Social Security for Educators is the hottest topic that I speak on. At these speaking events I usually get asked a lot of questions. Many of them are similar from place to place, but there is always one question that is asked every time. Why? Why do they pick on educators with these crazy Social Security rules?
In this video I’ll go into the thinking that went into setting up these weird rules.
Hello everyone! This is Devin Carroll with Social Security Intelligence. You know, the topic of social security for educators is the hottest thing that I speak and write about and, invariably, when I finish answering a question about the weird rules, a person comes up and says why? Why do they pick on educators?
I wanted to take just a few minutes and explain the why behind some of these rules. Now, today’s video is not going to go into the mechanics of the windfall elimination provision or the government pension off of that, but if you want to see that, you’re in luck because we just released a video a couple of weeks ago that covers these things in pretty good detail so check that out and there’s a link coming up at the bottom of your screen ow that you should be able to see. Click on that and go right to the video first. Additionally, there’s a video on social security basics that is a great starting point for all of this so you can check that out followed by the social security for educators and you can finish it up with this video. You’ll be more informed than most people about these weird rules.
The Reason Behind The Windfall Elimination Provision
When the windfall elimination provision was introduced, it was supposed to insure the fair treatment between individuals who have covered earnings, those who paid social security tax, and those with non-covered earnings, those who did not pay social security tax. Originally, legislators thought that individuals were double-dipping if they received both a pension from a job where they didn’t pay social security tax and a social security benefit despite the fact that that social security benefit was most likely from work outside of that job that they were receiving the pension from. Their thinking was that social security benefits were intended as a safety net and you can see that in the formula by which benefits are determined. It’s set up to calculate an individual’s social security benefit based on a replacement rate of pre-retirement earnings. Now, this formula is progressive in that it delivers a higher replacement rate for lower income earners and a lower replacement rate for higher income earners.
Let’s walk through quick example and see how this actually works in real life and these numbers are directly off of the social security website. For an individual with an adjusted average earnings of $20,830, they would receive a benefit of $11,124. That would give them a replacement rate of 53% of pre-retirement earnings. For an individual with a $46,290 adjusted average earnings, they would receive a social security benefit of $18,324 or a 40% replacement of pre-retirement earnings. You can see that as the average adjusted lifetime earnings increase, the amount of the social security benefit, as a percentage of those earnings, starts to decrease down to 33% and then all the way down to 26%. Those with a lower income receive a higher replacement rate of pre-retirement earnings.
Social Security for a Teacher-Example
Let’s look at an example of someone’s earnings to see exactly how this works. The Social Security Administration uses your inflation adjusted earnings during your lifetime and they take the highest 35 years. The average of that highest 35 years is what they run through the formula. Let’s look at this individual that started work in 1980 with $21,000 in earnings in 1981, received a raise, and you can see how those earnings begin to increase. This individual continued to work all the way to 2015 at which point their salary had climbed to $41,998. When the Social Security Administration ran their average earnings calculation, their earnings had come in at $30,330. Now, let’s take an individual that has the identical earnings but with a slight twist to see how it changes. This individual also started out with $21,000 in earnings. In 1981, it went up to $21,420, the same earnings on and on. Here’s the difference. In 1985, when they decided to go into education, they quit participating in social security and all of those earnings, which were still identical to the other person’s earnings, now no longer counted because they weren’t paying social security tax on it. In 2010, they came back to a covered job and for the last six years they paid social security tax. The Social Security Administration would look at their earnings and in those years where they didn’t pay social security tax, instead of using those earnings, they would use zeroes and when you average that out, you get an average earning of $9701. You have two individuals, they both have identical earnings. For the purposes of the social security calculator, one has a much lower earnings and running that through the formula will give them a much higher replacement rate of those pre-retirement earnings. That’s the intent behind the rule, to keep people from getting a higher replacement rate. I’m not saying it’s right and I’m not saying I like it because I know that you probably don’t either but that’s the thought behind it.
I hope this video has helped. Again, be sure and check out those other videos that I told you about and also stay connected. If you’re on Twitter, you can find me at Devin A. Carroll. If you’re on Facebook, I’m at Devin Anthony Carroll. Be sure and find me on my blog at socialsecurityintelligence.com and, beginning January of 2017, you can find me on my podcast at BigPictureRetirement.net. Thanks for watching. Have a great day.