Allworth Co-CEO Scott Hanson explains why some retirees may not get their full Social Security benefit.
Have you heard of the Social Security Windfall Elimination Provision? How about the Government Pension Offset?
The Windfall Elimination Provision (WEP) is a formula that calculates (and lowers) the Social Security benefit amounts of people who earned what are called “non-covered pensions,” but who also qualified for Social Security based on their other earnings, usually from a job they might have held in the private sector.
The WEP is typically applied to local and state government pension recipients but does not generally impact Federal Government employees because they already pay Social Security taxes.
Legislators passed the WEP to keep workers who earned certain types of pensions (one paid to you by an employer that did not withhold Social Security taxes) from receiving benefits as though they were long-time, low-wage earners.
Simply, it was designed to keep government workers from “double dipping.” (Receiving a government pension and Social Security.)
Confused yet? As high as three percent of all Social Security recipients eventually are impacted by the WEP, and many, unfortunately, have no idea it will apply to them until after they retire and file for Social Security.1
So, the million-dollar question is, will/does this impact you?
My first question would be, did/do you receive a pension from a state or local government or a non-U.S. employer?
If so, this is what you need to consider.
How Does the Social Security WEP Work?
For people who paid into the system, Social Security payments are determined through the application of three unique formulas applied to your lifetime average indexed monthly earnings (AIME). Those are then added up to determine your full retirement age monthly benefit amount (also known as a “primary insurance amount,” or PIA).
Taken directly from the Social Security website, generally, your PIA is the sum of:
- 90 percent of the first $826 of AIME, plus
- 32 percent of AIME over $826 and through $4,980, plus
- 15 percent of AIME over $4,980
The WEP primary insurance amount (for pension recipients) pretty much follows the ordinary PIA calculation, except that instead of adding in the full 90 percent of the first bullet above, it deducts (in five percent increments all the way down to 40 percent), money based on your work history and pension amount.
As you can probably imagine, the WEP can lower a person’s monthly benefit amount by hundreds of dollars, and a lifetime Social Security amount by tens of thousands of dollars (but, by law, unlike something I’ll discuss below, the WEP can’t entirely wipe it out).
What about Government Pension Offsets?
I often get asked to explain the difference between the WEP and something called the “Government Pension Offset” (GPO). As substantial as the WEP is, financially speaking, the GPO can reduce your Social Security benefit amount even more.
The GPO comes into play when you’ve received a government pension (upon which you didn’t pay Social Security taxes) in addition to Social Security spousal or survivor benefits. The GPO can lower a person’s Social Security payout by an amount that is equal to two-thirds of the amount of their pension.
Referenced above, there is a big difference between the WEP and the GPO: While there is a provision in the WEP that keeps it from ever totally wiping out your Social Security payout, the GPO offers no such protection. When the GPO comes into play, if your pension amount is larger than your spousal or survivor benefit amount, you’ll likely receive nothing from Social Security. (If you’re due to receive a non-covered pension, the Social Security Administration’s website conveniently has both a WEP calculator and a GPO version, that can help you figure out the damage.)
Another related question that I often receive is whether a spouse’s non-covered pension calculation can impact their partner’s Social Security payout. That answer is, at least for the time being, no.
Interestingly, in recent years there have been rumblings about the possibility of eliminating one or even both the WEP and the GPO. But with the Social Security trust fund due to be wrong-side-up in as little as 10 years, I wouldn’t bet on any changes that lead to an increase in payouts. In fact, if anything, while I no longer have a crystal ball, I would be more inclined to believe that severe, sudden legislation that reduces, delays, or even eliminates payouts for high earners is even more likely.
In the end, knowledge is power, and it helps to have a retirement and an investment plan that account for as many contingencies as possible.
If you have any questions regarding the WEP, the GPO, Social Security, investing, or anything related to your personal financial situation and retirement, don’t hesitate to contact us. We are here to help.
1 https://www.ssa.gov/policy/docs/program-explainers/windfall-elimination-provision.html