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Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)

Key Retirement Planning Issue: Understanding and Planning for the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO):

Introduction:

We specialize in retirement planning and one of the most important benefits that you may have are your Social Security and/or other pensions.  However, if you or your spouse are participants in certain “non-covered” pensions then your Social Security benefits may be reduced.  It is important to understand these rules, how the apply to you, and how you may minimize their impact on your retirement plan.

Below you will find introductory information that you should consider if you are looking to understand your Social Security benefits better, planning for an upcoming retirement and/or looking to hire a financial planner to help you with your retirement planning.

A brief outline of  Social Security:

Social Security was created in 1935 to provide a safety net of protection against the financial risks of old age, poverty, and parent-less children.  It was subsequently strengthened gradually from 1952-72 to become the robust system we know today that many Americans have come to rely on as a major source of retirement income.  Social Security was designed, and still very much remains, a progressive system that provides more robust benefits to lower income workers in proportion to actual contributions to the system.

For covered workers, Social Security provides:

      1. Retirement Benefits:
        1. Early at age 62.
        2. Normal Retirement at age 65-67 depending on your date of birth.
        3. Increased benefits for delaying benefits up to age 70.
      2. Disability Benefits.
      3. Spousal/Survivorship Benefits.
      4. Small Death Benefit.

*Click here to visit SSA.gov for a complete list of benefits and detailed explanations of the Social Security System.

The Windfall Elimination Provision (WEP):

The WEP is designed to maintain SS’s progressive nature by reducing benefits to those that are receiving pensions (in which they did not contribute to Social Security – also called “non-covered” pensions) because they would receive higher payouts than their income should otherwise merit had they participated in Social Security for their entire working career.

Many find this rule “unfair” however, we must realize that we do not generally pay enough into the system for the benefits promised and the system is designed to be a safety net to protect those on the lower end of the income scale.  Thus the WEP tries to maintain this status quo for systems that exercise their right to be excluded from the Social Security system (generally, state pensions).  So whether you agree with the WEP or not, if you are a participant in a “non-covered” pension, you should plan  to reduce its effects and/or prepare adequately for a reduced SS payout.

Will you be effected by the WEP?

Generally, if you have less than 30 years worth (120 credits) in the Social Security system and you are going to receive income from a “non-covered” pension then you are going to be subject to the WEP.  You may accumulate up to 4 credits in a given year based on how much your substantial earnings were in a particular year – Please reference the chart below for the applicable earnings needed to receive all 4 credits for a given year:

How much can the WEP reduce my Social Security?

The WEP can reduce your SS payment by upto $408/mo. in 2014.  Please reference the chart below to see your potential liability:

Estimating benefits with WEP:

It can be a difficult undertaking to get your exact benefit amount but you have three main options:

          1. Use SSA's online calculator (not perfect but it will get you very close).
          2. Schedule an appointment to speak with a Social Security counselor and they will be able to provide you with an estimate (generally, they only like to run estimates for you once you are close to retirement age because they don't like to guess future earnings).
          3. You can hire a financial advisor/planner that has invested in software that can make these calculations for you and potentially run various permutations to help you maximize your benefits.   We have this capability and you can call us or schedule an appointment to see how we might be able to help you.

Government Pension Offset (GPO):

The Government Pension Offset (GPO) was also established in 1983 to reduce spousal benefits due when a spouse received their own pension from a "non-covered" pension (generally, CSRS or a state pension).  Social Security was initially setup to support traditional family values by helping to support non-working spouses and widows.  Given that more and more spouses that used to be home-makers are working and building their own retirement benefits, Congress felt it necessary to limit the SS benefits due to spouses and widows to those that actually needed the traditional non-working spouse safety net.

Who is effected by the GPO?

If you are receiving income from a "non-covered" pension (basically a pension in which you did not have to contribute to SS) and you are due a spousal or survivorship/widower benefit then you are most likely going to have a reduction of your SS benefit.

How much can my Social Security be reduced?

You spousal/survivor benefit will be reduced by 2/3 of your "non-covered" pension benefit.

For example, if you were collecting a $2200/mo. OPERS pension check and you were due $1500/mo. survivor benefit then your SS benefit would be reduced by $1467/mo. and you would be due $33/mo. 

There are a couple of exceptions to the GPO which you may reference in the Social Security's publication by clicking here.

Estimating benefits with GPO:

The GPO is much easier to estimate, but you should definitely speak with a professional to make sure that you are not leaving money on the table or that you have not over-looked a possible benefit:

    1. Use SSA's online calculator.
    2. Schedule an appointment to speak with a Social Security counselor: 800-772-1213.
    3. You can hire a financial advisor/planner that has invested in software that can make these calculations for you and potentially run various permutations to help you maximize your benefits.   We have this capability and you can call us or schedule an appointment to see how we might be able to help you.

Preparing your total financial plan while maximizing your Social Security and Pension benefits:

Few people realize that there are 567 different strategies to claiming your Social Security benefits.  Guess how many strategies most retirees consider and the impact that will have on their over-all retirement.  Most retirees are leaving considerable amounts of money on the table and many "non-covered" pension participants are not even sure how their service will effect their SS, not to mention how they might maximize it.

Watch our video to see how we help our clients with their financial planning:

Have a "non-covered" Pension and want more detailed advice?

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*No advice on this subject can be truly universal or objective, you should consult with your appropriate financial, tax, and/or legal advisor about your individual circumstance(s) before taking any action.

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