Social Security gotchas with WEP and GPO Pensions
Two big areas of confusion among people and advisors are the Windfall Elimination Provision(WEP) and the Government Pension Offset(GPO). Although they are often spoken in the same breath, they are really quite different. The only thing they have in common is that they affect people who worked in jobs notcovered by Social Security and get a pension instead.
Typically, these non-covered jobs are with school systems or government agencies that opted out of Social Security. Rather than paying the usual 6.2% Social Security tax, workers pay into an alternate retirement system. When they retire, they receive a pension from that system.
Complications arise when a person also qualifies for some type of Social Security benefit. This can happen when a person also worked in a covered job and has enough credits from that job to qualify for Social Security retirement benefits. It can also happen when a non-covered person is (or was) married to a covered worker who paid into Social Security and wishes to claim benefits as a spouse or survivor based on the covered spouse’s work record.
To keep people who are receiving full government or teacher’s pensions from also receiving full Social Security benefits, Congress instituted the WEP and GPO. The WEP affects a worker’s own retirement benefit (as well as some auxiliary benefits based on that worker’s WEP-adjusted PIA), while the GPO affects spousal and survivor benefits paid to the person who worked in the non-Social Security-covered job.
Please note that the receipt of a government pension, by itself, does not automatically mean the WEP or GPO will apply. Many state and local jobs are covered by Social Security and also provide an additional pension. For the WEP or GPO to apply, the person must have worked in a job not covered by Social Security and be entitled to a pension from that job.
The idea behind the WEP is that workers who are receiving a full pension from a non-covered job should not also get higher Social Security benefits as if they were long-time, low-wage earners. So in 1983 Congress passed the WEP, which changes the formula by which the primary insurance amount (PIA) is calculated. For those who worked 20 years or less in a Social Security covered job, the first bend point is multiplied by .40 instead of .90. This has the effect of reducing the PIA by .50 times the first bend point. For the 1956 cohort turning 62 in 2018, the maximum WEP reduction is $895 x .50, or $447.50. If a person worked between 20 and 30 years in a Social Security covered job, the multiplier is gradually increased from .40 to .90. See this table of WEP adjustments going back to 1990 for workers with up to 30 years of covered employment.
This WEP reduction is not reflected on the Social Security statement. Until a person applies for Social Security and tells SSA that they worked in a non-covered job, SSA does not know to apply the WEP. The WEP affects only about 2.5% of Social Security beneficiaries (1.5 million), but for those who are affected by it, the consequences of failing to plan for it can be substantial. Imagine thinking your monthly retirement income will be roughly $450 more than it turns out to be—and not finding that out until you go to apply for Social Security. People plan ahead by referring them to the SSA WEP calculator for a more accurate estimate of their retirement benefit.
Note that the amount of the pension is not relevant to the WEP other than to determine the “WEP guarantee,” by which the WEP reduction cannot exceed 50% of the pension amount. So if a person born in 1956 had a pension of less than $895 a month ($447.50 x 2), their WEP reduction would be less than the $447.50. If they don’t receive any pension from the non-covered employment (unusual), there will be no WEP reduction.
What does matter is how long the person worked in the covered job because that determines whether the first bend point multiplier is .40 or .90 or somewhere in between. The annual earnings must be substantial–that is, at least $23,850 in 2018. (For prior years’ substantial earnings thresholds, see this table). The pension start date also matters. The WEP should not be applied until the person becomes “entitled” to the pension. Entitlement is determined by the employer and usually happens when the worker retires. So it would be possible for a person to keep working and file for Social Security at FRA (when the earnings test no longer applies) and receive their full, non-WEP-adjusted Social Security retirement benefit until they retire and start the pension.
The WEP-adjusted PIA is used to calculate the worker’s own retirement benefit as well as spousal and dependent benefits. The reduction is removed for survivor benefits paid off that worker’s record.
The GPO affects spousal and survivor benefits for people who receive non-covered pensions. Here the pension amount does matter because the GPO reduces spousal or survivor benefits by two-thirds of the pension amount. Congress created the GPO in 1977 as a dollar-for-dollar reduction; in 1983 it was reduced to two-thirds. The GPO now affects about 9.7% of the 6.5 million beneficiaries of spousal or survivor benefits. Beneficiaries affected by the GPO had an average monthly non-covered pension of $2,250, which was $500 more than the average Social Security retired worker benefit of $1,708 in 2014. Nearly three-quarters of beneficiaries affected by the GPO have their entire spousal or survivor benefit offset.
As with the WEP, the GPO reduction doesn’t kick in until the pension starts. So it would be possible to get a full spousal or survivor benefit for a few years between FRA and when the pension starts. If a person who worked in a non-covered job asks you if they can get spousal benefits, explain that their spousal benefit will be reduced by two-thirds of their pension amount. A quick calculation will reveal whether the spousal benefit will be fully or partially offset. After a spouse dies, a person whose spousal benefit was fully offset by the GPO may be able to receive some part of the survivor benefit.
If a spouse takes the non-covered pension as a lump sum, SSA refigures it as an annuity. See this POMS reference for more details on how the pension is figured for GPO purposes.
If a spouse who always worked in covered employment gets a survivor pension based on a deceased spouse’s non-covered employment, the GPO will not be applied to the surviving spouse’s own Social Security benefit. Only those who did not pay into Social Security are affected by the WEP or GPO (except for spouses whose spousal benefits are based on the WEP-adjusted PIA of the non-covered worker.)
Where one spouse of a couple worked in non-covered employment, the WEP and GPO application and calculations are relatively straightforward. Unless that spouse worked more than 30 years in a covered job, that worker’s own Social Security retirement benefit will be reduced for the WEP and his or her spousal or survivor benefits will be reduced by two-thirds of the non-covered pension amount under the GPO. The other spouse, who always worked in covered jobs, will receive his or her full Social Security benefit unaffected by the WEP or GPO; if that spouse becomes widowed, he or she can receive the non-covered survivor pension and still receive full Social Security benefits, including Social Security survivor benefits off the deceased spouse’s record, if higher.
Where things can get really convoluted is where both spouses worked in non-covered employment and where one or both spouses also qualify for Social Security. In that case each spouse’s own retirement benefit (assuming they both qualify for one) will be reduced for the WEP, and each spouse’s spousal benefit will be reduced for the GPO. In a case like this, all you can do is unpack each component one at a time.
Let’s look at some examples of where the WEP and GPO might apply.
William and Wanda
William and Wanda are married. They both turn 66 in 2018. William was a police officer for the county, which had its own retirement system and did not pay into Social Security. He retired in 2008 and receives a police pension of $3,000 per month. After retiring from the police job, he worked for ten years as a consultant for a private firm. He therefore qualifies for Social Security and has a pre-WEP adjusted PIA of $1,200. Wanda worked all her life in a regular, Social Security-covered job and has a PIA of $1,800. Here’s what William and Wanda can expect out of Social Security under a variety of scenarios:
William files for his retirement benefit. William’s PIA will be reduced under the WEP because of his police job. According to this table, William’s WEP reduction will be $408 (≤20 years of covered employment, age 62 in 2014). So his WEP-adjusted PIA is $1,200 – $408=$792. If he delays claiming to age 70, he’ll receive delayed credits on the WEP-adjusted amount: $792 x 1.32=$1,045.
William files a restricted application for his spousal benefit. His spousal benefit will be subject to the GPO and reduced by two-thirds of the amount of his police pension. Since his maximum spousal benefit is $900 (50% of Wanda’s $1,800 PIA), the GPO reduction of $2,000 (two-thirds of William’s $3,000 pension) would wipe out the entire spousal benefit.
Wanda dies and William files for his survivor benefit. Likewise, under the GPO William’s survivor benefit will be reduced by two-thirds of his pension amount. If Wanda delays to age 70, her benefit could be as much as $2,376 ($1,800 x 1.32). Subtracting the $2,000 GPO, William would end up with a survivor benefit of $376.
Wanda files for her retirement benefit. She will receive her Social Security benefit as usual because all of her earnings were from Social Security-covered jobs.
Wanda files a restricted application for her spousal benefit. Since Wanda was born before 1954, she is grandfathered under the Budget Act. If she files a restricted application for her spousal benefit, she can receive 50% of William’s WEP-adjusted PIA: $792 x .50=$396 from age 66 to 70 and then switch to her own maximum benefit.
William dies and Wanda files for her survivor benefit. The WEP reduction will be removed for Wanda’s survivor benefit. It will be calculated the usual way, including any delayed credits applied to the full, unreduced PIA: $1,200 x 1.32=$1,584. Since Wanda’s own retirement benefit is higher, she would not switch to the survivor benefit. She may start receiving the survivor pension from William’s police job without it affecting her own Social Security benefit.
George and Gladys
Here’s another example. George and Gladys are married, both are age 66. George was a maximum earner in a regular, Social Security-covered job and has a PIA of about $2,800. Gladys worked her entire career as a teacher for a school system that opted out of Social Security. She never worked in a Social Security-covered job and therefore does not qualify for Social Security based on her own work record. She retires and collects a teacher’s pension of $2,100 per month. Let’s look at their possibilities.
George files for his retirement benefit. George’s retirement benefit is not affected by either the WEP or GPO because all of his earnings came from a job that paid into Social Security. His benefit will be based on his $2,800 PIA. If he files at 70, he’ll receive four years of delayed credits, which will bring his benefit up to $3,696, not counting COLAs.
Gladys files for her spousal benefit. When Gladys files for her spousal benefit (after George files for his benefit), SSA will ask her if she is entitled to a pension from a non-Social Security-covered job. She will say yes. Then they will subtract two-thirds of her pension amount, or $1,400 from her spousal benefit. This will completely offset the $1,400 spousal benefit.
George dies and Gladys files for her survivor benefit. Before the GPO, Gladys’ survivor benefit would be the $3,696 George was receiving at the time of his death. After subtracting two-thirds of Gladys’ pension amount, or $1,400, she will receive a survivor benefit of $2,296.
Obviously, there would be no spousal or survivor benefits for George based on Gladys’ record because she never qualified for Social Security on her own work record.
How to spot the issue
Ask people if they ever worked in a job that was not covered by Social Security. Most people know this. If they’re not sure, look at the person’s Social Security statement. If you see either very low earnings with many zeroes (was this unemployment or uncovered employment?), or if there’s a discrepancy between the Social Security and Medicare columns, that’s a tipoff that the person had some non-covered earnings and may be affected by the WEP or GPO. (people who don’t pay into Social Security usually pay Medicare taxes.)
By the way, some people wonder if military pensions will subject them to the WEP or GPO. The answer is no. Military people have always paid into Social Security. See this newsletter on Military Service and Social Security for more.
Federal workers are a different story. Anyone who has worked for the federal government since 1984 has paid into Social Security; their federal pension will therefore not subject them to the WEP or GPO. However, if they worked for the old Civil Service system prior to 1984 and stayed in that system after the federal government switched over to the Social Security system, at least part of their pension is considered to be from non-covered employment and will trigger the WEP or GPO. See Federal Employees.
Original article for an adviser newsletter by Elaine Floyd, CFP®, Director, Retirement and Life Planning, Horsesmouth, LLC, within which I’ve made edits for the public.
Other postings on the interaction between uncovered employment pensions and Social Security.