Ten Odd Social Security Rules and Practices That You Don't Want to Forget

Ten Odd Social Security Rules and Practices That You Don't Want to Forget

Ask Bob: How Do I Keep My Retirement Contributions from Reducing My Social Security Benefit?

A reader wants to know if contributions to a teacher's retirement system will reduce her Social Security benefit and how to avoid that impact.
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Question

I currently have 40 credits with Social Security. I have been working since 9/3/20 for a school district in Texas that takes TRS retirement money out of my check. If I continue to work for the school for 5-6 years total, will this reduce the Social Security I would get? Would rolling my TRS contributions over into an IRA instead of to the TRS pension prevent my Social Security from being reduced?

Answer

The short answer is maybe, says Robert Kron, CFP®, managing director at Nuveen.

People who earn a pension while not paying the Social Security payroll tax, can have their Social Security benefit that was earned from another job, reduced. “The culprit,” Kron says, “is something called the Windfall Elimination Provision (WEP)." To understand how it works and if it impacts the reader, Kron explains how a Social Security benefit is calculated:

The formula essentially looks at the average amount a worker earned every month that was subject to the Social Security payroll tax. The lower their average monthly earnings, the higher the percentage of those earnings they get back in the form of a monthly benefit. This progressive formula reflects the original intent of Social Security – to keep seniors out of poverty. The logic: if you are a low earner, you will need a higher percentage of your earnings to stay out of poverty. For those who earned a pension while not paying the Social Security payroll tax, WEP modifies the formula, to account for these additional resources available to the retiree.

In 2021, $498 per month is the maximum reduction a Social Security benefit can experience from WEP. “All of this would be moot if your reader works for one of the school districts in Texas that has their teachers pay into Social Security and the Teacher’s Retirement System (TRS). If this isn’t the case, there are four ways your reader might avoid some or all of the WEP reduction when they retire.”

1. They don’t qualify for a pension.

If your reader’s 5-6 years of service doesn’t qualify for a pension from TRS and they withdraw their contributions and associated earnings (but not any of the employer’s), WEP wouldn’t impact them at all. However, if they qualify for a pension and choose to take a lump sum distribution instead, WEP will still apply. Social Security has rules for how a lump sum translates to a monthly benefit amount.

2. Their TRS pension is small.

If they do qualify for a pension, with only 5-6 years of service, it will likely be small. The WEP reduction is limited to 50% of their monthly pension benefit. So, if your reader qualifies for a $50 per month pension (or equivalent lump sum), their WEP reduction would be limited to $25.

3. Their Social Security benefit is small.

If your reader’s pension was miraculously large, but their Social Security benefit was small, WEP would still be limited. The WEP reduction can’t be more than 50% of their monthly Social Security benefit either. Someone entitled to $500 per month at their full retirement age, would incur a maximum $250 WEP reduction.

4. They paid the Social Security payroll tax for more than 20 years.

For each year past 20 that someone has “substantial” earnings subject to the Social Security payroll tax, the maximum WEP penalty is reduced. By the time someone has 30 years of substantial earnings, WEP is completely eliminated. Social Security considers earnings above $26,550 in 2021 substantial. That threshold was $14,925 in 2001 and $9,900 in 1991.

Kron suggests using the Social Security Administration’s WEP calculator. To help determine the reduction, you will need to know if you qualify for a pension, the monthly benefit amount, and your Social Security earnings history (also available at ssa.gov).

“Because there are many complexities associated with Social Security and WEP,” says Kron, “I recommend anyone struggling with the decision to seek the assistance of a qualified financial professional. Other factors usually play a critical role in making an informed decision and Social Security elections are often difficult, if not impossible to unwind.”

Got questions? Get answers!

Email Robert.Powell@maven.io

Question

I currently have 40 credits with Social Security. I have been working since 9/3/20 for a school district in Texas that takes TRS retirement money out of my check. If I continue to work for the school for 5-6 years total, will this reduce the Social Security I would get? Would rolling my TRS contributions over into an IRA instead of to the TRS pension prevent my Social Security from being reduced?

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