Potentially Devastating Social Security Offsets

[walkinwood]

The Nov. Issue of the Journal of Financial planning has an article on the effects of little known SS offsets. It addresses 2 offsets - the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP).

"The people potentially affected by these benefit offsets are the workers who receive a pension from employment in which they did not pay Social Security taxes, or the workers, their spouses, and widows/widowers who had employment both in a job that paid Social Security taxes and employment in a job that did not."

Potentially Devastating Social Security Offsets

The JoFP keeps article online only for the current month, so if you find it interesting, download and save it.

It does not affect me, so I haven't read it in detail.

 

[samclem]

We had a good discussion of this a while back (not that we shouldn't discuss it again, but here's the previous "bidding").

The WEP, at least, is very fair from some perspectives, not fair from others. It depends upon which side of the table you sit.

From a post by NW-Bound:

Quote:
Originally Posted by Oldbabe
I think the "fairness" issue comes into play in this way: a person who paid into SS for ten years then was a teacher, for ex., for 20 years and has a state pension should be able to also collect the same SS payment as anyone else who paid into the system for 10 years.

Oldbabe, your argument is a reasonable one. However, SS benefits do not increase proportionally to the years of service. A person who paid 30 yrs into the system does not get 3 times the benefits of someone who paid into the system for 10 yrs.

In this case, the person in your example, when her 20-yr teacher pension is added to the 10-yr benefits of SS, is getting paid more than someone who was with SS for straight 30 yrs.

In a way, SS is a form of welfare. The payout was never intended to be proportional to what one paid in. Again a person who paid in for 30 yrs does not get out 3X the amount of a person who worked for 10 yrs. So, if you paid into SS for 10 yrs, then paid 20 yrs into something else, you may end up ahead of someone who paid 30 yrs of SS.

Compared to someone who paid 30 yrs of SS, you are getting a "windfall". Compared to someone who paid only 10 yrs of SS, you would think fairness is when you get the same she does.

See how complicated things become when wealth gets redistributed?

 

[youbet]

Yep, we've discussed this emotional subject at length on previous threads. Our household is involved since DW is a retired teacher and the GPO reduces her SS, based on my SS, to zero. That pisses me off since the recession has caused us to do some belt tightening and an extra $10k or so added to the youbet family income would be pretty darn helpful! OTOH, since the SS dollars she would have contributed were channeled to the teacher's pension fund, it doesn't seem completely unfair. Hows that...... We're pissed were not getting something but yet understand the treatment seems basically fair? Talk about an oxymoron!

This JoFP article is well written, one of the easiest to understand explanations of WEP and GPO I've seen. Good reading for anyone who is interested and confused by the info on the SS web site.

The bottom line is if you want to collect SS, you shouldn't have your SS contribution dollars routed to another pension system........

 

[Peter]

There appears to be an error in the linked article. There is a table that gives percentage WEP reduction as a function of years of substantial earnings:

http://www.fpajournal.org/docs/assets/McCormack-Table-1.jpg

This gives a reduction factor 0.9 for 30 years and more substantial earnings. But the table on the Social Security site shows that for 30 years the factor is 1, that is 0% reduction:

http://www.ssa.gov/retire2/wep-chart.htm

There is also a statement that "If you paid Social Security tax on 30 years of substantial earnings you are not affected by the Windfall Elimination Provision (WEP)".

This seems to contradict the data in the article. Am I missing something here?

Peter

 

[youbet]

That is confusing. Because we're affected by GPO rather than WEP, I didn't look closely at that table.

However, this reference you gave: substantial earnings does show 0.9 in agreement with the JoFP article. So the confusion starts with the SS site.

Edit: Found it. 90% is the factor SS uses to "normalize" the first, of three, levels of your income. That is followed by two additonal lower percentages on higher levels of income. This gives more credit for the first dollars you earn than the last and thus folks with lower incomes receive a higher percentage of their salary as a SS benefit than folks with higher incomes. (SS is progressive.) So, the tables do agree. One is saying you get the full (1 or 100%) amount, which is 0.9. The other is saying you get 0.9. Same thing.

 

[ziggy29]

Depending on the circumstances, how many years you worked in the private sector to earn SS credits (and paid SS taxes) and what your overall SS+pension income is, this provision can range anyone from rather fair to grossly unfair.

In particular, if someone paid SS taxes for 20 years and then got a new j*b with an SS-exempt government pension for another 20 years of work, you lose a lot of what you otherwise would have earned for SS by paying taxes into it for 20 years. In that situation the WEP can be punitive. On the other hand, if someone worked all their life in a job that didn't pay SS taxes, I think it's reasonable that their SS benefits be reduced.

 

[Peter]

That is confusing. Because we're affected by GPO rather than WEP, I didn't look closely at that table.

However, this reference you gave: substantial earnings does show 0.9 in agreement with the JoFP article. So the confusion starts with the SS site.

So it does! What's more, there's a directly contradictory statement right below that number, saying WEP doesn't affect you if you have 30 years or more:

 

[youbet]

Peter, we must have cross posted when I added the edit to my post above. There is no confusion. 90 percent is full credit. So, saying that when you get 90 percent there is no reduction is correct.

If you're having trouble understanding this, read the section on how your SS benefit is calculated. Then, the WEP modification to that calcualtion will be easier to understand.

 

[youbet]

Depending on the circumstances, how many years you worked in the private sector to earn SS credits (and paid SS taxes) and what your overall SS+pension income is, this provision can range anyone from rather fair to grossly unfair.

I suppose it depends on what your personal definition of "fair" is.

I do notice however that folks who are lucky enough to be excused from SS and pay into an alternate public pension system are not clamoring to have this changed! They look at it as a sweet deal that could be even sweeter if it weren't for WEP and GPO.

 

[Peter]

Peter, we must have cross posted when I added the edit to my post above. There is no confusion. 90 percent is full credit. So, saying that when you get 90 percent there is no reduction is correct.

If you're having trouble understanding this, read the section on how your SS benefit is calculated. Then, the WEP modification to that calcualtion will be easier to understand.

Ah yes, thanks, I see now. I still think it's confusing, though!

Peter

 

[ziggy29]

I do notice however that folks who are lucky enough to be excused from SS and pay into an alternate public pension system are not clamoring to have this changed! They look at it as a sweet deal that could be even sweeter if it weren't for WEP and GPO.

Again, looking at the WEP chart, if you work for 20 years (or close to it) subject to SS taxes, you are screwed by it. If you had little to no employment subject to SS taxes, it seems to be fair.

It seems wrong that someone who pays SS taxes for 20 years is hit as hard by the WEP as someone who did so for only one year.

If we start with a 40% factor for 0 years and 100% for 30 years, I think it would be better to just add 2% for every year (i.e. 42% for 1 year, 44% for 2 years, 60% for 10 years, 80% for 20 years) than to stick it to someone who paid SS taxes for 20 years like they do. Or some similar formula where each additional year of paying SS taxes reduces the penalty.

 

[youbet]

Ah yes, thanks, I see now. I still think it's confusing, though!

Peter

I'm only into it because when we first discovered that DW was not going to get 50% of my SS due to GPO, I did a deep dive into the whole ball of wax to understand what was going on. Fortunately, this was long enough before our retirements that our misunderstanding was not a factor in our calculations.

I agree, it's confusing. In fact, the whole SS system is confusing. To this day, I'm not sure I've selected the best time to start my SS. And the answer to that question continues to be bantered about this board and others too.

 

[youbet]

Again, looking at the WEP chart, if you work for 20 years (or close to it) subject to SS taxes, you are screwed by it. If you had little to no employment subject to SS taxes, it seems to be fair.

It seems wrong that someone who pays SS taxes for 20 years is hit as hard by the WEP as someone who did so for only one year.

If we start with a 40% factor for 0 years and 100% for 30 years, I think it would be better to just add 2% for every year (i.e. 42% for 1 year, 44% for 2 years, 60% for 10 years, 80% for 20 years) than to stick it to someone who paid SS taxes for 20 years like they do. Or some similar formula where each additional year of paying SS taxes reduces the penalty.

You understand that the 40% factor only applies to the first few dollars of your earnings, right? There are two categories after that that apparently don't change due to WEP.

In your example above, you're using incorrect numbers. The maximum credit is 90%, not 100% as you state. (See my discussion with Peter, above.)

You have a point regarding the 20 yr cliff and I'm sure that point was somewhat arbitrary when it was established. (Why 20 and not 18 or 19 or 21 or 22??) Perhaps some sort of slope would be better. But, the concept that folks who worked substantially for non-SS employers should not receive a low income subsidy in their SS benefit calculation is a good one IMHO. Earning wages outside the SS system is very different than not earning wages at all, being poor and qualifying for a subsidy.