 She – State DB $900 GPO 2/3 X $900 = $600 Payable as a: Spouse: $0 ($500-$600=$0) Widow: $400 ($1,000-$600=$400) Dual Entitlement vs GPO: Example Cont. House D - Dan He – State DB $1,200 She – S.S. $1,000 GPO 2/3 x $1,200 = $800 Payable as a: Spouse: $0 ($500-$800=$0) Widower: $200 ($1,000-$800=$200)

National Conference on Public Employee Retirement Systems GPO ensures fairness It treats Bea, the noncovered teacher, the same way we treat Cleo, who was covered under Social Security It says you can’t get a dependent’s benefit unless you truly are dependent

National Conference on Public Employee Retirement Systems GPO Exceptions Anyone paying Social Security tax for the last 60 months of government employment.

National Conference on Public Employee Retirement Systems GPO Arguments For GPO Effective method of preventing what would otherwise be an unfair advantage for Government workers Against GOP Unfair because it reduces a benefit that the worker had included in retirement plans

National Conference on Public Employee Retirement Systems Additional References Social Security web site Social Security web site for information on WEP Social Security web site for information on GPO

National Conference on Public Employee Retirement Systems NCPERS 2016/17 Educational Programs Public Pension Funding Forum August 21-23, 2016 at Yale University, CT Public Safety Employee Pension & Benefits Conference October 23-26, 2016 in Las Vegas, NV Legislative Conference January 29-31, 2017 in Washington, DC Trustee Educational Seminar (TEDS) May 20-21, 2017 in Hollywood, FL NCPERS Accredited Fiduciary (NAF) Program May 20-21, 2017 in Hollywood, FL Annual Conference & Exhibition (ACE) May 21-24, 2017 in Hollywood, FL 36

National Conference on Public Employee Retirement Systems For More Information NCPERS 444 North Capitol Street, NW Suite 630 Washington, DC