Social Security: Baby Boomers Should Beware of This Provision

If you have worked for both public and private employers, your Social Security benefits could be adversely affected.

Jul 12, 2014 at 11:05AM



Are you a baby boomer who has worked for both the public and private sector during your working career? If so, you are probably feeling pretty good about your retirement options, which very likely include a public pension, as well as Social Security. Unfortunately, under the Windfall Elimination Provision, you may not be eligible for all the Social Security benefits you think are coming to you.

No more "double dipping"
Before 1983, people who worked in both public and private jobs could collect a full pension when they retired, as well as Social Security benefits, as long as they qualified. Benefits were calculated as though the employee had been a low-wage worker throughout his or her career.

In order to make sure that lower-paid employees are given an ample monthly payment upon retiring, Social Security is calculated in favor of low wage-earners. So not only were public employees able to retire with a pension, but any additional work in which employees paid into Social Security was calculated with maximum returns in mind.

Therefore, a retired public worker with a pension could also draw a monthly Social Security benefit based upon around 55% of private-sector earnings prior to retirement -- quite a bit more than the 25% that high-wage individuals typically get. The enactment of the WEP put an end to this "double dipping."

How it works
Whether WEP applies to you depends on a few factors. The first, of course, is that you must have worked for a federal, state, or local government, employment which was covered by pension benefits, but not Social Security -- in other words, you never had Social Security tax deducted from your pay. Secondly, you must have also worked in a job that was covered by Social Security, even if the employer also offered a pension plan.

If this is the case, you will have your Social Security benefits reduced according to the Social Security Administration's formula, which takes your inflation-adjusted, average monthly earnings, and divides them into three brackets: in approximate terms, the first $800, the next $3,300, and the amount above $4,100. The first amount is multiplied by 90%, the second by 32%, and anything left over, by 15%. Adding them together gives you your monthly benefit. It's that 90% bracket that the WEP uses to reduce your benefit. 

A big exception
You are excepted from the WEP under certain circumstances – one of which is that you had 30 years or more of "substantial" earnings, reproduced in this chart. In order to obtain the 90%, you will need that full 30 years; the percentage drops after that. With 20 or fewer years of substantial earnings, the multiplier is only 40%.

The SSA's Retirement Planner gives an indication of how this might work. The maximum monthly reduction for someone reaching age 62 this year, with 20 or fewer years of substantial earnings, is $408.00.

A few things affect this amount, however. One is that the WEP will never be more than one-half of your non-Social Security pension; the other has to do with cost of living adjustments. The WEP will be calculated on your benefit amount before the yearly COLA is applied.

The age at which you take benefits also factors into the mix. The SSA chart represents a scenario for retirement at age 62, the earliest age at which you may collect. Retiring at your full retirement age -- or later -- will change your benefit profile accordingly.

Though you won't really know how WEP will affect you until you reach retirement age, being aware that it will be a factor will spare you any surprises later on. In addition, knowing this fact can allow you to tweak your retirement planning in order to minimize the WEP's impact.

A mix of public and private employment can influence Social Security spousal benefits, as well. I'll take a look at that issue next week, so stay tuned.

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A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

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The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

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I love the exercise, because it makes you think about what's important and forces you to be succinct.

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Everything else is details. 

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