Many of us are counting on ours, or our spouses’, Social Security Benefits for a significant part of our retirement income. But, if you or your spouse are government workers or teachers, you may be in for a surprise with Social Security WEP and GPO offsets.
What are these offsets? WEP is short for the Windfall Elimination Provision and GPO is short for the Government Pension Offset. Both could adversely affect how much money you’ll receive in retirement — and your Social Security checks may be a lot smaller because of them.
The history of WEP and GPO
Prior to 1983 if you worked in a government job and did not pay FICA (Federal Insurance Contribution Act) taxes, the Social Security Department did not know you had a government job. By design, the Social Security System on a percentage basis pays lower-income people a higher percentage benefit than higher-income people. If the government didn’t know (or didn’t care) that you had a government job, frequently the percentage of Social Security benefits you received was out of balance. In time, this was deemed “double-dipping” and perceived as a problem.
In 1981, a bi-partisan commission was established to make funding suggestions to Congress that would support the Social Security system well into the 21st century. Part of this process was to eliminate this double-dipping loophole. The bi-partisan commission introduced the Social Security Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) as solutions to the government paying too much in Social Security benefits to people who have not paid into the system but are not really lower-income workers because they receive other government benefits.
The Social Security spousal and survivor benefits are two of the benefits same-sex couples gained when the Supreme Court approved marriage equality in all 50 states in 2015. WEP and GPO now affect the Social Security spousal and survivor benefits that we discussed on this Queer Money™ episode with Freitag.
Both the Social Security WEP and GPO government offsets are provisions designed to keep Social Security payments “fair”, but they are little known and often overlooked even by financial planners. In the past, people who paid into Social Security likely received a “green line” form from the Social Security Department that listed their contribution into Social Security to date and their expected Social Security retirement payment based on those contributions. Recently, for people under the age of 60, to cut costs, the Social Security Administration migrated this service online to an online web account.
The Windfall Elimination Provision
The Windfall Elimination Provision or WEP affects the worker who earned pension money from a state or local government agency in which they did not pay FICA taxes. It was not required that they paid into the Social Security system during their time in that role.
The WEP offset can be particular problem to those who have worked in both the public and private sectors, or a state or government agency with a pension and a non-state or government agency in which they paid Social Security taxes. Even though both retirement benefits may have been earned separately from each other, WEP can still reduce the amount of Social Security benefits paid to the worker.
The good news is that the WEP adjustment reduces but does not eliminate the monthly Social Security check the worker receives.
The Government Pension Offset
The bigger issue of both government offsets, though, is the Government Pension Offset or GPO. GPO can severely affect recipients of Social Security survivor and spousal benefits if they themselves worked for a state or government agency at any point in their career. The GPO will affect them if, during their employment, they became eligible to receive a government pension and did not contribute to Social Security.
The specific problem for the worker with the state or government agency job is that their survivor or spousal benefits from Social Security could be cut by two-thirds of the amount of their own government pension payout. In most cases, this is a significant reduction.
For example, Mary is receiving a government pension of $2,400 after years of working in her government job as a teacher. The “two-thirds rule” would reduce her survivor or spousal Social Security benefit by $1,600. A disclosure on the Social Security Full Statement says, “If the Government Pension Offset applies, your Social Security Benefit (in this case the Social Security Survivor or Spousal Benefit) will be reduced to the amount equal to two-thirds of your government pension and it could be reduced to $0.”
In this case, Mary, because she did not understand the GPO offset, expected to receive a Social Security $2,000 survivor benefit from her partner Ann. In reality, the GPO offset of $1,600 will reduce this survivor benefit to $400. If Mary’s pension from her government service was $3,400 a month, she will receive $0 Social Security survivor benefits from Ann.
Applying these offsets to your retirement plan
The concern is that with so many LGBTQ people in teaching and other public sector jobs, including older federal government employees, these offsets could reduce the amount of money they’ll receive from a benefit we only recently earned. More important is that their spouse’s eligibility for Social Security spousal and survivor benefits could be adversely affected.
At greater risk are same-sex married couples who haven’t come out to their financial planners. If one spouse is a teacher and the other is in a corporate job, they may be doing well financially while they’re both alive. Should the spouse with the corporate job pass away, the surviving spouse, the teacher, could be forced to drastically reduce their standard of living because of the GPO offset.
“Take a look at your retirement holistically to make sure you’re considering all factors. You’ll want to look at every piece of information, and the sooner the better,” says Shocklee. A financial planner who knows your full financial and personal picture can help prepare you for these consequences.
Preparing for WEP and GPO
The best test to confirm whether you’ll be affected by either offset is on the Social Security My Account page. As Freitag says, “The government website ssa.gov is the holy grail of resources.”
By creating a My Account, users can click “My Home” and then click “Estimated Benefits” where the Social Security Administration gives both the good and bad news. The good news is under the Retirement section, toward the top, is where Social Security recipients will see the estimated Social Security payouts that they’ll start receiving at ages 62, 67 or 70, depending on the age they declare retirement. The bad news is just above the Retirement section where it points out that you might be subject to a reduction because of WEP and GPO offsets.
MassMutual recently did a study with consumers across the U.S. of 1,000 participants between the ages of 50 to 59 and asked them if they’ve created their My Account on the Social Security website. Eighty-six percent of respondents said they have not. The risk with so many workers not creating or looking at My Account is that they may not know if they’re affected by these government offsets, meaning they won’t know that their Social Security payments will be less than expected. If you haven’t set up this account at https://www.ssa.gov/myaccount/, the time to do so is now.
These offsets can be as confusing as they are surprising but ignoring their potential effects on your financial life is not a financial plan. Listen to Queer Money™ with David Freitag and Kimberly Shocklee of MassMutual, open and review your Social Security My Account and talk with your financial planner.
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