Fewer Americans can expect a pension to fund retirement in today’s world. According to Gallup Poll, only about 36 percent of Americans retired with a pension in 2013. There are many reasons that today’s workers count on Public Pension Social Security retirement benefits as a means of replacing income in retirement. Typical pension plans replace from 50 to 70 percent of the worker’s salary during the prior three to five years he or she earned an income.
In comparison, Social Security retirement benefits are calculated on the worker’s highest 35 earnings years. Social Security’s income replacement calculation is used to determine the beneficiary’s Primary Insurance Amount (PIA). This is the Social Security retirement benefit the worker may receive at Social Security Full Retirement Age (FRA). For workers before 1960, Social Security FRA is 66 years. FRA for workers born in 1960 and thereafter is 67 years. To determine FRA, visit SSA.gov.
Public sector employees still have greater access to pension coverage than Americans working in public sector jobs. However, coverage by public sector pensions can chop beneficiaries’ Social Security benefits by more than USD 400 per month. Let’s review the Social Security rules as they apply to public sector employees.
Public Pensions Social Security Retirement Benefits
The goal of earning a retirement pension is one of the reasons many Americans stay in public service jobs for decades.
Under the Windfall Elimination Provision, also known as WEP, public sector employees receiving pensions receive lower Social Security retirement benefits. WEP was signed into law during the 1980s Reagan administration to prevent retirees with public sector pensions from access to full Social Security retirement benefits.
A similar Social Security rule, known as the Government Pension Offset, or GPO, may also result in lower survivor or spousal benefits. It’s important to consider the impact of WEP and/or GPO on retirement planning.
Windfall Elimination Provision
According to Social Security Administration (SSA), about 1.5 million Social Security retirement beneficiaries were affected by WEP four years about. Approximately 600,000 were affected by GPO. Most affected were state or local government employees or public school teachers.
It’s important to consider the financial impact of earning a public pension on Social Security retirement benefits. Many older workers are surprised to learn about the “double-dipping” safeguards. Prior to 2005, public sector employers weren’t required to inform employees about the law. Today, employers are only required to inform <i>new</i> employees about the possible negative effect of earning a public sector pension after accruing Social Security credits from previous private sector employment.
Since 2007, SSA’s statement of benefits to workers includes a general description of WEP and GPO and the rules’ possible impact on Social Security retirement benefits. SSA strives to inform affected workers when possible. SSA has online tools to calculate the financial impact of WEP and GPO on Social Security retirement benefits.
SSA sends a letter to individuals who’ve previously worked in jobs that weren’t covered by Social Security to explain they’re ineligible for Social Security retirement benefits.
Of course, many people who are affected by WEP and GPO feel the rules aren’t fair. <i>The Equal Treatment for Public Servants Act</i> (H.R. 711), sponsored by Kevin Brady (R-TX) was postponed in July 2016. The Bill seeks to treat public service employees in the same way as other American workers where Social Security retirement benefits are concerned.
Social Security Retirement Benefits Distribution
To understand why WEP was voted into law, it’s important to know something about how SSA distributes retirement benefits across a wide spectrum of wage earners.
Somewhat like income tax brackets, SSA employs a progressive formula to give higher relative benefits to those who’ve earned the least. Social Security’s formula is quite complex. However, without WEP in place, a worker with only 20 years of Social Security wages could earn a larger return because of the bracket formula.
The “double dip” concern relates to the position covered by a public service pension rather than Social Security retirement benefits. SSA writes that if an individual worked in a public service (“non-covered”) job for most of his or her work life, there should be “shared burden” between Social Security and the public service pension received for employment.
Without WEP, if the worker’s job was Social Security-covered for several years but becomes non-covered employment through the move to public service employment for most of his or her career, he or she could receive a higher return than employees who always worked in Social Security-covered jobs.
WEP and Social Security Retirement Benefits
If a retired worker already receives a <i>qualifying pension</h2> when he or she requests Social Security retirement benefits, WEP automatically kicks in. SSA questions the beneficiary about whether he or she receives a non-covered pension in the retirement benefit claim application. SSA will have access to the beneficiary’s retirement income from a pension or other retirement income (IRS Form 1099R):
If the worker delays requesting the non-covered pension after claiming Social Security benefits, Social Security will adjust his or her income then.
If the worker has 30 years or more Social Security covered credits, then WEP isn’t applied.
If the worker has at least 20 years up to 30 years employment, WEP is applied according to a sliding scale.
If the worker has less than 20 years of Social Security covered credits, the benefit could decline even more.
According to SSA, if the worker is expected to earn USD 1,400 as a Social Security retirement benefit each month, the net benefit could drop to about USD 1,000 because of WEP. The worker’s maximum loss is approximately 50 percent of the non-covered pension. If the worker doesn’t earn a large pension check, then the impact of WEP is small.
WEP and Delayed Social Security Retirement Benefits
Like American workers in Social Security-covered jobs, workers in non-covered positions may still increase Social Security benefits by waiting claim them. It’s possible to delay claiming Social Security retirement income benefits to age 70. In the interim, the worker receives the benefit of annual cost-of-living adjustments (COLA) for inflation. WEP still affects the initial Social Security retirement benefit.
WEP also affects the benefits a spouse or dependents may claim during the beneficiary’s lifetime. If the beneficiary’s spouse requests survivor benefits after the beneficiary’s death, he or she receives the original unadjusted benefit (without the impact of WEP).
It’s possible to avoid the impact of WEP by taking Social Security-covered employment before retirement. If the beneficiary has at least 30 years of covered work and <i>substantial earnings</i> over that period (USD 22,050 in 2016), he or she can avoid the impact of WEP from a public service pension.