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Major Social Security Bill Passed: $190B in New Benefits to be Paid After Eliminating WEP & GPO
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James Knoll
On January 5, former President Joe Biden signed into law the Social Security Fairness Act. For some, this will increase their Social Security benefit by over $1,000 per month. But for others, it could end up costing them in the long term. Today I'm going to walk through exactly what the bill did. Give you an example so you can see what's changing between previous law and now. And then walk you through both the pros and the cons of this new bill. This is another episode of Ready for Retirement. I'm your host, James Knoll, and I'm here to teach you how to get the most out of life with your money. And now onto the episod. So for some basic background, they've been pushing to change Social Security laws for about 40 years now. Now they tossed out things like raising the retirement age. They talked about other factors. And to be clear, some of those things may still be coming in the future. But what this specific bill did is it repealed the windfall elimination provision as well as the government pension offset. The windfall elimination provision, you probably see it abbreviated as wep. And the government pension offset you see abbreviated as gpo. What those have to do with is those have to do with the Social Security benefits that people with non covered pens. Now, even if that's not you, stay tuned because I'm going to walk through the implications for everybody as part of this video. Let's use an example to show you exactly how this works. Let's use Maria. Maria is a public school teacher in California. Now, California is one of 15 states across the country that does not have its teachers pay into Social Security. What does that mean? It means they're not paying Social Security taxes are 6.2% of every dollar that you earn up to a cap. Nor is the school matching those contributions. Those are part of payroll taxes and that's how Social Security is funded. So for these teachers In California and 15 other states, or 14 other states, 15 total, they are not paying into Social Security nor do they receive Social Security benefits because they receive what's called a non covered pension. They are paying into a pension plan instead. And that in some ways could be thought of as taking the place of Social Security. So what's the issue here? Well, the issue is, let's say Maria during the summer months works at a bookstore part time. So she has her wages in the school district, let's say from September until June. But maybe in July and August she's working part time at a bookstore to earn some extra cash over the summer. Well, while she's working at that bookstore. She is earning wages and those wages are not non covered. Those wages are fully subject to federal taxes, state taxes, as well as payroll taxes, the majority of which is Social Security. So while Maria was working at that bookstore, she was paying into Social Security. Under the former law, this is how that worked out. Social Security administration would look at Maria's earnings and they would look at the Social Security benefit that she is eligible for. They would then reduce that based upon her non covered pension. This could also be reduced when you look at spousal benefits, not just her own earnings record. That's the main difference between the windfall elimination provision that has to do with your own benefit and the government pension offset that has to do with your eligibility for spousal benefits or survivor benefits. So when they look at this, Social Security would reduce Maria's Social Security benefit because of the pension that she was receiving, in this case from CalSTRS, the California Retirement System for Teachers. Now is that fair is the question. You could argue both ways. In one respect you could say Maria earned that Social Security benefit. It's not fair that the Social Security administration would reduce her benefit because of that. Now the flip side of that argument, you have to understand that Social Security is a progressive system, meaning the first dollars that you contribute into Social Security are weighted more heavily in your overall Social Security benefit than are the higher dollar amounts that you earn. And I'll give you an example in specific numbers in just a second. And here's what you need to understand with that. Social Security has what are called bend points in 2025, the first 12, 26 of average index monthly earnings that you receive, 90% of those earnings are included in your Social Security calculation. When Social Security calculates what you're eligible for at your primary insurance age or your primary insurance amount, I should say at your full retirement age. So keep that in mind. 90% of the first call, $1,200 or so that you earn each month. Now, any amounts between $1,226 and $7,391, 32% of that amount is factored into the calculation of your primary insurance amount. And then anything above that amount, only 15% of that is weighted into your Social Security calculation, the primary insurance amount calculation. So why does this matter? Well, why this matters is take Maria for example. Social Security is looking at her earnings and because there's only a couple months of earnings part time over the summer, they're looking at Maria like she's a very low income earner. And so Social Security being progressive, people with lower average earnings are getting a higher relative Social Security benefit, a lower dollar amount, but a higher benefit relative to the earnings they had and the amount that they paid into Social Security. Whereas higher earners are definitely getting a higher amount, but that amount that they're receiving is a lower amount relative to the earnings they've had into what they've paid into Social Security. So it's a way of Social Security trying to means test this. It's a way of Social Security trying to sa this is designed to be a social safety net in lower income people. They're going to get lower benefits, but it's going to be a higher percentage of the amount that they paid into Social Security. So go back to Maria. They look at Maria like a very low income person in this case because they're only looking at maybe those couple months of earnings that she had at the bookstore. They're not taking into account all the earnings that she has a teacher, because those earnings were non covered. So you can make the argument to say, okay, well because of that, Maria, your benefit from Social Security should be reduced because Social Security is giving you this benefit as if you were very low incomer earner. Whereas the reality is you were a higher earner and there's a pension that you're going to receive from the state to account for that. Now there's all kinds of other details to this, but that's the gist of it. And so the Social Security Fairness act, what this did is it eliminated the windfall elimination provision and the government pension offset. Those were the things that reduced benefits for people that had non covered pensions. So essentially what the bill did is it eliminated the reduction. It's not so much a total increase in benefits that people are eligible for as much as it's eliminating what was formerly the benefit that you had reduced by the windfall elimination provision or the government pension offset. By eliminating the reduction, it gets people back to what they would be receiving. Did they not have any non covered pension? So pros and cons of this? Pros? Well, if you had a non covered pension, on average you're getting $360 per month more in Social Security benefits going forward than you previously did. For some people it's lower. For some people it's going to be over $1,000 per month more. So there's a pretty dramatic change for a lot of people who had a non covered pension in terms of what they can expect to receiving Social Security benefits. Who are those people on average? Well, it's going to be teachers, it's firefighters, it's police officers, it's postal workers. It does depend upon what state these people are in because every state is different. Some states teachers both have a pension that they pay into as well as they pay into Social Security. So this isn't universal across the board. So make sure that you're checking out your Social Security statement to see if this impacts you. But if it does, it could be an enormous difference in the benefit that you're actually receiving going forward. So those are the pros. Some people are going to get a lot more benefits because of this change. What are the downsides, though? The biggest downside is this is projected to cost over the next 10 years an additional $190 billion to the Social Security fund. Now, I don't think you need me to remind you that there's already a lot of talk about the fund running out, the fund setting to be depleted, benefits being cut. Change is going to happen sometime in early to mid-2030, most likely. So what does this change do? Well, it certainly expedites the depletion of some of these funds. So if you're not one of those workers, if you do have your normal Social Security benefit, the downside is does this potentially impact you? I know you want to say potentially this will impact you. To what degree will that impact you? Well, it's going to depend. It's going to depend upon what do they do to resurrect the Social Security system, whether it's higher taxes, whether it's pushing out retirement ages, whether it's making some other structural change. But there will have to be a change that comes and this probably accelerates the timeline that that change needs to be made by to preserve Social Security for everyone going. So while this bill is very helpful to some people, it's certainly not a long term solution. If anything, it magnifies the problems with Social Security. So be on the lookout because over the coming years I'm not going to try to predict which changes will happen. But as I mentioned, it's probably going to be some combination of raising taxes, pushing out ages, increasing the Social Security wage base that you pay Social Security taxes on, or some other similar factor. Now the final detail to all of this, if you were impacted by these changes in a positive way, meaning if you're going to receive a higher benefit because you were impacted by windfall and nomination provision or government pension offset, this is going to be retroactive to the end of December 2023, meaning whatever benefits you would have received, whatever increased benefits you would have received over the course of 2024, you are scheduled to receive a check to pay for that. So going forward your benefit will both go up on a monthly basis and that specific amount of course will be based upon the non covered pension that you're receiving as well as what you did earn in Social Security benefits over the course of your lifetime. But you will also be receiving a one time payment because of the fact that 2024 is when this was introduced and there's going to be a retroactive payment because of that. Now, whether you were impacted by this bill or not, you absolutely should be taking a look at your Social Security benefit and seeing what can you do to maximize that because this is one of the most foundational pieces to most people's retirement plans. If you're not sure exactly how to do that, don't worry. I made this video right here I talk about four simple things you can do to increase your Social Security benefit and it does not matter whether you impacted by this bill or not. All four of these principles will apply to you Root Financial has not provided any compensation for and has not influenced the content of any testimonials and endorsements shown. Any testimonials and endorsements shown have been invited, have been shared with each individual's permission, and are not necessarily representative of the experience of other clients. To our knowledge, no other conflicts of interest exist regarding these testimonials and endorsements. Hey everyone, it's me again. For the disclaimer, please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartners.com and click Start Here, where you can schedule a call with one of our advisors. We work with clients all over the country and we'd love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss on this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.