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In states and municipalities across the nation, gays and lesbians are entering into legal civil unions. In Massachusetts, they can even get married. But when it comes to retirement planning, some of those laws are as worthless as a three-dollar bill.
The Federal Government Can Still Work Against Gays/Lesbians
Legally, there are major differences between gay partners and straight spouses, says Lara Schwartz, legal counsel for the Human Rights Campaign www.hrc.org (HRC). For starters, federal laws mean same-sex partners or even same-sex married couples do not receive the same retirement benefits.
The federal Defense of Marriage Act, for example, limits marriage to a partnership between men and women. It trumps the Employee Retirement Income Security Act (ERISA) of 1974, which sets minimum standards for most voluntarily established pension and health plans in private industry. ERISA provides protection for participants in these plans but not for partners in civil unions or same-sex marriages -- not even in Massachusetts.
Gay couples also are short-changed when it comes to Social Security benefits. While Social Security taxes are capped at $84,000 for gay and straight people alike, there are no Social Security benefits for domestic partners. “That makes all family and survivor benefits meaningless,” Schwartz says.
And the federal government -- the largest civilian employer -- may offer a substantial retirement package, but same-sex partners are not entitled to those benefits. Veterans’ benefits are also denied to surviving same-sex partners.
But Same-Sex Couples Are Getting More
That’s not to say that today’s same-sex partners aren’t faring better than the preceding generation, due both to changing governmental policies and the policies of private employers.
Until recently, private savings vehicles like 401ks varied enormously between same-sex and married couples. In August 2006, however, Congress revised the Pension Protection Act of 2006, giving same-sex couples (and nonmarried heterosexual partners) much fairer -- though still not equal -- treatment.
Same-sex partners can now use money from a 401k for “hardship distribution” needs, such as housing or medical care. To do so, an employee must name that partner on a form (legally married heterosexual spouses are automatically listed).
While closeted employees may hesitate to fill out that form, the recent legislation actually works to their advantage, says Tim Mahoney, HRC’s director for estate planning. “It provides a bit of cover,” he says. “More people can now name more people as beneficiaries, without answering questions about who they are.”
Once more, Schwartz notes, employers are the managers of defined-contribution plans. In many cases, they allow employees to name a domestic partner (or anyone else, including a friend or neighbor) as a beneficiary, but there is no mandate that employers do so.
Defined-benefit plans -- traditional pensions that provide a stream of income based on salary and number of years worked -- also can provide benefits to same-sex partners. While typically a surviving legally married spouse receives 50 percent of the benefits after a pensioner’s death, some plans offer benefits for another named beneficiary, says Andrew Sherman, senior vice president of Segal Co., a national benefits consulting firm.
“You should ask if benefits are available before or after retirement,” Sherman says. “If your plan does not include provisions for nonspouses, ask if it’s possible to add him or her.”
Baby Boomers at a Disadvantage
Because Social Security forms the cornerstone of many Baby Boomers’ retirement plans, denial of those benefits is often a greater issue for Boomers than for younger workers. And current taxation policies can make them feel even more disadvantaged.
At the state level, Schwartz says, same-sex partners are often taxed at different rates than legally married partners. This means that the sale or transfer of a home hits gays and lesbians harder -- and real estate may be a major source of retirement funds. That taxation -- combined with a lack of Social Security or pension benefits for same-sex partners -- can be a lethal one-two punch.
“Many Boomers own their own homes,” Schwartz says. “The sale of their home could be a significant chunk of their nest egg. There’s a better gain on that sale for a married couple than if there is only one name on the title.”
Reason for Optimism
Still, younger workers are faring better. “People my age will benefit more from changing laws,” says Schwartz, who is 34.
And as Sherman points out, as more companies move away from defined benefits plans, most retirement planning -- for both gays and lesbians and straight people -- will consist of personal savings, Social Security and a defined-contribution plan. To get the most out of their retirement, younger workers can start saving now.
