Social Security: How WEP and GPO work

A lot of people may assume that they'll either receive Social Security benefits on their own or through their spouse's earnings. This may be a mistake for those who are affected by the windfall elimination provision, or WEP, and the government pension offset, or GPO.

• The WEP removed an unintended "windfall" that the regular Social Security benefit formula created. The goal was to make sure that people who were eligible for a government pension weren't overly compensated with Social Security benefits.
• The GPO makes sure that a spouse or surviving spouse who receives a government pension and is also eligible for a Social Security spousal benefit doesn't receive extra compensation as compared to other spouses or surviving spouses without a government pension.

Read on to understand how WEP and GPO work. We'll show you how to determine if they apply to you — and if so, how they might impact your Social Security benefits.

Don't most people pay into Social Security with FICA taxes?

Although most workers pay into the Social Security retirement system through the U.S. Federal Payroll Tax (FICA), about 6% of all workers participate in "noncovered" employment, which doesn't pay into Social Security.

According to a Congressional Research Service report, as of December 2021, about 2 million people were affected by the WEP and almost 724,000 by the GPO.

How do I know if I participated in noncovered work?

If you earned income from a job that paid into Social Security, your earnings are covered.

Noncovered employment is work in which you didn't pay into Social Security and instead contributed toward some type of government — federal, state or local — pension system.^{See note1}

Examples of noncovered employment can include:

• Most federal employees hired before Jan. 1, 1984, who are covered by the Civil Service Retirement System or other alternative retirement plan
• Employees covered by the Railroad Retirement program
• State employees, such as teachers or those who pay into a state retirement system rather than Social Security
• Local level employees, such as fire, EMS and law enforcement personnel covered by employer pensions
• Other employment, such as farm workers with earnings below certain thresholds and people with low levels of net earnings from self-employment

It's important to note that, for WEP and GPO, military pensions aren't included.

Workers affected by WEP

The WEP applies to retired or disabled workers who receive both a pension from noncovered work and Social Security benefits based on fewer than 30 years of earnings in covered — or self-employed — work.

WEP may not apply if you meet these conditions:

• You have 30 or more years of earnings.
• You're not eligible for a noncovered pension.

How WEP is calculated

Social Security was never intended to replace 100% of a worker's preretirement income. According to the 2020 Social Security Trustees report, Social Security replaces about 50% of lower earners' preretirement income, 40% for average earners and about 25% for higher earners.

Social Security benefits use a weighted formula to ensure lower-paid workers receive a larger percentage of their preretirement earnings than highly paid workers.

• Social Security uses your highest 35 earnings years, adjusted for wage growth, to calculate your Average Indexed Monthly Earnings. Your AIME is your monthly benefit.
• Your AIME is then separated into three amounts to calculate your Primary Insurance Amount, which is your Social Security benefit.

But what if you earned income from noncovered work? In that case, your benefit is calculated with a different formula.

Substantial earnings from 1937 to 2022

If you worked at least 30 years in a job that withheld Social Security, you're exempt from WEP. But if you worked 20 to 29 years from 1937 to 2022 and earned "substantial earnings," the WEP will reduce your benefits.

The following chart shows the minimum amount you need to have earned in a certain year to meet the "substantial earnings test," according to the Social Security Administration.^{See note1} The subsection in the bottom right tells you what the percentage factor is applied against the Social Security benefit formula.

A few other important things regarding the WEP:

• The maximum WEP reduction in 2022 is $512 per month.
• The WEP includes a guarantee that the reduction in the benefit amount caused by the WEP formula can never exceed more than 50% of the noncovered pension.
• For workers who are eligible for benefits starting in 2022, the maximum reduction in their Social Security benefits due to WEP may be less than $512.
• The WEP reduces the initial Social Security benefit amount before it's reduced or increased due to early retirement, delayed retirement credits, cost-of-living adjustments or other factors. The difference between the final benefit with and without the WEP may be less than or greater than $512. But the maximum WEP reduction is still limited to 50% of the noncovered pension.
• WEP takes effect on the first month a person is entitled to both Social Security and a pension based on noncovered employment.

People affected by GPO

The GPO impacts the Social Security benefits received by a spouse or surviving spouse. For example, let's say Isaac worked in state government and didn't pay into Social Security. His spouse, Margaret, worked in the private sector and paid into Social Security.

If Isaac receives a retirement or disability pension from a federal, state or local government based on the work for which he didn't pay Social Security taxes, the spousal or survivor Social Security benefit he receives based on Margaret's earnings may be reduced.

How GPO is calculated

The GPO reduction calculation is straightforward:

• The worker's spousal or survivor benefit may be reduced by two-thirds of their pension.
• If their pension is paid in a lump sum, the reduction is calculated as if paid monthly.

Case study 1: How to calculate PIA if the WEP affects you

Twin sisters Dolly and Molly are both engineers. Dolly worked in the private sector for her entire 40-year career, and Molly worked in state government for 30 years and then 10 years in the private sector.

The twins' earnings histories were the same, and, taking their highest 35 years of earnings, they each have an AIME of $3,750 per month.

Using the following table, we can calculate their PIA at their full retirement age.

• Since Dolly worked her entire career in the private sector and has 30 years or more of earnings, she's not affected by the WEP, and her PIA is calculated as:
  • 90% of first $1,024 of AIME equals $921.60, plus
  • 32% over $1,024 through $6,172 equals $872.32, plus
  • 15% of the remainder equals $0
  • Dolly's PIA equals $1,793.92.
• Since Molly had less than 30 years of covered employment, her AIME is reduced, and her PIA for Social Security benefits is calculated as:
  • 40% of first $1,024 of AIME equals $409.60, plus
  • 32% of amount over $1,024 through $6,172 equals $872.32, plus
  • 15% of the remainder equals $0
  • Molly's WEP PIA equals $1,281.92.

Case study 2: How to calculate PIA if the GPO affects you

Maria worked in a state government job and now qualifies for a pension of $2,100 per month. Maria's husband, David, worked his entire career in the private sector.

When he reached full retirement age, David applied for his Social Security benefit of $2,600 per month. Maria applied for the Social Security spousal benefit based on David's benefit amount.

• Normally, Maria would receive about 50% of David's benefit amount, or $1,300 per month. But because of her noncovered employment and government pension, she is subject to the GPO, which reduces her potential Social Security spousal benefit by two-thirds of her pension amount.
• Doing the math, two-thirds times $2,100 equals $1,400. Since $1,400 is greater than her Social Security spousal benefit amount of $1,300, she wouldn't receive anything from Social Security.
• If David were to die, Maria would normally qualify for a survivor benefit equal to David's entire benefit of $2,600. Because of the GPO, the benefit would first be reduced by two-thirds of her pension, and she would only receive $1,200 total per month.
• The GPO only applies to the individual's own noncovered work. In this case, if the surviving spouse, David, is a beneficiary of a noncovered pension from Maria, then his Social Security benefits would not be reduced.

Next steps if WEP or GPO apply to you

If you believe that you may be affected by either WEP or GPO, here are a few ideas to consider:

• Your Social Security benefits statement won't reflect any potential WEP or GPO adjustments until you file for benefits. So don't count on receiving exactly what the statement shows if you'll be affected by WEP, GPO or both.
• It's usually a good idea to earn at least the 40-credit minimum to secure Social Security retirement benefits.
• If you don't have 30 years of earnings, consider working longer to increase the number of years and lower the WEP reduction factor.
• Review state employer rules for possible covered employment before retirement.
• Revisit benefits on an ex-spouse or deceased spouse to see how this may affect you.
• Delay filing for Social Security benefits until full retirement age, or FRA, age 70 to maximize your income potential.