On Jan. 6, President Joe Biden signed into law the Social Security Fairness Act. This law repeals the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO).
This is a momentous occasion for public sector retirees in Massachusetts who were previously subject to the WEP/GPO.
The Windfall Elimination Provision is a rule that has been in place since 1983. It affected how Social Security benefits were calculated for people who worked in jobs where they didn’t pay into the Social Security system. This included government employees who worked for a federal, state or local government. Groups impacted by the provision include Massachusetts teachers, police officers and firefighters.
The provision reduced Social Security benefits to ensure that people who receive pensions from non-Social Security-covered employment didn’t receive a so-called “windfall” (an unfairly large benefit) from both Social Security and their pension. By eliminating the provision, Massachusetts teachers and other public sector employees who qualify for Social Security benefits through covered work will receive a higher benefit once the new rules go into effect.
For example, teachers and other public employees who accumulated at least 40 quarters (10 years) of covered employment outside the schools should see higher Social Security benefits. This could include those who worked summers at another job, those who spent years in another job, and even those who worked in other states prior to starting in Massachusetts. This is a big positive impact for both current and future retirees.
The American Federation of Teachers estimates the new law will impact more than 100,000 people in Massachusetts. President Biden said that the measure will mean Social Security benefits will increase by an average of $360 per month for more than 2.8 million recipients nationally.
The normal benefit formula (absent the Windfall Elimination Provision) calculates your average indexed monthly earnings (AIME) by averaging your highest 35 years of covered earnings (adjusted for inflation). This number is used to calculate your primary insurance amount (PIA). It is a progressive formula calculated as follows:
• 90 percent of the first $1,024 of your AIME.
• 32 percent of the AIME between $1,024 and $6,172.
• 15 percent of any AIME above $6,172.
Let’s say your average indexed monthly earnings over your career was $5,000. Your PIA would be $2,194 (90 percent of $1,024 + 32 percent of $3,976). This would be the monthly gross benefit you would receive at your normal retirement age. (The actual amount received may be higher or lower based on what age you claim and cost-of-living adjustments.)
Now take the example of a teacher who spent 30 years in the schools but also worked 10 years in jobs outside the school during which she paid into Social Security. Because she only had 10 years of covered earnings, her average indexed monthly earnings will likely be lower. Let’s say it is only $1,500. The normal benefit formula would calculate her PIA as $1,074 – a decent complementary income to her teacher pension.
But the WEP reduces the benefit formula. Instead of 90 percent of the first $1,024, the formula is calculated using only 40 percent of the first $1,024. Her Social Security PIA was therefore reduced to $562, a more than $500 reduction in monthly income.
There are other nuances to the calculation, but the point is that Massachusetts teachers and other public employees who worked in other jobs at some point in their lives saw sizable reductions in their potential benefits because of the provision. These reductions will be eliminated, and Biden has said that law could be backdated to the beginning of 2024.
This means that Social Security beneficiaries subject to the provisions will receive a lump-sum amount for last year, in addition to higher benefits going forward. This could create a nice income boost for both current retirees and those planning for retirement in the future.
Current and retired Massachusetts public employees who were previously subject to the Windfall Elimination Provision or the Government Pension Offset should be very pleased about this potential for additional Social Security benefits.
