The Social Security system is insanely complicated. I often joke when I teach Social Security classes to certified public accountants (CPAs) that “at your FRA, you’re entitled to your PIA, which is based off of your AIME, unless you delay, at which point you need to factor in DRCs and COLAs.”
This litany of acronyms (which, of course, stand for full retirement age, primary insurance amount, average indexed monthly earnings, delayed retirement credits and cost of living adjustments) doesn’t include two more you may have heard of: the WEP (Windfall Elimination Provision) and the GPO (Government Pension Offset).
That’s because the WEP and GPO no longer exist, thanks to the Social Security Fairness Act (SSFA), which was signed into law on January 5. Good news for all those financial advisers who never understood them in the first place. And on the face of it, great news for retirees who have been receiving reduced benefits owing to one of these provisions. Here’s what they mean:
Windfall Elimination Provision. Reduces Social Security benefits based on your individual earnings. This is caused by working for an employer where you paid into a pension instead of into Social Security.
Government Pension Offset. A reduction for those eligible to receive spousal or survivor Social Security benefits, while also receiving their own pension from a non-Social Security-covered job.
Who is affected?
According to the SSA, the new law will adjust the benefits of more than 3 million people. However, there was no funding attached to it to cover the increased workload it will produce. It’s hard to fathom how the SSA will handle that volume. My advice is to figure out for yourself, or with an adviser, whether or not you’re affected.
If you’ve ever heard the term “non-covered pension,” the odds are you’ve worked in a profession that may be impacted. In the DC metro area, we default to federal employees under the “old system,” aka the Civil Service Retirement System (CSRS). However, employees of certain states or localities could also be impacted.
Essentially, if you are eligible for Social Security because of a job (or jobs) where you paid in, but also receive a pension from an employer where you did not pay Social Security taxes, you are likely subject to the WEP.
Example: In high school and in college, you worked retail and service jobs. While you didn’t make a lot, you were an employee paying income and Social Security taxes. Upon college graduation, you started with the federal government under the old system. You didn’t pay Social Security taxes for 30 years.
After 30 years of service, you spent 10 years consulting and, once again, paid income and Social Security taxes. You will not receive a benefit based on your federal work, but you were eligible for a reduced benefit based on your work, before and after. That benefit will no longer be reduced.
Additionally, if you are eligible for spousal or survivor benefits from Social Security but don’t currently receive them owing to a non-covered pension from your work, you will benefit.
What to do if you’re affected
For those who are affected, the domino effect is surprising. Obviously, income increases, which changes the overall tax picture. It may also reduce the necessary distributions from other retirement accounts, once again changing the tax picture.
The bigger picture is that it will change how much you can spend, and thus, what you can do in retirement without running out of money. We rely on planning software to figure that new number out, but you can access a free version here.
While the SSFA became law this year, it will apply retroactively to reduced benefits paid out since January 2024. The payments have started to arrive — so it’d be a good idea to ensure your information with the SSA is up to date, including your address and direct-deposit information.
For those who have never applied for Social Security benefits because they would not have received any benefit pre-SSFA, the SSA is advising that you apply ASAP because it may affect when you start receiving benefits from this change. You can apply for Social Security benefits online, while survivor benefits can be applied for only by calling 1-800-772-1213.
