Jim Blankenship’s financial planning practice isn’t far from Springfield, the state capitol of Illinois. That means he often faces the job of breaking some bad news to clients about their Social Security benefits. Many will get much less than what their annual Social Security statement reflects simply because they have worked part of their career in government.
“I see it regularly,” says Blankenship, a CFP who has also written extensively about Social Security. “Usually they knew already there would be an impact—they just didn’t know how bad it might be.”
Blankenship is talking about the Windfall Elimination Provision (WEP), a little-understood Social Security rule designed to prevent double dipping from Social Security and public sector pensions. The WEP and its cousin, the Government Pension Offset (GPO), can mean very sharp benefit cuts for affected workers.
Under the WEP, a worker retiring this year who might otherwise receive a $976 monthly Social Security benefit could see that chopped to $548, according to the Congressional Research Service. The GPO can result in even sharper cuts to spousal and survivor benefits.
The WEP affected 1.7 million beneficiaries at the end of 2015, according to the Social Security Administration (SSA), while the GPO impacted about 652,000. The provisions impact many teachers, police, firefighters, postal workers, air traffic controllers and some federal government state, county, local and special district workers.
The WEP was enacted as part of broader Social Security measures taken in 1983 to avert a solvency crisis. The intention was to eliminate a supposed advantage in the Social Security benefit formula to people who also had pensions from jobs that are not covered by Social Security.
Employee associations representing affected state and municipal workers have been pushing for changes to the WEP and GPO for years. Legislation has been introduced repeatedly in Congress that would repeal both, but that would be expensive. The SSA's chief actuary estimates that it would bring the depletion date for Social Security's trust fund one year closer; in 2007, the SSA estimated that repealing the WEP would cost $40 billion over 10 years.
The Equal Treatment of Public Servants Act of 2015, sponsored by Rep. Kevin Brady (R-Texas), who chairs the powerful Ways and Means Committee, would reduce the WEP penalty by 15 percent beginning in 2018, and a 50 percent reduction would follow in 2027, according to estimates by the Social Security actuary. The bill has been hung up in debate among the sponsors and reform advocates on who exactly should receive relief and how to pay for it.
Why would government workers be treated differently from everyone else? The answer begins with the way that Social Security benefits are distributed across wage earners of varying incomes.
Social Security's benefit formula is progressive; workers with low average lifetime earnings get a higher benefit amount compared with their earnings than people who are better paid. Social Security expresses the benefit as a primary insurance amount. This number is derived from calculating a worker’s average indexed monthly earnings—their top 35 years of earnings before age 60 are indexed, then put on more of a proper comparative basis with the earnings level in our society as of the year they turned 60. That is done using the average wage indexing series that the Social Security Administration computes every year.
Then, the primary insurance amount (PIA) is calculated. This is a weighted formula that gives a higher benefit relative to career earnings for a lower earner than for a high earner. A worker receives 90 percent of average indexed monthly earnings (AIME) for the first segment of PIA (also referred to as a "bend point"). This year, that covers the first $856 of monthly AIME. For the next segment, between $856 and $5,157, the worker gets 32 percent of AIME. For any AIME amount above that amount, they get 15 percent of AIME.
But the PIA formula doesn't distinguish between workers who had low wages and those who worked for part of their careers in jobs not covered by Social Security. Many federal and state jobs are outside the system because they are covered by government pension plans.
The WEP aims to eliminate the high-benefit return these workers get on their Social Security incomes when they are not really low-income. The Committee on Ways and Means offers this example:
Consider two workers: one with her entire career as a privately employed security guard, the other having split her career between a privately employed security guard and a police officer for a government employer that does not participate in Social Security.
Throughout their careers, both have the same average monthly earnings—$4,000. That full amount is cranked into AIME for the private sector worker, but just $2,285 is considered for the worker who split her time between the public and private sectors. The WEP reduces initial Social Security payments from $1,776 to $800.
For federal employees, the WEP applies only to workers who started their federal employment before 1983, were covered by the Civil Service Retirement System and did not contribute to Social Security. The provision does not apply to people covered by the newer Federal Employees Retirement System, which is a defined contribution plan. Those workers contribute to Social Security.
What can planners do to help clients affected by WEP and GPO? First, make sure they know it’s coming and build it into their retirement plans. The annual statement of benefits issued by the SSA has included a description of the possible impact of the WEP and the GPO since 2007; for workers who are affected, the statement includes a link to an online tool to help them calculate the impact. People who have worked only in jobs not covered by Social Security get a letter indicating that they are not eligible.
Some clients may be able to reduce or sidestep WEP entirely by lengthening the amount of time spent in Social Security–covered jobs. The impact of the WEP is reduced for workers who spend 21 to 29 years in Social Security–covered work, and it is eliminated entirely for those who spend 30 years or more in such jobs.
“For some clients, working longer can help,” says Blankenship. “And that doesn’t mean you can’t be receiving Social Security benefits at the same time,” he notes. “That’s the foolproof way out of it.”
The key is to earn enough in a given year to meet Social Security’s definition of a “substantial year” of work. In 2015, the amount was $22,050 (newer figures have not been released). More detail on the substantial work rules area is available in this Social Security publication (pdf).
For more on the WEP and GPO, consult this resource page on the Social Security Administration website.