Careful planning can help public employees avoid Social Security reductions

Nothing angers public employees more than rules that reduce the Social Security benefits they have earned by working in the private sector when they are also eligible for a government pension based on work where they did not pay FICA taxes. Just mention “windfall elimination provision” (WEP) or “government pension offset” (GPO) and watch the sparks fly.

Normally, public employees can’t avoid these reductions. But one savvy financial adviser was able to help his client dodge the offsets completely by carefully timing when and how she claimed her Social Security benefits and her pension.

First, let me review how these two rules work.

The WEP reduces the earned Social Security benefits of an individual who also receives a pension from employment not covered by Social Security, such as a state or local government or federal employees covered by the old Civil Service Retirement System. The WEP reduces the individual’s Social Security benefit by up to half of the amount of the public pension, but the reduction cannot exceed $428 per month in 2016.

The WEP can never eliminate a Social Security benefit completely, and it exempts workers who have 30 or more years of substantial employment covered under Social Security. Lesser reductions apply to workers with 21 through 29 years of substantial earnings. In 2016, substantial earnings are defined as $22,050. Back in 1980, it only took earnings of $4,725 per year to qualify for a year of substantial earnings. The amounts have gradually increased each year.

The GPO applies to spouses or survivors who qualify for both a government pension based on their own non-Social Security covered employment and a spousal or survivor benefit based on their spouse’s (or ex-spouse’s) Social Security earnings record. The GPO reduces Social Security spousal and survivor benefits by two-thirds of the amount of the pension with no dollar cap. Unlike the WEP, the GPO can completely wipe out a Social Security benefit and it does not have an exemption for 30 years of substantial earnings.

Marcus Dickerson, owner of Gulf Coast Social Security Strategies in Beaumont, Texas, wrote to me with questions about a 67-year-old client who was eligible for a Social Security benefit based on her own earnings as well as a spousal benefit. She also earned a public pension in Colorado based on work where she did not pay FICA taxes.

Mr. Dickerson realized his client’s Social Security benefits would not be reduced until she began collecting her public pension. So he urged his client to immediately begin collecting her spousal benefits based on her husband’s Social Security record. That would allow her to collect half of his full retirement age benefit amount. Because she had not yet begun collecting her public pension, her Social Security spousal benefit would not be reduced.

He recommended that his client wait until 70 to begin collect her public pension. At that point she would also switch to her own Social Security retirement benefit. Normally, her Social Security benefit would be reduced by up to half of the amount of her public pension, but because she has 30 years of substantial earnings in the private sector, she is exempt from the WEP reductions.

By carefully mapping out when his client should claim her Social Security benefits and pension, Mr. Dickerson helped his very grateful client avoid all reductions in her Social Security benefit. “I just wish she had come to me a year earlier as she left about $15,000 in spousal benefits on the table by not filing at 66,” he said. However, because she was already beyond her full retirement age, she was able to request the maximum six months of retroactive benefits paid in a lump sum, cutting her loss in half.

By enacting the WEP and GPO rules as part of broader Social Security reform legislation in 1983, Congress intended to address a perceived inequity between those who spent a lifetime working and paying into Social Security and government employees who did not pay into the system. Public employees and their advocacy groups have been trying to repeal the rules ever since. Although several bills that would reduce or repeal the WEP have been introduced in the current Congress, none have progressed beyond the committee stage.

The GPO affects about 615,000 people or about 1% of all beneficiaries, according to the National Committee to Preserve Social Security and Medicare, which supports the repeal of both the GPO and WEP. The vast major of those affected by the GPO reductions are women.

The WEP has a broader impact, affecting more than 1.5 million people or about 2.7% of all Social Security beneficiaries, the National Committee said. Some or all of public employees in a dozen states do not participate in Social Security, including Alaska, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio and Texas. In addition, employees in some local jurisdictions in Georgia, Kentucky and Rhode Island do not pay FICA taxes.

(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a certified financial planner.