I have received a slew of questions recently from financial advisers who are trying to create retirement plans for married couples where one spouse has had a career in public service or public education.
As advisers, it is important to know whether clients who have worked for federal, state or city governments — or in some cases, public school systems — may be affected by rules that can reduce or even eliminate certain Social Security benefits.
When an individual has worked in a job not covered by Social Security and receives a pension from that non-covered employment, retirement planning can be complicated. The key is the pension from government or other non-covered work.
If there is no pension, then the following Social Security reductions don't apply.
Although most federal workers hired after 1983 are covered by Social Security, public-sector employees in 15 states aren't. That total includes the entire states of Alaska, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio and Texas, as well as certain local governments in Georgia, Kentucky, and Rhode Island.
Unfortunately, many people don't realize that their benefits may be reduced until they retire because their Social Security benefit estimate — the one that they used to receive in the mail and now must go online to retrieve — doesn't reflect the reduction.
But if a Social Security benefits statement lists $0 for any year of work, that is the first hint that a client may be subject to offset rules for retirement or dependent benefits. Advisers who aren't sure should urge their clients to contact their current or former employer to ask how their work may affect their Social Security benefits.
Those who earned a pension from a job where the employer didn't withhold Social Security taxes from their salaries and who also worked at least 10 years in other jobs to qualify for Social Security retirement benefits, may be affected by the windfall elimination provision.
The WEP rules affect how retirement or disability benefits are calculated and can result in a lower Social Security benefit. The WEP reduction is limited to no more than one half the amount of the pension from employment that isn't covered by Social Security.
For example, if a public-sector pension is $500 per month, the WEP reduction in Social Security benefits can't exceed $250. The maximum WEP reduction this year is $408 per month.
Because dependents' benefits are derived from the worker's benefit, WEP affects dependents' benefits as well.
For example, if a worker affected by the WEP benefit formula receives a reduced Social Security benefit of $700 per month, his wife would receive a maximum spousal benefit of $350 per month, one-half the worker's WEP benefit amount.
When the worker dies, the WEP reduction is removed and the surviving spouse's benefit is refigured using the regular benefit formula, according to the Social Security Administration.
The Congressional Research Service estimates that about 1.5 million Social Security beneficiaries are affected by WEP reductions.
A separate rule, the Government Pension Offset provision, applies to spousal and survivor benefits and can completely wipe out those Social Security payments.
One adviser in Texas is working with a couple where the wife, a former public- school teacher, receives a pension from that job, at which she didn't pay Federal Insurance Contributions Act taxes. The adviser asked if the wife will be eligible for Social Security benefits as a spouse or as a survivor if the husband dies first.
It depends on the amount of her schoolteacher pension.
Normally, Social Security spousal benefits are equal to half the worker's benefit if claimed at the spouse's normal retirement age, and less if claimed earlier. Survivor benefits are worth 100% of the worker's benefit if claimed at the survivor's normal retirement age and less if claimed earlier.
Spousal benefits can be collected as early as 62 and survivor benefits as early as 60.
But if an individual is subject to GPO rules, Social Security benefits will be reduced by two-thirds of the government pension. For example, if an individual gets a monthly public teacher's pension of $600, two-thirds of that amount, or $400, will be deducted from Social Security dependent benefits.
Let's say an individual is eligible for a $500 spouse's or widow's benefits from Social Security. The $400 government pension offset would be deducted from the Social Security benefit so that the person would receive just $100 per month in Social Security benefits.
Individuals can't skirt the rules by taking a government pension in a lump sum. Social Security will calculate the GPO reduction as if the individual chose to get monthly benefit payments from government work.
More than half a million Social Security beneficiaries have had their benefits reduced by the GPO formula, according to the Congressional Research Service.
Check out the GPO and WEP calculators on the Social Security website (ssa.gov) to estimate the impact of these benefit reduction rules.