The Social Security Act of 1935 did not include federal, state and local public-sector employees; however, all but 15 states now cover their public-sector employees with Social Security. The states that don’t are Alaska, California, Colorado, Connecticut, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island and Texas. In these states, public sector employees rely on state-run pensions.
There are two rules that may reduce the amount of Social Security benefits you will receive as a public -sector employee – the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). Most people think these provisions were put in place to prevent “double dipping.” While that sounds right, it’s not the main reason. These provisions are designed to treat everyone as if Social Security is their only pension source.
One thing to keep in mind is that when Social Security was enacted, the majority of households had one working spouse and one stay-at-home spouse. The original laws were designed to provide benefits to the non-working, stay-at-home spouse. Those demographics have changed and continue to change. It’s not unusual today for both spouses to be earning the maximum benefit.
Therefore, if you or your spouse is receiving a public-sector pension, these two provisions come into play in order to provide the same benefits as if you were receiving only Social Security. You might question if this is fair, but this article will not be the arbiter of fairness. What it will do is describe the reasoning behind the decisions to enact the provisions.
What is the Purpose of WEP?
In order to understand why the WEP was initiated, you have to understand how Social Security benefits are calculated. The Social Security Amendments of 1983 provided for the WEP. This provision can affect you when you earn a pension from an employer who did not withhold Social Security taxes and you qualify for Social Security benefits.
When Social Security calculates benefit amounts, the calculation provides a greater benefit – percentage wise – for those who have lower earnings. This is the “social” aspect of Social Security. Benefits are calculated in a way designed to give lower-paid employees a higher monthly benefit as a percentage of their income than a higher-paid employee.
For example, let’s say you work as a university professor who isn’t covered under Social Security, but you have a nice salary, work part-time in the Social Security system and make a small salary tutoring. When you apply for Social Security benefits, what do you look like to Social Security? A lower-earning person, but you are really not.
Therefore, a public-sector employee would receive a disproportionally larger Social Security benefit. If all of your earnings were in the Social Security system, the calculation would provide a lower benefit percentage wise. The WEP is designed to provide the same benefit as if all of your earnings were in the Social Security system.
- It only applies to “worker” retirement benefits – not spousal, ex-spousal or survivor benefits.
- The maximum reduction for 2017 is $442.50.
- If you have worked in the Social Security system for 20-30 years and have “substantial” earnings, the WEP reduction is phased out $44.25 a year.
- The reduction is limited to 50 percent of your public-sector pension.
- The WEP reduces, but does not eliminate your Social Security benefit.
- There is no reduction in Social Security benefits until you start collecting your public-sector pension.
What is the Government Pension Offset?
The other rule that public-sector employees need to understand is the Government Pension Offset. This law also was changed in 1983.
Unlike the Windfall Elimination Provision that affects only “workers” benefits, this provision affects “spousal”, “ex-spousal” and “survivor” benefits. What the law is designed to do is to treat public-sector employees as if they worked in the Social Security system and were to receive spousal, ex-spousal or survivor benefits.
Here is what most people don’t know. When your spousal, ex-spousal or survivor benefit is calculated, you always are paid your worker benefit first. If applicable, an additional amount is added for the spousal and ex-spousal benefit to arrive at your total spousal benefit. If your worker benefit is higher, you always are paid that instead of spousal, ex-spousal or survivor benefits.
- Social Security benefits are reduced by two thirds of the non-Social Security retirement benefit. For example, if you receive $3,000 as a government pension, two thirds of that benefit – or $2,000 – will be deducted from any spousal, ex-spousal or survivor benefit to determine your Social Security benefit.
- Lump sum payments of non-Social Security benefits are converted to a monthly annuity payment.
- There is no 30-year exemption like with WEP.
- It can totally eliminate Social Security benefit.
- Usually there is no reduction in Social Security benefits for military service.
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