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Social Security: The Shocking Ways the Government Can Cut Your Benefits

You've worked hard to earn your Social Security benefits, and the worst news possible would be if the government took them away. Yet that's exactly what happens in some situations, and you need to be able to predict if it's going to happen to you before it's too late to plan for it.

In this installment of The Motley Fool's Social Security Q&A, Dan Caplinger, The Motley Fool's director of investment planning, answers a question from Ilene, who asks whether a school pension she's eligible to receive will cut her benefits. Dan explains two different provisions that can cut benefits, including the windfall elimination provision for benefits on her own work history and the government pension offset for spousal benefits on her husband's work history. Dan notes that how much the windfall elimination provision reduces your benefits depends on a complex formula on how much time earn wages subject to Social Security taxation, while the government pension offset is usually a straight reduction of your benefits by two-thirds of your pension payment. Dan concludes that it's essential to know how these rules will affect you in order to make the smartest decision for your own particular situation.

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Have general questions about Social Security? Email them to SocialSecurity@fool.com, and they might be the subject of a future video!


Read/Post Comments (22) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 08, 2014, at 9:00 AM, chrispike wrote:

    But is it really that surprising? I remember being in sixth or seventh grade and our math problems having to do with the unsustainability of Social Security. I mean it always seemed to me that Gen X or Y would have to fix it for ourselves since Congress is too polarized to care to fix it and probably don't care to fix it since it's not seen as a problem that will affect the majority of them.

  • Report this Comment On June 08, 2014, at 9:44 AM, skypilot2005 wrote:

    On June 08, 2014, at 9:00 AM, chrispike wrote:

    " I mean it always seemed to me that Gen X or Y would have to fix it for ourselves ..."

    The choice was clear. A successful businessman or a community organizer.

    And yet, your generation voted for Obama overwhelmingly, twice. This proves elections have consequences. You all will be paying for it for a long time.

  • Report this Comment On June 08, 2014, at 10:03 AM, jademan wrote:

    Dan is only half right on the first half of his answer. Yes, because the questioner has at least 30 years of earnings she could eliminate the windfall elimination provision penalty but only if those thirty years had "substantial earnings". The amount of "substantial earnings" varies each year and can be found on the social security website.

  • Report this Comment On June 08, 2014, at 10:06 AM, HoosierNative wrote:

    Dan, I object to your very vague explanation to Ilene. I am in the same situation - other than the spousal stuff,. She has more than enough years. SSA requires 30 years of substantial earnings (substantial changes each year) to get full benefits under the Windfall Provision Act.

    Each year less than 30 years will result in a 5% reduction in the first tier calculation for benefits but not in the 2nd or 3rd tiers. At this time of 2014, a 5% reduction is about $49 per month.

    After 30 years there is no reduction.

    While I agree with your comments on "checking it out", I find your post quite Foolish and without the information that the questioner would find helpful.

  • Report this Comment On June 08, 2014, at 10:09 AM, KingNerd wrote:

    I think this article might be misleading.

    The Government Pension offset was created, because Federal employees in the Civil Service Retirement System did not pay social security tax, and then worked the 40 quarters to qualify and collected full benefits. As I recall, they were called Triple Dippers.

    So, this offset was created to correct the unearned social security check.

    I don't think Social Security really is bankrupt. It is among the best managed government programs and it works. Most people over 70 would be in a huge world of hurt without social security; it is their only income.

    Medicare works, too.

  • Report this Comment On June 08, 2014, at 10:14 AM, Jackson101 wrote:

    I worked for 15 years in the private sector (and paid into Social Security) and 23 years as a public school teacher. I used the Windfall Elimination Provision calculator on the Social Security website and found that my normal benefit of $9,400 per year will be cut almost in half. It's criminal to penalize people for choosing to work in the public sector after (or before) working in the private sector.

    Below is an excerpt from the Social Security website "explaining" why they cut benefits of hard-working people.

    "Before 1983, people who worked mainly in

    a job not covered by Social Security had their

    Social Security benefits calculated as if they

    were long-term, low-wage workers. They had

    the advantage of receiving a Social Security

    benefit representing a higher percentage of their

    earnings, plus a pension from a job where they

    did not pay Social Security taxes. Congress

    passed the Windfall Elimination Provision to

    remove that advantage."

    I'm not asking for full Social Security benefits; just the $9,400 per year I'm due based upon my years of working in the private sector. Yes, my "advantage" has been removed. I earn a small teacher's retirement pension and I will receive a reduced Social Security benefit ($5,200 per year) when I apply at age 66.4 years of age. I'm guess I'm doing my part to make life more fair for others.

  • Report this Comment On June 08, 2014, at 10:34 AM, jperkins123 wrote:

    The two problems I have with social security:

    If you continue to earn income even after age 70, you get taxed on your social security benefits that you paid in for those 30 to 40 + years. Double taxation.

    Our wonderful politicians do not adhere to the same program and plan that they so faithfully decide for us.

    I thought they were elected to serve "our" best interest?

  • Report this Comment On June 08, 2014, at 10:39 AM, greyhound44 wrote:

    The Congressional Research Service concluded a couple of years ago that if the "caps"/ Taxable Wage Base on the SS portion of FICA were eliminated that the SS "Trust Fund" would be solvent for 70 years.

    Will not happen as all our criminal politicians and their criminal contributors would be affected.

    Having retired 31 Aug 2003 at age 58.75 after having paid Max SS portion of FICA for 35 + years, I took maximum SS retirement income (reduced for age) at 62, and on Tuesday 10 June, I'll have received US$146,537.40 from same.

    As an insider I get great medical care with Medicare.

    retired expatriate (11 years in Conde Nast's 2013 "World's Best City") MD; NBME; ABIM: ABNM; ABR w/spec comp NR

  • Report this Comment On June 08, 2014, at 10:41 AM, ernieson48 wrote:

    I have personally been negatively affected by the WEP seeing my benefits substantially reduced after working TWO jobs my whole life.

    Two teacher friends' husbands paid into SS as a heavy equipment operator and a businessman for more than 50 years and the two women were denied survivors benefits beyond the insulting $255 death benefit. This is wrong when people like my own mother didn't contribute one cent to SS, yet received $1200 monthly after my dad died.

    The WEP applies to a handful of states. If a person pays into the system, that person deserves the same treatment as anyone who pays into the system.

    I know people who are not denied SS benefits and who are receiving 5 pensions.

    The WEP and GPO are unfair, unjust and discriminatory.

  • Report this Comment On June 08, 2014, at 10:43 AM, Jackson101 wrote:

    My apologies for an error I made in my previous post. My normal annual benefit should be $9,100, not $9,400. However, I just used the WEP calculator again to double check my figures and my status has changed (since using the calculator last year) from "insured" to "possibly insured." I guess I better plan on being "uninsured" by the time I turn 66.4 years old and attempt to claim benefits.

  • Report this Comment On June 08, 2014, at 10:54 AM, DrG wrote:

    I dont get why people that dont pay anything into Social Security still get benefits. Kids of people who are getting Social Security also get it? Too many Disability claims being paid to able bodied people. If you paid in you should get some benefit

  • Report this Comment On June 08, 2014, at 11:22 AM, bella66 wrote:

    Also, if you have saved carefully and get SS it will be reduced because you will be charged more for your Medicare benefits. I saw my SS benefits drop by more than $200 because of the amount I received in pension and 401K benefits. So, my careful planning allows the government to not keep their original promise.

  • Report this Comment On June 08, 2014, at 11:56 AM, gadfly1000 wrote:

    "my normal benefit of $9,400 per year "

    The WEP exists because pensions give back 90% of average monthly earnings in the first bracket, but people who had jobs NOT on Social Security thus have income UNKNOWN to Social Security yet their pension would be calculated as if they had very low incomes their whole lives--which is not true. It's a matter of fairness.

    The WEP reduction CANNOT be more than about $400 per month or MORE than half the non-Social Security pension.

  • Report this Comment On June 08, 2014, at 1:02 PM, grambyof3 wrote:

    From what I've read and heard over the years, too many other federal agencies kept borrowing from social security and leaving IOU's and to date have not paid those back. Isn't it time for those agencies to pay back social security and there wouldn't be any discussion on where future monies would be coming from. Another point that gnaws at me and my benefit is that I'm being taxed at 25% simply because my husband makes to much money(under $!50,000) and because we are married, we are penalized. I think it is time, that when it comes to social security, which has already been taxed once, that it does not get taxed again once you start receiving it. That amount along with Medicare which I have to pay at the higher rate because of our combined income once again, and then Part D, which I can't use in my little town because we do not have a network pharmacy, leaves me at less than half my original benefit. How is this fair. It's no wonder married couples find themselves getting legal separations and in some cases divorces, just to get their full benefit.

  • Report this Comment On June 08, 2014, at 1:42 PM, slopestyle wrote:

    As a baby boomer I am very happy with the benefits from SS. I have little fear that it will run dry during my lifetime. I can't say the same for millennials or ten X or Y. The solve is painful. Change the early age to start payments form 62 to 63 and max from 66 to 68. Then change the Cola to the CPI. Eliminate the unfair benefit of capital gain to earned income subject to SS for the carried interest partnership people. Then make all dividends paid from pass through entities subject to SSI.

  • Report this Comment On June 08, 2014, at 3:30 PM, toomuchgas wrote:

    Slopestyle you don't know what you are talking about. Dividends paid from limited partnerships are return of capital not income so can't be subject to SS. Carried interest for hedge fund owners should be taxed at ordinary rates but they shouldn't be subject to SS. SS is on for the first $117,000 of salary so Richie Rich won't be effected much my it. SS is a scam and a ponzi scheme so no one should want to give it any more hard earned money.

  • Report this Comment On June 08, 2014, at 3:55 PM, gwc7311 wrote:

    My wife and I also are affected by the WEP. She had her 40 quarters for SS. Then entered teaching and out of SS. Her small SS benefit of 595 has been reduced to 93 monthly (net after Medicare). It does sort of tick us off when we have friends who have triple dipped and still get 100% of SS. However; for our age (66), health is good, no debt, I mean none whatsoever and even though below all experts warning that it is not enough, our IRA and 503B have been growing(645,000) with no expectations of withdrawals till the tax man has to be paid in installments in a few years.

  • Report this Comment On June 08, 2014, at 5:44 PM, JohanStrauss wrote:

    I *really* wish you people would just post an article and not some stupid video.

  • Report this Comment On June 08, 2014, at 7:21 PM, bkmobal wrote:

    If there are any accounts left that have money in them the Government will cut an IOU for that dime. The Social Security Trust Fund has 2.7 to 3 trillion worth of IOU's in it. At one time I heard that the Highway Trust Fund was placing their worthless IOU's in Social Security and borrowing Social Security IOU's and cashing them in. Remember that Social Security is being paid for out of the General Funds that are taken in every year. As we head toward the 18 trillion mark and toward the 21 trillion figure there is no way that Social Security can be sustained. They will either cut it by the 25 percent they have been talking about of means testing it. Once interest rates start edging up we will see what is going to happen as all that is paid out of the general fund and their is only so much money taken in every year.

  • Report this Comment On June 08, 2014, at 8:23 PM, oldman wrote:

    Social Security benefits have been reduced in the past 8 years by 30 percent by inflation. it is impossible to take away the SS system, but the government can make the dollar worthless.

  • Report this Comment On June 09, 2014, at 8:40 AM, TMFGalagan wrote:

    @jademan - Good note - you can find the substantial earnings limits here in this PDF: http://www.ssa.gov/pubs/EN-05-10045.pdf

    @HoosierNative - It's always a balancing act answering a single direct question versus trying to give broad-based information that people in similar but slightly different situations can all use. I appreciate your clarification and will take the opportunity to provide a more in-depth answer in a future article.

    thanks,

    dan (TMF Galagan)

  • Report this Comment On June 09, 2014, at 10:17 AM, danielcfrey wrote:

    I am pending a hearing with SSA's ODAR regarding the application of WEP to my benefits. Aside from incorrect information in their notice as to my FICA and non-FICA earnings over the years, my main beef is that in addition to WEP being applied to my SSA retirement benefit, OPM is reducing my federal service benefit because I receive SSA! Talk about a double whammy! Anyone have any information about this situation, from personal experience? Thanks.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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