Social Security Offsets

Until 1990, many government pension participants faced an unenviable prospect upon divorce. Participants in state or federal government plans that take the place of Social Security found that their entire pension was thrown into the marital pot. However, if their spouses worked in jobs covered by Social Security, only their company pensions, if any, were considered an asset subject to equitable distribution. Their Social Security was not included in the marital estate because of the federal prohibition against dividing Social Security in a divorce. In Hisquierdo v. Hisquierdo, 439 U.S. 572, 587 (1979), the court ruled that Tier I—essentially Social Security—benefits of the Railroad Road Retirement Board were not subject to direct division.

THE COURTS’ VIEW

In an increasing number of cases this decade, courts have concluded that Social Security, while not directly divisible, is an essential property factor when the economic partnership of marriage ends. See Pogonis v. Pogonis, 606 A.2d 1055 (Me. 1992), Knapp v. Knapp, 874 S.W.2d 520 (Mo Ct. App. 1994) and White v. White, 284 N.J. Super. 300, 664 A.2d 1297 (Ch. Div. 1995) for several notable examples.

Cornbleth v. Cornbleth, 397 Pa. Super. 421, 580 A.2d 369 (1990), challenged that prohibition in an innovative way. It introduced the concept of “hypothetical” Social Security benefits. Instead of directly dividing the Social Security of the spouse who worked under covered compensation, it looked at part of the government pension as being in lieu of Social Security and not subject to equitable distribution.

Terry Cornbleth, a clinical psychologist, was covered under the Civil Service Retirement System (CSRS) and did not participate in Social Security. Catherine Cornbleth, a professor, also had amassed a pension and Social Security benefits. The inequity, Mr. Cornbleth’s counsel argued, stemmed from the sacrosanct nature of the Social Security benefit, which remained beyond the reach of equitable distribution while all of Mr. Cornbleth’s pension assets were included in the marital pot. After all, some of Mr. Cornbleth’s martial monies went into the Social Security payments for which he would receive no benefit.

Keep in mind that for every three dollars a government pension participant receives from a government pension he forfeits two dollars of independent spousal Social Security benefit. For example, if a CSRS participant is receiving a $9,000 annual pension, he would receive no spousal Social Security unless the spousal benefit was greater than $6,000.

The use of hypothetical Social Security skirted the problem of directly dividing the Social Security benefit. The Cornbleth court’s solution follows: “To facilitate a process of equating CSRS participants and Social Security participants, we believe it will be necessary to compute the present value of a Social Security benefit had the CSRS participant been participating in the Social Security system. This present value should be deducted from the present value of the CSRS pension…. This process should result in equating, as near as possible, the two classes of individuals for equitable distribution purposes.”

In practice, a hypothetical offset is calculated by running the individual’s earnings history under the CSRS-type pension through Social Security software to determine the accrued benefit he would have had under Social Security. This step is followed by a typical present value computation to determine the amount of the offset against his government pension.

But there is a potential problem of fairness with hypothetical Social Security offsets. What if the Social Security participant had a meager benefit of $80 a month and the government pension-holder had a hypothetical Social Security benefit of $1,100? Would it be fair to reduce the size of his government pension by the value of his hypothetical Social Security pension, or would it tilt the distribution field unfairly to his side? Some courts have considered adding the following limitation to that offset: The present value of the Social Security recipient should be the limit of the offset so as not to over compensate the government participant. Brent Danninger and Andrew Buland made this point in their 1991 article, “Making Social Security a Marital Asset” in the “Family Advocate.”

Pennsylvania moved in this direction in the McClain case, McClain v. McClain, Pa. Super. 693 A.2d 1355 (1997). It refined Cornbleth by stating that no Social Security offset should be used when no actual Social Security benefit exists.

A number of courts have avoided the obvious fairness problem of hypothetical offsets by factoring in the actual Social Security benefits of the couple. These courts have been careful to point out that Social Security benefits, while not a directly divisible asset, are an important factor in dividing government pensions, which are Social Security substitutes.

In fact, Smith v. Smith, 91 Ohio App. 3d 248, 632 N.E.2d 555 (1993), directed that Social Security must be an element in dividing pensions. The Smith court was quite aware that the Social Security Act does not allow the transfer or assignment of benefits under any legal process with the exception of child and spousal support payments (42 U.S.C. Section 407 (a)). Therefore, it prohibited merely subtracting the present value of one spouse’s actual Social Security benefit from the present value of the government pension. Instead, the court directed subtracting the actual Social Security benefit of the covered participant from the state pension. Whatever remains of the state pension is then subject to equitable distribution. Incidentally, this government pension net of Social Security could then be reduced to a present value and utilized in determining offsetting assets. Social Security only exists in the eyes of the Smith court as an offset against the government pension and not as an independent asset.

Implementing the provisions of Smith can be challenging. When the parties are different ages and have differing retirement dates, simply netting out pensions is not so simple. For example, one could easily envision a scenario in which a 48-year-old husband retires from the police pension fund, while his 46-year-old wife must wait for at least 16 years for her Social Security benefits. Some method of discounting the various pensions to reflect the time value of money must be made in lieu of the easier method of simply netting out present values. For example, a Social Security benefit of $1,000 to be received in 16 years would have to be discounted by an assumed interest rate and then subtracted from the current police pension in the example above. The present value of the remaining police pension could then be determined.

Clearly, whether hypothetical or actual Social Security offsets are employed, state courts have been careful to note that they are not dividing Social Security but only factoring it in to the totality of circumstances.
DIFFERING ENTITLEMENTS

One Social Security issue crops up in most divorces. It is also a more difficult “sell” to most courts because it does not employ hypothetical or cash-flow offsets that are designed to circumvent the federal preemption. It deals with the intrinsic difference between the 100% entitlement of a worker covered by Social Security and the 50% independent spousal benefit of the former spouse. This, of course, is much more common than the situation where one spouse works under Social Security and the other works under a government plan which is in lieu of Social Security.

In other words, should the courts take into account that a worker who receives a $1,200 a month benefit has a spouse who receives only $600? The Iowa Supreme Court in Boyer questioned whether the U.S. Supreme Court ruling in Hisquierdo should cause a state domestic relations court to “purge so obvious an economic reality in its assessment.” In re Marriage of Boyer, 538 N.W.2d 293, 296 (Iowa 1995), they concluded that differing Social Security entitlements between spouses should enter the division of marital property.

Other courts disagree that Social Security can be factored into a divorce even when cloaked in the “totality of circumstances” argument. “Calling a duck a horse does not change the fact it is still a duck,” said the Nevada court at 921 in Wolf v. Wolf, 929 P.2d 916 (Nev. 1996). Wolf rejected any consideration of the Social Security benefits of the couple.