My previous Blog on July 27, 2015 discussed the Windfall Elimination Provision (WEP) which applies to anyone who has a non-covered pension (a pension funded by earnings not subject to social security tax) in addition to having a social security benefit. For these individuals the WEP comes into play and effectively reduces their social security benefit by up to $413 per month. So if you have a non-covered pension, as do police officers, firefighters, some teachers and some government workers, then your social security benefits may be affected by the WEP.
The purpose of the WEP was to account for what congress deemed to be "double dipping". By excluding the non-covered pension income from the social security earnings calculation such individuals were being paid a higher amount of social security benefits than they would have otherwise received had they included this non-covered pension income in the calculation.
However, congress didn't stop at the WEP. They also instituted what is called the Government Pension Offset (GPO). It is similar to the WEP in that it affects workers who receive a non-covered pension and also qualify for a social security benefit. The difference is that the GPO affects those same workers who may also be entitled to some form of spousal or survivor benefit from social security on the record of their spouse or former spouse.
As a result of the GPO these individuals will have their spousal or survivor benefits reduced by two-thirds of the worker's non-covered pension. For most workers affected by GPO, this rule will affectively eliminate their spousal benefit and also most or possibly all of their survivor benefits! Clearly, the GPO could have a potentially devastating affect on one's otherwise eligible social security retirement benefits.
As an example, assume a police officer received a $2,100 per month police pension and his wife's social security benefit was $2,200 per month (at full retirement age). He may normally be eligible to receive a spousal benefit equal to 50% of her benefit or $1,100 per month. However, since he's affected by the GPO he will not qualify for any spousal benefit. This is because he would have to deduct two-thirds of his police pension or $1,400 (2/3 X $2,100) from 50% of his wife's benefit or $1,100 ($2,200 X 50%) which results in him netting zero spousal benefits. Likewise, if his wife passed away his pre-WEP survivor benefit would be $2,200. However, since he is affected by the GPO his survivor benefit would also be reduced by $$1,400 to only $800 per month ($2,200 - $1,400).
What about workers who have a non-covered pension but choose to take this benefit as a lump-sum instead of annuity payments. Would they be exempt from WEP since they are not actually receiving monthly non-covered pension income? Unfortunately, receipt of a lump-sum benefit will not exempt a non-covered worker from WEP. Social security will simply calculate their WEP reduction as if they had chose to receive their non-covered pension payments on a monthly basis.
If you are a worker affected by WEP and GPO it is important to note that the affect of these provisions on your social security benefits will not be shown on your social security statement. Although a description of WEP and GPO are disclosed on your statement it is up to you to do the calculations to determine the affect they may have on your benefits.
In order to properly identify the affects of WEP and GPO on your benefits, it may be advantageous to work with a social security retirement income specialist who can help you to navigate these complex rules and perhaps identify some filing strategies which may be available to mitigate the affects of WEP and GPO on your benefits. This is one of the most complex areas in the social security retirement benefits program and it's potential affect on one's benefits may be significant to say the least!
Ash Ahluwalia, NSSA, CCSCA, MBA