PERA and Social Security Explained
Why don’t most Colorado PERA members participate in Social Security? And why might a PERA member’s Social Security be affected by participation in PERA?
These are questions we hear every day at PERA. To answer them, let’s go back to the beginning.
When Colorado PERA was established in August of 1931, Social Security did not exist. After hearing from a group of state employees who wanted a way to plan and save for retirement, the Colorado General Assembly acted to create the State Employees’ Retirement Association (SERA). At first, only state employees were covered by SERA. Voluntary coverage under the plan was offered to schools districts and local governmental entities in the 1940s and SERA was renamed the Public Employees’ Retirement Association to better reflect the broader membership in the association.
When the Social Security Act was passed by Congress in 1935, State and local governmental entities were specifically excluded from participating in Social Security. Congress questioned whether it could compel the States and their political subdivisions to include their employees in the system. It could have been considered unconstitutional under the Tenth Amendment to the U.S. Constitution as a levy of taxes on States and localities.
In 1951, Congress added Section 218 to the Social Security Act, which allowed a state to independently decide whether or not to include some or all of its public employees in Social Security. Colorado executed a Section 218 agreement but narrowly defined the employees who would participate in Social Security. That same year, all school districts other than Denver Public Schools (DPS) were required to participate in PERA. (This was because DPS had their own separate retirement system at the time.)
Still today, most public employees in Colorado do not participate in Social Security (a few Local Government Division employers participate in both PERA and Social Security). PERA serves as a substitute for Social Security; instead of paying the 6.2 percent FICA tax (made up of 5.3 percent for Old-Age and Survivors Insurance and 0.9 percent for Disability Insurance), most PERA members contribute 8 percent of pay to PERA (providing retirement, survivor, and disability benefit coverage).
Two separate federal provisions are in place today that may reduce a public employee’s or retiree’s Social Security benefit. As a result, an anticipated Social Security benefit may be reduced due to participation in PERA. A PERA benefit, however, will not be reduced by any Social Security benefit received. (Read more about PERA and Social Security and Information for Government Employees.)
Windfall Elimination Provision (WEP)
In order to qualify for a Social Security benefit, workers must earn 40 credits (typically, working in a Social Security-covered job for 10 years). PERA members with at least 40 credits in Social Security, however, may have their worker benefit reduced by the WEP as a result of not contributing to Social Security while working for a public employer. Colorado is one of 15 states where most public employees do not participate in Social Security. As noted by the Coalition to Preserve Retirement Security:
“However, non-covered employees can be found in all 50 states according to data from the Social Security Administration. It’s estimated that 75% of all public safety officers (police, fire, and correctional personnel) are exempt from Social Security. Additionally, it’s estimated that approximately 40% of America’s public school teachers are also exempt.”
Nationally, it’s estimated that 6.5 million public workers are not covered by Social Security.
According to the Social Security Administration, Social Security benefits are intended to replace only some of a worker’s pre-retirement earnings, and lower-paid workers receive a greater replacement percentage of career average earnings than higher paid workers. Prior to the WEP being enacted in 1983, non-Social Security government workers had the advantage of receiving a Social Security benefit representing a higher percentage of their actual earnings. Congress passed the WEP to remove the advantage since these workers also qualified for a pension from a job for which they didn’t pay Social Security taxes.
The law protects non-Social Security workers who receive a low government pension from having the WEP result in a smaller combined benefit by guaranteeing that the WEP will not reduce a Social Security benefit by more than one-half of the non-Social Security pension (so a PERA member would never end up with less overall as a result of the WEP). Furthermore, the maximum WEP reduction to a Social Security benefit in 2015 is $413, and the WEP does not apply to an individual with 30 or more years of substantial Social Security earnings (and it is prorated for 21-29 years of substantial earnings). The Social Security Administration offers a WEP Online Calculator to estimate a Social Security benefit with the WEP applied.
Government Pension Offset (GPO)
The GPO applies to PERA retirees who also receive a Social Security spousal or widow(er) benefit, and reduces the Social Security benefit by two-thirds of the PERA benefit. “Dependent” benefits were established in the 1930s to compensate spouses who stayed home to raise a family and were financially dependent on the working spouse. According to the Social Security Administration, now that it is common for both spouses to work, the GPO requires the “dependent” benefit to be offset by the dollar amount of their own retirement benefit, and it ensures the benefits of government employees who do not pay Social Security taxes are treated the same as workers in the private sector who pay Social Security taxes. Because the average PERA benefit is usually larger than the average Social Security spousal benefit, an “average” PERA member’s spousal benefit may be eliminated by the GPO.
PERA and Social Security
It is PERA’s understanding that the GPO and WEP still apply even when a member refunds a PERA account if employer matching dollars are included in the refund or rollover. A bill has been introduced in Congress to eliminate the WEP (read more here), and a recent report by the Social Security Advisory Board has been released questioning the math of the WEP. PERA provides contact information for members of Congress on this or any issue here.
While the Social Security spousal benefit will most likely be completely offset by the GPO and a worker benefit may be reduced by the WEP, the resulting PERA benefit will be far greater and more than make up for any offsets to an anticipated Social Security benefit – and a PERA benefit is sustainable today and into the future as a result of reforms passed under SB 1.
