Logical or not, the rules
can introduce a lot of quirks into a couple’s claiming decisions.
In this week’s
column, Phil Moeller, the author of Get What’s Yours for Medicare: Maximize Your Coverage, Minimize Your
Costs and co-author of the updated edition of How to Get What’s Yours: The Revised
Secrets to Maxing Out Your Social Security, answers a reader’s
question about two rules that could impact your Social Security benefits.
Got a question of
your own about Medicare or Social Security? Send it to askphil@considerable.com.
Should the Windfall
Elimination Provision or the Government Pension Offset impact your decision to
delay Social Security benefits?
Question: Nobody ever talks
about the WEP (Windfall Elimination Provision) and GPO (Government Pension
Offset), and I don’t think many people are aware of the potential effects these
two absurd laws have on Social Security benefits.
My basic question is
this: should being subject to either of these affect one’s decision to delay
Social Security benefits? I have no non-covered earnings and will reach my
full Social Security retirement age of 66 in June 2020; my wife will reach hers
in October 2021. She is a retired teacher with both covered and
non-covered wages, and will be subject to WEP and possibly the GPO should
something happen to me, since my Social Security benefits are much larger than
hers.
We both had planned
to delay our benefits until age 70, but now we aren’t sure that’s our best
option given the impact WEP and possibly GPO will have on her
benefits. Any thoughts on this? —Randy
Answer: Randy’s question
aptly illustrates the possible complexity of Social Security claiming decisions
as well as the subtantial boost in public knowledge about Social Security that
he and other readers have shown since our updated Social Security book came out in
2016.
The initials that
Randy refers to are short-form references to two related sets of Social
Security claiming rules that affect people and their spouses who have earnings
from public-sector jobs that did not require them to pay Social Security
payroll taxes. Earnings at such jobs are referred to as “non-covered” as
compared with “covered” earnings at jobs where Social Security payroll taxes
were backed out of worker pay. WEP stands for Windfall
Elimination Provision; GPO refers to the Government
Pension Offset program.
Although Randy thinks
these rules are absurd, there is a logical explanation for them. I’ve never
gotten an email supporting the programs from a reader who’s been affected by
them, but there’s a case to be made that they save money for other recipients
of Social Security benefits. The reason can be found in the details of how
Social Security calculates a person’s benefits.
The program is
purposely designed to tilt its benefits formula toward lower-paid workers, who
receive much higher percentages of their work income in Social Security
payments than do more highly paid persons. Social Security achieves this
“progressive” benefit structure by using what it calls “bend points.” (Maybe
now is a good time to get another cup of coffee).
Bend points for 2019
Social Security benefits
Here’s how Social
Security describes bend points for 2019 benefits:
“For a worker who
turns 62 in 2019, the first $926 of average monthly earnings is multiplied by
90%; earnings between $926 and $5,583 by 32%; and the balance by 15%.”
Higher-paid employees
do get bigger benefits, but the boost for their additional earnings is much
smaller than the 90% rate received on benefits up to the first bend point. Cue
the WEP and GPO rules!
Windfall Elimination
Provision (WEP) and Government Pension Offset (GPO), explained
Workers with
non-covered earnings often receive pensions from their public sector jobs. If
they also have covered earnings, they also may be eligible for Social Security
benefits. That person’s covered earnings are likely to be modest, given that
they’ve also worked long enough in the public sector to earn a pension. When
they file for Social Security, therefore, the agency likely would regard them
as a lower-paid worker and award them the bulk of their benefits using the 90%
rate.
Given that this
person is not really a low-wage worker, they would wind up receiving an
unfairly large Social Security benefit. The WEP adjusts benefits of such people
by creditng only 40% of their first $926 of covered monthly earnings to their
Social Security payments.
As for Randy’s
specific question, I am still inclined to advise people in his situation to
delay benefits until 70.
If such a person also
applied for a spousal benefit, they would be due the same type of overly
generous Social Security benefit. The GPO was designed to deal with this, and
does so by subtracting two-thirds of that person’s public-sector pension from
their Social Security benefit — possibly wiping out their Social Security
spousal benefit entirely! (You are now premitted to get a third cup of
coffee.)
As for Randy’s
specific question, I am still inclined to advise people in his situation to
delay benefits until 70. This can leave some money on the table if one or both
spouses passes away early. But if one or both live into their late 80s or even
90s, maximizing their Social Security payout remains an attractive form of
longevity insurance, regardless of any WEP and GPO reductions.
Logical or not, the
rules can introduce a lot of quirks into a couple’s claiming decisions.
As the higher-earner,
maximizing his own benefits is also the best way to assure his wife the
highest-possible survivor benefit. It also could make sense, as we write in the
book, for Randy’s wife to claim her public-sector pension as soon as possible
to avoid as many months of WEP reductions as possible before she files for her
Social Security. Doing so would make less sense, however, if her pension
benefits would increase should she delay them until a later date.
Our Social Security book
devotes an entire chapter to the WEP and GPO. Logical or not, the rules can
introduce a lot of quirks into a couple’s claiming decisions, as it clearly has
for Randy.
“We would just remind
you that we don’t make the rules,” we wrote, “and, because we can’t avoid
piling on, that we hope never to make up rules with such unintended, illogical,
and unfair impacts as some of the doozies brought to us” by Social Security.
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