Social Security WEP and GPO Rules

For more than 40 years, two well-intended Social Security rules have confused and perhaps unfairly penalized millions of state and local government employees. They are called the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). Most people have never heard of them, but millions of state and local government employees are affected by these rules.

They were enacted to prevent people from receiving Social Security benefits to which they are not entitled. This applies to some people receiving public-sector pensions based on earnings for which they did not have Social Security taxes withheld from their paychecks.

Gail, a reader, is one of them. She worked in the public and private sectors. She has already drawn on her government pension and wrote to me because she is now getting ready to file for Social Security. Her situation illustrates the mind-numbing complexity of these rules, which can make it nearly impossible for people to comply with them.

“I have received three distribution rollovers into a regular IRA from my 401a account (employer-only contributions),” her email said. “What is the amount used for determining my retirement payment? Is it all three or just the last one? It has been suggested to me by an outside consulting source that they should use the balance of my account on the day that I retired. If so, what section of the Social Security code would support that?”

“My second question is, can I apply for my Social Security benefit based on my spouse’s benefits even if he has not yet applied? If I did, would that be half of his benefit?”

I was able to answer the first question, or rather retired Social Security claims expert Jerry Lutz was:

“If a person is allowed to determine when to receive distributions from a pension fund that counts for WEP purposes, the SSA prorates the entire amount in the person’s fund account into a monthly amount,” he said. “They then use that monthly rate when calculating the applicable WEP. All of the distributions she’s received from her pension fund will count when calculating her WEP reduction. The pertinent POMS reference is GN 00605.364, parts C4 & C5.”

Got that?

Lutz said the second question was too complicated to answer without access to SSA software and directed Gail to a service called Maximize My Social Security. (Note: this business was founded by Laurence Kotlikoff, a co-author with PBS economics correspondent Paul Solman and me of the Social Security guide, Get What’s Yours.)

Back to WEP and GPO

Government employees, especially police and firefighters, often can retire with full pensions after as little as 20 years on the job. Many then begin working in the private sector, where they pay Social Security withholding taxes. After as little as 40 quarters of paying these taxes, they qualify for Social Security retirement benefits.

The WEP and GPO programs were designed to prevent an unintended loophole in the formula that determines retirement benefits. Social Security has a “progressive” benefit structure. It pays benefits to lower-income retirees that are a much higher percentage of their working-life wages than is the case with higher-income retirees.

So far, so good. But what happens when a government worker, who already qualifies for a nice pension, is also entitled to Social Security? When they apply for their benefits, the Social Security Administration will look at the amount of their wages on which they paid withholding taxes. Because these folks have not worked in the private sector that long, they will appear to Social Security as low-income retirees who should get benefits that are a high percentage of their private-sector compensation.

Thus the “windfall” in WEP. It was designed to cut benefits by reducing the progressivity of its benefit awards to public-sector workers who also qualify for Social Security.

The GPO was designed to reduce the amount such workers receive when they applied for Social Security spousal benefits.

Get What’s Yours devoted an entire chapter to WEP and GPO rules.

There are limits on WEP reductions, but they have introduced their own layers of complexity:

· Regardless of what the benefit formula says, you can never lose more than half of your Social Security payment due to WEP cuts.

· There’s no WEP effect at all if your work record includes a full 30 years of substantial covered employment, and there’s a sliding scale for the WEP reductions for fewer years, based on how many years of substantial covered earnings you’ve logged. The dollar amount that determines substantial is adjusted yearly for inflation.

· When you die, your family’s survivor benefits are not subject to WEP reductions.

As for the GPO, we wrote, “If you get a pension from a government or other non-covered employer, the GPO says that two-thirds of this amount will be deducted from any spousal or widow/widower Social Security benefit linked to your spouse’s Social Security earnings record.”

People hated the rules then and they still do. Government unions have besieged Congress to dump the rules, and more than 300 U.S. House members have supported total repeal of the WEP and GPO. But while this measure gets lots of headlines, it is unlikely to be enacted in its current form.

“Repeal” makes for more engaging headlines than “amend.” Some Social Security experts argue, however, that setting new rules for “proportionate” benefit adjustments would be a fairer response to the problem. It also would protect the Social Security retirement trust fund from paying out bigger benefits that it cannot afford.

Ignorance of the WEP and GPO rules is hardly bliss, however. Social Security, and Medicare for that matter, do not give people a free pass or do-over if they unintentionally fail to comply with program rules. The burden is on us, and the consequences of breaking even unknown rules can be life changing.

If Congress does get serious about changing the law, it would be doing a huge public service if it required Social Security to send a notice every year to folks who’ve worked for state and local governments about how their move into private-sector jobs might affect their retirement benefits.