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“Is it true that I don’t get my Social Security benefit because I’m a teacher?”
If you’re a teacher, you’ve probably seen lots of conflicting information on this topic. There’s no denying that it’s a complex issue, so here’s a closer look at the rules on Social Security for teachers.
In the 197os and 1980s, laws were passed that amended the Social Security Act in an effort to keep individuals from “double dipping” — receiving both a Social Security benefit and a pension from a job for which they did not pay into the Social Security system. The results of these amendments are two rules that could affect your ability to claim a full Social Security benefit: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).
These provisions reduce benefits for those who worked in a job in which they qualified for a pension and did not have to pay Social Security taxes. This is not limited to teachers; it can also include firefighters, police officers and numerous other state, county and local employees.
Employment not covered by Social Security
Not all public sector employees are covered by Social Security, and in fact, initially Social Security didn’t cover any of these workers. However, over the years, many states abandoned their own pension plans and adopted coverage agreements with the Social Security Administration. Today there are 15 states that participate solely in their own state-run pension plans for their public employees instead of Social Security.
If you are a teacher in one of those states, the rules for collecting a Teacher Retirement System (TRS) pension and Social Security can be confusing and intimidating. That’s especially true if you’ve also had a job in which you paid into the system for enough quarters to qualify for a Social Security benefit, which is fairly common among teachers.
For many, teaching is a second career, after they’ve spent years working in a job or a state where Social Security taxes were withheld. For example, teachers in my town, which is divided between the states of Texas and Arkansas, may qualify for both. If they worked in Arkansas (where teachers participate in Social Security) for at least 10 years and then taught in Texas (where teachers do not participate in Social Security), they would qualify for both Social Security and the Teacher Retirement System of Texas.
If you qualify for both
Since your Social Security statement does not reflect the reduction in benefits thanks to your state-run teacher’s pension, it’s hard to know what to expect if you qualify for both.
The WEP rule applies only to individuals who are entitled to a Social Security benefit based on their own work history and also have a pension from work for which they did not pay Social Security tax. The GPO rule applies only to individuals who are entitled to a Social Security benefit as a survivor or spouse and also have a pension from work for which they did not pay Social Security tax.
Here’s a look at how each rule would affect your benefit.
Windfall Elimination Provision
The WEP is simply a recalculation of your Social Security benefit if you also have a pension from “non-covered” work (that is, no Social Security taxes were paid). The normal Social Security calculation formula is thrown out and replaced with a new calculation that results in a lower benefit amount. According to the Congressional Research Service, as of December 2014, about 1.6 million Social Security beneficiaries were affected by the WEP.
It would be easy to write a three-part essay just on the WEP, but the necessary components can be consumed in a few simple points:
- The maximum Social Security reduction will never be greater than one half of your pension amount. This is capped at a monthly reduction of $413 (for 2015).
- If you have more than 20 years of substantial covered earnings (that is, you paid Social Security tax), the impact of the WEP begins to diminish. At 30 years of substantial covered earnings, the WEP does not apply.
Chart by Devin Carroll; data from Social Security Administration
This phase-out of the WEP reduction offers a planning opportunity if you have worked at a job for which you paid Social Security tax. For example, if you worked as an engineer for 20 years before you began teaching, you may be able to do enough part-time work between now and when you retire to completely eliminate the monthly reduction.
Would it be worth it? If you consider how much more in benefits you could receive over your retirement lifetime, it could be worth $100,000 in extra income over a 20-year retirement. Obviously, not everyone has the option of accumulating enough years to wipe out the big monthly WEP reduction. But for those who do, or can get close, it’s worth considering.
Government Pension Offset
The mechanics of the GPO are simple. If you meet both of the requirements for the GPO — you are entitled to a Social Security benefit as a survivor or spouse and have a pension from a job for which you did not pay Social Security tax — your Social Security survivor or spousal benefit will be reduced by an amount equal to two-thirds of your pension.
As an example, let’s say Michael worked for 30 years as a schoolteacher in California (one of the 15 states where teachers are not covered by Social Security) and his wife was a pharmacist. Upon retirement, he began receiving his California teacher’s retirement pension of $3,000 per month. His wife retired at the same time and filed for her Social Security benefits of $2,300 per month, which she received until her death four years later.
At that time, Michael learned that he would not be eligible to receive a normal Social Security survivor’s benefit. Thanks to the GPO, his survivor’s benefit was reduced to $300 per month. Here’s the math:
Chart by Devin Carroll
Some would say that’s not fair, and I think they have a valid point. Why? The GPO applies only because of Michael’s profession. This is effectively a penalty for public service — what I call the hero’s penalty. If he had been an accountant instead of working in education, he would have been eligible to receive the full $2,300 per month. (Of course, under those circumstances he would have paid into Social Security during his career as an accountant.)
If you qualify only for a TRS pension
If you have never paid a penny of Social Security tax, most likely you’ll never receive a Social Security benefit. Although this makes perfect sense to some, others think it’s unfair that this isn’t true for everyone. For example, if you had chosen to stay at home as the household manager, you would not have paid into the Social Security system. However, you would be eligible for full spousal and survivor benefits. Meanwhile, in certain states, teachers who never pay into Social Security won’t receive any benefits. (But in those cases, of course, teachers and other public sector employees may have pension benefits that a stay-at-home spouse would not.)
These intricate Social Security regulations and how differently they may affect a worker’s retirement income make it critical that you plan ahead. Before you make your elections on your TRS pension, consider how your monthly cash flow would change with a spouse’s death.
As a teacher, you have plenty to keep up with, and these complex rules on Social Security don’t make it any easier. But don’t let it get to you. Instead, get informed so you can make the best decisions for you and your family.
Image via iStock.