On Retirement

Public pensions offset Social Security

Beware: Retirement benefits can be reduced or eliminated completely

Feb 2, 2014 @ 12:01 am

By Mary Beth Franklin

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.

FALSE ESTIMATES

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.

TWO RULES

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.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

How did we pick this year's 40 under 40 winners?

Special projects editor Liz Skinner and editor Fred Gabriel say efforts to improve the financial advice industry and the promise of future success factored heavily in candidate selection.

Latest news & opinion

Merrill re-evaluates commission ban in retirement accounts

The wirehouse's wealth management group announces a fresh look at the ban now that the DOL rule is on the brink of death.

10 biggest retirement mistakes

Adhere to enrollment deadlines and distribution rules or pay a hefty penalty.

DOL fiduciary rule on brink of death as key deadline passes

Justice Department didn't petition the Supreme Court to rehear the case. A mandate from the 5th Circuit would finally lay the fiduciary rule to rest.

Finra to overhaul broker information system, cut compliance costs for broker-dealers

The move is intended to cut compliance costs for firms as well as make the registration and disclosure process more efficient.

SEC rule proposal doesn't include 401(k) sponsors in 'best interest' advice

Plan sponsors are left out of the equation because they don't appear to fall within the definition of "retail" investor, legal experts say.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print