Public employees, such as school teachers, slated to receive a pension may face challenges when planning for retirement, particularly if they hope to include Social Security as well. If a client works in a job that does not withhold Social Security payroll taxes, the receipt of a pension may eliminate or reduce Social Security benefits.
Clients who work for state and local governments in positions such as teachers, fire fighters, and police officers, and who are eligible for a retirement pension, may be affected. Specifically, public sector employees are not covered by Social Security in 15 states: Arkansas, California, Colorado, Connecticut, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Montana, Nevada, Ohio, Rhode Island, and Texas.
Federal workers, however, are not affected since most hired after 1983 are covered by Social Security.
Social Security has two provisions in its rules that address situations where an individual has worked multiple jobs in both the private and public sectors, and where he or she is looking to claim spousal and survivor benefits.
1. Windfall Elimination Provision (WEP)
Prior to the introduction of WEP, those who worked primarily in a job not covered by Social Security, but who had some employment history with a job that was covered, were treated as if they were long-term, low-wage workers. As a result, they received a Social Security benefit that was based on a higher percentage of their earnings. In these cases, government workers had received a disproportionately large benefit.
The WEP ensures that the workers with multiple types of jobs are treated the same as government workers in jobs that did not pay into Social Security. With the WEP provision, Social Security benefits may be reduced but not totally eliminated. The provision can also affect the amount a spouse, but not a survivor, receives in Social Security benefits.
How it works:
- If an individual has 30 years of “substantial” Social Security earnings, the WEP does not apply.
- The provision affects an individual who earned a pension where the employer didn’t withhold Social Security taxes and who worked at least 40 quarters (10 years) in a job covered by Social Security.
- For example, assume an individual has a government pension of $2,000 per month, and he or she has also worked in a Social Security-covered job for the past 15 years, with an income of $75,000 per year. The individual’s monthly Social Security benefit would be reduced from $1,490 to $1,084 per month due to the WEP.
The Social Security Administration provides a calculator to determine the reduction. [link to calculator]. For more detailed information on how the WEP works, read the SSA’s publication, Windfall Elimination Provision.
2. Government Pension Offset
This provision may affect those who earned a pension where the employer didn’t withhold Social Security and who are now applying for Social Security spousal or survivor benefits based on the spouse’s earnings history.
In this case, Social Security benefits could be totally eliminated.
How it works:
- Social Security benefits are reduced by two thirds of the amount of the public pension. For example, consider a teacher’s pension of $750 per month and Social Security spousal benefits of $600 per month. The Social Security benefit would be reduced by two thirds of the pension ($500), resulting in a benefit of $100.
- For more detailed information, read more about the Government Pension Offset.
Discuss Social Security as part of retirement plan
Social Security should be part of the discussion early on in retirement planning, especially with clients who may be public employees or whose spouses may work for the government. Clients may assume that because a portion of their earnings or their spouse’s earnings was paid into the Social Security system, they are entitled to full benefits.