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 That is the maximum potential cut for 2015 stemming from the
Windfall Elimination Provision (WEP), a little-understood rule that
was signed into law in 1983 to prevent double-dipping from both
Social Security and public sector pensions. A sister rule called the
Government Pension Offset (GPO) can result in even sharper cuts to
spousal and survivor benefits.
WEP affected about 1.5 million Social Security beneficiaries in
2012, and another 568,000 were hit by the GPO, according to the U.S.
Social Security Administration (SSA). Most of those affected are
teachers and employees of state and local government.
These two safeguards often come as big news to retirees because the
SSA gives them no advance warning, and until 2005, no law required
that affected employees be informed by their employers. Even now,
the law only requires employers to inform new workers of the
possible impact on Social Security benefits earned in other jobs.
Many retirees perceive the two rules as grossly unfair. Opponents
have been pushing for repeal, so far to no effect.
WHY WEP?
To understand the issue, you need to understand how Social Security
benefits are distributed across the wealth spectrum of wage-earners.
The program uses a progressive formula that aims to return the
highest amount to the lowest-earning workers - the same idea that
drives our system of income tax brackets.
It is a complex formula, but here is the upshot: Without the WEP, a
worker who had just 20 years of employment covered by Social
Security, rather than 30, would be in position to get a much higher
return because of those brackets.
Where is the double dip? The years in a job covered by a pension
instead of Social Security.
"If you had worked in non-covered employment for a significant
portion of your career, there should be a shared burden between the
pension you receive from that period of your employment and from
Social Security in providing your benefit,” says SSA Chief Actuary
Stephen C. Goss. “Just because a person worked only a portion of
their career with Social Security-covered employment, they should
not be benefiting by getting a higher rate of return.”
If you are already receiving a qualifying pension when you file for
Social Security, then the WEP formula kicks in immediately. The SSA
asks a question about non-covered pensions when you file for
benefits, and it also has access to the Internal Revenue Service
Form 1099-R, which shows income from pensions and other retirement
income.
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If your pension payments start after you file, the adjustment will
occur then.
If you have 30 years of Social Security-covered employment, no WEP
is applied. From 30 to 20 years, a sliding WEP scale is applied.
Below 20 years, your benefit would drop even more. (For more
information, see http://1.usa.gov/1IiHJCC)
How does this affect your checks? The SSA offers this example: A
person whose annual Social Security statement projects a $1,400
monthly benefit could get just $1,000, due to the WEP.
Your maximum loss is set at 50 percent of whatever you receive from
your separate pension, so if that is relatively small, the WEP
effect will be minimal.
You can still earn credits for delayed filing, and you will still
get Social Security's annual cost-of-living adjustment for
inflation, but the WEP will still affect your initial benefit.
The WEP formula also affects spousal and dependent benefits during
your lifetime. However, if your spouse receives a survivor benefit
after your death, it is reset to the original amount.
Can you do anything to avoid getting whacked by WEP? Working longer
in a Social Security-covered job before retiring might help.
Remember, you are immune to the provision if you have 30 years of
what Social Security defines as "substantial earnings" in covered
work. That amounts to $22,050 for 2015.
So if you have 25 years, try to work another five, says Jim
Blankenship, a financial planner who specializes in Social Security
benefits. "That’s money in your pocket.”
(Editing by Lauren Young, Beth Pinsker and Lisa Von Ahn)
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