Even though a worker has paid into the Social Security system, he or she may not be eligible for the full amount of anticipated benefits upon retirement.
Social Security Administration rules that govern who is entitled to benefits, and how much the benefits might be reduced for various reasons, can cause confusion, says Jeremy Kisner, president of SureVest, a wealth management firm in Phoenix.
Financial advisors need to know how to walk their clients through the rules so that the amounts to be paid in benefits, and the reasons for any reductions, are clear, he says.
Two regulations that could reduce benefits unexpectedly are the Windfall Elimination Provision (WEP) that affects wage earners, and its companion, the Government Pension Offset that affects spouses, widows and widowers.
“Some people are surprised when they do not get the full Social Security amount they expect, so they feel like they are getting ripped off,” Kisner says. “They need to know if their Social Security benefits might be reduced because they have paid into more than one retirement program.”
The WEP was passed in 1983 to eliminate any advantage workers might have by being paid from a public pension system and Social Security, if they paid into both at some time during their careers. Social Security is meant to replace a higher percentage of low-income workers’ pay and replace a smaller percentage of higher income workers’ pay. Before WEP was passed, Social Security was replacing a disproportionate amount of wages in some cases. A person could be receiving Social Security as if he were a lower wage worker and, at the same time, be collecting benefits from another public pension system.
The Social Security Administration calculates a worker’s top 35 years of earnings, adjusts all earnings for inflation and then replaces a percentage of that worker’s average monthly wage. The replacement ratio works like this: Social Security replaces 90 percent of the first $791 of average monthly earnings, 32 percent of the next $3,977, and 15 percent of the remainder. The maximum Social Security retirement benefit that someone can collect in 2013 at full retirement age of 66 is $2,533 per month.
Some workers do not pay into Social Security. Instead, they pay into another public pension system, such as the Civil Service Retirement System, a teacher’s pension system or a police or firemen’s pension system. If this is the only employment that a worker had, they are not eligible for Social Security.
However, many workers pay into Social Security for a portion of their career and a public retirement system for the remainder of their career. Those workers may be entitled to Social Security, as well as a public pension, but their Social Security may be reduced by the WEP.
Social Security benefits are reduced on a sliding scale depending on how long a person paid into the Social Security System.