The Curse of the WEP-GPO: Why Some Clients Face Reduced Benefits or Worse. What Advisors Need to Know About These Rare But Painful Rules.

Transcription

1 The Curse of the WEP-GPO: Why Some Clients Face Reduced Benefits or Worse. What Advisors Need to Know About These Rare But Painful Rules.

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3 The Curse of the WEP-GPO: Why Some Clients Face Reduced Benefits, or Worse. What Advisors Need to Know About These Rare but Painful Rules Copyright 2017 by Horsesmouth, LLC. All rights reserved. No part of this report may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, faxing, ing, posting online or by any information storage and retrieval system without permission by the Publisher. Unauthorized use, reproduction or distribution of the material contained in this report is a violation of federal law and punishable by civil and criminal penalty. Multiple copies of Horsesmouth reports may be purchased for business or promotional use for special sales. For information, contact: Horsesmouth, LLC (Outside the US: ) Reports@horsesmouth.com 21 West 38 th Street New York, NY Edition 1.0 Unauthorized use, reproduction or distribution of the material contained in this report is a violation of federal law and punishable by civil and criminal penalty. For permission and more information, contact reports@horsesmouth.com 1

4 Windfall Elimination Provision In 1983 it came to Congress s attention that some career government employees were retiring in their 40s or 50s with large government pensions, then going to work in Social Security covered jobs and building earnings credits. As a result, these employees were getting substantial benefits from Social Security, as well as their own pensions. Since Social Security is supposed to be a safety net that replaces only a portion of a retiree s income, the government deemed it unfair that a person could get both a large pension and a sizable Social Security check. So Congress passed the Windfall Elimination Provision (WEP), which effectively takes away some of their Social Security. The WEP affects anyone who has earned a pension from working in a job where Social Security taxes were not withheld, and also worked in other jobs long enough to qualify for Social Security retirement benefits. Many clients are not aware that their actual Social Security benefits may be lower than the amount shown on their annual benefit estimate or computed by the online calculators. In other words, the WEP reduction does not occur until the person applies for benefits and the Social Security Administration finds out that he is entitled to a pension. Then Social Security applies a formula to determine the WEP reduction. This can be a rude awakening for clients who built their retirement plans around a certain amount of Social Security income. The first thing to do is determine if a client is subject to the Windfall Elimination Provision. There are two conditions: 1. The client is eligible for a monthly pension based on work where he did not pay Social Security taxes. State and local government agency jobs covered under the Civil Service Retirement System (CSRS) are the most common types of jobs where people accrue pensions without paying into Social Security. In contrast, federal jobs under the Federal Employees Retirement System (FERS) are covered by Social Security, so the WEP does not apply. In 1984, the federal government switched from CSRS to FERS. Employees hired in 1984 or later are covered under FERS and therefore are entitled to full Social Security benefits with no WEP reduction. Those hired before 1984 had a choice; if they stayed with CSRS, they may be subject to the WEP. 2. In addition to working long enough in a non-covered job to qualify for a pension, the client worked long enough in a Social Security covered job to qualify for Social Security benefits. For people who are affected by the Windfall Elimination Provision, the first bend point in the computation of the PIA that is, the 90% bend point is reduced to anywhere between 40% and 90%, depending on how long the person worked in the Social Security covered job. The longer he worked, the higher the bend point will be. After all, it is possible for a person to have worked for a relatively short time in a non-covered job and be entitled to a small pension, and then go on to work 30 years in a Social Security covered job. In that case there would be no WEP reduction. The maximum WEP reduction for individuals turning 62 in 2016 is $428 (the $856 bend point times the maximum reduction of.50). Unauthorized use, reproduction or distribution of the material contained in this report is a violation of federal law and punishable by civil and criminal penalty. For permission and more information, contact reports@horsesmouth.com 2

5 Let s look at an example. Tim was a police officer for the county, which had its own retirement system and did not pay into Social Security. He retired in 2004 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. Tim's PIA will be reduced under the WEP because of his police job. Once again, the WEP reduction is not related to the amount of his pension, but rather the number of years he worked in the consulting job. If he worked 20 or fewer years, his benefit would be subject to the maximum WEP reduction. Furthermore, the reduction of Tim s benefit will depend on what the first bend point is for his age cohort. If Tim was born in 1955, the first bend point is $885. If this were to be multiplied by 40% instead of the usual 90%, it would cause his $1,200 PIA to be reduced by the maximum reduction of $442, leaving him with a WEP-adjusted PIA of $758. Of course, Tim s actual benefit could be higher or lower than the $758 depending on when he applies. Now let's look at Jerry, whose primary career was in a regular Social Security-covered job but who also worked as a teacher for a school district that had its own retirement system. Jerry did not pay into Social Security under the teaching job. When he retires, he will qualify for a pension from that job. To see if Jerry is subject to the WEP, SSA will consider how many years of "substantial earnings" he had in the Social Security-covered job. If he had 30+ years of approximately $20,000 in earnings (this amount is adjusted each year for inflation), his Social Security benefit will not be reduced for the WEP Government Pension Offset The Government Pension Offset (GPO) affects the spousal and survivor benefits of a person who worked in a non-covered job. Under the GPO, the spousal or survivor benefit is reduced by two-thirds of the amount of the pension. Let s use Tim as an example again. Let s say his wife, Mary, worked all her life in a regular, Social-Security covered job and now has a PIA of $1,800. Because Tim worked in a noncovered job, his spousal benefit will be subject to the GPO. This means any spousal benefit he may be entitled to will be reduced by two-thirds of the amount of his police pension. Since his maximum spousal benefit is $900 (50% of Mary's $1,800 PIA), the GPO reduction of $2,000 (two-thirds of Tim's $3,000 pension) would wipe out the entire spousal benefit. Now, let s say Mary dies, and Tim wants a survivor benefit. If Mary waited until 70 to file, her benefit could be as high as $2,376 ($1,800 x 1.32). Subtracting $2,000 for the GPO, Tim is left with a survivor benefit of $376. Needless to say, the WEP and the GPO can cause significant complications in Social Security planning. They are a common source of confusion for advisors and their clients alike. Here is the key principle to keep in mind: Only those who are eligible for Social Security benefits despite having worked in a non-covered job are subject to the WEP and the GPO. The spouses of WEP and GPO-subject workers are not directly affected. However, their benefits may be indirectly reduced. 3

6 Further Claiming Scenarios Let s go back to Tim and Mary. If Mary wants a spousal benefit based on Tim s earnings record, it will be based on his WEP-adjusted PIA of $758, not his pre-wep PIA of $1200. If she files for her spousal benefit at FRA, she will receive half of Tim s WEP-adjusted PIA, or $379. Her spousal benefit is not subject to the Government Pension Offset, because she never worked in a non-covered job. Now suppose Tim dies and Mary wants her survivor benefit. Her survivor benefit will be based on Tim s full, unreduced PIA of $1200 the WEP vanishes for survivor benefits. Once again, because Mary never worked in a non-covered job, she is not subject to the GPO. Of course, the amount of Mary s survivor benefit will vary depending on both when Tim filed for his retirement benefit, and when she files for her survivor benefit. Alerting clients to potential benefit reductions due to the WEP or GPO before they go in to apply for benefits is a very valuable service you can provide. Be sure to ask all clients if they ever worked in a job that was not covered by Social Security, and either help them estimate their benefits or refer them to SSA. Twenty Savvy WEP/GPO Questions Every day, Horsesmouth s Director of Retirement and Life Planning Elaine Floyd answers a wide variety of difficult Social Security questions from members of the program. Questions may be submitted to our Questions and Answers Forum. Questions on the WEP and the GPO comprise about 6% of submissions. Some of these are reproduced below: 1. Q: Our client has been paying into Social Security for 27 years. In 2001, she kept the same job, but her place of employment stopped paying into Social Security. I used the Social Security Online Calculator (WEP Version) and it showed that her SS would be reduced by just a few dollars. I just want to make sure I'm not missing anything. Does this sound correct? She is only 58 years old and still working. A: Yes, it sounds correct. The WEP reduction is reduced if the person worked more than 20 years in a covered job. It is eliminated entirely after 30 years. So 27 years should cause a small WEP reduction. 2. Q: I have a client who is retiring with a pension of $4,000 a month from a school district that did not contribute to Social Security. For a different 27 years (including this year) she paid into Social Security. Her PIA is $2,089. Her husband's PIA is $1,656. Both are turning 66 this year and would prefer to file at their full-retirement age or later. Will she be subject to the WEP or the GPO even if she paid into Social Security for 27 years? If so, how will it affect her spousal benefits, survivor benefits and filing strategies? She hopes to delay her own Social Security until age 70. A: There will be a small WEP reduction. She would need to have paid into Social Security 30 years to wipe out the WEP. Her covered work won't change the GPO: spousal or survivor 4

7 benefits will be reduced by two-thirds of the $4,000 pension, reducing them to zero. Considering that she s the higher earner and ineligible for spousal or survivor benefits, she should definitely delay to 70. He should consider delaying his benefit as well. Use our WEP/GPO Planning Calculator to help determine the best strategy for this couple. 3. Q: I have a client who is full retirement age and who has covered and non-covered employment. I understand how the WEP reduction takes into account her covered years of employment, but how does covered employment work for GPO? Her spousal benefit is higher than her own benefit. After working in a non-covered job from which she received a small pension, she worked for about 25 years in a covered job. A: The GPO doesn't consider years worked in covered employment. Rather, it considers the amount of the pension from the non-covered work. It should work out that if she worked a short time in a non-covered job, she would have a small pension, and this would naturally cause the GPO reduction to be smaller. 4. Q: My client is age 65 and is divorced. She has not remarried, and she has a PIA of $2,064. Her ex-spouse had a non-covered pension benefit of $3,000 per month. He also has a WEP-reduced PIA of $100 per month. As part of the divorce settlement, she is receiving one-half of her ex-spouse's non-covered pension benefit, totaling $1,500 per month. If she files for her own Social Security benefit at FRA, will she have any of her own SS benefit reduced by the GPO because she is receiving part of his non-covered pension benefit? If instead, at FRA, she filed for ex-spousal benefits and deferred her own benefit to age 70, could she collect 50% of his WEP-adjusted PIA as a benefit? A: She should not be subject to the GPO because she did not work in the non-covered job. I know this is true for widows who receive a survivor pension from their husbands' non-covered job, so it should apply in divorce cases as well. She should just make it clear when she applies that she always paid into Social Security and that she never worked in a non-covered job. The answer to your second question is yes. If she files a restricted application at FRA, she can receive 50% of her ex-husband's WEP-adjusted PIA. 5. Q: Can an individual be impacted by both WEP and GPO? Specifically: If an individual is subject to WEP, then his or her Social Security payment can be reduced (up to the maximum of $442 per month in 2017), based on the table provided by SSA. If you are the spouse of a WEP-impacted individual and you are subject to the GPO, is the reduction (two thirds of your pension) deducted from the WEP-reduced figure of your spouse, assuming you requested spousal income at FRA and your spouse is FRA or older? A: If you worked in a non-covered job, your own benefit is subject to the WEP, and any spousal or survivor benefits you may receive off your spouse's record are subject to the GPO (reduced 5

8 by two-thirds of the pension). If your spouse always worked in a covered job, her own benefit will not be affected by the WEP or GPO, even if you die and she receives a survivor pension from your non-covered job. If she files for a spousal benefit off your record it will be based on your WEP-adjusted PIA. If she files for a survivor benefit off your record, it will be based on your full PIA the WEP reduction goes away. 6. Q: I have a widower who was subject to WEP on his Social Security retirement benefit. His deceased spouse was not subject to WEP and had a considerably higher benefit. Can the surviving spouse claim a survivor benefit, and would any survivor benefit be subject to WEP? Both are beyond FRA. A: If the widower was subject to the WEP, it means any spousal or survivor benefits he might be entitled to would be subject to the GPO and be reduced by two-thirds of the amount of his pension. When he applies for the survivor benefit they will ask him about his pension. SSA will tell him how much, if anything, he is entitled to. 7. Q: If a husband's benefit is reduced because of the WEP, is the spousal benefit based on half of his reduced benefit or half of his 'original' benefit on the statement? A: It would be based on his WEP-adjusted PIA. If the spouse applies for the spousal benefit at her FRA, the spousal benefit would be 50% of his WEP-reduced PIA. If he dies, the WEP adjustment goes away and her survivor benefit would be based on his full PIA. 8. Q: I have a client with a sister receiving SSDI (Social Security Disability Insurance). The sister is now able to draw her Missouri teacher's retirement of around $750 per month. Will this have any impact on her ability to continue to receive SSDI? A: Yes. Missouri teachers do not pay into Social Security. The WEP affects disability benefits as well as retirement benefits. 9. Q: I have a client who has been on Social Security for about 2 years. He also has a pension from the fire department which has reduced his Social Security by 50% because of the WEP. When his wife retires and applies for her spousal benefit, will it be reduced because of her husband s pension through the fire department? If the WEP is applied to the spousal benefit and his benefit is higher, can he switch to a spousal benefit on his wife s earnings record? 6

9 A: Her spousal benefit will be based on his WEP-adjusted PIA. He can't switch to a spousal benefit because it would be reduced by even more than the WEP -- it would be reduced by two thirds of the amount of his pension under the GPO. This would probably bring it down to zero. 10. Q: If a wife receives a benefit from her deceased husband's government pension, is her Social Security then reduced by the GPO or WEP (assuming she s taking her own benefit after her husband dies)? A: No. As long as she never worked in a non-covered job, her own Social Security retirement benefit will not be affected by the receipt of a survivor pension from her husband's non-covered job. 11. Q: Our client is age 61 and has a government pension from a job in which he did not pay into Social Security. Also, he has Social Security earnings for 17 years that meet the threshold for substantial earnings. If he works 3 more years with substantial Social Security earnings, then he would only get 40% of the Social Security listed on his statement, right? If not, where did I go wrong? A: No, that s not right. The 40% applies to the first bend point. In computing his PIA, the first bend point would be multiplied by.40 instead of.90. This has the effect of reducing the PIA by about $400; depending on the client s age cohort and what that first bend point is to begin with. It's best to use the SSA WEP calculator to determine the WEP adjustment. Once you ve figured out the WEP adjustment, our WEP/GPO calculator can help you devise a strategy for your client. 12. Q: Are dependent benefits impacted by a WEP-adjusted PIA? A: It depends. If the worker is still alive, then the answer is yes dependent benefits are subject to the WEP. However, if the worker is deceased and the dependents are receiving survivor benefits, there is no WEP reduction. 13. Q: Mary s date of birth is 1/27/52. She worked in a non-social Security covered job from the early 1970 s until about She is now receiving a pension from the non-covered job. She left that job and started Social Security covered employment. Her SS statement shows $0 work history from 1970 to 1993 as expected. However, 1993 and 1994 look strange with the following info: 1993: SS Earnings = $0; Medicare Earnings = $10, : SS Earnings = $13,471; Medicare Earnings = $34,265 From 1995 forward, Social Security and Medicare earnings are the same, just as expected. What would explain differences? Is it correct to use the Social Security earnings amounts when inputting data into a WEP calculator? Are there any other questions I should be asking? 7

10 A: It is not unusual pay into Medicare but not Social Security. Either she had a different job, or the employer changed its plan. In any case, use the earnings as shown on the Social Security statement in the WEP calculator. 14. Q: My client is married and will receive a government pension. Her PIA is $2,000, but with the WEP she will get $1,700 monthly. If she passes, will her husband get the reduced benefit as a survivor? Or will he receive the full $2,000 monthly? A: He'll get the $2,000. Survivor benefits are not reduced for the WEP. I should remind you, however, that the exact amount of the survivor benefit will depend on when he claims it. 15. Q: Is there a comprehensive list of non-covered pensions that are subject to WEP/GPO? A: Well there's this: Also see this: However, the best way to tell if a person worked in a job that didn't pay into Social Security is to look at their Social Security statement. Many zeroes or low earnings would suggest they did not pay into Social Security. 16. Q: Two questions: First, if a federal pensioner (FERS) receives his pension and his wife (non-federal employee) receives her Social Security, then upon his death could his wife receive both her Social Security benefit and his survivor pension from the government? Or would there be an offset? Please describe the offset. And second: How long would a federal pensioner need to work in private industry to qualify for Social Security benefits? Which offsets, if any, would apply? A: Federal employees have paid into Social Security since It is likely that your client's federal pension will not be subject to the WEP, unless he worked before 1984 and falls under the Civil Service Retirement System (CSRS). If he is indeed subject to the WEP, here are the answers to your questions: 1) If he dies and she receives her survivor pension, it will not affect her own Social Security benefit as long as she is not receiving a pension from a non-covered job. 2) He would need to pay into Social Security at least 10 years to qualify for a Social Security benefit. But again, it is possible he paid into Social Security during his federal job. He should check. 8

11 17. Q: I m working with a prospect that is retired but not drawing Social Security. He has 17 years of Social Security earnings ranging from $31 to $2,765. He receives a teacher s pension of $5,000 a month. His Social Security statement shows a PIA of $212 at age 66, $280 at age 70 and $167 at age 62. How do I figure the adjusted Social Security amount he will receive based on his pension? Also, his wife was a teacher and currently receives a monthly pension of $4,000. She has 10 years of Social Security earnings ranging from $312 to $11,316. However, she falls short of 40 credits apparently she only has 22? Will she be eligible for any of her benefits and if so how do I figure out the reduced amount? A: Both spouses will be subject to the WEP for their own benefits and the GPO for their spousal benefits. The GPO reduction is two-thirds of the pension amount; this will wipe out both spousal benefits. It will also wipe out both survivor benefits after either spouse dies. To figure the WEP reduction, just go to SSA and use the WEP calculator. The WEP reduction is not based on the pension amount. It is based on the number of years of substantial earnings. It looks like neither spouse has enough years of substantial earnings to lessen the WEP reduction. But the SSA WEP calculator can tell you. 18. Q: Does the fact that an individual has a WEP-adjusted PIA impact an ex-spouse's spousal benefit? A: Yes. The divorced-spouse benefit will be based on the WEP-adjusted PIA, not the full, unreduced PIA. 19. Q: Suppose you are not affected by the WEP because you ve got more than 30 years of substantial earnings. Are you also exempt from the GPO? A: Not necessarily. WEP and GPO look at different things. The years of substantial earnings does not apply to the GPO. What matters for the GPO is the amount of the pension from the non-covered job. Realistically, though, if a person had 30 years of substantial earnings in a covered job, it would probably mean that was their main career and any pension they might get from a non-covered job would be a small one but not always, of course. 20. Q: A client was married to a postal worker for thirteen years. Will she be able to draw Social Security from him? A: Postal workers do not pay into Social Security. If he also had a job that paid into Social Security (but worked less than 30 years in that job), his Social Security benefit will be reduced for the Windfall Elimination Provision (WEP). This could reduce his PIA by as much as $428. The wife's spousal benefit would be based on this WEP-adjusted PIA. 9

12 Useful Resources Windfall Elimination Provision. SSA Publication No Government Pension Offset. SSA Publication No SSA POMS: RS WEP Applicability SSA POMS: RS Windfall Elimination Provision (WEP) Exceptions SSA POMS: RS Determining Pension Applicability, Eligibility Date, and Monthly Amount SSA POMS: GN Government Pension Offset Table of Contents SSA POMS: GN Determining a Pension Amount (GPO) National Education Association Social Security Offsets: Frequently Asked Questions Social Security Fairness GPO WEP FAQ SSA - POMS: GN General Rules for Government Pension Offset (GPO) Presenting: Savvy Social Security WEP/GPO Calculator We are pleased to announce that Horsesmouth now has a WEP/GPO Calculator to accompany the Spousal Planning Calculator. Functionally, the WEP/GPO Calculator is similar to the Spousal Planning Calculator, but with an added option to adjust for these cumbersome rules. As with all Horsesmouth calculators, the WEP/GPO Calculator comes with a reporting feature. Horsesmouth s premade client reports are a handy resource for taking clients through the insand-outs of various claiming strategies. 10