If you are among those Americans whose work history qualifies
them for both Social Security retirement benefits and a
government pension, there are two rules of which you may (and
definitely should) be aware. The first, the Windfall Elimination
), affects individual benefits; the second, the Government
Pension Offset (
), can have an impact on your spousal and survivor benefits.
The stated intention of these provisions is to ensure that
those workers who have earned Social Security and a government
pension are not advantaged over those working Americans who have
spent their entire careers in the private sector (all the while
paying Social Security payroll taxes).
Despite the simplicity in the intent, the matter can become
complicated (and sometimes controversial) in the execution. I'll
attempt to shed some light on the subject here.
Windfall Elimination Provision
If you worked for an employer, such as a government agency,
that did not withhold Social Security taxes from your salary, the
pension you receive based on that work may reduce your Social
Security retirement benefits. In a nutshell, this affects you
- You earned a pension in any job where Social Security taxes
were not paid, and
- You worked in other jobs long enough to qualify for Social
Security retirement benefits.
WEP closed a loophole that enabled people who worked in both
covered and non-covered employment to appear to be low-wage
workers and receive higher benefits. Why would that be so?
Because the way Social Security works, the earnings of lower-wage
workers are replaced at a higher percentage than those of higher
earners. The Social Security Administration (SSA) explains in
. The WEP, enacted in 1983, ended the so-called "windfall" that
allowed certain Americans to receive a disproportionately large
Social Security benefit on top of a government pension.
Your WEP reduction is derived from a recalculation of your
full SS benefit (or more precisely, your
primary insurance amount, or PIA
) and will vary based on your years of "substantial earnings" at
the time you claim benefits. The SSA offers a
to assist you, but the fastest and easiest way to know how the
WEP might impact you is to
Just to be clear, we're talking about government pensions
here. So if a federal, state or local government in the U.S. has
provided you with pension benefits, while not deducting for
Social Security, you are likely impacted by WEP. However, if
you've paid into a private pension while also paying Social
Security payroll taxes, then you are entitled to both benefits
for which you have paid. And here are a few more important
- You are not affected by WEP if you paid Social Security tax
on 30 years of substantial earnings (per the SSA's chart,
Publication No. 05-10045
- A guarantee protects individuals with small pensions.*
- Survivor benefits are not affected by WEP. So even if you
were subject to WEP, your eligible survivors will receive
benefits based on the normal calculation of your PIA (not the
WEP recalculation). Spousal benefits, however, generally are
not exempt from the WEP recalculation.
Government Pension Offset
Whereas WEP applies to individual benefits, the GPO applies to
the spousal and/or survivor benefits to which you may be
entitled. If you receive a pension from a federal, state or local
government based on work where Social Security payroll taxes were
not withheld, the spousal and/or survivor benefits that you
collect will be reduced by two-thirds of the government pension.
This is probably best explained by looking at the math:
In enacting GPO, the government's stated intent was to
ensure that government employees who do not pay Social Security
taxes are treated much the same as workers in the private sector
who do pay the tax. Let me explain: Social Security law does not
allow two spouses in the private sector to "stack" their
individual and spousal benefits (one offsets the other). So,
essentially, the GPO put that same rule in place for couples in a
public/private collection situation. There are circumstances
where the GPO does not apply, and the SSA describes them in
In the end, it's all about knowing where you stand so that you
can make the most informed decisions in regard to your earned
retirement benefits. I encourage you to explore the
, your first source for Social Security info, and to visit me
back here on The Blog as I continue my effort to offer some
insight on this rich (and often confusing) topic.
Rob Kron, Managing Director, is the head of Investment and
Retirement Education for BlackRock's U.S. Wealth Advisory
group. He is the newest contributor to
and provides practical information on topics that are
important to every saver and investor of every age. You can
find more from Rob
* The reduction cannot exceed 1/2 of that part of the pension
based on non-covered earnings after 1956.
The above commentary is based on Social Security laws in
effect as of July 2014. Congress has made changes to the laws
in the past, and can do so at any time in the future.
This material is provided for educational purposes only and
does not constitute investment advice. The information
contained herein is based on current tax laws, which may change
in the future. BlackRock cannot be held responsible for any
direct or incidental loss resulting from applying any of the
information provided in this publication or from any other
source mentioned. The information provided in these materials
does not constitute any legal, tax or accounting advice.
Investors should consult with their own tax and or accounting
advisors for planning and investment advice.