by John R. Berry
Social Security is a big component of America's retirement safety net, but in certain instances, having a government pension can impact how your Social Security benefits are calculated. This happens when you or your spouse has held a job in which Social Security taxes were not withheld because another retirement plan (pension) was in place.
A common example in our area concerns teachers, who pay into the Teacher Retirement System (TRS) but not Social Security. If being a teacher in Texas was one's only career, an individual would have earned a TRS pension but would not have any Social Security credits. Access to Social Security spousal and survivor benefits is also impacted, because those are designed to be "dependent" benefits. The government does not consider you dependent if your own retirement benefit exceeds what you would collect as a spouse.*
Two often-interlocking provisions are at work here.
The first is the Windfall Elimination Provision (WEP), which concerns your own Social Security benefit. WEP kicks in if you have a retirement income from an employer that did not withhold Social Security taxes and qualify for Social Security retirement or disability benefits through work at another job.
Under the Windfall Elimination Provision, your Social Security benefit is reduced based on the number of years you had "substantial earnings" at a job that withheld Social Security. Common sensically, the more years you pay in to Social Security, the less of a reduction you take as a function of the Windfall Elimination Provision. After 30 years of substantial earnings there is no benefit reduction.
Here is Social Security's handout on the Windfall Elimination Provision.
A second formula affecting Social Security calculations is the Government Pension Offset (GPO). This impacts spousal and survivor benefits. If a member of a married couple has a government pension from an employer that does not participate in the Social Security system, their benefit as a spouse or survivor from Social Security will be reduced or possibly eliminated because it is "offset" by another government pension. The basic formula is this: 2/3 of the amount of your government pension must be deducted from your spousal/survivor benefit.
Confused? Let's have an example. Mrs. Smith is a retired teacher with a $1,500 pension from TRS who also worked for 10 years in the private sector. Her husband, Mr. Smith, receives $2,000 per month in Social Security after a career as a truck driver.
Mrs. Smith's own Social Security benefit will be subject to a reduction multiple because she gets a teacher pension and didn't work long enough in the private sector (WEP). She would not be able to access a spousal benefit during her husband's lifetime because her own government pension (GPO) is greater than the $1,000 she would receive on his record. If her husband precedes her in death, she will receive $1,000 ($2,000-($1,500X2/3) per month based on his earnings record.
Here is the Social Security handout on the Government Pension Offset.
There is nothing scary per se about not being able to access Social Security benefits, or having a reduced benefit. After all, you have a stream of pension income. However, married couples in particular must take into consideration the windfall and offset provisions of Social Security, as well as the survivor stipulations for their respective pensions. In most cases the death of one spouse means a reduction in household income for the survivor.
Such a scenario cannot be prevented, but it many cases it can be planned for.
John R. Berry is a CERTIFIED FINANCIAL PLANNERTM and owner of Corner Post Financial Planning in Mineral Wells. Contact him at (940) 325-9800.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual
*Many city (TMRS) and county (TCDRS) employees in Texas pay into pension systems and Social Security, so these scenarios don't apply.