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The Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) are two particularly nasty pieces of Social Security work. These provisions stem from the Constitutional restriction on forcing federal, state, and local governments from participating, as employers, in Social Security. These governments and their agencies can, and many do, choose not to participate or not to participate fully. An example is the State of Illinois Teachers Retirement System with its half million non-covered participants.
Of course, an Illinois school teacher might have started teaching after having attained full Social Security coverage (40 quarters) due to working in covered employment. Alternatively, he might have taught first and then worked enough in covered jobs to get the 40 quarters. Or he might have become fully covered by flipping between covered and non-covered positions, including in the same year.
The maximum quarters of coverage you can attain in a single year is 4. But you can earn those 4 quarters by working for just one second. For each $1,730 you earn in 2024, one coverage quarter comes your way. So, if you can get paid $6,920 for a second, or even a nanosecond of work, you’ll bag all four quarters in that instant.
The Social Security benefits you can receive as well as provide to dependents and ex-spouses (auxiliary benefits) are anchored to your Primary Insurance Amount (PIA). Your PIA is your retirement benefit if you take it in the month you turn full retirement age. Hence, the PIA is also called your full retirement benefit.
The PIA formula depends on your Averaged Indexed Monthly Earnings (AIME). The AIME is an average of your highest 35 years of all past covered earnings indexed, by economy-wide average wage growth, through age 60. Nominal covered earnings after age 60 are ranked together with indexed earnings through age 60 in determining your highest 35 values. You can raise your AIME year after year after age 60 if you earn enough. Indeed, as long as you earn above the covered earnings ceiling after 60, you’ll raise your AIME, your PIA, and all benefits that depend on your PIA.
The PIA Formula is Highly Progressive
As your AIME increases, your PIA increases, but not proportionately. To be precise, your PIA increases 90 cents on the AIME dollar up to an initial bracket (bend point), 32 cents on the AIME dollar between the first and second bend point, and 15 cents on the AIME dollar above the second bend point.
Someone who works in non-covered employment for most of their career, but still attains 40 quarters of coverage, will, other things equal, have a lower AIME and appear to be a lifetime low earner even if that’s not the case. The WEP and GPO are meant to keep the system from treating such workers, via the PIA formula, as lifetime poor when they aren’t. But they do so in remarkably crude manners, which can easily overly penalize some of our most valued workers, including teachers, policewomen, and firemen. A number of proposals have been advanced to fix the WEP and GPO. One now if front of Congress — the Social Security Fairness Act — simply calls for eliminating both provisions.
The WEP
Workers with non-covered pensions or non-covered retirement accounts face a less generous PIA formula. Up to the first bend point, your PIA is only 40 cents, not 90 cents on the AIME dollar. There are, however, two main exceptions to how much this formula can reduce your PIA. First, as you accrue between 20 and 30 years of covered earnings that are above what the Social Security Administration (SSA) specifies as substantial earnings, the WEP benefit reduction is, itself, gradually reduced. Once you reach 30 of substantial earnings, the WEP reduction is zero. Second, SSA generally limits its benefit reduction relative to the no-WEP case to half of your non-covered pension or the pension SSA imputes on your non-covered retirement account.
This 50 percent reduction limit aside, the biggest injustice here is that the WEP is independent of the size of your non-covered pension. Two people with the same covered earnings can face the same WEP even though one person has a much larger non-covered pension than the other. Second, having a high non-covered pension doesn’t mean you were a high lifetime earner. You may simply have worked for, say, a non-covered school system that had low wages, but a substantial pension.
The GPO
The GPO reduces the auxiliary Social Security benefits received by relatives or former spouses of a retired, disabled, or deceased worker. The reduction is two thirds of the recipients’ non-covered actual or imputed pension. Auxiliary benefits include spousal, divorced spousal, widow(er), divorced widow(er), child-in-care spousal, mother (father), and divorced mother (father) benefits. Note that if two thirds of the pension or imputed pension of an auxiliary beneficiary exceeds their auxiliary benefit, their benefit will be wiped out entirely.
How to Postpone the WEP and GPO
Most of the millions of Americans with non-covered pensions or non-covered retirement accounts from which non-covered pensions are imputed are, it seems, unaware that the WEP and GPO only apply once one starts receiving their non-covered pension or withdraws, in any form, even $1 from their non-covered retirement account. Let’s call the date of first receipt of a non-covered pension or first withdraw of even $1 from a non-covered retirement account the Start Date.
Thus, if you collect Social Security benefits before the Start Date, neither the WEP nor GPO will apply until the Start Date. To see this, consider Jane Doe, age 62, and her husband, Dan Doe, age 77. Dan is already collecting his retirement benefit. Jane (but not Dan) worked in non-covered employment and intends to collect a $30,000 per year pension from her non-covered employer starting at age 70. Jane knows nothing about the WEP or GPO. But she has also correctly heard that waiting till 70 to collect her retirement benefit means it will start at a 76 percent higher level, adjusted for inflation. Dan’s maximum age of life is 90. Jane’s is 100. Hence, Jane will be 75 when Dan passes assuming she doesn’t predecease him.
I ran my company’s $49 tool — Maximize My Social Security (MMSS) — to evaluate Jane’s optimal Social Security strategy. As the figure below shows, MMSS delivers $84,044 in additional lifetime benefits to Jane. Jane’s optimal strategy is not to wait to 70, but to take her retirement benefit at 62. Yes, it will be lower than at age 70. But between ages 62 and 70, Jane won’t be subject to the WEP! During these years, Jane’s real (inflation-adjusted) retirement benefit will equal $20,008. Once the WEP kicks in, at 70, it will drop to $14,886.
Yes, $14,886 is a lot less than the $24,888 retirement benefit Jane would receive, even after reduction by the WEP, were she to wait until 70 to collect. But Jane would only receive this higher amount for five years. When she hits 75, Jane will jump onto her deceased hubby, Dan’s, benefit, i.e., Jane will start collecting the larger of her widow’s benefit and her own retirement benefit. Her widow’s benefit is $30,400 after its reduction by the GPO.
Should Jane Wait Till 70 to Collect her Non-Covered Pension?
If Jane’s non-covered employer adequately compensates Jane for waiting to collect her non-covered pension by increasing its starting amount, then waiting to collect her non-covered pension and taking her Social Security retirement benefit early is a no brainer — one you can measure by running MMSS.
If the employer doesn’t provide a higher benefit for waiting, you can run MaxiFiPlanner.com to examine the optimal combined choice of when to start Social Security and when to start your non-covered pension. MaxiFi goes beyond MMSS in maximizing not just your lifetime Social Security benefits, but your lifetime spending.
What If Jane Has a Non-Covered Retirement Account and She Waits Till 75 to Collect It?
In this case, Jane’s lifetime benefits are $34,447 higher. Adding this to the $84,044 shows that MMSS produces a massive $118,491! That’s roughly five years of Jane’s last year of after-tax wages. Also note that if Jane and Dan have other assets on which they can draw, Jane’s leaving her non-covered retirement assets with her employer until age 75 comes at no cost.
Lessons for Non-Covered Employers
I may be missing something, but it seems that non-covered employers could help their workers receive far higher lifetime Social Security benefits by providing higher pensions to workers who wait to collect. Even better, they could replace their pension plans with 403(b) plans. This would postpone activation of the WEP and GPO to age 75, which will shortly be the age at which required minimum distributions begin.
Related: Scary Medicare Traps: 10 Pitfalls to Avoid This Open Enrollment