The Savings Game: Social Security Fairness Act passes House, needs Senate approval

Most Americans have jobs that withhold payroll taxes (aka FICA taxes) that contribute to the Social Security system, and when they reach retirement age they are able to claim a Social Security benefit based on their earnings. Other people work at jobs that are not within the Social Security system, meaning no Social Security taxes are paid that accrue to a future benefit. But some people spend enough time in both kinds of job that when they retire, they are due both a pension and a Social Security benefit.

I hear from readers who fall into that latter category. They write saying that they believe that the provisions of Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) reduce Social Security benefits and are unfair both to them and their beneficiaries. Members of Congress, for many years, have proposed legislation that would repeal WEP and GPO. In an environment in which Social Security is facing shortfalls, the proposed legislation has not been approved by Congress.

In November, however, the House passed the Social Security Fairness Act, which would repeal both WEP and GPO if the Senate also passes the bill and the president signs it.

Workers impacted by WEP and GPO include certain public sector workers, including some federal and local workers whose retirement systems are not part of the Social Security system. This often includes police officers, firefighters and many foreign workers.

WEP impacts you if you are entitled to a Social Security benefit as well as a pension for work done not subject to FICA taxes. Under current WEP regulations, you do not receive the same Social Security benefit (for the same length of work) as workers who did not work outside Social Security.

Social Security benefits are based on the 35 highest years of employment under Social Security. For a worker who earned a pension outside of Social Security, those years are posted as “zero” years, and unless the worker was employed 30 years paying FICA taxes, the benefit that worker will receive from Social Security is much less than the benefits received by workers who only worked under Social Security for the same workload.

For example, someone who worked 10 years under Social Security might receive $400/month less than an individual who also worked 10 years under Social Security only (that is, who doesn’t have a pension for non-FICA work). If the Social Security Fairness Act becomes law, then there would be no penalty, and workers who earned a pension outside Social Security would receive the same Social Security benefit as workers who worked the same number of years but did not work outside Social Security. WEP affects only your Social Security payment, not the pension you receive for work outside Social Security.

If you apply for spousal or survivor benefits, the Government Pension Offset could reduce or eliminate those benefits. The amount of the reduction is two-thirds of your pension. The offset is often enough to eliminate any spousal benefit or survivor benefit. For example, assume you would normally be eligible for a spousal benefit of $1,500/month (50% of your spouse’s $3,000 Social Security benefit). Also suppose your pension for work outside Social Security is $3,000/month. The offset of 2/3 is $2,000/month, which is more than the spousal benefit. So, in this example, you would not be eligible for a spousal benefit.

Bottom line: The regulations associated with WEP and GPO will reduce your Social Security benefit if you receive a pension from work outside Social Security, and are entitled to Social Security benefits for work done under Social Security. They may also reduce or eliminate a spousal benefit or a survivor benefit. If you have been impacted by WEP or GPO, or will in the future, you should immediately write your two senators and ask them to approve the Social Security Fairness Act this year. Having WEP and GPO repealed can have a significant impact on your retirement income.

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com