WEP and GPO can lower retirees' Social Security checks

Q: I worked for the government for several years and then took a job in the private sector, which I left at retirement. I took Social Security at age 62 and, at that time, the amount I received seemed to be sufficient. Now at age 75, my wife and I wonder if the amount calculated was correct. It seems as though many people are collecting much more than I am. Every year we get a notice of the new benefit amount, but it seems to be still on the low side. Is it worth investigating whether I can receive a higher benefit amount, or is it too late since I never checked it sooner? — Joseph Silecchia, Camden, Del.

A: It’s worth investigating, but ultimately it’s too late to increase your benefit. It’s not too late, however, to make sure your spouse, assuming you predecease her, plans for her survivor’s benefit, which could be lower than currently expected because of something called the government pension offset or GPO.

Two reasons why your benefit appears low. First, you’re likely subject to something called the windfall elimination provision or WEP. According to Uncle Sam, if you work for an employer who does not withhold Social Security taxes from your salary, such as a government agency or an employer in another country, any pension you get from that work may reduce your Social Security benefits.

And two, workers who start receiving Social Security benefits before their normal (or full) retirement age, receive a reduced benefit. A worker can choose to retire as early as age 62, as you did, but doing so may result in a reduction of as much as 30%, according to Uncle Sam.

Here’s a bit more background on the WEP from Stephen Stellhorn, author of Navigating the Maze of Social Security: Claiming Strategies for Fifty Shades of Grey: Congress passed the WEP provision in 1983 to eliminate any advantage a worker might have by being paid from a public pension system and Social Security. So, if you have 30 years of Social Security-covered employment, no WEP is applied. But from 30 to 20 years, a sliding WEP scale is applied. Below 20 years, your benefit would drop even more. And the calculation to determine average earnings is a multistep formula.

If you are subject to the WEP, the reduction in your Social Security benefit cannot be more than 50% of the amount of your government pension. The maximum potential cut in 2015 is $413 per month. The Social Security Administration has a WEP Online Calculator, which consumers can use if the WEP is applicable to them. The link is www.socialsecurity.gov/retire2/anyPiaWepjs04.htm.

Unfortunately, there’s not much you can do to reverse the effect of WEP on your Social Security benefit.

And here’s a bit more background on the second reason — the benefit reduction for early retirement — why your benefit appears low. If a primary beneficiary, you in this case, begins to receive benefits at his/her normal (or full) retirement age, the primary will receive 100% of what’s called your primary insurance amount.

But when you retire early, your benefit is reduced: 5/9 of 1% per month for the first 36 months and 5/12 of 1% for each additional month. How much your benefit gets reduced depends on the year of your birth and when you file to collect Social Security. But in general, if you file for benefits at age 62, the benefit reduction ranges from 20% for those born in 1937 or earlier to 30% for those for those born in 1960 or later. For someone born in 1940, we’re guessing that’s the year of your birth, the benefit reduction at age 62 would have been 22.5%.  And, sadly, there’s not much you can do to reverse the effects of having filed earlier.

Another item to note: Your spouse’s benefit, assuming that she’s collecting off your work record, instead of her own benefit, would have been reduced by 27.5%.  That, in essence, means this: If your FRA benefit was $1,000, it’s now $775 (not including the effects of WEP) and your spouse’s benefit is $362 (not including the effects of the GPO).

Survivor benefits for a spouse are not affected by the WEP regulation, but survivor benefits — since you are receiving a government pension — may be affected by the GPO.

“The GPO rule could reduce or even eliminate spousal or survivor benefits from Social Security in the future,” says Stellhorn. “If your spouse is subject to the GPO rule, her Social Security benefit could be reduced by two-thirds of your government pension. Once you die, your spouse could see a reduction in her survivor benefits due to this rule.”

Why is this important? “Not being aware of these rules can have severe, unintended consequences for retirement planning and income needs over you and your spouse’s remaining lives,” says Stellhorn.

In your case, forewarned is forearmed. Check out the Social Security Administration’s online GPO calculator to see how this provision of the law might affect you and your spouse. The link is www.ssa.gov/planners/retire/gpo-calc.html.

One last note. Stellhorn says there’s an easy way to determine if you’re affected by either of these two regulations, the WEP and the benefit reduction for early retirement: Read your Social Security benefit statement. “If you see a lot of zeroes for annual income on page three of Your Social Security Statement, this could be a warning sign that you are seeing a reduction in retirement benefits,” he says.

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Emailrpowell@allthingsretirement.com.