---- — Anyone who has earned 10 years of Social Security work credits is eligible to receive a Social Security benefit at retirement age. Your benefit amount is based on your earnings averaged over the 35 years you earned the most and the age you begin receiving your Social Security checks. The higher your lifetime earnings and the longer (up to age 70) you delay collecting benefits, the larger the monthly check.
However, for certain workers Social Security imposes two “offsets” that reduce, sometimes drastically, the full monthly benefits that would otherwise be paid. These offsets known as the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP) affect those who are receiving a public employee pension in a job where they did not pay Social Security taxes.
Although both of these provisions can have a significant impact on the retirement income of affected workers, few people take the time to understand and plan for them. Let’s take a look at these provisions and how they can affect your benefits.
The Government Pension Offset became law in 1977 and it affects the benefits that you are entitled to receive as a spouse or a surviving spouse based on your partner’s earnings record. If the GPO applies to your situation, the resulting offset will reduce the amount of your Social Security spousal or survivor benefit by an amount equal to two-thirds of your government pension. For example, if you are receiving a state pension of $1,200 per month and you were entitled to a Social Security spousal benefit of $1,000 per month or a survivor’s benefit of $1,800 per month, the GPO would reduce both of them by $800 per month (two thirds of $1,200). Therefore the net monthly Social Security benefits would be $200 and $1,000 for the spousal and survivor benefits respectively.
The Windfall Elimination Provision which was passed in 1983 affects individuals who apply for Social Security benefits based on their own (not their spouse’s) earnings from work in the private sector where they contributed to Social Security, but are also receiving a public employee pension in a job where they did not pay Social Security taxes. If the WEP applies to you, Social Security will use a modified formula to calculate your benefit resulting in a lower monthly amount than you would otherwise receive. Unlike the GPO which uses a simple deduction of two-thirds of your pension from your Social Security benefits, the WEP formula is based on your particular Social Security earnings history. If you want to estimate the impact that WEP will have on your benefits, you’ll need to go to the WEP calculator on the Social Security website.
Social Security plays an important role in providing economic security for many Americans. Take the time to understand the benefits to which you are entitled and the implications of the GPO and WEP so you can plan properly for a comfortable retirement.
John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.