Social Security currently pays retirement, survivors and disability benefits to over 45 million Americans.
It is a broad-based program provided by the federal government. Public educators in California, however, do not
participate in Social Security by virtue of their employment. As a result, a CalSTRS member’s relationship to
Social Security is significantly different than for most people in this country. The purpose of this item is to
describe how Social Security operates, the implications of the fact that CalSTRS-covered service is not covered by
Social Security, and the current issues that relationship raises.
CalSTRS members are the largest single group of State and local government employees in the country who do not
participate in the Social Security system. However, CalSTRS members are not alone in this status. State and local
government workers in some 14 other States also are not covered by Social Security.
Unlike the pay-as-you-go Social Security system, the state of California has pre-funded its future retirement
liabilities. CalSTRS currently pays out more than $5.6 billion a year in retirement, disability and survivor benefits.
| 1935 |
Social Security was established originally as a modest retirement system for employees of private
industry as the Old Age and Survivors Insurance program (OASI). Employees of state and local government were excluded
from coverage when Congress passed the Social Security Act. This was because of the constitutional question of levying
the employer portion of the Social Security tax on state and local government. |
| 1951 |
Public employees who were not in positions covered by a state or local retirement system were
given the option of joining Social Security. Some states overcame this restriction by dissolving the existing
retirement system, obtaining Social Security coverage for the jurisdictions' public employees and then reinstating
the retirement system with either the same or revised provisions. Coverage under the new state system was usually
mandatory for new hires in those states. |
| 1954 |
The Social Security program was again amended to make coverage voluntary to public employees even if
they were covered by a state plan. The choice was up to the states, subject to a majority vote of the members of the plan.
If Social Security coverage was elected, all current and future employees would be covered. |
| 1955 |
In California, an every-member vote was conducted by the California Teachers Association (CTA).
In 1955, administrators were members of CTA. The election resulted in rejection of Social Security on full-time teaching
by 4 to 1. |
| 1956 |
Social Security coverage could be extended to current employees who wanted the coverage,
while those who did not desire coverage could be excluded, if all newly hired employees were automatically covered.
This provision was eventually extended to 20 states, including California (State legislation was passed for school
classified and state employees to be covered under this provision in 1959 and 1961, respectively). Also, the Disability
insurance program was added, providing income to disabled workers. The program has since been referred to as the Old-Age,
Survivors, and Disability Insurance program (OASDI). |
| 1977 |
Legislation was passed establishing the "Government Pension Offset" which reduces Social Security
spousal benefits under certain circumstances if there is a pension based on employment not covered by Social Security.
The offset became effective in 1982 and only if the spouse was not eligible for retirement as of that date. |
| 1983 |
Legislation was passed establishing the "Windfall Elimination Provision". This provides for an
alternate calculation, resulting in a lower Social Security benefit, for retirees who primarily worked in employment
not covered by Social Security, and who had other jobs where they paid Social Security taxes long enough to become
eligible for covered benefits. |
| 1990 |
As part of the Omnibus Budget Reconciliation Act of 1990 (OBRA), Congress enacted a law requiring all
public employees not covered by a state or local retirement plan meeting specified standards to be covered by Social
Security. This led to the development of the CalSTRS Cash Balance Benefit Program for part-time teachers. |
| 2004 |
Effective January 1, 2005 public employers that are not covered by Social Security must
disclose the applicability of WEP and GPO to employees hired on or after January 1, 2005. The law
requires newly hired public employees to sign a statement that they are aware of a possible
reduction in their future Social Security benefit entitlement. The employers are also required
to provide a copy to the retirement system, such as CalSTRS. |
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The essence of Social Security is a social insurance program provided by the federal government. The legislation
that created Social Security was enacted in response to the growing financial needs of the American people created
by the Great Depression. The program was a natural development at the time when many aged people had lost their
lifetime savings during the Depression and gainful employment opportunities were few. Social Security was designed
to provide workers and their dependents with protection against poverty in the event of declining income due to
retirement, disability, or death. To achieve that purpose, Social Security redistributes income in the following ways:
- from workers who have higher lifetime earnings to those who have lower earnings
- from people who have no dependents to those who do have dependents
- from unmarried wage earners and two-earner couples to one-earner couples
- from those with shorter life spans to those who live longer
Although changes have been made over the years to improve benefits payable under Social Security, it was never
intended for Social Security to meet all of a worker's financial needs. Rather, it always has been intended to
supplement a worker's private pension and personal savings.
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Social Security benefits are funded by payroll taxes collected from the salary earned by covered workers. Most, but not all,
workers and their employers each pay a tax of 6.2 percent of the workers’ employment earnings, up to a specified amount of earnings,
which in 2005 was $90,000. Self-employed individuals pay both the worker and employer shares of the payroll tax for a total tax of
12.4 percent of earnings. With the payroll taxes collected, the federal government is able to pay Social Security benefits to workers
who retire or become disabled and to dependents of retired, disabled and deceased workers.
In order to be entitled to Social Security benefits, a worker must have earned a minimum of 40 credits (generally 10 years of work).
A worker must have a certain minimum salary in order to earn one credit, and a worker cannot earn more than four credits in any
calendar year. The amount of earnings required to earn one credit in 2005 is $920 and four credits would be earned with wages of
$3,680 in the year. The amount required to earn a credit increases annually based on wage inflation.
It is important to realize that the nature of Social Security benefits is different from the nature of pension benefits
provided by many public and private employers. A pension represents an agreement between the employer and employee.
It is a benefit earned by virtue of employment with the specific entity that agrees to provide benefits in exchange for
the services of the employee. In contrast, Social Security benefits are not earned through any particular employment agreement.
They represent a promise from the federal government to help workers enhance their financial standing in their post-employment
years. This promise is made in exchange for the Social Security payroll tax the workers pay during their working years.
Likewise, the payroll taxes that fund Social Security benefits are not contributions in the sense that many
workers and employers contribute to the funding of many private and public pension plans. For instance,
CalSTRS members are credited with the amount of contributions they make to the CalSTRS and the CalSTRS
periodically determines the normal cost rate for crediting service. Benefits are funded at the time they are
earned by the contributions paid by members and employers when the service is performed and liability for a
benefit related to the service is assumed by the CalSTRS. At retirement, member and employer contributions
made throughout a worker's career help fund the member's benefit and remaining funds needed come from investment
earnings on the contributions. Members who terminate employment and do not want a monthly benefit can request a
lump-sum return of their own contributions with interest.
Unlike CalSTRS, Social Security operates on a pay-as-you-go basis. At any point in time the federal government
pays Social Security benefits using the payroll tax collected from the salaries earned by individuals who are
working at that time (i.e., the combined 12.4 percent of salary mentioned above). The formula used to determine
Social Security benefits favors lower paid workers by providing a benefit that represents a higher percentage of
the low-wage earner's salary than the benefit paid to a person who earned a higher salary. This is not the case
with a pension payable from most private or public defined benefit plans. In most instances, a pension provided
to employees is determined on an individual's age and years of service with the entity providing the pension and
the individual's salary level. The longer an employee works for the specific entity and the higher the salary he
or she earns, the higher the pension benefit is likely to be.
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All private sector employment is covered by Social Security. This means earnings from such employment (up to the
maximum taxable earnings) are subject to the 6.2 percent Social Security payroll tax that is paid both by the
employee and employer. As indicated in the earlier detailing of the history of Social Security coverage for
public employees, however, the availability of that coverage has evolved over time. Public sector work in most
states is now covered by Social Security. In fact, Social Security estimates that more than 75 percent of state
and local government employees have jobs where the work is covered by both Social Security and a State or local
governmental pension system.
However, in some states (including California), neither workers nor employers pay the Social Security payroll tax on
salary workers earn from certain State and local government employment. For this reason, the earnings from such
government employment are not included in the determination of Social Security benefits for these workers.
California is one of only 15 states where some or all of the public employees are not covered by Social Security
and do not pay the Social Security payroll tax on their employment earnings. Seven states, including California,
account for more than 75 percent of the non-covered workers. The Social Security Administration estimates that
95 percent of non-covered state and local government employees at some point in time become entitled to Social
Security as covered workers through private sector or other covered government service or as the spouse or
dependent of a covered worker.
Although members of CalSTRS do not pay the Social Security payroll tax on earnings from CalSTRS-covered service,
and therefore are not entitled to Social Security benefits for such service, many CalSTRS members are eligible
for Social Security benefits because they had private employment that was covered by Social Security. Still
others are eligible for Social Security benefits as the spouse or widow(er) of a worker who was covered by
Social Security.
California's public school teachers declined Social Security coverage primarily because the benefits available
to them from CalSTRS were greater than the benefits payable under Social Security. An individual with earnings
equal to the U.S. average (now about $34,000) can expect to receive a Social Security benefit at age 62 that
would replace about 41 percent of pay after 35 years of employment. In contrast, with 35 years of service and
retirement at age 62 under CalSTRS, the replacement ratio would be approximately 94 percent of pay. Under
Social Security, the wage replacement ratio declines as an individual's earnings increase. A covered worker
who always had maximum earnings under Social Security could expect to receive a benefit that replaces only
about 24 percent of covered earnings. This replacement ratio is estimated to gradually increase to about 28
percent after the year 2010.
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