February 22, 2009

Will You Miss Out on Social Security Benefits? - Your Retirement and the Windfall Elimination Provision

One of the biggest issues facing educators (at least in Georgia) is whether or not they have been contributing to Social Security. If they have not, then the Georgia Teachers Retirement System (TRS) pension they receive will be used in a calculation by the Social Security Administration (SSA) that can reduce any Social Security benefits that they receive. This comes as a great surprise to many that it effects.

It is such a shock because every single year we all receive those little Social Security statements that project a benefit for us. We see that projected benefit, and we think, "Well, at least I will have that..." But not so fast...

The SSA uses something called the "Windfall Elimination Provision" (WEP) to calculate your benefit since you paid into a pension plan and did not pay into social security. The formula used takes your monthly pension payment, all of the earnings over the year that you paid and did not pay into social security and recalculates your benefit. Since most educators will be employed and pay into the system for 30 years, this reduction could be somewhat dramatic.

Recently, I helped a client that is a former educator project her SSA benefit. Like most people, she thought that her SSA benefit statement was going to be her benefit. She was projected to have about $900 a month at her full retirement age (66 for her). After plugging the numbers in the WEP calculator on-line, her monthly benefit dropped to about $580 total. This is a reduction of $320 a month or $3,840 annually - a huge difference.

Survivor Benefits

This does not only affect your SSA benefit, but this could and most likely will greatly affect any benefit that you could possibly receive from your spouse's SSA benefit. The calculation on the spousal benefits are a bit difficult to explain, but even though that little statement your spouse receives may say that their surviving spouse could receive $X,XXX, it most likely will be quite a bit less and possibly nothing.

What Are Your Options?

Every employer (school system) is potentially different, so check with your human resources department to see what you have available.

All of the options below assume that you contribute to TRS.

1 - Do not contribute to SSA, do not contribute to any other pension

If you are employed by a county that does not pay into SSA, then you most likely have a higher net paycheck coming to you than if you did. If this is the case, then this is a great reason to use some of the extra 6.2% of your gross pay (what you would be paying into SSA) to start a 403(b). I have written about starting one many times, and this is a prime example as to why it is needed.

2 - Do not contribute to SSA, your system has an alternative system

In Gwinnett County, educators do not pay into SSA, but they do contribute 1% of their gross pay to the Gwinnett Retirement System (GRS). This is similar to SSA, but this is something that should be discussed directly with GRS. Additionally, since you have an extra 5.2% of your salary, it is a good idea to put some of that away in a 403(b) here too.

3 - Do not contribute to SSA, your system mandates a 403(b) contribution

My wife was previously an educator in Rockdale County, and over there, educators do not contribute to SSA, but they have a mandatory 2% employee contribution to a 403(b) account. The good thing about this plan is that employer also makes a mandatory 4% employer contribution for the employee to a 403(b) account (in the employee's name). All contributions from the employer and employee are 100% vested immediately, thus if the employee leaves the system, the accounts are theirs.

Final Thoughts

If you do not contribute to SSA, now is the time to understand what your options are and what you can do to help yourself. Call SSA and call human resources for your system.

When a financial planner sits down to evaluate a plan, we look at pensions, 401(k)s, 403(b)s, and social security. If one of those items is potentially reduced or nonexistent, that is a major change in evaluating your potential retirement income. Your TRS pension is a great foundation for your retirement, but you really need to know what other income sources you will have.

Take some time to research your situation, and then start looking to plan your retirement income. E-mail me with questions if needed.

2 comments:

Anonymous said...

I came from Alabama to Georgia with 29 years paid into Social Security. I have been working here, in a Georgia Public School System that does not take out Social Security. In considering retirement from the Teacher's Retirement System in Georgia, it caused me to talk with the TRS Representatives about benefits. In doing so, hey brought to my attention the WEP. After this information, I called Social Security concerning(according to the WEP Brochure, I received), where it sais: If you have 30 or more years paid into Soc. Security, you would not be affected by the WEP. The SS Rep I talked with, stated if I could work in a school system that does have Social Security for 1 more year, that will give me my 30 years of Social Security with no penalty from WEP. My question is: Is it just that simple for me? Of course, I am currently, in my 34th year of teaching and know in my heart, I won't just do one more year only, just to fulfill this quota. Please share your professional knowledge and current research regarding my WEP Status. Thanks!

Robert (Robby) E. Schultz III, CFP®, ChFC®, CPWA® said...

Thank you for your comment. If you could email me - rschultz@rollinsfinancial.com - I could discuss this further with you and be a bit more specific.

If you have 29 years of "substantial" Social Security earnings, then the WEP issue should be very minimal to you. In 2016, it looks like a SSA benefit would be reduced by $43 a month ($516 annually).

Please send me an email, and I will try to give you a bit more information if possible.

Robby