The Best Investment in the Midst of the COVID-19 Pandemic

The Best Investment in the Midst of the COVID-19 Pandemic

Ask Bob: Can You Collect a Spousal Benefit If You Have a Non-Covered Pension?

Heather Schreiber, RICP, the founder of HLS Retirement Consulting, helps a reader sort through how the windfall elimination provision (WEP) and the government pension offset (GPO) affect a non-covered pension.
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Question

I worked from age 16 to 40 and had low earnings. At 40, I became a teacher and was enrolled in the California State Teachers’ Retirement System (CalSTRS), which provides retirement benefits to California’s public school educators.

I started collecting my CalSTRS pension (about $2,300 per month) starting last September and I now work for a private company that takes out Social Security. I was married for 11 years and have been divorced for five years and I'm not married. My former spouse started collecting Social Security ($2,100 per month) at his full retirement age. I'm 63 years and 9 months.

How much would I collect if my Social Security is about half of his? I know under the "windfall provision" my pension would be reduced.

Answer

Here’s what Heather Schreiber, RICP, the founder of HLS Retirement Consulting, had to say:

As a California public school educator under the CalSTRS program, your earnings as a teacher were not subject to Social Security taxes. As a result, your own Social Security retirement benefit, assuming you are entitled to one, may be reduced to account for your years of “non-covered” earnings. You also ask about any ex-spousal benefit to which you may be entitled. The answer to that is based on a separate rule called the government pension offset (GPO). Let’s start first with the potential effect of your CalSTRS pension on your retirement benefit.

Heather Schreiber

Heather Schreiber

A Non-covered Pension

The windfall elimination provision (WEP) applies to individuals entitled to a non-covered pension but who have also earned the 40 credits required to be entitled to a Social Security retirement benefit. The reduction to your Social Security retirement benefit (not your public pension) is the lesser of ½ of your monthly pension or the maximum WEP reduction in your initial eligibility year, age 62.

If my math serves me right, your birth year is 1956 which means your initial eligibility year was 2018. Therefore, the maximum WEP reduction for you would be $447.50. However, if you have more than 20 years of substantial covered (i.e., Social Security taxed) earnings, the effect of the WEP on your retirement benefit is smaller, until it no longer applies with 30 or more years of covered earnings. Refer to the WEP chart here: https://www.ssa.gov/benefits/retirement/planner/wep.html#h3

For example, let’s assume that all your years of working from age 16-40 met the substantial earnings test. For the definition of what is considered substantial earnings by year, reference the windfall elimination fact sheet here: https://www.ssa.gov/pubs/EN-05-10045.pdf.

With 24 years of substantial earnings, your maximum WEP reduction would be $268.50 since this is less than 50% of your CalSTRS pension. This reduction applies before any reductions or credits for early or delayed filing and cost-of-living adjustments. So, for example, if your monthly benefit at FRA is $1,000, your WEP-adjusted benefit at FRA would be $731.50. Keep in mind that this example is based upon an assumption of 24 years of substantial earnings so the effect on your retirement benefit could be more or less depending upon your situation.

The Potential Effect of GPO

The other side of the coin is the potential effect of the government pension offset (GPO) that may reduce, or eliminate, a spousal, ex-spousal, or survivor benefit to which you otherwise would be entitled. The formula here is straight forward. If you receive a pension from a job with non-covered earnings, your ex-spousal benefit is reduced by 2/3 of your CalSTRS monthly pension amount.

Without the GPO, the maximum monthly benefit to which you would be entitled is 50% of your former spouse’s benefit at full retirement age (FRA), assuming it is greater than your own retirement benefit. With a $2,100 benefit, that means you would collect $1,050, if you collected at your FRA of 66 and 4 months. A reduction would apply for an earlier claim.

However, in your case, you must apply the GPO to determine how much, if any, of your former spouse’s benefit you could collect. Since you are collecting a monthly pension of $2,300 from CALSTRYS, 2/3 of that amount, or $1,533, would be deducted from the benefit. Since the benefit of $1,050 is less than $1,533, you would be ineligible for a benefit under your former spouse’s record.

That’s the bad news but here is the of good news:

1. You may still be able to collect a WEP-reduced retirement benefit, depending upon the variables just discussed.

2. If your post-teaching earnings, combined with your pre-teaching earnings, meet the substantial earnings test, your total covered earnings at 30+ years would eliminate the WEP reduction entirely.

3. If your former spouse pre-deceases you, while the GPO would still apply, you would potentially be able to collect a portion of the survivor benefit, even with the GPO factored in. This is true even if you remarry since remarriage at age 60 or later would not disqualify you for survivor benefits from your first spouse.

Here’s an example:

Suppose your former spouse dies in 10 years. For the sake of simplicity, no cost-of-living adjustments are factored in. At the time of his death, he is collecting $2,100 per month. Your GPO adjusted monthly survivor benefit would be $567 ($2,100 - $1,533). If this is greater than what you are collecting as a retirement benefit, you could collect the higher survivor benefit (but not both).

Lastly, remember that your benefit estimates on your Social Security statement do not factor in any WEP or GPO reduction(s) so a consultation with a Social Security representative would be encouraged to determine your actual benefits when you are ready to claim.

Got questions? Get answers!

Do you have questions about the CARES Act, Social Security, Medicare or money in general? Write Robert.Powell@Maven.io.

Question

I worked from age 16 to 40 and had low earnings. At 40, I became a teacher and was enrolled in the California State Teachers’ Retirement System (CalSTRS), which provides retirement benefits to California’s public school educators.

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