Let me start out by saying that I hope the editors of the various publications that print my column keep the terms “WEP” and “GPO” in the headline. Why? Because those abbreviations mean a lot to a certain group of my readers.
I’ll explain what those abbreviations stand for in a minute. But first, who makes up this specialized group of readers? They are primarily teachers in some states and police officers and firefighters in other states. Or they are old-time federal employees who started working before government employees were switched to Social Security in 1984. These local, state and older federal employees are covered by other retirement plans and not by Social Security.
Why is that? Because back when Social Security laws were enacted in the 1930s, Congress felt that they could not force a federal pension plan (Social Security) on state and local governments, so they gave them the option of joining Social Security or not. Most did. But some did not. And still today, about 10% of all workers, mostly in state and local jobs in the public sector, are not covered by Social Security.
Federal government employees were initially not covered by Social Security because they had their own pension system in place before Social Security came along. But all federal employees hired since 1984 pay into Social Security. (That includes the president and members of Congress, by the way.) But as I said, there are still some old feds out there who are not in Social Security.
Folks who spend the bulk of their careers in jobs not covered by Social Security are potentially subject to a couple of offsets that impact either their own Social Security benefit (based on Social Security-covered work they did outside of their regular job) or any benefits they potentially might be due from their spouse’s Social Security record. There always has been a great deal of confusion and an awful lot of misinformation about those offsets. If you are potentially impacted by these offsets, today’s column is directed at you and will help you understand them.
One offset is called the “windfall elimination provision,” or WEP. This is the one that impacts your own Social Security benefit. The other is called the “government pension offset,” or GPO, and it reduces any spousal benefits you might be due.
The key to understanding WEP is to realize that the word “social” in Social Security means something. Unlike private and other public sector pension plans, there are social goals built into the Social Security program. One of those goals is to raise the standard of living of lower-income workers in retirement. This is accomplished through a benefit formula that is designed to give lower-paid workers a better deal than their more highly paid counterparts. Very low-paid workers could get a Social Security benefit that represents up to 90% of their pre-retirement earnings. This percentage is known as a “replacement rate.” People with average incomes (the middle class) generally get a 40% replacement rate. Higher-income people get a rate around 30%.
The problem is that people who spend the bulk of their working lives not paying into Social Security are automatically treated as low-income people by the Social Security Administration’s computers. That’s because there are “zeros” on their Social Security earnings record for every year they spent in their non-Social Security job. SSA’s records won’t show they were actually working at the other job and earning another pension. Instead, their Social Security earnings record simply shows gaps in their work history. So, when figuring their Social Security retirement benefit, SSA’s computers automatically use the formula intended to compensate a lower income person — and they usually get the 90% replacement rate.
But teachers, police officers, firefighters and other government employees generally can be classified as people with average incomes, so they should get the same Social Security replacement rate paid to all middle-class workers. That’s why a modified formula is used to refigure their benefits and give them the proper — and fair — replacement rate. If you’re an employee affected by this law, that modified formula takes you from the 90% (poor person’s) replacement rate to the 40% (middle-class person’s) replacement rate, thus usually reducing estimated benefits by about half.
Most career teachers and government employees generally have just barely over the qualifying 40 quarters (10 years) of Social Security covered work. But if you have 30 or more years of “substantial” Social Security earnings, the windfall provision won’t apply, and your benefit will not be reduced. If you have between 20 and 29 years of substantial earnings, your Social Security benefit will be only partially reduced. A chart giving a year-by-year breakdown of what the government considers substantial earnings is available in my book. More about that in a minute.
The other rule that so many people misunderstand is the government pension offset, or GPO. In a nutshell, that law says that an amount equal to two-thirds of a non-Social Security-covered pension must be deducted from any Social Security dependent’s benefits a person might be due. And most public employees despise this law.
But what these people don’t realize is that the government pension offset law simply treats them in the same way that all other working people have always been treated. For example, if a woman who worked at a job that was covered by Social Security gets a Social Security retirement pension, that pension has always offset any spousal benefits she might have been due. Before the GPO law went into effect, people getting a non-Social Security pension were the only working people in this country who could get their own retirement pension AND a full dependent’s benefit from Social Security.
And the GPO law actually gives these public employees a bit of a break. Social Security retirement pensions offset spousal benefits dollar for dollar. But a non-Social Security retirement pension causes only a two-thirds offset. In other words, for each $3 you get in a teacher’s or other non-covered pension, you lose only $2 from Social Security spousal benefits.
Due to space constraints, this has been a very simplified explanation of some very complicated laws. To learn more about WEP and GPO, order my book, “Social Security: Simple and Smart.” There is a fact sheet in that book that explains these rules in much more detail.
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