Is it Equitable to Divide a Pension 50/50 in Divorce?

As a standalone decision, dividing a pension 50/50 in divorce makes financial sense. But when you consider the full financial picture — including the pension type and the Social Security benefits — the balanced split might not be equitable to both parties. This article presents three case studies to illustrate how uncovered pensions and Social Security may affect the split.

Let’s start with a few definitions:

• Covered pension: A retirement system where employees participate in a pension and also pay FICA taxes (meaning they pay into Social Security).
• Uncovered pension: A public retirement system where employees participate in a pension but do not pay FICA taxes (do not pay into Social Security). This often applies to public school teachers, postal workers, air traffic controllers, firefighters, police officers, and other first responders. Colorado, Connecticut, Louisiana, Massachusetts, Nevada, and Ohio have the largest percentage of public employees not covered by Social Security¹.
• Spousal Social Security: A Social Security benefit for a spouse or ex-spouse who earns less over the course of their career. The maximum amount of the benefit is one-half of the higher-earning spouse’s full benefit.
• Windfall elimination provision (WEP): An adjustment to your own Social Security benefit if you are eligible for an uncovered pension and Social Security.
• Government pension offset (GPO): An adjustment to your spousal or ex-spousal Social Security benefit if you are eligible for an uncovered pension. The spousal Social Security benefit is reduced by two-thirds of the amount of your uncovered pension.

Case Study #1: Uncovered Pension

George and Barbara have been married for 35 years and are divorcing. George has been a firefighter for 30 years and Barbara was a stay-at-home mom. George has an uncovered pension that will pay $48,000 per year at retirement. Neither George nor Barbara have ever paid into Social Security.

This is a simple case where splitting a pension may be equitable. Since George and Barbara have been married the entire time George has been a firefighter and paying into the pension, each party is entitled to half of the pension.

If the pension is split 50/50, the resulting annual income for each is:

George: $24,000
Barbara: $ 24,000

Case Study #2: Uncovered Pension Impact on Spousal Social Security

George and Barbara have been married for 35 years and are divorcing. George has been a firefighter for the last 30 years and Barbara works as an attorney. George has an uncovered pension that will pay $48,000 per year at retirement. Barbara has earned enough credits from Social Security to receive $38,000 per year once she retires.

This case introduces the government pension offset (GPO) adjustment. It is calculated by the Social Security Administration to determine a spousal or ex-spousal benefit when one party also has an uncovered pension. Since George and Barbara have been married the entire time George has been a firefighter and paying into the pension, each party is entitled to half of the pension. But is that really equitable? Let’s take a look at the math.

Since Barbara qualifies for Social Security benefits totaling $38,000 per year, George is entitled to a maximum ex-spousal benefit of $19,000. The Social Security Administration will reduce George’s ex-spousal benefit by two-thirds of his full uncovered pension amount. The fact that the pension may be split either through their agreement or ordered by the court will not reduce the effect of the GPO. Two-thirds of George’s full uncovered pension amount is $32,000.

GPO: $48,000 X (2/3) = $32,000

George’s offset on the ex-spousal benefit is $32,000. $19,000 – $32,000 is less than 0, so George is left with $0 from Social Security.

Barbara will be able to claim her entire $38,000 Social Security benefit at full retirement age.

If the pension is split 50/50, the resulting annual income for each is:

George: $24,000 (half of the pension)
Barbara: $62,000 ($24,000 from half of the pension + $38,000 from Social Security)

Case Study #3: Uncovered Pension Impact on Own Social Security

George and Barbara have been married for 35 years and are divorcing. George worked for his father for 10 years before becoming a firefighter for the last 30 years, and Barbara works as an attorney. George has an uncovered pension that will pay $48,000 per year at retirement, and he is also entitled to $8,000 per year ($667/month) in Social Security benefits. Barbara has earned enough credits from Social Security to receive $38,000 per year once she retires.

This case introduces the windfall elimination provision (WEP) calculated by the Social Security Administration to determine a Social Security benefit when one party also has an uncovered pension. Since George and Barbara have been married for the entire time George has been a firefighter and paying into the pension, each party is entitled to half of the pension. But is that really equitable? Again, let’s take a look at the math.

George will face the same GPO as in case study #2 and will not be entitled to any spousal Social Security Benefit. George will be entitled to his own benefit but at a reduced amount because of WEP. The maximum WEP reduction for someone with fewer than 20 years of substantial earnings is $512 per month² or one-half the amount of the uncovered pension, whichever is less.

George’s WEP reduction is $512 per month, leaving him with Social Security totaling $155/month ($1,860/year).

Barbara will be able to claim her entire $38,000 Social Security benefit at full retirement age.

If the pension is split 50/50, the resulting annual income for each is:

George: $25,860 ($24,000 from half of the pension + $1,860 from Social Security)
Barbara: $62,000 ($24,000 from half of the pension + $38,000 from Social Security)

These cases were meant to show how lopsided a settlement can be once the income sources are analyzed and their impacts accounted for. In cases two and three, Barbara ends up with around two and a half times more guaranteed retirement income than George. Even though Barbara is entitled to half of the pension based on coverture, it may be more equitable to offset her settlement amount by her guaranteed Social Security amount.

George: $43,000 (from the pension)
Barbara: $43,000 ($5,000 from the pension, $ 38,000 from Social Security)

Each divorce case is unique and requires an evaluation of the complete financial picture to determine an equitable solution. In divorce, the equitable division of an uncovered pension can be controlled but the rules around Social Security cannot. It is important to involve experts who understand how pensions may impact eligibility, the intricacies of Social Security, and the calculations necessary to determine an equitable solution.

Sources

1. https://www.ssa.gov/policy/docs/ssb/v80n3/v80n3p1.html
2. https://www.ssa.gov/benefits/retirement/planner/wep.html

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