Social Security benefits may not be the most exciting topic in this edition—and reading about obscure Social Security Administration regulations may not be your favorite pastime; but this stuff is important—and it’s complicated—so grab a double espresso, sit down, turn the TV off, and read up.
First of all, let me say up-front what I have said in this magazine many times—you are one of the fortunate in the world who have a government pension. Most of my clients do not. They have no guaranteed monthly paycheck; no automatic and unlimited cost-of-living raises; no subsidized health-care; and for that matter; no 22-year retirements. People usually have what they have saved in an IRA or 401K and when they retire they get nothing from their employer other than their last paycheck and a pat on the back. (Surprisingly, because they had to take control of their own retirement and actually save some money–many of these clients are better off than our own retiring Troopers; but that’s a subject for another edition.)
However, one Governmental benefit that most non-MSP people receive that you won’t is a Social Security Administration (SSA) pension check upon reaching 67 years of agei. During your career you did not pay into SSA—so, fair enough, you don’t get the benefit. And considering the amount of most SSA checks you might not see it as such a big deal, most retired Troopers should be able to get by without it.
You may be wondering then, if we don’t get a SSA check, why should we worry about such things like the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO); it doesn’t pertain to us.
Here’s why; most retired troopers don’t really retire, they leave MSP and take on a new career—one in which they do pay into SSA. Or they may have had a FICA paying job before becoming a Trooper—a civilian job pre-MSP. And once someone pays 40 quarters into SSA (one quarter is $1,000 of earnings up to a maximum of four quarters per calendar yearii) they become eligible to receive a SSA pension check.
Upon turning 40 years of age (so I’ve been told) SSA begins sending a statement (three months before each subsequent birthday) reporting the number of quarters completed, how much you have paid in, and how much the estimated benefits/payments will be when you qualify.
The Devil is in the details. The problem with their estimate is that the SSA doesn’t know why you didn’t pay into the fund for the last 22 to 30 years; they only know that you didn’t. So their estimates on your SSA statement do not take into account that you already have a government pension. Missing information does not confound the SSA mega-computer—it just calculates your benefit with the information it has.
SSA is like most government programs, the people who make the money support those who do not, i.e., the benefits are bottom heavy. The more a person earns, the less—as a percentage–they get from SSA. Here’s the formulaiii:
The first $680 of average monthly earnings is multiplied by 90%, the next $3,420 of average monthly earnings is multiplied by 32%, and everything over that, is then multiplied by 15%. The result is your monthly pension.
As an example, if an employee earns $4,000 in average monthly earnings a normal employee would be entitled to approximately $1,674.40 per month from SSA. But as you know, Troopers are not normal employees—they have a governmental pension and this puts them squarely under the provisions of Section 215 of the Social Security Act (42 U.S.C. 415)—the Windfall Elimination Provision or WEP.
Under the WEP, the first multiplier of average monthly earnings is reset from 90% to 40%. The second multiplier remains at 32%. Thus a worker who falls under the WEP with average monthly earnings of $4000 would receive $1,334.40 per month, a 20% reduction or $340 less than the SSA estimate.
Just what the heck is WEP and why do we have it? As I explained earlier in this article, governmental programs try to level things out—they try to use finite SSA funds as effectively as possible. Politicians who designed the program wanted the greatest amount of money to go to people who didn’t earn that much while working—people who needed a supplemental pension most. Since during a State Trooper’s career they did not pay into SSA, the computer thinks the Trooper is poor and in need of a safetynet. While you might be a little short on cash, you are decidedly, not poor. You have a “government pension” that you earned while not paying FICA taxes so therefore, you must be adjusted—or WEP’D.
This is not the only difference between your SSA benefits and the rest of the working stiffs. Another section of the Social Security Act that trips up the SSA computer is the spouse’s benefit.
Benefits paid to spouses are dependent’s benefits and are designed to help people who stay at home to raise the children while the other half goes to work. Without dependent’s benefits the stay at home person becomes overly financially dependent on the working spouse, the one who accrues all of the SSA benefits while they get nothing. The SSA takes this situation into account and issues what’s called a dependent benefit. A non-working spouse is usually entitled to receive dependent benefits equal to one half of that which the working spouse has earned.
SSA dependent benefits may still apply when both spouses work. However, the dependent’s benefits of the lesser-earning spouse are reduced by the amount of SSA benefits earned in his or her own right. For example, if a working spouse has earned an $800 per month benefit, and the dependent’s benefit (based on the other working spouse’s earnings) is $500, the lesser earning spouse would receive just $800, not $1,300 (it’s not cumulative). However, if the first spouse had earned a SSA benefit of just $400, the total SSA benefit would be changed to $500 a month–the $400 he or she earned and the $100 from the dependent’s benefit.
But what if a spouse does not have a personal SSA benefit, but does have a pension? Let say for example, maybe a governmental employee who did not pay into SSA—like, I don’t know, maybe a State Trooper who has zero SSA benefits? Would they get the whole spouses dependent benefit—they don’t have any SSA pension to offset the benefit, right? Why wouldn’t they get the whole $500 spouse’s benefit?
Well the short answer is they don’t get it, even though the initial estimate might say they do. Remember, the computer does not know you have a pension—but Congress does and they closed this loophole with the Government Pension Offset provision, Section 202(k) of the Social Security Act (42 U.S.C. 402K).
Remember, the intent was to help the stay-at-home spouse, someone who had no pension—it was never meant to help governmental employees who did not pay FICA. Under the GPO, the spouse’s benefit is reduced by two-thirds of the government pensioniv. If you receive $600 from a government pension, two thirds of that, $400 must be deducted from your spouse’s benefit—the amount you would’ve been entitled to from your working spouse. The same $500 benefit mentioned above would then be $100. The end result of GPO, since most Troopers receive more than the spousal benefit in pension, effectively eliminates the spouse’s or widow’s or widower’s benefit for Troopers.
OK, so you made it to the end of this edition’s article; congratulations! If you have read this far it must be because you are looking at your Social Security statement and you have questions or issues. You should call them and ask to speak to a benefits counselor. Simply go to www.ssa.gov, find the local office locator link, enter your Zip code and find the closest office. They are the SSA experts and they should be able to say how much you are entitled to when you retire. Be sure to tell them that you have a government pension—you don’t want to be surprised later on when you are counting on X, but get Y.
Marty Knight, MBA, is a retired Captain from the Maryland State Police and is a Financial Advisor with Chesapeake Investment Advisors, Inc. Chestertown Maryland; he can be reached at 410-810-0735 or 1-800-994-0221 or email email@example.com.
Securities and Advisory Services offered through Geneos Wealth Management, Inc. member FINRA/SIPC
i SSA retirement age changes frequently, for this article we’ll use 67 as the age when full SSA benefits are available.
ii So if a worker earned $4,000 per year and paid SSA on those earnings the worker receives credit for four quarters for that year. If the worker only earned $3,999 only 3 would be counted.)
iii SSA Publication No. 05-10045 iv SSA Publication No. 05-10007