Personal Finance: What People with Government Pensions Should Know about Social Security
Wednesday, January 28, 2015
Retirees who formerly worked in a government job and certain public school employees need to be aware of these rules given their potential impact. The following are some of the key basics to know.
What Is the WEP?
The WEP is a limitation placed on the Social Security retirement benefit to which a worker is otherwise entitled as a result of having worked at a job whose wages were subject to Social Security tax (“covered employment”). If this same worker is also entitled to a pension from a government or public sector job whose wages were not subject to Social Security tax (non-covered employment”), the WEP rule may reduce the Social Security benefits otherwise due to that worker.
How Does the WEP Work?
The WEP provision can reduce a worker’s monthly Social Security retirement benefit in 2015 by up to $413. The reduction is limited to no more than 50% of the non-covered employment pension amount.
If a worker entitled to a pension from a non-covered job also worked at least 20 years at a job subject to Social Security tax, they may be partially exempt from the WEP reduction. If this worker had “substantial earnings” in each of these years, the maximum WEP reduction is phased out gradually according to a schedule. Each year the substantial earning threshold is adjusted for inflation. In 2015, the threshold is $22,050.
The WEP reduction is totally phased out if a worker has 30 years or more of substantial earnings in total from covered employment.
What Is the GPO?
Similar to the WEP, the GPO limits Social Security benefits for workers entitled to a pension from a non-covered job. However, while the WEP impacts retirement benefits, the GPO limits spousal and survivor benefits to which one spouse is entitled on the earnings record of the other spouse.
How Does the GPO Work?
The GPO reduction is 2/3rds of the non-covered pension amount. So for example, if a spouse is receiving a $500/month spousal benefit and is also receiving a non-covered pension of $600/month, her spousal benefit will be reduced by $400, to $100/month. If her pension was paying her $750 or more per month, the GPO would wipe out her spousal benefit entirely.
Are the WEP and GPO Fair?
For workers who paid into the Social Security system expecting to eventually collect a Social Security benefit, the reductions triggered by the WEP and the GPO are a bitter pill to swallow. These provisions were added to the law in 1983 as part of other changes to the system. The WEP and the GPO were justified based on the rationale that Social Security is only intended to replace a portion of a worker’s covered lifetime earnings. If that worker is allowed to receive a Social Security benefit based on both covered and non-covered compensation, the thinking was that this worker would be “double dipping” and potentially receiving as great a benefit, as a percentage of their pre-retirement income, as a worker who had only worked in a covered job their entire career and paid Social Security taxes throughout.
Regardless of how you feel about these provisions and their fairness, they are the law and need to be taken into account in your retirement planning.
Wait, There is More
An important thing to note about the WEP in particular is that it results in a reduction of the PIA amount itself. The PIA, or primary insurance amount, is the monthly retirement benefit a worker is due at their full retirement age. Since the spousal benefit is based on the PIA, if the PIA is reduced for one spouse as a result of the WEP, the other spouse will in turn receive a reduced spousal benefit, even if he or she is not themselves entitled to a pension from a non-covered job!
The good, though morbid, news is that once the spouse collecting a non-covered pension dies, the WEP limitation dies as well. The surviving spouse will therefore receive a Social Security survivor benefit based on the retirement benefit of the decedent, unencumbered by the WEP limitation. As long as the surviving spouse is not entitled to a non-covered pension of their own, and therefore not impacted by the GPO, their survivor benefit will be free of either limitation.
For some the WEP and GPO limitations represent bad news for their retirement income. While this is not pleasant, knowing in advance about these provisions allows for proactive planning to minimize their impact and increase your chances of being able to achieve your desired retirement lifestyle in spite of them.
Readers with questions on personal finance and Social Security can email Joe Alfonso at [email protected].
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