A big win for teachers and some others with public pensions was signed into law over the weekend by President Biden in the last weeks of his presidency. The Social Security Fairness Act (HR82) will eliminate the reductions in social security income some people experience when they have a pension from work not covered under social security.
One of the largest groups to be impacted by this is teachers. Teachers in Connecticut generally do not pay into social security. Instead, they pay into a pension administered by the Connecticut Teachers Retirement Board. The benefit from this pension is significantly higher than that of social security but there have been a couple of policies that have worked against some of these people known as the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). So what are these policies?
Windfall Elimination Provision
The WEP affects people who have both a pension from work not covered by social security and social security-covered earnings. There is a decrease in the amount of Social Security retirement benefit someone receives based on the amount of their non-covered pension, and the number of years of "substantial earnings" they have under Social Security. CT Teachers with non covered pensions who work side jobs, for example, have to pay into social security based on those earnings but generally earn a reduced amount in retirement benefits. You can read more about the details on the Social Security Administration's website here.
Government Pension Offset
The GPO affects people who have a pension from work not covered by Social Security and outlive their spouse who is covered by Social Security retirement benefits. When two people are collecting social security retirement income, a surviving spouse is eligible to receive the larger of the two benefits they collected in retirement. So if someone with a lower benefit outlives their spouse, they get to receive their spouses higher benefit for the rest of their life. The GPO is a rule that offsets the survivorship by 2/3 of a non-covered pension. If someone with a non-covered pension works for a significant time with a good salary, 2/3 of their pension is often more than their spouse's social security benefit, meaning they get no survivorship benefit at all. That benefit could be worth over $50,000 for some earners who defer taking their benefit.
What does this mean for those impacted?
If this affects you, it would be wise to update your financial planning. We'll have to see how the Social Security Administration rolls out these changes. That said, if there are potential swings to your retirement income of tens of thousands of dollars, it may have a significant impact on your plans. Perhaps you can change your investment risk based on an augmented time-horizon, update your estate planning, modify your income strategy, or just rest easier at night. You may be able to carry less life insurance which is very costly in retirement!
This highlights the importance of financial planning. Even if you have a lot of guaranteed income in retirement, there are many things that can impact your plans. Having an advisor who understand the impact of these types of changes and who can help guide you through different options as a result can be incredibly valuable. Especially when two spouses have very different types of retirement plans.
If you'd have questions about this or anything related to your financial planning, please reach out at info@bergenn.com or schedule a time to meet. We'd be happy to provide clarity and guidance.