FERS Transfer Handbook: Brief Description of the Social Security Program
Introduction
Social Security is a national system of old-age, survivors and disability insurance (OASDI) cash benefits. The program's basic plan is a simple one: During working years, employees, their employers, and self-employed persons pay Social Security taxes; when their earnings stop or are reduced due to retirement, severe disability, or the death of an employee, monthly cash benefits are paid to replace part of the earnings the employee and the family have lost.
How the Program Is Financed
The primary sources of financing are the Social Security taxes paid by employees and their employers and by the self-employed. In 1998, employers and employees each contribute 7.65% of the employee's wages, which includes 1.45% for Medicare hospital insurance (HI). The maximum amount of earnings taxed for Social Security purposes ($68,400 in 1998) is subject to automatic adjustment under a formula related to the increase in wages.
Qualifying for Benefits
To become eligible for old-age, survivors, and disability insurance benefits, an employee must have credit for a required amount of work that is covered by Social Security. Social Security work credits are measured in quarters of coverage. In 1998, a credit is earned for each $700 in covered annual earnings up to a total of four credits ($2,800) for the year.
The minimum requirement is 6 credits for death and disability benefits and the maximum is 40 credits of coverage. An employee who has accumulated the required number of credits is considered to be fully insured and eligible for most types of benefits.
An additional insured status test must be met by employees in order to qualify for disability insurance benefits. Employees who become disabled after age 31 must have worked under Social Security at least 5 of the last 10 years preceding the onset of disability. Employees between ages 24 and 31 must have worked at least half of the quarters from age 21 and before disablement, and employees under age 24 may qualify for benefits with a minimum of 1 years (18 months) of work in the 3 years prior to becoming disabled.
Who Is Eligible for Benefits
Fully insured employees are eligible for benefits as early as age 62, but benefits are permanently reduced for each month of entitlement prior to the full-benefit retirement age, currently age 65. The age at which unreduced benefits are payable will be increased gradually from age 65 to 67 over a 21-year period beginning with individuals who reach age 62 in the year 2000. (The age of eligibility for Medicare is not affected by these changes.)
Employees who are fully insured and who become disabled, are eligible for unreduced benefits, regardless of age. Under the Social Security law, a person is considered disabled if he/she is unable to engage in any substantial gainful activity due to a physical or mental impairment that lasts for at least 12 months or is expected to result in death. The term "substantial gainful activity" refers to the performance of significant productive physical or mental duties, generally for pay or profit.
Benefits to Family Members
Auxiliary benefits may be payable to members of the employee's family (as listed below) whenever the indicated requirements for entitlement are met. As explained later in this section, there is a limit on the amount of family benefits payable on an employee's record. (References to age 65 are used because that is the current retirement age at which unreduced benefits can be paid.)
Note: While the following benefits are expressed as a percentage of an employee's benefits, their payment does not reduce the employee's benefit. For example, the spousal benefit [in (1) below] can be paid in addition to the employee's Social Security benefit.
Spouse (of employee receiving retirement or disability benefits):
- Married to the employee for at least 1 year, or, if less than 1 year, is the parent of the employee's child, and meets one of the following age requirements:
- Any age, with entitled child under age 16 or disabled in care (payment rate is 50% of employee's full benefit).
- Age 65 (50% of employee's full benefit).
- Age 62-64 (50% of employee's full benefit, permanently reduced for each month of entitlement prior to age 65).
- Divorced spouse, married to the employee at least 10 years, and meets one of the following age requirements:
- Age 65 (50% of employee's full benefit).
- Age 62-64 (50% of employee's full benefit, permanently reduced for each month of entitlement prior to age 65).
Child (of employee receiving retirement or disability benefits):
- Under age 18 and unmarried (50% of employee's full benefit).
- Attending elementary or secondary school full-time at age 18 and through the end of the school term in which age 19 is attained (50% of employee's benefit).
- Disabled child, age 18 or over, who was disabled before age 22 (50% of employee's full benefit).
Monthly cash benefits are also payable, as follows, to the survivors of a deceased employee:
Widow/Widower (of deceased employee):
- Married to the employee at least 9 months (3 months in the case of accidental death), or married to the employee and is the parent of the employee's child, and meets one of the following age requirements:
- Any age with entitled child in care (75% of employee's full benefit),
- Age 65 (100% of employee's full benefit),
- Age 60-64 (permanently reduced benefit),
- Age 50-59 and disabled (permanently reduced benefit).
- Surviving divorced spouse, married to the employee at least 10 years, age 60 or over (permanently reduced benefit if entitled prior to age 65),
- Disabled surviving divorced spouse, married at least 10 years, age 50-59 (permanently reduced benefit).
Child (of deceased employee):
- Under age 18 and unmarried (75% of employee's full benefit).
- Attending elementary or secondary school full-time at age 18 and through end of school term in which age 19 is attained (75% of employee's full benefit).
- Disabled child, age 18 or over, who was disabled before age 22 (75% of employee's full benefit).
Dependent Parent Age 62 or Older (of deceased employee):
- One surviving parent (82% of the employee's full benefit).
- Two surviving parents (75% of employee's full benefit payable to each parent).
Lump-Sum Death Payment--A one-time payment of $255 is payable, upon the death of an employee, to a spouse with whom the employee was living at the time of death or to a spouse or child who is eligible for monthly survivor benefits in the month of the employee's death.
Amount of Social Security Benefits
An employee's primary insurance amount (PIA) is the monthly benefit amount payable at disability or at the full-benefit retirement age. All other monthly benefit amounts are derived from the PIA.
- The employee's PIA is derived by applying a three-step benefit formula to the employee's lifetime average earnings in employment covered by Social Security. Before averaging the earnings, the yearly earnings are adjusted to reflect wage levels prevailing shortly before retirement, disability, or death. (These are known as adjusted career earnings.)
- For employees who receive an annuity based on CSRS service (including those who transfer to FERS from CSRS) a modified benefit formula may be used in computing the Social Security retirement or disability benefit. (See Windfall Elimination Provision.)
As previously noted, benefits taken before the full benefit retirement age are permanently reduced. For example, retirement benefits for employees entitled at age 62 are currently reduced by 20% and benefits for spouses entitled at age 62 are reduced by 25%. As the full-benefit retirement age increases in the future, reduced benefits will continue to be available at age 62 for employees and spouses (age 60 for surviving spouses), but the reduction factors will be revised so that there is a further reduction. The maximum reduction will increase gradually to 30% for employees entitled at age 62 and to 35% for spouses entitled at age 62. There is no increase in the maximum reduction in the case of widows and widowers entitled at age 60 (28.5%).
Family benefits payable on an employee's Social Security record are limited to a maximum set by law. The maximum family benefit is generally related to the employee's PIA. The maximum monthly benefit that can be paid to a family (including the employee) ranges from 150% to 188% of the employee's PIA in retirement and survivor cases. In disability cases, it ranges from 100% of the PIA to 150% of the PIA. Generally, the maximum family benefit amount applies whenever there is more than one auxiliary or survivor beneficiary entitled on the employee's record.
Under the "dual-entitlement" provision, a person who qualifies for benefits based on the earnings of more than one employee (for example, a benefit as an employee and a benefit as a spouse of another employee) cannot receive both benefits in full. The amount of the spouse's or surviving spouse's benefit is offset dollar for dollar against the person's own employee's benefit so that the spouse receives the larger of the two benefits.
Similar to the dual entitlement provision discussed above, under the Government Pension Offset Provision, the amount of a person's Social Security benefit as a spouse or surviving spouse will be reduced by two-thirds of the amount of the Government pension (for example, a CSRS annuity) the person receives based on his/her own work that was not covered by Social Security. Note: If you transfer to FERS and are not covered under FERS for 5 years before retirement, the Government Pension Offset will still apply to you.
Social Security benefits are increased automatically each year whenever the cost of living, as measured by the Consumer Price Index rises.
Taxation of Social Security Benefits
Social Security benefits are subject to income tax if a beneficiary's total income exceeds specified limits. The limits generally are $25,000 for a single taxpayer; $32,000 for a married couple filing a joint tax return. If the appropriate limit is exceeded, up to 85% of the benefit is taxable. Revenues generated by this tax are deposited to the Social Security Trust Fund.
Social Security Earnings Test
This section applies to you if you plan to work after you begin receiving your FERS Special Retirement Supplement or your Social Security Benefit.
What Is the Social Security Earnings Test?
The Social Security Earnings Test is part of the Social Security law. It means that your Social Security benefits may be reduced if you work after retirement and earn more than the allowable amount.
Who Is Affected?
If you switch to FERS, this provision could affect parts of your benefit.
Note that this provision also applies if you remain with CSRS or CSRS Offset and have enough Social Security credits to qualify for a benefit. Your CSRS benefit will not be affected in this case, but your Social Security benefit will be.
Benefits you receive from the Thrift Savings Plan are not included as income for the Social Security Earnings Test.
How the Social Security Earnings Test Works
If you work after you start receiving Social Security benefits and are under age 70, the amount of money you earn by working can reduce your Social Security benefits. Earnings from savings, most investments, and insurance will not affect your Social Security benefit. Wages and earnings from self-employment can, however. Under the Social Security earnings test, Social Security counts wages for services rendered during the year on net earnings from self-employment minus any net loss from self-employment.
Whether or not your Social Security benefit is reduced depends on how much you earn when you work. In 1998, the annual exempt amount of earnings is $9,120 if you're under 65, and $14,500 if you're age 65-69. You can earn up to these amounts without affecting your Social Security income. If you earn more than these amounts, however, your Social Security benefit will be reduced. If you are under age 65, it will be reduced by $1 for every $2 above the limit that you earn by work. For people age 65 and over, $1 in benefits is withheld for each $3 in earnings above the limit. If you are age 70 or above, your Social Security benefits will not be reduced because of your earnings.
The amount you can earn each year before your benefit is affected increases yearly. How much it increases is based on how much average wage levels increase in the United States as a whole.
Similar rules, including the $9,120 limit, apply to the Special Retirement Supplement provided to those who retire under FERS before age 62.
Conclusion
If you are eligible for the FERS Special Retirement Supplement (that is, you retire at your MRA with 30 or more years of service, at age 60 with 20 or more years of service, or other rules that allow receipt of the Supplement), the earnings test may reduce the amount of your Supplement. If you plan to work past age 62, you can delay your application for Social Security benefits in order to receive higher benefits. In any case, you should remember that the earnings test only applies when you have substantial earned income during your "retirement" years.
Windfall Elimination Provision
The rules concerning the Windfall Elimination Provision (WEP) may be a transfer consideration if:
- You are under CSRS (not CSRS Offset); and
- You will reach age 62 after 1985 and are eligible for a Social Security benefit; and
- You will have had "substantial" earnings under Social Security for less than 30 years; and
- You are first eligible to retire under CSRS after December 31, 1985.
Benefits you receive from the Thrift Savings Plan will not reduce your Social Security Benefits under the WEP.
If you already have Social Security coverage as a CSRS Offset employee, the WEP is not a transfer consideration, but you may want to read this section to find out if your future Social Security benefits will be reduced by the WEP.
What the Windfall Elimination Provision Is
Social Security law includes a provision that reduces Social Security benefits for those who have less than 30 years of substantial coverage under Social Security and who have earned a retirement benefit from employment not covered by Social Security; for example, CSRS service. (In 1998, the amount of substantial coverage is $12,675. In contrast, the amount needed to earn four credits of coverage in 1998 is $2,800.) If it applies to you, your benefits will be figured at a different formula from the one used for those with longer covered service.
Who Is Affected
If you have fewer than 30 years of substantial Social Security coverage and become eligible for a Social Security benefit, this provision will affect you if you are also eligible for a retirement benefit that includes service performed under CSRS rules. NOTE: The provision will apply to you even if you have past CSRS (non-Offset) service that will become subject to FERS rules when you transfer. See the examples section.
If you do not earn at least 10 years (or 40 credits) of Social Security coverage, you will not be eligible for a Social Security benefit (unless you were born before 1929, in which case fewer quarters of coverage are required). This provision would, of course, not apply to you if you are not eligible for Social Security benefits. Likewise, it does not apply to you if you already have 30 years of substantial Social Security coverage. If you are uncertain how many years of substantial Social Security coverage you have, and this issue is a consideration in deciding to transfer to FERS, request your earnings history from the Social Security Administration (SSA). You may request a Personal Earnings and Benefit Estimate Statement (PEBES) electronically from the SSA.
How the Windfall Elimination Provision Works
The WEP was designed to eliminate the "windfall" that could result if you were to receive a CSRS annuity based on many years of employment not covered by Social Security and also receive a full Social Security benefit because you did have a few years of covered employment. If you're subject to the WEP, your earned Social Security benefits will be figured using a modified benefit formula.
The modified formula is not used in computing survivor benefits upon your death or the Special Retirement Supplement. It is used in computing Social Security retirement as well as disability benefits if you become disabled.
The regular Social Security benefit formula uses three levels of earnings. Each level of earnings is multiplied by a different percentage. The first level of earnings is multiplied by 90%. The second by 32%, and the third by 15%. Those amounts are added together to determine a person's basic benefit rate.
Under the modified benefit formula, the first level of earnings is not multiplied by 90%, but by a smaller percentage, depending on the number of years of substantial Social Security coverage you have. The modified formula reduces your Social Security Benefit to the greatest extent if you have less than 21 years of substantial Social Security coverage. In that case the first level of earnings is multiplied by 40% instead of 90%. For each year of coverage over 20 years the percentage increases by 5% increments (e.g., 45% for 21 years, 50% for 22 years, etc.). However, in no case will the reduction in your Social Security benefit because of the WEP be greater than one-half of the portion of your pension from employment not subject to Social Security taxes; for example, your CSRS annuity.
That aspect of the WEP will only help if the amount of your CSRS benefit is relatively low. If you could earn between 21 and 30 years of substantial Social Security coverage, you should consider whether or not you could earn the required years by transferring to FERS. If you can, it will reduce or cancel out the effect of this provision. For example: Two employees with the same date of birth retire at age 65. Both have worked for the same employer for their entire working career and have identical wages posted to their earnings records. However, one also worked for the Federal Government and is receiving a CSRS pension of $800 per month, based on that non-covered work. When Social Security benefits are computed, the worker entitled only to Social Security will receive a benefit of $567 per month. The second worker is subject to the WEP modified formula and will receive a benefit of $354 per month.
These benefit amounts are computed using the different percentages as follows:
| 426 x .90 = 383.40 | 426 x .40 = 170.40 |
| 574 x .32 = 183.60 | 574 x .32 = 183.60 |
| Total 567.00 | Total 354.00 |
Conclusion
If you become eligible for a Social Security benefit, you may be subject to the WEP whether you choose to stay with CSRS or transfer to FERS. This is because, either way, you may not be able to acquire 30 years of substantial Social Security coverage.
If you earn 21 or more years of substantial Social Security coverage, though, you can lessen the effects of this provision. Depending on your age, your previous Social Security coverage, and the number of years you plan to work, transferring to FERS could allow you to earn some or all of the additional Social Security coverage you need to avoid the WEP. This could be especially valuable for lower paid employees.
Social Security generally provides a higher proportion of benefits to lower income employees than it does to those who are higher paid. The reduction that results from the WEP, however, tends to cancel out this effect. Lower salaried employees who are subject to the WEP will find FERS a less attractive alternative than those who are not. If you are low salaried, staying with CSRS is usually a better choice if you are sure you will retire from the Federal Government and will not be able to earn enough Social Security substantial earnings years to avoid the Windfall reduction by transferring to FERS.
How to Estimate the Reduction in your Social Security Benefit Resulting from the Windfall Elimination Provision
Upon request by a worker (using form SSA-7004 or request a PEBES electronically), the Social Security Administration (SSA) will send a Personalized Earnings and Benefit Estimate Statement (PEBES) that will list the worker's earnings in employment covered by Social Security and provide a Social Security retirement benefit estimate assuming retirement at alternative ages -- 62, 65 and 70. The benefit estimate is based on the person's own estimate of his or her future annual earnings in employment covered by Social Security.
The following table shows how the PEBES benefit estimate for a person reaching age 62 in 1998 or later can be adjusted to reflect the WEP in most cases by subtracting a specified amount from the age-62 or age-65 benefit estimate. The amount to be subtracted depends on the number of years of "substantial" Social Security earnings (see Glossary) the worker will have acquired by the time he or she begins to receive Social Security benefits.
| 30 or more | $ 0 | $ 0 |
| 29 | 19 | 24 |
| 28 | 38 | 48 |
| 27 | 58 | 72 |
| 26 | 77 | 96 |
| 25 | 96 | 120 |
| 24 | 115 | 144 |
| 23 | 134 | 168 |
| 22 | 154 | 192 |
| 21 | 173 | 216 |
| 20 or less | 192 | 240 |
These amounts apply only to PEBES benefit estimates generated in 1998. To use PEBES generated in subsequent years, these amounts need to be adjusted by the increase in average wages in the economy--currently estimated to be about 5% per year. Thus, to use with PEBES generated in 1999 and later, increase the amounts shown by about 5% for each subsequent year after 1998.
You can obtain the PEBES request form (SSA-7004) by calling (800) 772-1213. You can also request a PEBES electronically through the SSA website at http://www.ssa.gov/pebes/.
Use of PEBES Benefit Estimates to Estimate CSRS Offset Reductions
If you are a CSRS Offset employee considering whether to join FERS, you may want to know how much your CSRS annuity will be reduced under the CSRS Offset calculation. Generally, this reduction is the smaller of:
- The difference between (a) the Social Security benefit including future Federal CSRS Offset employment and (b) the Social Security benefit excluding future CSRS Offset employment; and
- 1/40 of the Social Security benefit (including future Federal employment), multiplied by the number of years of future CSRS Offset employment.
You can estimate these reductions by first requesting two Personalized Earnings and Benefit Estimate Statements (PEBES) from the Social Security Administration (see How to Estimate the Reduction in Your Social Security Benefit Resulting From the Windfall Elimination Provision in the previous section). On one PEBES request form, you should indicate the annual Federal pay you estimate that you would have (in today's dollars) until age 62; on the other PEBES request form, you should show no future earnings under Social Security. When you receive the two statements from SSA, adjust each benefit estimate for the windfall elimination provision (WEP) as explained in the previous section.
After adjusting for the WEP, the difference between the two Social Security benefit estimates at age 62 can be used as an estimate of (1), above--assuming that you continue to work under CSRS Offset until age 62. If you plan to work until age 65, use the age-65 benefit estimates on the PEBES output.
The reduction under (2), above, can be estimated by taking one-fortieth of the estimated Social Security benefit including future CSRS Offset employment (as adjusted for the WEP) and then multiplying by the number of years of future CSRS Offset employment.
Government Pension Offset
This section applies to you if:
- You are covered by CSRS (or you transfer to FERS, but do not serve 5 years under FERS); and
- Based on your work history you are eligible for no Social Security benefit or only a small Social Security benefit; and
- Based on your spouse's (or former spouse's) work history, he or she is eligible for a full Social Security benefit.
This section does not apply to you if you are covered by CSRS Offset provisions. People who are mandatorily covered under Social Security are exempt from the Government Pension Offset.
What the Government Pension Offset Is
Under the Government Pension Offset, the amount of the benefit a person receives from Social Security as a spouse, former spouse, or surviving spouse will be reduced if that person also receives a pension based on his/her own work in Federal, State, or local government that was not covered by Social Security.
Who Is Affected?
Federal employees who remain with CSRS are subject to the Government Pension Offset. In addition, CSRS employees who transfer to FERS must serve 5 years in FERS before becoming exempt from the offset.
The Government Pension Offset does not affect any benefits you receive from your Thrift Savings Plan account.
What Is a Social Security Spouse or Survivor Benefit?
In some cases, Social Security law provides for what is known as a spouse or survivor benefit. If your spouse has earned a Social Security benefit and you have earned little or no benefit, you can receive an additional Social Security benefit based on your spouse's Social Security benefit. If you begin taking this benefit at age 65, it will amount to one-half (50%) of the amount your spouse receives. If you start receiving this benefit at age 62, it will amount to a little over one-third (37.5%) of the amount your spouse receives.
Example: Your spouse receives a monthly check from Social Security in the amount of $1,200. If you begin receiving Social Security benefits as a dependent of your spouse at age 65, you will receive a monthly check from Social Security in the amount of $600. If you begin receiving your spousal benefit at age 62, you will receive a monthly check from Social Security in the amount of $450.
How the Government Pension Offset Works
If you retire from the Federal service under CSRS and are also eligible for Social Security benefits as a spouse, former spouse, or survivor, your Social Security benefit will be reduced. It is reduced because you are receiving a pension from the Federal Government based on earnings that are not covered by Social Security. For every $3 you receive from your CSRS annuity, your Social Security spousal benefit will be reduced by $2.
Example: Using the above example where you were eligible for a $600 Social Security spousal benefit, suppose you were also receiving a CSRS benefit that amounted to $1,200 a month. The Government Pension Offset would be two-thirds of your monthly $1,200 CSRS benefit, or $800. Since the offset amount is larger than your $600 Social Security benefit, your Social Security benefit would be eliminated.
What Is the Effect of Transferring to FERS?
Employees who transfer and work at least 5 years under FERS before retiring are exempt from the Government Pension Offset.
Conclusion
This factor will probably not be significant for anyone who earns his/her own Social Security benefit based in whole or in part on FERS service. This is because earned Social Security benefits are usually larger than spousal benefits, and Social Security will not pay both at the same time. Even those who are thinking of transferring to FERS because of this factor should also consider the fact that non-Social Security survivor benefits under the Basic Benefit Plan are slightly lower and more costly under FERS.
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