Before leaving office in January, former President Joe Biden signed the Social Security Fairness Act into law, which could change retirement benefits. By removing two rules for public-sector works and public-sector retirees, planning for retirement could become easier.
Overview
In early January, former President Joe Biden signed into law the Social Security Fairness Act, addressing a problem that affected nearly three million Americans and created headaches for retirees trying to claim Social Security benefits.
Certain public-sector workers, such as teachers, police officers, firefighters and many others, were subject to the Windfall Elimination Provision (WEP). The Government Pension Offset (GPO) affected public-sector retirees with pensions from jobs not covered by Social Security, which reduced or eliminated spousal or survivor’s benefits.
Here’s how these rules worked:
- WEP: The WEP reduced the Social Security benefits of those who also receive a pension from a job where they didn’t pay into Social Security. For example, if you were a teacher in one of the 15 states that opted out of Social Security for educators, the WEP could lower the benefits you accrued from other Social Security-covered jobs. That was especially unfair to career changers who didn’t receive the full benefit of their Social Security contributions.
- GPO: The GPO slashed spousal and survivor’s Social Security benefits for public sector workers. For example, say your government pension is $3,000 per month and the survivor’s benefit is $2,200. The GPO reduced your government pension amount by two-thirds, or $2,000. So, $2,000 was taken from the $2,200 survivor’s benefit, leaving a measly $200 per month.
Not only did these provisions create financial hardship for many retirees, but in many cases, they meant overestimating retirement income, or spending time talking to the Social Security Administration, trying to figure out exactly what the real benefit was.
“Retirement planning is difficult enough. Integrating the GPO and WEP rules added a bunch of complexity to the process,” says Mark Wilson, founder and president at MILE Wealth Management in Irvine, California. “Planning is easier with these out of the picture.”
Difficult to Estimate Benefits
A big problem with these rules was that Social Security frequently overestimated benefits for people affected by WEP and GPO before these provisions were applied to their accounts. So, when people downloaded their Social Security benefit statements, the amount was greater than they would actually get, as it didn’t factor in reductions.
The Social Security Administration (SSA) is now calculating benefit changes for Americans who were affected by WEP or GPO. Those include people who didn’t bother to apply for Social Security as they knew they would be affected by one or both of those provisions.
Others whose benefits are being reviewed include:
- Those who didn’t apply for spousal benefits due to the reductions
- Those who currently have cases pending at the SSA due to WEP and GPO-related situations
But not everyone is thrilled about the change. In a November news release, before Congress voted on the repeal, the Committee for a Responsible Federal Budget said, “Social Security is just nine years away from insolvency, and our seniors need a fix fast. Congress should not vote to make the problem worse.”
According to the SSA, people who were affected by WEP and GPO don’t need to take any action except to verify their current mailing address and direct deposit information if those have changed.
Reviewing Benefit Statements
Financial planners are also reviewing clients’ past tax returns and benefit statements to identify those who may have been affected by these provisions.
Bob Cheatham, investment advisor and financial planner at Integrity Wealth Advisors in Ventura, California, is among those who have clients who may benefit from the repeal of WEP and GPO.
He cites a client who spent her 20s and early 30s working in hospital marketing. She paid into Social Security well beyond the 40-quarter requirement, according to Cheatham.
“Later, she paused her career to raise a family and eventually found a second career teaching journalism in her 50s,” he explains. “Until this legislation passed, Social Security denied her years of benefits simply because she qualified for a partial pension later in life. That wasn’t fair.”
Wilson says he has two clients who are affected by the repeal of WEP and GPO.
“One is an early retiree who is under 60, so we have a few years before any real planning begins; my guess is that these changes will impact how soon the wife will claim her benefit since the spousal benefit is in play again.”
With the other client, the husband has been waiting until age 70 to claim his Social Security benefit, while the wife is receiving a pension from a job not covered by Social Security. Wilson says he’s gathering updated Social Security details so he can rerun the numbers looking for optimal start dates now that the WEP and GPO provisions are no longer an issue.
As of this writing, the Social Security Administration is still in the process of updating its public information about the repeal, as the details of implementation are still unfolding.
Millions Will Get Back Pay
When he signed the act into law, Biden noted one implementation measure.
“Over two and a half million Americans are going to receive a lump sum payment of thousands of dollars to make up for the shortfall benefits they should have gotten in 2024,” he said. “They are going to receive these payments this year and this is a big deal.”
One way that it’s a big deal is that it will allow many retirees to allow more of their investments to grow, rather than making withdrawals for living expenses.
“The net effect could be a real game changer for some, by helping to increase the amount of money they could spend each year in retirement and/or increase the probability of not running out of money during retirement,” says Stephen Vecchione, MBA, co-founder and managing partner at Statera Advisors in Hunt Valley, Maryland.
“Overall, this could be a big positive for those who were previously affected,” he adds. Cheatham agrees that this action is significant.
“In future years and decades, inflation will continue to erode the dollar’s purchasing power. For anyone relying on a pension, especially one they didn’t contribute to for a full 30 years, this repeal will result in significant improvements to their future cash flow,” he says.
The impact of this change will be especially meaningful over time. The cumulative effect of receiving full Social Security benefits alongside a pension can make a substantial difference in a retiree’s financial situation.
“It’s not like winning the lottery or receiving a bonus but rather, it’s more like correcting an injustice that has disadvantaged second-career pension recipients for far too long,” Cheatham says. “In their younger years, they earned every penny of these additional Social Security benefits.”
Editor Norah Layne contributed to this article.
