Fiscal Soundness of Social Security
Questions have been raised about the fiscal soundness of Social Security. Private pension plans are usually thought to be safe because they are “insured” and by the Pension Benefit Guaranty Corporation (PBGC); certain premiums are paid to the system and plan assets are transferred and managed for the “distressed” plan. However, this is still no absolute guarantee that any person will receive the “projected” benefit promised on the date of hire. While some changes are likely in the funding or structure of Social Security, it is not likely that Social Security will cease to exist. Currently, under the existing structure, the fund is considered to be solvent until 2040.
Individual Social Security Report
Prior to the Neville v Neville decision in July, 2003, Social Security was only considered as an offset to a State or Government plan where the participant was not covered under Social Security for wages earned under the plan. Such an approach is still used. In 2006, Hurte v Hurte, stated that Courts must consider Social Security. In the situation where the attorney only wishes to examine the value of the current, accrued benefit for the wage earner, this report provides the current value of the benefit that would be payable at the earliest entitlement date based on earnings to date and the current Social Security laws. This report applies a conservative post-retirement Cost-Of-Living Allowance (COLA) assumption in calculating the current value and applies a marital coverture based on the laws’ definition of Average Indexed Monthly Earnings (AIME). The calculation of the AIME for the benefit and the coverture fraction considers a conservative pre-retirement COLA for the “indexing” of past wages. This report does not consider any potential spouse or widow(er) entitlements that may become payable as a result of a ten-year marriage.
Neville Social Security Report
In Ohio, the Neville v Neville decision in July, 2003, stated that Courts may consider Social Security in the equitable and overall disposition of marital property. To accomplish this, other considerations need to be made beyond the simple accrued benefit for each party. Social Security law is very complex and has many inter-dependencies for married couples and for divorced spouses and widow(er)s as a result of a ten or more year marriage. Ohio Courts have been unsure as to how they should implement the Neville ruling. Some have reserved continuing jurisdiction, while others have attempted to reach a division of assets including some combination of Social Security entitlements.
The Social Security Summary Table offers the best overview of our “Neville” report. The top part of the table outlines the Social Security benefits of the parties, while the bottom half reduces those monthly payments to a lump sum present value. You may want to print this table as it is referred to frequently in the following discussion.
"Neville" Reports are still an unsettled matter of law. It would be inappropriate for anyone other than the Courts to pick the "best" values. The Summary Table offers the different streams of income and their derivative present values. It should be reviewed with care to determine which stream of income should be considered or whether the benefits should be reduced to present value for use with offsetting assets.
Projected vs Current - There have been no further rulings or interpretations of Neville in the higher courts; the Hurte ruling was from the Ohio Third District. Both Courts agree that Social Security should be considered in some fashion but are silent on the exact manner of that consideration. Over the last three years, the majority of the settlements and findings of which we have learned favor the “current” approach over the “projected.” Courts have split on whether to consider the potential additional spousal benefits. Courts have overwhelmingly rejected the potential additional widow(er) benefits as being too speculative since it involves the actuarial concept of multiple lives and a specific set of circumstances. We will continue to offer all possibilities and let the Courts determine the appropriateness of each.
Note that under both the "projected" and "current" approaches the benefits and present values for the spousal and widow(er)'s benefits are fully marital and are presented as additional benefits above the Social Security benefit earned by the lower wage earner. That means that the benefits listed on the Social Security Summary Table can be used independent of the other values. Offering each stream of income and present value as a separate line item will allow the parties to engage in more sophisticated settlement discussions.
The projected method has been designed to present the complex entitlements available under Social Security assuming continued covered employment. This method assumes earnings increase at a specified salary scale until earliest eligibility, age 62. The projected value offers an illustration of how earnings may increase into the future.
Please note that we project the earnings of both parties based on the wages reported on the Social Security earnings history. We understand that the income level of one or both of the parties may change after the divorce. At your direction, we can incorporate a dramatic change in anticipated earnings which is expected to occur following the end of the marriage as the base for the projection, i.e. a return to employment or completion of education and subsequent higher employment.
Keep in mind that a spouse of 10+ years who has not remarried has the right to draw spousal and widow(er) benefits based on the former spouse's entitlement at the time of eligibility - not those frozen at the time of divorce. Thus, Social Security allows one to reap benefits that may include decades of post-divorce earnings by a former spouse.
The current set of values is given and represents the more traditional approach assuming no future earnings. The current values are consistent with the way other present values are calculated. The current values are typically used when offsetting assets is called for to provide a more consistent comparison.
We will continue to offer both the projected benefit and current approach in an effort to give the court the information necessary to use the Neville report as each case dictates.
Windfall Elimination Provision and Government Pension Offset – The Social Security law mandates an offset to the earned benefit (WEP) and any spousal or widow(er) benefit (GPO) for anyone who is receiving a benefit from a non-covered pension plan based on their own non-covered earnings. When calculating individual or other entitlements, it is necessary to know the amount of the expected non-covered benefit. Under our default assumptions, we normally do not project the non-covered benefit for the calculation of projected Social Security benefits. This can be done at the attorney’s request.
Other Considerations - The Neville report does not quantify all possibilities. It is important to remember that Social Security is very complex. Benefit entitlements are interconnected between all family members and even some extended family. Depending on relative ages and wages, a former spouse may be eligible for a potential spouse and widow(er) benefits from the other based on the “current” basis and then later, under the “projected” basis, the situation might reverse. (It might even reverse again if the couple is in and out of the workforce!) We have quantified the most common scenario knowing individual cases may demand a different approach. The basic scenario considered in this report is the status quo: the current larger wage earner will remain the larger wage earner.
On the Social Security Summary Table, the widow(er) entitlements have been simplified and are shown only as the benefit at age 62. Of course, widow(er) benefits can commence as early as age 60 (50 if survivor is disabled). The value of the potential age 60 and 61 benefits have been included in the present values.
Also keep in mind that former spouse benefits are not limited by, and do not limit, the family maximum and that remarriage and divorce can change the nature of entitlements for the lesser wage earner far into the future.
Special Note - The present value of the marital portion of the projected wage earned benefit is likely to be less than the marital present value of the current benefit. This is true because the relative weight of the indexed earnings, and the years counted toward the benefit, usually shift toward the end of a work career and would, therefore, cause a lower portion of the benefit to be considered as earned during the marriage. Spousal and widow(er) benefits may increase or decrease depending on the relative increases of each individual’s projected benefits.
When to use Neville – Neville would not apply for any marriage of less than 10 years duration. Basically, it would seem unnecessary to perform a Neville-style evaluation when the parties are under 45-50 years of age or they had relatively equal work careers. The impact of Neville is more appreciated when the parties are closer to retirement age and there has been a large disparity in their work history and earnings. For cases where the more comprehensive Neville report is unnecessary, you may still want to look at the individual “current” basis evaluation for offset or other purposes.
Please feel free to call our office to discuss the “Neville” report in further detail. We would be glad to go through the specifics of your case to help you determine if a “Neville” report is warranted.
Explanation of Terms:
Both the projected and the current numbers are shown in the following way:
Higher Wage Earner:
Wage Related Benefit: This is the total benefit earned under Social Security covered compensation and the marital portion of same beginning at age 62 and payable for life.
Lower Wage Earner:
a) Wage Related Benefit: This is the total benefit earned under Social Security covered compensation and the marital portion of same beginning at age 62 and payable for life.
b) Additional 50% Spousal Benefit: This amount represents the difference between the earned wage related benefit and the minimum spouse's benefit. This benefit begins at the younger's age 62 and is payable for life (or remarriage of lesser wage earner).
c) Additional 100% Widow(er) Benefit: This represents the amount necessary to add to the above spousal level to reach the 100% widow(er) level for the lower wage earner. This benefit begins at the latter of the higher wage earner's death or lesser wage earner's age 60 and is payable for life. (This benefit is not forfeited if remarriage occurs after payment begins.)
Only a), a total of a) and b), or a total of all three components for the lower wage earner can be used under both scenarios to arrive at the appropriate value of the potential Social Security benefits. Some examples of considerations for including or excluding b) and/or c) would be the health of both parties, likelihood of remarriage, and potential earning capacity for both parties.
COLA and Salary Scale - The “Neville” report (and our individual Social Security report) considers the “current” benefit including a “pre-retirement” COLA for the indexing of past earnings rather than the “frozen” benefit that is given on the Social Security Statement received by anyone with covered earnings. Both the actual Social Security for the larger wage earner and that of their spouse is based on a conservative projection of that benefit assuming the past wages will continue to grow in value each year. We use Social Security’s projections based on the "2005 Trustees Report Alternative I." Social Security's "Low Cost" projection that assumes a 1.8% pre-retirement Cost-of-Living Adjustment (COLA) in the benefit. For “projected” benefits, Alternative I assumes a 3.4% increase in future wages. Alternatives II and III are based on more aggressive assumptions of 2.8% COLA with 3.9% salary scale and 3.8% COLA with 4.4% salary scale respectively. Our default position is Alternative I; however, if the attorney wishes to argue a more aggressive set of assumptions, we can do so with direction and disclosure.
Coverture – Unlike most corporate salary-based pension benefits, Social Security benefits accrue most rapidly at the beginning of a work career. For a person eligible for benefits in 2007, the first $680 of Average Indexed Monthly Earnings are multiplied by a 90% factor while the next $3,420 are multiplied by 32% and the remaining portion by 15%. Like corporate plan covertures, a method is needed to spread the accrual more evenly across the time that it was earned. Most evaluators, including Pension Evaluators, base the marital coverture on a ratio of the 35 highest years considered in the Average Indexed Monthly Earnings (AIME) earned inside the marriage to the total AIME. This approach avoids the "two spouse" scenario whereby a first spouse would receive a greater award, because of the higher percentage in the formula for the earlier earnings, than a second spouse, both having relatively the same length marriage to the same person.
Note on Hypothetical Offsets
Prior to the July, 2003 ruling in the Neville v. Neville case, Ohio counties were split on the type of Social Security offsets that they would consider. Courts in Districts 1, 8 and 9 accepted the idea of hypothetical offsets where other Ohio Districts preferred valuing the actual Social Security for the non-participant. With the decision in Neville, Courts could now consider Social Security of both parties. This decision seemed to render the idea of hypothetical passé. In July, 2004, a Clark County Appeals Court, in the case of Harshbarger v. Harshbarger ruled against hypothetical offsets. However, since early 2006, we have seen an upturn in the number of cases requesting hypothetical offset values. We will continue to offer these reports for the same cost as actual offsets. The attorney should specify if a hypothetical offset approach is being requested.
