If you are eligible for a pension based on work you did for a federal, state or local government, a nonprofit organization, or in another country and you did not pay Social Security taxes, this pension can affect the amount of your Social Security benefits, according to the Social Security Administration. The reduction is referred to as the Windfall Elimination Provision.
WEP doesn’t really affect all that many retirees. In 2018, for instance, just 1.8 million retirees, spouses and children, most of whom live in just seven states – California, Colorado, Illinois, Louisiana, Massachusetts, Ohio and Texas, were subject to WEP.
But the number of people affected by WEP has grown 14.7% in five years ending 2018, and experts say WEP can be a big shock for those unaware of the provision.
Here’s what you need to know about WEP and how to plan for it.
Read your Social Security statement
Many affected by WEP are taken by surprise. They shouldn’t be, says Heather Schreiber, the founder of HLS Retirement Consulting. Instead, they should read their Social Security Statement which, she says, “clearly states that benefit estimates may not be accurate if the individual has worked in a position in which Social Security taxes were not paid.”
Without the knowledge of this, Schreiber says many non-covered governmental workers are surprised to learn that they may experience in 2020 as much as a $480 reduction to the estimated benefits.
Do you have 40 credits?
Too many people labor under the misconception that the receipt of a public pension based on work not covered under Social Security means that they will never be eligible for anything from Social Security, says Kurt Czarnowski, a Social Security expert with Czarnowski Consulting. That erroneous belief lingers, he says, even though they may have accumulated 40 credits. Those credits, which are based on your total wages or income for the year, and can be earned up to a maximum of four per year.
“That is just wrong,” he says. “As long as someone has those 40 credits, they will always be eligible for something each month from Social Security, even though they receives that public pension.”
The bad news, however, is that, absent 30 or more years of “substantial earnings,” the person’s Social Security benefit won’t be as high as it would have been without that pension, says Czarnowski. “However, they will always receive something,” he says. “The WEP never reduces someone’s benefit to zero.”
Schreiber says those affected by WEP should strive to “fully understand the dynamic relationship between Social Security covered earnings for an individual who also worked for a governmental employer in which earnings were not subject to Social Security and instead, applied a different system to permit the employee to later collect a pension.”
Absent education on the topic, she says individuals may find themselves with less anticipated monthly income if they planned around the estimated benefits on the Social Security statement.
What triggers WEP?
Receipt of your pension is what triggers the application of WEP, according to Czarnowski.
Why is that important? Because once someone reaches their full retirement age, or FRA, the person’s work and earnings no longer affect his/her ability to collect Social Security benefits, says Czarnowski. “Therefore, if someone has reached FRA, but has not yet retired from public service, they can apply for Social Security at that point, and receive a full – non-WEP – benefit amount each month,” he says. “Once the person actually retires and starts to receive the public pension, they will need to notify Social Security that the pension has begun, and the person’s Social Security benefit amount will be adjusted downward at that point to account for the impact of the WEP.”
Work never hurts
Many public employees lose sight of the fact that a Social Security retirement benefit is based on an average of the person’s 35 highest years of inflation-adjusted earnings under the system, says Czarnowski. “These same folks are subject to the different formula of the WEP unless they accumulate 30 or more years of ‘substantial earnings,’ ” he says.
“So, unless they have 35 years of actual earnings, any Social Security earnings that they have will result in a higher monthly retirement benefit, even if the additional year of earnings isn’t high enough to count as a year of ‘substantial earnings’ which reduces the impact of the WEP,” says Czarnowski.
