Federal retirement expert, Chris Kowalik, helps eligible CSRS employees understand how their Social Security benefit may be financially impacted by two provisions — the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) — so they know what to expect in retirement.
Key takeaways (WEP):
- The good news and bad news for CSRS employees who are eligible for Social Security benefits.
- Summary of the Windfall Elimination Provision (WEP) and how it can affect CSRS employees who find themselves eligible for Social Security based on their own work record
- The government’s laughable definition of a “windfall” and how it impacts CSRS employees
- Current legislative changes in the works to change how the WEP will impact CSRS employees in the future
Key takeaways (GPO):
- Learn how CSRS employees can still receive a hefty Social Security benefit even if they’ve never contributed to the program — and the big catch that will make most of them not eligible
- Explanation of the Government Pension Offset (GPO) and how it is likely to affect CSRS employees who intend to take a “spousal benefit” based on a spouse’s work record
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Scott: Hello and welcome to this episode of FedImpact, candid insights on your federal retirement. I’m Scott Thompson with myfederalretirement.com and I’m here today with Chris Kowalik of ProFeds, home of the Federal Retirement Impact Workshop. Chris is here today with us to discuss how CSRS employees can be impacted by two Social Security provisions called the Windfall Elimination Provision and the Government Pension Offset. Hi, Chris.
Chris: Hi, Scott. So glad to be here. Thanks.
Chris: Yeah, you bet, Scott. The two programs that we’re going to focus on today, like you mentioned, are the Windfall Elimination Provision and the Government Pension Offset. We’ll take a look at how these provisions can impact a CSRS’ eligibility to claim the Social Security benefits that they think that they are entitled to. Before I forget, like all of our episodes, we want to make sure to hear from our listeners so I know what they thought of today’s episode and what topics they want to hear in the future. So, we’ll be sure to give all those details towards the end of today’s broadcast.
Scott: Okay, great. Although the CSRS workforce is shrinking quickly, the WEP and GPO remain very popular topics on myfederalretirement.com, because the vast majority of the remaining CSRS employees are eligible to retire now and they’re facing these questions on Social Security. So, I’m looking forward to what you have to share today.
Chris: Yeah. Well, let’s start with some background so we know that we’re all on the same sheet here. Like you mentioned, CSRS employees are not usually eligible for traditional Social Security benefits. Unlike FERS employees, CSRS employees don’t contribute to the Social Security program, so it’s not a big shocker that they’re not eligible to get a Social Security benefit once they retire.
Now, there are two kinds of Social Security benefits that we need to make a distinction between so that we’re all talking about the right thing here. The first one is someone’s earned benefit. That is on their own work record. So, them having a job, whether it’s in the private sector, or wherever it might be, that’s contributing to Social Security, that is their own earned benefit. There’s also another benefit under the Social Security program that’s the spousal benefit. That is a person’s ability to draw a Social Security benefit based on the work record of their spouse.
Scott: Okay. Well, hopefully you have some good news for CSRS employees today.
Chris: Well, I make no promises that this will be great news to hear, unfortunately, but hopefully we’ll give some clarification on the impact that the WEP and the GPO have on what CSRS can reasonable expect from Social Security.
Scott: Okay. That seems fair.
Chris: The earned benefit that I mentioned before refers to the Social Security benefit that someone earned based on their own work record and their contributions into the Social Security program. For employees covered under Social Security, like FERS and private sector employees, they all contribute 6.2% of their pay into Social Security each pay period. Now, doing this over someone’s lifetime creates that monthly benefit that they can start from Social Security as early as age 62.
Of course, just because a CSRS employee isn’t contributing to the Social Security program right now, that doesn’t mean that they haven’t done so in the past. Maybe prior to joining federal service they were in the private sector; they did some moonlighting; they had a side business along the way. Even working in the private sector after retiring from CSRS could cause them to be eligible for Social Security.
Now, I do want to make one caveat of a group that we’ll cover under a different episode and that is CSRS offset employees. By definition, these are people under CSRS who are currently paying into Social Security as a condition of their CSRS employment, so they’re a bit more complex. Just in fairness to them, I want to be thorough in my explanation of their situation. So, in this episode we’re just going to talk about “normal” CSRS employees.
Scott: Okay. Well, that’s a good distinction to make, Chris. Just thinking about the normal CSRS employees, how are they treated differently when it comes to their earned Social Security benefit?
Chris: Yeah. This is the part where I get to give some not-so-great news to CSRS employees who think they are going to get the benefit that is listed on their Social Security statement. Sadly, that is not the amount that they are going to receive, thanks to the Windfall Elimination Provision. The windfall … The government has interesting ways of defining words like that. The government assumes that a CSRS employee, or in this case a retiree, that they’re receiving their CSRS pension, and that is a magic windfall. I mean, really shocking the way that they define that.
Here’s how it works: The penalty that will be applied to the Social Security benefit that someone’s going to receive will be one of two numbers. It will either be half of the employee’s Social Security expected benefit or up to $428 per month. The way the government decides which one of those things they use: whichever yields the better benefit for the employee is the one that they get. So, whichever penalty is less is the one that’s going to be applied. That’s a little bit of good news. They can’t take away all of an employee’s Social Security benefit if they’re under CSRS.
Let’s give an example. I’ll try to keep this pretty simple, because this can kind of rattle your brain a little bit. CSRS employees that have a relatively low Social Security benefit of, let’s say, $300 per month, the penalty would be $150 per month; so, that’s the half explanation. For an employee under CSRS that has a relatively high Social Security benefit of $1200 per month, the penalty would be $428 per month, so that leaves the employee with 772. So, in this case, it’s just a matter of how much of a benefit that you’re getting which one of the rules are going to apply, but the most they could take away is $428 or half, whichever yields a better benefit for the employee.
So, that’s really the good news, is that the WEP doesn’t take away all of a CSRS employee’s Social Security benefit, but the bad news is that the employee might have been expecting that much, because, gosh, that’s what’s on their Social Security statement.
Scott: Right. You’re right. That can be a steep penalty for CSRS employees who are expecting to draw Social Security.
Scott: Is there any way for a CSRS employee to avoid the WEP penalty?
Chris: There sure is. If a CSRS employee who is under this situation, where they are eligible for Social Security at age 62, if they have at least 21 years of what we call substantial earnings under Social Security by the time they reach age 62, then they can begin to mitigate or chip away at that penalty. Now, if they can get all the way to 30 years of substantial earnings by the time they’re 62, then they completely avoid the WEP and draw the full amount that they’re entitled to that would be on their Social Security statement.
So, there is a way to avoid it. It just becomes increasingly more difficult for a CSRS employee to get to 30 true substantial years of earnings under Social Security, because most of their career they’ve simply been in a program where they weren’t naturally contributing to the Social Security program.
Scott: Right. Right. Okay. Well, what can you tell us about the recent legislation surrounding the Windfall Elimination Provision?
Chris: Yeah. There’s currently a bill in the House that would somewhat soften this penalty, both for CSRS employees who are already collecting as well as those who haven’t started collecting yet. Now, just to be clear, the bill does not repeal the Windfall Elimination Provision. The penalty’s still going to be there; it’s just maybe a different calculation of what the penalty is.
The bill kind of lists out two distinct groups of people. The first are those people born prior to 1955. By definition, they would have already turned 62 by the time 2017 rolls around. The penalty appears to be cut in half of what it currently is, so that, hopefully, is good news, but know that no retroactive payments are going to be paid out. They’re not going to say, “Well, for the last 10 years we’ve applied the WEP to you at full strength. Now we’ll go back and make it up to you.” That’s not happening.
Now, for all those people born after 1955, so those who will turn 62 after 2017 when this would naturally go into effect, there’s a new formula that supposedly puts about $77 extra per month into the pockets of these CSRS employees; so, they’re lessening the penalty associated with the WEP. That will happen for about 83% of the people expecting to be impacted by WEP. But, leave it up to the government that, in the midst of “fixing” a law, that they’re causing 17% of people to actually have a bigger penalty.
Chris: It’s so bizarre to me and crazy the way government legislation works.
Scott: Yeah. It does seem a bit crazy, doesn’t it? Well, we’ve covered a lot about the WEP, which impacts a person’s earned benefit in Social Security. Can you tell us more about the spousal benefit and how that works?
Chris: Yeah. Like I did previously, I want to give some background on the Social Security spousal benefit, just so everyone knows what we’re talking about before we jump into the GPO. Now, under the Social Security program — for all participants, not just CSRS employees, but all of them — there is a special benefit called the spousal benefit. That allows someone to choose to either take all of their own earned benefit on their own work record or half of their spouse’s earned benefit, whichever number is greater.
This program was designed at a time when so many families had a stay-at-home mom who wasn’t contributing to Social Security and, therefore, was not eligible for benefits. So, they thought, “How can the Social Security Administration support families that way when mom’s staying home, maybe to raise children, and dad’s out working? Shouldn’t mom have some sort of benefit as well?” I know we’ve come a long way as a nation, and rarely do we find families that can have a stay-at-home parent, period. They can’t survive that way. But that’s why it was created.
Let’s look at that scenario so we can set this up and give some numbers for our audience. Let’s say that the husband was the breadwinner and had an earned Social Security benefit of $1200 per month, and the wife only had an earned benefit of $400 a month. This is simply due to the fact that she wasn’t in the workforce as long as the husband, because perhaps she stayed home to raise a family. The wife has an option under the spousal benefit. She can either take all of her own earned benefit, which is $400 per month, or she can elect to take half of her husband’s benefit, which in this case would be $600 per month.
Of course, she’s going to choose the spousal benefit, because it gives her an extra $200 per month that she’ll draw. Now, that affects him in absolutely no way. It doesn’t lower the amount that he draws. It’s simply allowing the spouse to mirror half of the benefit of their spouse. That is the way the spousal benefit was designed and how it is supposed to work.
Scott: I’m going to guess there’s a catch for CSRS employees?
Chris: There usually is, and in fact, that is the case here. If we have a CSRS employee who receives their normal CSRS pension, but is not covered by Social Security, and they are married to a person who has worked in the private sector, or even FERS, that contributes to Social Security naturally, and probably over a long lifetime, the CSRS employee is not eligible to exercise the spousal benefit.
Chris: Yeah. It’s unfortunate. The provision that causes this to happen is the Government Pension Offset. Here’s how it works: The rule says the Social Security spousal benefit that we just talked about would be reduced, or penalized, by two-thirds of whatever the government pension is that they’re receiving. The vast majority of the time the CSRS retiree will not get a single dime of that spousal Social Security benefit.
Let’s circle back to the original example that I just gave, and we’ll change it up just a bit to show you how GPO works when we have a CSRS retiree in the mix — not someone that was in the private sector, but a CSRS retiree. Again, we have, let’s say, a private sector husband who has a Social Security benefit of $1200 per month. Let’s say his wife is a CSRS employee who expects to draw a CSRS pension of $2500 per month. That’s about $30,000 a year, so nothing astronomical here. Of course, in this scenario the wife does not qualify for Social Security on her own record, because she spent her whole lifetime as a CSRS employee.
Now, she simply makes too much in her CSRS pension for her to qualify for any of his spousal benefit, so she would be disqualified from taking the additional $600 per month in the spousal benefit. Now, the only way that she would be eligible to do this, or anyone in her scenario, would be if her pension was under $900 per month.
I mean, it’s ludicrous to believe that there are any CSRS employees out there with a pension that low these days. There was a time, of course, that CSRS pensions were that low, but nothing today, given the fact that the last one was hired at the end of ’83. They’ve had all of these years as CSRS employees and drawing a much higher pension than $900 per month; so, very unlikely that a CSRS employee today would have a pension that low enough to qualify.
Now, for our listeners, if you want to kind of plug your numbers in to see if you’re one of the very, very rare exceptions to this, here’s how you’ll do it. First, you’ll determine what the spousal benefit is. In the example that we gave, it was $600, because it was half of 1200. The second step would be to determine what the monthly CSRS pension is expected to be. In the example we gave, we determined it was going to be $2500 per month. We would in the third step take that monthly pension, the 2500, times two-thirds. That gives us 1667 per month. The Social Security benefit, the spousal benefit, would have to exceed 1667 for the spouse to get anything.
Chris: The numbers just don’t work out. In all the cases that I work with, thousands of cases throughout the years, I have never, never seen a CSRS retiree be eligible for the spousal benefit under Social Security.
Chris: Pretty impressive.
Scott: Yeah. Well, I know some of our listeners might be frustrated to learn this; but, to your point, it’s better to know now so that you can plan around it. Chris, since we’ve covered so much information today, could you just do a quick recap?
Chris: Oh. You got it. The Windfall Elimination Provision impacts the amount of Social Security that a CSRS employee can receive based on their own earned Social Security benefit, so presumably out in the private sector. The penalty that would be applied would either be half or up to $428, so whichever yields the better benefit. The WEP affects a CSRS employee’s own work record.
The GPO keeps CSRS employees from being able to take advantage of that spousal benefit under Social Security. While it’s not impossible for CSRS employees to draw the spousal benefit, they’re pension would have to be so drastically low to qualify that we’re likely not going to see it.
Scott: Okay. Well, thanks for that summary. Do you have any parting words today for us?
Chris: Yeah. The bottom line is we all have to be ready for retirement by knowing our numbers and all that weird legislation that happens that surrounds them. I have a phrase that I use in my retirement workshops that really seems to resonate with folks. The phrase is, “If what you thought was true wasn’t, when would you like to know?” Most people would rather know right now so they can do something about it. While we might not be able to change all the legislation that we don’t like, and all that, we can manage our finances better in retirement if we know what impacts them.
Scott: Right. Well, Chris, it’s been great talking with you today. Thanks so much for the great insights you’ve given. Now, you mentioned earlier that you love getting feedback from federal employees and want to encourage our listeners to interact with you. What kind of feedback are you looking for, and where should they go to visit to give you that feedback?
Chris: Oh, yeah. Well, of course, we want to make sure that we’re talking about topics that our listeners actually want to hear; so, if they have some topic ideas, or want to share their reaction to today’s content, they can visit our website, fedimpact.com/feedback, and share their thoughts with us.
Scott: Well, again, it’s been a pleasure to have Chris Kowalik of ProFeds with us today. Stay tuned for another episode of the FedImpact podcast to get straight answers and candid insights on your federal retirement.