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Public educators in California 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 the United States. This document, presented
to the Teachers’ Retirement Board on September 9, 2005, describes how Social Security operates,
the implications of CalSTRS-covered service not being covered by Social Security and some current
issues dealing with that relationship.
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.
Through sound management over nine decades, CalSTRS has developed into the third largest public pension system in the
United States, with more than 754,000 active and retired members and assets of more than $128 billion. 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. 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.
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| 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 effect 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.
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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 supplemental 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 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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Potentially, there are two Social Security benefits that can be paid upon a covered worker’s retirement—a benefit is
payable to the worker, and a benefit also may be payable to the worker’s spouse. The first step in determining Social Security
benefits payable to a worker is to establish the worker’s “average indexed monthly earnings” (AIME). AIME is based on a covered
worker’s lifetime Social Security earnings record using the highest 35 years of earnings, indexed for inflation. Only earnings
on which the worker paid the Social Security payroll tax are included in AIME. If the worker paid the Social Security payroll
tax for fewer than 35 years, then annual earnings of zero would be included for the number of years required to add up to 35 years
for computing the worker’s AIME. The maximum AIME for persons who reached age 62 in 2005 is generally $6,137. From AIME,
Social Security determines the worker’s “primary insurance amount” (PIA). A covered worker’s PIA is always determined as of age 62
regardless of whether or not the worker begins collecting Social Security benefits at that time. If the worker delays retirement
beyond age 62, the PIA will be increased by the percentage increase in the cost of living since December of the year in which the
worker reached age 62.
The PIA for persons who attained age 62 in 2005 would be determined as follows:
90% of the first $627 of AIME, plus
32% of the next $3,152 of AIME, plus
15% of AIME in excess of $3,779 ($627 + $3,152 = $3,779)
A worker who reached age 62 in 2005 and had the maximum AIME of $6,137 would have a primary insurance amount
of $1,926. This PIA is the amount the worker would receive if he or she retired at “full retirement age” (FRA),
although if retirement is delayed beyond age 62, the primary insurance amount resulting from the formula will be
increased annually to reflect changes in the cost of living. While a worker can begin receiving Social Security
benefits at age 62, full retirement age is age 65 for people who were born before 1938, gradually increasing to age 67
for those who were born in 1960 and later. Benefits are reduced when a worker retires at an age younger than 65. The full
retirement age under Social Security for persons who attain age 62 in 2005 is age 66 years.
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The second benefit that can be paid upon retirement is a benefit for the spouse, former spouse or widow(er)
of a worker who was covered under Social Security. As a social insurance program, Social Security pays an additional
benefit if the spouse of a worker is financially dependent on the worker. Such benefits are intended to provide income
for persons who have little or no pension from their own employment and the benefits in such instance are based on the
more highly paid worker’s earnings from covered employment. That worker may have provided all or most of the household
income thus providing for a spouse who was financially dependent. For example, the worker’s spouse may have been the primary
caregiver for the children in the household and therefore may not have had significant years of employment.
The spousal benefit is equal to 50 percent of the higher wage earner’s PIA while they are both living and is reduced by
the amount of any benefit paid based on the lower paid spouse’s own Social Security earnings record. If the worker predeceases
the dependent spouse, the dependent surviving spouse would receive 100 percent of the worker’s PIA. If the spouse also qualifies
for a Social Security benefit based on his or her own earnings, generally speaking, the spouse could receive the greater of a
benefit based on his or her own Social Security earnings record or a spousal benefit, but not both. In effect, the higher benefit
would be paid.
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As does Social Security, CalSTRS provides benefits to members of CalSTRS who retire or become disabled. CalSTRS also
provides benefits to spouses and dependents of members. When a CalSTRS member retires, he or she may choose from a number
of joint and survivor options that will provide a surviving spouse (or any other person named by the member) with a monthly
allowance after the member’s death. The member’s retirement benefit is reduced under an option and the continuing monthly
benefit for the surviving spouse or other beneficiary is equal to at least 50 percent (and as high as 100 percent) of the
reduced amount payable to the retired member. A surviving spouse and eligible dependents may also be entitled to a benefit in
the event the death of a CalSTRS member occurs before retirement.
The Social Security benefit formula is fundamentally different from the type of formula used in a defined benefit
retirement plan, such as CalSTRS’ Defined Benefit (DB) Program. Under the CalSTRS DB Program, and most similar types of plans,
the percentage of a worker’s average salary that is replaced by the retirement formula is based on the number of years
the worker was covered under the plan, the worker’s age when he or she begins to receive the benefit and the worker’s final
average salary. For any given age or years covered under the plan, however, the amount of average salary that is replaced by
the retirement formula is not affected by the amount of the average salary itself.
In contrast, the Social Security benefit, as social insurance, is directly affected by the amount of the worker’s
average salary. In addition, the Social Security benefit is affected by the number of years worked only to the extent that
if the worker paid the Social Security payroll tax for fewer than 35 years, the worker’s AIME is reduced because it reflects
one or more years with zero earnings. Put in other terms, at one level the dollar value of the Social Security benefit increases
with average income because the benefit is equal to a percentage of average income and will therefore increase as average income
increases. On the other hand, when determining a worker’s PIA the percentage of AIME that results from the formula decreases as
average income increases. Consequently, a Social Security benefit does not increase as rapidly as does the average income.
The following table shows the percentage of a worker’s AIME that would have been replaced by the Social Security benefit
formula if the worker had been born in 1940 and retired in 2005 at age 65.
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| Average Indexed Monthly Earnings (AIME) |
Percentage of Worker’s AIME Computed by Benefit Formula |
Social Security Benefit Dollar Amount |
| $ 627 |
90% |
$ 564 |
| $1,000 |
69% |
$ 694 |
| $1,500 |
58% |
$ 869 |
| $2,000 |
52% |
$1,044 |
| $4,000 |
43% |
$1,700 |
As indicated in the table, the social insurance component of the Social Security benefit formula pays a relatively
lower benefit for a worker with higher average earnings. Although the worker with AIME of $4,000 would have received a
monthly benefit of $1,700, that dollar amount represents only 43 percent of the worker’s AIME; whereas, the worker with
AIME of only $627 would have received a monthly benefit of $564 which represents 90 percent of that worker’s AIME. Consequently,
if the Social Security benefit were to be based on a level of earnings that was less than the level actually earned, the worker
would receive a relatively higher benefit than was intended by the formula. Although an understatement of earnings would not happen
in private employment, where all employment is subject to the Social Security payroll tax, it could happen with respect to any public
employment that is not subject to Social Security coverage. For this reason, Social Security reduces the benefits paid to many
people who also receive a pension from employment that was not covered by Social Security. How those benefits are reduced is
discussed in more detail in the next section.
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Given the current discussion concerning the long-term financial viability of Social Security, there is greater visibility
to the details of how that program operates. As a result, there is a greater likelihood that the current relationship of CalSTRS
members to Social Security could change if Congress enacts legislation to improve the level of Social Security financing. The two
specific issues that dominate the discussion concerning CalSTRS members, and other public employees, are intricately related—the
prospect that participation in Social Security will become mandatory for CalSTRS members and the current reductions in Social Security
benefits faced by CalSTRS members.
Because the reliance on Social Security-covered earnings understates the financial strength of members who receive a pension from
employment, such as California public education, that is not covered by Social Security, Social Security adjusts the benefits paid
to such pension recipients to offset that understatement, and provide a benefit more consistent with the financial strength of
Social Security recipients with similar employment history that was covered by Social Security. These two offsets are called the
Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).
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The WEP was enacted in 1983 to reduce the advantage previously realized by people who worked in jobs not covered by Social Security.
The WEP is applied to the Social Security benefits of individuals who reach age 62 after 1985 and who also are eligible for a public pension.
Prior to 1983, the Social Security formula computed benefits for these individuals as if they were long-term, low-wage workers,
which resulted in these workers receiving a higher wage replacement ratio than they would have received if all of their employment had been
covered by Social Security. When the WEP is applied, a modified formula is used to compute benefits and reduce the previous advantage,
thereby recognizing the fact that the individuals were not really long-term, low-wage workers. Rather, for a portion of their working years
these individuals did not pay the Social Security payroll tax on the salary they earned because their employment was not subject to Social
Security coverage.
As noted previously, the Social Security benefit is calculated using a three-tier formula that gives greater weight to lower earnings.
In paying a relatively higher benefit to lower-paid workers, in order to achieve the system’s social insurance objective, the formula
implicitly assumes that all of the earnings received by a worker are covered by Social Security. However, some employment is not covered
by Social Security, meaning that the worker does not pay the Social Security payroll tax on his or her earnings from that employment.
As a result, a worker with significant earnings from employment that was not covered by Social Security could receive a Social Security
benefit that replaced the same relatively high percentage of earnings as would be received by a worker with an identical history of
employment. The only difference in the two situations would be that all of one worker’s earnings were from employment that was covered by
Social Security and some, but not all, of the other worker’s earnings were from covered employment.
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This can be demonstrated by considering a woman born in 1940 who began work in 1965, at the age of 25. Assume she earned $10,000
in 1965 from employment that was covered by Social Security, and received a 5 percent salary increase each year thereafter.
If covered employment continued for 40 years until she reached age 65 and 6 months and retired in 2005, his or her Social Security
benefit would represent 35.8 percent of average indexed monthly earnings of $4,722. Now, assume she had Social Security-covered
employment for only 15 years and then became a public school teacher in California. If the salary earned as a teacher had been the
same as the salary that would have been earned in Social Security-covered employment, her Social Security benefit would have been
calculated on 15 years of covered earnings, and Social Security would have assumed the worker did not have other earnings. In this
case, AIME would have been only $1,150, which is $3,572 less than AIME would be if her entire employment had been covered by Social
Security, even though both examples had identical earnings. Because AIME is lower in the second example, her Social Security benefit
reflects a higher percentage of AIME, specifically 61.8 percent (without WEP application), as compared to only 35.8 percent in the
first example.
Career earnings for public employees who work at jobs not covered by Social Security actually are higher than it appears by
looking only at the earnings that were covered by Social Security. To offset this fact, workers who have employment covered by
Social Security and also have other employment that was not covered by Social Security are subject to application of the WEP when
the monthly benefit payable from Social Security is determined. When the WEP is applied in determining Social Security benefits,
the first tier percentage used in figuring a worker’s AIME is reduced from 90 percent to 40 percent. As an example, consider the
following situation for a worker whose AIME is only $2,838 (the monthly earnings for a worker at the U.S. average wage level of
$34,064). If he had retired in 2003 at age 62, before the WEP was applied, the PIA would have been $1,271. However, after including
the WEP in the determination of benefits his PIA would have been reduced to $957. The PIA for those two situations would be computed
as follows:
PIA Without the WEP |
PIA With the WEP |
90% of $ 627 = $ 564.30
|
40% of $ 627 = $ 250.80
|
32% of $2,211 = $ 707.50
|
32% of $2,211 = $ 707.50
|
15% of $ 0 = $ 0.00
|
15% of $ 0 = $ 0.00
|
$1,271.80 |
$ 958.30 |
This example shows that the monthly Social Security benefit would have been reduced by $313.50 under the WEP.
As long as a worker’s AIME was at least $627, monthly Social Security benefits generally would be reduced by $313.50
because under the WEP the reduction appears in the first tier of the formula.
At this point we must keep in mind that the dollar amounts used in the formula for determining the primary insurance amount are
the dollar amounts in effect at the time the worker actually reached age 62 regardless of whether or not the worker retired at that
time. Thus, the reduction in benefits under the WEP continues to increase as the dollar amounts (“breakpoints”) in the three tiers of
the formula increase to reflect rising wages. For instance, if a worker turned 62 in 2001 instead of 2005, the first tier amount is
$561 as opposed to $627 for the worker turning 62 in 2005. This difference would mean that the reduction in Social Security benefits
as a result of the WEP would be only $280.50 instead of $313.50. Again, as the breakpoints are increased annually to reflect rising
wages and changes in the cost of living, the reduction in benefits by application of the WEP also will increase. Another way of
looking at this phenomenon is that once a worker’s AIME is established at age 62 it will not change even though the worker may retire
at a later date, so the sooner a worker reaches age 62 the better; but the younger a worker is today the greater the reduction will
be by the time that worker reaches age 62.
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There are some exceptions to the WEP. For instance, a worker is exempt from application of the WEP if he or she has 30 or
more years of “substantial earnings” under Social Security. The amount of wages a worker must earn in a year to meet the threshold
for substantial earnings changes annually. Back in 1954 a worker needed to earn only $900 to have substantial earnings. For 2005 a
worker had to earn $16,725 to have substantial earnings.
For workers who have between 21 and 30 years of substantial earnings there is graded application of the WEP. That is, the 90
percent factor in the first tier of the Social Security benefit formula is reduced on a sliding scale depending on the worker’s
years of substantial earnings. For a worker with 21 years of substantial earnings, the first tier percentage is 45 percent, rather
than 40 percent. The first tier percentage increases by 5 percentage points for each additional year of substantial earnings, until
the first tier percentage for a worker with 30 or more years of substantial earnings is 90 percent. So, a worker who had non-covered
employment but also had 30 years of substantial earnings that were covered under Social Security would not have his or her Social
Security benefits reduced under the WEP. In any case, the benefit reduction under the WEP cannot be more than one-half of the worker’s
pension benefit from the non-covered employment. In 2005, the reduction under the WEP is $313.50. However, if the individual were
receiving a benefit of only $250 per month from CalSTRS, Social Security benefits would have been reduced by only $125 (one-half of $250)
rather than $313.50 as prescribed by the formula with application of the WEP.
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The Social Security benefit paid to a worker is based, at least in part, on the worker’s earnings in covered employment. If that
worker was the spouse of another worker and was financially dependent on the other worker, the Social Security benefit based on
the dependent spouse’s own earnings might not be significant. This could occur if the dependent spouse was the primary caregiver for
children in the household and had limited outside employment. Social Security, as a social insurance program, pays an additional benefit
if the spouse of a worker is financially dependent on the worker. The additional benefit is equal to 50 percent of the higher
wage earner’s primary insurance amount, and 100 percent of the higher PIA upon the worker’s death. Generally speaking, a spouse can
receive the greater of a benefit based on his or her own Social Security earnings record or a spousal benefit, but not both.
Before the GPO was enacted, many people were able to receive a government pension based on their own employment in the public sector
(e.g., teaching in the California public schools) and also could qualify for a spousal benefit under Social Security.
In 1977, the GPO was enacted to ensure that spousal and widow(er) benefits under Social Security would be paid only to
individuals who are (or were) financially dependent on their husbands or wives. Social Security benefits were intended to
provide some protection to spouses or surviving spouses who had limited working careers. Those who work long enough in
non-covered employment to earn a pension of their own do not meet Social Security’s limited career criterion. For these
individuals, the modified benefit formula used under the GPO reduces the amount of Social Security benefits payable.
A spouse or surviving spouse can receive the equivalent of a Social Security benefit based on his or her own earnings record or
the earnings record of a husband or wife, whichever provides a higher benefit, but cannot receive full benefits based on both
earnings records. Prior to enactment of the GPO, many government employees received Social Security benefits based on their spouse’s
earnings, even though they were entitled to benefits based on their own non-covered government employment and were not
financially dependent on a spouse. In this respect, there was disparate treatment of spouses who received government pensions
based on their own work and spouses who had little or no employment history.
The 1977 amendments to the Social Security Act provided that Social Security benefits payable to a spouse or widow(er) would be
reduced on a dollar-for-dollar basis by the amount of any government pension the spouse or widow(er) received based on his or her
own government employment if that employment had not been covered by Social Security. This offset was changed in 1983 from a full
reduction to a reduction that is just two-thirds of the amount of the government pension for persons who first became eligible for
a public pension in 1983 or later. Theoretically, reducing or eliminating the spousal benefit for those people who receive a
government pension based on non-covered employment makes eligibility for Social Security benefits for spouses and widow(er)s
who also receive government pensions consistent with the benefit eligibility requirements imposed on spouses and widow(er)s who
do not receive other pension benefits or receive such other benefits based solely on work that was covered under Social Security.
For example, consider a CalSTRS member is entitled to a $1,500 per month benefit from CalSTRS and a Social Security widow’s benefit
of $1,000 per month. Two-thirds of the $1,500 CalSTRS benefit is $1,000 and would then be deducted from the $1,000 Widow’s benefit.
The result is that this member would receive nothing from Social Security. Alternatively, if a person received a $600 per month
CalSTRS benefit and was eligible for a $500 per month spousal, two-thirds of the $600 monthly CalSTRS benefit, or $400, would be
deducted from the $500 per month Social Security benefit, leaving a net Social Security benefit of $100. In addition, because a
benefit recipient receives a cost of living adjustment annually from both CalSTRS and Social Security, this benefit is
recalculated every year.
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Both the WEP and the GPO are intended to eliminate what is perceived as an excessive Social Security benefit that is paid to
people who are receiving a pension from service, such as California public education, that was not covered by Social Security.
Although the intent of the two offsets is understandable. It isn’t clear that the specific reductions appropriately reduce
the benefit. In an analysis of the offsets in 2003, staff had indicated one of the weaknesses of the WEP was that the adjustment
made to the Social Security benefit effectively assumed that a person was working under noncovered employment in any year in which
no covered wages were paid. The experience at CalSTRS, in contrast, is that many CalSTRS members will experience years with no
compensation at all, such as when the member takes time off to raise a family. As a result, the WEP often overcompensates for the
noncovered pension received by the worker. H.R. 4391 was introduced in Congress last year to respond to that apparent weakness.
It would have replaced the WEP with a new calculation that bases the adjustment on relative amount of noncovered wages received by
the worker. This would more appropriately have adjusted the Social Security benefit. Similarly, reducing a spousal benefit by
two-thirds of the public pension probably overcompensates for the increased financial security that the public pension provides.
This is because the Social Security benefit that a CalSTRS member would have received if the CalSTRS service was covered by Social
Security is substantially less than two-thirds of the resulting CalSTRS benefit. Consequently, a CalSTRS member subject to the
offset would get less of a combined benefit than would a person whose employment was covered by Social Security.
In addition to the weaknesses in the specific adjustments made by the WEP and the GPO, these offsets could have a workforce
implication. To the extent that covered workers recognize that noncovered employment could affect future Social Security benefits,
there may be increased difficulty in recruiting people in the middle of their career from pursuing such employment. Not only could
this affect the willingness of people to become teachers from other professions, it also could affect the willingness of experienced
educators in other states, in which the employment was covered by Social Security, to relocate to California.
This raises another issue with respect to the offsets. CalSTRS members tend to fall into one of two categories; either
they are not aware that public school employment could reduce their future Social Security benefits, or they overstate the extent
to which their benefits are reduced. The first issue is being addressed both by CalSTRS and federal law. CalSTRS is developing more
information to be made available to younger educators, so they understand the implication of their employment on their future benefits.
In addition, beginning in 2005, federal law requires all new public educators to sign a document that discusses the two offsets, so they
have earlier notice of their existence. The other problem is that many members overstate the impact of the offsets on their monthly income.
Members often inquire about taking a refund of their CalSTRS contributions in order to avoid receiving a monthly CalSTRS benefit and
therefore avoid being subject to an offset; not only does that strategy often fail to avoid the offset, but the amount lost in CalSTRS
benefits could be significantly more than the avoided reduction in Social Security benefits.
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One means to eliminate the impact of the Social Security offsets is to subject the CalSTRS service to Social Security. Mandating
all new state and local government employees to pay Social Security taxes has been identified as a means to improve the fiscal
viability of Social Security by increasing the resources available to pay benefits. The enactment of such a proposal, however,
would have a major fiscal impact on new California teachers, employers, and CalSTRS. Currently, members contribute 8 percent and
employers 8.25 percent of pay to fund DB benefits. If Social Security were mandated for CalSTRS members, there would be an additional
burden of 6.20 percent of payroll to both new California teachers, and California school employers, resulting in a total required
contribution rate of 28.65 percent of payroll for new hires. School district administrators have indicated to CalSTRS that a serious
reduction in education services would be necessary in order to address the increased costs of mandatory Social Security coverage.
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In 2001, when mandating Social Security was being discussed in Congress, the Superintendent of the Hemet Unified School District,
located in Riverside County, California prepared information on the impact of including his educational employees in Social Security.
The detailed budget that he prepared at that time underscored the burden that mandatory Social Security coverage would impose on a
local school district struggling on a budget already stretched thin to meet the fiscal demands of educating California's children.
According to the analysis, after taking into account current salary and facility costs, increased power costs, the cost of operating
a new school, the cost of recently-expanded special education programs, and the cost of employing new teachers and staff to respond
to student body growth as well as class-size reduction and other State educational reform initiatives, there would be no resources
left to absorb the harsh cost burden of mandatory Social Security, a cost burden which will only grow over time as more new teachers
are hired. New certificated personnel being placed into the Social Security system would have had a significant negative impact on
the District's ability to offer quality educational programs and services. Although the analysis was completed in 2001, the impact
is equally applicable today. The Hemet Unified School District is representative of school districts in California that are
maximizing all available resources to implement successful programs and services.
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Mandatory Social Security coverage for new teachers could also necessitate the closure of the current CalSTRS program to new
members and the enactment of a new, lower cost CalSTRS program that complements the Social Security program. The CalSTRS Defined
Benefit (DB) Program is designed as a fully independent program with a retirement benefit equal to 2 percent of final compensation
per year of service at age 60 plus ancillary disability and survivor benefits. The average retirement benefit is equal to 65 percent
of the member’s final salary, although for 43 percent of the members retiring with at least 20 years of DB Program service,
the benefit is equal to 80 percent or more of the member’s final salary. The addition of Social Security on top of this program will
create an overlap of disability and survivor benefits, and create a combined benefit that could be considered excessive by many people.
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Milliman, CalSTRS’ consulting actuary, estimated the impact of mandating Social Security on California public schools and CalSTRS.
In doing so, Milliman identified two different approaches to reduce DB Program benefits to offset the potential of a mandatory Social
Security tax. The first approach, termed the Level Benefit Approach, would reduce the DB Program benefit to exactly offset the Social
Security benefit, resulting in a combined benefit that is equivalent to the benefit currently provided by the DB Program. Milliman
estimates that, under this approach, mandatory Social Security coverage for new teachers would drive up total retirement costs for
California school districts by an additional 7.487 percent of payroll simply to fund the same level of retirement benefits as currently
provided to California's teachers under the CalSTRS plan. The 1,200 local school districts in California have a combined annual payroll for
teachers of almost $24 billion annually. Therefore, a proposal to impose mandatory Social Security coverage for new teachers will increase
local school costs by as much as $1.5 billion annually, just to provide the existing level of retirement benefits.
The second approach is called the Level Cost Approach. Under this approach, the benefits paid under the DB Benefit Program would
be reduced to the level that could be funded by current member and employer contributions that would be remaining after paying the
Social Security payroll tax. In other words, rather than having the member contribute 8 percent of earnings to CalSTRS, as current
members do, the member would contribute a total of 8 percent, 6.2 percent would be paid as a Social Security payroll tax with the
1.8 percent balance being contributed to pay for the reduced DB Program benefit. However, under this approach, the combined benefit
paid from Social Security and CalSTRS would be between as much as 30 percent lower than a CalSTRS member receives now.
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One particular complication of proposals to mandate Social Security on new employees is that the requirement to participate would
be triggered when a person took a new previously uncovered job with a new employer. If, for example, an experienced teacher in
Sacramento City Unified School District took a job at Elk Grove Unified School District after the effective date of the change, that
teacher’s new job would now be covered by Social Security, and the employee and employer would have to pay an additional 6.2 percent
in payroll taxes. Because the person was already a DB Program member, she would continue to be a member, and pay the existing
8 percent contribution rate, with the employer paying 8.25 percent. Although CalSTRS could provide a new benefit structure for new
members that did not result in higher total employer and employee contribution rate, with Social Security, constitutional limitations
on the impairment of benefits would preclude compelling existing members from opting into the new reduced CalSTRS benefit program.
As a result, existing members, and their new employers, could find themselves paying substantially higher costs than existing members who
remained with their current employers or people who are entirely new to CalSTRS. This problem could be avoided if a requirement to
participate in Social Security was limited to people who were not already members of a retirement system, such as CalSTRS, in which the
service was not covered by Social Security.
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Historically, the Teachers’ Retirement Board (Board) has expressed its opposition to mandating Social Security for California
teachers. In September 1997 the Board voted to oppose mandatory Social Security. Subsequently, and most recently in June 2005,
CalSTRS has submitted testimony to Congress on the negative impacts of mandatory Social Security on California school employers and
employees.
Social Security benefits were intended to replace only a percentage of a worker’s pre-retirement earnings. The way Social
Security benefit amounts are computed, lower-paid workers get a Social Security benefit that equals about 55 percent of their
pre-retirement earnings. The average replacement rate for highly paid workers is about 25 percent.
CalSTRS has successfully provided financial stability as well as retirement, disability, and survivor benefits to California's
public school teachers from kindergarten through community college over the past nine decades to become the third largest public
pension plan in the United States. CalSTRS has taken an active role in opposing mandatory Social Security in the past and will
continue to do so in the future. In addition, CalSTRS will continue to monitor legislation that modifies or eliminates the offset
provisions. Although legislation is introduced consistently to either modify the offset provisions or completely eliminate them,
CalSTRS is considering alternatives that could make these provisions more acceptable.
Until such time as the offset provisions are modified or eliminated, CalSTRS is pursuing educating its membership by
providing information via the CalSTRS Web site and printed materials.
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