Last week, congress passed and the president signed the “Social Security Fairness Act,” which was aimed at filling a gap between those who had paid into Social Security during their working years but were then disqualified from receiving Social Security benefits because they spent the majority of their career paying into Social Security alternative programs such as PERA or other public pension plans.
Specifically, the passage of the Social Security Fairness Act repeals the “Windfall Elimination Provision” and the “Government Pension Offset,” two terms of Social Security that reduced or eliminated entirely benefits for those who had their own Social Security earnings or who might have elected to claim Social Security benefits as a spouse under their spouse’s earnings. To explain that a bit more, let’s talk about what each of those provisions were and what their repeal does for those who are eligible to benefit.
Windfall Elimination Provision
The Windfall Elimination Provision, or “WEP” as we’ll say going forward, was a provision designed to account for the event that someone might work at an employer who does not withhold Social Security income tax. For example, teachers working in the St. Vrain Valley School District participate in PERA, which, rather than withholding Social Security taxes, instead withholds a slightly larger percentage than the 6.45% OASDI tax from teachers’ paychecks and contributes it with a matching amount into the PERA Pension fund. Teachers are then eligible to claim a PERA pension.
However, this dynamic creates an interesting outcome in Social Security (prior to the passage of the Social Security Fairness Act). Social Security calculates a benefit as follows:
- 90%, or $0.90 on $1.00 earned up to $1,174 in monthly income that is subject to Social Security taxes.
- 32%, or $0.32 on $1.00 earned above $1,174 and below $7,078 in monthly income that is subject to Social Security taxes.
- 15%, or $0.15 on $1.00 earned above $7,078 in monthly income that is subject to Social Security taxes.
This dynamic means that someone earning $1,174 per month (subject to the averaged indexed monthly earnings calculation, which is another complex step and not worth understanding for the explanation here) is going to receive $1,056.60 in monthly Social Security income benefits or 90% replacement of their pre-retirement income. However, someone earning twice as much, say $2,348, will receive a benefit of $1,432.28, or 61% of their pre-retirement income.
In the context of a world without a WEP, this means that someone who may have had a lower-earning or part-time job before starting a non-Social Security participating pension like PERA might receive close to 90% (or exactly 90%) income replacement from their old college or pre-pension job from Social Security, and then receive their entire pension benefit on top of it. The WEP was designed to reduce the number of eligible earning years for Social Security, thus reducing the amount that is calculated as “$1,174” or “$7,078” in the calculations above since that calculation is derived from your 35 best earning years before claiming Social Security. That reduction then effectively resulted in the severe reduction of, or complete elimination of, Social Security benefits for those who were subject to the WEP. However, with the passage of the Social Security Fairness Act, those covered by non-participating pensions, such as PERA, are now newly re-eligible for their full Social Security benefit as if they had never worked under PERA. Now mind you, the benefit may still not be very large, but last we checked, a dollar is still greater than zero.
Government Pension Offset
The Government Pension Offset, or GPO, was designed to solve “the spousal half” of the same problem in the WEP. For understanding the GPO, a basic example is helpful:
- Your spouse is reciving $3,000 in Social Security benefits.
- You have worked in PERA or another non-Social Security tax paying pension-covered roll. Your retirement pension is $3,000 per month, and you never paid into Social Security, so you are not eligible for your own benefit.
- When your spouse passes away, you are entitled to keep their Social Security income or your own, which you don’t have. Because you’re a survivor, you’re normally entitled to receive 100% of your spouse’s benefit of $3,000 per month. However, because of the GPO, their Social Security is reduced by 2/3rds of your pension benefit, rather than the full $3,000. This results in receiving $1,000 per month ($3,000 in Social Security minus 2/3rds of your pension value) after your spouse passes away, rather than being able to elect between keeping their $3,000 benefit or your $0 individual benefit.
- So your total income after their passing is $4,000, not $6,000.
Effectively, the GPO was designed to close a loophole in which someone who never paid into Social Security (or who paid very little into Social Security) could effectively receive the full Social Security benefits entitlement of a covered spouse after their passing and their own pension benefit which was supposed to replace Social Security. Take the scenario above and replace the pension with Social Security benefits only; a person without the GPO-covered pension would have to choose between keeping their own $3,000 or their spouse’s $3,000 benefit but wouldn’t keep both. Thus, in the GPO-affected scenario, the survivor keeps their own $3,000 pension and a $1,000 Social Security benefit from their spouse, but the non-GPO household only keeps one of the $3,000 Social Security benefits. The ending of the GPO removes this issue and allows the survivor in this case to receive $6,000 in continuing income, which presents a significant advantage for those households with blended pension and social security income that differs significantly between spouses.
Passage and Impacts
For those who were already claiming Social Security going back to December of 2023, there will be some retroactive backpay. For those currently receiving lessened or no Social Security income benefits because of the WEP or GPO, it’s time to go talk to the Social Security administration about getting your increased or restored Social Security income. The SSA will likely be flooded with these requests over the coming months, so don’t expect a quick turnaround, but you should expect some backpay and increased income going forward, which is a great boon.
Now, there is some reasonable concern about the impact of increased distributions for spending on the Social Security trust. These impacts have not been fully explored but are likely to hasten the necessity of Social Security funding reform to help preserve the Social Security trust, which prior to the passage of the Social Security Fairness Act, was anticipated to begin reducing benefits come 2035 unless there was an intervention for funding for benefits calculation provided by congress. With more spending, there will be an increased urgency to provide some degree of funding solution, whether that be by increasing OASDI taxes or increasing the timeline for eligible retirement.