We specialize in retirement planning and one of the most important benefits that you may have is 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 they 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.
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.
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.
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:
The WEP can reduce your SS payment by upto $447.50/mo. in 2018. Please reference the chart below to see your potential liability:
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.
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.
Few people realize that there are many different strategies for claiming 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 affect their SS, not to mention how they might maximize it. Additionally, individuals turning 66 in 2019 (full retirement age) are the last group that can take advantage of the restricted application filing method.