How WEP takes a bite from Social Security check

Q: I am five months from turning 67 (my full retirement age, or FRA, was 66) and although I earned enough credits to qualify for Social Security, most of my career was spent as a Civil Service Retirement System (CSRS) federal employee (where I didn't pay Social Security taxes, and do have a federal pension). I have not yet filed for Social Security.

My wife is currently 60, had a long career in the private sector and for the last five years has been working for the federal government and participates in the Federal Employees Retirement System (or FERS) and has paid Social Security taxes. Her FRA is a few months past 66. So what options do I have? When should I file for my own benefits? Can I apply for spousal benefits when my wife reaches her FRA? — David Weiss, Hawaii

A: So, before we discuss your options, let’s start with some facts about your circumstances. “Since most of your career was spent in what is known as non-covered employment, you will be subject to the WEP, or Windfall Elimination Provision, on that portion of Social Security benefits attributed to your own work record, and the Government Pension Offset, or GPO, for any potential spousal or survivor benefits based on the work record of your spouse,” says David Cechanowicz, director of education at Social Security Timing.

First let's deal with the WEP, which according to the Social Security Administration can affect you when you earn a pension from an employer who didn't withhold Social Security taxes and you qualify for Social Security retirement or disability benefits from work in other jobs for which you did pay taxes. Read Windfall Elimination Provision. The GPO, by contrast, works this way: If you receive a pension from a federal, state or local government based on work for which you didn’t pay Social Security taxes, the Social Security Administration may reduce your Social Security spouse’s or widow’s or widower’s benefits. Read Government Pension Offset.

According to Cechanowicz, the Social Security benefit formula is weighted most heavily to lower-income earners. A short earnings record with Social Security and a long record outside of covered employment generally indicates a dual career path, but not necessarily a lifetime of low income.

“Therefore, an adjustment is made to offset the first tier of Social Security benefits,” says Cechanowicz, who notes that the offset applies in full to those workers with fewer than 20 years of substantial earnings under Social Security employment and disappears when a worker has 30 years of substantial earnings from “covered employment.” The maximum reduction for 2016 for purposes of the WEP is $428 per month. And that amount, he says, could be deducted from your total Social Security benefit.

On the other hand, your spouse has many years of covered earnings and should, therefore, have a more robust Social Security benefit, says Cechanowicz. “If we assume that her benefit will be $2,000 per month at  age 67 and two months, then the maximum spousal benefit you could receive would be $1,000 per month, at your full retirement age,” he says.

Now, according to Cechanowicz, there are three important facts you need to be aware of about this benefit.

• First, you cannot collect a spousal benefit until your spouse has filed for his or her own benefits. Therefore, the earliest you might be eligible is if your spouse files for a reduced benefit at her age 62.
• Second, your spousal benefit at or after your own full retirement age would not be reduced because of the fact that she filed for benefits early.
• And finally, your spousal benefit (and ultimately a survivor benefit) is subject to the GPO. The GPO looks to the pension that you receive from non-covered employment and then uses two-thirds of your pension as a reduction against the spousal or survivor benefit. Therefore, if you have a non-covered pension of $3,000 per month, your spousal or survivor benefit would have to exceed $2,000 per month before you would be eligible for any Social Security benefits on the work record of your spouse.

“Without knowing the numbers in your particular case, if your non-covered pension is significant enough, the GPO will end up blocking the payment of any spousal or survivor benefits,” says Cechanowicz. “Additionally, you will be subject to the WEP reduction against your own Social Security retirement benefit that was created because of your work in covered employment.”

Bottom line: Consider consulting with a financial adviser who truly understands Social Security and who can calculate optimized Social Security benefits that are based on your projected lifetimes. “Those numbers may give you a better idea of when and how you and your spouse can claim your individual Social Security benefits,” says Cechanowicz. “Based on the information given, your spouse's work record would also preclude her from ever claiming a spousal Social Security benefit since her own work record will most probably be greater than yours.”

Also note, if your retirement-income plan will allow for it, Cechanowicz says it may make sense for your spouse to delay collection of her own Social Security benefits as long as possible so as to receive the largest amount of lifetime benefits.

Robert Powell is editor of Retirement Weekly, contributes regularly to Paste BN, The Wall Street Journal and MarketWatch. Got questions about money? Email rpowell@allthingsretirement.com .