Transcript Part-Timer Retirement: Should You Switch to Social Security?

Part-Timer Retirement:
Should You Switch to
Social Security?
Presented by Cliff Liehe
Los Angeles, April 13. 2007
Revised by Phyllis Eckler, February 2008
What’s Happening?
 Part-Timers in the Los Angeles Community
College District may soon have the
opportunity to switch from the CalSTRS Cash
Balance (CB) retirement plan to Social
Security.
 If you are in CB, you need to decide if you
should switch to Social Security; i.e., if the
switch would benefit you.
How Does CB Work?
 CB is a “cash balance” plan (hybrid of a
“defined benefit” plan and a “defined
contribution” plan)
 Immediate vesting
 Contributions: 3.75% employee, 4.25%
employer, and tax deferred
 Guaranteed interest rate
 “Portable”: if you quit teaching, your CB funds
can be rolled over to another retirement plan
 No administrative fees
How are CB Benefits Calculated?
 The retirement benefit is the employee’s
account balance at time of retirement: i.e.,
total of all contributions (employee and
employer) plus all compounded annual
guaranteed interest
 The benefit is paid as a lump sum or, if over
$3500, may be paid as a lifetime annuity
based on age and account balance
What Would My Monthly Annuity
from Cash Balance Be?
A chart of your monthly Cash Balance annuity
benefit is available at the site below :
http://www.calstrs.com/Calculators/DBS_annuit
y_calcs_SR_REVISED.pdf
How Does Social Security Work?
 A “defined benefit” plan (sort of)
 Requires 40 “credits” (previously calendar
quarters), subject to maximum of 4 credits per
year, to vest
 Contributions: 6.2% from employee, 6.2%
from employer, and not tax deferred
 Not portable
How Are Social Security Benefits
Calculated In General?
 The retirement benefit formula is based on an
employee’s highest 35 years’ earnings (many
more years than other defined benefit plans)
 The formula favors lower wage earners
How Are Social Security Benefits
Calculated Specifically?
 First, all past earnings, subject to a maximum
for each year, are indexed for inflation
 Then the highest 35 years’ indexed earnings
are added together
 Next, the sum is divided by 420 (number of
months in 35 years) to get average monthly
indexed earnings
 No, this is not the benefit. We’re not done
yet--see next slide.
How Are Social Security Benefits
Calculated Specifically?
 Then:
 (1) The first $680 of monthly average is
multiplied by 90%
 (2) The amount of monthly average over $680
and not over $4,100 is multiplied by 32%
 (3) The amount of monthly average over
$4100 is multiplied by 15%
 Finally, the three products are added together
and the sum is rounded down to next lowest
dollar to get the retirement benefit at “full
retirement age”
Example of Calculating Social
Security Retirement Benefit
 Assume that a worker’s highest 35 years’
indexed earnings add up to $1,500,000
 $1,500,000 divided by 420 = $3,571.42
average monthly indexed earnings
 (1) $680 x 90% = $612
 (2) $3,571.42 - $680 = $2,891.42

$2,891.42 x 32% = $925.25
 (3) $0 x 15% = $0
 $612 + $925.25 + $0 =$1,537.00/month
What Are The “WEP” and “GPO”?
 “WEP” is the Windfall Elimination Provision


It may reduce your Social Security retirement
benefits
See SSA publication No. 05-10045
 “GPO” is the Government Pension Offset


It may reduce or even wipe out your Social
Security spousal, widow, or widower benefits
See SSA Publication No. 05-10007
Should You Switch to Social Security?
 [Will Social Security Go Broke?]
 Will You Be Vested in Social Security If You
Switch?
 When Do You Plan to Retire?
 Do You Want Portability If You Quit
Teaching?
 How Much Withholding Can You Afford?
 Will You Be Affected by the WEP or GPO?
 Will You Get More Retirement Income If You
Switch?
Will You Be Vested in Social Security
If You Switch?
 Need 40 credits (up to 4 per year) to vest in
Social Security
 In 2007, you receive one credit for each
$1,000 of earnings, up to the maximum of
four credits per year
When Do You Plan to Retire?
 CalSTRS CB: no minimum retirement age,
but tax penalty if withdrawn before age 55
 Social Security: 62 minimum retirement age
(with reduced benefits)
Do You Want Portability If You Quit
Teaching?
 CalSTRS CB: Portable to another retirement
plan
 Social Security: Not portable
How Much Withholding Can You
Afford?
 This should be irrelevant!
 CalSTRS DB: 3.75%
 Social Security: 6.2%
Will You Be Affected By The WEP
and/or GPO?
 CalSTRS CB is considered an “alternative
pension”, even if benefits are paid as a lump
sum, and may subject you to the WEP and/or
GPO
 What if CB funds are transferred to an IRA or
other retirement plan?
 The WEP offset may be reduced or
eliminated entirely if you have 21 or more
years of “substantial earnings”
 Other exceptions to the WEP or GPO are rare
Windfall Elimination Provision
If any part of your government pension is based
on work not covered by Social Security, you
may be affected by the Windfall Elimination
Provision.
How Social Security Determines Your Benefit
Social Security benefits are based on earnings
Step 1
Step 2
Step 3
Your wages are adjusted for inflation
Find the average of your 35 highest earnings years
Result is “average indexed monthly earnings”
In 2007, the maximum earnings taxable for Social Security is $97,500 gross. Because
of these maximum limits, the maximum payment in 2007 is $2116.
Example:
AIME = $4225
40%
272.00
 90% X
680
=
612.00
 32% X 3420
= 1094.40
 15% X
125
=
18.75
 Primary Insurance Amount 1725.00
1385.00
Exception of the Windfall Elimination Provision
Years of Coverage
% of First Factor
in Benefit Formula
30 or more
29
28
27
26
25
24
23
22
21
90
85
80
75
70
65
60
55
50
45
Government Pension Offset (GPO)
If you receive a government pension
based on work not covered by Social
Security, your Social Security spouse’s
or widow(er)’s benefits may be
reduced.
Government Pension Offset (GPO)
Spouse’s Benefits Only
2/3 of amount of Government
pension will be used to reduce the Social
Security spouse’s benefit
Example:
$900 of Government pension
Social Security Spouse Benefits
No cash benefit payable by Social Security
2/3 = $600
= $500
Will You Get More Retirement
Income If You Switch?
 You need to estimate your CB and Social
Security benefits under different scenarios
and compare the results
 The bad news:


Math is involved
All estimates require making assumptions
which may or may not turn out to be true
 The good news:
 Social Security has calculators available to do
the math for you
What Are The Possible Scenarios?
 1) You stay in CB and will have no Social
Security benefits
 2) You stay in CB and will also have Social
Security benefits
 3) You switch to Social Security and will have
minimal or no CB benefits
 4) You switch to Social Security and will also
have CB benefits
How Do You Estimate Your CB
Benefits (conservatively)?
 You need your latest annual CalSTRS
Retirement Progress Report (statement) and
a calculator
 Find account balance on statement
 Add this year’s employee and employer
contributions (estimate or use last year’s ) to
previous year’s account balance
 Multiply sum by 1.0475 (interest rate for
2006-07 is 4.75%) to get new account
balance
How Do You Estimate Your CB
Benefits (conservatively)?
 Repeat for each year you are in CB after this
until your Social Security “full retirement age”
(for comparison)
 This lump sum estimate is in today’s dollars
and assumes same load, salary, and 4.75%
interest rate each year
 To determine equivalent monthly benefit, use
the CalSTRS DBS Member-Only Annuity
table (also used for CB)
Example of Estimating CB Benefits
(conservatively)
 Assume annual CB statement for last year
(2005-06) showed $2,000 current year
contributions (employee and employer) and
$20,000 account balance
 Assume employees stays in CB until Social
Security full retirement age in 2010
 ($20,000 + $2,000) x 1.0475 = $23,045
estimated new balance end of 2006-07
 ($23,045 + $2,000) x 1.0475 = $24,139.64
estimated new balance end of 2007-08
Example of Estimating CB Benefits
(conservatively)
 ($24,139.64 + $2,000) x 1.0475 = $25,286.27
estimated new balance end of 2008-09
 ($25,286.27 + $2,000) x 1.0475 = $26,487.36
estimated new balance end of 2009-10
(payable as lump sum or lifetime monthly
annuity)
 Looking at the CalSTRS DBS Member-Only
Annuity table, the equivalent monthly benefit
will be a little more than $205 per month
How Do You Estimate Your Social
Security Benefits (conservatively)?
 You need your latest annual Social Security
Statement and a calculator (hard way) or an
online computer (easy way)
 Note: your statement includes estimates
 Hard way: follow instructions on back of SSA
publication No. 05-10070, Your Retirement
Benefit: How It Is Figured
How Do You Estimate Your Social
Security Benefits (conservatively)?
 Easy way (sort of):
 Go to www.ssa.gov
 Under Retirement near middle of page click on
“Calculate Your Benefits”
 Download Calculator 3, Detailed Calculator
 When it asks amount of other government
pension, enter monthly CB amount previously
estimated (calculator includes reduction for
WEP)
 Be sure to save your file (for future use) before
ending calculator program