Pension offsets reduce Social Security
benefits, but some qualify for exceptions.
Aug 27, 2018 @ 12:52 pm
There are about 2,700 different rules that
govern Social Security benefits, but two of them stand out as the most confusing and
unfair — at least according to the subset of workers and family members who are
subject to them.
About a quarter of employees of state and
local governments — including public school teachers, first responders and
civil servants in select states — as well as federal employees hired before
1984 do not pay FICA taxes on their earnings and therefore do not qualify for
Social Security benefits. But many of them are eligible for Social Security
benefits based on their work in the private sector or as a spouse or surviving
spouse of a worker who is entitled to benefits.
In many cases, retirees and their financial
advisers are shocked to discover that those Social Security benefits can be
reduced or even eliminated if those retirees also receive a public pension based
on work where they did not pay FICA taxes.
The Windfall Elimination Provision applies to
workers with non-covered public pensions who also worked at least 10 years in
the private sector and are eligible for Social Security benefits on their own
earnings record. A good way to remember this rule is to focus on the
"w" as in worker and windfall.
The WEP can reduce such workers' Social
Security benefits by up to half of the amount of their pension, but by no more
than $447.50 per month in 2018. For example, if a retired public employee
receives a pension of $3,000 a month and is entitled to a Social Security
benefit of $1,000 per month, his Social Security benefit would be reduced by
the maximum $447.50 to $552.50 per month.
A separate rule — the Government Pension
Offset (GPO) — applies to spouses and widows or widowers, as well as ex-spouses
and surviving ex-spouses, who were married at least 10 years before divorcing
(and who did not remarry before age 60).
The GPO can reduce a Social Security spousal
or survivor benefit by two-thirds of the amount of the government pension, with
no dollar limit. So if a retired public school teacher in one of the 15
affected states has a pension of $3,000 per month, her potential Social
Security spousal or survivor benefit could be reduced by $2,000 per month
(two-thirds of $3,000). That would wipe out any spousal benefit and
significantly reduce or even eliminate most survivor benefits.
A spousal benefit is worth up to 50% of a
worker's full retirement age benefit amount if the spouse claims it at full
retirement age or later. A survivor benefit is worth up to 100% of what the
deceased worker was collecting or entitled to collect at time of death,
including any delayed retirement credits, if the surviving spouse is at least
full retirement age.
There are a dozen states where public
employees are not covered by Social Security: Alaska, California, Colorado,
Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio
and Texas. In addition, employees of certain local governments in Georgia,
Kentucky and Rhode Island do not participate in Social Security.
Federal employees hired before 1984 who
participate in the Civil Service Retirement System are also affected by WEP and
GPO rules. So are people who receive a pension from an employer in a foreign
country.
Federal employees hired after the Social Security
reform legislation of 1983 pay FICA taxes as part of the Federal Employees
Retirement System and are not affected by the WEP reductions. Neither are
railroad retirees whose only pension is from railroad employment.
The triggering factor for benefit reductions
is the receipt of a non-covered pension, so it is possible for someone to claim
unreduced Social Security benefits first and reduced benefits later once their
pension begins. And don't think you can skirt the rules by collecting the
pension in a lump sum. The Social Security Administration will calculate the
annuity value of the pension and apply the offsets accordingly.
There are some escape hatches to these offset
rules, including working longer and
paying FICA taxes at the end of a public service career.
Workers with 30 or more years of "substantial earnings" subject
to Social Security payroll taxes can avoid the WEP completely, and the WEP
impact is reduced for workers with 21 to 29 years of substantial earnings. In
2018, substantial earnings are defined as $23,850 or more. Those with fewer
than 20 years of substantial earnings feel the full impact of the WEP reduction
on their Social Security benefits.
The GPO reduces Social Security spousal and
survivor benefits only if you receive a retirement or disability pension from a
federal, state or local government based on your own work where you didn't pay
Social Security taxes. The GPO does not apply if you receive a government
pension as a spouse or surviving spouse that is based on someone else's
earnings.
There is another important exception to the
GPO rule: Reductions do not apply to federal, state or local government
employees who paid Social Security taxes on their earnings during the last 60
months of government service.
http://www.investmentnews.com/article/20180827/BLOG05/180829937/some-public-employees-face-social-security-hurdles
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