By Boyce F. Lowery, CLU, ChFC
Having a state or federal government job is often seen as a great thing because of the pension and job security. While it can be great, there is a downside to that government pension. If you or your spouse is a government employee and plan on receiving Social Security retirement benefits someday, there are two important laws that you need to know about.
Government Pension Offset
The Social Security program provides benefits for spouses, widows, and widowers. Back when this law was put in place, many families had one spouse that stayed home to take care of the kids. Without outside income, they didn’t pay into Social Security to earn benefits, so they were given benefits based on the working spouse’s record.
Nowadays, there aren’t as many stay-at-home parents. Most adults have paid into Social Security and thus have earned their own benefits. In order to avoid double payments, a person can only be eligible for their own benefits or spousal benefits, but not both.
A lot of government employees and employees of foreign companies do not pay into Social Security but receive a different pension. In order to make it fair and prevent these people from receiving spousal Social Security benefits and a pension, the government created the Government Pension Offset. This offset lowers your Social Security benefits by a percentage of your pension benefits. So, if you are a government worker and were planning on collecting Social Security benefits based on your spouse’s record, you may not get as much as you were expecting.
Windfall Elimination Provision
Another similar law is the Windfall Elimination Provision (WEP). The WEP is designed for workers who have earned their own Social Security benefits and are also eligible for a government pension.
You see, when Social Security benefits are calculated, you get a higher percentage of the first income you receive and a lower percentage of your higher income. In that way, lower income earners receive a benefit that is a higher percentage of their earned wages than higher income earners, even though the higher earners receive a larger overall benefit.
When people only pay a little bit into Social Security and have a government pension as well, their benefit is calculated as if they were low-income workers. Thus, they receive a benefit that is higher than they would have if all their income had been subject to Social Security rather than government-related.
To combat this, the Windfall Elimination Provision was passed. The WEP reduces a person’s Social Security benefit by a percentage of their government pension. So, if you plan on receiving both a government pension and Social Security, you may not get as much as you were expecting.
What You Can Do About It
If government pension benefits are going to prevent you from receiving the Social Security benefits you thought were earned, what can you do about it? Bills to change these laws have been proposed multiple times and have never gone anywhere. It’s probably not wise to count on a change with the laws themselves.
Unfortunately, most people are caught unaware when it comes time to retire—when it is too late. Luckily, you still have time to prepare with life insurance. Having sufficient life insurance in force on yourself can help offset the lost Social Security benefits for your spouse when one or both of these laws apply. Additionally, if structured properly, a life insurance policy can provide you living benefits that can be significant in your overall planning.
If you want to be proactive about how these laws will affect your retirement, give Suncrest Advisors a call today at 888-827-0146. We can help you analyze how these laws will affect your Social Security benefits and how life insurance may be able to compensate for your loss of benefits.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit http://suncrestadvisors.com/ or connect with Boyce on LinkedIn.