Teachers may have enjoyed the spoils—breakfast pastries, sandwich platters, balloons and flowers—of Teacher Appreciation Week earlier this month. But many of them won’t see recognition in the form of Social Security benefits after retirement.

That’s because some teachers are among the employees of organizations, generally government agencies, that provide pensions but don’t pay into the Social Security system.

This can be confusing for clients who fall into this category—and for you, as you help them and possibly their spouses plan for retirement.

Indeed, I regularly receive inquiries from advisors working with individuals eligible for what are commonly called “noncovered pensions” about how and if their Social Security benefits, as well as those of their spouses and survivors, are affected.

Here is some information that may help.  

What Are Noncovered Pensions?
Just this term is confounding! A noncovered pension is one from an organization or agency that didn’t withhold Social Security taxes on behalf of employees (as this document explains). Those employees may have any potential Social Security benefits reduced or eliminated.

Two Social Security laws apply:

Windfall Elimination Provision (WEP)
The WEP applies to a worker who:

• Receives a pension from employment where Social Security taxes were not withheld

• Worked fewer than 30 years in a job where Social Security taxes were withheld

They may have their primary insurance amount (PIA) reduced by up to half their monthly government pension amount. (Note: The law does not apply to people who became eligible for Social Security before 1985.)

For example, your client worked for 20 years in the private sector, paying Social Security taxes, and made a career change to be a teacher for 15 years before retiring. This client:

• Has a PIA of $2,850

• A monthly pension of $1,000

• Has their PIA reduced by $1,000 and receives $1,850 monthly from Social Security.

The adjustment also affects spousal and dependent benefits but not survivor benefits. The maximum WEP reduction is half of the PIA.

While we often associate noncovered pensions with government employment, WEP can apply in other situations, such as a client’s employment in foreign countries where Social Security taxes were not paid.

The  Social Security Administration (SSA) website, ssa.gov, has more information on WEP, including a calculator for estimating how WEP may affect Social Security benefits.

Government Pension Offset (GPO)
This applies to spouses or widows (er)s of individuals who receive monthly noncovered pensions. They may have their Social Security benefit reduced by two-thirds of the monthly pension amount or eliminated. (More GPO rules can also be found in this SSA publication.) 

Let’s use an example:

• A client receives a monthly civil service pension of $2,500 as a spouse or widow. Two-thirds of that amount is $1,667.

• The client’s monthly Social Security PIA is $3,200.

• The SSA will deduct  $1,667 from $3,200 and pay your client $1,533.

A spouse or widowed spouse whose Social Security benefit is more than two-thirds of the non-covered pension benefit will receive $0 from the SSA.   

If a client took a government pension annuity in a lump sum, the SSA will calculate the reduction as if you selected to get a monthly benefit payment from your government work.

It Gets More Complicated
The GPO's purpose is fairness — to ensure that individuals receiving non-covered pensions don’t receive an undue advantage by receiving full Social Security benefits based on a spouse's or deceased spouse's earnings record.

It's important to note that not all government pension income is subject to the GPO, and the rules can be complex. GPO rules may apply differently depending on the type of government pension and the specific circumstances of the individual's employment history.

How To Sort Out Individual Cases
In best-case scenarios, you work with clients years before they retire to develop. But whether your clients are members of Gen X or on the cusp of retirement, my hard-and-fast rule for Social Security planning is to contact the SSA for their most up-to-date benefits information.

Sometimes, clients are unsure if their employer withheld Social Security taxes. They should contact their human resources or pension departments for that information.

Once you have collected information on benefits eligibility and pensions, you can use a Social Security benefits optimization tool to factor in the effects of noncovered pensions on benefits.  

Alyson Dorosky, CSSCS, is a Social Security support expert at LifeYield. She works with advisors and their clients to address their thorniest Social Security issues.