I wrote previously about the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) and how unlike many of my colleagues I actually think the intent is good, although the formula used to compute them is a very blunt instrument and could be improved. (We have each individual’s earnings data, and we have, you know, computers now, so it wouldn’t be that difficult.) But based on some recent discussions I’ve had with people, a lot of folks don’t really understand how the WEP and GPO are calculated, how they might interact with each other, and how understanding how they work might affect your decision-making around both your pension and your Social Security.
While I’m going to try to not go into too much detail, some detail is required for background. It’s helpful to understand the basics of how your Social Security benefit is calculated. (This will not be a thorough explanation, just enough to get us what we need.) Social Security uses your highest 35 years of earnings (indexed for inflation) to compute something called your Averaged Indexed Monthly Earnings (AIME). (Note: You have to have at least 10 years – 40 quarters – of Social Security-covered earnings to get any benefit at all.) They then apply a formula to your AIME to compute your Primary Insurance Amount (PIA), which is the amount you are entitled to at your Full Retirement Age (FRA). (For everyone born in 1960 or later, your full retirement age is 67. You can take benefits as early as age 62 or as late as age 70, with benefits before FRA being lower than your PIA and after your FRA benefits being higher – but maxes out at age 70.)
Your PIA is calculated using a formula which is progressive, which means that lower income earners get a higher percentage of their AIME than higher earners do. The formula is comprised of three different percentages of your AIME that get calculated around “bend points” that change each year. For 2022, the bend points are $1,024 and $6,172.
Your PIA is then calculated as:
- 90% of your first $1,024 of AIME, plus
- 32% of your AIME over $1,024 and up to $6,172, plus
- 15% of your AIME over $6,172
Some examples. Someone with an AIME of:
- $1,024 will have a PIA of $921.60 (90% of $1,024).
- $2,000 will have a PIA of $1,233.92 (90% of $1,024 and 32% of $976, the amount over $1,024).
- $7,000 will have a PIA of $2,693.16 (90% of $1,024, 32% of $5,148 – the amount between $1,024 and $6,172, and 15% of $828 – the amount above $6,172).
For folks who have a non-covered pension, meaning they paid into the pension but not into Social Security at the same time, they have a WEP PIA. The WEP PIA uses the exact same bend points, but you get a smaller percentage up to the first bend instead of 90%. The percentages above the first bend point remain the same (32% and 15%). The percentage for the first bend depends on how many years of “substantial” Social Security earnings you have. If you have less than 20 years, then you get 40% up to the first bend point. For each year thereafter, you get an additional 5%. (So, if you have 21 years, you get 45%; 22 years, 50%, etc.). Once you have 30 or more years of substantial earnings, the WEP no longer affects your benefit. Here’s a table indicating what qualifies as “substantial” earnings for each year, as well as listing the WEP percentage for the first bend (source).
There is also a maximum amount that WEP can affect your benefit; the difference between the regular PIA and the WEP PIA cannot exceed one-half of the monthly non-covered pension. For 2022, this means that the maximum amount that WEP can lower your PIA is $512 (50% of $1,024), and that will only happen if your AIME is $1,024 or higher and your covered pension is at least $1,024 per month. Also keep in mind that if you are eligible to start drawing your own Social Security benefit before you start receiving your pension, the WEP does not impact your Social Security benefit until you start receiving your pension.
The GPO is a much simpler calculation. If you are entitled to a spousal or survivor’s benefit from Social Security, your benefit will be reduced by two-thirds of your non-covered pension benefit. (Note: the rules around spousal or survivor’s benefits can be complicated in and of themselves, but I’m not going to go into detail on them, but once you know what the number would be without the GPO, figuring out the impact of the GPO is fairly easy.)
For example, let’s look at someone who would normally be eligible for a Social Security Survivor’s Benefit of $1,500 a month beginning at age 60. But because they are receiving a non-covered pension benefit of $2,100 a month starting at age 58, that will get reduced by two-thirds of $2,100 (which is $1,400), so their Survivor’s benefit will now be $100/month ($1,500 – $1,400). (Note that Social Security never impacts your pension benefit.)
A key point to remember here, however, is that the GPO does not impact your spousal or survivor’s benefit until you start drawing your pension. So, in the above example, if they didn’t start drawing their pension until age 65, they would still receive $1,500 a month in Survivor’s Benefits from ages 60-64, and then it would drop down to $100 a month at age 65.
So this leads to some of the nuances of how the WEP and GPO can interact with each other and how you should think about them in terms of your own planning.
- Some pension plans allow you to purchase years in order to increase your pension benefit. Many folks who are affected by WEP and GPO often decide not to do this because they think it won’t be worth it because it will increase the impact of the WEP and GPO, offsetting some of the increase in their pension from purchasing years. While that can be the case, often it is not. For example, as long as your pension is at least as much as the bend point (currently $1,024), increasing your pension will not increase the impact of WEP at all. It could still increase your GPO, but for many folks their GPO already completely wipes out their spousal or survivor’s benefit, so therefore increasing their pension doesn’t really change anything.
- The GPO has a much larger dollar amount impact than the WEP. Therefore for some folks who qualify for a spousal or survivor’s benefit and won’t be taking their pension until later (age 65, for example), it can make sense to take the spousal or survivor’s benefit up until you start drawing your pension, then switch to your Social Security benefit. During the years before you take your pension, neither the WEP nor the GPO will affect your Social Security benefit. Once you start taking your pension benefit, you will then only be affected by the WEP (which has a much smaller impact than the GPO and the GPO will never come in to play for you). And, remember, while the GPO reduces your social security benefit by two-thirds of your pension, that still means your total benefit (pension plus social security) will be one-third of your pension higher than your social security benefit alone.
- Some people see the decreasing impact of the WEP as your substantial years exceed 20 and approach 30 and convince themselves they should get a Social Security-covered job for a few years after retiring from their pension-covered job. That may make sense for a variety of reasons, including life satisfaction and current income, but the impact on WEP is likely to be fairly minimal compared to the time you put in. For each additional year over 20 you earn substantial income, you increase the WEP percentage of that first bend point by 5%, which translates into $51.20/month. While that’s not nothing, it’s also not a lot, and it’s likely that if you had stayed one more year at your pension-covered job the impact on both your current and your retirement income would’ve been much more significant than that.
- All of the above has assumed you start collecting benefits at your Full Retirement Age. But if you retire earlier than that (as early as 62), you get a reduced early retirement Social Secuirty benefit and, if you retire later than that (up to age 70), your benefit increases. Because the WEP is applied before the early or delayed retirement credits, that means the impact of the WEP is different if you retire earlier or later than FRA. If you start taking your benefits before FRA, the calculated dollar amount reduction of WEP is then multiplied by the early retirement reduction factor, meaning the actual dollar amount effect of the WEP is smaller. Alternatively, if you retire after FRA, the effect is the opposite, reducing the (positive) dollar amount impact of the delayed retirement credits (see this post for a much more detailed explanation).
Many folks look at the WEP and GPO and have a visceral “ugh!” reaction. And that’s understandable. But if you are someone who is going to get a non-covered pension, it’s worth spending just a little bit of time understanding their specific impact on you. It may turn out that knowing more really doesn’t change anything. But it’s also possible that it will have a significant impact on your decision making and timing of claiming your various benefits.