The Social Security Benefit REDUCTION Act of 2015?

A.K.A The Equal Treatment of Public Servants Act of 2015

wep repeal social security

 

I really thought the repeal of the Windfall Elimination Provision through HR 711: The Equal Treatment of Public Servants Act of 2015  was a good idea.

I’ve changed my mind.

Read my original article on the repeal of the Windfall Elimination Provision

The spirit of the bill is great. Teachers, firefighters and other public servants often get the short side of the stick with Social Security and I thought this bill was going to go a long way towards fixing it. There were some lingering questions, but overall I was excited that some real action on this unequal treatment seemed poised to finally move forward.

That excitement was before I had a conversation with Dr. Andy Szakmary, a Professor of Finance at Richmond University. His take on this legislation was a little different than mine. He caught a few things in the Bill and supporting testimony that had slipped right by me. After several conversations with Dr. Szakmary, these are some of his comments and insight that really stood out to me.

“The primary problem with HR 711 is the 14 MILLION PEOPLE (according to Goss’ testimony, pp.3-4) who are not currently subject to the Windfall Elimination Provision (WEP) but will become impacted due to the formula change in HR 711.  (versus 1.25 million people who will receive a higher benefit than under the current formula)

So there will be 11 losers for every winner.

While some of these people will become WEP-impacted because HR 711 removes the WEP exemption for those with 30+ years of significant covered earnings, the overwhelming majority of these newly-impacted folks will be people who did short 1-5 year stints as teachers, firemen, policemen, political appointees, nonprofit workers (many of whom were not covered under SS until 1984), etc. and did not work long enough in non-covered employment to become eligible to collect a pension based on this employment. Under current law, they are protected from WEP because the WEP can only impact those who are eligible to draw a pension from non-covered employment. But under the formula change and procedures in HR 711, this protection is removed and they will become impacted. I am still working on a model that explains more precisely how these folks who had short stretches of non-covered employment will be affected, but my preliminary findings indicate that if the following conditions are met, you will definitely be negatively affected to at least some degree by the formula change in HR 711 and in President Obama’s Budget:

  • You have any non-covered employment on which you are not eligible to draw a pension and on which you did not receive employer contributions toward retirement.
  • Your total years of covered employment are less than 35.
  • Your AIME (average indexed monthly earnings) based on both covered and non-covered employment is higher than the first bend point in the PIA formula ($856 in 2016).

The third condition is interesting, because proponents of the bill claim it will benefit those with low lifetime earnings. It will not. If they are not eligible for pensions, then the illustrations below show that the best case scenario relative to current law is to break-even, and this can only happen if one’s average lifetime earnings are substantially below minimum wage (i.e. you must have worked only part-time for most of your career):

ILLUSTRATION #1:  worker earned $856 per month in wage-indexed terms every year he worked. Worker has 30 years in covered employment and 3 years in non-covered employment. Worker is not eligible to collect a pension from non-covered employment. [note: 30 years = 360 months, 3 years = 36 months]

Under current law: AIME =

PIA  = 0.9 x 733.71 = 660.34     Note: no WEP reduction.

Under HR 711, if it were in effect in 2016:

We know from above that AIME based on covered earnings is 733.71.

Thus,    Note that this is exactly the same final PIA as under current law.

ILLUSTRATION #2:  worker earned $2,000 per month in wage-indexed terms every year he worked. Worker has 30 years in covered employment and 3 years in non-covered employment. Worker is not eligible to collect a pension from non-covered employment. Note that $2,000 per month is still a very low income, barely more than half of the SS average wage in 2014, but it is enough to put the individual well beyond the first bend point in the PIA formula.

Under current law: AIME =

PIA  = (0.9 x 856) + 0.32 x (1,714.29 – 856) = 1,045.05    Note: no WEP reduction

Under HR 711, if it were in effect in 2016:

We know from above that AIME based on covered earnings is 1,714.29.

Thus,    Note that this individual suffers a diminishment of $45.13 relative to current law. Why does this occur? Because his  is beyond the first bend point in the PIA formula, and his marginal accrual rate is only 0.32. This illustrates that for any marginal accrual rate < 0.9, the new formula results in a lower benefit.

ILLUSTRATION #3:  worker earned $4,000 per month in wage-indexed terms every year he worked. Worker has 30 years in covered employment and 3 years in non-covered employment. Worker is not eligible to collect a pension from non-covered employment. Note that $4,000 per month is just slightly above the SS average wage in 2014.

Under current law: AIME =

PIA  = (0.9 x 856) + 0.32 x (3,428.57 – 856) = 1,593.62    Note: no WEP reduction

Under HR 711, if it were in effect in 2016:

We know from above that AIME based on covered earnings is 3,428.57.

Thus,    Note that this individual suffers a diminishment of $45.13 relative to current law, which is exactly the same in dollar terms as the individual in illustration 2 who earned half as much. This shows that the diminishment in dollar terms is determined by the marginal accrual rate in the PIA formula, which was 0.32 for both individuals.

ILLUSTRATION #4:  worker earned $7,000 per month in wage-indexed terms every year he worked. Worker has 30 years in covered employment and 3 years in non-covered employment. Worker is not eligible to collect a pension from non-covered employment.

Under current law: AIME =

PIA  = (0.9 x 856) + 0.32 x (5,157 – 856) + 0.15 x (6,000 – 5,157) = 2,273.17    Note: no WEP reduction

Under HR 711, if it were in effect in 2016:

We know from above that AIME based on covered earnings is 6,000.00.

Thus,    Note that this individual suffers a diminishment of $124.84, which is larger than for the individuals in illustrations 2 and 3 because this person is in the 0.15 marginal accrual rate bracket according to the PIA formula.

Generalizing from the above, it appears that for someone with 30 years of covered employment, the diminishment imposed by HR 711 (and by the President’s Budget) when fully implemented would be $0 for anyone in the 0.90 PIA accrual rate bracket, about $15 per month for every year of non-covered employment up to 5 for someone in the 0.32 PIA accrual rate bracket, and about $42 per month for every year of non-covered employment up to 5 in the 0.15 PIA accrual rate bracket.

Even with a modicum of thought one should realize that this bill is discriminatory against women, as females are more likely to leave paid employment for several years to raise children (making it less likely that they will have 35 years of covered SS employment and be relatively unimpacted by the new formula). I would not be surprised to learn that two-thirds, or even three-fourths, of the individuals negatively affected by this bill will be female, but admittedly that is conjecture on my part.

Because so many people not now affected by the WEP will become affected with the new formula, in the aggregate, the reduction in Social Security benefits that will be imposed is substantial. According to Goss’ testimony, if this bill were fully in effect in 2016, 1.25 million people currently impacted by the WEP would receive an average benefit increase of $77 per month under the new procedure. However, 0.25 million people currently impacted by the WEP would see an average $13 monthly benefit reduction, and 14 million people not currently impacted by the WEP would become impacted and receive an average benefit reduction of $27 per month. So let’s do the math:

Aggregate monthly change in SS benefits paid = (1,250,000 x $77) – (250,000 x $13) – (14,000,000 x $27) = -$285,000,000

Aggregate annual change in SS benefits paid = -$285,000,000 x 12 = -$3,420,000,000

This is why the bill is much more than revenue neutral – it actually saves SS tons of money. But it does so on the backs of many millions of innocent people who did nothing wrong, in most cases having worked in government or non-profit employment for only a few years, and who cannot now travel back in time and retroactively change their work histories.”

Here’s Where it Gets Nasty

“Upon first glance it appears that benefit reductions will only apply to those who are currently 61 and under and had some non-covered employment. A closer reading of Goss’ testimony (p.4), however, indicates that this is NOT the case. Every current SS beneficiary (yes, even 90-year-olds) who since 1977 has any recorded non-covered earnings (even if only 1 year) and has less than 30 years of substantial covered earnings under SS will be subjected to a “WEP Audit.” They will have to obtain a certification letter from any non-covered employer they ever had since 1977 that states that they are not eligible for a pension based on that employment, by the end of 2016. If they are unwilling or unable to obtain this certification letter in the required window, then the WEP will be retroactively applied to them back to the month they first collected a SS benefit. The cumulative “overpayments” they received will then be recovered from their future benefit checks, and in addition, their benefits going forward will be reduced as the WEP reduction is applied. Allow me to sketch out a typical scenario below:

A 90-year-old receives the WEP audit letter. She is confused/unwilling/unable to obtain certification that she is ineligible for a pension based on what the SSA determines was non-covered employment from 1978-1980. The SSA then determines that she is guilty of concealing a non-covered pension (because she has failed to prove her innocence) and that she should therefore retroactively be assessed a $27 per month WEP penalty. Since she began receiving benefits at age 62, which was 336 months ago, SSA thus determines that she has received a cumulative overpayment of $27 x 336 = $9,072. This overpayment will then be recovered from her future benefit payments, and in addition, her benefit going forward will be reduced by $27 per month from what she was previously receiving.

Can you imagine the confusion and administrative nightmare this will cause for millions of current beneficiaries, their former non-covered employers, and the poor SSA employees in field offices who will be besieged by current beneficiaries, demanding an explanation for why their benefits were suddenly and unexpectedly cut? I understand that there is currently inconsistent application of the WEP, that some SS applicants conceal their non-covered pensions and that they therefore escape the WEP reduction that they ought to have been subjected to. I also understand that some people cheat on their income taxes. But the IRS does not audit 100% of tax returns, and for a bill to propose that every current beneficiary who has even 1 single year of recorded non-covered earnings be subjected to a WEP audit is simply absurd. Surely there must be a more intelligent, less costly, less intrusive way of going about enforcing the existing WEP. Suggestions: don’t bother with anyone who has less than 5 years of non-covered earnings with the same employer, as these individuals are extremely unlikely to have qualified for a non-covered pension; don’t audit anyone over the age of 75, as you cannot reasonably expect such individuals to be able to comply with a demand to obtain a certified letter from an old employer stating they are not eligible for a pension; allow people who are subject to the WEP audit to sign a sworn statement, under penalty of perjury, that they are not receiving or eligible to receive a pension based on non-covered employment if they cannot get a letter from the entity they worked for.

Only people in Congress would have the chutzpah to entitle this bill “The Equal Treatment of Public Servants Act of 2015.” A more accurate title would be “The Social Security Benefit Reduction Act of 2015.” I truly believe that the latter is more reflective of the true purpose and ulterior motivation for the bill. My strong preference would be for this bill to fail. However, barring that, it is absolutely imperative that the bill is amended such that the current-law link between the WEP reduction and the existence and amount of a pension based on non-covered employment is retained, and that the scope and intrusiveness of the WEP audits for existing beneficiaries is greatly reduced.”

 

changing my mind