WILL YOUR FUTURE SOCIAL SECURITY PAYMENTS
BE
SMALLER THAN EXPECTED?
Your future Social Security payments might be smaller than
expected—more than $300 a month smaller in some cases—and you might
not even realize it.
Are you entitled to receive pension benefits from a job in
which you pay no Social Security taxes, such as work for the federal
government under the Civil Service Retirement System, your state
government, or for an employer in another country? Yet you’ve also
worked part-time or gone into a second career where you paid Social
Security taxes and will some day be eligible for benefits? Then those
Social Security benefits (including disability benefits) might be smaller
than you anticipate because of what’s called the Windfall Elimination
Provision. [JFP submission in the Social Security benefits computer file.
Says nine percent]
Around for over 20 years, WEP is designed to take away
some of the "double dipping" a worker might receive who accrues
a small or modest amount of Social Security benefits while working
primarily in jobs not covered by Social Security. That’s because Social
Security benefits are skewed more heavily toward low wage earners.
The law exempts some workers from WEP. Those hired by the
federal government after 1983 are not subject to the limitation because
they are under the Federal Employees Retirement system, which pays Social
Security taxes. Also exempt are those whose non-covered work occurred
before 1957, whose only pension is based on railroad employment, or who
have managed to accumulate 30 or more years of "substantial
earnings" under Social Security.
But many workers, particularly those in their 50s or 60s
with long careers in government, remain affected by the Windfall
Elimination Provision and they don’t realize it. As a consequence, they
often are less financially prepared for retirement than they might think.
Currently, for example, the annual retirement benefit estimates that
Social Security sends to workers don’t reflect any potential benefit
loss due to WEP.
To better inform future Social Security recipients, the
Social Security Protection Act of 2004 included two provisions. Starting
this year, employers not covered under Social Security will be required to
inform new hires moving from jobs that paid into Social Security about WEP
and its potential impact on their future Social Security benefits.
Starting in 2007, the Social Security Administration must inform those
potentially subject to WEP how much their benefits might be reduced.
How can you determine in the meantime whether and how much
the Windfall Elimination Provision might affect you? Start with what
Social Security calls "substantial earnings." Each year, Social
Security publishes the minimum amount of earnings necessary to qualify for
a full year’s credit of "substantial earnings." For example,
in 2004 a worker needed to earn $16,275 to qualify. In 1984, the amount
was $7,050.
If you can accumulate 30 years of qualified
"substantial earnings," such as through side jobs or years of
full employment in jobs paying Social Security tax, you won’t be hit by
WEP. But if you have less than 30 years of substantial earnings, WEP will
reduce benefits. Let’s say you retire at age 65 with 20 years of
substantial earnings and you’re eligible for $1,000 in monthly Social
Security retirement benefits. According to Social Security tables, your
monthly benefits would be reduced by $306. With 25 years of substantial
earnings, you’d lose $153 monthly.
The WEP limits the reduction of Social Security benefits
to no more than 50 percent of the benefits you receive from a non-Social
Security pension. This helps workers with small pensions. For example, if
your non-covered pension is $400, the reduction in Social Security
benefits would be no more than $200, even if benefits would have been
reduced more than that under the standard WEP tables.
Also keep in mind that the amount your Social Security
benefits are reduced remains the same every year. That is, if you lose
$153 in monthly benefits your first year of collecting Social Security,
then you’ll never lose more than that amount in the future, even though
your overall Social Security payments rise due to annual inflation
adjustments.
While disclosure of the impact of the Windfall Elimination
Provision will better alert future retirees, financial planners caution
workers to keep one key point in mind: if you believe you will fall under
WEP, you need to adjust your retirement plans and savings efforts
accordingly to make up the shortfall.
‑30‑
January 2005 —This column is produced by the Financial
Planning Association, the membership organization for the financial planning
community, and is provided by McGuire & Co, LLP , a local member of the
FPA.
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