Pensions, exempt pay may lower Social Security benefits ...
Pensions, exempt pay may lower Social Security benefits for government employees
By Susan B. Garland
Saturday, September 18, 2010; 10:29 PM
Perhaps you had two careers. In one job, you were a government employee whose earnings were exempt from the Social Security payroll tax. You also worked in the private sector, paying into the Social Security system. When you retire, you'll get your public pension, but don't count on getting your full Social Security benefit.
Under federal law, any Social Security benefits that you earned will be reduced if you were a federal, state or local government employee who earned a pension on wages that were not covered by Social Security. Reductions also apply to Social Security spousal or survivor benefits that are claimed by government pensioners.
David Walrath, a lobbyist for the California Retired Teachers Association, says many government employees don't realize their Social Security will be squeezed until they apply. "People will get their annual statement with a benefit number, but they're not told they're subject to an offset," Walrath says.
The two rules that cover government employees are the "windfall elimination provision" and the "government pension offset." The WEP applies to workers, and the GPO applies to government pensioners who apply for Social Security spousal and survivor benefits.
Patricia Kohlen got hit by both. Kohlen, 61, paid into a public pension system for 28 years when she worked as an elementary school teacher. She also worked part-time as a secretary and paid Social Security taxes through that job.
Just before Kohlen retired with a disability in 2003, her statement showed that she was due $247 a month in Social Security disability payments. The windfall provision reduced the payments to $108 a month. Her monthly teacher's pension is $1,930.
The big shock came when she asked the Social Security Administration about a survivor benefit after her husband, Kenneth, died at age 62 in 2006. He was getting a Social Security benefit of $1,406 a month, plus a private pension of $4,000 a month.
Widows and widowers are typically eligible for a Social Security survivor benefit that is 100 percent of the deceased spouse's benefit. Because of the formula used to calculate the GPO, Kohlen was told she would receive nothing when she became eligible for a survivor benefit at age 60.
Kohlen, who lives in San Luis Obispo, Calif., says that they had been counting on his Social Security payments. "He paid into Social Security for 49 years, and I feel, as a widow, that I am entitled to that money," she says. "It's just so terribly unfair."
Lawmakers on Capitol Hill have introduced legislation that would end or modify the two provisions. Don't expect any decision soon. These issues will probably be addressed only when Congress takes up the larger issues of Social Security solvency and deficit reduction.
In the meantime, become familiar with the two rules if you have ever worked in a job that was not covered by Social Security. Check with your employer or former employer. Also, if your Social Security statement lists $0 for years that you worked for a government agency, that's an indication you may be subject to the two rules.
To understand how the windfall elimination provision works, you need to know how Social Security calculates benefits. Social Security looks at average monthly earnings for the years a person paid into the system. Benefits are intended to replace a percentage of a worker's preretirement earnings. Lower-income workers get a larger percentage of their earnings replaced those with higher incomes.
The windfall provision does not apply to government pensioners who paid into the Social Security system for 30 years or longer. Nor does it apply to workers who receive a military pension or a private pension. You can use a WEP calculator to figure your benefit.
As with all Social Security beneficiaries, your WEP-reduced benefit could change based on your age when you claim it. Here's an example: After 20 years of covered earnings, you turn 62 in 2009. Your full monthly benefit at 66 would be $1,372, which is reduced $372 by the WEP. If you claim at 62, your benefit would be reduced by 25 percent, to $750. For each year you delay past 66, you get an 8 percent delayed-retirement credit until you reach 70.
A government pensioner who applies for a spousal or survivor benefit based on his or her spouse's Social Security earnings record will also face cuts. Typically, a spousal benefit is about 50 percent of a husband or wife's benefit if that's more than the spouse would receive based on his work record. A survivor generally receives 100 percent of a deceased spouse's benefit. But if the government pension offset applies, your Social Security spousal or survivor benefit will be reduced by two-thirds of your government pension.
- Kiplinger's Personal Finance
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