How WEP can affect a person's Social Security

Q: My wife is 67 and currently receiving Social Security benefits. She began receiving Social Security disability at age 62, which then reverted to regular benefits last year.

I am 62 and on a civil service retirement. I am currently working and have worked for the last five years on a job that pays into Social Security. I hope to continue to work a few more years. Prior to my current employment  I paid into Social Security when I was in my teens for five years.

At age 21 I started working for the federal government and didn't pay into Social Security for 37 years. What are my best options based on my current situation? I have worked in high-paying positions for the last five-plus years. — Mel Smith, Dallas

A: You are asking what some have often as the million-dollar question. And since we don’t have all the details, we’ll have to touch on some of the factors that will affect your benefit and then offer you some general guidance.

So, first, it seems any Social Security benefits you receive will be affected by WEP (Windfall Elimination Provision) or GPO (Government Pension Offset), says Jim Blankenship, author of A Social Security Owner's Manual. Read Windfall Elimination Provision, Government Pension Offset, and Calculators: GPO Calculator.

How WEP takes a bite from Social Security check

Those two programs, says Blankenship, reduce the amount of Social Security benefit that you receive from different sources, based upon the pension you're receiving from the non-Social Security-covered source. “This is also assuming that you're currently receiving a pension from the federal government,” says Blankenship. “I assume this as you stated you are on a civil service retirement.”

To be specific, the WEP, enacted in 1983, reduces Social Security benefit payments to beneficiaries whose work histories include both Social Security-covered and non-covered employment, with the non-covered employment also providing pension coverage, according to a paper published by Alan Gustman, a professor at Dartmouth College, and Thomas Steinmeier, a professor at Texas Tech University.

To be affected by the WEP, an individual must have worked in covered employment long enough to qualify for Social Security benefits; must have also worked in non-covered employment, meaning that Federal Insurance Contributions Act (FICA) Social Security payroll taxes were not paid; and, importantly, must have earned a pension in that noncovered job.

The GPO, wrote Gustman and Steinmeier, reduces Social Security benefits paid to spouses or survivors when the spouse or survivor earned a pension from a government job that was not covered by Social Security. The GPO reduction is equal to two-thirds of the amount of the pension payment from noncovered government work.

Now truth be told, the WEP and the GPO affect only about 3.5% of U.S. households, but the provisions may have a substantial effect on benefits in those households, wrote Gustman and Steinmeier.

So here’s how it might go down in your household. “When you take your own Social Security benefit, your monthly benefit will be reduced (because of WEP) by the lesser of 50% of the Social Security benefit or $428,” says Blankenship. “By taking your benefit at age 62, you're also reducing the overall benefit by 25%, since age 62 is considered ‘filing early’ in Social Security terms."

Now, without knowing what your potential benefit is, Blankenship can't say for certain what your reductions would be. “But I think it's pretty clear that the pension and early filing will have a significant impact,” he says.

WEP and GPO can lower retirees' Social Security checks

In addition, when you file for your Social Security benefit, you will also be deemed to have filed for a spousal benefit based on your wife's earnings record, says Blankenship. “If your wife’s monthly benefit is more than double your benefit, this spousal benefit could increase your total Social Security benefit,” he says. “However, since you're receiving a pension from a government entity that was not subject to Social Security tax, any potential spousal benefit you might be eligible for will be reduced by a factor equal to two-thirds the amount of your pension. This could eliminate the spousal benefit altogether.”

So what are your best options? “The decision about when to file is subject to many, many variables,” says Blankenship. “Do you need the money now? Is the Social Security benefit something that will make a significant impact to your financial situation? If so, then filing now may be the best option for you. On the other hand, if you can afford to delay, it will only serve to increase your benefit, 8% per year for every you delay. Note, however, that GPO and WEP will still have an impact.”

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