As many of you get closer to the end of your career, your retirement planning will begin in earnest. You may do things such as request a pension estimate, reduce your exposure to the stock market, and plan out your retirement budget. Many of you will also logon to www.ssa.gov to review your Social Security benefit statement but beware – you may be caught off guard on just how much your Social Security check could get trimmed.
For those of you who are firefighters, police officers, postal workers, teachers, and a certain type of federal employee, you are probably aware that your Social Security benefit will be reduced because of the Windfall Elimination Provision (WEP) and possibly by the Government Pension Offset (GPO). The WEP and GPO are special rules that apply to certain types of government workers in order to prevent what is considered double dipping from Social Security and public sector pensions.
According to the Congressional Research Service, a retired worker who is subject to the WEP and whose Social Security benefit is estimated to be $976 per month will see that amount fall to $548. The GPO, which is triggered when a retired worker qualifies for spousal or survivor benefits, can put a much larger dent in one’s benefits; even a cut down to $0 isn’t out of the question.
The WEP was enacted in 1983 as a way to shore up Social Security and the rule was designed to eliminate the advantage it created for certain government workers. But how did some government workers gain an advantage before WEP and GPO were put into place? It has to do with the way Social Security benefits are calculated.
For starters, Social Security benefits are designed to replace a larger percentage of a lower wage earner’s lifetime average monthly income than for a higher wage earner. For example, someone with an average lifetime monthly income of $60,000 may receive $30,000 in Social Security benefits per year. However, someone who earned an average of $100,000 annually over his career may only get $32,000 in Social Security benefits. While the lower wage-earner gets 50% of his average lifetime income replaced, only 32% of the higher wage earner has his income replaced.
All Social Security benefits are based upon a worker’s Primary Insurance Amount (PIA), and the PIA is based upon your Average Indexed Monthly Earnings (AIME). You either get 100% of your PIA, a bit less, or a bit more depending upon when you decide to take your Social Security benefits. If you take your PIA at your Full Retirement Age e.g. age 66, then you’ll get 100% of what the Administration has calculated for you. If you take your benefits early, you’ll get less than your PIA and if you wait until after your Full Retirement Age, you’ll get more.
The Administration calculates your AIME by looking at your top 35 years of earnings before the age of 60, and then adjusts those figures for inflation. The PIA is calculated using a weighted formula that splits your AIME into tiers and then replaces a larger percentage of income at the lower tiers. The Administration calculates your Social Security benefit by adding together…
So assuming your AIME turns out to be exactly $5,336, and you begin taking benefits at your Full Retirement Age, your PIA (i.e. monthly Social Security check) would be $2,195. This number was derived by multiplying $885 by 90%, which equals $770, then $1,425 was added, which was derived by multiplying $4,451 times 32%. $4,451 is the difference between the $5,336 threshold and $885 threshold.
As it relates to certain government workers, the issue with the PIA formula and how it’s calculated is that is was not able to distinguish between workers who truly were low wage earners and those who earned a good wage but worked in a job not covered by Social Security. So before WEP and GPO went into effect, a well-paid teacher that was not covered by Social Security i.e. he nor his employer were making FICA contributions, appeared to be a low-wage earner. So if the well-paid teacher, in addition to his normal 9-5 job, worked a part-time job where he was covered by Social Security prior to, during or after his teaching career, the formula used to calculate the AIME only considered his part-time income as wages. Consequently, the well-paid teacher, in the eyes of the Administration, appeared to be a low-income earner and low-income earners get a larger portion of their lifetime earnings replaced than higher-income, covered (by Social Security) workers. The WEP and GPO eliminate this disparity.
To illustrate, consider two workers: one who worked as a teacher at a for-profit school and who was covered by Social Security and the other who worked as a teacher in the public school system and did not participate in Social Security yet had a job during the summer months that was covered.
Throughout their careers, both had the same AIME of $4,000 and the entire $4,000 is accounted for in the private sector worker’s AIME, but only $2,285 is considered for the worker who earned an income both in the private and public sector. While the private sector worker will get $1,776 in monthly Social Security benefits, the worker who earned income form both the private and public sector will have his benefits trimmed down to $800 because of the WEP.
For federal employees, the WEP only applies for those who started working for the government before 1983, were covered by the Civil Service Retirement System and did not contribute to Social Security. WEP and GPO do not apply to federal employees covered under Federal Employees Retirement System (FERS), which is a defined contribution plan, because they contribute to Social Security i.e. are considered “covered.”
Lobbying groups representing state and municipal workers have been trying to influence legislation that would lessen the impact that WEP and GPO have, but it’s estimated that repealing the rules would cost taxpayers roughly $40 billion over the course of ten years.
So what can you do if you are going to be impacted by the WEP and GPO? The first thing is to check your Social Security statement so you can estimate by how much you will be impacted and your statement has a link to an online calculator to help you figure out the reduction in your benefit. If you’ve worked only in a job not covered by Social Security, then you’ll get a letter indicating your ineligibility.
The other thing to do is decide if it’s worth taking on a job that is covered by Social Security since the impact of the WEP and GPO are reduced if you work at least 20 years in a Social Security-covered job. The negative impact of the WEP and GPO are completely eliminated if you work at least 30 years in a “covered” job where your earnings were on average (and indexed for inflation) about $23,000 per year.
For more information about the WEP and GPO, please click HERE.
Securities and advisory services offered through Ausdal Financial Partners, Inc. Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807 563-326-2064 www.ausdal.com. Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and operated.