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CALPERS and Social Security

 

Reconciling Your CalPERS and Social Security Benefits

By Mike Gaskins, Association Staff

Most public employees in California are enrolled in the PERS retirement system; but a good many of these employees have ALSO either have contributed, or are currently contributing, to the Social Security System. What happens when you retire from both? Most people have “sort of” heard that when they retire from both CalPERS and Social Security, they will NOT receive the full benefit they have earned from both systems. One program is “sort of” deducted from the other – but very few people understand how…

The purpose of this article is to enable you to understand how (unless this system is changed through legislation) the PERS and Social Security Systems are “reconciled” to determine exactly how much money a public employee who has also become eligible for Social Security will receive at retirement. Please keep in mind that this is general information. The retirement systems, and formulas they apply, are complex and unique to each individual’s situation. Please contact them directly to find out what your own pension picture will be.  CalPERS, holds retirement seminars regularly; their website is http://www.calpers.ca.gov/.

In the beginning, all employers were in Social Security. In 1981 public employers in California (most of who were enrolled in CalPERS) were given the opportunity to withdraw from Social Security.  Most agencies did choose to drop out of social security (by a vote of the employees.) A number of cities stayed on with Social Security, however, continuing to participate in both retirement systems.

PERS and Social Security are similar to the extent that both are based on the concept of shared employer and employee contributions, and both provide a “defined benefit” in the end. In PERS, the (non-sworn) employees’ contribution is 7% or 8%, depending on which option your agency contracts for: the 2%, 2.5%, or 2.7% @ 55; or the 3% @ 60. Most public agencies pay all or part of the employees’ contribution. The employer’s contribution is “experience rated,” meaning that it can go up or down, depending on the plans’ usage and the money it generates through investments.

In the Social Security system the contribution scheme is simple: 15%, half paid by the employer; half by the employee. The 7.5% is a “hard cost” for the employee.

PERS has three obvious advantages over Social Security for most employees: first, it’s malleable to the extent that employees can negotiate with employers to raise the level of benefit. The “3% @ 60” for example, is far, far more generous to the retiree than the 2% @ 55 at age 60.

Second, because the fund is both smaller (though still the biggest single pot of money in California) and more malleable than Social Security, it has generated its own income through investments. Thus, for most of the last decade, almost all employers PERS accounts were “superfunded,” which meant that they didn’t need to make ANY employer contributions -- and, presumably, were able to spend these savings on pay and other benefits. (Unfortunately, the era of double-digit interest rates ended with the “dotcom bust,” and superfunding wore off, almost universally, by 2004.) 

Third, since most PERS-contracted agencies pay both the employer AND employee contributions, those employees have not had a lot of “out of pocket” for retirement. Most employees in Social Security, on the other hand, have paid 7.5% of their incomes for their entire careers.

For employees enrolled in PERS only, it’s good to know that you have by far the more flushed of the two plans. For employees in both systems, you should know that it is virtually impossible for your employer to withdraw from Social Security, but you do have the advantage of being “double covered,” and you can negotiate with the City to pick up your 7.5% cost. It’s a compelling argument that since your benefits are, literally, REDUCED because of the double coverage, you should not be forced to pay the 7.5%

So…back to the original question: how ARE these benefits reduced. It’s complicated, because the formulas differ based on the kind of contract your employer has with Social Security, but here are three scenarios.

Scenario A) Your employer is enrolled in both PERS and Social Security, and is a  “coordinated” employer. In the most basic terms, this means that the City subtracts $133 from the salary it reports to PERS each month as your base pay. Over the years, this has the effect of lowering your pension payments by a small, but real percentage.

For example, an employee in a “coordinated” City with a $3,000 per month base pay, who retires under the PERS 2% @ 55, plan after 20 years, will receive a PERS pension of $1146. If he were NOT also in the Social Security System, but in PERS only, he would receive $1200 per month. In other words, an employee in both systems in a “coordinated” city makes about 5% less on his PERS because he’s also in social security.  When this same employee ALSO begins collecting his Social Security pension, however, he’ll receive a total, monthly, of $2149. 

Scenario B) The current employer is ONLY in PERS, but you, personally, will receive a Social Security pension (because you worked or will work another job, covered by Social Security for at least 40 quarters.) In this scenario, your Social Security pension will be reduced by what is called the “windfall elimination provision.” This provision subtracts part of your PERS income from your Social Security income, based on a really complex formula. The bottom line is that the more you earned in both systems, the more you lose, but no one loses more than $315 per month.

Now, our chance to make you really crazy…. Scenario C) Your employer participates in both social security and PERS, but it is NOT a “coordinated employer.”   In this case, the employee is subject to the “windfall elimination provision,” rather than the $133 reduction in reported salary on the front end. These employees definitely lose more from their future double pensions than the employees in the “coordinated” agencies, so it may be worth your while to know what kind of pension contract your employer is operating under. (Not because an employer can change its option, because you cannot figure your future pension without knowing which system you’re in AND because errors in the system are rife!) 

No one knows exactly what will happen to either CalPERS or Social Security under the current administrations, but we do know that neither is warmly inclined toward the public employee. Assuming no immediate change, it is possible to determine what your future retirement pension will be and, hopefully, for your Union to make bargaining decisions and for you to make employment decisions which will provide for the most lucrative retirement options…

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