Windfall Elimination Provision trims benefits; spousal benefits can be wiped out
Over the past few weeks, I've heard from several public sector employees and retirees who are hopping mad about rules that offset the Social Security benefits they earned while working in the private sector before, after or during their government careers.
I can't offer them any hope that those rules will be changed, despite the fact that legislation is introduced each year to eliminate them. But year after year, those bills languish on Capitol Hill in the congressional equivalent of the dead-letter office.
As financial advisers, it's very important to know whether your clients who have worked for city, state or federal governments -- or in some cases, public school systems -- may be affected by rules that can reduce or eliminate certain Social Security benefits. If your client isn't sure, they should contact their human resources department at work.
Unfortunately, many people don't realize their benefits may be reduced until they retire. That's because their Social Security benefit estimate — the one they used to receive in the mail and now must go online to retrieve — doesn't reflect the reduction.
The sooner you both know the real impact of these reductions, the better you will be able to tweak their retirement income plan, even if it means they may have to work a bit longer or trim their spending. Otherwise, you can toss that carefully crafted financial plan onto the trash heap along with your clients' broken retirement dreams.
The Windfall Elimination Provision (WEP) affects how retirement or disability benefits are calculated when you receive a pension from work where Social Security taxes were not taken out of your pay. The WEP rule applies only to a worker's retirement benefits.
A separate rule — the Government Pension Offset (GPO) — applies to spousal and survivor benefits. It can significantly reduce or even wipe out Social Security spousal or survivor benefits if the beneficiary also receives a pension from work not covered by Social Security.
The WEP provision, on the other hand, can merely reduce the size of a worker's retirement benefit. For 2013, the maximum reduction under the WEP formula is $395.50 per month. However, it could be less. The WEP reduction is limited to no more than one-half of the amount of the pension from employment that is not cover by Social Security. For example, if your pension is $500 per month, the WEP reduction could not exceed $250.
One reader named Sandy, who works for a city government in California after earlier jobs in the private sector, called the WEP and GPO rules “unconstitutional takings that penalize public employees as though we are felons.”
Another reader named James is both a military retiree and a retired civil servant who worked part-time in private sector jobs throughout his career. But when it came time to retire, he said his $800-per-month Social Security benefit was cut in half due to the WEP provision.
James said he had thought about waiting until his full retirement age to file a restricted claim for Social Security benefits based on his wife's higher earnings. But the GPO rules, which reduce a spouse's or surviving spouse's Social Security benefit by two-thirds of the amount of the person's non-covered pension, would have wiped out his spousal benefit completely.
“I worked in the civilian sector and paid my dues into the Social Security system, but when it came to retirement, I got shafted, not once, but twice,” he wrote.
The WEP and GPO restrictions were created as part of the 1983 Social Security reforms. In explaining the rationale for the two rules, the Social Security Administration notes that Social Security benefits are intended to replace only a percentage of a worker's pre-retirement earnings.
The way Social Security benefit amounts are calculated, lower-paid workers get a higher return than highly paid workers. For example, lower-paid workers could get a Social Security benefit that equals about 55% of their pre-retirement earnings while the average replacement rate for highly paid workers is about 25%.
Before 1983, people who worked mainly in a job not covered by Social Security had their Social Security benefits calculated as if they were long-term, low-wage workers. They had the advantage of receiving a Social Security benefit representing a higher percentage of their earnings, plus a pension from a job where they did not pay Social Security taxes, according to the SSA fact sheet. Congress passed the WEP to remove that advantage.
Public-sector employees, who also worked in the private sector and paid Social Security tax on 30 years of substantial earnings, are not affected by the WEP rules.
