Will Your Social Security be Reduced by the Windfall Elimination Provision?
As many of you may already know, the majority of Police Officers and other public employees in Ohio do not pay into Social Security. However, you may have had previous work in the private sector or continue to work part time jobs where you are paying into Social Security. If you are going to receive a pension from a job not covered by Social Security, but have paid enough Social Security to qualify for a retirement benefit, your benefit will likely be reduced by the Windfall Elimination Provision (WEP).
How does Social Security work?
Social Security benefits were created to replace only a percentage of a worker’s pre-retirement earnings. It is set up so lower-paid workers would get a higher return than highly paid workers. For example, lower-paid workers could get a Social Security benefit that equals about 55% of their pre-retirement earnings. The average replacement rate for highly paid workers is only about 25%.
To understand why this is, you need to know how your Social Security benefit is calculated. Your benefits are based on your average monthly earnings adjusted for inflation. Then, they separate your average earnings into three amounts and multiply the amounts using three separate factors. In the case of a worker who turns 62 in 2012, the first $767 of average monthly earnings is multiplied by 90%; the next $3,857 by 32%; and the remainder by 15%. The sum of the three amounts equals the total monthly payment amount. The 90% factor is the most important and is what can be reduced by the WEP.
How does the Windfall Elimination Provision affect my benefit?
First, we need to verify that you are eligible for Social Security benefits. The government no longer mails statements to those under the age of 60 as a cost cutting measure. However, you can access your benefit calculation on the www.ssa.gov website by creating a user name and password.
Generally, you need 40 “credits” to be eligible for benefits. In 2012, you receive one credit for each $1,130 of earnings covered under Social Security, up to the maximum of four credits per year. Each year the amount of earnings needed for credits goes up slightly as average earnings levels increase. We here at Lineweaver Financial can calculate your earned credits for you.
The WEP reduces the “90% factor” discussed above. In the example in the previous section, instead of multiplying your first $767 of earnings by 90%, you would multiply it by only 40%, thus reducing your benefit by $383.50. In 2012, if you retired at age 62, $383.50 per month is the maximum your Social Security benefit could be reduced by the WEP.
Exceptions to the WEP
There are exceptions, however. If you are receiving a relatively low pension, the WEP cannot reduce your Social Security benefit by more than 50% of your pension. So if you were to receive a $500 per month pension, the maximum reduction to your Social Security benefit would be $250 per month. WEP does also not affect survivor’s benefits.
There is also the “Substantial Earnings” test. If you have 30 or more years of Substantial Earnings under Social Security, you won’t be faced with the WEP at all! Unfortunately, this isn’t an easy task for public employees to accomplish. To pass the “Substantial Earnings” test in 2012, you need $20,475 of earnings under Social Security; however, in 1990 you only needed $9,525 in covered earnings. Also, if you have between 20-29 years of substantial earnings, you will face less of a reduction from the WEP, with each year of substantial earnings having a different reduction percentage. Lineweaver Financial will be glad to help you calculate your “substantial earnings.”
Start planning now
Everyone can be affected differently by the WEP and other provisions regarding your Social Security. The key is to plan ahead and seek advice from a professional if you want help. We try to educate individuals of all ages, and these provisions can affect many people in the public sector. With all the changes you are experiencing with your public pensions and work environment, it is important to be well educated and well versed on how you can proactively plan a comfortable retirement, regardless of how old you are now. If you’d like more information or a complimentary analysis, feel free to give us a call.
Lineweaver Financial Group
9035 Sweet Valley Drive
Valley View, OH 44125
Securities Offered Through Sigma Financial Corporation. Member FINRA/SIPC
Last Updated (Saturday, 15 December 2012 13:23)