Upon retirement, some workers will be set to receive Social Security while simultaneously drawing a public pension.
But this arrangement can lead to reduced Social Security benefits – to the tune of hundreds per month.
Why? The answer can be found in two Social Security provisions: the “windfall elimination provision” (WEP) and the “government pension offset” (GPO) provision.
Kiplinger explains:
The [WEP] provision affects workers who have had two careers: private-sector jobs that were covered by Social Security and state or local government jobs that were exempt from the Social Security payroll tax.
Many public pensioners get hit twice. If they apply for a Social Security spousal or survivor benefit based on a spouse’s earnings record, those benefits will be reduced as well — and possibly eliminated. That rule is known as the “government pension offset,” or GPO.
The windfall provision does not apply to public pensioners who have 30 years or more of substantial earnings under Social Security. And Social Security benefits are not reduced for those with military pensions.
The WEP was aimed at correcting a quirk in the calculation of Social Security benefits. Benefits are based on average monthly earnings and are meant to replace only a percentage of a worker’s salary. The formula replaces a greater percentage of a lower-wage worker’s salary than it does a higher-wage worker’s salary.
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Say a person worked for 10 years in the private sector at $50,000 a year and drew a public pension of $2,500 a month. If the windfall provision did not exist, she would receive a Social Security benefit of $894 a month at age 66. But under the provision, her benefit is $487. (The maximum WEP reduction for 2014 is $408.)
The WEP also affects a Social Security spousal benefit based on the public pensioner’s earnings record, says Jason Visner, a financial adviser for Brook Capital, in Brookfield, Wisc. In this example, the pensioner’s spouse would qualify for a spousal benefit of up to half of $487, instead of half of $894. A surviving spouse, however, will get the pensioner’s full Social Security benefit without the WEP reduction.
How do you find out whether these provisions are being applied to your checks? Kiplinger tells us:
You can find out whether you’ll be subject to the GPO and WEP and determine how they could affect your retirement income. “If you don’t know that’s coming, you’re in for a rude awakening,” Visner says.
Check your Social Security statement, which you can find online if you sign up for a “My Social Security” account at www.socialsecurity.gov. Zeros will show up in years in which your earnings came from a job that wasn’t covered by Social Security. You can calculate the impact on your benefit by using the site’s WEP calculator. To estimate your monthly Social Security benefit, plug into the calculator your earnings from years of private work, zeros for your years of public-sector earnings and your monthly public pension benefit.
The windfall provision will take a bite from your Social Security benefit no matter when you claim. But if you claim before full retirement age, your benefit will be reduced both by the windfall provision and for claiming early. If you wait until 70, you’ll still be hit by the WEP, but you’ll get an 8% delayed retirement credit for each year you delay past your full retirement age.
Photo Credit: Simon Cunningham via Flickr Creative Commons License
