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If you or your spouse worked for the government at any point during your or their career, you should probably revisit your current retirement planning strategy and perhaps make appropriate adjustments, thanks to a new law.
The newly enacted legislation, titled the Social Security Fairness Act, struck down the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) provisions that applied to workers who receive a local, state, or federal government pension and did not pay into the Social Security program.
- The WEP offset applies to benefits received by workers based on their contributions in the Social Security program.
- The GPO offset applies to spousal and or survivor benefits workers could receive because they were married.
These changes impact about 3 million people in this country, according to the Congressional Research Service. The elimination of these offsets means those affected will be eligible for retro-active benefits from 2024 and all future benefits in 2025 and beyond.
These WEP/GPO offsets were established in 1983 when most of the Social Security rules we use today were signed into law by President Reagan. The intent at that time was to prevent extra benefits being paid to workers who did not pay Social Security payroll taxes but did pay into a state-sponsored benefit plan. Proponents of the new law argued that those offsets over time have led to unfair reductions in benefits for those who have worked in public service for much of their careers.
- In 2024, the maximum reduction because of the WEP offset was $587 monthly.
- For those with smaller benefits, the WEP reduction was capped at 50 percent.
The amount of the reduction was based on the number of years a worker paid significant Social Security taxes. The more years of paying the Social Security tax the less the reduction of benefits at retirement.
How WEP reduced benefits
The WEP did not totally eliminate all the benefits, but it did reduce them.
For example:
- Mary worked in the private sector and paid into Social Security.
- Later in her career she switched to government service for twenty years and did not pay any Social Security taxes.
- Based on private sector payments, she was eligible to receive a benefit of $2,000 a month.
- However, due to her length of service as a government employee and her government pension, her Social Security benefit was reduced to $1,413 a month.
How the GPO reduced benefits
The Government Pension Offset, was much more punitive. If a worker qualified for spousal benefits or survivor benefits, and was receiving a government pension and did not pay Social Security taxes to earn that government pension, the GPO could reduce the potential spousal and survivor benefit by two-thirds of the government pension. This two-thirds reduction had no limit and could reduce both of these important benefits to zero.
For example:
- Assume that Bob worked in the private sector and paid Social Security taxes his entire working life.
- At retirement his Social Security retirement benefit at full retirement age was $3,000 a month. Mary, his wife, earned a $6,000 monthly pension teaching in a state that did not require her to pay Social Security taxes.
- Once Bob retired, Mary expected to receive a spousal benefit of $1,500.
However, the GPO rule required that two-thirds of her pension, or $4,000, would offset against the $1,500 Social Security spousal benefit and as a result she would not receive any spousal benefit at all from Bob.
Additionally:
- When Bob died, Mary expected to receive his entire Social Security survivor benefit of $3,000 a month from Bob’s record.
- Again, two-thirds of her pension would completely offset any Social Security survivor benefits she might receive from Bob.
How Social Security benefits improve
The elimination of the WEP and GPO dramatically improves both the retirement and survivorship plans for workers impacted by these offsets. And, as a result of the new law, workers impacted by these WEP and GPO offsets will be eligible for retro-active benefits from 2024 and all future benefits in 2025 and beyond.
Given the significance of these changes, those who worked for the government at some point in their career are encouraged to revisit their current retirement planning strategies and make the appropriate adjustments. A financial professional can help sort out impacts and options. (Find a MassMutual financial professional here)
While the elimination of these offsets is good short-term news to those affected by them, these higher payments will also increase funding pressure on the Social Security Trust Fund that provides support for current and future retirees. Under current funding constraints and benefit demand, the fund was already projected to start running out of money in 2033- 2034 and having to reduce benefits. The Congressional Budget Office projects that the elimination of WEP and GPO offsets comes at a projected 10-year cost of about $196 billion dollars. These changes are likely to increase calls and urgency to restructure the future Social Security funding model.
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