Over the weekend, a Republican House and Democrat Senate Congress passed the Social Security Fairness Act of 2023 aka H.R. 82 and President Biden is expected to sign it into law. For the last 40 years, there have been multiple attempts to repeal the controversial Windfall Elimination Provision and Government Pension Offset that is applied to the social security benefit calculation for millions of public sector employees such as teachers, police officers, fire fighters and their spouses. We want to share this update in case you, your spouse, family members and/or friends are or could be impacted by this recent passage. Another key element is this Act will be retroactive to the start of January 2024.
As background, the Windfall Elimination Provision (WEP) affects workers who qualify for social security by paying into the trust fund and earning the required 40 credits/10 years of work AND earned a pension from jobs where they didn’t pay social security taxes. A common example is someone who worked in the private sector for 10+ years in the early stage of their career and then transitioned to a public sector job with a pension not covered by social security. WEP was created to prevent people from the proverbial “double-dipping.” For further explanation, the social security program design has been skewed to give lower-paid workers a better benefit calculation versus a more highly paid worker under a “replacement rate” whereby the percentage starts at 90%, then drops to 32% and then 15%. Under the WEP, the worker we described above would see the replacement rate on the top tier slashed to 40%, then the same 32% and 15%. Critics of WEP say it disproportionately penalizes lower income public sector employees who also rely on social security to supplement their pension. With this repeal, any retiree who has a pension will not be subject to this calculation for their social security benefit.
The Government Pension Offset (GPO) affects spousal and survivor’s benefits for those who receive government pensions by reducing their Social Security benefits by 2/3. A familiar example is someone who worked as a teacher their entire career, while their spouse worked and paid into social security ultimately qualifying for a monthly benefit. In any scenario upon the spouse’s passing, the surviving spouse is entitled to 100% of the deceased spouse’s benefit; however, because of their government pension status, the GPO reduces their survivor’s benefit. Let’s use some numbers to illustrate the point. A teacher earned a $3,000 pension and the deceased spouse’s social security benefit was $3,500. 2/3 of $3,000 is $2,000. $3,500 less $2,000 is $1,500. The surviving spouse would receive $3,000 from pension and a reduced survivors benefit of $1,500. If the surviving spouse did not have a pension, their benefit would have been the full $3,500. The same reduction applies for spousal benefit calculations. As most people know, social security spousal benefits are 50% of their working spouses benefit. Oftentimes the spousal benefit for those with pensions are 100% eliminated due to the GPO application. Again, critics say it disproportionately penalizes families who had one spouse working their entire career paying into social security and rely on that spousal and/or survivor benefit to supplement their retirement. Those who oppose the repeal say why should civil servants who receive a pension get an unintended benefit from their spouse.
A significant issue here is the solvency of the Social Security Trust Fund which is scheduled to last until 2035, at which time there will only be enough to pay an estimated 70-80% of all current benefits. The passage of H.R. 82 is expected to cost $196 Billion (Congressional Budget Office estimate) in the next decade and will accelerate the shortfall to approximately 2033. Currently there is no proposal on the table to shore up the Fund, but it will definitely need to be addressed in the near term. There’s plenty of conjecture on possible solutions, i.e. increasing the social security taxable base (currently at $176,100), changing eligibility by increasing Full Retirement Age, or increasing payroll tax rate (currently 6.2%) to name a few…although none of them seem very popular. Speaking of government efficiency, we suspect there will be some administrative timing challenges as the Social Security department works through the process to fully implement the new calculations and payments.
We hope you found this informative and please reach out if you would like to discuss further and have a Happy New Year!
