Teachers Get Dinged on Social Security

Hey Paul: I have taught in the local school system for 30 years. I plan to retire in a few years and my teacher’s pension will be about $36,000. I also managed a tutoring business for 10 years and paid social security taxes out of those paychecks. My Social Security statement projects my age 66 benefit to be $500 a month. How will my teacher’s pension impact my social security benefit?

 Teachers like yourself and other state workers generally do not pay social security taxes so they don’t receive full social security benefits. To the extent that they also worked in employment covered by social security as you have they will receive partial social security benefits.

There are two gotchas the SSA applies to those who did not pay into the social security system on all their employment. The first is called the Windfall Elimination Provision (WEP) and means that the reported value of $500 of your own benefit in your SS statement is likely going to be much lower in reality. As a rough rule-of-thumb expect about half in social security from what is stated on the SSA report.

The reasoning behind this reduction is that your limited number of years (10 in your case) in SS covered employment with a modest salary gives the impression that you are a low-income earner. Of course in reality you also had a good teaching salary in addition to the tutoring income.

The SS retirement benefit is based on a three-tiered formula in which the first $856 of averaged monthly earnings is replaced at 90%. The second tier drops down to 32% for earnings between $856 and $5157 and then is only 15% on higher earnings. That is low income workers get almost all of their working years’ income replaced by SS benefits. Middle-class and high-income earners get a larger SS check but at a progressively lower rate.

Accounting for your teachers’ pension makes you “middle-class” so the WEP reduces the first benefit bracket from 90% to 40%. I applied this lower rate to your situation and your own SS benefit will be about $222 a month rather than the reported $500 due to WEP. Sorry to be the bearer of bad news.

There are a several caveats and exceptions to WEP but most don’t apply to new retirees. One exception is that your SS can’t be reduced by more than half your pension. This applies primarily to those with very modest pensions. In your case SS will be reduced by about $278 that is much less than half your monthly pension of $1500.

Another WEP exception is that you can bump up the 40% rate by 5% for each year above 20 years that you have “substantial earnings”. If you have 30 plus years of substantial earnings you are no longer WEP’d! In 2016 substantial earnings was defined by the SSA as $22,050. In your case you only had 10 years that may have qualified as substantial earnings so you are stuck with the WEP 40% rate.

For those who serve as life-long teachers with little or no SS covered employment the WEP doesn’t come into play as you need at least 10 years of work to be eligible for your own social security benefit. But suppose you have a spouse (or ex-spouse you were married to for 10 years). Can you receive a SS spousal benefit approximately equal to half their retirement benefit or can you receive a SS widow benefit equal to their full retirement benefit if you survive your spouse?

No, sorry that’s not going to happen. The Government Pension Offset (GPO) reduces any spousal or widow benefit by two-thirds of your pension. Since your monthly pension is $3000, two-thirds of this or $2000 will be offset on any spousal or widow benefits. Since the maximum SS own benefit this year is about $2600 the maximum spousal benefit is $1300. So you definitely won’t be receiving a spousal benefit. If your spouse dies then your widow benefit would be sharply reduced by $2000. For anyone like yourself with a good pension, don’t count on much if any SS spousal or widow benefits.

Is there anything you can do to avoid or diminish the impact of the WEP and GPO? Yes, here are a couple of things to keep in mind. First, the WEP and GPO are triggered by the actual receipt of your teacher’s pension. If you can start your own SS or spousal benefit at 62 (or widow benefit as early as age 60) before you start your pension then these adjustments do not apply. Once you do start your pension they will likely wipe out any SS benefits but perhaps you can get a few years in of un-dinged SS benefits.

If you are married then it typically is a good idea to select a joint-life annuity rather than single life annuity. This provides longevity insurance at the cost of a smaller benefit check. However the smaller pension would reduce the GPO penalty on spousal and widow benefits. I wouldn’t make the annuity payment type based solely on trying to skirt the GPO but it is another reason to consider a joint payout.

The SSA has two-page briefs on the WEP and GPO (https://www.ssa.gov/pubs/EN-05-10045.pdf and https://www.ssa.gov/pubs/EN-05-10007.pdf) that give further details on these laws.

Dr. Paul Hamilton, CFP is currently offering a comprehensive planning session that will cover your specific situation in Social Security, Taxes, Retirement, and Estate Planning. The one-time fee of $500 is guaranteed to return savings, confidence and peace-of-mind. Contact him at Paul.Hamilton@USA-Economics.com to discuss your situation.

 A Free workshop covering Medicare will be held this Sunday (Aug. 14) at the Jessamine Public Library from 3 to 4pm.