Why Congress restored full Social Security benefits for public sector retirees
The program's controversial WEP and GPO provisions were repealed last weekend. Here's a look at why the reductions were created in the first place, and what drove the movement for repeal.
Social Security is an earned benefit. You become eligible by paying the payroll tax during your working years, and the amount you get is geared to your wage history - with a glaring exception.
Since the 1980s, some public sector workers have seen their earned Social Security benefit amounts cut sharply due to a little-understood rule called the Windfall Elimination Provision (WEP).
The logic of the WEP - and its cousin, the Government Pension Offset (GPO) - was inscrutable to all but policy analysts and actuaries. These rules can chop earned benefit amounts by more than half; they have provoked fury over the years from affected workers and repeated lobbying efforts at reform or repeal.
Last weekend, Congress responded by repealing the WEP and the GPO with a law dubbed the Social Security Fairness Act. Opponents of the repeal argue that the two rules address alleged overpayments to people who split their careers between jobs covered by Social Security and other work covered by a public sector defined benefit plan. Opponents also argue that repeal will accelerate depletion of Social Security’s trust funds. Some claim it would increase the federal deficit. The truth is that it will not, because Social Security has its own dedicated funding stream separate from the general government budget.
Most Americans are in jobs covered by Social Security - the main exception is state and municipal workers who participate in separately funded pension plans. Consequently, the WEP and GPO impacted only about 2.5 million Social Security beneficiaries as of late 2023, according to the Congressional Research Service. That’s just 4% of the total beneficiary pool. The repeal will hasten the insolvency of the Social Security trust funds by about six months, according to the Congressional Budget Office - but that is a problem Congress will need to address separately, anyway.
Why would these public sector workers be treated differently from everyone else? The answer stems from the way that Social Security benefits are distributed across wage earners with varying incomes. This gets a little wonky, but stick with me.
Social Security’s benefit formula is progressive - workers with low average lifetime earnings get a higher benefit amount compared with their earnings than people who are better paid. In this system, workers affected by the WEP look as though they earned less over the span of their careers than they actually did - so their unadjusted benefit would be larger than they otherwise would. The WEP aims to eliminate the high benefit return these workers get on their Social Security income when they are not really low-income.
Social Security expresses your benefit as a Primary Insurance Amount (PIA). This amount is derived by calculating your Average Indexed Monthly Earnings (AIME) - your top 35 years of earnings before age 60 are averaged and then indexed to put them on more of a proper comparative basis with the earnings level in our society as of the year you turned 60. That is done using the average wage indexing series that the Social Security Administration computes every year.
Then, your PIA is calculated. This is a weighted formula that gives a higher benefit relative to career earnings for a lower earner than for a high earner. Workers receive 90% of AIME for the first segment of the PIA (which is also referred to as a bend point). They receive 32% of the amount in the second bend point, and 15% in the third.
But the PIA formula does not distinguish between workers who had low wages and those who worked for part of their careers in jobs not covered by Social Security. And because AIME considers the 35 top years of earnings, people impacted by the WEP look like they are low wage earners.
In my Reuters column this week, I take a look at why the WEP and GPO were created in the first place, and what drove the movement for reform. And, since Congress seems to be interested in “fairness” with passage of this law, I toss in a few suggestions on some other reforms that I think would be “fair” for lawmakers to take up.
What I’m reading
How AARP shills for United Healthcare . . . F.D.A. okays weight-loss drug to treat sleep apnea . . .Stress associated with high-cost cancer treatments . . . Private equity in healthcare - a look at state policy . . . Annuities that look like CDs are selling fast . . . Retire? They’d rather jump out of a plane.
Unfortunately, most of this discussion does not address the timing of certain changes in employment status. For example, my husband worked for 35 years as an elementary school teacher, and, as such, receives the highest pension from STRS that was available. After retirement we realized that he did not have enough quarters to qualify for Medicare, so he got a great little job pouring wine part-time. That resulted in Medicare eligibility, but his SSI does not cover the Medicare costs. Not a problem because we are savvy investors over many years and can afford to pay the difference.
On the other hand, I worked in a very lucrative job that I hated, and should be eligible for a comfortable but not amazing SSI pension. Because I chose to go into teaching in my late 30's, and for five years only as a part-timer, my STRS pension is based on only 20 years of service credit. This is true for many college instructors who wait a long time to be hired full-time. They often work several part-time teaching jobs as well as working simultaneously in the private sector. In essence they are often penalized in both systems. That is the unfairness of all this. Many public sector jobs rely on part-time workers, so even though they may be in a pension system, they do not ever receive full benefits from that system. In these instances, there is not "double-dipping," just piecing together some retirement income that does not reflect what they paid into the Social Security system.
The simple purpose of WEP and GPO was to treat everybody the same whether they are in a Social Security covered pension or non-Social Security covered pension. The author explains why WEP was created in an attempt at fairness. As for GPO, consider a couple with both people covered by Social Security pensions. Each person will receive the higher of their own SS benefit or their SS spousal benefit, but not both. Now consider a couple with one covered by a SS pension and one covered by a non-SS pension. With GPO repealed, the non-SS pension person will now receive their own non-SS pension plus 1/2 of their spouse's SS pension at full retirement age. So, yes, they will now do better than the two-SS pension couple. WEP and GPO formulas could have been tweaked for more accuracy, but this complete repeal does introduce inequities into the system.