Avoid Big Surprises After You Retire – Like a Major Reduction of Your Social Security

By: Jeff Chang

There are two ways in which state and local government employees can receive a “rude awakening” from the Social Security Administration: Through the application of the Windfall Elimination Provision and/or the Government Pension Offset.

Because the loss of a significant or, for that matter, any portion of your Social Security benefit is a serious thing, let’s start by clarifying who may be subject to these reductions and who is not. The WEP generally applies to employees who have worked both in a private or public sector position that was subject to Social Security and in a public sector position that was not subject to Social Security. You will not be subject to a WEP reduction of your Social Security benefits if you paid Social Security taxes on at least 30 years of substantial earnings (an indexed annual amount that was $23,625 for 2017 — less for prior years). By contrast, the GPO is a potential reduction in Social Security benefits that may be payable to a spouse or surviving spouse of a Social Security beneficiary. Like the WEP, the GPO applies to spouses and surviving spouses of employees who have worked both in a private or public sector position that was subject to Social Security and in a public sector position that did not pay into Social Security. The GPO will not be applied to reduce a surviving spouse’s Social Security benefit in situations where the surviving spouse has paid into Social Security, based on his/her own earnings for at least 60 months prior to becoming eligible for Social Security.

How does the WEP operate to reduce your Social Security benefits? According to the Social Security Administration, your Social Security benefit is a function of your average monthly earnings. Monthly average earnings are divided into three segments, and then the earnings within each segment are multiplied by a specified percentage. For example, if you turned 62 in 2017, the first $885 would be multiplied by 90 percent, earnings between $885 and $5,336 by 32 percent and the balance by 15 percent. Your monthly basic Social Security benefit (also referred to as your Primary Insurance Amount, or PIA) is the sum of these products. However, if you worked in a public position that was not subject to Social Security and you had less than 30 years of substantial earnings in Social Security covered employment, the 90 percent factor used to calculate your PIA is reduced according to a table. For example, the 90 percent factor is reduced based on your years of substantial earnings in Social Security covered employment from 90 percent (for 30 or more), to 45 percent for 21 years, and to 40 percent for 20 years or less. Most people can do the math, but for those of us who are arithmetically challenged, the SSA provides a WEP calculator online. Note that the WEP will not reduce your Social Security benefit by more than half of your pension for earnings on which you did not pay Social Security taxes (“WEP Maximum”).

For example, if you turn 62 in 2017, have average monthly earnings of $4,000, 15 years of substantial earnings in Social Security covered employment and a pension resulting from non-Social Security covered employment, the 90 percent factor will be reduced to 40 percent. Therefore, subject to the WEP Maximum, your monthly benefit will be reduced from $1,793.30 to $1,350.80 because of the WEP. However, if your pension resulting from non-Social Security covered employment is $500 per month, the WEP Maximum will limit the WEP reduction to $250 rather than the intended $442.50 WEP reduction, such that your adjusted monthly Social Security benefit would be $1,543.30 rather than $1,350.80.

What about the GPO? Basically, it works to reduce the amount of any spouse’s, widow’s or widower’s benefit from Social Security you may receive by two-thirds of any government pension you also receive. For example, if you receive a monthly CalPERS pension of $600, two-thirds of that, or $400, must be deducted from your Social Security spouse’s benefit. If you are receiving $500 in Social Security benefits, the GPO would reduce that $500 monthly amount to only $100 ($500 – $400). If two-thirds of your government pension is more than your Social Security benefit, your benefit could be reduced to zero. I’ve seen how this works, because the GPO was applied to one of my parents’ Social Security benefit. Once again, if you need help figuring this out, there is an online GPO calculator.

So, if you have worked in a position(s) that was subject to Social Security and in a position(s) that was not subject to Social Security, it makes good sense to analyze whether you could be impacted by either the WEP or the GPO and to determine if there is anything you would want to do to mitigate those impacts. As part of the process, it wouldn’t hurt to check on the accuracy of your Social Security earnings record and your projected Social Security benefits. To do this, click here.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.

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