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Understanding Social Security Offsets

The Social Security Act of 1935 excluded federal, state and local government employees from mandatory Social Security coverage. The exclusion for state and local public employees was based upon constitutional concerns about the federal government’s ability to impose taxes upon state governments. During the early 1950s, Congress passed legislation that allowed state and local government employees to be covered by Social Security if they voluntarily chose coverage in a referendum. These choices were made in Oklahoma and Texas on a district by district basis.

At last count, teachers and school administrators are not covered by Social Security in 45 Oklahoma school districts and varying degrees of Social Security coverage existed for teachers and school administrators in 18 Texas school districts.

Incidentally, 13 other states do not provide Social Security coverage for teachers. These states have so-called “independent” retirement systems for teachers and, in certain cases, other public sector employees. The states are Alaska, California, Colorado, Connecticut, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Missouri, Nevada and Ohio.

Social Security benefits for some Oklahoma and Texas public school employees are reduced because of their Teachers Retirement system (TRS) pensions. The spousal benefit reduction is called the Government Pension Offset and the reduction in benefits associated with careers outside of public education is called the Windfall Elimination Provision.

Another Congressional concern factored into the Social Security Act of 1935: People with dual careers in public service and the private sector could simultaneously receive retirement benefits from a public pension and Social Security. Congress apparently did not consider the case—which has become increasingly common in today’s society—of people moving back and forth between public and private sector careers.

Spousal Offset

The Government Pension Offset (GPO), or “spousal offset,” reduces Social Security spousal benefits by two-thirds of the monthly benefit from any government pension a spouse receives for work not covered by Social Security. Even if a spouse receives his or her government pension in a lump sum, Social Security will nevertheless calculate a monthly benefit amount and use it to offset the Social Security spousal benefit. If a government pension is high enough, it can actually offset the entire Social Security benefit.

For example, suppose a teacher will receive a $2,000 monthly TRS pension benefit and is also eligible for $1,000 per month in Social Security spousal benefits, based upon her husband’s employment. Under the GPO requirement, the pension offset amount is $2,000 x 67% = $1,334 per month. Since the offset is greater than the Social Security spousal benefit, the teacher will receive no spousal Social Security benefit.

The GPO equalizes public and private sector workers for purposes of collecting spousal benefits. The Social Security law has always required that a person’s benefit as a spouse, widow or widower be offset dollar-for-dollar by the benefits he or she earns from his or her own work. Thus, for example, a woman who earns an $800 monthly Social Security benefit, based upon her own career earnings, cannot also collect the first $800 in monthly spousal benefit based upon her husband’s Social Security record.

Before the GPO was passed, a woman who received a pension for public sector work not covered by Social Security could collect both the pension and the full Social Security spousal benefit because her public sector earnings did not appear in Social Security Administration records. Congress enacted the GPO in 1977. It applies to anyone who qualifies for a TRS pension on or after December 1, 1982.

Teachers and school administrators are penalized by the current Social Security benefit reductions through the spousal offset and the Windfall Elimination Provision. These Social Security reduction provisions specifically penalize those people who change careers to enter teaching.

A safe and secure 403(b) Plan can help counter the negative consequences of the Government Pension Offset.

The Windfall Elimination Provision

The Windfall Elimination Provision (WEP) changes the formula used to calculate Social Security benefits for a person who has earned a pension from non-covered employment and also qualified for Social Security, based upon a work history in covered employment. The Social Security benefit formula redistributes benefits so lower paid workers receive a higher return from the system than better paid workers. this is accomplished by replacing a higher proportion of a low-paid worker’s career earnings. Low-paid workers receive a benefit that replaces about 55 percent of career earnings while a higher paid worker’s benefit replaces only about 25 percent.

Because wages from non-covered employment do not appear in Social Security Administration records, before the WEP was established, workers entitled to public sector pensions from non-covered employment appeared to be low-paid and their Social Security benefit was calculated on the subsidized basis, giving them a supposedly undeserved “windfall.”

In 1983, Congress passed the WEP to modify the benefit formula for those with government pensions from non-covered employment. Instead of replacing 90 percent of the first $711 of a person’s normal wages, 32 percent of the next $3,577 and 15 percent of the remainder (the standard formula), the Windfall Elimination Provision replaces only 40 percent of the first $711, thus reducing the overall benefit.

For example, a worker not receiving a TRS pension whose average covered earnings were $2,000 per month would normally be eligible for a monthly Social Security benefit of about $1,052, compared to a monthly Social Security benefit of about $697 for a TRS member with the same covered earnings. (Note: This example is for workers who reached retirement age after 1990.)

The Windfall Elimination Provision applies to TRS members who become eligible for a pension on or after January 1, 1986. There are exceptions to the Windfall Elimination rules, such as people who have at least 30 years of “substantial earnings” from covered employment (i.e., in a job where Social Security taxes were paid). Also, the WEP reduction cannot exceed 50 percent of any pension benefits attributable to non-covered earnings after 1956.

Here is an explanation on the Social Security Administration website, with a Table of Substantial Earnings, and a second table showing the WEP percentages based upon years worked.

Many individuals change careers and enter teaching after age 35. These individuals could lose retirement benefits because of the Windfall Elimination Provision. The Windfall Elimination Provision also hurts recruitment of teachers from out of state. Such teachers, who may have been part of Social Security in their former state of residence, will lose retirement benefits if they transfer to Texas. Teacher retirement systems are based upon years of service. Consequently, teachers who relocate to Texas and teach for 15 to 20 years will experience a double penalty of lower retirement allowance, because of their Texas service not comprising their entire teaching career, plus a reduction of their earned Social Security.

A safe and secure 403(b) Plan can help counter the negative consequences of the Windfall Elimination Provision.