8.22.17

Why the Windfall Elimination Provision and the Government Pension Offset EXIST-in Plain English” by Tom Hager, CPA, CGMA, NSSA | Principal – Tax  

The Social Security Act of 1935, did not include federal, state and local public-sector employees. Since then, all but 15 states now cover their public-sector employees with Social Security. In those states that don’t, public sector employees rely on state run pensions. The states that don’t cover their employees with Social Security are: Alaska, California, Colorado, Connecticut, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island and Texas.

Two Rules that May Reduce the Amount of Social Security Benefits You Will Receive as A Public Sector Employee

There are two rules that may reduce the amount of Social Security benefits you will receive as a public -sector employee. Specifically, they are 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, that’s not the main reason. The main reason is 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 ask if this is fair? This article will not be the arbiter of fairness. What it will do is describe the reasoning behind the decisions to enact the provisions.

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. The way benefits are calculated is 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, not covered under Social Security, have a nice salary and 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, public sector employees 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 provide the same benefit as if all of your earnings were in the Social Security system.

WEP Rules

  • 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 between 20-30 years, and have “substantial” earnings, the WEP reduction is phased out $44.25 a year.
  • The reduction is limited to 50% 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.

So What is the Government Pension Offset?

The other rule that public-sector employees need to understand is the Government Pension Offset. This law was also 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 the same way they would be treated 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 are always paid your worker benefit first. An additional amount if applicable is added for the spousal and ex-spousal benefit to arrive at your total spousal benefit. If your worker benefit is higher, you are always paid that instead of spousal, ex-spousal or survivor benefits.

GPO Rules

  • Reduction in Social Security benefits of 2/3rds of the non-Social Security retirement benefit.

For example, if you receive $3,000 as a governments pension, 2/3rds of that benefit-$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
  • No 30-year exemption like WEP
  • Can totally eliminate Social Security benefit
  • Usually no reduction in Social Security benefits for military service

Planning for your social security benefits can  be cumbersome. If you have questions about your social security benefits I can help, contact me at 330.867.7350 or via email