Social Security Reductions Eliminated for Some Federal & Public Workers!

This just in. Two of the most prominent provisions that can substantially reduce Social Security benefits for some federal, many public sector, and civil service employees were just eliminated after being in effect for nearly the last forty years. Teachers, police officers, firemen, and some federal workers are some of the most common groups affected by these provisions. And as of December 31, 2023, they may see a bump in benefits or expected benefits they're eligible to receive.

Hello, and welcome to the Retired-ish podcast, where we discuss topics and strategies to help you save taxes, simplify investing, and create a fruitful retirement income stream. I have some breaking news for you today. It's a new year, and already we have new retirement laws effective that will affect many retirees across the United States.

Just recently, in the first week of 2025, President Biden signed into law the Social Security Fairness Act, which has put an end to two provisions that reduce Social Security benefits for some federal and other public service workers. These provisions have been argued for decades, and we are finally seeing some changes. These two provisions were known as the Windfall Elimination Provision, or WEP for short, and the Government Pension Offset, or GPO.

We actually had a great listener question some episodes back where I discussed how each of these worked and how they might affect you. So I'll be sure to add a link to that episode in the show notes of today's episode, so be sure to check that out. Again, these provisions don't affect everyone, just those who have held longer-term careers in public and government sectors where they did not pay into Social Security but may have paid in from private sector jobs before or after the fact.

Essentially, the WEP affects those individuals who are actually receiving a public or government pension benefit and have had any potential Social Security benefits of theirs reduced or eliminated. And if you weren't already receiving a benefit, once you became eligible for Social Security, once you decided to take it, you are likely to be affected by that provision.

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And the GPO affects spouses and surviving spouses who have a public or government pension benefit, but their current spouse or deceased spouse had a Social Security benefit, and therefore, any potential Social Security benefit to be paid to the non-Social Security spouse was reduced or eliminated. These two provisions have consistently been touted as unfair penalties that have historically reduced Social Security benefits for public service workers, such as police officers, teachers, firemen, etcetera. I'm all for benefits for our civil servants. They deserve to be taken care of for what they do for our communities. So I personally think this is a great thing.

And to an extent, these provisions were a bit unfair since you could have someone in a situation where they had enough credits on their own to qualify for some sort of Social Security benefit, meaning they paid into the system and earned a benefit for at least ten years, but then due to the provisions, they don't receive benefits in retirement, or they are reduced to the point where the age in which they break even is very late in life.
It's estimated that over 2,000,000 plus retired individuals have been impacted by the WEP provision, and another 750,000 plus affected by the GPO. So, you might be wondering how exactly were people affected by these provisions. Well, Social Security benefits are based on a progressive formula, which gives lower earners a higher percentage of their earnings over their working lifetime, although a lower total benefit amount than higher earners.

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To account for hiccups in this formula, they introduced these two provisions. The reason was that someone with a relatively short career in what we call covered employment, meaning employed somewhere and paying into Social Security or self-employed and paying into Social Security, can resemble someone with a low lifetime income to the Social Security Administration. And this causes them to have a higher proportional benefit despite the fact that they are receiving other noncovered employment and related pension income.

As an example, you work in the private sector for fifteen years and pay into Social Security. Therefore, you worked long enough to be eligible for some Social Security benefits in retirement. Then you get a career in civil service, for example, with its own retirement benefits or pension system where you are no longer paying into Social Security, but you are now paying into their pension system. You then retire from that career after thirty years and start collecting your pension. You then look to see what kind of Social Security benefit you might be eligible for from your work prior.

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Social Security would apply their progressive formula and look at your earnings history with Social Security and see a bunch of zeros for your thirty years of work in the public sector because you weren't paying into the system during that time. So they see no record of what you earned, and therefore, it looks like you earned very low to no income when they average that out over time. As I mentioned before, the formula gives lower earners a higher percentage of their lifetime earnings. So, in a case like this, there would be a misleading earnings history on Social Security's end that's being used in the calculation. So, the WEP and GPO worked to combat this by reducing the amount of covered income that counts towards calculating one's benefit for those with less than thirty years of covered employment. Again, that is employment where you are paying into Social Security.

Now, I want to dive a little bit more into the details of how these provisions work because this will help you understand how your benefits may change moving forward if you're someone who's affected by these provisions. First, we have the Windfall Elimination Provision or WEP, and this affects your own Social Security retirement benefits if you're eligible at all, and you receive a noncovered pension in addition.

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This reduced benefits for retirees and for would-be retirees if this provision had not been eliminated in these situations by applying a rather complicated formula, which I won't get into. However, what's important to know is that Social Security did provide for a maximum amount that your benefits could be reduced by from the WEP, and this ultimately depended on how large your monthly noncovered pension amount was. And regardless of how large it is, the absolute maximum they could reduce your Social Security benefits by was $587 a month in 2024. And that was supposed to jump to 613 in 2025, but now I guess that's sort of a moot point. The government pension offset or GPO, on the other hand, is the provision that affects a spouse trying to get a spousal Social Security benefit that is based on their spouse's earnings record who has been paying into Social Security and is not going to be receiving any public pension benefits.

So let's say you're a teacher and didn't pay much into Social Security your entire working career, but your spouse was self-employed for thirty years. He or she would be eligible for Social Security, and you could apply for a spousal benefit of up to 50% of their Social Security benefit even though you will have your own noncovered pension from government work or some public sector work. However, the amount you get from Social Security could be drastically reduced by the GPO.

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And it also affected what a surviving spouse with a public pension would receive, had their spouse that was collecting Social Security benefits predecease them. In other words, the spouse who worked primarily in these public positions and is going to be receiving a pension would have some sort of reduced Social Security benefit that they tried to collect off of their spouse's record, whether dead or alive. So, in my example, if the self-employed spouse passed away, the surviving spouse would be eligible for 100% of the deceased spouse's Social Security benefit. And even though now they are eligible for the full benefit on the surface, the GPO would still reduce it to an extent.

The GPO was equal to two-thirds of the amount of the noncovered or public pension and had the potential to wipe out a Social Security benefit entirely. So, to try and illustrate this, if our teacher had a $1,000 a month public pension and the spouse had an $1800 a month Social Security benefit, our teacher could apply for 50% of those benefits, so $900 a month. However, once we account for the GPO, that $900 a month would be reduced by $667, leaving a $233 a month spousal benefit. Why? Because two-thirds of the $1,000 a month pension is $667 a month.

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So, we reduce the spousal benefit by that amount, leaving us with $233 a month. Now let's imagine the teacher's pension is $1600 a month instead. Two-thirds of this is over $1,000 a month, meaning it would completely wipe out the potential $900 spousal benefit. Essentially, these provisions weighed most significantly on those who held public sector jobs that provided for low wages or a very small pension and those with smaller public pensions who were left widowed by a spouse who received or would have received a low Social Security benefit.

But even those with very large noncovered pensions, like many firefighters I know, have been affected as well, but didn't feel the sting as much since they have a higher income due to their larger pension. It more so just pisses them off. Okay. So, with these new changes, how much more in potential benefits are we looking at here? Well, First and foremost, you have to actually be in a situation in which you or your spouse are covered by a non-covered pension. That's requirement number one.

And number two, as you've just learned, it will be dependent upon how large your noncovered pension is. The Congressional Budget Office estimated in September of 2024 that eliminating the WEP could increase monthly benefits to affected Social Security recipients by an average of around $360 per month by December 2025. However, this is just an average. Yours may be more or less, of course.

And getting rid of the GPO could increase monthly benefits in December 2025 by an average of $700 per month for recipients receiving benefits based on living spouses. The increase would amount to an average of 1,190 a month for the estimated amount of surviving spouses currently getting a widow or widower benefit or Social Security survivor benefits. Now, these figures that they've estimated do make intuitive sense since the effects of the GPO can be much greater than the max WEP of $587 a month.

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Remember, that's because the GPO is two-thirds of your pension amount, which can be quite large in some cases. And the benefits lost by a surviving spouse can be greater than a living spouse since the spousal Social Security benefit while they're alive is limited to 50%, and the survivor benefit is 100% of what the deceased spouse was or could have received. So for your particular situation, it will require a little bit of math. But for those who had the max WEP of $587 a month being held back, you might expect to see your benefits jump by a similar amount moving forward. And those affected by the GPO may see even more substantial jumps based on the size of their noncovered pension. Time will tell.

All that being said, the other good news is that if you aren't retired yet but are in this type of situation, you now don't have to worry about any of those provisions anymore, and you can expect more retirement income than you otherwise would have received. So, if you are gearing up for retirement and you've been doing some financial planning, it's time to go back to the drawing board.

Now for some more good news. One of the most interesting pieces of this new legislation is that they are planning to pay certain affected beneficiaries back pay for every month in 2024 that they were entitled to benefits. This is true even though the law was technically passed just recently, in the year 2025. This back pay is apparently expected to be paid in a lump sum. But as far as when you can expect those payments, it is still to be determined. These lump sum payments can be a good thing, but can also present some tax issues people won't realize until tax filing next year in 2026.

Speaking of taxes, let's quickly review some of the potential tax implications of all this. According to the Congressional Budget Office, this law would add an estimated $195,000,000,000 to the federal deficit over the next decade.

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Now, this is the ugly side of this. It seems like in recent news, we were hoping that the new administration would make Social Security completely tax-free. But the biggest issue with that is how expensive it would be. A change like that would drain the Social Security trust even faster, which means more Social Security taxes down the road for the working class. Now add that to the fact that these provisions have now gone away. Things just get really expensive and will have to be made up for elsewhere. We can't lose sight of that. In my opinion, tax-free Social Security looks unlikely, but hey, it could happen. There are plenty of other ways they can reduce taxation of benefits without making them completely tax-free for all, such as adjusting the provisional income brackets for the last few decades of inflation.

These provisional income brackets are what determine how much of your benefits get taxed when you do your tax return. But, anyway, I digress. On a personal level, though, be mindful of any lump sum payments you might receive for 2024 if eligible. The fact is that Social Security benefits are currently taxable depending on your other income. So, if you receive a lump sum, you may owe taxes on it. And if you do not currently have any withholding from your current benefits, you may be receiving right now, they are likely not going to withhold from any lump sum benefit. So get with your tax professional and don't spend it all. Also, you will need to plan ahead if you start to receive a higher monthly benefit.

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A higher benefit could change your tax situation in many ways. So again, it is wise to consult your tax professional if this is your particular situation. If you don't address it again, you may be in for a big surprise come tax time. And last but not least, what do you need to do to receive these additional benefits? Many people are wondering, if I previously filed for Social Security benefits and they are partially or completely offset by one of these provisions, what do I need to do to make sure I get the additional benefits? How do I get my money?

Well, the Social Security website, as of January 7, 2025, states at this time, you do not need to take any action except to verify that we have your current mailing address and direct deposit information if it has recently changed. Most people can do this online with their personal My Social Security account without calling or visiting Social Security. Visit ssa.gov/myaccount to sign in or create your account. We will provide ongoing updates regarding implementation on this page.

So, no, as of right now, you don't need to call the administration and wait on hold for hours or make an in-person appointment. Just make sure your basic info is up to date. And by the way, I will add a link to this page in the episode show notes so that you can stay up to date on the latest news.

Alright. Wow! Who knew breaking news about retirement could be so exciting? This is definitely a huge step forward for our hardworking public servicemen and women. It's also less complicated nuances to the system as a whole, which is a good thing. Next, if they could just overhaul the entire tax system and internal revenue code, that'd be great!

If you find the strategies and info I provided in today's show actionable, insightful, insightful, and valuable, do yourself a favor and subscribe to or follow the show on your podcast app.

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That way, you can get alerts each time a new episode drops. Also, be sure to check out the Retired-ish video newsletter to get more useful information on retirement planning, investments, and taxes once a month straight to your inbox. The newsletter will often dive deeper into some of the topics discussed on the show, as well as provide useful guides and charts available for download. If you want to learn more about Social Security as it applies to your situation or you want to ask a question to be answered on a future episode, you can find links to the resources we have provided in the show notes right there on your podcast app. Or you can head over to retiredishpodcast.com/61. Thanks again for tuning in and following along. See you next time on Retired-ish.

Disclosure [00:19:53]
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