One of the most popular topics discussed on PERA on the Issues is Social Security. From federal proposals to repeal the Windfall Elimination Provision (WEP)/Government Pension Offset (GPO) to updates on the OASI Trust Fund depletion date, there is a lot of information to digest. For most Colorado public employees, Colorado PERA serves as a substitute for Social Security and may therefore affect anticipated Social Security benefit amounts.
History of PERA and
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 school 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. Consensus thought at the time was that by requiring the states to participate, it may be considered unconstitutional under the Tenth Amendment to the U.S. Constitution as a levy of taxes on states and localities.
What is FICA? FICA is a U.S. federal payroll tax (most PERA members only pay the Medicare tax). It stands for the Federal Insurance Contributions Act and is deducted from each paycheck. FICA helps fund both Social Security and Medicare programs, which provide benefits for retirees, the disabled, and children. The money you pay in taxes is not held in a personal account for you to use when you get benefits. Today’s workers help pay for current retirees’ and other beneficiaries’ benefits. Any unused money goes to the Social Security trust funds to help secure today and tomorrow for you and your family. Source: Social Security Administration.
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 (although 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 currently contribute 8 percent of pay to PERA (although provisions in Senate Bill 18-200 will increase member contributions) that provide retirement, survivor, and disability benefit coverage, just like Social Security does.
Two separate federal provisions are in place today that may reduce a public employee’s or retiree’s Social Security benefit: the Windfall Elimination Provision and the Government Pension Offset. 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.
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.
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 because these workers also qualified for a pension from a job for
which they didn’t pay Social Security taxes.
Social Security and You: Because most PERA members do not participate in Social Security while working for a PERA employer, their anticipated Social Security benefit may be affected by the Windfall Elimination Provision and the Government Pension Offset. More details about PERA and Social Security can be found here, and online Social Security benefit reduction calculators are available for the WEP and GPO. There is also a website and video explaining Social Security reductions for PERA members.
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 2019 is $463, 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
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
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 typical PERA benefit will be far greater and more than make up for any offsets to an anticipated Social Security benefit. Here’s a comparison chart of PERA and Social Security: