Ask Bob: How the WEP and GPO Impact Social Security

Question: I was born in 1940 and went to work for the state of Alaska in 1981 at age 41. I already had my required quarters of Social Security contributions in. The state of Alaska was not paying into Social Security; we had a plan called Supplemental Benefit System (SBS). When I retired in 1996 at the age of 56, I took my SBS out in monthly payments until I turned 62, when my Social Security would kick in. I applied at 62 for Social Security and was told I don't get my full Social Security, only a percentage of it, because the State of Alaska didn't pay into it. So, I get less than $300 per month. Why is it legal for Social Security to keep my money that I worked for and paid into Social Security? Also, they told me I'm not able to draw on my husband's Social Security because I worked for the state of Alaska. Also, I would not be able to collect Social Security if he passed away before me. Can this be possible? It seems very unfair to me.

Answer: The Social Security program has been in place for nearly 83 years now. Despite its age and economic impact, myths and misunderstandings still exist about its operation, says Kurt Czarnowski, a principal with Czarnowski Consulting.

"Among the biggest areas of misunderstanding is how the receipt of a public pension based on work not covered under the program impacts someone's ability to collect Social Security benefits," says Czarnowski, who served as the regional communications director for the Social Security Administration for 19 years.

The two provisions, the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), potentially impact people in this position, and below is what Czarnowski had to say about both provisions. Incidentally, WEP and GPO are not mutually exclusive, and someone can be affected by just one or the other, or by both at the same time, and you, the letter writer, falls into this latter category.

Windfall Elimination Provision

The Windfall Elimination Provision affects individuals who have earned a pension from working for a government agency where they did not pay Social Security taxes, but who also worked at other jobs where they did pay Social Security taxes long enough to qualify for a Social Security retirement or disability benefit. It may also affect an individual who earned a pension in another type of job where he/she did not pay Social Security taxes, such as work in a foreign country.

The good news is that as long as someone has worked under Social Security for at least 10 years, i.e., has earned 40 Social Security credits, then he or she will always receive something each and every month from Social Security. The bad news is that the amount that the person receives will likely be less than it would have been if he/she did not receive the public pension. Under the WEP, the Social Security Administration (SSA) is required to use a different, and admittedly less generous, formula to compute a person's monthly Social Security benefit amount.

What is the rationale behind the WEP? Well, Social Security benefit amounts are figured with a weighted benefit formula that gives proportionately higher benefits to workers with low lifetime earnings. However, when computing a person's monthly Social Security benefit, the SSA considers only earnings covered under Social Security. As a result, a worker with a substantial period of non-covered work appears to have lower lifetime earnings than he/she actually had.

By adjusting the benefit formula, the WEP prevents workers who receive both Social Security and a pension based on non-covered work from receiving the advantage of the weighted benefit formula.

However, workers with relatively low pensions are protected because the reduction in the Social Security benefit under the modified formula cannot be more than one-half of the pension attributable to earnings that were not covered by Social Security.

WEP applies to all benefits based on the retired or disabled worker's earnings. However, it does not apply to survivor benefits. In addition, a person with 30 or more years of "substantial" earnings under Social Security is exempt from the WEP.

For additional information about the WEP, read the Social Security Administration's WEP Fact Sheet.

Government Pension Offset

The Government Pension Offset (GPO) provision reduces the Social Security spousal, divorced spousal, or survivor benefit that a person who worked in a federal, state or local government job not covered under Social Security by 2/3 of the amount of his or her government pension.

Social Security spouse's and widow(er)'s benefits were intended to provide income to women and men who had little or no Social Security benefits of their own and were financially dependent on their husbands or wives. As a result, any Social Security benefits payable to a person as a spouse or widow(er) are always reduced by the amount of that person's own Social Security retirement benefit.

Before the enactment of the GPO provision in 1977, a person who received a public pension based on work not covered under Social Security and who was also eligible for a Social Security spouse's or widow(er)'s benefit, would receive both benefits in full. However, since passage of GPO, these individuals are now treated the same as individuals who have worked primarily in Social Security covered employment.

Here's an example that illustrates the point:

Bill collects a Social Security benefit of $600 per month. His wife, Mary, is potentially eligible for a wife's benefit of up to 50% of Bill's, or $300. However, Mary also worked and paid into Social Security, qualifying for her own retirement benefit of $400. By law, Mary can receive only the higher of the two benefits she is eligible for, not both. She will not receive any spousal benefits because her $400 retirement benefit, in effect, "offsets" her $300 spousal benefit.

Bill's neighbor, Tom, also gets a Social Security benefit of $600 per month. But his wife, Nancy, had a job with the federal government, instead of one where she paid Social Security taxes, and earned a civil service pension of $600 per month. Before the government pension offset provision was in place, Nancy would have been eligible for both her $600 civil service pension and a $300 spousal benefit on Tom's Social Security record. With the offset provision, Nancy's $300 spousal benefit will be reduced by 2/3 of her $600 government pension, or $400. Three hundred minus $400 is less than zero, therefore Nancy does not qualify for a spousal benefit from Social Security and is treated the same as Mary.

There are a number of people who are exempt from GPO, among them are:

  • Anyone whose government pension is not based on his or her own earnings;
  • Anyone who received or was eligible to receive a government pension before December 1982 and who meets all of the requirements for Social Security spouse's benefits in effect in January 1977; and, finally,
  • Anyone who received or was eligible to receive a federal, state or local government pension before July 1, 1983, and was receiving one-half support from their spouse.

For additional information, read the SSA's GPO Fact Sheet. You can also visit SSA's GPO/WEP website.

Got questions about the new tax law, Social Security, Medicare, retirement, investments, or money in general? Want to be considered for a Money Makeover? Email Robert.Powell@TheStreet.com.