Understanding the Windfall Elimination Provision and Government Pension Offset for Public Employees
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By Tim Hayes, Financial Advisor for the Public and Not-for-Profit Sector
As a public employee, it’s crucial for you to understand the implications of the Windfall Elimination Provision and the Government Pension Offset. These provisions can significantly alter your Social Security benefits, underscoring the importance of being well-informed and empowered about your financial planning.
With his extensive experience and deep knowledge, Financial Advisor Tim Hayes is a trusted source for financial planning in all 50 states. His expertise, particularly in navigating the complexities of the Windfall Elimination Provision and the Government Pension Offset, can provide you with the confidence you need for your financial future.
Here’s a clear roadmap to help you understand the impact of these two laws on your retirement benefits:
- Get an estimate of your retirement benefit from the state or city retirement system. If you work in California, for example (where some public employees pay into Social Security while others don’t) and you have worked for multiple employers, remember to include how much of that estimated benefit is from the employer where you didn’t.
- Do the same for Social Security, and if married, get your spouse’s Social Security benefit estimates.
Understanding the Windfall Elimination Provision for Public Employees
The Windfall Elimination Provision affects public employees who earned a pension from an employer that did not contribute to the Social Security system. This provision reduces their Social Security benefits. Although these employees did not contribute to Social Security, they may still be eligible for benefits based on work completed during college, summer, or second jobs throughout their careers, other public employment, or employment in the private sector before or after their public service.
One must understand Social Security’s “bend points” to know how the Windfall Elimination Provision impacts you. In 2024, the program pays 90% of the first $1,174 of an individual’s average monthly income, 32% between $1,174 and $7,078, and 15% over $7,078. As you can see, it replaces a higher percentage (90%) of workers’ average monthly income with a lower average income.
The Windfall Elimination Provision changed the formula for the first bend point from 90% to 40% for public employees with an earned pension from an employer that didn’t pay into the system. In the early 1980s, the government justified this change because public employees’ work record included mostly part-time, primarily seasonal work, causing the program to replace a higher percentage of income than comparable paid employees who had paid into the system.
However, the reduction due to WEP is limited to 50% of your monthly pension amount from noncovered employment. There is a way out of the Windfall if the public employee has substantial Social Security earnings, which are defined as earning at least a certain amount each year. For every year over 20 years, the formula increases the 40% by 5%, so if an employee has 30 years of substantial earnings, the first bend point bumps back to 90% (40% + 5%×10).
Planning Tip: We thoroughly check if you meet the criteria for substantial earnings. We also review what you would get under the WEP from Social Security at different ages and by delaying payment. Social Security increases benefits by 8% per year if someone waits to take their benefit after reaching their full retirement age. The increase stops at age 70, so there is no benefit in waiting until after that age. Rest assured, we are here to guide you through this process and ensure your financial security.
Public Employee Question: What if I take my accrued public employment benefit as a lump sum? This won’t get you out of the Windfall Elimination Provision because Social Security requires you to amortize that payment into a monthly income. So, you lose a potential lifetime guaranteed income from your retirement system but still end up impacted by the WEP.
Government Pension Offset
Unlike the Windfall Elimination Provision, which someone can logically argue for, why should a public employee paid a good salary that wasn’t reported as earnings to Social Security replace 90% of their part-time or seasonal income, a percentage rate more in line with a low-earning participant? The Government Pension Offset (GPO), the first of the two laws implemented, seems more political. It was introduced as a compromise between two sides of the Senate, one of which wanted to reduce the spouse’s benefit totally, while the other tried to reduce it by a third. The final decision was to reduce it by two-thirds.
Unlike the Windfall Elimination Provision, which impacts the benefits earned by an individual, the GPO impacts the benefits one becomes eligible for from their spouse. When the Roosevelt administration implemented the Social Security program, many married couples relied on one income, so the program created formulas to provide a spouse with retirement income. Today, spouses (including divorced spouses married for at least 10 years) probably have their own benefits and may be eligible for half their spouse’s benefit. If you are a widow or widower, you are eligible for 100% of their benefit. It works because Social Security always pays an individual’s earned benefit. If an individual is eligible for a spousal benefit, it adds to their earned benefit.
Planning Tip 2: First, we get your monthly benefit from the state retirement system. We then multiply that by two-thirds. We then get an estimate from your and your spouse’s Social Security. We reduce your benefit by the Windfall amount. We then subtract the Windfall amount, two-thirds of your pension, from your spousal or widower’s benefit to see if you are eligible for any spousal benefit.
An example might help. Say your state pension is $5,000 a month. Two-thirds of that is $3,333, and let’s say you have earned a $1,000 monthly payment from Social Security that is reduced to $450 by the Windfall Elimination Provision. Now, suppose you are eligible for a $2,000 monthly spousal benefit. In that case, first, we need to reduce it by your benefit ($450) then by $3,333 (2/3 of your state pension), and you can quickly see that the spousal benefit gets eaten up. Now, the spousal benefit never gets negative—it stops at zero—and the public employee reverts to only receiving their reduced Windfall benefit, in this example, $450 a month.
Public Employee Question: My state pension offers a survivor benefit. Why should I take a lower pension to provide this benefit if I am not eligible for Social Security? Remember: The Government Pension Offset does not apply to the surviving spouse if you provide a survivor benefit.
Planning Tip 3: The Government Pension Offset might initially reduce your total spousal benefit. However, if your spouse passes away, your spousal benefit could increase to a survivor benefit, rising from 50% to 100% and potentially making you eligible for some of your spouse’s benefits. With inflation adjustments (COLAs), your survivor or spousal benefit may increase enough to qualify you for a spousal or survivor pension.
Social Security Guidance for a Public Employee
“Mr. Hayes is truly an amazing, kind, knowledgeable and compassionate gentleman. His clients are fortunate to have him looking out for their financial future! After reading his very informative online article about the repeal of the Social Security Government Pension Offset and Windfall Elimination Provisions and how it may affect public employees, I reached out through email to see if he could provide insight. To my amazement, he immediately answered my question, taking time out of his busy schedule to provide both opinion and expert advice to an individual who was not even a client. After communicating with him several times during the past few months, it became increasingly apparent what an astonishing person Mr. Hayes is. His willingness to assist a complete stranger with his unimaginable degree of respect and kindness speaks volumes as to his character. I can only imagine the excellent service his clients receive. I wish him the best for the future.”
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Testimonial Disclosure: Testimonials are based on individual client experiences and may not represent the experiences of all clients. They are not a guarantee of future performance. Each client’s situation is unique. No compensation has been provided for these testimonials.
Make an Appointment
I can discuss your options via phone, Zoom, email, or in person. I can provide services to public employees in all 50 states. It will likely take a couple of work of hours at $150 per hour. We review your options to maximize your pension, Social Security, and, if applicable, spousal or survivor benefit. Please email me or call my cell at 508-277-5847 to get started.
These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.