WEP (the Windfall Elimination Provision) will eat my retirement.
May 2, 2019 4:52 AM Subscribe
I'm scheduled to interview for a fantastic job I probably cannot take, because under the new job's retirement plan, I would incur severe Windfall Elimination Provision penalties, which will make my already dim retirement prospects much worse. I'm interested an any advice or corrections to my understanding.
I'm scheduled to interview for a fantastic job I probably cannot take. It's a job at a university at which employees contribute to both a pension plan (though it's a sort of non-traditional one) and to Social Security. I'm now in my late 40's and have spent many years as a grad student and in various teaching positions, not putting enough away for retirement (I am single and have no children, and I do have some modest retirement savings).
The problem is that throughout most of my work history, I either contributed to a pension plan that made no social security payments, or was a student of some sort, making too little for my annual contributions to Social Security to count as "substantial earnings," as defined on this pdf. So, while I have 18 years of payments into social security (enough to be entitled to some benefits), only 5 are "substantial earnings" years (though in each of these 5 years I made twice what was required for a "substantial earnings" year).
What I believe this means is that any Social Security income I might obtain from my prospective position would be largely eaten up by the Windfall Elimination Provision of Social Security, which reduces social security payments for those with fewer than 30 years of "substantial earnings" in the Social Security system (it's a system designed to prevent "double-dipping" by those receiving generous pension benefits, but it can harm those with small public pensions).
It would take 15 years of substantial earnings with payments to Social Security before any reductions to my social security penalties begin, and 25 before they are eliminated (so I'd be about 72). I'm not yet eligible to retire but the Social Security WEP chart specifies a $463 monthly WEP penalty this year, which will presumably increase a lot (frustratingly, the Social Security WEP chart doesn't extend to future years) prior to my initial eligibility for retirement. My present projected monthly social security payment is $621/month, pre-WEP. However my small pension payments (projected at just under $1000/month) will reduce my social security benefit by either the amount on the WEP chart (presently $463/mo), or half the amount of any payments from one or more pensions systems. Thus, the more my pension from my new employer grows, the more it will eat into any social security benefit I would receive (even though in my new position I would now be paying more in to the Social Security system).
It's frustrating, since this desirable position at a state institution offers only one retirement option for all employees. It seems like, unless I'm misunderstanding something, I may need to withdraw my application from consideration, since WEP will cause such significant reductions to the Social Security payments retirees from this institution depend upon. Perhaps in the future I should limit my applications to institutions that make no contributions to Social Security.
If anyone has had similar experience with WEP penalties arising from a having a small pension and a low number of years when "substantial earnings" were made while paying into Social Security. I'd be interested to hear about these. I would also be grateful for suggestions for dealing with this situation (for example, could I somehow petition for a few additional years of SS credit, based on either my 13 years low-income years of SS contributions, or my 5 years when I made 2x the substantial earnings requirement?). I'm also interested (though I understand that you are not my financial advisor) in possible corrections to my understanding of this situation.
I'm scheduled to interview for a fantastic job I probably cannot take. It's a job at a university at which employees contribute to both a pension plan (though it's a sort of non-traditional one) and to Social Security. I'm now in my late 40's and have spent many years as a grad student and in various teaching positions, not putting enough away for retirement (I am single and have no children, and I do have some modest retirement savings).
The problem is that throughout most of my work history, I either contributed to a pension plan that made no social security payments, or was a student of some sort, making too little for my annual contributions to Social Security to count as "substantial earnings," as defined on this pdf. So, while I have 18 years of payments into social security (enough to be entitled to some benefits), only 5 are "substantial earnings" years (though in each of these 5 years I made twice what was required for a "substantial earnings" year).
What I believe this means is that any Social Security income I might obtain from my prospective position would be largely eaten up by the Windfall Elimination Provision of Social Security, which reduces social security payments for those with fewer than 30 years of "substantial earnings" in the Social Security system (it's a system designed to prevent "double-dipping" by those receiving generous pension benefits, but it can harm those with small public pensions).
It would take 15 years of substantial earnings with payments to Social Security before any reductions to my social security penalties begin, and 25 before they are eliminated (so I'd be about 72). I'm not yet eligible to retire but the Social Security WEP chart specifies a $463 monthly WEP penalty this year, which will presumably increase a lot (frustratingly, the Social Security WEP chart doesn't extend to future years) prior to my initial eligibility for retirement. My present projected monthly social security payment is $621/month, pre-WEP. However my small pension payments (projected at just under $1000/month) will reduce my social security benefit by either the amount on the WEP chart (presently $463/mo), or half the amount of any payments from one or more pensions systems. Thus, the more my pension from my new employer grows, the more it will eat into any social security benefit I would receive (even though in my new position I would now be paying more in to the Social Security system).
It's frustrating, since this desirable position at a state institution offers only one retirement option for all employees. It seems like, unless I'm misunderstanding something, I may need to withdraw my application from consideration, since WEP will cause such significant reductions to the Social Security payments retirees from this institution depend upon. Perhaps in the future I should limit my applications to institutions that make no contributions to Social Security.
If anyone has had similar experience with WEP penalties arising from a having a small pension and a low number of years when "substantial earnings" were made while paying into Social Security. I'd be interested to hear about these. I would also be grateful for suggestions for dealing with this situation (for example, could I somehow petition for a few additional years of SS credit, based on either my 13 years low-income years of SS contributions, or my 5 years when I made 2x the substantial earnings requirement?). I'm also interested (though I understand that you are not my financial advisor) in possible corrections to my understanding of this situation.
I think you should talk to an accountant or a financial planner or something before you make any important decisions based on your own personal understanding of Social Security regulations (I mean, unless you’re a professor of tax law or something). Also you need to consider this job against your other options and consider how likely it would be that you’ll stay in this job for the rest of your career, AND also think about what other saving for retirement you can/should be doing outside of the pension plan and social security.
posted by mskyle at 6:21 AM on May 2, 2019 [11 favorites]
posted by mskyle at 6:21 AM on May 2, 2019 [11 favorites]
Have you played with their WEP benefits calculator? Obviously I don't have the information to enter for you, but I think you're misunderstanding things pretty seriously.
You wouldn't hit the new standard retirement age of 67 for 20 years, so assuming this isn't a contract position that disappears in a few years, your mental point of comparison should be someone with 25 years of substantial earnings, not 5. At that point, the WEP penalty is much reduced. Assuming the patterns in the WEP penalty table continue into the future, you'd be looking at a maximum monthly reduction of about $420 if you retired at 67, $330 at 68, $250 at 69, and $170 at 70.
I played around with those forms, assuming you'd earned $50K of socsec-paying income the past five years and $5K/year taking it back to 18 years of payments in, and assuming that the job you're interviewing for also paid $50K. For those numbers, which you should change to your real numbers, it reduced the projected social security payout from $1550 to $1320/month.
I think I get your quandary? At some level, would you maybe be better off continuing with non-ss state employment, taking a presumably larger non-ss pension payout from it, and getting only a token amount from social security? Sure, maybe. If you have an offer of employment from one of those jobs *and* a job offer from a ss-paying job, you'd have to really sit down to compare the two.
BUT
That only matters if you're comparing two offers. If your only offer ends up being for a social-security job, then your question is whether you'd rather have that job or have no income, which ain't tough.
posted by GCU Sweet and Full of Grace at 6:24 AM on May 2, 2019 [7 favorites]
You wouldn't hit the new standard retirement age of 67 for 20 years, so assuming this isn't a contract position that disappears in a few years, your mental point of comparison should be someone with 25 years of substantial earnings, not 5. At that point, the WEP penalty is much reduced. Assuming the patterns in the WEP penalty table continue into the future, you'd be looking at a maximum monthly reduction of about $420 if you retired at 67, $330 at 68, $250 at 69, and $170 at 70.
I played around with those forms, assuming you'd earned $50K of socsec-paying income the past five years and $5K/year taking it back to 18 years of payments in, and assuming that the job you're interviewing for also paid $50K. For those numbers, which you should change to your real numbers, it reduced the projected social security payout from $1550 to $1320/month.
I think I get your quandary? At some level, would you maybe be better off continuing with non-ss state employment, taking a presumably larger non-ss pension payout from it, and getting only a token amount from social security? Sure, maybe. If you have an offer of employment from one of those jobs *and* a job offer from a ss-paying job, you'd have to really sit down to compare the two.
BUT
That only matters if you're comparing two offers. If your only offer ends up being for a social-security job, then your question is whether you'd rather have that job or have no income, which ain't tough.
posted by GCU Sweet and Full of Grace at 6:24 AM on May 2, 2019 [7 favorites]
However my small pension payments (projected at just under $1000/month) will reduce my social security benefit by either the amount on the WEP chart (presently $463/mo), or half the amount of any payments from one or more pensions systems. Thus, the more my pension from my new employer grows, the more it will eat into any social security benefit I would receive (even though in my new position I would now be paying more in to the Social Security system).
You are getting two things wrong here: As the document you linked to says, "We won’t reduce your Social Security benefit by more than half of your pension for earnings after 1956 on which you didn’t pay Social Security taxes."
So first, the reduction is the lesser of half of the pension under consideration or the standard reduction. You're estimating a $1000 pension, which is more than twice the standard WEP reduction, so any increase in that pension amount would not affect your SS benefit.
Second, the pension income used in this calculation included only income from only pensions from uncovered work (that is, work in which you don't pay Social Security payroll taxes and don't receive credit toward Social Security benefits). The job you are considering is covered by Social Security, so the WEP calculation wouldn't consider it. (And if any of the $1000 in your estimated existing pension is from a pension that was earned at a job that was covered by Social Security, then the WEP reduction might be even lower than you estimate.)
So for both of those reasons, your WEP reduction will not increase if you take this job - and if you have 15 or more years in this or another covered job, the WEP reduction will be reduced. Go for it! Feel free to message me if you have any further questions.
posted by Mr.Know-it-some at 6:56 AM on May 2, 2019 [4 favorites]
You are getting two things wrong here: As the document you linked to says, "We won’t reduce your Social Security benefit by more than half of your pension for earnings after 1956 on which you didn’t pay Social Security taxes."
So first, the reduction is the lesser of half of the pension under consideration or the standard reduction. You're estimating a $1000 pension, which is more than twice the standard WEP reduction, so any increase in that pension amount would not affect your SS benefit.
Second, the pension income used in this calculation included only income from only pensions from uncovered work (that is, work in which you don't pay Social Security payroll taxes and don't receive credit toward Social Security benefits). The job you are considering is covered by Social Security, so the WEP calculation wouldn't consider it. (And if any of the $1000 in your estimated existing pension is from a pension that was earned at a job that was covered by Social Security, then the WEP reduction might be even lower than you estimate.)
So for both of those reasons, your WEP reduction will not increase if you take this job - and if you have 15 or more years in this or another covered job, the WEP reduction will be reduced. Go for it! Feel free to message me if you have any further questions.
posted by Mr.Know-it-some at 6:56 AM on May 2, 2019 [4 favorites]
You should continue your application, wait for a job offer, and consult a tax attorney.
posted by DarlingBri at 7:27 AM on May 2, 2019 [4 favorites]
posted by DarlingBri at 7:27 AM on May 2, 2019 [4 favorites]
Definitely worth consulting with a professional, but I don't know if many tax attorneys would be familiar with the WEP. At least two companies specialize in this area: Social Security Solutions and Maximize My Social Security.
posted by Mr.Know-it-some at 7:54 AM on May 2, 2019
posted by Mr.Know-it-some at 7:54 AM on May 2, 2019
Also it is really important to find out long you have to be there to vest in the pension. My employer it is 10 years.
posted by AlexiaSky at 8:08 AM on May 2, 2019
posted by AlexiaSky at 8:08 AM on May 2, 2019
You are misunderstanding how WEP works. As you stated, it just prevents you from double-dipping. So if you take the new job, you might, depending on exactly how the numbers work out, be double-dipping and that will be reduced by WEP. So the alternative is to take a job in which you are not double-dipping, which means that you won't be subject to WEP. You are no worse or better off in either case. You just aren't benefiting from double dipping.
The important thing to realize is that double-dipping doesn't refer to simply having two pensions. It refers to the fact that your second pension from Social Security would have a higher than expected benefit because you appear to be a poorer person who only worked a few years. WEP just removes the artificially excess amount of Social Security benefit.
Here is a bit of explanation about WEP. If you work in certain government jobs, they can offer you a pension that is similar to Social Security, and instead of paying Social Security taxes, you pay an equivalent tax into your pension. But then you also at some point in your career take a job that collects Social Security and gives you a Social Security pension in addition to your other pension.
The important thing to realize is that Social Security benefits are progressive. You get a higher percentage of benefits if you are low income wage earner than if you are a high income wage earner. These benefit rates are based on your lifetime average wage.
So, if your lifetime average monthly income (adjusted for inflation) is below $895, you will get a Social Security pension that is 90% of your average lifetime income. Above that, you get a benefit that is 32% of your lifetime income. And if your lifetime monthly income is above $5400, you get a monthly benefit that is only 15% of your average income. So as you can see, Social Security benefits are much better for low income people than high income people.
But what happens if you work part of your career in a government job that provides a traditional pension instead of collecting Social Security taxes and then you spend part of your career in a job that collects Social Security taxes?
Since you spent fewer years in the Social Security system, it will appear that your lifetime average wage was very low. That's because your lifetime wages are divided by 30 years, even if you only worked for 10 years under Social Security.
For example, when you divide your 10 years of Social Security income by 30 years, you could appear to have an average income under $895 even though your job paid much more than $895 per month. So under the standard formula, you would look like a very low income person entitled to more generous benefits. The WEP works to eliminate that bias, by effectively looking at both your traditional pension and your Social Security pension and adjusting your Social Security benefit rate as if you had worked you entire career under the Social Security system.
So you aren't really losing anything from WEP. You are just getting the Social Security benefit you would be entitled to if you had spent your entire career under Social Security, not the Social Security benefit of what looks like an artificially poor person.
You should pick the job that is most appealing to you. Your decision shouldn't be determined by a concern about WEP. You aren't losing anything.
posted by JackFlash at 8:58 AM on May 2, 2019 [12 favorites]
The important thing to realize is that double-dipping doesn't refer to simply having two pensions. It refers to the fact that your second pension from Social Security would have a higher than expected benefit because you appear to be a poorer person who only worked a few years. WEP just removes the artificially excess amount of Social Security benefit.
Here is a bit of explanation about WEP. If you work in certain government jobs, they can offer you a pension that is similar to Social Security, and instead of paying Social Security taxes, you pay an equivalent tax into your pension. But then you also at some point in your career take a job that collects Social Security and gives you a Social Security pension in addition to your other pension.
The important thing to realize is that Social Security benefits are progressive. You get a higher percentage of benefits if you are low income wage earner than if you are a high income wage earner. These benefit rates are based on your lifetime average wage.
So, if your lifetime average monthly income (adjusted for inflation) is below $895, you will get a Social Security pension that is 90% of your average lifetime income. Above that, you get a benefit that is 32% of your lifetime income. And if your lifetime monthly income is above $5400, you get a monthly benefit that is only 15% of your average income. So as you can see, Social Security benefits are much better for low income people than high income people.
But what happens if you work part of your career in a government job that provides a traditional pension instead of collecting Social Security taxes and then you spend part of your career in a job that collects Social Security taxes?
Since you spent fewer years in the Social Security system, it will appear that your lifetime average wage was very low. That's because your lifetime wages are divided by 30 years, even if you only worked for 10 years under Social Security.
For example, when you divide your 10 years of Social Security income by 30 years, you could appear to have an average income under $895 even though your job paid much more than $895 per month. So under the standard formula, you would look like a very low income person entitled to more generous benefits. The WEP works to eliminate that bias, by effectively looking at both your traditional pension and your Social Security pension and adjusting your Social Security benefit rate as if you had worked you entire career under the Social Security system.
So you aren't really losing anything from WEP. You are just getting the Social Security benefit you would be entitled to if you had spent your entire career under Social Security, not the Social Security benefit of what looks like an artificially poor person.
You should pick the job that is most appealing to you. Your decision shouldn't be determined by a concern about WEP. You aren't losing anything.
posted by JackFlash at 8:58 AM on May 2, 2019 [12 favorites]
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