In a recent column, I wrote about rules that can reduce or eliminate Social Security benefits for public sector employees.
I explained that there are two sets of rules. The first, the Windfall Elimination Provision, applies to some federal, state and local workers — including some public school teachers — who earned a pension from work in which they did not pay FICA taxes and also worked in the private sector long enough to be eligible for Social Security benefits.
Generally, one must work and pay FICA payroll taxes for at least 10 years to accumulate the 40 quarters needed to be eligible for Social Security benefits.
The WEP rules reduce their monthly Social Security benefits by up to 50% of the amount of their public pension — but not more than $408 per month — as of 2014.
A second rule, the Government Pension Offset provision, reduces Social Security benefits paid to a spouse or survivor when the spouse or survivor earned a pension from a government job at which he or she did not pay Social Security taxes. The GPO reduction is equal to two-thirds of the amount of the pension based on non-covered work.
Unlike the WEP, which can merely reduce a worker's Social Security benefit by up to half of the amount of the government pension, the GPO has no maximum. Therefore, it can completely wipe out a spousal or survivor benefit.
GETTING AROUND THE PROBLEM
Bruce Farman, a financial adviser from Fayetteville, Ga., congratulated me on my thorough and well-written article. But, he said, he disagreed with my conclusion that “there is nothing you can do to get around the WEP and GPO reductions.”
Mr. Farman explained that he has been providing retirement planning advice to public school teachers in Georgia for 32 years. The state has about 45 city and country public school systems that are not covered by Social Security.
“The first way to 'get around' the WEP is to have 30 years of covered service under Social Security,” Mr. Farman wrote. “To translate via practical example, after a 30-year private sector career, John Smith decides to teach for 10 years in a public school system not covered by Social Security,” he said. “John's Social Security benefits will not be reduced. The WEP is not applicable.”
That's true. In fact, that very rule applies to my husband, who worked for the federal government before the 1983 Social Security reform, when civil servants did not pay FICA taxes, and returned to work after 1984 when he did contribute. As a result, he has paid Social Security taxes for more than 30 years and is not subject to the WEP reductions.
WEP reductions can be minimized, as long as you have 21 years or more of substantial earnings where you paid Social Security taxes, and completely eliminated if you worked 30 years or more in the private sector. So encouraging your clients with public sector pensions to work a little longer in the private sector might result in a larger Social Security benefit.
Mr. Farman's second tip regarding an exception to the GPO rules has limited application, but it is certainly worth mentioning.
The official SSA publication on Government Pension Offset rules notes: “Generally, your Social Security benefits as a spouse, widow or widower will not be reduced if you paid Social Security taxes on your earnings during the last 60 months of government service.”
Based on the experience of one of his clients, Mr. Farman offered the following example of how the 60-month rule can negate what he called the “draconian effects of the GPO.”
THE CASE OF MS. JONES
Sally Jones is a public schoolteacher who taught in Georgia Public School System ABC — which is not covered by Social Security — for 25 years. She divorced 10 years ago after 16 years of marriage and has never remarried. Sally's former husband always worked in the private sector and always participated in Social Security.
Sally applies for and obtains a teaching position in nearby Georgia Public School System XYZ — which is covered by Social Security. She then teaches in Georgia Public School System XYZ for the last five years of her 30-year career and then applies for her Teachers Retirement System of Georgia defined benefit pension plan.
Because she participated in Social Security for the past 60 months before retirement, Sally will be eligible for full spousal benefits based on her former spouse's earnings record while he is alive and full widow's benefits if he dies.
Mr. Farman conceded that the Sally Jones scenario is not widely utilized, but about 25 of his clients have done what Sally did to “get around” the GPO.
I certainly learned something new from Mr. Farman. I hope you have, too.
(Questions about Social Security? Find the answers in my new e-book.)