Questions from readers about Social Security rules and strategies seem to come in waves. The latest tsunami involves Social Security rules for public employees, their spouses and survivors — a total of about 2.5 million people.
Although participation in Social Security is compulsory for most workers, about 7% of all workers are not covered by Social Security, according to a
new report from the Congressional Research Service. Noncovered workers include state and local government employees, such as teachers, police officers and firefighters, in certain states that provide alternative retirement systems, as well as most federal civilian employees hired before 1984. Noncovered workers do not pay FICA taxes on their earnings.
There are two separate provisions that can
reduce Social Security benefits for public-sector workers and their eligible family members if the worker receives a pension based on earnings from employment not covered by Social Security.
The Windfall Elimination Provision applies to most people who receive both a pension from noncovered work (including certain foreign pensions) and Social Security benefits based on covered employment or self-employment. The WEP affects retired or disabled beneficiaries and their eligible dependents, but it does not affect survivor benefits.
A separate provision, the Government Pension Offset, reduces a spouse's or survivor's Social Security benefit if that spouse or survivor also receives a pension based on federal, state or local government employment not covered by Social Security.
Public employees in a dozen states, including, Alaska, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio and Texas, are affected by the WEP and GPO provisions. So are public employees of some local governments in Georgia, Kentucky and Rhode Island.
The WEP can reduce, but not eliminate, a worker's own Social Security benefit by cutting it by up to half of the amount of the noncovered public pension, with the reduction limited to $463 per month in 2019.
Affected employees can avoid being whacked by the WEP if they have at least 30 years of substantial earnings in covered employment or self-employment. In 2019, the amount of substantial earnings needed for a year of coverage is $24,675. This amount is adjusted annually.
The GPO, on the other hand, can totally wipe out a Social Security benefit for spouses and survivors who also receive a noncovered government pension.
The GPO reduces any potential spousal or survivor benefits from Social Security by two-thirds of the amount of the noncovered government pension with no dollar limit. However, workers who pay FICA taxes during their last 60 months of government employment are exempt from GPO reductions.
I regularly answer readers' questions about the best way to maximize Social Security benefits, but my friend Maggie recently presented me with the Rubik's Cube of Social Security claiming strategy conundrums.
It all started when she told me her husband, a federal retiree, planned to claim Social Security later this summer when he turns 66. My reaction: Not so fast!
Maggie is retired, will turn 65 in October, and will be entitled to $2,473 at her full retirement age of 66. Her husband Mike receives a government pension and now works as a self-employed consultant.
Mike is eligible for a Social Security benefit of $1,467 per month in August when he turns 66, after offsetting for the WEP reduction. But because he switched from the noncovered Civil Service Retirement System to the covered Federal Employee Retirement System during his last decade of government employment, he is exempt from GPO reductions.
I suggested that Maggie file for Social Security when she turns 65 in October and enroll in Medicare at that time. She would receive about $2,300 per month by claiming one year early and would also trigger spousal benefits for Mike.
Then Mike, who was
born in 1953, could file a restricted claim for spousal benefits and collect $1,236 — half of Maggie's full retirement age amount — while his own retirement benefit continues to grow by 8% per year up to age 70. At that point, Mike would collect his WEP-reduced maximum Social Security benefit of $1,936, beginning in August 2023.
Assuming Mike lives to an average life expectancy of 84 and Maggie to 86, this claiming strategy would result in total lifetime Social Security benefits of more than $983,000 according to benefit estimates supplied by Jim Blair, co-founder of the National Social Security Association and Premier Social Security Consulting.
That's about $14,500 in additional lifetime benefits compared to the couple's original strategy of having Mike claim his benefit at 66 and Maggie claim her maximum benefit at 70.
For those who might think me imprudent to recommend that Maggie claim her Social Security benefit before her full retirement age, rest assured that
this couple is entitled to several sources of lifetime income, so outliving their money is not a major concern. But not using the last available Social Security claiming strategy to maximize benefits for workers born before Jan. 2, 1954, is a concern.
Check out Mary Beth Franklin's podcast, Retirement Repair Shop.
