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Congress just passed The Social Security Fairness Act, which eliminates both the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) for all benefits paid in 2024 and beyond. This is a huge deal for many current retirees and workers who worked or are working in non-Social Security-covered jobs. It’s also, as I’ll explain, a major financial opportunity for many working in the covered sector to switch to working in the non-covered sector.
WEP — the Background
Until now, the WEP reduced retirement benefits of Social Security-insured workers who spent some, much, or most of their careers in non-covered employment — jobs with state and local governments that don’t participate in Social Security and jobs in foreign countries. Such non-covered jobs don’t levy FICA taxes on your earnings.
But if you worked enough in covered jobs to attain insured status — typically requiring 10 years of work, your retirement benefit would be reduced (WEP’d) based on your receipt of a pension from your non-covered employment. Taking withdrawals from a retirement account accumulated in non-covered employment would also trigger the WEP — the use of a far less generous formula in determining a worker’s retirement benefit.
The rationale for the WEP was that non-covered workers with short earnings histories would appear poor in Social Security’s benefit formula, which is based on average annual earnings, most values of which would be zero. And since that standard benefit formula is highly progessive, such workers would be treated by the System as lifetime poor when the opposite may have been true.
Anyone receiving a non-covered pension or withdrawing from a non-covered retirement account would face the WEP formula with a maximum loss in one’s Social Security benefit equal to half of one’s non-covered pension (or the pension-equivalent withdrawal from a non-covered retirement account).
In short, the WEP was a extremely crude way to make sure workers who spent their entire career in covered employment were treated fairly compared to those who did not. Hence, calling this the Social Security “Fairness” Act is rather rich. But I’m not here to argue the point. The WEP was terribly designed and terribly implemented — accounting for roughly one third of the System’s estimated 3 million annual clawbacks. But simply scrapping it (as well as the GPO) rather than fixing it, well that’s a huge deal.
The GPO
The GPO also went after non-covered workers for receiving benefits from their current or former spouses. The list includes widows, divorced widows, spousal, divorced spousal, child-in-care, and mother(father) benefits. Specifically, it reduced such benefits by two-thirds of the recipient’s non-covered pension or non-covered pension equivalent.
The rationale for the GPO always escaped me. If I work for decades, pay FICA taxes, and die before collecting much or, indeed, any of my retirement benefits, why should my spouse’s survivor benefit be potentially dramatically reduced, if not eliminated? Because they were a school teacher or a policeman or a fireman, whose town or state didn’t participate in Social Security?
The GPO was akin to telling Illinois kindergarten teachers that the life insurance they received from their just deceased spouse would be reduced because they worked for the uncovered State of Illinois Teachers Retirement System.
Everyone Now Being Hit or Expecting to Be Hit By the WEP and GPO Should Calculate their New Higher Benefits
There’s an easy and inexpensive way to do this. Just run Maximize My Social Security (MMSS), my company’s $49 Social Security lifetime benefit maximization program. Or, better, run my company’s $109 MaxiFi Planner lifetime financial planning tool, which incorporates the same Social Security code as MMSS, but does comprehensive planning for people of all ages. MaxiFi Premium, for $149, has, just sayin, our amazingly powerful Roth Conversion Optimizer.
We are going to modify both MMSS and MaxiFi in the next week or two in light of the new law. But for right now, run either of the tools two ways — first entering your non-covered pension and/or retirement account information and second leaving out this information (just set the values to zero). The difference in the program’s calculation of your current and future benefits will provide the increase in annual and lifetime benefits under the new law.
Illustrating the Gain from the Fairness Act Using MMSS
Martha Jones, a hypothetical person, is age 62. She worked most of her career in non-covered employment as a teacher in Boston. The Boston school system does not partake in Social Security.
At 51, Helen started working part time, earning, initially $30,000, at a private school. Her husband, James, passed last year at age 61. Before he died, he was earning $127,000. Martha just retired (Her age-61 earnings were $40,317 and was expecting to start collecting a $3,893 WEP’d retirement benefit until reaching full retirement, at which point she’d collect a GPO’d widows benefit of $15,688 (in today’s dollars) based on Jame’s record. Martha’s lifetime benefits from Social Security? $130,260.
Martha’s expected retirement benefit were, prior to the new law, quite low due to the WEP and GPO. The reason is that Martha just started collecting her $40K, fully inflation-indexed, non-covered teacher’s pension.
To be clear, Martha and James were solidly in the upper middle class. Martha was earning $60K before going part time. Had she stayed in her teaching job, the couple’s combined salary last year, before James passed, would have been north of $200K.
A $830,625 Bonanza for Martha!
How much will the passage of the Fairness Act raise Martha’s lifetime benefits?The answer is a colossal $830,625!
How come? The WEP and GPO were, from Martha’s perspective, very nasty pieces of work. Thanks to the new law, Martha’s annual retirement benefit more than doubles —from $3,893 to $8,758. And her widows benefit almost triples — from $15,688 to $42,355.
Results Will Vary
Not all current or near-term retirees who have been or would have beenWEP’d or GOP’d will benefit to the tune of hundreds of thousands of dollars. The gains will depend on a range of factors, including when you contributed to the System, how much you contributed, the level of your covered earnings, how long you contributed, and the size and inflation-indexation of your non-covered pension or its equivalent.
I suggest running either MMSS or MaxiFi to calculate the higher benefit payment you should start collecting as well as the lump sum payment to expect due to Congress’ making the Fairness Act retroactive to December 2023. If you don’t receive what our software says you should, gross of any withholdings for Medicare Part B premiums and federal income taxation, Social Security is likely underpaying you. They may also overpay you. The system is as dysfunctional as it gets. Hence, trust, but verify!
Should Workers In Covered Employment Consider Switching to Non-Covered Employment?
The short answer is yes. Take 30 year-old, single Ron who lives in Texas and is making $65,000 after the employer contribution to Social Security. For around $10K he can become accredited to teach in a local Texas school district — one that doesn’t partake in Social Security. Ron’s productivity, pre the Social Security employer tax is $69,296. If he gets paid this much as a teacher, his lifetime spending will be at least $25K — high enough to more than cover the roughly $10K credentialization investment. If I assume the school district provides a decent 403(b) plan, the gain is closer to $50K. These gains will be even larger for better compensated workers particularly if benefits are differentially cut for those with higher lifetime average earnings.
Should States and Localities Participating in Social Security Stop Doing So?
The answer may well be yes. But making that decision requires careful analysis of the gains and losses to all employees. I.e., it requires doing one’s homework. But clearly, withdrawing from Social Security looks a lot better today than it did yesterday. One wonders if President Musk thought all of this through before he lent his support to the new law.
Terry’s Excellent Column on the Fairness Act
Let me close by putting in a plug for my co-author, Terry Savage’s, excellent column on the Fairness Act. As many of your know, Terry and I have been fighting hard to get Social Security to stop its hideous clawback policies, which have damaged, if not destroyed the financial wellbeing of millions upon millions of Americans. Our book, Social Security Horror Stories, explains that roughly one third of the System’s clawback victims are beneficiaries with non-covered pensions. The rest are disabled workers and those on SSI. We view the Fairness Act as a major victory in our campaign to end Social Security egregious financial abuse of the American public and I don’t use these terms lightly even if it’s not what we would have designed.
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