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

1
Part-Timer Retirement Should You Switch to
Social Security?

• Presented by Cliff Liehe
• Los Angeles, April 13. 2007
• Revised by Phyllis Eckler, February 2008

2
Whats 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.

3
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

4
How are CB Benefits Calculated?

• The retirement benefit is the employees 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

5
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_annuity_cal
  cs_SR_REVISED.pdf

6
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

7
How Are Social Security Benefits Calculated In
General?

• The retirement benefit formula is based on an
  employees highest 35 years earnings (many more
  years than other defined benefit plans)
• The formula favors lower wage earners

8
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. Were not done
  yet--see next slide.

9
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

10
Example of Calculating Social Security Retirement
Benefit

• Assume that a workers 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

11
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

12
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?

13
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

14
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)

15
Do You Want Portability If You Quit Teaching?

• CalSTRS CB Portable to another retirement plan
• Social Security Not portable

16
How Much Withholding Can You Afford?

• This should be irrelevant!
• CalSTRS DB 3.75
• Social Security 6.2

17
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

18
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.
19
How Social Security Determines Your Benefit
Social Security benefits are based on
earnings Step 1 Your wages are adjusted for
inflation Step 2 Find the average of your 35
highest earnings years Step 3 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.
20
Example

• AIME 4225
• 90 X 680 612.00
• 32 X 3420 1094.40
• 15 X 125 18.75
• Primary Insurance Amount 1725.00

272.00
40
1385.00
21
Exception of the Windfall Elimination Provision
of First Factor Years of Coverage in Benefit
Formula 30 or more 90 29 85 28 80 27 75 26 70
25 65 24 60 23 55 22 50 21 45
22
Government Pension Offset (GPO)
If you receive a government pension based on work
not covered by Social Security, your Social
Security spouses or widow(er)s benefits may be
reduced.
23
Government Pension Offset (GPO)
Spouses Benefits Only 2/3 of amount of
Government pension will be used to reduce the
Social Security spouses benefit
Example 900 of Government pension
2/3 600 Social Security Spouse
Benefits 500 No
cash benefit payable by Social Security
24
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

25
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

26
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 years employee and employer
  contributions (estimate or use last years ) to
  previous years account balance
• Multiply sum by 1.0475 (interest rate for 2006-07
  is 4.75) to get new account balance

27
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 todays 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)

28
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

29
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

30
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

31
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