The windfall elimination provision (WEP) and the government pension offset (GPO) are two rules designed to prevent certain individuals from "double dipping" and receiving both Social Security and public-sector pension benefits. Unfortunately, they can drastically affect retirement income for individuals who have a history of working in both the public and private sectors. If you have clients subject to either the WEP or GPO, what do you need to know to better predict their cash flow in retirement? Let's take a closer look at how the numbers work.
Who Is Subject to the WEP?
If your client will receive a pension from a job not covered by Social Security and is also eligible for Social Security benefits from working at another job, his or her Social Security payments may be reduced by the WEP.
The formula depends on the number of years in which the client had "substantial earnings" under Social Security and his or her eligibility year (i.e., the year the client turns 62 or becomes totally disabled). The reduction is generally limited to half the amount of the noncovered pension.
- The WEP cannot reduce the Social Security benefit to $0.
- Among other exceptions, it does not apply if the worker has 30 or more years of substantial earnings under Social Security. (For 2017, this amount is $23, 625.)
- Workers with between 21 and 29 years of substantial earnings will see some offset but not as much as those with 20 or fewer years of substantial earnings.
- There is a maximum monthly reduction that is indexed for inflation.
Who Is Subject to the GPO?
If your client will receive a pension from a job not covered by Social Security and is also eligible for Social Security benefits as the spouse or survivor of a worker, his or her spousal or survivor Social Security payments may be reduced by two-thirds of the client's government pension.
How the Numbers Work
The Social Security Administration offers two calculators to help you and your clients determine the potential reduction in benefits for government and public workers.
- To use the WEP Online Calculator, you will need the earnings listed on the client's annual statement.
- To use the GPO Online Calculator, you will need the spouse's statement.
Let's look at some examples of how these calculators can help you more accurately account for Social Security benefits in your client's retirement income plan.
Example #1: Jill taught first grade at the local public school for most of her working life, and like many teachers, she worked during her summer breaks. She didn't earn much at those summer jobs, but she did earn enough credits to be fully insured for Social Security.
Jill expects to receive $5,000 per month through her state's teachers' retirement program, and her Social Security statement reports that her benefit will be $434 per month at her full retirement age (FRA) of 66.
Using the WEP Calculator, Jill finds that her benefit will be reduced to $192 per month. If she retires earlier than her FRA, it will be reduced even more.
Example #2: Jill's husband, Jack, has always worked in the private sector. His Social Security benefit will be $2,500 per month at FRA. How will Jill's pension affect her spousal benefit?
