While pensions are marital property subject to equitable distribution, Social Security income is not. Thus, the social security benefit earned during a marriage is not divisible under a QDRO-type order, nor is it valued for immediate offset purposes.
Because of this, many states, including Pennsylvania, have case law addressing the issues surrounding Social Security offset when the employee-spouse is in a pension plan not subject to Social Security, such as the Civil Service Retirement System (CSRS) or the Philadelphia Fire and Police Plans.
In Cornbleth v. Cornbleth, 580 A.2d 369 (Pa. Super. 1990), the participant-husband argued that since he could not share in his wife's Social Security, it was unfair for her to share in his entire pension under the CSRS, since he was not receiving Social Security. The court agreed, concluding that a portion of his pension was equivalent to Social Security, and that part was subtracted out of the marital portion of his pension.
The court stated, "To facilitate a process of equating CSRS participants and Social Security participants we believe it will be necessary to compute the present value of a Social Security benefit had the CSRS participant been participating in the Social Security system. The present value should then be deducted from the present value of the CSRS pension at which time a figure for the marital potion of the pension could be derived and included in the marital estate for equitable distribution purposes. This process should result in equating, as near as possible, the two classes of individuals for equitable distribution purposes."
Thus, under Cornbleth, the imputed Social Security benefit calculated on the basis of the CSRS participant's earnings during the marriage is subtracted from the marital portion of the pension. Practically speaking, this means that the pension valuator must plug the salary history up to the date of separation into the Social Security calculation to calculate the imputed Social Security benefit resulting from these earnings. This benefit is then present-valued and subtracted from the present value of the marital portion of the pension.
Suppose, however, that both spouses are in plans that do not contribute to Social Security. Then husband's argument could not be sustained. This is the essence of Elhajj v. Elhajj 605 A.2d 1268 (Pa. Super. 1992). The court in Elhajj found that in such a situation, the Social Security offset should not be used in the valuation of the husband's or wife's pension.
What if the wife has no Social Security because she never worked during the marriage? Again, husband's argument in Cornbleth would not work, because wife has no Social Security benefits. This is the situation in McClain v. McClain, 693 A.2d 1355 (Pa. Super. 1997).The McClain court found that if the non-employee spouse (wife, in this case) has earned no pension and no Social Security during the marriage, the Cornbleth offset does not apply.
WHERE LOGIC FAILS
However, there is a flaw in McClain. In McClain, the wife did not earn exactly zero Social Security, but a "miniscule" amount, since she worked less than one year as a sales clerk during the marriage.
So, what would happen if wife's Social Security were greater than "miniscule," assuming she worked several years, but still small? What is the point at which McClain does not apply and Cornbleth does? To understand this, it is necessary to understand the magnitude of the Social Security offset.
Suppose the marital present value of the pension is $140,000 before the offset and $97,000 after the offset. In other words, the imputed Social Security benefit is worth approximately 30 percent of the pension. This is reasonable in a CSRS pension, where the employee is approximately age 50 and has been earning close to the Social Security maximum (which has been more than $60,000 per year since 1994).For employees earning less (say in the $40,000 range), the imputed Social Security is a higher percentage of the CSRS pension. The reason for this is that the Social Security benefit curve flattens out and reaches a maximum for the higher-wage earners. Social Security is designed to benefit those at the lower end of the wage scale.
Note that for employees in the Philadelphia Police and Fire plans, the imputed Social Security is a far lower percentage of the pension, typically 10 percent. This is because the (unreduced) Social Security retirement age for a person born in 1950 is age 66. The normal retirement age in CSRS is age 62, while the normal retirement age for the police and fire pension is age 45.The earlier retirement age results in a much higher present value. Thus, the Cornbleth offset is a lesser factor in the police and fire pension cases.
However, in CSRS cases, the offset is a very significant factor, especially when the CSRS employee is at the lower end of the salary scale. Now, under McClain, if the non-employee spouse has no pension and no Social Security of his or her own, the offset does not apply, and the marital present value is $140,000.But suppose the wife had a few part-time jobs, and earned a Social Security benefit with a present value of $4,500 during the marriage. If this amount is enough to cross the McClain threshold, the result is an "all or nothing" dilemma.
Assuming a 50-50 split, wife's share of the CSRS pension is worth $70,000, if she had no Social Security. But because she has a Social Security benefit worth $4,500, her share is only $48,500, after applying the offset. Remember that after the offset, the value of the CSRS pension is $97,000. Thus, the $4,500 in Social Security has cost her $21,500. This does not seem equitable.
One way around this dilemma is to reduce the Social Security by the wife's actual Social Security benefit, but this does not follow Cornbleth. That case clearly, unequivocally states that the employee-spouse's imputed Social Security benefit should be subtracted.
However, in cases where the wife's Social Security earnings are so low as to bring the McClain case into play, this could be a possible solution. If the $140,000 were reduced by $9,000 (twice wife's Social Security benefit), wife's share of the CSRS pension would then be one half of the result of $140,000 minus $9,000, or $65,500. Then, $65,500 plus $4,500 equals $70,000.Under McClain, $70,000 is the award to wife if she has no Social Security of her own and also is the combined value of her equitable distribution award plus her own Social Security when she has minimal benefits.
In other words, there is no Cornbleth offset, and wife's own Social Security is subtracted from her portion of the pension. Thus, wife is not penalized by having her own, small Social Security benefit. She will receive the same $70,000 that she would have received without any Social Security benefit of her own.
Again, please note that this method does not follow Cornbleth. However, in cases where the non-employee spouse's Social Security benefit is small but nonzero and he or she has no pension, it may be reasonable to subtract the present value of the non-employee's Social Security benefit from her portion of the pension in order to apply McClain in an equitable manner.
Published with permission from Pennsylvania Law Weekly
PAC provides pension valuations, QDROs and actuarial reports for divorce attorneys and marriage dissolution mediators nationwide. Our Philadelphia offices are located in the suburb of Elkins Park, Pennsylvania, from where we serve the needs of legal professionals nationally, including east coast states such as New York, New Jersey, Virginia, North Carolina, Florida, Washington, D.C., and Maryland. Our Florida office located in Coral Gables, FL serves Florida family attorneys.