If you are among those Americans whose work history qualifies them for both Social Security retirement benefits and a government pension, there are two rules of which you may (and definitely should) be aware. The first, the Windfall Elimination Provision (WEP), affects individual benefits; the second, the Government Pension Offset (GPO), can have an impact on your spousal and survivor benefits.
The stated intention of these provisions is to ensure that those workers who have earned Social Security and a government pension are not advantaged over those working Americans who have spent their entire careers in the private sector (all the while paying Social Security payroll taxes).
Despite the simplicity in the intent, the matter can become complicated (and sometimes controversial) in the execution. I’ll attempt to shed some light on the subject here.
Windfall Elimination Provision
If you worked for an employer, such as a government agency, that did not withhold Social Security taxes from your salary, the pension you receive based on that work may reduce your Social Security retirement benefits. In a nutshell, this affects you if:
- You earned a pension in any job where Social Security taxes were not paid, and
- You worked in other jobs long enough to qualify for Social Security retirement benefits.
WEP closed a loophole that enabled people who worked in both covered and non-covered employment to appear to be low-wage workers and receive higher benefits. Why would that be so? Because the way Social Security works, the earnings of lower-wage workers are replaced at a higher percentage than those of higher earners. The Social Security Administration (SSA) explains in this fact sheet. The WEP, enacted in 1983, ended the so-called “windfall” that allowed certain Americans to receive a disproportionately large Social Security benefit on top of a government pension.
Your WEP reduction is derived from a recalculation of your full SS benefit (or more precisely, your primary insurance amount, or PIA) and will vary based on your years of “substantial earnings” at the time you claim benefits. The SSA offers a chart to assist you, but the fastest and easiest way to know how the WEP might impact you is to call the SSA directly.
Just to be clear, we’re talking about government pensions here. So if a federal, state or local government in the U.S. has provided you with pension benefits, while not deducting for Social Security, you are likely impacted by WEP. However, if you’ve paid into a private pension while also paying Social Security payroll taxes, then you are entitled to both benefits for which you have paid. And here are a few more important facts/caveats:
- You are not affected by WEP if you paid Social Security tax on 30 years of substantial earnings (per the SSA’s chart, available in Publication No. 05-10045).
- A guarantee protects individuals with small pensions.*
- Survivor benefits are not affected by WEP. So even if you were subject to WEP, your eligible survivors will receive benefits based on the normal calculation of your PIA (not the WEP recalculation). Spousal benefits, however, generally are not exempt from the WEP recalculation.
Government Pension Offset
Whereas WEP applies to individual benefits, the GPO applies to the spousal and/or survivor benefits to which you may be entitled. If you receive a pension from a federal, state or local government based on work where Social Security payroll taxes were not withheld, the spousal and/or survivor benefits that you collect will be reduced by two-thirds of the government pension. This is probably best explained by looking at the math:
In enacting GPO, the government’s stated intent was to ensure that government employees who do not pay Social Security taxes are treated much the same as workers in the private sector who do pay the tax. Let me explain: Social Security law does not allow two spouses in the private sector to “stack” their individual and spousal benefits (one offsets the other). So, essentially, the GPO put that same rule in place for couples in a public/private collection situation. There are circumstances where the GPO does not apply, and the SSA describes them in detail here.
In the end, it’s all about knowing where you stand so that you can make the most informed decisions in regard to your earned retirement benefits. I encourage you to explore the SSA website, your first source for Social Security info, and to visit me back here on The Blog as I continue my effort to offer some insight on this rich (and often confusing) topic.
Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group. He is the newest contributor to The Blog and provides practical information on topics that are important to every saver and investor of every age. You can find more from Rob here.
* The reduction cannot exceed 1/2 of that part of the pension based on non-covered earnings after 1956.
The above commentary is based on Social Security laws in effect as of July 2014. Congress has made changes to the laws in the past, and can do so at any time in the future.
This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in these materials does not constitute any legal, tax or accounting advice. Investors should consult with their own tax and or accounting advisors for planning and investment advice.