February 7, 2022 By

Q&A: Social Security is insurance

Dear Liz: My wife died in March 2020. I receive nothing from her Social Security (other than $255) and will receive only a portion of mine due to the windfall elimination provision. Is there anything I can do since I am receiving none of what she paid into Social Security and only a fraction of mine?

Answer: In a word, no. If you’re receiving a pension from a job that didn’t pay into Social Security, the government pension offset reduces any Social Security survivor or spousal benefit by two-thirds of the amount of your pension. If two-thirds of the amount of your pension is greater than your survivor benefit, you don’t get a survivor benefit.

Is that an outrage? Perhaps, if you think that Social Security should act like a retirement account. In reality, it’s insurance. (The formal name for Social Security is Old Age, Survivors and Disability Insurance.)

With a retirement account, what you take out usually bears some relationship to what you put in. With insurance, that’s not necessarily the case. You may take out more than you put in, less or nothing at all.

Many people pay Social Security taxes for decades but ultimately get more from a spousal or survivor benefit than from their own work record. Then there are those, like you, who have their retirement benefit reduced, or a survivor benefit eliminated, because they have a generous pension from a government job that didn’t pay into the Social Security system. In these cases, it can feel like the Social Security taxes paid — the “premiums,” if you will — have been wasted even if financially you’ve come out ahead.

Filed Under: Insurance, Q&A, Social Security Tagged With: , , ,
January 17, 2022 By

Q&A: Social Security and government pensions

Dear Liz: You recently mentioned the windfall elimination provision that affects pensions from jobs that don’t pay into Social Security. I’m wondering what those jobs are. Are they just part of the gig economy, or is there some other category of jobs that don’t pay into Social Security?

Answer: Gig economy jobs are supposed to pay into Social Security, just like the vast majority of other occupations. People with gig jobs are often considered to be self-employed, so instead of paying just 6.2% of their gross wages into Social Security like most workers, they also pay the employer’s 6.2%, for a total of 12.4% of their earnings.

Some state and local governments have their own pension systems that don’t require workers to pay into Social Security. People who get pensions from those systems and who also qualify for Social Security benefits from other jobs can be affected by the windfall elimination provision, which can reduce their Social Security benefit. They also can be affected by the government pension offset, which can reduce or even eliminate spousal and survivor benefits from Social Security. Here’s an example:

Dear Liz: I am 59, retired, and receive a pension of approximately $150,000 a year. My husband receives a small pension, about $1,000 a month, and Social Security disability due to a diagnosis of Stage 4 lung cancer. I am the sole financial support of my 88-year-old destitute mother, who requires care that costs approximately $5,000 a month. I retired earlier than anticipated to care for my ailing mother and husband.

Although I worked many years where I paid into Social Security, I knew I would receive only about half of my Social Security check due to the windfall elimination provision that affects pensions received from jobs that didn’t pay into Social Security. What I didn’t know is that when my husband passes, I will receive no survivor benefits from his 41-plus years of paying into the system.

Our entire retirement planning was based on his Social Security combined with my pension. He’s just a few months from passing, and I will not be receiving anything, which will immediately put me in an untenable financial position. How is it that after 30 years of marriage I will receive nothing because I have a pension? This just doesn’t seem right. Do I have any options?

Answer: Your situation shows why it’s so important to get sound advice about Social Security before retiring because many people don’t understand the basics of how benefits work.

Even if you didn’t have a pension, for example, your income would have dropped at your husband’s death. When one spouse dies, one of the couple’s two Social Security benefits goes away and the survivor gets the larger of the two checks the couple received.

Your pension is much, much larger than the maximum you could have received from Social Security in any case. If you can’t get by without your husband’s benefit, consider ways to reduce your expenses. Because your mother is destitute, she may be eligible for Medicaid, the government healthcare program for the poor. Unlike Medicare, Medicaid pays the costs of nursing home and other custodial care expenses. Contact your state Medicaid office for details.

Filed Under: Q&A, Retirement, Social Security Tagged With: , , ,
November 22, 2021 By

Q&A: Windfall elimination provision explained

Dear Liz: I understand your explanation of the windfall elimination provision that reduces Social Security benefits if someone is receiving a pension from a job that didn’t pay into Social Security. I am a teacher with such a pension who also worked more than 10 years in the private sector. I’d accept the explanation and the reduction if the WEP were applied in all 50 states. As you know, it is not. How is this reduction justifiable in any way?

Answer: The idea that WEP doesn’t apply in all states is a myth. WEP applies regardless of where you live. What matters is whether you’re getting a pension from a job that didn’t pay into Social Security. Some states provide such pensions while others don’t.

“If a state doesn’t provide its workers with their own pension and instead has them join Social Security, then exempting them from the windfall elimination provision is fully appropriate,” says economist Laurence Kotlikoff, president of Economic Security Planning Inc., which offers Social Security claiming software at MaximizeMySocialSecurity.com.

As mentioned earlier, WEP is not designed to take away from you a benefit that others get. Rather, the provision is designed to keep those who receive pensions from jobs that didn’t pay into Social Security from getting significantly higher benefits than workers who paid into the system their entire working lives.

That can happen because of the progressive nature of Social Security benefits, which are meant to replace a higher percentage of a lower-earner’s income than that of a higher earner.

People who don’t pay into the system for many years can appear to be much lower earners than they actually are. Without adjustments, they would get bigger benefit checks than people in the private sector with the same income who paid much more in Social Security taxes.

Filed Under: Social Security Tagged With: , ,
November 15, 2021 By

Q&A: Windfall elimination provision

Dear Liz: I just read your answer regarding the windfall elimination provision question. I receive a pension after having retired from law enforcement. I was fortunate to be able to retire at 46. Then I landed a great job with excellent pay. I expect to pay into Social Security for a total of 17 years and I’ve been contributing the maximum for the last six. How will this affect my benefits? Will I still be penalized?

Answer: The only way the windfall elimination provision wouldn’t affect you is if you paid into Social Security for 30 years or more. If you pay Social Security taxes for 20 years or less, you’ll face the full impact of this provision, which affects those who get pensions from jobs that didn’t pay into Social Security. Starting at year 21, the effect begins to lessen until it disappears at year 30.

You can learn more about what to expect on Social Security’s site. Some of the paid Social Security claiming strategy sites, including Maximize My Social Security and Social Security Solutions, can incorporate the windfall elimination provision into their calculations if you want to model how different retirement dates might affect your benefits.

Filed Under: Follow Up, Q&A, Retirement Tagged With:
October 28, 2019 By

Q&A: Triggering the windfall elimination provision

Dear Liz: After working and paying into Social Security for more than 40 years, I took a city job at age 60. This job does not pay into Social Security and will afford me a small pension upon retirement in a few years (I’m now 64). Will this pension amount be deducted from my Social Security payments?

Answer: Normally, people who get pensions from jobs that didn’t pay into Social Security face the “windfall elimination provision,” which can reduce any Social Security benefits they may have earned. If, however, you have 30 or more years of “substantial earnings” from a job that paid into Social Security, then this provision does not apply. The amount that counts as “substantial earnings” varies by year; in 2019, it’s $24,675.

Filed Under: Q&A, Social Security Tagged With: , , ,
April 30, 2018 By

Q&A: The idea here is not to cheat public servants

Dear Liz: Thanks for your column about Social Security claiming strategies. Here’s a further complication you didn’t address. If the surviving spouse is a teacher in many states, access to survivor’s Social Security benefits is further restricted (if not entirely blocked) by a misogynistic, anti-teacher ruling dubbed the windfall elimination provision, which perhaps was a backlash against the women’s liberation movement of the 1970s and 1980s.

Any clarification on the windfall elimination provision’s inconsistent application and its impact on my widow’s fixed income will be greatly appreciated.

Answer: The explanation is actually a lot more prosaic.

The windfall elimination provision and a related measure, the government pension offset, were not designed to rob public servants of benefits other people get. Instead, the provisions were meant to keep those who get government pensions from getting significantly bigger benefits than people in the private sector.

The provision that would reduce and possibly eliminate your spouse’s survivor benefit is actually the government pension offset. The offset, like the windfall elimination provision, applies to people who get pensions from jobs that didn’t pay into the Social Security system. (Some school systems, as well as other state and local government employers, have opted out of Social Security and provide their own pensions instead.)

If both you and your spouse had only Social Security and no government pensions, one of your two Social Security checks would stop at your death. After that, your spouse would get one check — the larger of the two checks the household received — as a survivor benefit.

If the government pension offset didn’t exist, your widow c​ould receive two checks: a survivor benefit equal to your Social Security benefit, plus her pension. She potentially would be getting a lot more from Social Security than those who paid into Social Security their entire working lives.

The windfall elimination provision, meanwhile, applies to people who have government pensions but also worked in jobs that paid into Social Security.

When people don’t pay into the system for several years because they have jobs with government pensions instead, their annual Social Security earnings for those years are reported as zero. Because Social Security is based on ​workers’ 35 highest-earning years, those zeros make it look like they have lower lifetime earnings than they actually did.

That’s a problem because the Social Security system is progressive, replacing more income for lower-earning workers than for higher-earning ones. Without adjustments, people with pensions would look like lower earners than they actually were. They would wind up with bigger Social Security checks than someone who had the same income in a private-sector job that paid in a lot more in Social Security taxes.

These provisions are complicated and hard to explain, which is part of the reason some people jump to the conclusion they’re being denied something others are getting. In reality, the provisions were meant to make the system more fair.

Filed Under: Q&A, Retirement Tagged With: , , , ,
April 11, 2016 By

Q&A: Social Security vs. state pension

Dear Liz: I worked enough in private industry to qualify for Social Security benefits, but then worked for the state and did not contribute to Social Security for another 20 years. So, I will have a state pension at my current salary as well as Social Security representing my former salary, which was about one-third of what I’m making now. My question is, would it be of value to retire early and return to private industry for a few years?

Answer: Your Social Security benefit is likely to be reduced because you’re getting a pension from a job that didn’t pay into Social Security. This is known as the windfall elimination provision, and you can learn more about it on the Social Security website.

You can avoid the provision if you had 30 years or more of “substantial earnings” (which varies by year but was at least $22,050 in 2015) from jobs that paid into Social Security.
It probably wouldn’t make much sense to quit a well-paying job with a presumably generous pension to try to boost a much smaller Social Security payout. But a fee-only financial planner could run the numbers for you and explain your various options.

Filed Under: Q&A, Retirement Tagged With: , , , ,
January 5, 2015 By

Q&A: Follow up on the Windfall Elimination Provision

Dear Liz: You recently addressed the issue of the Windfall Elimination Provision, which reduces Social Security benefits for people who paid into Social Security but who also get a pension from an employer that does not pay into the system. My wife taught for nearly 40 years. Neither she nor her employer contributed to Social Security. As a result she falls under the WEP. This also, however, affects her spousal benefits under my Social Security record. So, because of the WEP, any spousal benefits she would be entitled to are essentially zeroed out since she receives a pension. If she had never worked (thereby not contributing to Social Security), she would be entitled to her entire spousal benefit. That doesn’t seem reasonable to me.

Answer: What you’re referring to is a different provision, the Government Pension Offset. People who receive a pension from a federal, state or local government job that didn’t pay into Social Security can have their Social Security spousal or survivor benefit wiped out by the GPO. By contrast, the Windfall Elimination Provision typically leaves at least half of the worker’s Social Security benefit intact.

The rationale for the GPO goes like this: Spousal and survivor benefits are considered dependent’s benefits. The law has always required that these benefits be offset dollar for dollar by the amount of the person’s own retirement benefit. So if your wife had earned a $1,000 monthly Social Security benefit based on her own work record but a $500 spousal benefit based on yours, she would not receive both. Her own benefit would completely offset the spousal benefit.

Before the GPO, though, your wife could have received a $1,000 monthly pension from a job that didn’t pay into Social Security plus a spousal or survivor’s benefit from Social Security, leaving her much better off than someone who had paid into the system.

Filed Under: Estate planning, Q&A Tagged With: ,
December 22, 2014 By

Q&A: Windfall Elimination Provision followup

Dear Liz: In a recent column, I believe you got one aspect of Social Security’s Windfall Elimination Provision wrong. If you’re affected by WEP, in no case can you get more than 90% of your Social Security benefit. It is a sliding scale. With 20 years of earnings under Social Security, you get 40%. It goes up 5% per year to a maximum of 90% at 30 years. I worked 28 years as a paramedic and firefighter, most of the time for agencies that offered a pension instead of paying into Social Security. I also have 22 years of substantial earnings that were covered by Social Security and plan on working eight to 10 more years to get to 90%.

Answer: It’s easy to get confused about how Social Security figures benefits, but rest assured: If you have 30 years of substantial earnings from jobs that paid into Social Security, you will get 100% of your Social Security benefit even if you have a pension from a job that didn’t pay into Social Security.

Here’s what you need to know. Social Security is designed to replace more income for lower-wage workers, because higher-wage workers presumably find it easier to save for retirement. People who get pensions from employers who don’t pay into Social Security, but who also had jobs from employers that did, can look to the Social Security system as though they were long-term low-wage workers even when they’re not. Without the Windfall Elimination Provision, they could get a bigger Social Security check than they would have earned had they paid into the system all along.

To compute our benefits, Social Security separates our average earnings into three amounts and multiplies those amounts by different factors. For a typical worker who turns 62 this year, Social Security would multiply the first $816 of average monthly earnings by 90%, the next $4,101 by 32% and the remainder by 15%.

Those affected by WEP have a different formula, but it affects only that first part of their average earnings — the part where everyone else gets credited for 90%. The WEP formula is, as you note, on a sliding scale. Someone with 20 or fewer years of substantial earnings from jobs that paid into Social Security would see the first $816 multiplied by 40%. Someone with 28 years, by contrast, would have the first $816 multiplied by 80%. Someone with 30 years or more would get the full 90%.

Social Security’s pamphlet on WEP lays this out, and notes that the Windfall Elimination Provision does not apply to anyone with 30 or more years of substantial earnings from jobs that paid into Social Security. You can read more about it here: http://www.ssa.gov/pubs/EN-05-10045.pdf.

Filed Under: Estate planning, Q&A, Retirement Tagged With: , ,
December 1, 2014 By

Q&A: Pensions and the windfall elimination provision

Dear Liz: As a faculty member who was only recently allowed to participate in our state’s public employees’ retirement system, I will have a very small pension. I’m told that Social Security will then reduce my benefit by up to 50% as a result of the so-called windfall elimination provision. Can you tell me how this is legal?

Answer: Many people affected by Social Security’s windfall elimination provision are outraged that their benefits will be reduced. Before the provision was enacted in 1983, though, people who paid less into the Social Security system wound up getting an outsized benefit.

Here’s why. Social Security is designed to replace more of a worker’s income the less he or she makes, with the understanding that saving for retirement is harder the lower your income.

When you get a pension from an employer who doesn’t pay into the Social Security system, but you also qualify for Social Security benefits from other jobs, your Social Security earnings record can look as if you were a long-term, low-wage worker even when you’re not. Without the windfall elimination provision, you could wind up with a Social Security check that replaces more of your income than you would have received had you only worked in jobs covered by Social Security.

How much your benefit will be reduced depends in part on how many years you worked in those other jobs — the ones that were covered by Social Security. The longer you worked at jobs covered by Social Security, the less the windfall elimination provision affects you, as long as you had “substantial earnings” from those jobs. The amount that’s considered substantial varies by year, ranging from $3,300 in 1974 to $21,750 this year. You’ll experience the maximum 50% reduction if you have 20 or fewer years of substantial earnings. If you have 30 years of such earnings, the provision doesn’t affect you at all.

Filed Under: Q&A, Retirement Tagged With: , , ,