by Chris Kowalik of ProFeds
Most federal employees know that CSRS employees aren’t normally eligible for Social Security. Unlike FERS employees, CSRS employees don’t contribute to the Social Security program, so it’s not shocking to learn that they’re not eligible to get a Social Security benefit once they retire. However, sometimes CSRS employees can be eligible for certain benefits from the Social Security program. So, what can CSRS employees expect from Social Security?
Basically, CSRS employees can be impacted by two Social Security provisions – the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). This article will examine how these provisions can impact a CSRS’ eligibility to claim the Social Security benefits that they think that they are entitled to.
Although the CSRS workforce is shrinking quickly, the WEP and GPO remain very popular topics, because the vast majority of the remaining CSRS employees are eligible to retire now and they’re currently facing these questions on Social Security.
There are two kinds of Social Security benefits that we need to make a distinction between so that we’re all on the same page. The first one is someone’s earned benefit. That is on his/her own work record. So, someone having a job, whether it’s in the private sector, or wherever it might be, that’s contributing to Social Security, that is his/her 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 his/her spouse.
The earned benefit that I mentioned before refers to the Social Security benefit that someone earned based on his/her own work record and 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 he/she hasn’t done so in the past. Maybe prior to joining federal service, he/she was in the private sector, did some moonlighting, or had a side business along the way. Even working in the private sector after retiring from CSRS could cause him/her to be eligible for Social Security.
There is an exception for which the rules are a little different — and that is for 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. So, in this article, I’m only going to reference “normal” CSRS employees.
How are CSRS employees treated differently when it comes to their earned Social Security benefit?
This is the part where I have 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. 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 a simple example to illustrate this. For CSRS employees that have a relatively low Social Security benefit of $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 $1,200 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 receiving to determine 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 that is what’s listed on their Social Security statement.
Is there any way for a CSRS employee to avoid the WEP penalty?
If a CSRS employee who is under this situation, is eligible for Social Security at age 62, has at least 21 years of what we call substantial earnings under Social Security by the time he/she reaches age 62, then he/she can begin to mitigate or chip away at that penalty. Now, if a CSRS employee can get all the way to 30 years of substantial earnings by the time he/she is 62, then he/she completely avoids the WEP and can draw the full amount that he/she is entitled to that would be on his/her Social Security statement.
So, there is a way to avoid it. It just becomes increasingly more difficult for CSRS employees 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.
What about the recent legislation surrounding the Windfall Elimination Provision?
Another bill has been introduced in the House that purports to “fix” the WEP. The Public Servants Protection and Fairness Act (H.R. 4540) would make two notable changes regarding current law.
First, it would pay current Social Security beneficiaries impacted by the WEP an extra $150 per month starting nine months after enactment and continuing for as long as the eligible individuals are receiving Social Security benefits. The relief amount cannot exceed the size of each person’s current WEP reduction.
Second, for future retirees, the bill would establish a new benefits calculation formula called the Public Servant Protection (PSP) formula. The PSP calculates benefit amounts based on the proportion of lifetime earnings covered by Social Security. This article explains the new legislation in detail. However, given the performance of past bills in Congress, federal retirees probably shouldn’t get their hopes up just yet for seeing the elimination of the WEP.
What about the spousal benefit and how that works?
Under the Social Security program — for all participants, not just CSRS employees — there is a special benefit called the spousal benefit. That allows people 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 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 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. Unfortunately, most families can’t survive that way, but that’s why the spousal benefit was created.
Let’s say that the husband was the breadwinner and had an earned Social Security benefit of $1,200 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 his/her spouse. That is the way the spousal benefit was designed and how it is supposed to work.
However, there’s a catch for CSRS employees. If we have a CSRS employee who receives the normal CSRS pension, but is not covered by Social Security, and is 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.
The provision that causes this to happen is the Government Pension Offset (GPO). Here’s how it works: The rule says the Social Security spousal benefit that I just described 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 gave, and I’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. Let’s say we have a private sector husband who has a Social Security benefit of $1,200 per month. In this example, his wife is a CSRS employee who expects to draw a CSRS pension of $2,500 per month or about $30,000 a year. 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. 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. It’s very unlikely that a CSRS employee today would have a pension low enough to qualify.
If you want to 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 I gave, it was $600, because it was half of $1,200. The second step would be to determine what the monthly CSRS pension is expected to be. In the example, I determined it was going to be $2,500 per month. In the third step, you would take that monthly pension, the $2,500, times two-thirds, which gives us $1,667 per month. The spousal benefit would have to exceed $1,667 for the spouse to get anything.
Most of the time the numbers just don’t work out. In all the cases that I work with, thousands of cases throughout the years, I have never, ever seen a CSRS retiree be eligible for the spousal benefit under Social Security. That’s just how the math works.
In summary, the Windfall Elimination Provision (WEP) impacts the amount of Social Security that a CSRS employee can receive based on his/her 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, whichever yields the better benefit. The WEP affects a CSRS employee’s own work record.
The Government Pension Offset (GPO) keeps CSRS employees from being able to take advantage of the spousal benefit under Social Security. While it’s not impossible for CSRS employees to draw the spousal benefit, their pension would have to be so drastically low to qualify that it’s highly unlikely.
The bottom line is that we all have to be ready for retirement by knowing our numbers and all of the complicated legislation 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, we can manage our finances better in retirement if we know what impacts them.
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Chris Kowalik is a federal retirement expert and frequent speaker to federal employee groups nationwide. In her highly-acclaimed Federal Retirement Impact Workshops, she empowers employees to make confident decisions as they plan for the days when they no longer have to work.
As the developer of dozens of highly-regarded retirement planning materials for federal employees and the creator of the FedImpact Podcast, Chris has also analyzed the challenging retirement scenarios for thousands of federal employees – helping them to avoid costly mistakes, and highlighting opportunities for them to gain greater financial security in their retirement years.
Chris’ candid and straightforward nature allows employees to get the answers they need, and to understand the impact these decisions have on their retirement. After all, if what you thought was true wasn’t, when would you like to know?