The windfall elimination provision (WEP) is an altered benefit procedure that reduces the Social Security benefits of certain retired or disabled workers who are also entitled to pension benefits. Its purpose is to remove a “windfall” that these workers would otherwise receive. WEP’s supporters argue that the formula is a means to prevent larger payments and benefits to folks, whereas opponents argue that the provision radically reduces a benefit that workers may have included in their retirement plans. In this episode, Michael, Tommy and John will be sharing how the recent potential legislation will impact this provision and how this may affect you.
Listen in as they share why there is no maximum number for a CSRS employee, but there is a maximum number if you’re drawing a Social Security benefit. You will learn why WEP exists, what might happen if WEP becomes dismantled, and who WEP doesn’t affect.
Listen to the full episode here:
What you will learn:
- Who is not paying into Social Security. (2:10)
- What Social Security was actually designed for. (3:30)
- What “bend points” are. (7:10)
- What you can expect for WEP if the Social Security Fairness Act is passed. (13:20)
- Why fair in finances doesn’t truly exist for everyone. (16:55)
- What you need to be aware of with the Social Security Fairness Act. (25:00)
Ideas worth sharing:
“Social Security was never designed to be a pension—it was designed to be a safety security net.” - Mason & Associates, LLC
“You can’t be rich in your state retirement plan and then pretend to be poor in your Social Security system.” - Mason & Associates, LLC
“Fair is a fairytale.” - Mason & Associates, LLC
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Michael Mason, certified financial planner. Across the table from me, John Mason, certified financial planner, and Tommy Blackburn also, certified financial planner and certified public accountant.
Mason & Associates have over three decades experience helping federal employees with their financial plans.
Folks, tonight's episode, Social Security Fairness Act Two. This is the second version. We're going to deal with Windfall Elimination Provision. So, Social Security Fairness Act/HR 82, which gets reintroduced every new congress. And the goal was to eliminate the Windfall Elimination Provision and the Government Pension Offset.
First episode, we dealt with Government Pension Offset. Just a reminder, GPO for federal employees that didn't pay into social security and state employees that are part of a retirement system that doesn't pay into social security, Government Pension Offset reduces, and many times, eliminates benefits that could be received on another person's record, typically a spouse or an ex-spouse.
The second piece of the Social Security Fairness Act is the Windfall Elimination Provision. This is a provision that can reduce earned social security benefits for a retiree that has a government pension that was not subject to social security.
That's right folks — millions, millions of people that are currently retired and will retire are actually not paying the social security tax. People in states like California State Retirement System, Illinois, New York, New Jersey, many others, as well as the old CSRS, federal level, they don't pay into social security.
Rather, they pay a tax or a percentage of their pay into their state pension plans. And this is where the act came into play. We're going to build a big pension in our state plans and then, maybe we'll earn a social security benefit by kind of dabbling in the social security system.
So, we want to understand why the Windfall Elimination Provision exists. And John, we really want to kind of, I guess, compare and contrast the difference between social security and a true pension.
John Mason: They're not even close, I think is the easiest way to say it. Social security was never designed to be a pension, social security was designed to be a social safety net. So, one, we have to understand that it was never designed to be a pension, it was designed to be a social safety net.
So, as far as a government pension, the way these typically work, is you're going to have years of service times some factor. That factor could be 1% for every year, 2% for every year. And then the last variable in that equation is your highest three years of earnings or your highest five years of earnings. We take that average.
So, years of service times your multiplier, times that average salary, whether it be three or five years, for example. And that's going to determine your annual income, whether that's CSRS, FERS, California, Illinois, what have you. Social security, instead of it being a high-3, Mike, is actually a high-35.
Michael Mason: So, we're talking the average 35 years, and the high doesn't really matter because unlike a state pension or a federal pension — and we'll use an example, let's say your multiplier, John, was two and a half and you worked 30 years. So, that means you've got a 75% benefit. 75% of what?
Well, if it's based on a high-3 and your pay was a hundred thousand, what's 75% of a hundred? It's 75,000. You know, what if it was 200,000, was your high-3? Well, it's 75% of 200,000, so it's a double pension.
So, it's a direct recognition is what I want to call it, but it doesn't matter if you've maxed out social security your entire life. If your average high-3 is 120,000, you're not going to get a direct recognition of that social security benefit. Are you, Tommy?
Tommy Blackburn: No, you're certainly not. And it goes back to what both of you were saying, is when I think about a pension regardless of where it's from, it's compensation. It's part of your compensation package. When you decide to join up with that employer, that is something that should be going through your mind, if a pension is there, is this is incentivizing me to do this job and how it works.
Whereas, those of us in the social security system, there's no real choice of negotiation involved in that decision.
Michael Mason: Let me give an easy example here. Let's say you're a California State employee and you're working right beside another California State employee, and you both work 30 years and you both have a 75% income replacement. John, I'm sitting beside you and I make four times what you make, what's my benefit going to be?
John Mason: So, maybe we can just say it this way: in a pension system, your pension is proportionately higher. So, if you make double, your pension's double. If you make triple, your pension's triple. That's not the case in social security.
And I think we did some notes, Mike, before the show, and it was like if a $30,000 social security earner — so, somebody who has a W-2 of 30k, let's say their social security benefit is X. Well, if I make 60,000, the logical math would say my benefit is going to be 2x. It's going to be double that person.
Well, in fact, it's only 1.6x, which means you're not getting that direct recognition. So, you're getting a higher benefit on the lower end, and you're getting less benefit in social security as your income grows. The technical term for this is bend points.
Tommy Blackburn: Bend points.
John Mason: So, those bend points, Tommy, are waiting the social security benefit to the very … I shouldn't say very low, but the lower income you're getting proportionately higher.
Tommy Blackburn: Absolutely. And so, there's a few bend points. And that first one is I think, a 90% replacement. So, what it does is it says, let's say, for hypothetically, $10,000 of your earnings, that first 10,000, say you earned a hundred — the first 10,000 is 90% that social security wants to replace.
And then after that, the next bend point, it just starts dropping off a cliff. And the theme here is it's replacing the lower earnings at a higher rate. And as your earnings increase, it starts to drop off what it's aiming to replace.
So, that is the theme of that system. It is progressive. It is meant to ensure that lower income get a higher replacement. And as your income increases, you get lower, which is the example you laid out, John.
So, if we’re at the maximum amount, say we earned 120,000 was the example we were using; you would've paid in, I believe four times what somebody earning 30,000 would’ve paid into it. But your benefit is only two times what the person earning 30,000 got. So, you didn't get four times what they got, you got two times.
John Mason: And we've danced all around this, we've danced all around this, is that there's a maximum benefit available to people in social security right now. If you’re age 70 today, there's an actual maximum number that you can get out of the social security retirement system.
There is no maximum number, Mike, and I don't know if you want to talk about … maybe we'll get a little political here, but there is no maximum number for a CSRS retiree, but there is a maximum number if you're drawing a social security benefit.
Michael Mason: Oh, sure. I mean, you set me up for this, but we've talked about a name that's big in the media today, is Dr. Fauci, the highest paid federal employee in the land. He's got an 82% income replacement on a $420,000 high-3. There's no maximum. If they decided to pay him 600,000 over the next three years, it would be 80% of 600,000.
John Mason: And I guess to fair, the maximum CSRS is 82% limited to however congress and the government has determined maximum pay scale available not to exceed the president or however they do that.
So, I guess in theory, there is a cap, but in reality, like as long as salaries keep going up, there is no cap in a pension where there isn’t social security.
Michael Mason: You know, this is the Federal Employee Financial Planning Podcast, but this WEP and this social security or the Government Pension Offset and the Social Security Fairness Act, folks, as your federal employees, don't think that this is a minimal number of people that it applies to.
There are many states, millions of people in states that don't pay into the social security system. And California, you can get to 100% income replacement. So, think of some of those state employees in California that maybe head football coaches — 100% of 5, 6 … 700,000.
So, what I like to say before I ask Tommy this question, is the reason WEP is in there (Windfall Elimination Provision) is you don't get to live in the best of both worlds. You don't get a direct recognition retirement. Like I say, you can't be rich in your state retirement plan, and then pretend to be poor in your social security system where you just dabble in it and you get an enhanced benefit as if you didn't make any other income.
So, Tommy, my question to you, and if I'm out there and I don't understand all this — I'm asking: so, if I spent a career in a system that doesn't pay into social security, how could I have an earned social security in the first place?
Tommy Blackburn: So, many federal employees that we see, they're retiring in their mid-fifties, early-sixties, and they're not necessarily done completely working at that point in time. So, it's very normal to see someone retire from that system and then go pick up a part-time job.
It could be something I'm working at Home Depot, local hardware store, or I'm doing a little bit of consulting work on the side, I'm dabbling in things. And because I have retired from the nonsocial security system, now, my earnings, they are subject to social security. So, I've began to build up at earnings history and a benefit inside of the security system.
If we go back to what we said earlier, social security is designed to benefit those with lower incomes more proportionately than higher income. And social security cannot see this other career you had and this other great pension, or it doesn't see it at least initially, before these rules come into play.
And so, without anything in place, we're able to dabble and go earn … look like a low earner inside of the social security system and get a high replacement rate on that low earning.
John Mason: Mike, you and I were kind of going back and forth before we started this recording. And I think what we came up with was that a lot of people in the media, I think a lot of clients, a lot of people out there are thinking, well, what happens when social security is means-tested?
And I think we came to of the conclusion that Windfall Elimination Provision and GPO is effectively already means-tested social security to a certain extent, because it's saying you have this very large government pension, therefore, we do not want you to have the same social security benefit that somebody else with the same social security earning would've had, so we're going to artificially lower your benefit.
Now, we think that that makes sense. We think that Windfall Elimination Provision and GPO makes sense, but I thought it was interesting how you and I were conversing on the fact that maybe it's already means-tested.
Michael Mason: Yeah, and we talked about not just from a WEP standpoint, from a social security tax where you're taxed up to, I think — and this year, it's going to be almost $140,000. But I guarantee you anybody that's hit what's called the social security wage base for 30 to 35 years of their career, they're going to take multiple years to get their taxes back out of the system versus somebody that had that lower, that 30,000 a year.
So, it's already means-tested because it's not direct recognition, not just for WEP, but also for the high-income folks.
John Mason: And as we were talking, Tommy, you were in another room when we were having this conversation. But we were actually talking that if the Social Security Fairness Act is passed, it effectively undoes or is a reversal of this means-testing.
So, it almost would say, if you reverse GPO and WEP, then you should never reduce somebody's social security based on how much money they've saved. It's effectively the same thing, so it's very interesting.
I would say to you that if WEP is dismantled, then hopefully, that would mean anybody with 1, 2, 3, $5 million in an IRA should never worry about means-testing.
Tommy Blackburn: Yes, I would think so. And I guess, going a little off the rails here, as I think about it, all of these means tested, you kind of just hit on it — it kind of defeats the point to me because we’re means-testing for income on a tax return. None of this is looking at, do you have $5 million saved aside.
So, what are we means-testing? And of course, I think you're alluding to some of the proposals that have come out of DC, where they want to begin looking at what have you saved? What do you have in these accounts, and begin potentially taxing you a little different.
Michael Mason: You know, it's like I've used for 30-some years, the people we're talking about that will be affected by WEP are the secret millionaires. And it's good to be a secret millionaire.
When you have a $200,000 pension from the state of California, that's the equivalent of me having $5 million in a 401(k), but our elected leaders can't even spell social security, so they can't tell you — worse than that, they probably can't spell WEP, which is W-E-P.
So, they can't comprehend that a $400,000 pension makes you a secret millionaire. They would attack the person with a $5 million in a 401(k) while they would un-WEP the 400,000 or $200,000 pension for the state employee.
John Mason: So, I think the big takeaway here guys on this section is Windfall Elimination Provision, we know what it does. If you have a nonsocial security covered pension like CSRS, and then you start dabbling in social security, you're not going to get the same benefit that everybody else gets. That social security statement that you look at is lying to you. You are not going to get what you think you're going to get. So, what's the action?
Well, for the longest time in our office, on our radio show, with our clients, the action item here is fair is a fairytale. Fair is a fairytale, none of these things are fair. But what we have to do is we have to get a comprehensive financial plan in place so you know the rules of the game, you know the rules of engagement so you can make them as fair as possible for you. And you do that by having a comprehensive financial plan.
Michael Mason: Yeah, I like to say I made up fair is a fairytale. And the second part of that is, so life is not fair, just make it unfair to your benefit.
As we're going to do this lightning round on some of the neat provisions of maybe how to avoid WEP or when WEP doesn't apply, but let's think about this; give Americans a chance for a loophole, they're going to find it. It’s like the backdoor Roth IRAs.
So, Americans found out … and these Americans that are in pensions, not subject to social security, pre-1983, they found out, boy, if I just dabble and get 40 quarters, I'm going to get a pretty good check for a very little amount of taxes.
So, not only did the government figure this out back when Democrats and Republicans could actually look at something and say, “That's not right” and not be so partisan — so, here's where I want to go: WEP has no effect if you have 30 years of (keyword here) substantial social security earnings. You can't just dabble.
So, let me give you an example. In 1992, you could have received four credits of social security, a year's worth of credits with only having $2,200 paid in or earned in social security. But for that to count as a substantial year, it needed to be 10,350 of earnings.
So, again, this is part of the close the loophole. We're still not going to let you dabble. If you have a second career and you're really paying in and you made 10,350 in 92, and you made 15,750 in 2002, and you made 27,000 this year, well, all those years are going to count.
If you have 30 of those years, which means you're not gaming the system, you're actually working a second career in that system, you're not going to get WEP-ed. Tommy, there's some other times where maybe be a spouse gets WEP-ed and a spouse doesn't get WEP-ed. Let's talk about that.
Tommy Blackburn: Yeah. And as I think about this nuance we're going to talk about, it goes back to what you were saying of fair is just a fairytale, make it unfair to your advantage.
As I think about that, to me, it means make informed decisions, know the rules of the road, know the rules of engagement, and use that to make informed decisions to your benefit. We do that here with a comprehensive financial plan to help us make those plans and help us bob and weave as we go.
One intricacy, if you know the rules of the road, as WEP applies in a situation, is social security, you have your benefit based on your record. And if you have a spouse, your spouse is entitled to half of your benefit based on your record. How does WEP apply to this?
WEP applies, of course, to your earnings as we've been talking about. But if your spouse was to try to draw off your record, that half of your benefit, spousal benefit they're entitled to, that's going to be WEP-ed as well.
Interestingly, if you were to pass, exit, leave the plan, cease consuming assets, WEP goes away, and the survivor benefits — and now, your spouse gets to step into your shoes and your shoes are no longer WEP-ed.
So, an example could be say, you were receiving $500 a month from social security, and that was after WEP. And now, when we take away WEP, perhaps your spouse is going to get a thousand a month because that reduction is no longer there.
Where this takes us, and John, I can see you're going to jump in, and I'm looking and forward to it; is we come across these situations a lot of times where folks say this is insignificant, whether I take it now at 62 or I delay it to 70 when I apply this WEP. But with this knowledge in hand, where do we go with this, John?
John Mason: I know for sure, we've been doing this 11 years — I have at Mason & Associates over a decade of experience, Tommy, working with federal employees. You now, almost three; Mike and Ken, 60 years combined.
I can't put an exact stat to it, but I will: probably 75 or 80% of all CSRS folks who have earned social security either really, really want to or have taken social security benefits at 62 and have not considered the fact that their spouse would probably have been better off had they delayed that benefit until age 70.
So, to your exact point, what do they need $300 a month for? What do they need 500? “Mike, Ken, Tommy, John, Ben, is it really worth it? Should I delay until 70?” And the average financial planner who doesn't specialize with federal employee is going to say, “Just turn it on, it's insignificant.”
They're going to agree with these people, and it's not for wrong reasons. It's for not knowing that little tidbit that WEP does not apply to survivor social security. I can think of multiple clients, Mike, right now, that we're delaying social security until age 70, because it is insignificant now. They don't need it, but their survivor benefit, it's adding massive value to their financial plan.
Michael Mason: Well, just think, a hundred thousand is all ways an easy number to deal with. So, you have a CSRS pension that's a hundred thousand and a social security check that's $250 a month. When you die, the a hundred thousand goes down to 55,000.
What good was that $250 a month? What if it goes down to 55,000, but you delayed until age 70 and your social security benefit to your spouse is a thousand month? Well, now, you're at 55, you're at $67,000, that's a huge difference when you're off the planet.
Tommy Blackburn: It's interesting because it's so insignificant while you're alive when you think about it that way, because of the WEP reduction, it makes the factor, the waiting on that survivor benefit, oh, so more important. This is almost a non-event while you're alive at this point because of the WEP reduction. So, we are playing for survivor benefits here at this point.
Michael Mason: You know, 33 years for me … well, 35 now (it’s amazing how fast you get old) — 35 years for me, and you just made a statement, it's insignificant. People when they retire, they don't think that the reduction for survivor benefits is insignificant, but in reality, it is.
So, we make a lot of decisions. We've said this before, and I know this bleeds over into a different subject, but if you can't give up 10% of your pension when you retire to provide survivor benefits, so you have to have a hundred percent of your pension, but somehow or another, your spouse is going to survive on zero. So, it is insignificant when we think about that.
There's another suggestion that I would make. WEP only affects you when you're drawing your pension. So, if you're at full retirement age and still working in that state job or the CSRS job, you're definitely going to want to turn on your social security because it's free money. It's full benefits until you decide to retire. And now, it's a pension versus earned income.
Tommy Blackburn: And if you play that scenario out, again, to where we have a spouse and the WEP hasn't applied yet, because you're still working in that noncovered pension, CSRS, et cetera — well, your spouse is now going to get that spousal benefit non-WEP-ed as well.
So, this is, as Mike would say, let us in, making it unfair to your advantage, but it's really, it's being informed, making informed decisions.
John Mason: So, let's transition guys; lightning round, action items. As we wrap up the podcast, let's talk about like Windfall Elimination Provision, what do our listeners need to know? Let's go around the table maybe once or twice with some final thoughts on Windfall Elimination Provision. Here's mine.
All of this information's readily available, not just on our podcast, but social security fact sheets, opm.gov, there's stuff everywhere. We're going to put in the show notes a link to the Windfall Elimination Provision calculator. There's a link to that on our website at masonllc.net as well.
In addition, there's 10 or 15 other social security calculators that are there. What's the point? The point is that this information's available in Google and a variety of sources, but unless you have a comprehensive financial plan, the answer you get from ssa.gov, the answer you get from your life insurance agent, the answer you get from tsp.gov, they don't work together.
So, you're getting a whole bunch of independent data points that by themselves, guys, do nothing for you. They don't help you make educated decisions. You just have a bunch of data points that you can't make logical decisions.
The comprehensive financial plan brings all of these individual data points together. That's why you need it so you can maximize all of your benefits as a federal employee.
Tommy Blackburn: Yep, I just think about what you said, John, and it's one, we got to get the right information to even begin making decisions. Then we got to pull this all together in that comprehensive situation to make even more informed, better decisions that work together.
Another thing I think about is, is the social security statements recently changed. They still have your earnings history on there, but it only goes back so far at this point. So, it's probably a good idea to save your old social security statement and the government's pushing you to do this, they've been pushing to it for a while. Create a social security account online.
You can go see your earnings records there, and you'll have access to these calculators, which you can get through our website as well. You want to pay attention to those earnings records.
Michael Mason: And I would just say, so I come at this from a different angle. At 60-years-old, I would just say to you that you need to be informed when your members of Congress are lobbied to get rid of the WEP or the Government Pension Offset.
I would just like to call the attention to our military retirees, Virginia Retirement System, even the California Retirement System, Public Employees Retirement System. So, you've got two there; you got the state employees that don't pay into social security, and then you've got the public employees that do.
Many systems coordinate where you pay into both social security and your pension. So, there are millions and millions of people that are funding social security: military FERS, VRS state — the only thing that getting rid of WEP and GPO is going to do, is weaken social security.
It is going to give higher benefits to people that have paid the least into the system. And I just want to help you help educate your Congress members, because if they know this, they will vote the right way. The fact that they're leaning the other way is because they don't know. So, share the podcast with them is what I would say.
John Mason: FERS transfers and CSRS offset, WEP does apply to both of those folks. So, although those are rare categories, guys, you don't see a lot of CSRS offset. You don't see a lot of people who did that FERS transfer back in the nineties.
But if you are one of those, then Windfall Elimination Provision does apply to both. But interestingly enough, GPO, Government Pension Offset is not a player for those FERS transfers, assuming, I think you have five years of service after you transfer to FERS.
Michael Mason: Folks, my end of this is again, understand you're blessed with your pensions, wherever they come from. Thank you for your service in the military, that pension is well-earned. State, federal, it's well-earned, just understand the rules.
And I think everybody I've explained this to directly over the years that thought GPO or WEP was hurting them, once they understood the rules, they figured that it was fair. It would be unfair any other way. So, understand it, help your members of Congress understand it.
Tommy Blackburn: As it comes back to me and we think through this, kind of going back to that social security statement, as John says, it is a lie. They are lying to you, but they do leave you an asterisk on there that says “There are some additional rules that may apply to you. Go here to find out more.”
So, don't trust your social security statement in this situation. Use that earnings record we just talked about previously to go compute. Use the WEP calculator to figure out what your WEP adjusted social security benefit will be.
Michael Mason: Folks, if you like what you're hearing, we do a live radio show the first and third Tuesday of every month here in Hampton Roads, Virginia. You can tune in at AM 790 at six o'clock. We go from six to seven first and third Tuesday. It's also streamed at masonllc.net. You can actually email questions in advance or call during the show.
John Mason: Folks, this podcast is for you. We want to design the Federal Employee Financial Planning Podcast as an informational and educational resource to help you make the most informed and educated decisions; not only about your federal benefits, but about your financial plans.
Send your questions at masonllc.net. Please leave us five stars if you enjoy this podcast. Share it with your friends, family, and coworkers. We are Mason & Associates, masonllc.net.
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.