In several states, most school districts do not participate in Social Security. Instead, they have their own pension plan to which they contribute. But over time, a few school districts in these states have adopted agreements with the Social Security Administration which allows them to participate in both Social Security AND their own pension plan.
For example, the school districts in my hometown of Texarkana, Texas, do not participate in Social Security. They only contribute into the Teacher Retirement System of Texas (TRS). However, scattered around my state are several school districts, such as Austin ISD, that participate in Social Security in addition to Texas TRS.
If someone has worked at both types of school districts, this ‘mixed’ employment can make it challenging to properly calculate how much you should expect in Social Security benefits. If an educator spends their entire career at either a district that contributes solely to SS, or SS and TRS, there isn’t usually an issue. The complexity comes up when an individual has worked at a school district that pays into SS and TRS and then a school district that does not pay into SS but does pay into TRS (or vice versa).
It gets complicated due to the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), two provisions that apply to anyone with a pension from work where no Social Security taxes were paid. The WEP applies to an individual’s own Social Security benefit, and the GPO applies to survivor or spousal benefits.
On their own, these provisions can be difficult to fully understand. If you add mixed earnings to the equation, they’re often nearly incomprehensible. But…it’s important to understand how this should be calculated. If you don’t understand this, your Social Security benefit amount may be reduced incorrectly.
If you don’t have a clear understanding of how the WEP and GPO works, here are a few resources that I strongly encourage you to check out before proceeding.
- The Best Explanation of the Windfall Elimination Provision
- What You Need to Know About The Government Pension Offset
- Video: Social Security for Educators (and other public servants)
To help understand how this all works, we’re going to use the example of a person named Denise. Denise worked at Austin ISD for 15 years. While in Austin, she paid into Social Security and TRS. When her husband died, she moved to my hometown of Texarkana and started working for Texarkana ISD, where she spent the last 15 years of her teaching career. While in Texarkana, she paid into TRS, but did not pay Social Security taxes.
She retired with a TRS pension of $3,000, and she was also eligible for Social Security benefits. But how much would she receive in Social Security benefits?
She’d always heard about the Social Security provisions that would reduce an educator’s benefit amount. But, she was confused because in her research everything referenced the WEP and GPO applied to individuals with a noncovered pension (a pension where no Social Security taxes were paid). She had a pension, but half of it came from work where no Social Security taxes were paid. The other half was from her time in Austin where she did pay Social Security tax.
She came to me after the SSA claims rep told her that the work where she paid Social Security taxes didn’t matter. Needless to say, the SSA rep was wrong and it almost cost Denise several hundred dollars per year in missed benefits.
If you find yourself in this situation, here’s how the WEP and GPO should be calculated.
The Government Pension Offset
The GPO is a reduction to spousal or survivor benefits if you have a pension where you did not pay Social Security taxes. The reduction is 2/3 of your pension amount! For example, if your pension is $3,000, the SSA will subtract nearly $2,000 from any spousal or survivor benefits before you are paid. This large reduction often completely wipes out any benefit for which you are eligible.
If you have a pension from ‘mixed’ earnings, the entire pension amount should not be used in calculating the 2/3 reduction! Only the amount that came from the months where you did not pay Social Security taxes should be used.
The Social Security rules make this clear: “Some entities may pay a pension based on both government employment and private employment. For pensions based on a combination of federal, state, or local government employment and private employment (i.e., non-government employment), GPO applies only to the portion of the pension based on government employment. [emphasis added]
For example, when Denise filed for benefits they told her that her GPO reduction would be $2,000 (2/3 of her $3,000 pension). Instead, they should have told her that her spousal or survivor benefits would be reduced by *only* $1,000. (based upon the portion of her pension that was earned during years she did not contribute to Social Security.) That’s a big difference!
What they told her
$3,000 – Total Pension
x 2/3 Reduction
$2,000 Reduction to spousal or survivor benefits
What they should have told her
$1,500 – Prorated pension from noncovered work
x 2/3 Reduction
$1,000 Reduction to spousal or survivor benefits
If Denise’s monthly survivor benefit should be $2,200 at her full retirement age, the proper calculation of the GPO means that she would still receive $1,200. However, if it was not calculated with the prorated pension, she would only receive $200!
Understanding how this rule works could be an important part of successful retirement planning. For example, someone in Denise’s position could file for a survivor benefit only and switch to their own benefit at age 70. This would mean that their own benefit amount would be higher due to the increases for the delayed filing.
The Windfall Elimination Provision
The Windfall Elimination Provision is a reduction to an individual’s own Social Security benefit and applies to individuals who have a pension from work where they did not pay Social Security tax. The correct pro-ration of a pension is also important for calculating the impact of the WEP. This is especially critical for individuals who have more covered years than they do non-covered years.
To better understand this, let’s change our example a little. Let’s say Denise spent 24 years working at Austin ISD (where she did pay SS tax), and 6 years at Texarkana ISD (where she did not pay SS tax). Assuming that her TRS pension is $3,000, the portion of her pension from non-covered earnings would be $600.
One of the provisions of the Windfall Elimination Provision is the ‘WEP Guarantee‘ which limits your pension to no more than 1/2 of your noncovered pension. In Denise’s case, the maximum reduction would be $300. Additionally, the impact of the WEP would be lowered even more due to “years of coverage” which are also known as “substantial earnings.” These are earnings that were subject to Social Security taxes and met the limits. Workers who have 30 years of coverage are fully exempt from the Windfall Elimination Provision (WEP). Workers with 21 to 29 YOCs are eligible for a partial exemption. The SSA has a chart of the required earnings on their website.
How To Prorate Your Pension
The SSA seems to make it simple to verify the amount of your prorated pension. In their manual they say, “Request verification from the employer or pension-paying agency showing the amount of the pension based on only the government employment.” However, you may run into issues with your pension paying agency giving you this information. Many of them just don’t keep notes like these. If that’s the case, you’d want to get your employment records, SSA earnings history, and use the following formula to prorate it yourself.
Pension From Non-Covered Work = Total pension times months of non-covered work (post-1956) divided by the total months used to calculate pension
For example, Denise’s pension is $3,000. Her months of non-covered work were 180 (15 years). The total months used to calculate pension was 360 (30 years). This calculation would appear as follows:
$3,000 x 180 / 360 = $1,500 Amount of pension that is non-covered and thus excluded from the WEP and GPO calculations.
For months with both types of earnings, a month that contains both covered and non-covered employment is considered a covered work month.
There’s no question that this content is complex. If you still have questions, I’d encourage you to join my FREE Facebook members group. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too.