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Does Your Client Have a Pension? His or Her Social Security
Benefit May Not Be What You Expect
TERE D’AMATO, CFP®, CLU®, CHFC®, MSFS
Many towns, counties, states, and school systems do
not withhold social security taxes for their employees. In
addition, federal employees hired before 1984 may not
have paid into the social security system. Instead, these
workers receive a pension designed to replace the social
security retirement and disability benefits they would
otherwise receive.
But that doesn’t necessarily mean these workers don’t
qualify for social security benefits altogether. Many public
employees worked in the private sector at some point
during their careers and paid taxes into the system, making
them eligible for benefits. And therein lies the problem,
as there are two legislative provisions designed to prevent
these workers from “double-dipping”—or receiving both
their pension and full social security benefits—which can
drastically affect how much retirement income they receive.
The WEP and GPO
The Windfall Elimination Provision (WEP).
If your
client will receive a pension from a job not covered by
social security and is
also eligible for social security benefits
from working at another job
, his or her social security
payments may be reduced. The formula depends on the
client’s number of years of “substantial earnings” under
social security and his or her eligibility year (i.e., the year
the client turns 62 or becomes totally disabled). The
maximum reduction is limited to half the amount of the
noncovered pension in the first month of entitlement.
The WEP cannot reduce the social security benefit to $0,
and it doesn’t apply if the worker has 30 or more years of
substantial earnings under social security, which, in 2014,
is $21,750 (in 2013, $21,075). Workers with between 21
and 29 years of substantial earnings will see some offset
but not as much as those with 20 or fewer years of
substantial earnings.
The Government Pension Offset (GPO).
If your client
will receive a pension from a job not covered by social
security and is
also eligible for social security benefits as the
spouse or survivor of a worker
, his or her spousal or survivor
social security payments may be reduced by two-thirds of
the client’s government pension. If the pension is equal
to or greater than 1.5 times the social security spousal or
survivor benefit, the benefit will be reduced to $0.
Calculating the Impact of the WEP and GPO
If the annual social security statement is an overestimation,
how can you more accurately account for social security
benefits in your client’s retirement income plan? The SSA
has created two calculators to help determine the amount
of the reduction for government workers:
1.
To use the
WEP Online Calculator
, you will need
the earnings listed on the client’s annual statement.
2.
To use the
GPO Online Calculator
, you will need
the spouse’s statement.
The calculators, along with additional information on
WEP and GPO, are available at
Let’s look at a few examples.
Jill taught first grade at the
local public school for most of her working life, and, like
many teachers, she worked during her summer breaks.
She didn’t earn much at those summer jobs, but she did
earn enough credits to be fully insured for social security.
Jill expects to receive $5,000 per month through her
state’s teachers retirement program, and her social security
statement reports that her benefit will be $434 per month
at her full retirement age (FRA) of 66. Using the WEP
Calculator, Jill finds that her benefit will be reduced to
$192 per month. If she retires earlier than her FRA, it
will be further reduced.
Are you aware that the Social Security Administration (SSA) may be overstating
your clients’ benefits? When a teacher, firefighter, court clerk, state university
professor, or an employee at your local Social Security office requests his or her
statement online, the retirement benefit reported could be double or even triple
what that person can expect to receive.
