What are the Windfall Elimination Provision and the Government Pension Offset, and why could they ruin your retirement? Today we’ll answer those questions by looking at these two major congressional efforts to reform Social Security.

We’ll also look at how these pieces of legislation could ruin your retirement plans if you aren’t careful. Congress created both of these laws to reduce the Social Security benefits certain public sector workers collect. These reforms changed the formulas that determined the amount of benefits workers and their spouses and widow(er)s were able to collect. If you work in government or for an employer who does not collect FICA taxes, you’ll want to figure out whether or not your retirement plans will be affected, and how to plan around the WEP and GPO.

The History of WEP and GPO

Beginning in 1981, the U.S. Congress took up an important challenge: reforming Social Security to keep the program financially viable into the 21st century. A bipartisan effort soon identified an interesting loophole in the existing law, a loophole that allowed some people who worked in government jobs to get an advantage when calculating their Social Security benefits.

Specifically, people who worked in government jobs and didn’t have to pay Federal Insurance Contribution Act (FICA) taxes benefited because the Social Security Department did not know they had government jobs.

To understand why Congress wanted to change this, consider that Social Security is designed to pay lower-wage workers a higher percentage of whatever they earned before retirement than higher-wage workers. The idea is that people who earned less money during their careers will need more help.

What this means is that some people who worked in government but did not pay FICA tax were able to claim Social Security benefits at a significantly higher rate. Their Social Security benefits were calculated using the formula for long-term, low-wage workers – meaning they received a higher payout – and they were also able to benefit from their pensions, which were not subject to FICA tax. They were not low-income workers, but their Social Security benefits were calculated as if they were.

For Congress, this raised important questions about assessing people’s income. Congress wanted to get a better idea of how much money these public sector workers were actually making, in order to better serve them in retirement. The result was two significant pieces of legislation: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), both passed in 1983.

The Windfall Elimination Provision

Congress designed the Social Security Windfall Elimination Provision (WEP) to address those public sector workers whose state or local government jobs paid them pensions that were not subject to FICA taxes, along with private employers who similarly paid pensions without collecting FICA tax. Those state and local workers, along with private sector employers who did not collect FICA taxes, were able to benefit both from their pensions and from Social Security benefits calculated as if they were low-income workers.

Under the WEP, these workers can still collect Social Security benefits, but the formula the Social Security Administration (SSA) applies is different and leads to a reduced monthly benefits check. For 2022, the SSA determines the monthly benefit by taking 90% of the first $1,024 of monthly earnings, 32% of monthly earnings between $1,025 and $6,172, and 15% of anything above that, summing the three figures to produce the Primary Insurance Amount (PIA).

Once the SSA has your PIA, they may add or subtract based on whether the worker has reached Full Retirement Age (FRA). They also make cost-of-living adjustments (COLAs) for 2021 and annually.

What changes for the workers affected by the Windfall Elimination Provision is the percentage used for that first calculation. Instead of multiplying the first $1,024 of monthly earnings by 90%, the SSA uses a lower percentage. For people reaching 62 or becoming disabled in 1990 or later, the 90% factor goes down to as low as 40%. This chart provides the figures for the Windfall Elimination Provision in 2022.

The Government Pension Offset

Where the WEP is aimed at government workers, the Government Pension Offset (GPO) affects spouses and widows and widowers who received a federal, state, or local retirement or disability pension and did not pay Social Security taxes. While the WEP can significantly reduce Social Security benefits, the Government Pension Offset (GPO) is actually the more substantial reduction.

Under the GPO, an affected survivor or spouse could have their Social Security benefits cut by two-thirds of the amount of their government pension payout. The SSA explains that when Social Security was created, benefits paid to spouses, widows and widowers – “dependent” benefits – were intended to compensate stay-at-home spouses (in practice, generally wives and widows).

Now, however, it is common for both spouses to work. As the SSA explains, before the GPO, a spouse who worked in government and earned a government pension without paying into Social Security could also collect a full spouse’s benefit. The GPO, therefore, is designed to “correct” for this: it reduces the Social Security spousal benefits to compensate for the fact that the recipient is also benefiting from a government pension for which they paid no Social Security tax.

States affected by Social Security WEP/GOP

People who worked in the public sector in the following 15 states may be affected by the WEP Social Security laws:

• Alaska
• California
• Colorado
• Connecticut
• Georgia
• Illinois
• Kentucky
• Louisiana
• Maine
• Massachusetts
• Missouri
• Nevada
• Ohio
• Rhode Island
• Texas

The key thing to understand here is that where you currently live is not important, only the state in which you lived and worked. If you worked in North Dakota, a state not on the list, you may not be affected even if you now live in Illinois, which is on the list. Conversely, if you lived and worked in Illinois but now live in North Dakota, you may be subject to these provisions.

How to apply these offsets to your retirement plan

Applying these offsets to your retirement plan starts by making sure that you will indeed be affected by them. If you stand to be affected by WEP, you can use the SSA’s online WEP calculator to figure out what your Social Security benefit will likely be.

It’s also a very good idea to consider talking with a Certified Financial Planner® to not only check your calculations but also see what all of your options might be. The more assets you have or the more complex your work history is, the more you will need to take into account.

Indeed, there are a lot of factors to consider here, particularly if you are married. If you are married and both of you are public sector workers with pensions into which you have paid without Social Security tax, you will want to be particularly certain you have a clear picture of the effects of these offsets on your retirement plans.

Will WEP and GPO offsets impact you?

If you do not see FICA payroll taxes coming out of your paycheck and will receive a pension, or if you are the spouse of someone who is, you will want to consider WEP and GPO offsets. As we have seen, which state(s) you work or worked in also matter. If you have worked in a mixture of public and private employment, the offsets stand to affect the part of your employment history in which your primary employment was in the public sector.

While the SSA’s My Account page provides useful resources for figuring out whether you’ll be impacted by WEP and GPO offsets, it’s also a good idea to talk to a Certified Financial Planner®. There are many factors to consider, including your wages, primary source of income, and when you retired or expect to retire. There is no substitute for professional financial advice when it comes to making sense of these complex realities and protecting your retirement from ruin.

Need help making sense of it all?

We're here to help you navigate your retirement journey.

Talk with a Retirable Advisor