ORP and Social Security

Coordinating the Optional Retirement Program and the Windfall Elimination Provision


Texas ORP and the Social Security Windfall Elimination Provision

Not too long ago I saw a massive mistake made by a participant in the Texas Optional Retirement Program. It was a simple little move that cost her thousands of dollars.  To make matters worse, she made this move on the recommendation of her financial advisor.

I’ve seen this mistake more than once, so I’m going to tell you what to watch out for!

But first, what is the Optional Retirement Program? The Texas Higher Education Coordinating Board has the best description. “The Optional Retirement Program (ORP) is available as an alternative to the Teacher Retirement System (TRS) for full-time faculty, librarians, and certain administrators and professionals employed by Texas public institutions of higher education.”

Essentially, certain higher education employees can opt out of the Teachers Retirement System in favor of a plan that allows them to make their own contributions and get a match from their employer. The dollars in the plan can be invested in a variety of ways. On the surface it works much like a 401K or some other employer sponsored retirement plan. This intent of creating this plan was to give these employees a choice of how they saved for their retirement needs.

Social Security Reductions

Many employees of Texas colleges do not pay Social Security tax. If they have never paid this tax at a prior job, they are not eligible for a Social Security benefit. But many of these employees have worked in other jobs where they have paid these taxes and earned the required 40 quarters for Social Security benefit eligibility.  In a situation where there are both covered (SS taxes paid) & non-covered (no SS taxes paid) earnings, the Social Security Administration has some funny rules about how they reduce benefits.

I won’t use the space this article provides to go into a full discussion of the Social Security rules, but you should learn more about the Windfall Elimination Provision (WEP). The Basics of the WEP is that your benefit can be reduced by up to $413 (for 2015) every month if you held a job where you did not pay Social Security tax.

For in depth reading on the Windfall Elimination Provision, I highly recommend Jim Blankenship’s blog Getting Your Financial Ducks In A Row.  

The Big Mistake

The big mistakes that I’ve seen have not been due to how the funds are invested, but in what happens when the funds begin to be distributed. For those workers who are also eligible for Social Security, there is often a blanket assumption that those benefits will automatically be subject to the reduction from the Windfall Elimination Provision.

That’s just simply not true.

You can get a Social Security benefit that is NOT reduced by the Windfall Elimination Provision into your early seventies.  If you avoid the triggering events.

The Social Security Administration has a great piece on Texas ORP and Social Security on their website.  The rules found there on how the Texas ORP triggers the WEP can be boiled down to these points:

  • The trigger for the WEP reduction does not occur until you become entitled to benefits from your Texas ORP.
    • Entitlement does not occur until you take a distribution
      • For purposes of the WEP trigger, a distribution is
        • A rollover of any type
        • A lump sum distribution
        • Periodic Payments
  • Distributions are required no later than April 1 of the year following the year you attain age 70 1/2.

So, as long as you don’t meet the triggers, you are not “entitled” to your Texas ORP and thus are not subject to the Windfall Elimination Provision.  This could mean several years of a Social Security benefit with NO reduction.

$46,000 More?

Here’s how those rules apply in real life.  Depending on when your birthday falls, on average you have 113 months between your age 62 and April 1st of the year following the year you attain age 70 1/2.  The current maximum WEP reduction is $413 per month.  You could file for Social Security benefits at age 62 and have all those months with NO deduction as long as you don’t become “entitled” to your Texas ORP.   That could mean an additional $46,000 in Social Security benefits ($413 per month x 113 months).  I should point out that those figures do not include increases from the cost of living adjustment.

For some, this may not be an option.  It’s possible that you will rely on the income created by these savings to provide your retirement income.  However, some strategic retirement income planning may allow you pull income from other sources and eliminate the need for touching those Texas ORP dollars until you are required to take a distribution.

The Takeaway

Remember that your Texas ORP account can stay where it is when you retire.  If your financial advisor tells you that you need to do a rollover (or anything else) with your Texas ORP, be VERY inquisitive.  There could be $46,000 at stake.